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, 2001

                                      OR

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

                          Commission file number 1-640

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

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


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


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


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

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

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

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

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant at March 14, 2002 approximated $137 million.

There were 48,820,984 shares of common stock outstanding at March 14, 2002.

                     Documents incorporated by reference:

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


<PAGE>





Forward-Looking Information.

        The  statements  contained in this Annual  Report on Form 10-K  ("Annual
Report")  which  are  not  historical  facts,  including,  but not  limited  to,
statements found (i) under the captions  "Industry,"  "Products and operations,"
"Manufacturing   process  and  raw  materials,"   "Competition,"   "Patents  and
Trademarks," "Foreign  Operations," and "Regulatory and Environmental  Matters,"
all  contained  in Item 1.  Business;  (ii)  under the  captions  "Lead  pigment
litigation," "Environmental matters and litigation," and "Other Litigation," all
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;  (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; and (v) in Note 20, "Commitments and
contingencies - Legal proceedings" to the Consolidated Financial Statements, 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,"  "could" or comparable  terminology  or by
discussions  of  strategy or trends.  Although  the  Company  believes  that the
expectations  reflected in such  forward-looking  statements are reasonable,  it
cannot give any  assurances  that these  expectations  will prove to be correct.
Such  statements  by their nature  involve  risks and  uncertainties  that could
significantly  affect expected  results,  and actual future results could differ
materially from those described in such forward-looking statements.

        Among the  factors  that could  cause  actual  future  results to differ
materially are the risks and  uncertainties  discussed in this Annual Report and
those  described  from  time to time in the  Company's  other  filings  with the
Securities  and  Exchange  Commission.  While it is not possible to identify all
factors,  the Company continues to face many risks and uncertainties  including,
but not limited to, the  cyclicality of the titanium  dioxide  industry,  global
economic  and  political  conditions,   global  productive  capacity,   customer
inventory  levels,  changes in  product  pricing,  changes  in product  costing,
changes in foreign currency exchange rates,  competitive  technology  positions,
operating interruptions  (including,  but not limited to, labor disputes, leaks,
fires, explosions,  unscheduled downtime,  transportation interruptions, war and
terrorist activities),  recoveries from insurance claims and the timing thereof,
the ultimate  resolution of pending or possible  future lead pigment  litigation
and legislative  developments related to the lead paint litigation,  the outcome
of other litigation, and other risks and uncertainties included in the Company's
filings with the Securities and Exchange Commission. Should one or more of these
risks materialize (or the consequences of such a development  worsen), or should
the  underlying  assumptions  prove  incorrect,   actual  results  could  differ
materially  from  those  forecasted  or  expected.  The  Company  disclaims  any
intention or obligation to update publicly or revise such statements  whether as
a result of new information, future events or otherwise.


<PAGE>


                                     PART I

ITEM 1.        BUSINESS

General

        NL  Industries,  Inc.,  organized as a New Jersey  corporation  in 1891,
conducts its operations  through its principal wholly owned subsidiary,  Kronos,
Inc. Kronos is the world's fifth largest  producer of titanium  dioxide pigments
("TiO2")  with an estimated  11% share of  worldwide  TiO2 sales volume in 2001.
Approximately  one-half of Kronos' 2001 sales volume was in Europe, where Kronos
is the second largest producer of TiO2. NL and its consolidated subsidiaries are
sometimes referred to herein collectively as the "Company."

        The Company's primary objective is to maximize total shareholder return.
The Company continues to take steps towards  achieving its objective,  including
(i) controlling costs, (ii) investing in certain cost effective  debottlenecking
projects to increase TiO2 production capacity and efficiency,  (iii) maintaining
its regular quarterly dividend of $.20 per share, and (iv) improving its capital
structure. The Company periodically considers mergers or acquisitions, which may
be within or outside the chemical industry,  and acquisitions of additional TiO2
production capacity to meet its objective.

Industry

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

        Pricing  within the global  TiO2  industry is  cyclical,  and changes in
industry economic conditions can significantly impact the Company's earnings and
operating  cash flows.  The  Company's  average TiO2 selling  price on a billing
currency basis decreased from the preceding quarter during each quarter of 2001,
reversing  the upward  trend in prices that began in the fourth  quarter of 1999
and continued through the fourth quarter of 2000.  Industry-wide demand for TiO2
weakened  throughout  2001, with full year demand estimated as 7% lower than the
previous  year.  This is  believed  to have  been the  result of a  slowdown  in
economic growth and a reduction in customer  inventory levels.  Volume demand in
2002 is anticipated to increase,  if an expected recovery in worldwide  economic
growth materializes.

        Kronos has an estimated  18% share of European  TiO2 sales volume and an
estimated 13% share of North American TiO2 sales volume.  Per capita consumption
of TiO2 in the United States and Western  Europe far exceeds that in other areas
of the world and these  regions  are  expected  to  continue  to be the  largest
consumers  of TiO2.  Significant  regions for TiO2  consumption  could emerge in
Eastern Europe,  the Far East or China if the economies in these regions develop
to the point  that  quality-of-life  products,  including  TiO2,  are in greater
demand.  Kronos believes that, due to its strong presence in Western Europe,  it
is well  positioned to  participate  in growth in consumption of TiO2 in Eastern
Europe.   Geographic  segment   information  is  contained  in  Note  3  to  the
Consolidated Financial Statements.

                                      -1-

<PAGE>


Products and operations


        TiO2 is produced in two crystalline  forms:  rutile and anatase.  Rutile
TiO2 is a more tightly  bound  crystal that has a higher  refractive  index than
anatase TiO2 and, therefore,  better  opacification and tinting strength in many
applications.  Although many end-use  applications  can use either form of TiO2,
rutile TiO2 is the preferred form for use in coatings, plastics and ink. Anatase
TiO2 has a bluer  undertone  and is less  abrasive  than rutile TiO2,  and it is
often preferred for use in paper, ceramics, rubber and man-made fibers.

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

        Kronos currently produces over 40 different TiO2 grades,  sold under the
Kronos  trademark,  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.  TiO2 is  distributed by rail,  truck and ocean carrier in either
dry or slurry form.  Kronos'  manufacturing  facilities  are located in Germany,
Canada,  Belgium  and  Norway  and Kronos  owns a  one-half  interest  in a TiO2
manufacturing  joint venture located in Louisiana,  U.S.A.  Kronos has 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 80 years. As a result,  Kronos believes that it has developed  considerable
expertise and efficiency in the manufacture,  sale,  shipment and service of its
products  in  domestic  and  international  markets.  By  volume,  approximately
one-half of Kronos'  2001 TiO2 sales were to Europe,  with 38% 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 as a feedstock by  sulfate-process  TiO2 plants) and has estimated
ilmenite  reserves  that are expected to last at least 20 years.  Kronos is also
engaged in the  manufacture  and sale of iron-based  water  treatment  chemicals
(derived from co-products of the pigment  production  processes).  Kronos' water
treatment  chemicals (marketed under the name Ecochem) are used as treatment and
conditioning agents for industrial  effluents and municipal  wastewater,  and in
the manufacture of iron pigments.

        A fire on March 20, 2001 damaged a section of the Company's  Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result,  production of TiO2 at the Leverkusen  facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process  TiO2 plant
("Chloride  Plant"),  but did damage  certain  support  equipment  necessary  to
operate that plant. The damage to the support equipment  resulted in a temporary
shutdown of the Chloride Plant. On April 8, 2001, repairs to the damaged support
equipment  were  substantially  completed  and full  production  resumed  at the
Chloride  Plant.  The Sulfate  Plant became  approximately  50%  operational  in
September 2001 and became fully operational in late October 2001. See Note 17 to
the Consolidated Financial Statements.


                                      -2-
<PAGE>

Manufacturing process and raw materials

        TiO2 is manufactured  by Kronos using both the chloride  process and the
sulfate process.  Approximately  70% of Kronos' current  production  capacity is
based on its  chloride  process  which  generates  less waste  than the  sulfate
process. The sulfate process is a batch chemical process that uses sulfuric acid
to extract TiO2. Sulfate  technology  normally produces either anatase or rutile
pigment.  The chloride process is a continuous process in which chlorine is used
to extract rutile TiO2. In general,  the chloride process is also less intensive
than the  sulfate  process in terms of  capital  investment,  labor and  energy.
Because  much  of  the  chlorine  is  recycled  and  higher  titanium-containing
feedstock  is  used,  the  chloride  process   produces  less  waste.   Once  an
intermediate  TiO2  pigment has been  produced by either the chloride or sulfate
process,   it  is   'finished'   into   products   with   specific   performance
characteristics   for  particular  end-use   applications   through  proprietary
processes  involving  various chemical surface  treatments and intensive milling
and micronizing.

        Due to environmental factors and customer considerations, the proportion
of TiO2 industry sales  represented by  chloride-process  pigments has increased
relative to sulfate-process pigments and, in 2001,  chloride-process  production
facilities represented approximately 60% of industry capacity.

        Kronos  produced  412,000  metric  tons of TiO2 in 2001,  compared  to a
record  441,000  metric tons  produced in 2000 and 411,000  metric tons in 1999.
Kronos' average production capacity  utilization rate in 2001 was 91%, down from
near full capacity in 2000,  primarily due to lost production  volume  resulting
from the Leverkusen fire and the Company's decision to curtail production in the
fourth  quarter of 2001 as demand  remained  soft.  Kronos  believes its current
annual  attainable  production  capacity is  approximately  455,000 metric tons,
including its one-half interest in the joint venture-owned  Louisiana plant (see
"TiO2 manufacturing joint venture"). The Company expects its production capacity
will be increased by approximately  25,000 metric tons primarily at its chloride
facilities,  with moderate  capital  expenditures,  bringing Kronos' capacity to
approximately 480,000 metric tons during 2005.

        The primary raw materials used in the TiO2 chloride  production  process
are  titanium-containing  feedstock  derived from beach sand  ilmenite,  natural
rutile ore, chlorine and coke.  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 ilmenite sand from Richards Bay Iron
and Titanium (Proprietary) Limited (South Africa), a 51%-owned subsidiary of Rio
Tinto plc (U.K.),  under a long-term  supply contract that expires at the end of
2006.  Natural rutile ore is purchased  primarily from Iluka Resources,  Limited
(Australia),  a company  formed  through the merger of Westralian  Sands Limited
(Australia) and RGC Mineral Sands,  Ltd., under a long-term supply contract that
expires  at  the  end  of  2005.  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  titanium-containing  feedstock  derived  primarily from rock and beach sand
ilmenite  and  sulfuric  acid.  Sulfuric  acid is  available  from a  number  of


                                      -3-

<PAGE>

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 2001. For its Canadian  sulfate-process  plant,  Kronos also purchases
sulfate  grade slag from Q.I.T.  Fer et Titane  Inc.  (Canada),  a wholly  owned
subsidiary of Rio Tinto Iron & Titanium, Inc., under a long-term supply contract
which expires in 2006.

        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.
Should  Kronos'  vendors not be able to meet their  contractual  obligations  or
should Kronos be otherwise unable to obtain necessary raw materials, the Company
may incur higher costs for raw materials or may be required to reduce production
levels,  which may have a material  adverse  effect on the  Company's  financial
position, results of operations or liquidity.

TiO2 manufacturing joint venture

        Subsidiaries   of  Kronos  and  Huntsman   International   Holdings  LLC
("Huntsman") 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 Huntsman (the "Partners") pursuant to separate offtake agreements.

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

        The  manufacturing  joint  venture  operates on a break-even  basis and,
accordingly,  the Company  reports no equity in  earnings of the joint  venture.
Kronos'  cost for its  share of the TiO2  produced  is equal to its share of the
joint venture's  costs.  Kronos' share of net costs is reported as cost of sales
as the related TiO2 acquired from the joint venture is sold.

Competition

        The TiO2 industry is highly  competitive.  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 2001 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");  Millennium Chemicals, Inc.; Huntsman;  Kerr-McGee Corporation;  and
Ishihara Sangyo Kaisha,  Ltd.  Kronos' five largest  competitors  have estimated
individual  shares of TiO2  production  capacity  ranging from 23% to 5%, and an

                                      -4-
<PAGE>

estimated  aggregate 70% 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.

        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. In addition
to potential capacity  additions,  certain  competitors have announced that they
have either idled or shut down facilities.  Based on the factors described under
the caption  "Industry"  above,  the  Company  expects  that the average  annual
increase in industry  capacity from announced  debottlenecking  projects will be
less than the average  annual demand growth for TiO2 over the next three to five
years.

        No assurance  can be given that future  increases  in the TiO2  industry
production  capacity and future average annual demand growth rates for TiO2 will
conform to the Company's  expectations.  If actual  developments differ from the
Company's expectations, the Company and the TiO2 industry's performance could be
unfavorably affected.

Research and Development

        The  Company's  expenditures  for research and  development  and certain
technical  support  programs have  averaged  approximately  $6 million  annually
during the past three years.  Research and development  activities are conducted
principally at the Leverkusen,  Germany  facility.  Such activities are directed
primarily toward improving both the chloride and sulfate  production  processes,
improving  product quality and  strengthening  Kronos'  competitive  position by
developing new pigment applications.

Patents and Trademarks

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

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

Foreign Operations

        The Company's  chemical  businesses  have  operated in non-U.S.  markets
since the  1920s.  Most of Kronos'  current  production  capacity  is located in
Europe and Canada with  non-U.S.  net property and  equipment  aggregating  $323
million at December 31, 2001. Net property and equipment in the U.S.,  including
50% of the property and equipment of LPC, was $132 million at December 31, 2001.
Kronos' European  operations include production  facilities in Germany,  Belgium
and Norway.  Approximately $577 million of the Company's 2001 consolidated sales
were to non-U.S.  customers,  including $104 million to customers in areas other
than Europe and Canada.  Sales to customers in the U.S.  aggregated $258 million
in 2001.  Foreign  operations  are subject  to,  among  other  things,  currency
exchange rate  fluctuations and the Company's results of operations have, in the

                                      -5-
<PAGE>

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.  Kronos' largest ten customers
accounted  for  approximately  25% of net sales in 2001.  Neither the  Company's
business as a whole nor that of any of its principal  product groups is seasonal
to any significant  extent.  Due in part to the increase in paint  production in
the spring to meet the spring and summer painting season demand,  TiO2 sales are
generally higher in the second and third calendar quarters than in the first and
fourth calendar quarters.

Employees

        As of December  31,  2001,  the  Company  employed  approximately  2,500
persons, excluding the joint venture employees, with approximately 100 employees
in the United States and approximately 2,400 at sites outside the United States.
Hourly  employees  in  production  facilities  worldwide,   including  LPC,  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.

                                      -6-
<PAGE>

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

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

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

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

        The Company's capital expenditures related to its ongoing  environmental
protection and improvement  programs in 2001 were approximately $5 million,  and
are currently  expected to be approximately $5 million in 2002 and $4 million in
2003.

        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, 2001,  Valhi,  Inc.  ("Valhi")  and Tremont  Corporation
("Tremont"),   each  affiliates  of  Contran   Corporation   ("Contran"),   held
approximately 61% and 21%,  respectively,  of NL's outstanding  common stock. At

                                      -7-

<PAGE>

December  31,  2001,  Contran and its  subsidiaries  held  approximately  94% of
Valhi's outstanding common stock, and a company 80% owned by Valhi and 20% owned
by  NL  held   approximately   80%  of  Tremont's   outstanding   common  stock.
Substantially  all of  Contran's  outstanding  voting  stock  is held by  trusts
established for the benefit of certain  children and  grandchildren of Harold C.
Simmons, of which Mr. Simmons is the sole trustee.  Mr. Simmons, the Chairman of
the Board of NL and the  Chairman  of the Board and Chief  Executive  Officer of
Contran and Valhi and a director of  Tremont,  may be deemed to control  each of
such companies.

ITEM 2.        PROPERTIES

        Kronos currently operates four TiO2 facilities in Europe (Leverkusen and
Nordenham, Germany;  Langerbrugge,  Belgium; and Fredrikstad,  Norway). In North
America,  Kronos has a facility in  Varennes,  Quebec,  Canada and,  through the
manufacturing  joint venture  described above, a one-half interest in a plant in
Lake Charles,  Louisiana.  The Company also owns a slurry plant in Lake Charles,
Louisiana. See Notes 11 and 14 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
have certain restrictions regarding Kronos' ability to transfer ownership or use
of the Leverkusen facility.

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

        The Company has under lease various corporate and administrative offices
located in the U.S. and various sales offices located in the U.S.,  France,  the
Netherlands,  Denmark and the U.K. In January  2002 the  Company  announced  its
intent to close its New York administrative office.

                                      -8-

<PAGE>


ITEM 3.        LEGAL PROCEEDINGS

Lead pigment litigation

        The Company was formerly  involved in the  manufacture  of lead pigments
for use in paint and lead-based paint. During the past 14 years, the Company has
been named as a defendant or third party defendant in various legal  proceedings
alleging that the Company and approximately  seven other companies that formerly
manufactured  lead  pigments  for use in paint  (together,  the "former  pigment
manufacturers")  and  lead-based  paint are  responsible  for  personal  injury,
property damage and governmental  expenditures allegedly associated with the use
of these  products.  These cases assert a combination  of claims that  generally
include   negligent  product  design,   negligent  failure  to  warn,   supplier
negligence,  fraud  and  deceit,  public  and  private  nuisance,   restitution,
indemnification,  conspiracy,  concert of action,  aiding and  abetting,  strict
liability/failure to warn, and strict liability/defective  design, violations of
state  consumer  protection  statutes,   enterprise   liability,   market  share
liability,  and similar claims.  The Company has neither lost nor settled any of
these cases.  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.

        The Company has not accrued any amounts for this 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  cases are  without  merit and will  continue  to defend  the cases
vigorously. 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  against the former 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.  All but two of these actions,  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,  have been  dismissed.  These two cases have been
inactive since 1992.

        In June 1989 a complaint  was filed in the Supreme Court of the State of
New York, County of New York,  against the former pigment  manufacturers and the
LIA.  Plaintiffs  sought  damages 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). As a
result of pre-trial  motions,  the New York City  Housing  Authority is the only
remaining  plaintiff in the case and is pursuing damage claims only with respect
to two housing projects. Discovery is 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

                                      -9-

<PAGE>

purport to represent a class of similarly  situated persons throughout the State
of Ohio.  While  the  trial  court  has  denied  plaintiffs'  motion  for  class
certification,  discovery  and pre-trial  proceedings  are  continuing  with the
individual plaintiffs.

        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 children and
mothers  similarly  situated in New York State. The complaint seeks damages from
the LIA and other former pigment  manufacturers  for  establishment  of property
abatement  and medical  monitoring  funds and  compensatory  damages for alleged
injuries to plaintiffs. Discovery regarding class certification is proceeding.

        In  September  1999 an  amended  complaint  was  filed in Thomas v. Lead
Industries Association,  et al. (Circuit Court, Milwaukee,  Wisconsin,  Case No.
99-CV-6411)  adding as defendants  the former  pigment  manufacturers  to a suit
originally filed against  plaintiff's  landlords.  Plaintiff,  a minor,  alleges
injuries  purportedly  caused by lead on the  surfaces  of  premises in homes in
which he resided.  Plaintiff seeks  compensatory and punitive  damages,  and the
Company has denied  liability.  Pre-trial  motions and discovery are proceeding.
Trial is scheduled for June 2003.

        In October  1999 the Company  was served  with a  complaint  in State of
Rhode Island v. Lead  Industries  Association,  et al.  (Superior Court of Rhode
Island,  No.  99-5226).  The State seeks  compensatory  and punitive damages for
medical,  school,  and public and private building  abatement  expenses that the
State alleges were caused by lead paint,  and for funding of a public  education
campaign and health screening  programs.  Plaintiff seeks judgments of joint and
several liability against the former pigment  manufacturers and the LIA. A trial
date has been set for September  2002 at which the issue of whether lead pigment
in paint on Rhode  Island  buildings  is a public  nuisance  will be tried,  and
discovery is proceeding.

        In October 1999 the Company was served with a complaint  in Cofield,  et
al. v. Lead  Industries  Association,  et al. (Circuit Court for Baltimore City,
Maryland,  Case  No.  24-C-99-004491).   Plaintiffs,  six  homeowners,  seek  to
represent a class of all owners of nonrental residential properties in Maryland.
Plaintiffs  seek  compensatory  and  punitive  damages in excess of $20,000  per
household for the existence of lead-based paint in their homes,  including funds
for  monitoring,  detecting and abating  lead-based  paint in those  residences.
Plaintiffs  allege that the former  pigment  manufacturers  and other  companies
alleged to have manufactured paint and/or gasoline  additives,  the LIA, and the
National Paint and Coatings  Association  (the "NPCA") are jointly and severally
liable.  In August 2001 plaintiffs  voluntarily  dismissed  substantially all of
their  claims,  and in December  2001 the trial court  dismissed  the  remaining
claim. The time for appeal of that ruling has not expired.

        In October 1999 the Company was served with a complaint in Smith, et al.
v. Lead  Industries  Association,  et al.  (Circuit  Court for  Baltimore  City,
Maryland,  Case  No.  24-C-99-004490).   Plaintiffs,  seven  minors,  each  seek
compensatory  damages of $5 million  and  punitive  damages of $10  million  for
alleged  injuries due to  lead-based  paint.  Plaintiffs  allege that the former
pigment  manufacturers and other companies  alleged to have  manufactured  paint
and/or  gasoline  additives,  the LIA,  and the NPCA are jointly  and  severally
liable.  The Company has denied  liability,  and all defendants filed motions to
dismiss  various of the claims.  In February 2002 the trial court  dismissed all
claims  except  those  relating  to  product  liability  for lead  paint and the
Maryland  Consumer  Protection  Act.  Pre-trial  proceedings  and  discovery are
continuing.

                                      -10-


<PAGE>

        In February  2000 the Company was served with a complaint in City of St.
Louis v. Lead  Industries  Association,  et al.  (Missouri  Circuit  Court  22nd
Judicial  Circuit,  St. Louis City,  Cause No. 002-245,  Division 1).  Plaintiff
seeks compensatory and punitive damages for its expenses discovering and abating
lead-based  paint,  detecting  lead  poisoning  and  providing  medical care and
educational  programs for City  residents,  and the costs of educating  children
suffering injuries due to lead exposure.  Plaintiff seeks judgments of joint and
several  liability  against the former  pigment  manufacturers  and the LIA. The
defendants' motion to dismiss the case is currently pending.

        In April 2000 the Company was served with a complaint in County of Santa
Clara v. Atlantic  Richfield  Company,  et al.  (Superior  Court of the State of
California, County of Santa Clara, Case No. CV788657) brought against the former
pigment  manufacturers,  the LIA and certain paint manufacturers.  The County of
Santa  Clara  seeks to  represent a class of  California  governmental  entities
(other  than the state and its  agencies)  to recover  compensatory  damages for
funds the  plaintiffs  have  expended  or will in the future  expend for medical
treatment, educational expenses, abatement or other costs due to exposure to, or
potential exposure to, lead paint, disgorgement of profit, and punitive damages.
Santa Cruz, Solano, Alameda, San Francisco, and Kern counties, the cities of San
Francisco and Oakland,  the Oakland and San Francisco  unified school  districts
and housing  authorities  and the Oakland  Redevelopment  Agency have joined the
case as plaintiffs. Pre-trial proceedings and discovery are continuing.

        In June 2000 two  complaints  were filed in Texas  state  court,  Spring
Branch  Independent  School  District  v. Lead  Industries  Association,  et al.
(District  Court  of  Harris  County,   Texas,  No.  2000-31175),   and  Houston
Independent  School District v. Lead Industries  Association,  et al.  (District
Court of Harris County,  Texas, No. 2000-33725).  The School Districts seek past
and future damages and exemplary damages for costs they have allegedly  incurred
or will incur due to the presence of lead-based  paint in their  buildings  from
the  former  pigment  manufacturers  and the LIA . The  Company  has  denied all
liability.  Discovery and pre-trial motions are proceeding in both cases.  Trial
is scheduled in the Spring Branch case for September 2002.

        In June 2000 a complaint was filed in Illinois  state court,  Lewis,  et
al.  v. Lead  Industries  Association,  et al.  (Circuit  Court of Cook  County,
Illinois, County Department, Chancery Division, Case No. 00CH09800).  Plaintiffs
seek to represent two classes, one of all minors between ages six months and six
years who  resided in housing in  Illinois  built  before  1978,  and one of all
individuals  between ages six and twenty years who lived between ages six months
and six years in Illinois housing built before 1978 and had blood lead levels of
10  micrograms/deciliter  or more.  The  complaint  seeks  damages  jointly  and
severally  from the former  pigment  manufacturers  and the LIA to  establish  a
medical  screening  fund for the first class to determine  blood lead levels,  a
medical  monitoring  fund for the  second  class to  detect  the onset of latent
diseases,  and a fund for a public education campaign.  Pre-trial motions by the
defendants to dismiss all claims are pending.

        In  October  2000 the  Company  was  served  with a  complaint  filed in
California state court,  Justice,  et al. v.  Sherwin-Williams  Company,  et al.
(Superior Court of California,  County of San Francisco, No. 314686). Plaintiffs
are two minors who seek  general,  special and punitive  damages from the former
pigment manufacturers and the LIA for injuries alleged to be due to ingestion of
paint containing lead in their residence.  The Company has denied all liability.
Discovery is proceeding.

        In January  2001 the Company was served with a complaint  in Gaines,  et
al., v. The Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi,  Civil Action No. 2000-0604). The complaint seeks joint and several


                                      -11-
<PAGE>

liability   for   compensatory   and   punitive   damages   from  the   Company,
Sherwin-Williams,  and four local paint  retailers  on behalf of a minor and his
mother alleging  injuries due to exposure to lead pigment and/or paint. The case
has been removed to federal  court and that court has  dismissed the local paint
retailers. Discovery and pre-trial motions are proceeding.

        In February  2001 the Company was served with a complaint in Borden,  et
al. v. The Sherwin-Williams  Company, et al. (Circuit Court of Jefferson County,
Mississippi,  Civil Action No. 2000-587).  The complaint seeks joint and several
liability for  compensatory and punitive damages from more than 40 manufacturers
and retailers of lead pigment and/or paint,  including the Company, on behalf of
18 adult  residents of  Mississippi  who were  allegedly  exposed to lead during
their employment in construction and repair  activities.  Pre-trial  proceedings
are continuing.

        In May 2001 the Company was served with a complaint in City of Milwaukee
v. NL Industries, Inc. and Mautz Paint (Circuit Court, Civil Division, Milwaukee
County,  Wisconsin,  Case No.  01CV003066).  Plaintiff  seeks  compensatory  and
equitable relief for lead hazards in Milwaukee homes, restitution for amounts it
has spent to abate  lead,  and  punitive  damages.  The  Company  has denied all
liability. Pre-trial proceedings are continuing.

        In May 2001 the Company was served  with a complaint  in Harris  County,
Texas v. Lead Industries  Association,  et al. (District Court of Harris County,
Texas,  No.  2001-21413).  The complaint  seeks actual and punitive  damages and
asserts  claims jointly and severally  against the former pigment  manufacturers
and the LIA for past and future  damages  due to the  presence  of lead paint in
County-owned  buildings.  The Company has denied all  liability.  Discovery  and
pre-trial motions are continuing.

        In June 2001 a complaint was filed in Jefferson  County School  District
v. Lead  Industries  Association,  et al.  (Circuit  Court of Jefferson  County,
Mississippi,  Case No. 2001-69). The complaint seeks joint and several liability
for  compensatory  and  punitive  damages  for the  abatement  of lead  paint in
Jefferson County Schools from the former pigment  manufacturers  and local paint
retailers. The Company has denied all liability. The case was removed to federal
court and pre-trial proceedings are continuing.

        In December  2001 the  Company  was served  with a complaint  in Quitman
County School District v. Lead Industries Association,  et al. (Circuit Court of
Quitman County,  Mississippi,  Case No. 2001-0106).  The complaint asserts joint
and  several  liability  and seeks  compensatory  and  punitive  damages for the
abatement  of lead  paint in Quitman  County  schools  from the  former  pigment
manufacturers,  local paint  retailers  and  others.  The Company has denied all
liability. Pre-trial proceedings,  including those related to the removal of the
case to federal court, are continuing.

          In January and February 2002 the Company was served with complaints by
22 New Jersey municipalities and counties which have been consolidated as In re:
Lead Paint Litigation, Superior Court of New Jersey, Middlesex County, Case Code
702.  Each  complaint  seeks  abatement  of lead paint from all  housing and all
public buildings in each jurisdiction and punitive damages jointly and severally
from the former pigment  manufacturers  and the LIA. The Company intends to deny
all allegations of liability.

        In January 2002 the Company was served with a complaint  in Jackson,  et
al., v.  Phillips  Building  Supply of Laurel,  et al.,  Circuit  Court of Jones


                                      -12-
<PAGE>

County, Mississippi, Dkt. Co. 2002-10-CV1. The complaint seeks joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for  compensatory  and  punitive  damages  on behalf  of four  adults  for
injuries alleged to have been caused by the use of lead paint. The case has been
removed to federal  court.  The Company has denied all  allegations of liability
and pre-trial proceedings are continuing.

        In February  2002 the  Company  was served  with a complaint  in Liberty
Independent  School District v. Lead Industries  Association,  et al. , District
Court  of  Liberty  County,   Texas,  No.  63,332.  The  school  district  seeks
compensatory  and punitive damages jointly and severally from the former pigment
manufacturers and the LIA for property damage to its buildings.  The Company has
denied all allegations of liability.

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

        The Company has filed  actions  seeking  declaratory  judgment and other
relief against various  insurance  carriers with respect to costs of defense and
indemnity coverage for certain of its environmental and lead pigment litigation.
NL Industries,  Inc. v. Commercial  Union Insurance Cos., et al., Nos.  90-2124,
-2125 (HLS) (District Court of New Jersey).  The action relating to lead pigment
litigation  defense costs filed in May 1990 against  Commercial  Union Insurance
Company  ("Commercial  Union")  sought to recover  defense costs incurred in the
City of New York lead pigment  case and two other lead pigment  cases which have
since been resolved in the Company's  favor.  The action  relating to lead paint
litigation  defense  costs  has been  settled.  The  Company  has  also  settled
insurance  coverage claims concerning  environmental  claims with certain of the
defendants in the New Jersey environmental  coverage  litigation,  including the
Company's principal former carriers,  as more fully described below. The settled
claims are to be dismissed from the New Jersey litigation in accordance with the
terms of the settlement agreements. The Company also continues to negotiate with
several other insurance  carriers with respect to possible  settlement of claims
that are being  asserted in the New Jersey  environmental  litigation,  although
there can be no assurance that  settlement  agreements can be reached with these
other  carriers.   No  further  material   settlements  relating  to  litigation
concerning environmental remediation coverage are expected. The issue of whether
insurance coverage for defense costs or indemnity or both will be found to exist
for lead pigment litigation depends upon a variety of factors,  and there can be
no assurance that such insurance coverage will be available. 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, 2001,  the Company had accrued $107
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 reasonably  possible  costs to the Company.  Such costs
include,   among  other  things,   expenditures  for  remedial   investigations,
monitoring,   managing,  studies,  certain  legal  fees,  cleanup,  removal  and
remediation.  It is not  possible  to  estimate  the range of costs for  certain
sites.  The Company has estimated  that the upper end of the range of reasonably
possible  costs to the  Company  for sites for which it is  possible to estimate
costs is approximately  $160 million.  The Company's  estimate of such liability
has not been  discounted  to present  value and the  Company has not reduced its
accruals for any potential insurance recoveries.  No assurance can be given that
actual  costs will not  exceed  either  accrued  amounts or the upper end of the
range for sites for which  estimates  have been made,  and no  assurance  can be
given  that  costs  will not be  incurred  with  respect to sites as to which no
estimate  presently can be made. The  imposition of more stringent  standards or
requirements  under  environmental  laws or  regulations,  new  developments  or
changes  with respect to site cleanup  costs or  allocation  of such costs among
PRPs, or a  determination  that the Company is potentially  responsible  for the
release of hazardous  substances at other sites could result in  expenditures in
excess of amounts  currently  estimated  by the Company to be required  for such
matters.  Furthermore,  there can be no assurance that additional  environmental
matters  will not arise in the future.  More  detailed  descriptions  of certain
legal proceedings relating to environmental matters are set forth below.

        In June  2000 the  Company  recognized  a $43  million  net gain  from a
settlement  with one of the two  principal  former  insurance  carriers,  and in
December 2000 the Company  recognized a $26.5 million net gain from a settlement
with  certain  members of the other  principal  former  insurance  carrier.  The
settlement  gains are stated net of $3.1 million in  commissions,  and the gross
settlement proceeds of $72.6 million were transferred by the carriers to special
purpose trusts  established to pay future  remediation  and other  environmental
expenditures of the Company.  A settlement with remaining  members of the second
carrier  group was reached in January 2001,  and the Company  recognized a $10.3
million gain in the first quarter of 2001.  In 2001 the Company also  recognized
$1.4 million of other  litigation  settlement  gains.  The settlements  resolved
court  proceedings that the Company  initiated to seek  reimbursement  for legal
defense  expenditures  and indemnity  coverage for certain of its  environmental
remediation expenditures. No further material settlements relating to litigation

                                      -14-
<PAGE>

concerning  environmental  remediation coverage are expected. See Note 16 to the
Consolidated Financial Statements.

        In July 1991 the  United  States  filed an  action in the U.S.  District
Court for the  Southern  District  of  Illinois  against  the Company and others
(United States of America v. NL Industries,  Inc., et al., Civ. No. 91-CV 00578)
with respect to the Granite City,  Illinois lead smelter  formerly  owned by the
Company.  The  complaint  seeks  injunctive  relief to compel the  defendants to
comply with an  administrative  order issued  pursuant to CERCLA,  and fines and
treble damages for the alleged failure to comply with the order. The Company and
the other  parties  did not  implement  the  order,  believing  that the  remedy
selected by the U.S. EPA was invalid, arbitrary, capricious and was not selected
in accordance  with law. The complaint  also seeks  recovery of past costs and a
declaration that the defendants are liable for future costs. Although the action
was filed against the Company and ten other defendants, there are 330 other PRPs
who have  been  notified  by the U.S.  EPA.  Some of those  notified  were  also
respondents to the administrative order. In September 1995 the U.S. EPA released
its amended  decision  selecting  cleanup remedies for the Granite City site. In
September  1997 the U.S. EPA  informed the Company that past and future  cleanup
costs are estimated to total  approximately  $63.5 million. In 1999 the U.S. EPA
and certain other PRPs entered into a consent decree settling their liability at
the site for  approximately  50% of the site costs. The Company and the U.S. EPA
reached an agreement in principle in 1999 to settle the  Company's  liability at
the site for $31.5  million.  The Company  and the U.S.  EPA are  negotiating  a
consent decree embodying the terms of this agreement in principle.

        The  Company  reached  an  agreement  in 1999 with the  other  PRPs at a
formerly  owned  lead  smelter  site in  Pedricktown,  New  Jersey to settle the
Company's  liability  for $6 million,  of which $4.8 million has been paid as of
December  31,  2001.  The  settlement  does not  resolve  issues  regarding  the
Company's  potential  liability in the event site costs exceed $21 million.  The
Company does not  presently  expect site costs to exceed such amount and has not
provided accruals for such contingency.

        In 1998 the Company  reached an agreement to settle  litigation with the
other PRPs at a lead smelter site in Portland, Oregon that was formerly owned by
the Company. Under the agreement,  the Company agreed to pay a portion of future
cleanup costs. In 2000 the  construction of the remediation was completed and is
now in the operation and maintenance phase.

        In 2000 the  Company  reached  an  agreement  with the other PRPs at the
Baxter  Springs  subsite in Cherokee  County,  Kansas,  to resolve the Company's
liability.  The  Company and others  formerly  mined lead and zinc in the Baxter
Springs subsite. Under the agreement, the Company agreed to pay a portion of the
cleanup  costs  associated  with the Baxter  Springs  subsite.  The U.S. EPA has
estimated  the total  cleanup  costs in the  Baxter  Springs  subsite to be $5.4
million. The remedial action phase of the cleanup is underway.

        In 1996 the U.S. EPA ordered the Company to perform a removal  action at
a formerly  owned facility in Chicago,  Illinois.  The Company has complied with
the order and has  completed  the on-site work at the  facility.  The Company is
conducting an investigation regarding potential offsite contamination.

        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


                                      -15-

<PAGE>

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.  In
December  1994 the jury  returned  a  verdict  in favor of the  Company  and the
verdict was affirmed on appeal. 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.

        In 2000 the  Company  reached  an  agreement  with the other PRPs at the
Batavia  Landfill  Superfund Site in Batavia,  New York to resolve the Company's
liability.  The Batavia  Landfill is a former  industrial  waste  disposal site.
Under  the  agreement,  the  Company  agreed to pay 40% of the  future  remedial
construction  costs,  which the U.S. EPA has estimated to be  approximately  $11
million in total. Under the settlement, the Company is not responsible for costs
associated  with the operation and maintenance of the remedy.  In addition,  the
Company  received  approximately  $2 million from  settling  PRPs.  The remedial
action phase of the remedy is underway.

        In October 2000 the Company was served with a complaint  in Pulliam,  et
al. v. NL Industries, Inc., et al., No. 49F12-0104-CT-001301,  filed in superior
court in Marion  County,  Indiana,  on behalf of an alleged class of all persons
and  entities who own or have owned  property or have resided  within a one-mile
radius of an industrial  facility  formerly owned by a subsidiary of the Company
in Indianapolis,  Indiana.  Plaintiffs  allege that they and their property have
been  injured  by  lead  dust  and  particulates  from  the  facility  and  seek
unspecified  actual  and  punitive  damages  and a removal of all  alleged  lead
contamination under various theories,  including  negligence,  strict liability,
battery,  nuisance  and  trespass.  In December  2000 the Company  answered  the
complaint  denying all  allegations of wrongdoing  and  liability.  Discovery is
proceeding.

        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,  including the following
matters.

        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 inactive  since
1998.

                                      -16-
<PAGE>

        In February 1999 and October 2000 the Company was served with complaints
in Cosey, et al. v. Bullard, et al., No. 95-0069,  and Pierce, et al. v. GAF, et
al., No. 2006-150, filed in the Circuit Court of Jefferson County,  Mississippi,
on behalf of approximately  4,600  plaintiffs and 275 plaintiffs,  respectively,
alleging   injury  due  to  exposure  to  asbestos  and/or  silica  and  seeking
compensatory and punitive  damages.  The Cosey case was removed to federal court
and  has  been   transferred  to  the  eastern   district  of  Pennsylvania  for
consolidated  proceedings.  The Company has filed  answers in both cases denying
the material allegations of the complaint.

        In  addition,  the Company is a defendant  in various  asbestos,  silica
and/or  mixed  dust  cases  pending  in  various   jurisdictions  on  behalf  of
approximately 6,900 personal injury claimants.

        In August and  September  2000 the Company and one of its  subsidiaries,
NLO, Inc.  ("NLO"),  were named as defendants in four lawsuits  filed in federal
court in the  Western  District of Kentucky  against  the  Department  of Energy
("DOE")  and a number  of  other  defendants  alleging  that  nuclear  materials
supplied by, among others,  the Feed  Materials  Production  Center  ("FMPC") in
Fernald,  Ohio,  owned by the DOE and formerly  managed  under  contract by NLO,
harmed  employees and others at the DOE's Paducah,  Kentucky  Gaseous  Diffusion
Plant  ("PGDP").  With  respect to each of the cases listed  below,  the Company
believes  that the DOE is  obligated  to  provide  defense  and  indemnification
pursuant to its contract with NLO, and pursuant to its  statutory  obligation to
do so, as the DOE has in several  previous  cases  relating to management of the
FMPC, and the Company has so advised the DOE. Answers in the four cases have not
been filed. The Company and NLO have moved to dismiss the complaints in all four
actions and, as described below, three of the cases have been settled subject to
court approval.  If those motions are not granted, the Company and NLO intend to
deny all  allegations  of  wrongdoing  and  liability  and to  defend  the cases
vigorously.

*       In Rainer,  et al. v. E.I. du Pont de Nemours,  et al., ("Rainer I") No.
        5:00CV-223-M,   plaintiffs  purport  to  represent  a  class  of  former
        employees  at the PGDP and a class  consisting  of members of the former
        employees' households and seek actual and punitive damages of $5 billion
        each  for  alleged   negligence,   infliction  of  emotional   distress,
        ultra-hazardous activity/strict liability, strict products liability and
        battery. No answer or response to that complaint is yet due.

*       In  Rainer,  et al.  v.  Bill  Richardson,  et al.  ("Rainer  II"),  No.
        5:00CV-220-M, plaintiffs purport to represent the same classes regarding
        the same  matters  alleged  in  Rainer  I, and  allege  a  violation  of
        constitutional  rights and seek the same recovery sought in Rainer I, as
        well   as   asserting   claims   for   battery,   fraud,   deceit,   and
        misrepresentation,  infliction of emotional  distress,  negligence,  and
        conspiracy,  concert of action, joint venture and enterprise  liability.
        No answer or response to that complaint is yet due.

*       In Dew, et al. v. Bill  Richardson,  et al. ("Dew"),  No.  5:00CV-221-M,
        plaintiffs  purport  to  represent  classes  of all PGDP  employees  who
        sustained  pituitary  tumors  or  cancer  as a  result  of  exposure  to
        radiation  and seek actual and  punitive  damages of $2 billion each for
        alleged violation of constitutional  rights,  assault and battery, fraud
        and  misrepresentation,  infliction of emotional  distress,  negligence,
        ultra-hazardous  activity/strict  liability,  strict products liability,
        conspiracy,  concert of action, joint venture and enterprise  liability,
        and equitable estoppel. Pre-trial proceedings and discovery continue.

                                      -17-
<PAGE>

*       In Shaffer, et al. v. Atomic Energy Commission, et al. ("Shaffer"),  No.
        5:00CV-307-M,  plaintiffs purport to represent classes of PGDP employees
        and household  members,  subcontractors at PGDP, and landowners near the
        PGDP and seek actual and punitive damages of $1 billion each and medical
        monitoring  for the same  counts  alleged  in Dew.  In March  2001,  the
        magistrate  judge ordered that the landowner  plaintiffs be severed from
        the action and pursue their claims in a separate  action,  Oreskovich v.
        Atomic  Energy  Commission,   No.  01CV-63-M.   All  of  the  Oreskovich
        plaintiffs  subsequently  dismissed their claims against the Company and
        NLO with prejudice.

Subject  to court  approval,  the  Company  and NLO have  reached  an  agreement
pursuant to which the Rainer I, Rainer II, and Shaffer cases against the Company
and NLO will be settled and dismissed with  prejudice.  The trial court approved
the settlement in March 2002; the time during which the approval may be appealed
has not yet  expired.  The DOE has  agreed  to  reimburse  the  Company  for the
settlement amount.

        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, 2001.

                                      -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 14, 2002, there were
approximately  6,000 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 14, 2002, the closing price of
NL common stock according to the NYSE Composite Tape was $16.17.

<TABLE>
<CAPTION>

                                                                   Dividends
                                            High         Low        Declared
                                         ---------    ---------    ----------
<S>                                      <C>          <C>          <C>
Year ended December 31, 2001:
    First quarter ...................    $   24.31    $   16.25    $   .20
    Second quarter ..................        18.00        11.60        .20
    Third quarter ...................        16.75        13.80        .20
    Fourth quarter ..................        15.70        12.04        .20

Year ended December 31, 2000:
    First quarter ...................    $   16.38    $   13.00    $   .15
    Second quarter ..................        19.00        13.13        .15
    Third quarter ...................        24.38        15.50        .15
    Fourth quarter ..................        25.00        18.94        .20

</TABLE>


        The  Company's  indenture to its 11.75%  Senior  Secured  Notes due 2003
limits the ability of the Company to pay dividends,  acquire treasury shares and
make other restricted  payments,  as defined.  The aggregate amount of dividends
and other  restricted  payments  since  October  1993 may not  exceed 50% of the
aggregate  consolidated net income,  as defined in the indenture,  since October
1993. At December 31, 2001,  $20 million was available for  restricted  payments
including  dividends,   acquisition  of  treasury  shares  and  affiliate  stock
purchases.

        The Company paid four  quarterly  $.20 per share cash dividends in 2001.
On  February  6,  2002,  the  Company's  Board of  Directors  declared a regular
quarterly  dividend of $.20 per share to  shareholders  of record as of March 8,
2002 to be paid on March  22,  2002.  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.

        Pursuant  to  its  share  repurchase  program,   the  Company  purchased
1,059,000  shares of its common stock in the open market at an aggregate cost of
$15.5 million in 2001, 1,682,000 shares of its common stock at an aggregate cost
of $30.9  million in 2000 and  552,000  shares of its  common  stock in the open
market at an  aggregate  cost of $7.2 million in 1999.  Approximately  1,207,000
additional   shares  are  available  for  purchase  under  the  Company's  share
repurchase  program.  The available  shares may be purchased over an unspecified
period of time,  and are to be held as  treasury  shares  available  for general
corporate purposes.

                                      -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,
                                                  ----------------------------------------------------------------------
                                                      2001         2000         1999          1998          1997
                                                  ------------- ------------ ------------  ------------- ---------------
                                                                 (In millions, except per share amounts)

<S>                                                <C>          <C>          <C>          <C>          <C>
INCOME STATEMENT DATA:
Net sales ......................................   $     835.1  $     922.3  $     908.4  $     894.7  $     837.2
Operating income ...............................         169.2        212.5        145.7        171.2         82.5
Income (loss) from continuing operations .......         121.4        155.3        159.8         89.9        (29.9)
Net income (loss) ..............................         121.4        154.6        159.8        366.7         (9.5)

Earnings per share:
    Basic:
        Income (loss) from continuing operations   $       2.44 $       3.08 $       3.09 $       1.75 $       (.58)
        Net income (loss) ......................           2.44         3.07         3.09         7.13         (.19)
    Diluted:
        Income (loss) from continuing operations   $       2.44 $       3.06 $       3.08 $       1.73 $       (.58)
        Net income (loss) ......................           2.44         3.05         3.08         7.05         (.19)

Cash dividends per share .......................   $        .80 $        .65 $        .14 $        .09 $    --

BALANCE SHEET DATA at year end:
Cash, cash equivalents, current and
  noncurrent restricted cash equivalents and
  current and noncurrent marketable debt
  securities ...................................   $     199.0  $     207.6  $     151.8  $     163.1  $     106.1
Current assets .................................         559.1        553.8        506.4        546.8        454.9
Total assets ...................................       1,151.1      1,120.8      1,056.2      1,155.6      1,098.5
Current liabilities ............................         299.1        298.0        264.8        310.7        276.7
Long-term debt including current maturities ....         196.5        196.1        244.5        357.6        744.2
Shareholders' equity (deficit) .................         386.9        344.5        271.1        152.3       (222.3)

CASH FLOW DATA:
Operating activities ...........................   $     129.7  $     139.7  $     108.3  $      45.1  $      89.2
Investing activities ...........................         (57.2)       (56.2)       (38.4)       417.3        (11.1)
Financing activities ...........................         (75.5)       (95.7)       (88.0)      (396.2)       (82.6)
Operating, investing and financing activities ..          (3.0)       (12.2)       (18.1)        66.2         (4.5)

OTHER NON-GAAP FINANCIAL DATA:
EBITDA (1) .....................................   $     206.7  $     286.3  $     162.5  $     187.4  $      67.6

</TABLE>


                                      -20-

<PAGE>


<TABLE>
<CAPTION>

                                                         Years ended December,
                                         ------------------------------------------------------
                                            2001      2000     1999       1998       1997
                                            ----      ----     ----       ----       ----
                                                (In millions, except per share amounts)

<S>                                       <C>        <C>      <C>        <C>        <C>
OTHER DATA:
Net debt at year end (2) ..............   $ 43.7     $ 58.5   $149.8     $226.7     $652.0
Interest expense, net (3) .............     18.7       22.9     30.3       43.1       63.0
Cash interest expense, net (4) ........     21.8       23.8     28.6       24.8       39.9
Capital expenditures ..................     53.7       31.1     35.6       22.4       28.2

TiO2 OPERATING STATISTICS:
    Average selling price in billing
      currencies index (1983=100) .....      156        161      153        154        133
    Sales volumes (metric tons in
      thousands) ......................      402        436      427        408        427
    Production volume (metric tons in
      thousands) ......................      412        441      411        434        408
    Production capacity at beginning of
      year (metric tons in thousands) .      450        440      440        420        400
    Production rate as a percentage of
      capacity ........................      91%       Full      93%       Full       Full

</TABLE>


(1)     EBITDA,  as  presented,   represents  operating  income  less  corporate
        expense, plus (i) litigation settlement gains, net, (ii) other corporate
        income,   (iii)  depreciation,   depletion  and  amortization  and  (iv)
        insurance  recoveries,  net.  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 U.S. 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
        Notes11, 14 and 20 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 (i) 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" and (ii) 2000 when $70 million
        of net litigation  settlement  gains are included in EBITDA and excluded
        from operating  income,  which treatment  results in a higher percentage
        increase  over 1999 for EBITDA as  compared to the  percentage  increase
        over 1999 for operating income. See "Item 7. Management's Discussion and
        Analysis  of  Financial  Condition  and  Results  of  Operations"  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 and noncurrent  restricted  cash  equivalents  and
        current and noncurrent marketable debt securities.

                                      -21-
<PAGE>

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

(4)     Cash interest expense,  net represents interest expense,  net as defined
        in (3) above less noncash interest expense plus noncash interest income.
        Noncash  interest  expense  includes  deferred  interest  expense on the
        Senior Secured  Discount Notes in 1996 through 1998 and  amortization of
        deferred  financing  costs.  Noncash  interest income includes  interest
        income on restricted  cash and restricted  marketable debt securities in
        2001 and 2000.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The  accompanying  "Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations"  are based upon the Company's  consolidated
financial  statements,  which have been  prepared in accordance  with  generally
accepted  accounting  principles in the U.S. ("GAAP").  The preparation of these
financial  statements  requires the Company to make estimates and judgments 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 reported  period.  On an
on-going basis, the Company evaluates its estimates,  including those related to
inventory  reserves,  impairments of investments in marketable equity securities
and investments  accounted for by the equity method, the recoverability of other
long-lived assets, pension and other post-retirement benefit obligations and the
underlying  actuarial  assumptions  related  thereto,  and  the  realization  of
deferred  income  tax  assets  and  accruals  for   environmental   remediation,
litigation, income tax and other contingencies.  The Company bases its estimates
on historical  experience and on various other  assumptions that are believed to
be reasonable under the  circumstances,  the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses.  Actual  results may differ from  previously-estimated  amounts  under
different assumptions or conditions.

        The Company believes the following critical  accounting  policies affect
its more  significant  judgments and estimates  used in the  preparation  of its
consolidated financial statements:

*       The Company provides reserves for estimated obsolescence or unmarketable
        finished goods  inventory  equal to the  difference  between the cost of
        inventory and the estimated  market value based upon  assumptions  about
        future demand for its products and market  conditions.  If actual market
        conditions  are less  favorable  than  those  projected  by  management,
        additional  finished  goods  inventory  reserves  may be  required.  The
        Company  provides  reserves for tools and supplies  inventory  generally
        based on both historical and expected future usage requirements.

                                      -22-
<PAGE>

*       The Company owns investments in certain companies that are accounted for
        either as marketable equity  securities or under the equity method.  For
        all of such  investments,  the Company records an impairment charge when
        it believes an investment  has  experienced a decline in fair value that
        is other than temporary.  Future adverse changes in market conditions or
        poor operating results of underlying  investments could result in losses
        or an inability to recover the carrying  value of the  investments  that
        may not be reflected in an investment's  current carrying value, thereby
        possibly requiring an impairment charge in the future.

*       The  Company   recognizes  an  impairment  charge  associated  with  its
        long-lived  assets,  including  property  and  equipment,   whenever  it
        determines that recovery of such long-lived asset is not probable.  Such
        determination  is made in accordance with  applicable  GAAP  requirement
        associated  with the long-lived  asset,  and is based upon,  among other
        things, estimates of the amount of future net cash flows to be generated
        by the  long-lived  asset and estimates of the current fair value of the
        asset.  Adverse  changes in such  estimates  of future net cash flows or
        estimates  of fair value  could  result in an  inability  to recover the
        carrying value of the long-lived  asset,  thereby possibly  requiring an
        impairment charge to be recognized in the future.

*       The Company records a valuation  allowance to reduce its deferred income
        tax assets to the amount  that is believed  to be  realizable  under the
        "more-likely-than-not"  recognition  criteria.  While  the  Company  has
        considered  future taxable  income and ongoing  prudent and feasible tax
        planning strategies in assessing the need for a valuation allowance,  it
        is possible  that in the future the  Company may change its  estimate of
        the   amount   of  the   deferred   income   tax   assets   that   would
        "more-likely-than-not"  be realized,  resulting in an  adjustment to the
        deferred income tax asset valuation allowance that would either increase
        or  decrease,  as  applicable,  reported  net income in the period  such
        change in estimate was made.

*       The Company records an accrual for environmental,  legal, income tax and
        other contingencies when estimated future  expenditures  associated with
        such  contingencies  become probable,  and the amounts can be reasonably
        estimated.   However,   new   information  may  become   available,   or
        circumstances  (such as  applicable  laws and  regulations)  may change,
        thereby  resulting in an increase or decrease in the amount  required to
        be accrued  for such  matters  (and  therefore a decrease or increase in
        reported net income in the period of such change).

RESULTS OF OPERATIONS

  General

        The  Company's  operations  are conducted by Kronos in the TiO2 business
segment.  As discussed below,  average TiO2 selling prices in billing currencies
(which excludes the effects of foreign currency  translation)  decreased in 2001
compared with 2000 and increased in 2000 compared with 1999.  Kronos'  operating
income  declined  $43.3 million in 2001  compared with 2000 and increased  $66.8
million in 2000 compared with 1999.  Gross profit  margins were 31% in 2001, 34%
in 2000 and 27% in 1999.

                                      -23-
<PAGE>

        Many factors  influence  TiO2  pricing  levels,  including  (i) industry
capacity,  (ii) worldwide  demand growth,  (iii) customer  inventory  levels and
purchasing  decisions and (iv)  relative  changes in foreign  currency  exchange
rates. Kronos believes that the TiO2 industry has long-term growth potential, as
discussed in "Item 1. Business - Industry" and "- Competition."
<TABLE>
<CAPTION>

                                            Years ended December 31,            % Change
                                        --------------------------------- ---------------------
                                            2001       2000       1999     2001-00    2000-99
                                        ---------- ---------- ----------- ---------- ----------
                                                  (In millions)

<S>                                         <C>       <C>       <C>          <C>       <C>
Net sales and operating income
    Net sales ........................      $835.1    $922.3    $908.4        -9%      + 2%
    Operating income .................      $169.2    $212.5    $145.7       -20%      +46%
    Operating income margin percentage         20%       23%       16%

TiO2 operating statistics
    Percent change in average selling
      prices (in billing currencies) .                                        -3%       +6%
    Sales volume (metric tons in
      thousands) .....................         402       436       427        -8%       +2%
    Production volume (metric tons in
      thousands) .....................         412       441       411        -6%       +7%
    Production rate as a percent of
      capacity .......................         91%      Full       93%

</TABLE>

        Kronos'  operating  income  in  2001,  including  business  interruption
proceeds of $27.3 million,  was lower than 2000,  primarily due to lower average
TiO2  selling  prices  in  billing  currencies  and lower  sales and  production
volumes.  Kronos'  operating  income for 2000 was higher than 1999 due to higher
average TiO2 selling  prices in billing  currencies  and higher  production  and
sales volumes.

        Average TiO2 selling  prices in billing  currencies  during 2001 were 3%
lower  than  2000,  with  lower  prices in all  major  regions.  Pigment  prices
decreased from the preceding quarter during each quarter of 2001,  reversing the
upward trend that began in the fourth quarter of 1999 and continued  through the
fourth  quarter  of 2000.  The rate of price  declines  increased  in the fourth
quarter of 2001 to 5% over the third  quarter of 2001,  and December 2001 prices
were 2% lower  than the  average  selling  price for the  quarter.  The  average
selling price in billing  currencies in December 2001 was 13% below the December
2000 average selling price. The most significant  price erosion during this time
period occurred in the European and export markets.  TiO2 average selling prices
continued to trend  downward in the first quarter of 2002.  Average TiO2 selling
prices in  billing  currencies  in 2000 were 6% higher  than 1999,  with  higher
prices in all major regions.

        Industry-wide  demand was weak  throughout  2001 as compared to 2000 and
1999 levels.  Sales  volume of 402,000  metric tons of TiO2 in 2001 was 8% lower
than 2000,  primarily  due to lower sales in Europe and North  America.  Kronos'
sales volume in the fourth  quarter of 2001 decreased 1% from the fourth quarter
of 2000 and 11% from the  third  quarter  of  2001.  Approximately  one-half  of
Kronos'  2001 TiO2 sales  volume  was  attributable  to  markets in Europe  with
approximately  38%  attributable  to North  America,  and the  balance  to other
regions.  Sales volume in 2000 was 2% higher than 1999,  primarily due to higher
sales in Europe and North America.  Industry-wide demand was weak in early 1999.
Demand in the  second  half of 1999 and the  first  three  quarters  of 2000 was
stronger  than  comparable  year-earlier  periods  as a result of,  among  other
things,  customers  buying in advance of  anticipated  price  increases.  Demand
softened in the fourth quarter of 2000 and weakened throughout 2001.


                                      -24-
<PAGE>

        The  Company's  production  volume was 412,000  metric  tons in 2001,  a
decrease of 6% from a record  441,000  metric tons  produced in 2000.  Operating
rates were at 91% in 2001 down from near full capacity in 2000, primarily due to
lost production resulting from the Leverkusen fire and the Company's decision to
curtail  production  in the  fourth  quarter  of 2001 as demand  remained  soft.
Kronos'  production volume in 2000 increased 7% compared with the 411,000 metric
tons produced in 1999.  Operating rates in 1999 were 93%.  Production volume was
curtailed  in the  beginning  of the  first  quarter  of 1999 in order to manage
inventory  levels.  Finished  goods  inventory  levels  increased  in the fourth
quarter  of  2001  and at the  end of  2001  represented  approximately  two and
one-half months of sales.

        The  Company   settled  the  insurance   coverage  claim  involving  the
Leverkusen  fire for $56.4  million  during  the fourth  quarter of 2001  ($46.9
million  received as of December  31,  2001,  with the  remaining  $9.5  million
received  in  January  2002),   of  which  $27.3  million  related  to  business
interruption  and $29.1 million related to property  damage,  clean-up costs and
other extra  expenses.  The Company  recognized a $17.5 million  pre-tax gain in
2001 related to the property  damage  recovery after  deducting $11.6 million of
clean-up  costs and other extra  expenses  incurred  and the  carrying  value of
assets  destroyed in the fire. The gain was excluded from the  determination  of
operating income. The $27.3 million of business interruption proceeds recognized
in 2001 were allocated between other income, excluding corporate, which reflects
recovery of lost margin  ($7.2  million)  and as a reduction of cost of sales to
offset  unallocated  period costs  ($20.1  million).  The business  interruption
insurance  proceeds distorted Kronos' operating income margin percentage in 2001
as  there  were no  sales  associated  with the  lost  margin  operating  income
recognized.  No additional  insurance  recoveries related to the Leverkusen fire
are expected to be received.  See Notes 15 and 17 to the Consolidated  Financial
Statements.

        The Company's efforts to debottleneck  Kronos' production  facilities to
meet long-term demand continue to prove successful.  The Company expects Kronos'
production  capacity of 455,000 metric tons at the end of 2001 will be increased
to  approximately  480,000  metric tons during  2005,  primarily at its chloride
facilities, with moderate capital expenditures.

        The Company  expects TiO2 industry demand in 2002 will improve over 2001
levels, because it expects worldwide economic conditions to improve and customer
inventory levels to increase. Kronos' TiO2 production volume in 2002 is expected
to approximate Kronos' 2002 TiO2 sales volume. In January 2002, Kronos announced
price  increases in all major markets of  approximately  5% to 8% above existing
December 2001 prices,  scheduled to be implemented  late in the first quarter of
2002 and early in the  second  quarter of 2002.  Kronos is hopeful  that it will
realize  such  announced  prices  increases,  but the extent to which Kronos can
realize  these and  possibly  other price  increases  during 2002 will depend on
improving market conditions and global economic recovery.  However, because TiO2
prices were generally  declining  during all of 2001, the Company  believes that
its average 2002 prices in billing  currencies will be  significantly  below its
average  2001  prices,  even  if  the  recently-announced  price  increases  are
realized. Overall, the Company expects its TiO2 operating income in 2002 will be
significantly  lower than 2001,  primarily  due to lower  average  TiO2  selling
prices. The Company's expectations as to the future prospects of the Company and
the TiO2  industry  are based  upon a number of  factors  beyond  the  Company's
control,  including  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, the Company's results of operations could be unfavorably affected.

                                      -25-
<PAGE>

        Excluding the effects of foreign currency translation, which reduced the
Company's  expenses in both 2001 and 2000 compared to the year-earlier  periods,
Kronos'  cost of sales in 2001 was  lower  than 2000 due to lower  sales  volume
partially  offset by higher  unit costs,  which  resulted  primarily  from lower
production  levels. The effects of lower TiO2 sales volume and production volume
were partially offset by business interruption  proceeds.  Kronos' cost of sales
in 2000 was lower than 1999  primarily due to lower unit costs,  which  resulted
primarily from higher production  levels.  Cost of sales, as a percentage of net
sales,  increased  in 2001  primarily  due to the  impact  on net sales of lower
average  selling  prices and  higher  unit costs  partially  offset by  business
interruption  insurance  recoveries,  and decreased in 2000 primarily due to the
impact on net sales of higher average selling prices and lower unit costs.

        Excluding the effects of foreign currency translation, which reduced the
Company's  expense in both 2001 and 2000 compared to the  year-earlier  periods,
selling,  general and  administrative  expenses  ("SG&A"),  excluding  corporate
expenses,  decreased in 2001 from the year-earlier  period due to lower variable
compensation expense and lower selling and distribution expenses associated with
lower 2001 sales volume. SG&A,  excluding corporate expenses,  increased in 2000
from the  year-earlier  period  primarily  due to higher  variable  compensation
expense and higher selling and distribution expenses associated with higher 2000
sales volumes. SG&A, excluding corporate expenses, as a percentage of net sales,
was 12% in each of 2001,  2000 and 1999.  See  discussion of corporate  expenses
below.

        The Company has  substantial  operations and assets located  outside the
United States (principally Germany,  Norway,  Belgium and Canada). The Company's
non-U.S.  sales and  operating  costs are  subject  to  currency  exchange  rate
fluctuations which may impact reported earnings and may affect the comparability
of  period-to-period   revenues  and  expenses  expressed  in  U.S.  dollars.  A
significant  amount of the  Company's  sales  (57% in 2001) are  denominated  in
currencies  other  than the U.S.  dollar,  principally  the  euro,  other  major
European currencies and the Canadian dollar. Certain purchases of raw materials,
primarily titanium-containing feedstocks, are denominated in U.S. dollars, while
labor and other production costs are primarily  denominated in local currencies.
Fluctuations  in the  value of the U.S.  dollar  relative  to other  currencies,
primarily a stronger U.S.  dollar  compared to the euro,  decreased sales by $19
million and $68 million  during 2001 and 2000,  respectively,  compared with the
year-earlier  period.  When translated to U.S.  dollars using currency  exchange
rates prevailing during the respective  periods,  Kronos' average selling prices
for 2001 decreased 5% from 2000.  Kronos' average selling prices in U.S. dollars
for 2000  decreased  1% from 1999.  The effect of the  stronger  U.S.  dollar on
Kronos'  operating  costs  that  are not  denominated  in U.S.  dollars  reduced
operating  costs in 2001 and 2000  compared with the  respective  prior year. In
addition,  sales to export markets are typically denominated in U.S. dollars and
a stronger U.S. dollar improves margins on these sales at the Company's non-U.S.
subsidiaries.  The  favorable  margin  on  export  sales  tends  to  offset  the
unfavorable  effect of translating  local currency  profits to U.S. dollars when
the dollar is stronger.  As a result,  the net impact of currency  exchange rate
fluctuations  on  operating  income  in 2001 and 2000 was not  significant  when
compared to the year-earlier periods.

                                      -26-

<PAGE>

General corporate

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

                                     Years ended December 31,          Change
                                    ---------------------------   ------------------
                                      2001      2000      1999    2001-00    2000-99
                                    -------   -------   -------   -------    -------
                                                       (In millions)

<S>                                 <C>       <C>       <C>       <C>       <C>
Securities earnings:
    Interest and dividends .....    $   8.9   $   8.3   $   6.6   $    .6   $   1.7
    Securities transactions, net       (1.1)      2.5      --        (3.6)      2.5
Corporate income ...............       16.3      73.7       4.6     (57.4)     69.1
Corporate expense ..............      (25.9)    (29.6)    (21.5)      3.7      (8.1)
Interest expense ...............      (27.6)    (31.2)    (36.9)      3.6       5.7
                                    -------   -------   -------   -------   -------

                                    $ (29.4)  $  23.7   $ (47.2)  $ (53.1)  $  70.9
                                    =======   =======   =======   =======   =======
</TABLE>


        Corporate  interest  and dividend  income,  including  noncash  interest
income on restricted cash balances and restricted  marketable  debt  securities,
fluctuate in part based upon the amount of funds  invested  and yields  thereon.
Average funds invested in 2001 and 2000 were higher compared with the respective
prior  year  primarily  due  to the  increase  in  restricted  cash  related  to
litigation settlement proceeds in January 2001 and July 2000. See Note 16 to the
Consolidated  Financial Statements.  The Company expects security earnings to be
lower in 2002 than 2001 due to (i) lower  average  yields and (ii) lower average
levels of funds  available for  investment due to lower 2002 operating cash flow
and the Company's  decision to prepay $25 million of its 11.75%  Senior  Secured
Notes. See Note 23 to the Consolidated Financial Statements.

        Securities  transactions,  net in 2001 related to a second-quarter  $1.1
million noncash  securities loss related to an  other-than-temporary  decline in
value of certain available-for-sale  securities held by the Company.  Securities
transactions, net in 2000 included a second-quarter $5.6 million securities gain
related  to common  stock  received  from the  demutualization  of an  insurance
company from which the Company had purchased  certain  insurance  policies and a
fourth-quarter   $3.1   million   noncash   securities   loss   related   to  an
other-than-temporary  decline in value of certain available-for-sale  securities
held by the Company. See Note 6 to the Consolidated Financial Statements.

        Corporate  income in 2001 and 2000  included  gains of $11.7 million and
$69.5 million,  respectively,  related  principally  to settlements  with former
insurance carrier groups. No further material settlements relating to litigation
concerning  environmental  remediation coverage are expected. See Note 16 to the
Consolidated  Financial Statements.  The Company recognized $4.0 million in each
of  2001,  2000 and  1999 of  income  related  to the  straight-line,  five-year
amortization  of $20 million of proceeds  received in conjunction  with the 1998
sale of its specialty  chemicals business  attributable to a five-year agreement
by the Company not to compete in the rheological products business.

        Corporate expense in 2001 decreased from 2000,  primarily as a result of
lower  legal  expenses  and lower  variable  compensation  expense.  The Company
expects  corporate expense in 2002 will be comparable to or somewhat higher than
2001 levels.

                                      -27-
<PAGE>

        Interest expense in 2001 declined compared with the prior year primarily
due to reduced levels of its outstanding  11.75% Senior Secured Notes (resulting
from a $50 million prepayment in December 2000) and lower euro-denominated debt.
Interest  expense in 2000  declined  compared  to 1999 due to reduced  levels of
outstanding  euro-denominated  debt.  Assuming no significant change in interest
rates,  interest  expense in 2002 is expected to be lower compared with 2001 due
to lower levels of  outstanding  indebtedness.  See Note 23 to the  Consolidated
Financial Statements.

  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 14 to the  Consolidated  Financial  Statements.  The Company's
operations  are conducted on a worldwide  basis and the geographic mix of income
can  significantly  impact the Company's  effective income tax rate. In 2001 the
Company's  effective  income tax rate varied  from the  normally  expected  rate
primarily due to the  recognition of certain German income tax attributes  which
previously  did not meet the  "more-likely-than-not"  recognition  criteria  and
incremental   U.S.  taxes  on   undistributed   earnings  of  certain   non-U.S.
subsidiaries.  In 2000 the Company's  effective  income tax rate varied from the
normally expected rate primarily due to the geographic mix of income, changes in
the German income tax "base" rate and the recognition of certain  deductible tax
assets  which  previously  did not meet the  "more-likely-than-not"  recognition
criteria.  In 1999 the  Company's  effective  tax rate varied from the  normally
expected rate due  predominantly  to the  recognition of certain  deductible tax
attributes which previously did not meet the "more-likely-than-not"  recognition
criteria.  Also in 2000  and  1999,  the  Company  recognized  certain  one-time
benefits related to German tax settlements.

        Effective  January 1, 2001, the Company and its qualifying  subsidiaries
were  included  in the  consolidated  U.S.  federal  tax return of Contran  (the
"Contran  Tax  Group").  As a member of the Contran Tax Group,  the Company is a
party to a tax sharing agreement (the "Contran Tax Agreement").  The Contran Tax
Agreement  provides that the Company compute its provision for U.S. income taxes
on a separate-company basis using the tax elections made by Contran. Pursuant to
the Contran  Tax  Agreement  and using the tax  elections  made by Contran,  the
Company  makes  payments to or receives  payments from Valhi in amounts it would
have paid to or received from the U.S.  Internal Revenue Service had it not been
a member of the  Contran Tax Group.  Refunds  are limited to amounts  previously
paid under the Contran Tax Agreement unless the Company was entitled to a refund
from the U.S. Internal Revenue Service on a separate-company  basis. Pursuant to
the Contran Tax Agreement,  the Company has a $2.2 million receivable from Valhi
related to capital loss carrybacks  which would have been  recoverable  from the
U.S.  Internal  Revenue  Service.  See  Note  14 to the  Consolidated  Financial
Statements.

  Other

        Minority interest

        Minority  interest  primarily  relates to the  Company's  majority-owned
environmental management subsidiary,  NL Environmental Management Services, Inc.
("EMS").  EMS was established in 1998, at which time EMS  contractually  assumed
certain of the Company's environmental liabilities.  EMS' earnings are based, in
part,  upon its ability to favorably  resolve these  liabilities on an aggregate
basis.   The  minority   interest   shareholders  of  EMS  actively  manage  the

                                      -28-
<PAGE>


environmental  liabilities  and  share in 39% of EMS'  cumulative  earnings,  as
defined  in  the  formation   documents.   The  Company   includes   liabilities
contractually assumed by EMS in its consolidated balance sheet.

        Related party transactions

        The Company is a party to certain transactions with related parties. See
"Liquidity  and Capital  Resources  -  Investing  Cash Flows" and Note 19 to the
Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's  consolidated  cash flows for each of the past three years
are presented below.
<TABLE>
<CAPTION>

                                                          Years ended December 31,
                                                      --------------------------------
                                                         2001       2000       1999
                                                      ---------   --------   ---------
                                                                (In millions)
<S>                                                    <C>        <C>        <C>
    Operating activities:
        Before changes in assets and liabilities ..    $  135.3   $  153.1   $  115.7
        Changes in assets and liabilities .........        (5.6)     (13.4)      (7.4)
                                                       --------   --------   --------
                                                          129.7      139.7      108.3
    Investing activities ..........................       (57.2)     (56.2)     (38.4)
    Financing activities ..........................       (75.5)     (95.7)     (88.0)
                                                       --------   --------   --------

Net cash used by operating, investing and financing
  activities ......................................    $   (3.0)  $  (12.2)  $  (18.1)
                                                       ========   ========   ========
</TABLE>

  Operating cash flows

        Certain  items  included  in  the  determination  of net  income  do not
represent  current inflows or outflows of cash. For example,  the net litigation
settlement  proceeds  of $10.3  million and $69.5  million  received in 2001 and
2000,  respectively,  that were transferred by the insurance carriers to special
purpose  trusts did not result in an increase in operating  cash flow.  Further,
insurance  recoveries,  net of  $17.5  million  in 2001  are  excluded  from the
determination of operating cash flow. These insurance  proceeds are shown in the
statement of cash flows under investing  activities to partially offset the cash
outflow impact of capital  expenditures  related to the Leverkusen sulfate plant
reconstruction.  Noncash interest income consists of earnings on restricted cash
and restricted  marketable  debt  securities  which is not available for general
corporate  purposes.  Certain other items included in the  determination  of net
income have an impact on cash flows from operating activities, but the impact of
such items on cash will differ from their impact on net income. For example, the
amount of income or expense recorded for pension and OPEB assets and obligations
(which depend upon a number of factors,  including actuarial assumptions used to
value  obligations)  will  generally  differ from the  outflows of cash for such
benefits. See Note 12 to the Consolidated Financial Statements.

        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
decreased  $17.8  million in 2001 and  increased  $37.4 million in 2000 from the
preceding year.

        Operating cash flows, before changes in assets and liabilities,  in 2001
compared with 2000 were unfavorably affected by $43.3 million of lower operating

                                      -29-

<PAGE>

income, partially offset by $9.0 million of lower payments to fund the Company's
pension plans, $6.6 million of lower current tax expense, $3.8 million of higher
distributions  from LPC,  $3.8  million  of lower  corporate  expenses  and $2.0
million of lower cash interest expense, net.

        Operating cash flows in 2000 compared with 1999 were favorably  affected
by $66.8 million higher operating income and $4.8 million of lower cash interest
expense,  net,  partially  offset by $5.3 million of higher payments to fund the
Company's  pension  plans,  $8.2  million of higher  corporate  expenses,  $16.1
million of higher current tax expense,  and $6.1 million of lower  distributions
from LPC.

        Changes in the Company's assets and liabilities (excluding the effect of
currency  translation)  in 2001  compared with 2000 were  favorably  affected by
higher  accounts  payable  of  $21.8  million  and a  net  decrease  in  accrued
environmental  costs of $8.4 million primarily related to the use of assets from
the Company's special purpose trusts.  The Company's assets and liabilities were
unfavorably affected by higher inventories of $9.3 million,  lower accounts with
affiliates,  net of $5.5 million, and payment of accrued supplemental retirement
benefits  of $4.5  million.  In 2001 and  2000,  pursuant  to  terms of  certain
titanium ore  contracts,  the Company  purchased,  in advance of receipt,  $31.6
million and $15.3 million,  respectively, of titanium ore, a raw material, which
is reflected  in both  inventory  and accounts  payable and had no net effect on
operating cash flow.

        Changes in the Company's assets and liabilities (excluding the effect of
currency  translation) in 2000 compared with 1999 were  unfavorably  affected by
higher  inventories of $44.1 million  partially  offset by lower  receivables of
$23.7 million and lower environmental accruals of $12.6 million.

  Investing cash flows

        The Company's capital expenditures were $53.7 million, $31.1 million and
$35.6 million in 2001, 2000 and 1999, respectively. Capital expenditures in 2001
include an  aggregate  of $22.3  million  for the  rebuilding  of the  Company's
Leverkusen,  Germany  sulfate  plant.  The  Company  received  $23.4  million of
insurance  proceeds for property  damage  resulting from the Leverkusen fire and
paid $3.2  million of expenses  related to repairs and clean-up  costs.  Capital
expenditures  in 1999 were  higher  due to $6.0  million of  expenditures  for a
landfill expansion for the Company's Belgian facility.  Capital  expenditures at
LPC were  approximately  $4.0 million in each of 2001, 2000 and 1999 and are not
included in the Company's capital expenditures.

        The Company's capital  expenditures  during the past three years include
an aggregate of $23.0 million  ($5.0 million in 2001) for the Company's  ongoing
environmental  protection and compliance programs.  The Company's estimated 2002
and 2003 capital  expenditures are $32.0 million for each year, and include $5.0
million and $4.0 million,  respectively, in the area of environmental protection
and  compliance.  Included  in the 2002  capital  expenditure  estimate  is $4.0
million to complete reconstruction of the Leverkusen, Germany sulfate plant.

        In  February  2001,  EMS loaned  $13.4  million  to Tremont  Corporation
("Tremont") under a reducing revolving loan agreement.  See Notes 1 and 7 to the
Consolidated  Financial Statements.  The loan was approved by special committees
of the Company's and EMS's Boards of Directors. The loan bears interest at prime
plus 2% (8% at December 31, 2001),  is due March 31, 2003 and is  collateralized
by 10.2 million shares of NL common stock owned by Tremont. The creditworthiness


                                      -30-

<PAGE>

of Tremont  is  dependent,  in part,  on the value of the  Company as  Tremont's
interest in the Company is one of Tremont's more substantial assets. The maximum
amount  available for borrowing by Tremont  reduces by $250,000 per quarter.  In
each of the second,  third and fourth quarters of 2001,  Tremont repaid $250,000
of the loan.  At December  31,  2001,  the  outstanding  loan  balance was $12.7
million and no amounts were available for additional borrowings by Tremont.

        In May 2001, a wholly owned  subsidiary  of EMS loaned $20.0  million to
the Harold C. Simmons Family Trust No. 2 (the "Family Trust"), one of the trusts
described in Notes 1 and 7 to the  Consolidated  Financial  Statements,  under a
$25.0  million  revolving  credit  agreement.  The loan was  approved by special
committees  of the  Company's  and EMS's  Boards of  Directors.  The loan  bears
interest  at prime (6% at  December  31,  2001),  is due on demand  with 60 days
notice  and is  collateralized  by  13,749  shares,  or  approximately  35%,  of
Contran's  outstanding Class A voting common stock and 5,000 shares, or 100%, of
Contran's Series E Cumulative  preferred  stock,  both of which are owned by the
Family Trust. The value of the collateral is dependent, in part, on the value of
the  Company as  Contran's  interest  in the  Company,  through  its  beneficial
ownership of Valhi, is one of Contran's more substantial assets. At December 31,
2001, $5.0 million was available for additional borrowing by the Family Trust.

        In November  2001,  $7.9 million of  restricted  cash related to certain
letters of credit supporting certain insurance related contracts was released.

        In January  2002,  the Company  purchased  EWI RE, Inc. and EWI RE, Ltd.
(collectively  "EWI") for approximately $9.0 million. See Notes 19 and 23 to the
Consolidated Financial Statements.

        During 2000 the Company  purchased  1,000,000 shares of Tremont's common
stock in market transactions for an aggregate of $26 million.  See Notes 1 and 6
to the Consolidated  Financial Statements.  Tremont owns 10.2 million shares, or
21%, of NL's outstanding common stock.

  Financing cash flows

        In the second and third  quarters of 2001,  the Company  repaid euro 7.6
million  ($6.5  million  when paid) and euro 16.4  million  ($14.9  million when
paid),  respectively,  of its euro-denominated  short-term debt with excess cash
flow from operations.

        In the second and third  quarters of 2000 the  Company  repaid euro 17.9
million  ($16.7  million  when paid) and euro 13.0 million  ($12.2  million when
paid), respectively, of its euro-denominated short-term debt with cash flow from
operations.  In December  2000 the Company  borrowed  $43 million of  short-term
non-U.S.  dollar-denominated  bank debt and used the proceeds along with cash on
hand to redeem $50 million (par value) of the Company's  11.75%  Senior  Secured
Notes.

        In the first quarter of 1999 the Company  prepaid the remaining  balance
of DM 107 million  ($60  million  when paid) of a term loan that was part of the
Company's  previous  DM bank  credit  facility,  principally  by  drawing DM 100
million  ($56  million  when  drawn) on the  revolving  portion of the DM credit
facility.  In the second and third  quarters of 1999,  the Company  repaid DM 60
million ($33 million when paid) of the DM revolving  credit  facility  with cash
provided from operations.  The revolver's  outstanding balance of DM 120 million
was further reduced in October 1999 by DM 20 million ($11 million when paid). In


                                      -31-

<PAGE>

December  1999  the  Company  borrowed  $26  million  of  short-term   unsecured
euro-denominated  bank  debt and used the  proceeds  along  with cash on hand to
prepay the  remaining  balance of DM 100 million  ($52 million when paid) of the
revolving  portion of the DM credit  facility.  The DM credit  facility was then
terminated,  which released  collateral and eliminated certain  restrictive loan
covenants.

        On  February  6, 2002,  the  Company  gave  notice to the trustee of its
intention to redeem $25 million  principal  amount of the 11.75% Senior  Secured
Notes due 2003 on March 22, 2002, at the current call price of 100%. See Note 23
to the  Consolidated  Financial  Statements.  The Company may redeem  additional
11.75% Senior Secured Notes in 2002.

        The 11.75%  Senior  Secured  Notes are issued  pursuant to an  indenture
which  contains a number of covenants  and  restrictions  which,  among  others,
restrict the ability of the Company and its  subsidiaries  to incur debt,  incur
liens,  pay  dividends,  merge or  consolidate  with, or sell or transfer all or
substantially all of their assets to another entity. 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 11.75%  Senior  Secured  Notes at 101% of the  principal
amount.  The  Company  would  also be  required  to make an offer to  purchase a
specified  amount of the 11.75%  Senior  Secured Notes at par value in the event
the Company  generates a certain  amount of net proceeds from the sale of assets
outside the ordinary course of business, and such net proceeds are not otherwise
used for specified  purposes within a specified time period.  See Note 11 to the
Consolidated  Financial  Statements.  Other  than  operating  lease  commitments
disclosed in Note 20 to the Consolidated  Financial  Statements,  the Company is
not party to any off-balance sheet financing arrangements.

        Dividends paid during 2001,  2000 and 1999 totaled $39.8 million,  $32.7
million and $7.2 million,  respectively.  At December 31, 2001,  the Company had
$20 million available for payment of dividends,  acquisition of treasury shares,
acquisition of affiliate stock and other  restricted  payments as defined in the
11.75% Senior Secured Notes indenture.  On February 6, 2002, the Company's Board
of  Directors  declared  a  regular  quarterly  dividend  of $.20  per  share to
shareholders of record as of March 8, 2002 to be paid on March 22, 2002.

        Pursuant  to  its  share  repurchase  program,   the  Company  purchased
1,059,000  shares of its common stock in the open market at an aggregate cost of
$15.5 million in 2001, 1,682,000 shares of its common stock at an aggregate cost
of $30.9  million in 2000 and  552,000  shares of its  common  stock in the open
market at an  aggregate  cost of $7.2 million in 1999.  Approximately  1,207,000
additional   shares  are  available  for  purchase  under  the  Company's  share
repurchase  program.  The available  shares may be purchased over an unspecified
period of time,  and are to be held as  treasury  shares  available  for general
corporate purposes.

  Cash, cash equivalents,  restricted cash and restricted  marketable debt
securities and borrowing availability

        At  December  31,  2001,  the  Company  had cash  and  cash  equivalents
aggregating $116 million (29% held by non-U.S.  subsidiaries) and $83 million of
restricted cash  equivalents  and restricted  marketable debt securities held by
U.S. subsidiaries, of which $16 million was classified as a noncurrent asset. At
December 31, 2001,  the  Company's  subsidiaries  had $8 million  available  for
borrowing under non-U.S.  credit  facilities.  At December 31, 2001, the Company
had complied with all financial covenants governing its debt agreements.

                                      -32-
<PAGE>

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

  Income taxes

        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 penalties and interest.  See Note 14 to the
Consolidated Financial Statements.

        A  reduction  in the  German  "base"  income  tax rate  from 30% to 25%,
enacted in October 2000,  became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of  additional  deferred  income
tax expense in the fourth  quarter of 2000 due to a reduction  of the  Company's
deferred income tax asset related to certain German tax attributes.  The Company
does not expect its future current income tax expense to be affected by the rate
change in Germany.

        The Company  received tax assessments from the Norwegian tax authorities
proposing tax  deficiencies,  including  related  interest,  of NOK 39.3 million
pertaining to 1994 and 1996. The Company was  unsuccessful  in appealing the tax
assessments  and in June 2001 paid NOK 39.3 million  ($4.3 million when paid) to
the  Norwegian tax  authorities.  The Company was  adequately  reserved for this
contingency.  The lien on the Company's Fredrikstad,  Norway TiO2 plant in favor
of the Norwegian tax authorities has been released.

        The Company has received  preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities  proposing tax deficiencies,  including
related interest,  of approximately  euro 10.4 million ($9.2 million at December
31, 2001).  The Company has filed protests to the assessments for the years 1991
to 1997.  The Company is in  discussions  with the Belgian tax  authorities  and
believes that a significant portion of the assessments is without merit.

        No  assurance  can be  given  that the  Company's  tax  matters  will be
favorably resolved due to the inherent  uncertainties  involved in court and tax
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, 2001,  the Company had net deferred tax  liabilities  of
$133 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 $154 million at December 31, 2001,  principally related to Germany,
partially  offsetting  deferred  tax assets  which the  Company  believes do not
currently meet the "more-likely-than-not" recognition criteria.

                                      -33-
<PAGE>

  Environmental matters and litigation

        The Company has been named as a defendant,  PRP, or both, in a number of
legal  proceedings  associated  with  environmental  matters,   including  waste
disposal sites,  mining locations and facilities  currently or previously owned,
operated  or used  by the  Company,  certain  of  which  are on the  U.S.  EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
the Company evaluates the potential range of its liability at sites where it has
been  named  as  a  PRP  or  defendant,   including  sites  for  which  EMS  has
contractually  assumed the  Company's  obligation.  The Company  believes it has
adequate  accruals  for  reasonably  estimable  costs of such  matters,  but the
Company's ultimate  liability may be affected by a number of factors,  including
changes in  remedial  alternatives  and costs and the  allocation  of such costs
among PRPs.

        The Company is also a defendant in a number of legal proceedings seeking
damages for personal  injury and property damage arising out of the sale of lead
pigments and lead-based paints.  There is no assurance that the Company will not
incur  future  liability in respect of this  pending  litigation  in view of the
inherent  uncertainties  involved  in court  and jury  rulings  in  pending  and
possible  future cases.  However,  based on, among other things,  the results of
such litigation to date, the Company  believes that the pending lead pigment and
paint  litigation is without merit.  The Company has not accrued any amounts for
such pending litigation. Liability that may result, if any, cannot reasonably be
estimated.  The Company  currently  believes the  disposition  of all claims and
disputes,  individually and in the aggregate, should not have a material adverse
effect on the Company's consolidated  financial position,  results of operations
or liquidity.  There can be no assurance that additional  matters of these types
will not arise in the future. See Item 3. "Legal Proceedings" and Note 20 to the
Consolidated Financial Statements.

  Foreign operations

        As  discussed  above,  the Company has  substantial  operations  located
outside  the United  States for which the  functional  currency  is not the U.S.
dollar. As a result, the reported amount of the Company's assets and liabilities
related to its non-U.S. operations, and therefore the Company's consolidated net
assets,  will  fluctuate  based upon  changes in  currency  exchange  rates.  At
December 31, 2001,  the Company had  substantial  net assets  denominated in the
euro, Canadian dollar, Norwegian kroner and United Kingdom pound sterling.

  Euro currency

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

        The Company conducts substantial  operations in Europe. As of January 1,
2001, the functional currency of the Company's German, Belgian, Dutch and French
operations  have been  converted  to the euro  from  their  respective  national
currencies.  The  Company  has  assessed  and  evaluated  the impact of the euro
conversion on its business and made the necessary system  conversions.  The euro

                                      -34-

<PAGE>

conversion may impact the Company's  operations  including,  among other things,
changes  in  product  pricing  decisions   necessitated  by  cross-border  price
transparencies.  Such  changes in product  pricing  decisions  could impact both
selling prices and purchasing costs and, consequently,  favorably or unfavorably
impact results of operations, financial condition or liquidity.

  Other

        The  Company   periodically   evaluates  its   liquidity   requirements,
alternative uses of capital, capital needs and availability of resources in view
of, among other things,  its debt service and capital  expenditure  requirements
and estimated  future  operating  cash flows.  As a result of this process,  the
Company  in the  past  has  sought,  and in the  future  may  seek,  to  reduce,
refinance,  repurchase or restructure  indebtedness;  raise additional  capital;
issue additional  securities;  repurchase shares of its common stock; modify its
dividend policy; restructure ownership interests; sell interests in subsidiaries
or other assets;  or take a  combination  of such steps or other steps to manage
its liquidity and capital resources.  In the normal course of its business,  the
Company may review opportunities for the acquisition, divestiture, joint venture
or other business combinations in the chemicals or other industries,  as well as
the  acquisition  of  interests  in  related  companies.  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 11 to the Consolidated Financial Statements.

Summary of debt and other contractual commitments

        As more  fully  described  in the  Notes to the  Consolidated  Financial
Statements,  the Company is a party to various debt,  lease and other agreements
which  contractually  and  unconditionally  commit the  Company  to pay  certain
amounts  in the  future.  See  Notes  11 and  20 to the  Consolidated  Financial
Statements. The following table summarizes such contractual commitments that are
unconditional  both in  terms  of  timing  and  amount  by the  type and date of
payment.
<TABLE>
<CAPTION>

                                      Unconditional Payment Due Date
                                   -----------------------------------------------
                                              2003 -   2005 -   2007 and
  Contractual Commitment            2002      2004     2006      after      Total
  ----------------------           ------    -------   ------   --------  --------
                                                     (In millions)

<S>                                <C>       <C>       <C>      <C>       <C>
Indebtedness ..................    $   47.2  $  195.2  $    .2  $ --      $  242.6
                                   --------  --------  -------  --------  --------

Property and equipment ........        11.0    --       --        --          11.0
                                   --------  --------  -------  --------  --------

Operating leases ..............         4.0       5.2      2.8      20.1      32.1
                                   --------  --------  -------  --------  --------

                                   $   62.2  $  200.4  $   3.0  $   20.1  $  285.7
                                   ========  ========  =======  ========  ========
</TABLE>


                                      -35-
<PAGE>

        In addition,  the Company is a party to certain  other  agreements  that
contractually and  unconditionally  commit the Company to pay certain amounts in
the future. However, while the Company believes it is probable that amounts will
be spent in the future  under such  contracts,  the amount  and/or the timing of
such future payments will vary depending on certain provisions of the applicable
contract.  Agreements  to which  the  Company  is a party  that  fall  into this
category,  more  fully  described  in  Note  20 to  the  Consolidated  Financial
Statements,  includes the Company's  long-term supply contracts for the purchase
of chloride-process TiO2 feedstock.

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  General

        The Company is exposed to market risk from changes in currency  exchange
rates,  interest rates and equity security prices.  In the past, the Company has
periodically  entered  into  interest  rate swaps or other types of contracts in
order to manage a portion of its  interest  rate  market  risk.  Otherwise,  the
Company has not  generally  entered into  forward or option  contracts to manage
such market risks,  nor has the Company  entered into any such contract or other
type of derivative instrument for trading purposes.  The Company was not a party
to any forward or  derivative  option  contracts  related to  currency  exchange
rates,  interest rates or equity  security  prices at December 31, 2001 or 2000.
See Notes 2 and 21 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, 2001, the Company's aggregate
indebtedness  was  split  between  81%  of  fixed-rate  instruments  and  19% of
variable-rate  borrowings  (2000 - 73%  fixed-rate and 27%  variable-rate).  The
large percentage of fixed-rate debt instruments  minimizes  earnings  volatility
which would result from changes in interest rates.  The following table presents
principal amounts and  weighted-average  interest rates, by contractual maturity
dates, for the Company's  aggregate  indebtedness at December 31, 2001 and 2000.
At December  31, 2001 and 2000,  all  outstanding  fixed-rate  indebtedness  was
denominated in U.S. dollars, and all outstanding variable-rate  indebtedness was
denominated  in either euros or Norwegian  kroner.  Information  shown below for
such euro- and  kroner-denominated  indebtedness is presented in its U.S. dollar
equivalent at December 31, 2001 using that date's exchange rate of 1.13 euro per
U.S.  dollar (2000 - 1.08 euro per U.S.  dollar) and 9.02 kroner per U.S. dollar
(2000 - 8.90 kroner per U.S. dollar). Certain  kroner-denominated capital leases
totaling  $2.5 million in 2001 and $2.1 million in 2000 have been  excluded from
the table below.

                                      -36-

<PAGE>

<TABLE>
<CAPTION>


                                                                                Fair value at
                                               Contractual Maturity Date         December 31,
                                          ----------------------------------    -------------
                                          N/A      2002      2003      Total         2001
                                          ---      ----      ----      -----    -------------
                                                            (In millions)
<S>                                                <C>      <C>        <C>        <C>
December 31, 2001:
Fixed-rate debt (U.S. dollar-
  denominated):
    Principal amount ..................            $  --    $   194.0  $   194.0  $ 194.9
    Weighted-average interest rate ....               --       11.75%     11.75%
Variable-rate debt (Non-U.S. dollar
  -denominated):
    Principal amount - euro-denominated            $  24.0  $  --      $    24.0  $  24.0
    Weighted-average interest rate ....               3.8%     --           3.8%
    Principal amount - kroner
      denominated .....................            $  22.2  $  --      $    22.2  $  22.2
    Weighted-average interest rate ....               7.3%     --           7.3%

</TABLE>
<TABLE>
<CAPTION>

                                          2001     2002      2003      Total         2000
                                          ----     ----      ----      -----         ----
                                                            (In millions)

<S>                                       <C>      <C>      <C>        <C>        <C>
December 31, 2000:
Fixed-rate debt (U.S.dollar-
  denominated):
    Principal amount ..................   $   --   $  --    $   194.0  $   194.0  $ 195.9
    Weighted-average interest rate ....       --      --       11.75%     11.75%
Variable-rate debt (Non-U.S. dollar-
  denominated):
    Principal amount - euro-denominated   $  47.5  $  --    $  --      $    47.5  $  47.5
    Weighted-average interest rate ....      5.3%     --       --           5.3%
    Principal amount - kroner
      denominated .....................   $  22.5  $  --    $  --      $    22.5  $  22.5
    Weighted-average interest rate ....      7.9%     --       --           7.9%

</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 euro,  Canadian dollar,  Norwegian kroner 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.

        At December  31,  2001,  the Company had $24.0  million of  indebtedness
denominated  in euros (2000 - $47.5  million) and $22.2 million of  indebtedness
denominated in Norwegian kroner (2000 - $22.5 million).  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  $4.6
million (2000 - $7.0 million).

                                      -37-

<PAGE>

  Marketable equity and marketable debt security prices

        The  Company is  exposed to market  risk due to changes in prices of the
marketable  equity  securities  which are held.  The fair  value of such  equity
securities  at December 31, 2001 and 2000 was $45.2  million and $47.2  million,
respectively.  The  potential  change  in the  aggregate  fair  value  of  these
investments,  assuming a 10% change in prices,  would be $4.5  million  and $4.7
million,  respectively. The fair value of marketable debt securities at December
31, 2001 was $19.7 million.  The potential change in the aggregate fair value of
these  investments  assuming a 10% change in prices would be $2.0  million.  The
Company did not hold any  investments in marketable  debt securities at December
31, 2000.

  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  affect 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 could differ materially from such
assumptions.   Accordingly,   such  forward-looking  statements  should  not  be
considered to be projections by the Company of future events, gains or losses.

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

        Not applicable.

                                    PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

                                      -38-
<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  19 to  the  Consolidated  Financial
Statements.

                                     PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENT 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
                  -------------------

                  There  were no Reports  on Form 8-K filed  during the  quarter
                  ended December 31, 2001 and through the date of this report.

 (c)              Exhibits
                  --------

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

                                      -39-
<PAGE>





Item No.                              Exhibit Index
--------                              -------------

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

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

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

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

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

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

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

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

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

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

                                      -40-
<PAGE>


 10.4**        Amendment to Richards Bay Slag Sales  Agreement dated May 1, 1999
               between Richards Bay Iron and Titanium  (Proprietary) Limited and
               Kronos,  Inc. - incorporated  by reference to Exhibit 10.4 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 1999.

 10.5**        Amendment to Richards Bay Slag Sales Agreement dated June 1, 2001
               between Richards Bay Iron and Titanium  (Proprietary) Limited and
               Kronos, Inc.

 10.6          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.

 10.7          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.

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

 10.9          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.

 10.10         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.

 10.11         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.

 10.12         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.

 10.13         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.

                                      -41-
<PAGE>

 10.14         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.

 10.15         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.

 10.16         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.

 10.17         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.

 10.18*        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.

 10.19*        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.

 10.20*        NL Industries,  Inc. Variable Compensation Plan - incorporated by
               reference  to Exhibit B to the  Registrant's  Proxy  Statement on
               Schedule 14A for the annual meeting of  shareholders  held on May
               9, 2001.

 10.21*        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.

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

 10.23         Intercorporate   Services   Agreement  by  and  between   Contran
               Corporation and the Registrant  effective as of January 1, 2001 -
               incorporated  by reference  to Exhibit  10.1 to the  Registrant's
               Quarterly  Report on Form 10-Q for the  quarter  ended  March 31,
               2001.

                                      -42-
<PAGE>

 10.24         Intercorporate  Service  Agreement by and between Titanium Metals
               Corporation and the Registrant  effective as of January 1, 2001 -
               incorporated  by reference  to Exhibit  10.1 to the  Registrant's
               Quarterly  Report on Form  10-Q for the  quarter  ended  June 30,
               2001.

 10.25         Intercorporate   Services   Agreement  by  and  between   Tremont
               Corporation and the Registrant  effective as of January 1, 2001 -
               incorporated  by reference  to Exhibit  10.2 to the  Registrant's
               Quarterly  Report on Form 10-Q for the  quarter  ended  March 31,
               2001.

 10.26         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.

 10.27*        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.

 10.28*        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.

 10.29*        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.

 10.30*        Amended and Restated  Supplemental  Executive Retirement Plan for
               Executives  and Officers of NL Industries,  Inc.  effective as of
               May 1, 2001.

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

 10.32*        Agreement to Defer Bonus  Payment  dated January 10, 2002 between
               the   Registrant   and  Lawrence  A.  Wigdor  and  related  trust
               agreements.

 10.33*        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.

 10.34         Revolving   Loan  Note  dated   February  9,  2001  with  Tremont
               Corporation as Maker and NL  Environmental  Management  Services,
               Inc. as Payee - incorporated by reference to Exhibit 10.34 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2000.

                                      -43-
<PAGE>

 10.35         Security  Agreement dated February 9, 2001 by and between Tremont
               Corporation  and NL  Environmental  Management  Services,  Inc. -
               incorporated  by reference to Exhibit  10.35 to the  Registrant's
               Annual Report on Form 10-K for the year ended December 31, 2000.

 10.36         Tax  Agreement  between  Valhi,  Inc.  and  NL  Industries,  Inc.
               effective  as of January 1, 2001-  incorporated  by  reference to
               Exhibit 10.36 to the Registrant's  Annual Report on Form 10-K for
               the year ended December 31, 2000.

 10.37         Subscription   Agreement  by  and  among  Valhi,   Inc.,  Tremont
               Holdings,  LLC and Tremont Group,  Inc.  effective as of December
               31, 2000 -  incorporated  by  reference  to Exhibit  10.37 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2000.

 10.38         Revolving  Loan Note  dated May 4,  2001 with  Harold C.  Simmons
               Family  Trust No. 2 and EMS  Financial,  Inc. -  incorporated  by
               reference to Exhibit 10.1 to the Registrant's Quarterly Report on
               Form 10-Q for the quarter ended September 30, 2001.

 10.39         Security  Agreement  dated May 4, 2001 by and  between  Harold C.
               Simmons Family Trust No. 2 and EMS Financial, Inc. - incorporated
               by reference to Exhibit 10.2 to the Registrant's Quarterly Report
               on Form 10-Q for the quarter ended September 30, 2001.

 10.40         Purchase  Agreement  dated  January 4, 2002 by and among  Kronos,
               Inc.  as the  Purchaser,  and Big Bend  Holdings  LLC and Contran
               Insurance  Holdings,  Inc.,  as  Sellers  regarding  the sale and
               purchase of EWI RE, Inc. and EWI RE, Ltd.

 21.1          Subsidiaries of the Registrant.

 23.1          Consent of Independent Accountants.

 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,
               2001.

All  documents  in the  Exhibit  Index  above  that  have been  incorporated  by
reference were previously filed by the Registrant under SEC File Number 1-640.

*       Management contract, compensatory plan or arrangement.

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


                                      -44-
<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 14, 2002
                                           President and Chief Financial Officer




/s/ J. Landis Martin                        /s/ Harold C. Simmons
-------------------------------------       -----------------------------------
J. Landis Martin, March 14, 2002            Harold C. Simmons, March 14, 2002
Director,    President   and   Chief        Chairman of the Board
Executive Officer
(Principal Executive Officer)


/s/ Glenn R. Simmons                        /s/ Steven L. Watson
-------------------------------------       -----------------------------------
Glenn R. Simmons, March 14, 2002            Steven L. Watson, March 14, 2002
Director                                    Director


/s/ Kenneth R. Peak                         /s/ Dr. Lawrence A. Wigdor
-------------------------------------       -----------------------------------
Kenneth R. Peak, March 14, 2002             Dr. Lawrence A. Wigdor,
Director                                    March 14,2002
                                            Director,   President   and  Chief
                                            Executive Officer of Kronos


/s/ General Thomas P. Stafford              /s/ Ann Manix
-------------------------------------       -----------------------------------
General  Thomas P.  Stafford,               Ann Manix, March 14, 2002
March 14, 2002                              Director
Director



/s/ Robert D. Hardy
-------------------------------------
Robert D. Hardy, March 14, 2002
Vice President, Chief Financial
Officer
(Principal   Financial  Officer  and
Principal Accounting Officer)

                                      -45-
<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, 2001 and 2000             F-3 / F-4

Consolidated Statements of Income - Years ended
December 31, 2001, 2000 and 1999                                     F-5 / F-6

Consolidated Statements of Comprehensive Income - Years
ended December 31, 2001, 2000 and 1999                               F-7

Consolidated Statements of Shareholders' Equity - Years
ended December 31, 2001, 2000 and 1999                               F-8

Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999                                     F-9 / F-11

Notes to Consolidated Financial Statements                           F-12 / F-56


Financial Statement Schedules

Report of Independent Accountants                                    S-1

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

Schedule II - Valuation and Qualifying Accounts                      S-8


                                       F-1

<PAGE>






                        REPORT OF INDEPENDENT ACCOUNTANTS



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

        In our opinion,  the  accompanying  consolidated  balance sheets and the
related consolidated statements of income,  comprehensive income,  shareholders'
equity and cash flows present fairly, in all material respects, the consolidated
financial position of NL Industries, Inc. at December 31, 2001 and 2000, and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity  with accounting
principles  generally accepted in the United States of America.  These financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
auditing  standards  generally  accepted in the United States of America,  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.





                                                      PricewaterhouseCoopers LLP

Houston, Texas
March 1, 2002

                                       F-2




<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2001 and 2000

                      (In thousands, except per share data)

<TABLE>
<CAPTION>

                   ASSETS                                   2001         2000
                                                         ----------   ----------

<S>                                                      <C>          <C>
Current assets:
    Cash and cash equivalents ........................   $  116,037   $  120,378
    Restricted cash equivalents ......................       63,257       69,242
    Restricted marketable debt securities ............        3,583         --
    Accounts and notes receivable ....................      125,721      131,540
    Receivable from affiliates .......................        3,698          214
    Refundable income taxes ..........................        1,530       12,302
    Inventories ......................................      231,056      205,973
    Prepaid expenses .................................        3,193        2,458
    Deferred income taxes ............................       11,011       11,673
                                                         ----------   ----------

        Total current assets .........................      559,086      553,780
                                                         ----------   ----------


Other assets:
    Marketable equity securities .....................       45,227       47,186
    Receivable from affiliates .......................       31,650         --
    Investment in TiO2 manufacturing joint venture ...      138,428      150,002
    Prepaid pension cost .............................       18,411       22,789
    Restricted marketable debt securities ............       16,121         --
    Restricted cash equivalents ......................         --         17,942
    Unrecognized net pension obligations .............        5,901         --
    Other ............................................        6,517        4,707
                                                         ----------   ----------

        Total other assets ...........................      262,255      242,626
                                                         ----------   ----------


Property and equipment:
    Land .............................................       24,579       24,978
    Buildings ........................................      130,710      129,019
    Machinery and equipment ..........................      537,958      530,920
    Mining properties ................................       67,649       67,134
    Construction in progress .........................        5,071        4,586
                                                         ----------   ----------
                                                            765,967      756,637
    Less accumulated depreciation and depletion ......      436,217      432,255
                                                         ----------   ----------

        Net property and equipment ...................      329,750      324,382
                                                         ----------   ----------

                                                         $1,151,091   $1,120,788
                                                         ==========   ==========
</TABLE>

                                      F-3
<PAGE>





                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                           December 31, 2001 and 2000

                      (In thousands, except per share data)

<TABLE>
<CAPTION>


     LIABILITIES AND SHAREHOLDERS' EQUITY                      2001            2000
                                                           -----------    -----------

<S>                                                        <C>            <C>
Current liabilities:
    Notes payable ......................................   $    46,201    $    69,970
    Current maturities of long-term debt ...............         1,033            730
    Accounts payable and accrued liabilities ...........       176,223        147,877
    Payable to affiliates ..............................         6,919         10,634
    Accrued environmental costs ........................        59,891         53,307
    Income taxes .......................................         7,277         13,616
    Deferred income taxes ..............................         1,530          1,822
                                                           -----------    -----------

        Total current liabilities ......................       299,074        297,956
                                                           -----------    -----------

Noncurrent liabilities:
    Long-term debt .....................................       195,465        195,363
    Deferred income taxes ..............................       143,256        145,673
    Accrued environmental costs ........................        47,589         57,133
    Accrued pension cost ...............................        26,985         21,220
    Accrued postretirement benefits cost ...............        29,842         29,404
    Other ..............................................        14,729         23,272
                                                           -----------    -----------

        Total noncurrent liabilities ...................       457,866        472,065
                                                           -----------    -----------

Minority interest ......................................         7,208          6,279
                                                           -----------    -----------

Shareholders' equity:
    Preferred stock - 5,000 shares authorized, no shares
      issued or outstanding ............................          --             --
    Common stock - $.125 par value; 150,000 shares
      authorized; 66,845 and 66,839 shares issued ......         8,355          8,355
    Additional paid-in capital .........................       777,597        777,528
    Retained earnings ..................................       222,722        141,073
    Accumulated other comprehensive income (loss):
        Currency translation ...........................      (208,349)      (190,757)
        Marketable securities ..........................         8,350          8,885
        Pension liabilities ............................        (6,352)          --
    Treasury stock, at cost (17,808 and 16,787 shares) .      (415,380)      (400,596)
                                                           -----------    -----------

        Total shareholders' equity .....................       386,943        344,488
                                                           -----------    -----------

                                                           $ 1,151,091    $ 1,120,788
                                                           ===========    ===========

</TABLE>

Commitments and contingencies (Notes 7, 14 and 20)

                 See accompanying notes to consolidated financial statements.
                                       F-4

<PAGE>



                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                  Years ended December 31, 2001, 2000 and 1999

                      (In thousands, except per share data)

<TABLE>
<CAPTION>

                                                   2001          2000           1999
                                               -----------   -----------    -----------

<S>                                            <C>           <C>            <C>
Revenues and other income:
    Net sales ..............................   $   835,099   $   922,319    $   908,387
    Litigation settlement gains, net .......        11,730        69,465           --
    Insurance recoveries, net ..............        17,468          --             --
    Other income, net ......................        23,136        23,283         23,646
                                               -----------   -----------    -----------

                                                   887,433     1,015,067        932,033
                                               -----------   -----------    -----------

Costs and expenses:
    Cost of sales ..........................       578,060       610,449        662,315
    Selling, general and administrative ....       124,512       137,178        134,342
    Interest ...............................        27,569        31,243         36,884
                                               -----------   -----------    -----------

                                                   730,141       778,870        833,541
                                               -----------   -----------    -----------

        Income before income taxes, minority
          interest and extraordinary item ..       157,292       236,197         98,492

Income tax expense (benefit) ...............        34,925        78,420        (64,601)
                                               -----------   -----------    -----------

        Income before minority interest and
          extraordinary item ...............       122,367       157,777        163,093

Minority interest ..........................           960         2,436          3,322
                                               -----------   -----------    -----------

        Income before extraordinary item ...       121,407       155,341        159,771

Extraordinary item - early extinguishment of
  debt, net of tax benefit of $394 .........          --            (732)          --
                                               -----------   -----------    -----------

        Net income .........................   $   121,407   $   154,609    $   159,771
                                               ===========   ===========    ===========
</TABLE>



                                       F-5

<PAGE>





                             NL INDUSTRIES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)

                         Years ended December 31, 2001, 2000 and 1999

                            (In thousands, except per share data)

<TABLE>
<CAPTION>

                                              2001         2000          1999
                                           ----------   ----------    ----------

<S>                                        <C>          <C>           <C>
Basic earnings per share:
    Income before extraordinary item ...   $     2.44   $     3.08    $     3.09
    Extraordinary item .................      --              (.01)      --
                                           ----------   ----------    ----------

        Net income .....................   $     2.44$        3.07    $     3.09
                                           ==========   ==========    ==========


Diluted earnings per share:
    Income before extraordinary item ...   $     2.44   $     3.06    $     3.08
    Extraordinary item .................      --              (.01)      --
                                           ----------   ----------    ----------

        Net income .....................   $     2.44   $     3.05    $     3.08
                                           ==========   ==========    ==========

Weighted average shares used in the
  calculation of earnings per share:
    Basic ..............................       49,732       50,415        51,774
    Dilutive impact of stock options ...          124          334            93
                                           ----------   ----------    ----------

    Diluted ............................       49,856       50,749        51,867
                                           ==========   ==========    ==========

</TABLE>

          See accompanying notes to consolidated financial statements.
                                       F-6


<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                  Years ended December 31, 2001, 2000 and 1999

                                 (In thousands)

<TABLE>
<CAPTION>

                                                    2001         2000         1999
                                                 ---------    ---------    ---------

<S>                                              <C>          <C>          <C>
Net income ...................................   $ 121,407    $ 154,609    $ 159,771
                                                 ---------    ---------    ---------

Other comprehensive income (loss), net of tax:
    Marketable securities adjustment:
        Unrealized holding gains (losses)
          arising during the period ..........      (1,275)       4,064       (1,641)
        Add:  reclassification adjustment
          for loss included in net income ....         740        1,964         --
                                                 ---------    ---------    ---------

                                                      (535)       6,028       (1,641)

    Minimum pension liabilities adjustment ...      (6,352)       1,756        1,431

    Currency translation adjustment ..........     (17,592)     (30,735)     (26,582)
                                                 ---------    ---------    ---------

        Total other comprehensive loss .......     (24,479)     (22,951)     (26,792)
                                                 ---------    ---------    ---------

    Comprehensive income .....................   $  96,928    $ 131,658    $ 132,979
                                                 =========    =========    =========
</TABLE>


          See accompanying notes to consolidated financial statements.
                                       F-7


<PAGE>
                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                  Years ended December 31, 2001, 2000 and 1999

                      (In thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                                          Accumulated other
                                                                                                    comprehensive income (loss)
                                                                  Additional   Retained     ---------------------------------------
                                                       Common      paid-in      earnings     Currency       Pension      Marketable
                                                       stock      capital      (deficit)    translation    liabilities   securities
                                                     ---------    ----------   ---------    -----------    -----------   ----------
<S>                                                  <C>          <C>          <C>           <C>           <C>           <C>
Balance at December 31, 1998 ....................    $   8,355    $ 774,288    $(133,379)    $(133,440)    $  (3,187)    $   4,498

Net income ......................................         --           --        159,771          --            --            --
Other comprehensive income (loss), net of tax ...         --           --           --         (26,582)        1,431        (1,641)
Common dividends declared -  $.14 per share .....         --           --         (7,242)         --            --            --
Tax benefit of stock options exercised ..........         --             16         --            --            --            --
Treasury stock:
    Acquired (552 shares) .......................         --           --           --            --            --            --
    Reissued (25 shares) ........................         --           --           --            --            --            --
                                                     ---------    ---------    ---------     ---------     ---------     ---------

Balance at December 31, 1999 ....................        8,355      774,304       19,150      (160,022)       (1,756)        2,857

Net income ......................................         --           --        154,609          --            --            --
Other comprehensive income (loss), net of tax ...         --           --           --         (30,735)        1,756         6,028
Common dividends declared - $.65 per share ......         --           --        (32,686)         --            --            --
Tax benefit of stock options exercised ..........         --          3,224         --            --            --            --
Treasury stock:
    Acquired (1,682 shares) .....................         --           --           --            --            --            --
    Reissued (450 shares) .......................         --           --           --            --            --            --
                                                     ---------    ---------    ---------     ---------     ---------     ---------

Balance at December 31, 2000 ....................        8,355      777,528      141,073      (190,757)         --           8,885

Net income ......................................         --           --        121,407          --            --            --
Other comprehensive loss, net of tax ............         --           --           --         (17,592)       (6,352)         (535)
Common dividends declared - $.80 per share ......         --           --        (39,758)         --            --            --
Tax benefit of stock options exercised ..........         --             69         --            --            --            --
Treasury stock:
    Acquired (1,059 shares) .....................         --           --           --            --            --            --
    Reissued (38 shares) ........................         --           --           --            --            --            --
                                                     ---------    ---------    ---------     ---------     ---------     ---------

Balance at December 31, 2001 ....................    $   8,355    $ 777,597    $ 222,722     $(208,349)    $  (6,352)    $   8,350
                                                     =========    =========    =========     =========     =========     =========

<CAPTION>
                                                     Treasury
                                                      stock          Total
                                                    ----------      --------

<S>                                                 <C>             <C>
Balance at December 31, 1998 ....................   $ (364,801)     $152,334

Net income ......................................         --         159,771
Other comprehensive income (loss), net of tax ...         --         (26,792)
Common dividends declared -  $.14 per share .....         --          (7,242)
Tax benefit of stock options exercised ..........         --              16
Treasury stock:
    Acquired (552 shares) .......................       (7,210)       (7,210)
    Reissued (25 shares) ........................          210           210
                                                    ----------      --------

Balance at December 31, 1999 ....................     (371,801)      271,087

Net income ......................................         --         154,609
Other comprehensive income (loss), net of tax ...         --         (22,951)
Common dividends declared - $.65 per share ......         --         (32,686)
Tax benefit of stock options exercised ..........         --           3,224
Treasury stock:
    Acquired (1,682 shares) .....................      (30,886)      (30,886)
    Reissued (450 shares) .......................        2,091         2,091
                                                    ----------      --------

Balance at December 31, 2000 ....................     (400,596)      344,488

Net income ......................................         --         121,407
Other comprehensive loss, net of tax ............         --         (24,479)
Common dividends declared - $.80 per share ......         --         (39,758)
Tax benefit of stock options exercised ..........         --              69
Treasury stock:
    Acquired (1,059 shares) .....................      (15,502)      (15,502)
    Reissued (38 shares) ........................          718           718
                                                    ----------      --------

Balance at December 31, 2001 ....................   $ (415,380)     $386,943
                                                    ==========      ========
</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, 2001, 2000 and 1999

                                 (In thousands)

<TABLE>
<CAPTION>
                                                     2001           2000         1999
                                                   ---------     ---------     ---------

<S>                                                <C>           <C>           <C>
Cash flows from operating activities:
    Net income ................................    $ 121,407     $ 154,609     $ 159,771
    Depreciation, depletion and amortization ..       29,599        29,733        33,730
    Noncash interest income on restricted cash
      and restricted marketable debt securities       (3,580)       (1,531)         --
    Noncash interest expense ..................          467           599         1,682
    Deferred income taxes .....................        3,256        40,186       (86,772)
    Minority interest .........................          960         2,436         3,322
    Net (gains) losses from:
        Securities transactions ...............        1,133        (2,531)         --
        Disposition of property and equipment .          735         1,562           429
    Pension cost, net .........................       (2,967)      (11,816)       (4,702)
    Other postretirement benefits, net ........          531         1,062        (5,459)
    Distributions from TiO2 manufacturing joint
      venture .................................       11,313         7,550        13,650
    Litigation settlement gains, net ..........      (10,307)      (69,465)         --
    Insurance recoveries, net .................      (17,468)         --            --
    Extraordinary item ........................         --             732          --
    Other, net ................................          261          --            --
                                                   ---------     ---------     ---------

                                                     135,340       153,126       115,651

    Change in assets and liabilities:
      Accounts and notes receivable ...........          902         1,417       (22,289)
      Inventories .............................      (32,698)      (23,395)       20,663
      Prepaid expenses ........................         (526)         (244)         (463)
      Accounts payable and accrued liabilities        31,091         9,301         7,315
      Income taxes ............................        4,107         4,843         6,729
      Accounts with affiliates ................       (5,670)         (123)       (3,572)
      Accrued environmental costs .............        7,068        (1,279)      (13,856)
      Other noncurrent assets .................       (1,937)         (168)        1,090
      Other noncurrent liabilities ............       (7,944)       (3,723)       (2,960)
                                                   ---------     ---------     ---------

          Net cash provided by operating
            activities ........................      129,733       139,755       108,308
                                                   ---------     ---------     ---------
</TABLE>

                                      F-9


<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Years ended December 31, 2001, 2000 and 1999

                                 (In thousands)

<TABLE>
<CAPTION>

                                                        2001         2000         1999
                                                     ---------    ---------    ---------
<S>                                                  <C>          <C>          <C>
Cash flows from investing activities:
    Capital expenditures .........................   $ (53,669)   $ (31,089)   $ (35,559)
    Property damaged by fire:
        Insurance proceeds .......................      23,361         --           --
        Other, net ...............................      (3,205)        --           --
    Loans to affiliates:
        Loans ....................................     (33,400)        --           --
        Collections ..............................         750         --           --
    Purchase of Tremont Corporation common stock .        --        (26,040)        --
    Change in restricted cash equivalents and
      restricted marketable debt securities, net .       8,509          630       (5,176)
    Proceeds from disposition of property and
      equipment ..................................         419          139        2,344
    Proceeds from disposition of marketable
      securities .................................           4          158         --
    Other, net ...................................        --            (33)        --
                                                     ---------    ---------    ---------

        Net cash used by investing activities ....     (57,231)     (56,235)     (38,391)
                                                     ---------    ---------    ---------

Cash flows from financing activities:
    Indebtedness:
        Borrowings ...............................       1,437       44,923       82,038
        Principal payments .......................     (22,428)     (79,162)    (155,787)
    Dividends paid ...............................     (39,758)     (32,686)      (7,242)
    Treasury stock:
        Purchased ................................     (15,502)     (30,886)      (7,210)
        Reissued .................................         718        2,091          210
    Distributions to minority interests ..........          (5)          (6)          (6)
                                                     ---------    ---------    ---------

        Net cash used by financing activities ....     (75,538)     (95,726)     (87,997)
                                                     ---------    ---------    ---------

        Net change during the year from operating,
          investing and financing activities .....   $  (3,036)   $ (12,206)   $ (18,080)
                                                     =========    =========    =========
</TABLE>

                                      F-10
<PAGE>
                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Years ended December 31, 2001, 2000 and 1999

                                 (In thousands)

<TABLE>
<CAPTION>
                                                           2001          2000        1999
                                                         ---------    ---------    ---------

<S>                                                     <C>         <C>            <C>
Cash and cash equivalents:
    Net change during the year from:
        Operating, investing and financing activities   $   (3,036) $   (12,206)   $ (18,080)
        Currency translation .........................      (1,305)      (1,640)      (2,649)
                                                         ---------    ---------    ---------

                                                            (4,341)     (13,846)     (20,729)

        Balance at beginning of year .................     120,378      134,224      154,953
                                                         ---------    ---------    ---------

        Balance at end of year .......................   $ 116,037    $ 120,378    $ 134,224
                                                         =========    =========    =========

Supplemental disclosures - cash paid for:
    Interest .........................................   $  27,143    $  32,354    $  35,540
    Income taxes .....................................      29,770       33,398       14,963

</TABLE>

                                      F-11
<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Organization and basis of presentation:

        NL  Industries,  Inc.  ("NL")  conducts  its titanium  dioxide  pigments
("TiO2")   operations  through  its  wholly  owned  subsidiary,   Kronos,   Inc.
("Kronos").  At December 31, 2001, Valhi, Inc. ("Valhi") and Tremont Corporation
("Tremont"),   each  affiliates  of  Contran   Corporation   ("Contran"),   held
approximately 61% and 21%,  respectively,  of NL's outstanding  common stock. At
December  31,  2001,  Contran and its  subsidiaries  held  approximately  94% of
Valhi's outstanding common stock, and a company 80% owned by Valhi and 20% owned
by  NL  held   approximately   80%  of  Tremont's   outstanding   common  stock.
Substantially  all of  Contran's  outstanding  voting  stock  is held by  trusts
established for the benefit of certain  children and  grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee.  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. See Notes 7 and 19.

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  in  the  U.S.  ("GAAP")  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements,  and the reported  amount of revenues and
expenses during the reporting period.  Actual results may differ from previously
estimated amounts under different assumptions or conditions.

Translation of foreign currencies

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

Cash equivalents

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

                                      F-12

<PAGE>

Restricted cash equivalents and restricted marketable debt securities

        Restricted cash  equivalents  and restricted  marketable debt securities
are primarily invested in U.S. government securities and money market funds that
invest primarily in U.S. government  securities.  At December 31, 2001 and 2000,
restricted  cash  equivalents of  approximately  $8.6 million and $17.1 million,
respectively,  collateralized  undrawn  letters of credit,  and restricted  cash
equivalents and restricted  marketable debt  securities of  approximately  $74.4
million and $70.1  million,  respectively,  were held by special  purpose trusts
established  to pay  future  environmental  remediation  obligations  and  other
environmental  expenditures  of the  Company.  Generally,  restricted  cash  and
restricted  marketable  debt  securities  are  classified as either a current or
noncurrent asset depending upon the classification of the liability to which the
restricted amount relates.  Additionally,  restricted marketable debt securities
are generally  classified as either current or noncurrent  assets depending upon
the maturity  date of each  marketable  debt  security and are carried at market
which approximates cost. Unrealized gains and losses on available-for-sale  debt
securities are included in other  comprehensive  income  (loss),  net of related
deferred income taxes. See Note 6. Gains and losses on  available-for-sale  debt
securities are recognized in income upon  realization  and are computed based on
specific identification of the debt securities sold.

Marketable equity securities and securities transactions

        Marketable  equity  securities  are  carried  at market  based on quoted
market  prices.   Unrealized  gains  and  losses  on  available-for-sale  equity
securities are included in other  comprehensive  income  (loss),  net of related
deferred income taxes. See Note 6. Gains and losses on available-for-sale equity
securities are recognized in income upon  realization  and are computed based on
specific  identification of the equity  securities sold.  Declines in value that
are judged to be other-than-temporary are reported in other income, net.

Inventories

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

Investment in TiO2 manufacturing joint venture

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

Property, equipment, depreciation and depletion

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

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

                                      F-13
<PAGE>

        When  events or changes in  circumstances  indicate  that  assets may be
impaired,  an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances  include, among other things, (i) significant
current  and prior  periods or current  and  projected  periods  with  operating
losses,  (ii) a significant  decrease in the market value of an asset or (iii) a
significant  change  in the  extent  or  manner  in which an asset is used.  All
relevant  factors  are  considered.  The test for  impairment  is  performed  by
comparing the estimated  future  undiscounted  cash flows (exclusive of interest
expense)  associated  with  the  asset  to the  asset's  net  carrying  value to
determine  if a  write-down  to market  value or  discounted  cash flow value is
required. Effective January 1, 2002, the Company will assess impairment of other
long-lived  assets (such as property and  equipment  and mining  properties)  in
accordance with Statement of Financial  Accounting Standards ("SFAS") No. 144 as
discussed under "New accounting principles not yet adopted."

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 12.

        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 2001,
$1.7 million in 2000 and nil in 1999.

Environmental remediation costs

        Environmental  remediation  costs  are  accrued  when  estimated  future
expenditures  are  probable  and  reasonably  estimable.  The  estimated  future
expenditures  generally  are not  discounted  to present  value.  Recoveries  of
remediation  costs from other parties,  if any, are reported as receivables when
their receipt is deemed probable.  At December 31, 2001 and 2000, no receivables
for recoveries have been recognized.

Net sales

        The Company  adopted the  Securities and Exchange  Commission's  ("SEC")
Staff  Accounting  Bulletin ("SAB") No. 101,  "Revenue  Recognition in Financial
Statements," as amended,  in 2000.  Revenue  generally is realized or realizable
and earned when all of the  requirements of SAB No. 101 are met,  including when
title and the risks and rewards of ownership  passes to the customer  (generally
at the time the product is shipped to the customer).  The impact of adopting SAB
No. 101 was not material. Amounts charged to customers for shipping and handling
are included in net sales.

                                      F-14

<PAGE>

Repair and maintenance costs

        The Company performs  planned major  maintenance  activities  during the
year.  Repair and maintenance  costs estimated to be incurred in connection with
planned major maintenance  activities are accrued in advance and are included in
cost of goods sold.

Shipping and handling costs

        Shipping  and  handling  costs are  included  in  selling,  general  and
administrative expense and were $49 million in 2001, $50 million in 2000 and $54
million in 1999.

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 in the various taxing  jurisdictions  in which
it operates 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.

        Effective  January 1, 2001, the Company and its qualifying  subsidiaries
were  included  in the  consolidated  U.S.  federal  tax return of Contran  (the
"Contran  Tax  Group").  As a member of the Contran Tax Group,  the Company is a
party to a tax sharing agreement (the "Contran Tax Agreement").  The Contran Tax
Agreement  provides that the Company compute its provision for U.S. income taxes
on a separate-company basis using the tax elections made by Contran. Pursuant to
the Contran  Tax  Agreement  and using the tax  elections  made by Contran,  the
Company  makes  payments to or receives  payments from Valhi in amounts it would
have paid to or received from the U.S.  Internal Revenue Service had it not been
a member of the  Contran Tax Group.  Refunds  are limited to amounts  previously
paid under the Contran Tax Agreement unless the Company was entitled to a refund
from the U.S. Internal Revenue Service on a separate company basis.  Pursuant to
the Contran Tax Agreement,  the Company has a $2.2 million receivable from Valhi
related to capital loss carrybacks  which would have been  recoverable  from the
U.S. Internal Revenue Service.

Derivatives and hedging activities

        The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging  Activities,"  as amended,  effective  January 1, 2001. SFAS No. 133
establishes accounting standards for derivative  instruments,  including certain
derivative instruments embedded in other contracts,  and for hedging activities.
Under  SFAS No.  133,  all  derivatives  are  recognized  as  either  assets  or
liabilities and measured at fair value. The accounting for changes in fair value
of  derivatives  is  dependent  upon  the  intended  use of the  derivative.  As
permitted  by the  transition  requirements  of SFAS No. 133,  as  amended,  the
Company  exempted from the scope of SFAS No. 133 all host  contracts  containing
embedded derivatives which were issued or acquired prior to January 1, 1999. The
Company  is not a party to any  significant  derivative  or  hedging  instrument
covered by SFAS No. 133 at  December  31,  2001,  and there was no impact on the
Company's financial statements from adopting SFAS No. 133.

                                      F-15
<PAGE>

        The Company  periodically  uses interest rate swaps,  currency swaps and
other types of contracts to manage interest rate and foreign  exchange risk with
respect to  financial  assets or  liabilities.  The Company has not entered into
these  contracts for trading or  speculative  purposes in the past,  nor does it
currently  anticipate doing so in the future. The Company was not a party to any
such contracts during 2001, 2000 and 1999.

Earnings per share

        Basic  earnings  per share is based on the  weighted  average  number of
common  shares  outstanding  during each period.  Diluted  earnings per share is
based on the  weighted  average  number of  common  shares  outstanding  and the
dilutive  impact of outstanding  stock options.  The weighted  average number of
outstanding  stock options which were excluded from the  calculation  of diluted
earnings per share because their impact would have been antidilutive  aggregated
876,000, 222,000 and 1,511,000 in 2001, 2000 and 1999, respectively.  There were
no  adjustments  to  income  from  continuing  operations  or net  income in the
computation of the diluted earnings per share amounts.

Other

        Effective  July 1, 2001,  the Company  adopted  SFAS No. 141,  "Business
Combinations," for all business combinations initiated on or after July 1, 2001,
and all purchase business combinations (including step acquisitions). Under SFAS
No. 141, all business combinations will be accounted for by the purchase method,
and the pooling-of-interests method will be prohibited.

New accounting principles not yet adopted

        The Company  will adopt SFAS No.  142,  "Goodwill  and Other  Intangible
Assets,"  effective  January 1, 2002.  Under SFAS No. 142,  goodwill,  including
goodwill arising from the difference between the cost of an investment accounted
for by the equity method and the amount of the  underlying  equity in net assets
of such equity method investee ("equity method goodwill"), will not be amortized
on a periodic basis. Instead,  goodwill (other than equity method goodwill) will
be subject to an  impairment  test to be performed at least on an annual  basis,
and  impairment  reviews may result in future  periodic  write-downs  charged to
earnings. Equity method goodwill will not be tested for impairment in accordance
with SFAS No. 142;  rather,  the  overall  carrying  amount of an equity  method
investee will continue to be reviewed for impairment in accordance with existing
GAAP.  There is currently no equity method  goodwill  associated with any of the
Company's equity method  investees.  All goodwill arising in a purchase business
combination  (including  step  acquisitions)  completed on or after July 1, 2001
would  not be  periodically  amortized  from the date of such  combination.  The
Company had no goodwill at December 31, 2001.

        The Company will adopt SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations,"  no later than January 1, 2003. Under SFAS No. 143, the fair value
of a liability  for an asset  retirement  obligation  covered under the scope of
SFAS No.  143  would be  recognized  in the  period in which  the  liability  is
incurred,  with an  offsetting  increase in the  carrying  amount of the related
long-lived  asset.  Over time,  the  liability  would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset.  Upon settlement of the liability,  an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon  settlement.
The Company is still  studying this  standard to determine,  among other things,


                                      F-16

<PAGE>

whether it has any asset  retirement  obligations  which are  covered  under the
scope of SFAS No. 143, and the effect,  if any, to the Company of adopting  SFAS
No. 143 has not yet been determined.

        The Company will adopt SFAS No. 144,  "Accounting  for the Impairment or
Disposal of Long-Lived  Assets," effective January 1, 2002. SFAS No. 144 retains
the fundamental  provisions of existing GAAP with respect to the recognition and
measurement  of  long-lived  asset   impairment   contained  in  SFAS  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." However, SFAS No. 144 provides new guidance intended to address
certain  significant   implementation  issues  associated  with  SFAS  No.  121,
including expanded guidance with respect to appropriate cash flows to be used to
determine  whether  recognition of any long-lived  asset impairment is required,
and if required how to measure the amount of the  impairment.  SFAS No. 144 also
requires  that any net assets to be  disposed  of by sale to be  reported at the
lower of  carrying  value or fair  value  less  cost to sell,  and  expands  the
reporting of discontinued  operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity.  The  Company  believes  the  adoption  of SFAS No.  144 will not have a
material  adverse  effect  on the  Company's  consolidated  financial  position,
results of operations or liquidity.

Note 3 - Business and geographic segments:

        The  Company's  operations  are  conducted  by Kronos  in one  operating
business  segment - the production and sale of TiO2.  Titanium  dioxide pigments
are used to impart  whiteness,  brightness  and  opacity  to a wide  variety  of
products,  including paints,  plastics,  paper, fibers and ceramics. At December
31,  2001  and  2000,  the net  assets  of  non-U.S.  subsidiaries  included  in
consolidated   net  assets   approximated   $394   million  and  $352   million,
respectively.

        The Company  evaluates its TiO2 segment  performance  based on operating
income.  Operating  income is defined as income before  income  taxes,  minority
interest,  extraordinary items, interest expense, certain nonrecurring items and
certain general corporate items.  Corporate items excluded from operating income
include corporate expense, interest and dividend income not attributable to TiO2
operations, litigation settlement gains, securities transaction gains and losses
and gains and losses from the disposal of long-lived assets outside the ordinary
course of business.  The accounting policies of the TiO2 segment are the same as
those  described in Note 2. Interest  income included in the calculation of TiO2
operating income is disclosed in Note 15 as "Trade interest income."

        Segment  assets  are  comprised  of  all  assets   attributable  to  the
reportable operating segment. The Company's investment in the TiO2 manufacturing
joint  venture  (see  Note 8) is  included  in  TiO2  business  segment  assets.
Corporate assets are not attributable to the TiO2 operating  segment and consist
principally of cash, cash equivalents,  restricted cash equivalents,  restricted
marketable debt securities, marketable equity securities and certain receivables
from  affiliates.  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-17
<PAGE>
<TABLE>

                                                       Years ended December 31,
                                                -----------------------------------
                                                   2001         2000        1999
                                                ---------    ---------    ---------
                                                          (In thousands)

<S>                                             <C>          <C>          <C>
Business segment - TiO2

    Net sales ...............................   $ 835,099    $ 922,319    $ 908,387
    Other income, excluding corporate .......      10,815        8,167       12,484
                                                ---------    ---------    ---------
                                                  845,914      930,486      920,871

    Cost of sales ...........................     578,060      610,449      662,315
    Selling, general and administrative,
      excluding corporate ...................      98,667      107,554      112,888
                                                ---------    ---------    ---------

        Operating income ....................     169,187      212,483      145,668

    Insurance recoveries, net ...............      17,468         --           --
                                                ---------    ---------    ---------

        Income before corporate items, income
          taxes, minority interest and
          extraordinary item ................     186,655      212,483      145,668

    General corporate income (expense):
        Securities earnings:
            Interest and dividends ..........       8,886        8,346        6,597
            Securities transactions, net ....      (1,133)       2,531         --
        Litigation settlement gains, net and
          other income ......................      16,298       73,704        4,565
        Corporate expense ...................     (25,845)     (29,624)     (21,454)
        Interest expense ....................     (27,569)     (31,243)     (36,884)
                                                ---------    ---------    ---------

        Income before income taxes, minority
          interest and extraordinary item ...   $ 157,292    $ 236,197    $  98,492
                                                =========    =========    =========

    Capital expenditures:
        Kronos ..............................   $  53,656    $  31,066    $  32,703
        General corporate ...................          13           23        2,856
                                                ---------    ---------    ---------

                                                $  53,669    $  31,089    $  35,559
                                                =========    =========    =========

    Depreciation, depletion and amortization:
        Kronos ..............................   $  28,907    $  28,989    $  33,047
        General corporate ...................         692          744          683
                                                ---------    ---------    ---------

                                                $  29,599    $  29,733    $  33,730
                                                =========    =========    =========
</TABLE>

                                      F-18
<PAGE>

<TABLE>
<CAPTION>


                                                   Years ended December 31,
                                            ------------------------------------
                                               2001        2000          1999
                                            ---------    ---------    ---------
                                                       (In thousands)

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

    Net sales - point of origin:
        Germany .........................   $ 398,470    $ 444,050    $ 459,467
        United States ...................     278,624      313,426      299,520
        Canada ..........................     149,412      154,579      162,746
        Belgium .........................     126,782      137,829      138,671
        Norway ..........................     102,843       98,300       88,277
        Other ...........................      82,320       92,691       90,442
        Eliminations ....................    (303,352)    (318,556)    (330,736)
                                            ---------    ---------    ---------

                                            $ 835,099    $ 922,319    $ 908,387
                                            =========    =========    =========

    Net sales - point of destination:
        Europe ..........................   $ 425,338    $ 480,388    $ 478,652
        United States ...................     258,347      283,327      268,037
        Canada ..........................      47,061       53,060       60,834
        Latin America ...................      25,514       27,104       35,308
        Asia ............................      46,169       45,922       41,612
        Other ...........................      32,670       32,518       23,944
                                            ---------    ---------    ---------

                                            $ 835,099    $ 922,319    $ 908,387
                                            =========    =========    =========
</TABLE>
<TABLE>
<CAPTION>
                                                        December 31,
                                            ------------------------------------
                                               2001        2000          1999
                                            ---------    ---------    ---------
                                                       (In thousands)

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

    Net property and equipment:
        Germany ......................    $  182,387    $  173,385    $  190,292
        Canada .......................        54,676        57,929        62,334
        Belgium ......................        46,841        46,778        49,146
        Norway .......................        38,549        38,361        39,845
        Other ........................         7,297         7,929         6,841
                                          ----------    ----------    ----------

                                          $  329,750    $  324,382    $  348,458
                                          ==========    ==========    ==========

    Total assets:
        Kronos .......................    $  900,401    $  893,340    $  972,549
        General corporate ............       250,690       227,448        83,624
                                          ----------    ----------    ----------

                                          $1,151,091    $1,120,788    $1,056,173
                                          ==========    ==========    ==========
</TABLE>
                                      F-19
<PAGE>


Note 4 -Accounts and notes receivable:
<TABLE>
<CAPTION>
                                                             December 31,
                                                      -------------------------
                                                         2001            2000
                                                      ---------       ---------
                                                           (In thousands)

<S>                                                   <C>             <C>
Trade receivables ..............................      $  99,989       $ 114,776
Insurance claims receivable ....................         11,505           2,236
Recoverable VAT and other receivables ..........         16,585          16,750
Allowance for doubtful accounts ................         (2,358)         (2,222)
                                                      ---------       ---------

                                                      $ 125,721       $ 131,540
                                                      =========       =========
</TABLE>

Note 5 - Inventories:
<TABLE>
<CAPTION>
                                                             December 31,
                                                     ---------------------------
                                                        2001               2000
                                                     --------           --------
                                                           (In thousands)

<S>                                                  <C>                <C>
Raw materials ............................           $ 79,162           $ 66,061
Work in process ..........................              9,675              7,117
Finished products ........................            117,201            107,120
Supplies .................................             25,018             25,675
                                                     --------           --------

                                                     $231,056           $205,973
                                                     ========           ========
</TABLE>

Note 6- Marketable equity securities and securities transactions:
<TABLE>
<CAPTION>
                                                                December 31,
                                                           --------------------
                                                             2001         2000
                                                           --------    --------
                                                               (in thousands)

<S>                                                        <C>         <C>
Available-for-sale marketable equity securities:
    Unrealized gains ...................................   $ 14,917    $ 14,912
    Unrealized losses ..................................     (2,070)     (1,244)
    Cost ...............................................     32,380      33,518
                                                           --------    --------

        Aggregate fair value ...........................   $ 45,227    $ 47,186
                                                           ========    ========
</TABLE>

        During 2000 the Company  purchased  1,000,000 shares of Tremont's common
stock in market transactions for an aggregate of $26.0 million. Before the close
of business on December 31, 2000, the Company held 16% of Tremont's  outstanding
common  stock,  including  approximately  36,000 shares  previously  held by the
Company, and Valhi held an additional 64% of Tremont's outstanding common stock.
Effective  with the  close  of  business  on  December  31,  2000,  the  Company
contributed  substantially all of its Tremont shares,  and Valhi contributed all
of its Tremont shares, to a newly formed company,  Tremont Group, Inc. ("Tremont
Group"),  in return for a 20% and 80% respective  ownership  interest in Tremont
Group. After the contributions, Tremont Group held the 80% of Tremont previously
owned by the Company and Valhi.  At December  31, 2001 and 2000,  the  aggregate
fair value of the Company's indirect investment in Tremont was $29.9 million and
$33.1 million, respectively.

        The Company's  stock of Tremont Group is redeemable at the option of the
Company for fair value based upon the value of the  underlying  Tremont  shares,

                                      F-20
<PAGE>

and  the  Company   accounts  for  its   investment   in  Tremont  Group  as  an
available-for-sale  marketable equity security.  The Company also held 1,186,200
shares of Valhi's  outstanding  common stock  (approximately 1%) at December 31,
2001 and 2000. At December 31, 2001, the aggregate  adjusted cost basis and fair
value of the Valhi  common  stock was $5.9  million  ($5.9  million in 2000) and
$15.1 million ($13.6 million in 2000),  respectively.  The Company  accounts for
investments  in its parent  companies as  available-for-sale  marketable  equity
securities carried at fair value. See Note 1.

        In 2000 the  Company  received  approximately  390,000  shares of common
stock  pursuant to the  demutualization  of an insurance  company from which the
Company had purchased certain insurance policies.  The Company recognized a $5.6
million securities gain based on the insurance company's initial public offering
price of $14.25 per share.  The shares  were  placed in a  Voluntary  Employees'
Beneficiary  Association ("VEBA") trust, the assets of which may only be used to
pay for certain  retiree  benefits.  The Company  accounted for the $5.6 million
contribution of the insurance company's common stock to the trust as a reduction
of its accrued postretirement  benefits cost liability.  The shares were sold by
the trust in 2000 for $7.8 million or $20 per share. See Notes 12 and 15.

        In 2001 and 2000 the Company  recognized  noncash  securities  losses of
$1.1 million and $3.1  million,  respectively,  related to  other-than-temporary
declines in value of certain  available-for-sale  marketable  equity  securities
held by the Company. See Note 15.

Note 7 - Receivable from affiliates:

        A majority-owned  subsidiary of the Company, NL Environmental Management
Services,  Inc.  ("EMS"),  loaned  $13.4  million  to  Tremont  under a reducing
revolving  loan agreement in the first quarter of 2001. See Note 1. The loan was
approved by special  committees  of the Company's and EMS's Boards of Directors.
The loan bears interest at prime plus 2% (8% at December 31, 2001), is due March
31, 2003 and is  collateralized  by 10.2 million shares of NL common stock owned
by Tremont. The creditworthiness of Tremont is dependent in part on the value of
the  Company as  Tremont's  interest  in the  Company is one of  Tremont's  more
substantial  assets.  The maximum  amount  available  for  borrowing  by Tremont
reduces  by  $250,000  per  quarter.  In each of the  second,  third and  fourth
quarters of 2001, Tremont repaid $250,000 of the loan. At December 31, 2001, the
outstanding  loan balance was $12.7  million and no amounts were  available  for
additional borrowings by Tremont. See Note 19.

        In May 2001, a wholly owned  subsidiary of EMS loaned $20 million to the
Harold  C.  Simmons  Family  Trust No. 2  ("Family  Trust"),  one of the  trusts
described in Note 1, under a $25 million  revolving credit  agreement.  The loan
was  approved  by  special  committees  of the  Company's  and  EMS's  Boards of
Directors. The loan bears interest at prime (6% at December 31, 2001), is due on
demand  with  sixty days  notice  and is  collateralized  by 13,749  shares,  or
approximately  35%, of  Contran's  outstanding  Class A voting  common stock and
5,000 shares, or 100%, of Contran's Series E Cumulative preferred stock, both of
which are owned by the Family Trust.  The value of this  collateral is dependent
in part on the  value of the  Company  as  Contran's  interest  in the  Company,
through its beneficial  ownership of Valhi, is one of Contran's more substantial
assets. At December 31, 2001, $5 million was available for additional  borrowing
by the Family Trust.  The loan was classified as noncurrent at December 31, 2001
as the Company does not expect to demand repayment within one year. See Note 19.

                                      F-21
<PAGE>

Note 8 - Investment in TiO2 manufacturing joint venture:

        Kronos  Louisiana,  Inc.  ("KLA"),  a wholly owned subsidiary of Kronos,
owns a 50%  interest  in  Louisiana  Pigment  Company,  L.P.  ("LPC").  LPC is a
manufacturing  joint  venture that is also  50%-owned by Tioxide  Americas  Inc.
("Tioxide"), a wholly owned subsidiary of Huntsman International Holdings LLC, a
60%-owned  subsidiary  of  Huntsman   Corporation.   LPC  owns  and  operates  a
chloride-process TiO2 plant in Lake Charles, Louisiana.

        KLA is required to purchase  one-half of the TiO2  produced by LPC.  LPC
operates on a break-even basis and,  accordingly,  the Company reports no equity
in earnings of LPC.  Kronos' cost for its share of the TiO2 produced is equal to
its share of LPC's  costs.  Kronos'  share of net costs is  reported  as cost of
sales as the related TiO2 acquired from LPC is sold.

        LPC made cash  distributions  of $22.6 million in 2001, $15.1 million in
2000 and $27.3 million in 1999, equally split between the partners.

        Summary balance sheets of LPC are shown below.
<TABLE>
<CAPTION>
                                                               December 31,
                                                         -----------------------
                                                           2001           2000
                                                         --------       --------
                                                             (In thousands)

           ASSETS

<S>                                                      <C>            <C>
Current assets ...................................       $ 45,872       $ 56,063
Property and equipment, net ......................        250,501        264,918
                                                         --------       --------

                                                         $296,373       $320,981
                                                         ========       ========

   LIABILITIES AND PARTNERS' EQUITY

Other liabilities, primarily current .............       $ 16,767       $ 18,749
Partners' equity .................................        279,606        302,232
                                                         --------       --------

                                                         $296,373       $320,981
                                                         ========       ========
</TABLE>

                                      F-22
<PAGE>

        Summary income statements of LPC are shown below.
<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                            ------------------------------------
                                              2001          2000           1999
                                            --------      --------      --------
                                                      (In thousands)

<S>                                         <C>           <C>           <C>
Revenues and other income:
    Kronos ...........................      $ 93,393      $ 92,530      $ 85,304
    Tioxide ..........................        94,009        93,366        86,309
    Interest .........................           303           578           569
                                            --------      --------      --------

                                             187,705       186,474       172,182
                                            --------      --------      --------
Cost and expenses:
    Cost of sales ....................       187,295       186,045       171,829
    General and administrative .......           410           429           353
                                            --------      --------      --------

                                             187,705       186,474       172,182
                                            --------      --------      --------

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

Note 9 - Accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
                                                            December 31,
                                                     ---------------------------
                                                       2001               2000
                                                     --------           --------
                                                           (In thousands)

<S>                                                  <C>                <C>
Accounts payable .........................           $ 99,358           $ 64,553
                                                     --------           --------
Accrued liabilities:
    Employee benefits ....................             29,722             34,160
    Interest .............................              4,980              5,019
    Deferred income ......................              4,000              4,000
    Other ................................             38,163             40,145
                                                     --------           --------

                                                       76,865             83,324
                                                     --------           --------

                                                     $176,223           $147,877
                                                     ========           ========
</TABLE>
Note 10 - Other noncurrent liabilities:
<TABLE>
<CAPTION>
                                                              December 31,
                                                       -------------------------
                                                        2001              2000
                                                       -------           -------
                                                             (In thousands)

<S>                                                    <C>               <C>
Insurance claims expense ...................           $ 8,789           $10,314
Employee benefits ..........................             3,476             7,721
Deferred income ............................               333             4,333
Other ......................................             2,131               904
                                                       -------           -------

                                                       $14,729           $23,272
                                                       =======           =======
</TABLE>
                                      F-23
<PAGE>

Note 11 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
                                                               December 31,
                                                         -----------------------
                                                           2001           2000
                                                         --------       --------
                                                             (In thousands)

<S>                                                      <C>            <C>
Notes payable ....................................       $ 46,201       $ 69,970
                                                         ========       ========

Long-term debt:
    NL - 11.75% Senior Secured Notes .............       $194,000       $194,000
    Kronos .......................................          2,498          2,093
                                                         --------       --------

                                                          196,498        196,093
    Less current maturities ......................          1,033            730
                                                         --------       --------

                                                         $195,465       $195,363
                                                         ========       ========
</TABLE>

        The Company's  $194 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.

        In the event of foreclosure,  the holders of the Notes would have access
to the  consolidated  assets,  earnings and equity of the  Company.  The Company
believes  the  collateralization  of  the  Notes,  as  described  above,  is the
functional  economic  equivalent  of a full and  unconditional  guarantee of the
Notes by Kronos. In lieu of providing  separate audited financial  statements of
Kronos, the Company has included condensed  consolidating  financial information
in accordance with Rule 3-10 (e) of the SEC's Regulation S-X. See Note 24.

        The Company  redeemed  $50 million  (par value) of the Notes on December
29, 2000 at 101.5%. The remaining Notes are redeemable, at the Company's option,
at a  redemption  price of 100% of the  principal  amount.  The Notes are issued
pursuant to an indenture  which contains a number of covenants and  restrictions
which, among others, restrict the ability of the Company and its subsidiaries to
incur debt,  incur liens, pay dividends,  merge or consolidate  with, or sell or
transfer  all or  substantially  all of their assets to another  entity.  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 Company would also be required to make an offer to purchase a
specified amount of the Notes at par value in the event the Company  generates a
certain  amount of net  proceeds  from the sale of assets  outside the  ordinary
course of business,  and such net proceeds are not otherwise  used for specified
purposes  within a specified time period.  At December 31, 2001, $20 million was
available for payment of dividends  pursuant to the terms of the indenture.  The
quoted market price of the Notes per $100 principal  amount was $100.47 and $101
at December 31, 2001 and 2000, respectively.

        On  February  6, 2002,  the  Company  gave  notice to the trustee of its
intention to redeem $25 million principal amount of the Notes on March 22, 2002,
at the current call price of 100%.

        Notes payable consist of short-term  borrowings  denominated in non-U.S.
currencies due within one year from non-U.S. banks. Borrowings total $46 million


                                      F-24
<PAGE>

(euro 27 million and NOK 200 million) at December 31, 2001 and $70 million (euro
51 million and NOK 200 million) at December 31,  2000.  Interest  rates on notes
payable  ranged from 3.84% to 7.27% at December 31, 2001 and from 5.33% to 7.92%
at December 31, 2000.

        Unused  lines of credit  available  for  borrowing  under the  Company's
non-U.S. credit facilities approximated $8 million at December 31, 2001.

        The  aggregate  maturities  of  long-term  debt at December 31, 2001 are
shown in the table below.
<TABLE>
<CAPTION>

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

        <S>                                            <C>
        2002                                           $      1,033
        2003                                                195,008
        2004                                                    216
        2005                                                    115
        2006                                                    112
        2007                                                     14
                                                       ----------------

                                                       $    196,498
                                                       ================
</TABLE>

Note 12 - Employee benefit plans:

Company-sponsored pension plans

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

        The Company  contributes to eligible U.S.  employees' accounts an amount
equal to approximately  4% (4% in 2000 and 3% in 1999) of the employee's  annual
eligible  earnings and  partially  matches  employee  contributions  to the U.S.
contributory   savings  plan.  The  Company  also  has  a  nonqualified  defined
contribution plan covering certain executives, and participants receive benefits
based on a formula involving eligible earnings. The Company's expense related to
these plans was $.8 million in 2001,  $1.6  million in 2000 and $1.1  million in
1999.



                                      F-25
<PAGE>

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

                                                              December 31,
                                                  ------------------------------------
                                                     2001         2000         1999
                                                  ----------   ----------   ----------
                                                              (Percentages)

<S>                                               <C>          <C>          <C>
Discount rate .................................   5.8 to 7.3   6.0 to 7.8   5.8 to 7.5
Rate of increase in future compensation levels.   2.8 to 4.5   3.0 to 4.5   2.5 to 4.5
Long-term rate of return on plan assets .......   6.8 to 8.5   7.0 to 9.0   6.0 to 9.0
</TABLE>

        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 will change the actuarial  valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.

        The components of the net periodic  defined benefit pension cost are set
forth below.
<TABLE>
<CAPTION>
                                                         Years ended December 31,
                                                    --------------------------------
                                                      2001        2000        1999
                                                    --------    --------    --------
                                                             (In thousands)

<S>                                                 <C>         <C>         <C>
Net periodic pension cost:
    Service cost benefits .......................   $  3,976    $  4,063    $  3,942
    Interest cost on projected benefit obligation
      ("PBO") ...................................     15,605      15,088      16,170
    Expected return on plan assets ..............    (16,143)    (15,403)    (15,567)
    Amortization of prior service cost ..........        201         238         267
    Amortization of net transition obligation ...        510         530         578
    Recognized actuarial losses .................        443         226       1,144
                                                    --------    --------    --------

                                                    $  4,592    $  4,742    $  6,534
                                                    ========    ========    ========
</TABLE>

                                      F-26
<PAGE>


        The funded status of the Company's  defined benefit pension plans is set
forth below.
<TABLE>
<CAPTION>
                                                              December 31,
                                                       -------------------------
                                                          2001           2000
                                                       ---------      ---------
                                                            (In thousands)

<S>                                                    <C>            <C>
Change in PBO:
    Beginning of year ............................     $ 248,355      $ 260,186
    Service cost .................................         3,976          4,063
    Interest .....................................        15,605         15,088
    Participant contributions ....................         1,005          1,027
    Amendments ...................................         1,819           --
    Actuarial loss ...............................        10,149          1,022
    Benefits paid ................................       (15,849)       (16,993)
    Change in currency exchange rates ............        (3,255)       (16,038)
                                                       ---------      ---------

        End of year ..............................       261,805        248,355
                                                       ---------      ---------

Change in fair value of plan assets:
    Beginning of year ............................       216,984        218,942
    Actual return on plan assets .................         4,711         11,762
    Employer contributions .......................         7,559         16,558
    Participant contributions ....................         1,005          1,027
    Benefits paid ................................       (15,849)       (16,993)
    Change in currency exchange rates ............        (6,143)       (14,312)
                                                       ---------      ---------

        End of year ..............................       208,267        216,984
                                                       ---------      ---------

Funded status at year end:
    Plan assets less than PBO ....................       (53,538)       (31,371)
    Unrecognized actuarial loss ..................        44,744         24,191
    Unrecognized prior service cost ..............         4,371          1,693
    Unrecognized net transition obligation .......         4,269            786
                                                       ---------      ---------

                                                       $    (154)     $  (4,701)
                                                       =========      =========

Amounts recognized in the balance sheet:
    Prepaid pension cost .........................     $  18,411      $  22,789
    Accrued pension cost:
        Current ..................................        (5,993)        (6,270)
        Noncurrent ...............................       (26,985)       (21,220)
    Unrecognized net pension obligations .........         5,901           --
    Accumulated other comprehensive loss .........         8,512           --
                                                       ---------      ---------

                                                       $    (154)     $  (4,701)
                                                       =========      =========
</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,  2001  and  2000,  78% and 76%,
respectively,  of the  projected  benefit  obligations  of such plans  relate to
non-U.S. plans.

                                      F-27
<PAGE>
<TABLE>
<CAPTION>
                                                               December 31,
                                                       -------------------------
                                                         2001             2000
                                                       --------         --------
                                                            (In thousands)

<S>                                                    <C>              <C>
Projected benefit obligation .................         $228,647         $190,141
Accumulated benefit obligation ...............          206,669          169,077
Fair value of plan assets ....................          174,832          149,767
</TABLE>

Incentive bonus programs

        Certain  employees are eligible to participate in the Company's  various
incentive bonus programs. The programs provide for annual payments, which may be
in the form of cash or NL common stock. The amount of the annual payment paid to
an employee,  if any, is based on formulas involving the profitability of Kronos
in  relation  to the annual  operating  plan and,  for most of these  employees,
individual performance.

Postretirement benefits other than pensions

        In  addition  to  providing  pension  benefits,  the  Company  currently
provides  certain health care and life insurance  benefits for eligible  retired
employees.  Certain of the Company's  Canadian employees may become eligible for
such  postretirement  health  care and life  insurance  benefits  if they  reach
retirement age while working for the Company.  In 1989 the Company began phasing
out such benefits for currently active U.S. employees over a ten-year period and
U.S.  employees  retiring after 1998 are not entitled to any such benefits.  The
majority of all  retirees  are  required to  contribute a portion of the cost of
their benefits and certain  current and future retirees are eligible for reduced
health  care  benefits  at age  65.  With  the  exception  of the  $5.6  million
contributed in 2000 to the VEBA trust discussed in Note 6, 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, 2001, the expected rate
of increase in health  care costs is 8% in 2002  decreasing  to 5.5% in 2007 and
thereafter. Other weighted-average assumptions used to measure the liability and
expense are presented below.
<TABLE>
<CAPTION>

                                                             December 31,
                                                        ----------------------
                                                        2001     2000     1999
                                                        -----    -----    ----
                                                             (Percentages)

<S>                                                      <C>      <C>      <C>
Discount rate .......................................    7.0      7.3      7.5
Long-term rate for compensation increases ...........    6.0      6.0      6.0
Long-term rate of return on plan assets .............    7.7      7.7      9.0
</TABLE>

        Variances  from  actuarially  assumed  rates will  change  accrued  OPEB
liabilities,  net  periodic  OPEB  expense  and funding  requirements  in future
periods.  If the health care cost trend rate was  increased  (decreased)  by one
percentage  point for each  year,  postretirement  benefit  expense  would  have
increased  approximately $.2 million (decreased by $.1 million) in 2001, and the
projected  benefit  obligation  at  December  31, 2001 would have  increased  by
approximately $1.6 million (decreased by $1.4 million).


                                      F-28
<PAGE>




        The components of the Company's net periodic postretirement benefit cost
are set forth below.
<TABLE>
<CAPTION>

                                                     Years ended December 31,
                                                --------------------------------
                                                 2001        2000         1999
                                                -------     -------     -------
                                                        (In thousands)

<S>                                             <C>         <C>         <C>
Net periodic OPEB cost (benefit):
    Service cost benefits ..................    $    94     $    84     $    40
    Interest cost on PBO ...................      2,536       2,646       2,069
    Expected return on plan assets .........       (773)       (521)       (526)
    Amortization of prior service cost .....     (2,075)     (2,075)     (2,075)
    Recognized actuarial losses (gains) ....         27          24        (573)
                                                -------     -------     -------

                                                $  (191)    $   158     $(1,065)
                                                =======     =======     =======
</TABLE>
<TABLE>
<CAPTION>
                                                              December 31,
                                                        ------------------------
                                                           2001          2000
                                                        --------       --------
                                                            (In thousands)

<S>                                                     <C>            <C>
Change in PBO:
    Beginning of year ............................      $ 37,040       $ 37,354
    Service cost .................................            94             84
    Interest cost ................................         2,536          2,646
    Actuarial losses .............................           792          1,672
    Plan asset reimbursements ....................         1,197           --
    Benefits paid from:
        Company funds ............................          --           (1,790)
        Plan assets ..............................        (6,377)        (2,859)
    Change in currency exchange rates ............          (145)           (67)
                                                        --------       --------

        End of year ..............................        35,137         37,040
                                                        --------       --------

Change in fair value of plan assets:
    Beginning of year ............................        11,842          5,968
    Actual return on plan assets .................           460          2,705
    Employer contributions .......................           475          6,028
    Benefits paid ................................        (6,377)        (2,859)
                                                        --------       --------

        End of year ..............................         6,400         11,842
                                                        --------       --------

Funded status at year end:
    Plan assets less than PBO ....................       (28,737)       (25,198)
    Unrecognized actuarial gain ..................          (105)        (1,135)
    Unrecognized prior service cost ..............        (5,783)        (7,858)
                                                        --------       --------

                                                        $(34,625)      $(34,191)
                                                        ========       ========

Amounts recognized in the balance sheet:
    Current ......................................      $ (4,783)      $ (4,787)
    Noncurrent ...................................       (29,842)       (29,404)
                                                        --------       --------

                                                        $(34,625)      $(34,191)
                                                        ========       ========
</TABLE>

                                      F-29
<PAGE>




Note 13 - Shareholders' equity:

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

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

Balance at December 31, 1999 ..........       66,839       15,555        51,284
    Treasury shares acquired ..........         --          1,682        (1,682)
    Treasury shares reissued ..........         --           (450)          450
                                             -------      -------       -------

Balance at December 31, 2000 ..........       66,839       16,787        50,052
    Treasury shares acquired ..........         --          1,059        (1,059)
    Treasury shares reissued ..........         --            (38)           38
    Other .............................            6         --               6
                                             -------      -------       -------

Balance at December 31, 2001 ..........       66,845       17,808        49,037
                                             =======      =======       =======
</TABLE>

        Pursuant  to  its  share  repurchase  program,   the  Company  purchased
1,059,000  shares of its common stock in the open market at an aggregate cost of
$15.5 million in 2001, 1,682,000 shares of its common stock at an aggregate cost
of $30.9  million in 2000 and  552,000  shares of its  common  stock in the open
market at an  aggregate  cost of $7.2 million in 1999.  Approximately  1,207,000
additional   shares  are  available  for  purchase  under  the  Company's  share
repurchase  program.  The available  shares may be purchased over an unspecified
period of time,  and are to be held as  treasury  shares  available  for general
corporate purposes.

        The Company increased the regular quarterly dividend from $.03 per share
to $.035 per share in February 1999 and  subsequently  paid four quarterly $.035
per share cash  dividends in 1999.  In February  2000 the Company  increased the
regular  quarterly  dividend  to $.15 per  share  and  subsequently  paid  three
quarterly  $.15 per share cash  dividends  in the first nine months of 2000.  In
October 2000 the Company  increased the regular  quarterly  dividend to $.20 per
share and  subsequently  paid a  quarterly  $.20 per share cash  dividend in the
fourth  quarter of 2000.  The Company  paid four  quarterly  $.20 per share cash
dividends  in 2001.  On  February  6, 2002,  the  Company's  Board of  Directors
declared  a regular  quarterly  dividend  of $.20 per share to  shareholders  of
record as of March 8, 2002 to be paid on March 22, 2002.

Common stock options

        The NL Industries, Inc. 1998 Long-Term Incentive Plan ("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 and  non-employee  directors.  Although
certain stock options  granted  pursuant to a similar plan which preceded the NL
Option Plan ("Predecessor Option Plan") remain outstanding at December 31, 2001,
no additional options may be granted under the Predecessor Option Plan.

                                      F-30

<PAGE>


        Up to five million  shares of NL common stock may be issued  pursuant to
the NL Option Plan and, at December 31, 2001,  3,663,000  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.

        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, 1998        2,119      $    5.00  $   24.19  $ 31,019

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

Outstanding at December 31, 1999        2,437           5.00      24.19    34,943

    Granted ....................          432          14.25      14.44     6,165
    Exercised ..................         (918)          5.00      17.97    (9,508)
    Forfeited ..................         (349)          8.69      24.19    (7,237)
                                        -----      ---------  ---------  --------

Outstanding at December 31, 2000        1,602           5.00      21.97    24,363

    Granted ....................          484          20.11      20.51     9,737
    Exercised ..................          (38)         11.28      21.97      (627)
    Forfeited ..................          (34)         11.28      20.11      (513)
                                        -----      ---------  ---------  --------

Outstanding at December 31, 2001        2,014      $    5.00  $   21.97  $ 32,960
                                        =====      =========  =========  ========

</TABLE>

        At December 31, 2001, 2000 and 1999 options to purchase 658,560, 363,480
and 1,255,901  shares,  respectively,  were  exercisable and options to purchase
391,000 shares become exercisable in 2002. Of the exercisable  options,  options
to purchase  386,760  shares at December 31, 2001 had exercise  prices less than
the  Company's  December  31,  2001  quoted  market  price of $15.27  per share.
Outstanding  options at December 31, 2001 expire at various  dates through 2011,
with a weighted-average remaining life of seven 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 2001,  2000 and 1999 were $7.52,  $4.83 and $6.94 per
share,  respectively.  The fair values of employee stock options were calculated
using the Black-Scholes stock option valuation model with the following weighted
average assumptions for grants in 2001, 2000 and 1999: stock price volatility of
46%, 48% and 50% in 2001, 2000 and 1999, respectively;  risk-free rate of return


                                      F-31
<PAGE>

of 5% in 2001 and 2000 and 6% in 1999;  dividend yield of 4.0% in 2001,  4.9% in
2000 and 1.2% in 1999;  and an expected term of 9 years in 2001,  2000 and 1999.
For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options' vesting period.

        The Company's pro forma net income and basic net income per common share
were as follows.  The pro forma  impact on earnings  per common  share for 2001,
2000 and 1999 is not  necessarily  indicative of future  effects on earnings per
share.
<TABLE>
<CAPTION>
                                                         Years ended December 31,
                                                  ---------------------------------------
                                                     2001           2000          1999
                                                  -----------   -----------   -----------
                                                  (In thousands except per share amounts)

<S>                                               <C>           <C>           <C>
Net income - as reported ......................   $   121,407   $   154,609   $   159,771
Net income - pro forma ........................   $   118,959   $   152,201   $   156,868
Net income per basic common share - as reported   $      2.44   $      3.07   $      3.09
Net income per basic common share - pro forma .   $      2.39   $      3.02   $      3.03

</TABLE>

Preferred stock

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

Note 14 - Income taxes:

        The components of (i) income from  continuing  operations  before income
taxes and minority interest ("pretax  income"),  (ii) the difference between the
provision  for income taxes  attributable  to pretax income 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.

                                      F-32
<PAGE>

<TABLE>
<CAPTION>
                                                          Years ended December 31,
                                                   -----------------------------------
                                                     2001          2000        1999
                                                   ---------    ---------    ---------
                                                              (In thousands)

<S>                                                <C>          <C>          <C>
Pretax income:
    U.S ........................................   $   3,267    $  73,646    $  23,642
    Non-U.S ....................................     154,025      162,551       74,850
                                                   ---------    ---------    ---------

                                                   $ 157,292    $ 236,197    $  98,492
                                                   =========    =========    =========

Expected tax expense ...........................   $  55,052    $  82,669    $  34,472
Non-U.S. tax rates .............................      (3,887)      (6,445)       6,119
Resolution of German income tax audits .........        --         (5,500)     (36,490)
Change in valuation allowance:
    Corporate restructuring in Germany and other     (23,247)        --        (77,580)
    Change in German income tax law ............        --           --         24,070
    Recognition of certain deductible tax
      attributes which previously
      did not meet the "more-likely-than-not"
      recognition criteria .....................      (1,460)      (2,600)     (15,807)
Incremental tax on income of companies not
  included in the NL Tax Group .................       6,009        1,943        2,747
German rate change adjustment of deferred taxes         --          5,695         --
U.S. state income taxes ........................         459        1,348         (680)
Other, net .....................................       1,999        1,310       (1,452)
                                                   ---------    ---------    ---------

    Income tax expense (benefit) ...............   $  34,925    $  78,420    $ (64,601)
                                                   =========    =========    =========

Provision for income taxes:
    Current income tax expense (benefit):
        U.S. federal ...........................   $   1,352    $  (8,255)   $     193
        U.S. state .............................       1,309          622       (2,489)
        Non-U.S ................................      29,008       45,867       24,467
                                                   ---------    ---------    ---------

                                                      31,669       38,234       22,171
                                                   ---------    ---------    ---------
    Deferred income tax expense (benefit):
        U.S. federal ...........................      12,369       32,128      (47,426)
        U.S. state .............................        (850)         726        1,809
        Non-U.S ................................      (8,263)       7,332      (41,155)
                                                   ---------    ---------    ---------

                                                       3,256       40,186      (86,772)
                                                   ---------    ---------    ---------

                                                   $  34,925    $  78,420    $ (64,601)
                                                   =========    =========    =========

Comprehensive provision (benefit) for income
  taxes allocable to:
    Pretax income ..............................   $  34,925    $  78,420    $ (64,601)
    Extraordinary item .........................        --           (394)        --
    Additional paid-in capital .................         (69)      (3,224)         (16)
    Other comprehensive income (loss):
        Marketable equity securities ...........        (287)       3,244         (883)
        Pension liabilities ....................      (2,160)        --           --
                                                   ---------    ---------    ---------

                                                   $  32,409    $  78,046    $ (65,500)
                                                   =========    =========    =========
</TABLE>

                                      F-33

<PAGE>


        The components of the net deferred tax liability are summarized below:
<TABLE>
<CAPTION>
                                                              December 31,
                                           --------------------------------------------------
                                                     2001                      2000
                                           -----------------------    -----------------------
                                                 Deferred tax              Deferred tax
                                           -----------------------    -----------------------
                                             Assets    Liabilities     Assets     Liabilities
                                           ---------   -----------    --------    -----------
                                                             (In thousands)

<S>                                        <C>          <C>          <C>          <C>
Tax effect of temporary differences
  relating to:
    Inventories ........................   $   3,202    $  (2,849)   $   4,027    $  (2,966)
    Property and equipment .............      42,721      (54,084)      61,738      (53,753)
    Accrued postretirement benefits cost      11,398         --         13,145         --
    Accrued (prepaid) pension cost .....       2,711      (21,224)       4,348      (22,928)
    Accrued environmental costs ........      35,508         --         37,761         --
    Noncompete agreement ...............       1,517         --          2,917         --
    Other accrued liabilities and
      deductible differences ...........      18,647         --         18,327         --
    Other taxable differences ..........        --       (131,094)        --       (122,561)
Tax on unremitted earnings of non-U.S ..
  subsidiaries .........................        --         (3,933)        --         (4,396)
Tax loss and tax credit carryforwards ..     118,828         --        119,064         --
Valuation allowance ....................    (154,437)        --       (190,312)        --
                                           ---------    ---------    ---------    ---------

    Gross deferred tax assets
      (liabilities) ....................      80,095     (213,184)      71,015     (206,604)

Reclassification, principally netting by
  tax jurisdiction .....................     (68,398)      68,398      (59,109)      59,109
                                           ---------    ---------    ---------    ---------

    Net total deferred tax assets
      (liabilities) ....................      11,697     (144,786)      11,906     (147,495)
    Net current deferred tax assets
      (liabilities) ....................      11,011       (1,530)      11,673       (1,822)
                                           ---------    ---------    ---------    ---------

    Net noncurrent deferred tax assets
      (liabilities) ....................   $     686    $(143,256)   $     233    $(145,673)
                                           =========    =========    =========    =========
</TABLE>
                                      F-34

<PAGE>


        Changes in the Company's  deferred  income tax  valuation  allowance are
summarized below.
<TABLE>
<CAPTION>
                                                              Years ended December 31,
                                                        -----------------------------------
                                                          2001          2000          1999
                                                        ---------    ---------    ---------
                                                                   (In thousands)

<S>                                                     <C>          <C>          <C>
Balance at the beginning of year ....................   $ 190,312    $ 233,595    $ 134,477

    Recognition of certain deductible tax
      attributes which previously did not meet the
      "more-likely-than-not" recognition criteria ...     (24,707)      (2,600)     (70,946)
    Increase in certain deductible temporary
      differences which the Company believes do
      not meet the "more-likely-than-not"
      recognition criteria ..........................        --           --          1,629
    Offset to the change in gross deferred income tax
      assets due principally to redeterminations
      of certain tax attributes and implementation
      of certain tax planning strategies ............      (3,681)     (24,955)     183,150
    Foreign currency translation ....................      (7,487)     (15,728)     (14,715)
                                                        ---------    ---------    ---------

Balance at the end of year ..........................   $ 154,437    $ 190,312    $ 233,595
                                                        =========    =========    =========
</TABLE>

        Certain  of the  Company's  tax  returns in various  U.S.  and  non-U.S.
jurisdictions  are being  examined  and tax  authorities  have  proposed  or may
propose tax deficiencies, including penalties and interest.

        A  reduction  in the  German  "base"  income  tax rate  from 30% to 25%,
enacted in October 2000,  became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of  additional  deferred  income
tax expense in the fourth  quarter of 2000 due to a reduction  of the  Company's
deferred income tax asset related to certain German tax attributes.  The Company
does not expect its future current income tax expense to be affected by the rate
change in Germany.

        The Company  received tax assessments from the Norwegian tax authorities
proposing tax  deficiencies,  including  related  interest,  of NOK 39.3 million
pertaining to 1994 and 1996. The Company was  unsuccessful  in appealing the tax
assessments  and in June 2001 paid NOK 39.3 million  ($4.3 million when paid) to
the  Norwegian tax  authorities.  The Company was  adequately  reserved for this
contingency.  The lien on the Company's Fredrikstad,  Norway TiO2 plant in favor
of the Norwegian tax authorities has been released.

        The Company has received  preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities  proposing tax deficiencies,  including
related interest, of approximately  (euro)10.4 million ($9.2 million at December
31, 2001).  The Company has filed protests to the assessments for the years 1991
to 1997.  The Company is in  discussions  with the Belgian tax  authorities  and
believes that a significant portion of the assessments is without merit.

        No  assurance  can be  given  that the  Company's  tax  matters  will be
favorably resolved due to the inherent  uncertainties  involved in court and tax
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.

                                      F-35
<PAGE>

        During the fourth quarter of 2001, the Company completed a restructuring
of its German  subsidiaries,  and as a result  recognized  a $17.6  million  net
income tax benefit. This benefit is comprised of a $23.2 million decrease in the
valuation  allowance  due to a change in  estimate of the  Company's  ability to
utilize  certain German income tax attributes  that did not previously  meet the
"more-likely-than-not"   recognition   criteria   offset  by  $5.6   million  of
incremental   U.S.   taxes  on   undistributed   earnings  of  certain   foreign
subsidiaries.

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

        The $54 million  net  reduction  in the  Company's  deferred  income tax
valuation  allowance in 1999 is  comprised of (i) a $78 million  decrease in the
valuation  allowance to recognize the benefit of certain  deductible  income tax
attributes  which the Company now believes meets the  recognition  criteria as a
result of, among other things, a corporate restructuring of the Company's German
subsidiaries offset by (ii) a $24 million increase in the valuation allowance to
reduce the previously  recognized benefit of certain other deductible income tax
attributes  which the Company now believes do not meet the recognition  criteria
due to a change in German tax law.

        At December 31,  2001,  the Company  had,  for U.S.  federal  income tax
purposes,  a net operating loss  carryforward of approximately  $25 million,  of
which  $3  million  expires  in  2019  and  $22  million  expires  in  2021  and
approximately $5.7 million of alternative minimum tax credit  carryforwards with
no expiration  date. The Company also has  approximately  $317 million of income
tax loss  carryforwards in Germany with no expiration date.  Unutilized  foreign
tax credit carryovers of $2 million expired in 1999.

Note 15 - Other income, net:
<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                               --------------------------------
                                                 2001        2000        1999
                                               --------    --------    --------
                                                       (In thousands)

<S>                                            <C>         <C>         <C>
Securities earnings:
    Interest and dividends .................   $  8,886    $  8,346    $  6,597
    Securities gains (losses), net .........     (1,133)      2,531        --
                                               --------    --------    --------
                                                  7,753      10,877       6,597
Currency transaction gains, net ............      1,188       6,499      10,161
Noncompete agreement income ................      4,000       4,000       4,000
Trade interest income ......................      2,332       2,333       2,365
Disposition of property and equipment ......       (735)     (1,562)       (429)
Insurance recoveries, net (See Note 17) ....      7,222        --          --
Other, net .................................      1,376       1,136         952
                                               --------    --------    --------

                                               $ 23,136    $ 23,283    $ 23,646
                                               ========    ========    ========
</TABLE>

        The  Company  received a $20 million fee as part of the sale of Rheox in
January 1998 in payment for entering into a five-year covenant not to compete in
the rheological  products business.  The Company is amortizing the fee to income


                                      F-36
<PAGE>

using the  straight-line  method over the five-year  noncompete period beginning
January 30, 1998.

Note 16 - Litigation settlement gains, net:

        In June  2000 the  Company  recognized  a $43  million  net gain  from a
settlement  with one of its two  principal  former  insurance  carriers,  and in
December 2000 the Company  recognized a $26.5 million net gain from a settlement
with  certain  members of the other  principal  former  insurance  carrier.  The
settlement  gains are stated net of $3.1 million in  commissions,  and the gross
settlement proceeds of $72.6 million were transferred by the carriers to special
purpose trusts  established to pay future  remediation  and other  environmental
expenditures of the Company.

        A settlement  with  remaining  members of the second  carrier  group was
reached in January 2001, and the Company  recognized a $10.3 million gain in the
first  quarter of 2001.  The gross  settlement  proceeds of $10.7  million  were
transferred by the carriers to the above mentioned  special  purpose trusts.  In
2001 the Company also  recognized  $1.4 million of other  litigation  settlement
gains.

        The settlements resolved court proceedings that the Company initiated to
seek  reimbursement  for legal defense  expenditures and indemnity  coverage for
certain of its  environmental  remediation  expenditures.  No  further  material
settlements relating to litigation concerning environmental remediation coverage
are expected.

Note 17 - Leverkusen fire and insurance claim:

        A fire on March 20, 2001 damaged a section of the Company's  Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result,  production of TiO2 at the Leverkusen  facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process  TiO2 plant
("Chloride  Plant"),  but did damage  certain  support  equipment  necessary  to
operate that plant. The damage to the support equipment  resulted in a temporary
shutdown of the Chloride Plant.

        On  April  8,  2001,  repairs  to the  damaged  support  equipment  were
substantially  completed and full production  resumed at the Chloride Plant. The
Sulfate Plant became  approximately 50% operational in September 2001 and became
fully operational in late October 2001. The damages to property and the business
interruption losses caused by the fire were covered by insurance as noted below,
but the effect on the financial  results of the Company on a  quarter-to-quarter
basis was impacted by the timing and amount of insurance recoveries.

        The  Company  reached  an  agreement  and  settled  the  coverage  claim
involving the  Leverkusen  fire for $56.4 million  during the fourth  quarter of
2001 ($46.9  million  received as of December 31, 2001,  with the remaining $9.5
million  received in January 2002),  of which $27.3 million  related to business
interruption  and $29.1 million related to property  damage,  clean-up costs and
other extra  expenses.  The Company  recognized a $17.5 million  pre-tax gain in
2001 related to the property  damage  recovery after  deducting $11.6 million of
clean-up  costs and other extra  expenses  incurred  and the  carrying  value of
assets  destroyed in the fire. The gain was excluded from the  determination  of
operating income. The $27.3 million of business interruption proceeds recognized
in 2001 were allocated between other income, excluding corporate, which reflects
recovery of lost margin  ($7.2  million)  and as a reduction of cost of sales to

                                      F-37

<PAGE>

offset  unallocated  period  costs  ($20.1  million).  No  additional  insurance
recoveries related to the Leverkusen fire are expected to be received.

Note 18 - Other items:

        Advertising  costs are  expensed as incurred and were $1 million in each
of 2001, 2000 and 1999.

        Research,  development  and certain  sales  technical  support costs are
expensed as incurred and approximated $6 million in each of 2001 and 2000 and $7
million in 1999.

        Interest  capitalized in connection with long-term  capital projects was
nil in each of 2001, 2000 and 1999.

Note 19 - 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,  tax
sharing agreements,  joint ventures,  partnerships,  loans, options, advances of
funds on open  account,  and sales,  leases and  exchanges of assets,  including
securities  issued  by  both  related  and  unrelated  parties  and  (b)  common
investment and acquisition strategies,  business combinations,  reorganizations,
recapitalizations,  securities  repurchases,  and purchases and sales (and other
acquisitions  and  dispositions)  of  subsidiaries,  divisions or other business
units,  which  transactions have involved both related and unrelated parties and
have included  transactions  which  resulted in the  acquisition  by one related
party of a publicly  held minority  equity  interest in another  related  party.
While no  transactions  of the type described above are planned or proposed with
respect to the  Company  other than as set forth in this  Annual  Report on Form
10-K, the Company continuously 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 various  intercorporate  services  agreements
("ISA") with various related parties discussed below. Under the ISA's, employees
of one company will provide  certain  management,  tax  planning,  financial and
administrative  services to the other  company on a fee basis.  Such charges are
based upon estimates of the time devoted by the employees of the provider of the
services to the affairs of the recipient,  and the compensation of such persons.
Because of the number of companies affiliated with Contran, the Company believes
it  benefits  from cost  savings  and  economies  of scale  gained by not having
certain  management,  financial  and  administrative  staffs  duplicated at each
entity,  thus  allowing  certain  individuals  to provide  services  to multiple
companies but only be  compensated  by one entity.  These ISA's are reviewed and
approved  by the  Company's  Board of  Directors  including  members who are not
officers or  directors  of any other  entity that may be deemed to be related to
the Company.

                                      F-38
<PAGE>

        The  Company is a party to an  intercorporate  services  agreement  with
Contran ("Contran ISA") whereby Contran provides certain management  services to
the Company on a fee basis.  Intercorporate  services fee expense related to the
Contran ISA was $1.2 million in 2001 and $1.0 million in each of 2000 and 1999.

        The Company was a party in 2000 and 1999 to an  intercorporate  services
agreement with Valhi ("Valhi ISA") whereby Valhi and the Company provide certain
management,  financial and administrative services to each other on a fee basis.
Net intercorporate services fee expense related to the Valhi ISA was $.2 million
in 2000 and $.1 million in 1999.

        The  Company  is  party to an  intercorporate  services  agreement  with
Tremont ("Tremont ISA").  Under the terms of the contract,  the Company provides
certain   management  and  financial   services  to  Tremont  on  a  fee  basis.
Intercorporate services fee income related to the Tremont ISA was $.1 million in
each of 2001, 2000 and 1999.

        The Company is party to an  intercorporate  services  agreement  ("TIMET
ISA") with  Titanium  Metals  Corporation  ("TIMET"),  approximately  39% of the
outstanding  common stock of which is currently  held by Tremont at December 31,
2001. Under the terms of the contract,  the Company provides certain  management
and  financial  services to TIMET on a fee basis.  Intercorporate  services  fee
income related to the TIMET ISA was $.2 million in 2001, $.4 million in 2000 and
$.3 million in 1999.

        The  Company  was party in 2000 and 1999 to an  intercorporate  services
agreement ("CompX ISA") with CompX International,  Inc. ("CompX"),  a subsidiary
of  Valhi,  Under  the  terms of the  contract,  the  Company  provides  certain
management and administrative  services to CompX on a fee basis.  Intercorporate
services  fee income  related  to the CompX ISA was $.2  million in 2000 and $.1
million in 1999.

        Purchases of TiO2 from LPC were $93.4 million in 2001,  $92.5 million in
2000 and $85.3 million in 1999.

        The Company and Tall Pines Insurance Company ("Tall Pines") (formerly NL
Insurance,  Ltd. of Vermont),  a wholly owned subsidiary of Tremont, are parties
to an Insurance  Sharing  Agreement  with  respect to certain loss  payments and
reserves  established  by Tall Pines that (i) arise out of claims  against other
entities for which the Company is contractually responsible and (ii) are subject
to payment by Tall Pines under certain reinsurance  contracts.  Also, Tall Pines
will credit the Company with respect to certain  underwriting  profits or credit
recoveries that Tall Pines receives from  independent  reinsurers that relate to
retained  liabilities.  At December  31,  2001,  the Company has $1.7 million of
restricted cash that  collateralizes  certain of Tall Pines' outstanding letters
of credit.

        Tall Pines,  Valmont Insurance Company  ("Valmont")and  EWI RE, Inc. and
EWI  RE,  Ltd.  (collectively  "EWI")  provide  for  or  broker  certain  of the
Company's,  its joint venture's and its affiliates' insurance policies.  Valmont
is a wholly owned  insurance  company of Valhi.  An entity  controlled by one of
Harold C. Simmons'  daughters and Contran  owned all of the  outstanding  common
stock of EWI at December 31, 2001. On January 7, 2002, the Company purchased EWI
for $9 million.  See Note 23.  Through  December  31, 2000,  Harold C.  Simmons'
son-in-law managed the operations of EWI.  Subsequent to December 31, 2000, this
son-in-law  provides  advisory  services to EWI as requested by EWI.  Consistent
with  insurance  industry  practices,   Tall  Pines,  Valmont  and  EWI  receive


                                      F-39
<PAGE>

commissions  from the insurance and  reinsurance  underwriters  for the policies
that  they  provide  or  broker.   The  Company  and  its  joint   venture  paid
approximately  $10.1  million,  $5.7 million and $3.7 million in 2001,  2000 and
1999, respectively, for policies provided or brokered by Tall Pines, Valmont and
EWI. These amounts  principally  included payments for reinsurance and insurance
premiums paid to unrelated third parties,  but also included commissions paid to
Tall Pines,  Valmont and EWI. In the  Company's  opinion,  the amounts  that the
Company paid for these insurance  policies and the allocation  among the Company
and its affiliates of relative  insurance premiums are reasonable and similar to
those they could have obtained  through  unrelated  insurance  companies  and/or
brokers.  The Company expects that these relationships with Tall Pines,  Valmont
and EWI will continue in 2002.

        During 2000 the Company  purchased  414,000  shares of its common  stock
from  officers and  directors  of the Company for an aggregate of $9.4  million.
Such purchases were at market prices on the respective dates of purchase.

        From time to time, the Company loans funds to related parties.  See Note
7. These  loans  permit the  Company to earn a higher rate of return on cash not
needed at the time for use in its operations than it could otherwise earn. While
such  loans are of a lesser  credit  quality  than cash  equivalent  instruments
otherwise  available to the Company,  the Company believes that it has evaluated
the credit risks involved,  and that those risks are reasonable and reflected in
the terms of the loans.

        Amounts  receivable from and payable to affiliates are summarized in the
following table.
<TABLE>
<CAPTION>
                                                                December 31,
                                                           ---------------------
                                                             2001          2000
                                                           -------       -------
                                                              (In thousands)
<S>                                                        <C>           <C>
Current receivable from affiliates:

    Tremont ........................................       $ 1,000       $  --
    Valhi - income taxes ...........................         2,194          --
    TIMET ..........................................           459             1
    CompX ..........................................            45            82
    Other ..........................................          --             131
                                                           -------       -------

                                                           $ 3,698       $   214
                                                           =======       =======
Current payable to affiliates:
    Tremont ........................................       $   544       $ 1,923
    LPC ............................................         6,362         8,711
    Other ..........................................            13          --
                                                           -------       -------

                                                           $ 6,919       $10,634
                                                           =======       =======

Noncurrent receivable from affiliates:
    Family Trust ...................................       $20,000       $  --
    Tremont ........................................        11,650          --
                                                           -------       -------

                                                           $31,650       $  --
                                                           =======       =======
</TABLE>

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

                                      F-40
<PAGE>


Note 20 - Commitments and contingencies:

Leases

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

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

        Net rent expense  aggregated $9 million in each of 2001,  2000 and 1999.
At  December  31,  2001,   minimum  rental   commitments   under  the  terms  of
noncancellable operating leases were as follows:
<TABLE>
<CAPTION>

                                                            Real Estate  Equipment
                                                            -----------  ---------
                                                                (In thousands)
<S>                                                           <C>        <C>
Years ending December 31,


          2002 ............................................   $ 1,855    $ 2,190
          2003 ............................................     1,636      1,235
          2004 ............................................     1,440        903
          2005 ............................................     1,062        439
          2006 ............................................     1,026        245
          2007 and thereafter .............................    19,437        700
                                                              -------    -------

                                                              $26,456    $ 5,712
                                                              =======    =======
</TABLE>

Capital expenditures

        At December 31, 2001, the estimated cost to complete capital projects in
process  approximated  $11  million,   including  $4  million  to  complete  the
reconstruction of the Leverkusen Sulfate Plant.

Purchase commitments

        The  Company  has  long-term  supply  contracts  that  provide  for  the
Company's chloride feedstock  requirements  through 2006. The agreements require
the Company  purchase  certain  minimum  quantities  of  feedstock  with average
minimum annual purchase commitments aggregating approximately $159 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


                                      F-41
<PAGE>

proceedings  seeking damages for personal  injury and property damage  allegedly
caused by the use of lead-based paints. Certain of these actions have been filed
by  or  on  behalf  of  states,  large  U.S.  cities  or  their  public  housing
authorities,  school  districts  and certain  others have been asserted as class
actions.  These legal  proceedings  seek  recovery  under a variety of theories,
including  public and private  nuisance,  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 as a defendant, potential responsible party ("PRP") or both, pursuant
to the Comprehensive Environmental Response,  Compensation and Liability Act, as
amended by the Superfund  Amendments  and  Reauthorization  Act  ("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  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.

        At December  31,  2001,  the Company had accrued  $107 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 other than the settlements in 2001
and 2000 discussed in Note 16.

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

                                      F-42

<PAGE>

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. See Item 3. "Legal Proceedings."

Concentrations of credit risk

        Sales of TiO2  accounted for more than 90% of net sales from  continuing
operations  during each of the past three years. The remaining sales result from
the mining and sale of ilmenite ore (a raw material used in the sulfate  pigment
production process),  and the manufacture and sale of iron-based water treatment
chemicals (derived from co-products of the TiO2 production  processes).  TiO2 is
generally  sold to the paint,  plastics and paper  industries.  Such markets are
generally  considered   "quality-of-life"  markets  whose  demand  for  TiO2  is
influenced  by  the  relative  economic  well-being  of the  various  geographic
regions.  TiO2 is  sold to over  4,000  customers,  with  the top ten  customers
approximating  25% of net sales in each of the last three  years.  Approximately
one-half  of the  Company's  TiO2 sales by volume  were to Europe in each of the
past three years and  approximately 38% in 2001 and 37% in both 2000 and 1999 of
sales were attributable to North America.

        Consolidated cash, cash equivalents,  current and noncurrent  restricted
cash  equivalents  includes  $121  million  and $159  million  invested  in U.S.
Treasury securities purchased under short-term  agreements to resell at December
31,  2001  and  2000,  respectively,  of  which  $62  million  and $67  million,
respectively,  of such  securities are held in trust for the Company by a single
U.S. bank.

                                      F-43

<PAGE>


Note 21 - 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,
                                                            2001                  2000
                                                    -------------------   ---------------------
                                                    Carrying      Fair    Carrying      Fair
                                                     Amount      Value     Amount       Value
                                                    --------   --------   --------   ----------
                                                                  (In millions)
<S>                                                 <C>        <C>        <C>        <C>
Cash, cash equivalents, current and noncurrent
  restricted cash equivalents and current and
  noncurrent marketable debt securities .........   $  199.0   $  199.0   $  207.6   $    207.6
Marketable equity securities - classified as
  available-for-sale ............................       45.2       45.2       47.2         47.2

Notes payable and long-term debt:
    Fixed rate with market quotes - 11.75% Senior
      Secured Notes .............................   $  194.0   $  194.9   $  194.0   $    195.9
    Variable rate debt ..........................       48.7       48.7       72.1         72.1

Common shareholders' equity .....................   $  386.9   $  748.8   $  344.5   $  1,213.8

</TABLE>

        Fair value of the Company's  marketable  equity  securities,  marketable
debt securities and Notes are based upon quoted market prices and the fair value
of the Company's common  shareholder's equity is based upon quoted market prices
for NL's common  stock at the end of the year.  The Company  held no  derivative
financial instruments at December 31, 2001 or 2000.

                                      F-44
<PAGE>


Note 22 - 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, 2001:

    Net sales ...............................   $226,060   $220,105   $206,952   $181,982
    Cost of sales ...........................    149,902    151,320    145,945    130,893
    Operating income ........................     51,916     45,170     36,222     35,879(a)
    Net income ..............................     34,559     25,424     20,538     40,886(a)

    Earnings per share - net income:
        Basic ...............................   $    .69   $    .51   $    .41   $    .83(a)
                                                ========   ========   ========   ========
        Diluted .............................   $    .69   $    .51   $    .41   $    .83(a)
                                                ========   ========   ========   ========

    Weighted average common shares and
      potential common shares outstanding:
        Basic ...............................     50,079     49,932     49,621     49,304
        Diluted .............................     50,349     50,027     49,705     49,339

Year ended December 31, 2000:

    Net sales ...............................   $231,009   $251,126   $242,309   $197,875
    Cost of sales ...........................    159,265    164,033    159,021    128,130
    Operating income ........................     46,235     62,743     57,511     45,994
    Income from continuing operations .......     23,708     63,438     30,169     38,026(b)
    Net income ..............................     23,708     63,438     30,169     37,294(b)

    Earnings per share:
        Basic:
            Income from continuing operations   $    .47   $   1.26   $    .60   $    .76(b)
                                                ========   ========   ========   ========
            Net income ......................   $    .47   $   1.26   $    .60   $    .75(b)
                                                ========   ========   ========   ========
        Diluted:
            Income from continuing operations   $    .46   $   1.25   $    .60   $    .75(b)
                                                ========   ========   ========   ========
            Net income ......................   $    .46   $   1.25   $    .60   $    .74(b)
                                                ========   ========   ========   ========

    Weighted average common shares and
      potential common shares outstanding:
        Basic ...............................     50,920     50,499     50,203     50,045
        Diluted .............................     51,154     50,850     50,606     50,385
</TABLE>



        The sum of the  quarterly per share amounts may not equal the annual per
share amounts due to relative  changes in the weighted  average number of shares
used in the per share computations.

(a)     Operating income in the fourth quarter of 2001 included $16.6 million of
        pretax insurance  recoveries for business  interruption related to prior
        quarters due to the Leverkusen fire. Net income in the fourth quarter of
        2001 also included $11.6 million net of pretax insurance  recoveries for
        property  damage related to the Leverkusen  fire and a $17.6 million net
        income tax benefit  related to a restructuring  of the Company's  German
        subsidiaries.

                                      F-45
<PAGE>

(b)     Income from continuing operations in the fourth quarter of 2000 included
        a $26.5 million pretax net litigation  settlement gain (see Note 16) and
        a $3.1 million  noncash  securities loss (see Note 6). Net income in the
        fourth  quarter of 2000 also included a $.7 million  extraordinary  item
        for early extinguishment of debt, net of tax.

Note 23 - Subsequent events:

        Through  January  7,  2002,  an  entity  controlled  by one of Harold C.
Simmons'  daughters (the wife of the  son-in-law  who provides  services to EWI)
owned a majority of EWI, and Contran  owned the  remainder of EWI. On January 7,
2002, the Company  purchased EWI from its previous  owners for an aggregate cash
purchase  price of  approximately  $9  million,  and EWI  became a wholly  owned
subsidiary of the Company.  The purchase was approved by a special  committee of
the Company's Board of Directors consisting of two of its independent directors,
and the purchase  price was negotiated by the special  committee  based upon its
consideration  of relevant  factors,  including but not limited to due diligence
performed by  independent  consultants  and an appraisal of EWI  conducted by an
independent third party selected by the special committee.

        On  February  6, 2002,  the  Company  gave  notice to the trustee of its
intention to redeem $25 million  principal  amount of its 11.75% Senior  Secured
Notes due 2003 on March 22, 2002, at the current call price of 100%.

Note 24 - Condensed consolidating financial information:

        The Company's 11.75% Senior Secured Notes are collateralized by a series
of  intercompany  notes  to  NL  (the  "Parent  Issuer").  The  Notes  are  also
collateralized  by a first  priority  lien on the  stock  of  Kronos.  A  second
priority lien on the stock of NL Capital Corporation ("NLCC") collateralized the
notes  until  February  2000,  at which time it was  merged  into KII and became
included in the first priority lien on the stock of Kronos.

        In the event of foreclosure,  the holders of the Notes would have access
to the  consolidated  assets,  earnings and equity of the  Company.  The Company
believes  the  collateralization  of  the  Notes,  as  described  above,  is the
functional  economic  equivalent of a joint and several,  full and unconditional
guarantee of the Notes by Kronos and, prior to its merger into KII, NLCC.

        Management believes that separate audited financial statements would not
provide  additional  material  information that would be useful in assessing the
financial position of Kronos and NLCC (the "Guarantor Subsidiaries"). In lieu of
providing separate audited financial  statements of the Guarantor  Subsidiaries,
the Company has included condensed  consolidating  financial  information of the
Parent  Issuer,   Guarantor  Subsidiaries  and  non-guarantor   subsidiaries  in
accordance  with  Rule  3-10 (e) of the  SEC's  Regulation  S-X.  The  Guarantor
Subsidiaries and the non-guarantor  subsidiaries  comprise all of the direct and
indirect subsidiaries of the Parent Issuer.

        Investments  in  subsidiaries  are  accounted for by NL under the equity
method,  wherein  the parent  company's  share of  earnings  is  included in net
income.  The  elimination  entries  eliminate  (i) the  parent's  investment  in
subsidiaries  and the equity in  earnings  of  subsidiaries,  (ii)  intercompany
payables and receivables and (iii) other transactions between subsidiaries.

                                      F-46
<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES
                      Condensed Consolidating Balance Sheet
                                December 31, 2001
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                           Combined
                                             NL Industries                Non-guarantor
                                                  Inc.      Kronos, Inc.  Subsidiaries  Eliminations  Consolidated
                                             -------------  ------------  ------------  ------------  ------------
                     ASSETS

<S>                                          <C>           <C>           <C>            <C>            <C>
Current assets:
    Cash and cash equivalents ............   $    10,413   $    54,717   $    50,907    $      --      $   116,037
    Restricted cash equivalents ..........        63,257          --            --             --           63,257
    Restricted marketable debt securities          3,583          --            --             --            3,583
    Accounts and notes receivable ........         1,621       123,870           230           --          125,721
    Receivable from affiliates ...........         8,106            47         1,514         (5,969)         3,698
    Refundable income taxes ..............          --           1,528             2           --            1,530
    Inventories ..........................          --         231,056          --             --          231,056
    Prepaid expenses .....................           551         2,642          --             --            3,193
    Deferred income taxes ................         6,371         4,640          --             --           11,011
                                             -----------   -----------   -----------    -----------    -----------

        Total current assets .............        93,902       418,500        52,653         (5,969)       559,086
                                             -----------   -----------   -----------    -----------    -----------

Other assets:
    Investment in subsidiaries ...........     1,072,551          --             288     (1,072,839)          --
    Marketable equity securities .........           216          --          45,011           --           45,227
    Receivable from affiliates ...........       194,000       655,918        31,650       (849,918)        31,650
    Investment in TiO2 manufacturing joint
      venture ............................          --         138,428          --             --          138,428
    Prepaid pension cost .................         2,368        16,043          --             --           18,411
    Restricted marketable debt securities         16,121          --            --             --           16,121
    Other ................................         1,318        11,100          --             --           12,418
                                             -----------   -----------   -----------    -----------    -----------

        Total other assets ...............     1,286,574       821,489        76,949     (1,922,757)       262,255
                                             -----------   -----------   -----------    -----------    -----------

Property and equipment, net ..............         3,725       326,025          --             --          329,750
                                             -----------   -----------   -----------    -----------    -----------

                                             $ 1,384,201   $ 1,566,014   $   129,602    $(1,928,726)   $ 1,151,091
                                             ===========   ===========   ===========    ===========    ===========
</TABLE>

                                      F-47
<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES
               Condensed Consolidating Balance Sheet, (Continued)
                                December 31, 2001
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                             Combined
                                               NL Industries                Non-guarantor
                                                    Inc.      Kronos, Inc.  Subsidiaries  Eliminations  Consolidated
                                               -------------  ------------  ------------  ------------  ------------

   LIABILITIES AND SHAREHOLDERS' EQUITY

<S>                                            <C>          <C>          <C>            <C>            <C>
Current liabilities:
    Notes payable ..........................   $     --     $   46,201   $      --      $      --      $   46,201
    Current maturities of long-term debt ...         --          1,033          --             --           1,033
    Accounts payable and accrued liabilities       23,544      152,633            46           --         176,223
    Payable to affiliates ..................        1,083       11,365           440         (5,969)        6,919
    Accrued environmental costs ............       10,529         --          49,362           --          59,891
    Income taxes ...........................           96        7,181          --             --           7,277
    Deferred income taxes ..................         --          1,530          --             --           1,530
                                               ----------   ----------   -----------    -----------    ----------

        Total current liabilities ..........       35,252      219,943        49,848         (5,969)      299,074
                                               ----------   ----------   -----------    -----------    ----------

Noncurrent liabilities:
    Long-term debt .........................      194,000        1,465          --             --         195,465
    Notes payable to affiliate .............      655,918      194,000          --         (849,918)         --
    Deferred income taxes ..................       78,708       64,163           385           --         143,256
    Accrued environmental costs ............        7,489        6,732        33,368           --          47,589
    Accrued pension cost ...................        1,427       25,558          --             --          26,985
    Accrued postretirement benefits cost ...       16,806       13,036          --             --          29,842
    Other ..................................        7,658        7,071          --             --          14,729
                                               ----------   ----------   -----------    -----------    ----------

        Total noncurrent liabilities .......      962,006      312,025        33,753       (849,918)      457,866
                                               ----------   ----------   -----------    -----------    ----------

Minority interest ..........................         --            284         6,924           --           7,208
                                               ----------   ----------   -----------    -----------    ----------

Shareholders' equity .......................      386,943    1,033,762        39,077     (1,072,839)      386,943
                                               ----------   ----------   -----------    -----------    ----------

                                               $1,384,201   $1,566,014   $   129,602    $(1,928,726)   $1,151,091
                                               ==========   ==========   ===========    ===========    ==========
</TABLE>

                                      F-48
<PAGE>



                      NL INDUSTRIES, INC. AND SUBSIDIARIES
                      Condensed Consolidating Balance Sheet
                                December 31, 2000
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                             Combined
                                                NL Industries                Non-guarantor
                                                     Inc.      Kronos, Inc.  Subsidiaries  Eliminations  Consolidated
                                                -------------  ------------  ------------  ------------  ------------
                     ASSETS

<S>                                          <C>          <C>          <C>            <C>            <C>
Current assets:
    Cash and cash equivalents ............   $    3,632   $   52,979   $    63,767    $      --      $  120,378
    Restricted cash equivalents ..........       69,242         --            --             --          69,242
    Accounts and notes receivable ........          172      131,295            73           --         131,540
    Receivable from affiliates ...........        6,189         --             216         (6,191)          214
    Refundable income taxes ..............       10,512        1,790          --             --          12,302
    Inventories ..........................         --        205,973          --             --         205,973
    Prepaid expenses .....................          347        2,111          --             --           2,458
    Deferred income taxes ................        6,394        5,279          --             --          11,673
                                             ----------   ----------   -----------    -----------    ----------

        Total current assets .............       96,488      399,427        64,056         (6,191)      553,780
                                             ----------   ----------   -----------    -----------    ----------

Other assets:
    Investment in subsidiaries ...........      687,300         --             285       (687,585)         --
    Marketable equity securities .........          452         --          46,734           --          47,186
    Receivable from affiliates ...........      194,000      301,695        23,000       (518,695)         --
    Investment in TiO2 manufacturing joint
      venture ............................         --        150,002          --             --         150,002
    Prepaid pension cost .................        1,772       21,017          --             --          22,789
    Restricted cash equivalents ..........       17,942         --            --             --          17,942
    Other ................................        1,739        2,968          --             --           4,707
                                             ----------   ----------   -----------    -----------    ----------

        Total other assets ...............      903,205      475,682        70,019     (1,206,280)      242,626
                                             ----------   ----------   -----------    -----------    ----------

Property and equipment, net ..............        4,425      319,957          --             --         324,382
                                             ----------   ----------   -----------    -----------    ----------

                                             $1,004,118   $1,195,066   $   134,075    $(1,212,471)   $1,120,788
                                             ==========   ==========   ===========    ===========    ==========
</TABLE>
                                      F-49

<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES
               Condensed Consolidating Balance Sheet, (Continued)
                                December 31, 2000
                                 (In thousands)


<TABLE>
<CAPTION>

                                                                           Combined
                                              NL Industries                Non-guarantor
                                                   Inc.      Kronos, Inc.  Subsidiaries  Eliminations  Consolidated
                                              -------------  ------------  ------------  ------------  ------------

      LIABILITIES AND SHAREHOLDERS' EQUITY

<S>                                            <C>          <C>          <C>            <C>            <C>
Current liabilities:
    Notes payable ..........................   $     --     $   69,970   $      --      $      --      $   69,970
    Current maturities of long-term debt ...         --            730          --             --             730
    Accounts payable and accrued liabilities       24,098      123,555           224           --         147,877
    Payable to affiliates ..................        2,140       14,073           612         (6,191)       10,634
    Accrued environmental costs ............        5,046         --          48,261           --          53,307
    Income taxes ...........................         --         13,604            12           --          13,616
    Deferred income taxes ..................         --          1,822          --             --           1,822
                                               ----------   ----------   -----------    -----------    ----------

        Total current liabilities ..........       31,284      223,754        49,109         (6,191)      297,956
                                               ----------   ----------   -----------    -----------    ----------

Noncurrent liabilities:
    Long-term debt .........................      194,000        1,363          --             --         195,363
    Notes payable to affiliate .............      324,695      194,000          --         (518,695)         --
    Deferred income taxes ..................       70,985       73,699           989           --         145,673
    Accrued environmental costs ............        6,729        8,699        41,705           --          57,133
    Accrued pension cost ...................        1,438       19,782          --             --          21,220
    Accrued postretirement benefits cost ...       15,039       14,365          --             --          29,404
    Other ..................................       15,460        7,812          --             --          23,272
                                               ----------   ----------   -----------    -----------    ----------

        Total noncurrent liabilities .......      628,346      319,720        42,694       (518,695)      472,065
                                               ----------   ----------   -----------    -----------    ----------

Minority interest ..........................         --            299         5,980           --           6,279
                                               ----------   ----------   -----------    -----------    ----------

Shareholders' equity .......................      344,488      651,293        36,292       (687,585)      344,488
                                               ----------   ----------   -----------    -----------    ----------

                                               $1,004,118   $1,195,066   $   134,075    $(1,212,471)   $1,120,788
                                               ==========   ==========   ===========    ===========    ==========
</TABLE>
                                      F-50

<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES
                   Condensed Consolidating Statement of Income
                          Year ended December 31, 2001
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                            Combined
                                               NL Industries                Non-guarantor
                                                    Inc.      Kronos, Inc.  Subsidiaries  Eliminations  Consolidated
                                               -------------  ------------  ------------  ------------  ------------

<S>                                                <C>         <C>         <C>           <C>           <C>
Revenues and other income:
    Net sales .................................    $   --      $835,099    $    --       $    --       $835,099
    Interest and dividends ....................      27,323      36,060        5,803       (57,968)      11,218
    Equity in income of subsidiaries ..........     154,410        --           --        (154,410)        --
    Litigation settlement gains, net ..........      11,730        --           --            --         11,730
    Insurance recoveries, net .................        --        17,468         --            --         17,468
    Other income (expense), net ...............       3,464       8,483          (11)          (18)      11,918
                                                   --------    --------    ---------     ---------     --------

                                                    196,927     897,110        5,792      (212,396)     887,433
                                                   --------    --------    ---------     ---------     --------
Costs and expenses:
    Cost of sales .............................        --       578,060         --            --        578,060
    Selling, general and administrative .......      13,831     109,535        1,146          --        124,512
    Interest ..................................      58,263      27,274         --         (57,968)      27,569
                                                   --------    --------    ---------     ---------     --------

                                                     72,094     714,869        1,146       (57,968)     730,141
                                                   --------    --------    ---------     ---------     --------

        Income before income taxes and minority
          interest ............................     124,833     182,241        4,646      (154,428)     157,292

Income tax expense ............................       3,426      31,483           16          --         34,925
                                                   --------    --------    ---------     ---------     --------

        Income before minority interest .......     121,407     150,758        4,630      (154,428)     122,367

Minority interest .............................        --            16          944          --            960
                                                   --------    --------    ---------     ---------     --------

        Net income ............................    $121,407    $150,742    $   3,686     $(154,428)    $121,407
                                                   ========    ========    =========     =========     ========
</TABLE>
                                      F-51

<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES
                   Condensed Consolidating Statement of Income
                          Year ended December 31, 2000
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                    Combined     Combined
                                                    NL Industries   Guarantor    Non-guarantor
                                                         Inc.      Subsidiaries  Subsidiaries   Eliminations  Consolidated
                                                    -------------  ------------  -------------  ------------  ------------
<S>                                                   <C>           <C>           <C>           <C>             <C>
Revenues and other income:
    Net sales ....................................    $    --       $ 922,319     $    --       $      --       $   922,319
    Interest and dividends .......................       31,598        25,587         5,937         (52,443)         10,679
    Equity in income of subsidiaries .............      173,620          --            --          (173,620)           --
    Litigation settlement gains, net .............       69,465          --            --              --            69,465
    Other income, net ............................       12,595         5,834          --            (5,825)         12,604
                                                      ---------     ---------     ---------     -----------     -----------

                                                        287,278       953,740         5,937        (231,888)      1,015,067
                                                      ---------     ---------     ---------     -----------     -----------
Costs and expenses:
    Cost of sales ................................         --         610,449          --              --           610,449
    Selling, general and administrative ..........       25,381       112,429          (632)           --           137,178
    Interest .....................................       52,701        30,985          --           (52,443)         31,243
                                                      ---------     ---------     ---------     -----------     -----------

                                                         78,082       753,863          (632)        (52,443)        778,870
                                                      ---------     ---------     ---------     -----------     -----------

        Income before income taxes, minority
          interest and extraordinary item ........      209,196       199,877         6,569        (179,445)        236,197

Income tax expense ...............................       53,855        22,850            12           1,703          78,420
                                                      ---------     ---------     ---------     -----------     -----------

        Income before minority interest and
          extraordinary item .....................      155,341       177,027         6,557        (181,148)        157,777

Minority interest ................................         --              47         2,389            --             2,436
                                                      ---------     ---------     ---------     -----------     -----------

        Income before extraordinary item .........      155,341       176,980         4,168        (181,148)        155,341

Extraordinary item - early extinguishment of debt,
  net of tax benefit of $394 .....................         (732)         --            --              --              (732)
                                                      ---------     ---------     ---------     -----------     -----------

        Net income ...............................    $ 154,609     $ 176,980     $   4,168     $  (181,148)    $   154,609
                                                      =========     =========     =========     ===========     ===========
</TABLE>

                                      F-52
<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES
                   Condensed Consolidating Statement of Income
                          Year ended December 31, 1999
                                 (In thousands)
<TABLE>
<CAPTION>

                                                          Combined       Combined
                                          NL Industries   Guarantor      Non-guarantor
                                               Inc.      Subsidiaries    Subsidiaries   Eliminations    Consolidated
                                          -------------  ------------    -------------  ------------    ------------

<S>                                          <C>           <C>           <C>             <C>             <C>
Revenues and other income:
    Net sales .........................      $   --        $908,387      $    --         $    --         $908,387
    Interest and dividends ............        30,843        24,425          6,823         (53,129)         8,962
    Equity in income of subsidiaries ..       154,625          --             --          (154,625)          --
    Other income, net .................         4,565        10,119           --              --           14,684
                                             --------      --------      ---------       ---------       --------

                                              190,033       942,931          6,823        (207,754)       932,033
                                             --------      --------      ---------       ---------       --------

Costs and expenses:
    Cost of sales .....................          --         662,315           --              --          662,315
    Selling, general and administrative        16,037       116,138          2,167            --          134,342
    Interest ..........................        49,872        40,141           --           (53,129)        36,884
                                             --------      --------      ---------       ---------       --------

                                               65,909       818,594          2,167         (53,129)       833,541
                                             --------      --------      ---------       ---------       --------

        Income before income taxes
          and minority interest .......       124,124       124,337          4,656        (154,625)        98,492

Income tax benefit ....................        35,647        26,955          1,999            --           64,601
                                             --------      --------      ---------       ---------       --------

        Income before minority interest       159,771       151,292          6,655        (154,625)       163,093

Minority interest .....................          --              48          3,274            --            3,322
                                             --------      --------      ---------       ---------       --------

        Net income ....................      $159,771      $151,244      $   3,381       $(154,625)      $159,771
                                             ========      ========      =========       =========       ========
</TABLE>
                                      F-53

<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES
                 Condensed Consolidating Statement of Cash Flows
                          Year ended December 31, 2001
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                                 Combined
                                                   NL Industries                 Non-guarantor
                                                        Inc.       Kronos, Inc.  Subsidiaries   Eliminations  Consolidated
                                                   -------------   ------------  ------------   ------------  ------------


<S>                                                  <C>           <C>            <C>           <C>           <C>
Net cash provided (used) by operating activities     $ (3,905)     $ 157,306      $ (3,169)     $(20,499)     $ 129,733
                                                     --------      ---------      --------      --------      ---------

Cash flows from investing activities:
    Capital expenditures .......................          (13)       (53,656)         --            --          (53,669)
    Property damaged by fire:
        Insurance proceeds .....................         --           23,361          --            --           23,361
        Other, net .............................         --           (3,205)         --            --           (3,205)
    Change in restricted cash equivalents and
      restricted marketable debt securities, net       18,539           --            --         (10,030)         8,509
    Loans to affiliates, net ...................         --          (69,678)       (9,650)       46,678        (32,650)
    Other, net .................................           24            399            (8)            8            423
                                                     --------      ---------      --------      --------      ---------
        Net cash provided (used) by investing
          activities ...........................       18,550       (102,779)       (9,658)       36,656        (57,231)
                                                     --------      ---------      --------      --------      ---------

Cash flows from financing activities:
    Indebtedness:
        Borrowings .............................         --            1,437          --            --            1,437
        Principal payments .....................         --          (22,428)         --            --          (22,428)
    Treasury stock purchased, net ..............      (14,784)          --            --            --          (14,784)
    Dividends, net .............................      (39,758)       (30,500)          (29)       30,529        (39,758)
    Loans from affiliates ......................       46,678           --            --         (46,678)          --
    Other, net .................................         --                3          --              (8)            (5)
                                                     --------      ---------      --------      --------      ---------

        Net cash used by financing activities ..       (7,864)       (51,488)          (29)      (16,157)       (75,538)
                                                     --------      ---------      --------      --------      ---------

Cash and cash equivalents:
    Net change from:
        Operating, investing and financing
          activities ...........................        6,781          3,039       (12,856)         --           (3,036)
        Currency translation ...................         --           (1,301)           (4)         --           (1,305)
                                                     --------      ---------      --------      --------      ---------
                                                        6,781          1,738       (12,860)         --           (4,341)
    Balance at beginning of year ...............        3,632         52,979        63,767          --          120,378
                                                     --------      ---------      --------      --------      ---------

    Balance at end of year .....................     $ 10,413      $  54,717      $ 50,907      $   --        $ 116,037
                                                     ========      =========      ========      ========      =========

</TABLE>
                                      F-54
<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES
                 Condensed Consolidating Statement of Cash Flows
                          Year ended December 31, 2000
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                   Combined      Combined
                                                  NL Industries    Guarantor     Non-guarantor
                                                       Inc.       Subsidiaries   Subsidiaries   Eliminations  Consolidated
                                                  -------------   ------------   -------------  ------------  ------------

<S>                                                  <C>           <C>            <C>           <C>           <C>
Net cash provided by operating activities ......     $ 12,318      $ 177,642      $  4,795      $(55,000)     $ 139,755
                                                     --------      ---------      --------      --------      ---------

Cash flows from investing activities:
    Capital expenditures .......................          (23)       (31,066)         --            --          (31,089)
    Purchase of Tremont Corporation common stock      (26,040)          --            --            --          (26,040)
    Change in restricted cash equivalents ......        4,480           --          (3,850)         --              630
    Loans to affiliates ........................       50,000       (115,856)       55,000        10,856           --
    Other, net .................................          107             77          --              80            264
                                                     --------      ---------      --------      --------      ---------
        Net cash provided (used) by investing
          activities ..........................        28,524       (146,845)       51,150        10,936        (56,235)
                                                     --------      ---------      --------      --------      ---------

Cash flows from financing activities:
    Indebtedness:
        Borrowings .............................         --           44,923          --            --           44,923
        Principal payments .....................      (50,000)       (29,162)         --            --          (79,162)
    Treasury stock:
        Purchased ..............................      (30,886)          --            --            --          (30,886)
        Reissued ...............................        2,091           --            --            --            2,091
    Dividends, net .............................      (32,686)       (55,000)         --          55,000        (32,686)
    Loans from affiliates ......................       60,856        (50,000)         --         (10,856)          --
    Other, net .................................         --               (6)           80           (80)            (6)
                                                     --------      ---------      --------      --------      ---------
        Net cash provided (used) by financing
          activities ...........................      (50,625)       (89,245)           80        44,064        (95,726)
                                                     --------      ---------      --------      --------      ---------

Cash and cash equivalents:
    Net change from:
        Operating, investing and financing
          activities ...........................       (9,783)       (58,448)       56,025          --          (12,206)
        Currency translation ...................         --           (1,635)           (5)         --           (1,640)
                                                     --------      ---------      --------      --------      ---------
                                                       (9,783)       (60,083)       56,020          --          (13,846)
    Balance at beginning of year ...............       13,415        113,062         7,747          --          134,224
                                                     --------      ---------      --------      --------      ---------

    Balance at end of year .....................     $  3,632      $  52,979      $ 63,767      $    --       $ 120,378
                                                     ========      =========      ========      ========      =========

</TABLE>
                                      F-55
<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES
                 Condensed Consolidating Statement of Cash Flows
                          Year ended December 31, 1999
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                   Combined      Combined
                                                  NL Industries    Guarantor     Non-guarantor
                                                       Inc.       Subsidiaries   Subsidiaries   Eliminations  Consolidated
                                                  -------------   ------------   -------------  ------------  ------------

<S>                                                  <C>           <C>            <C>          <C>           <C>
Net cash provided (used) by operating activities     $ 28,742      $ 134,937      $(5,371)     $(50,000)     $ 108,308
                                                     --------      ---------      -------      --------      ---------

Cash flows from investing activities:
    Capital expenditures .......................       (2,856)       (32,703)        --            --          (35,559)
    Change in restricted cash equivalents ......      (12,065)          --          6,889          --           (5,176)
    Other, net .................................          (17)         2,334         --              27          2,344
                                                     --------      ---------      -------      --------      ---------

        Net cash provided (used) by investing
          activities ...........................      (14,938)       (30,369)       6,889            27        (38,391)
                                                     --------      ---------      -------      --------      ---------

Cash flows from financing activities:
    Indebtedness:
        Borrowings .............................         --           82,038         --            --           82,038
        Principal payments .....................         --         (155,787)        --            --         (155,787)
    Treasury stock purchased ...................       (7,000)          --           --            --           (7,000)
    Dividends, net .............................       (7,242)       (50,030)          30        50,000         (7,242)
    Other, net .................................         --               (6)          27           (27)            (6)
                                                     --------      ---------      -------      --------      ---------

        Net cash provided (used) by financing
          activities ...........................      (14,242)      (123,785)          57        49,973        (87,997)
                                                     --------      ---------      -------      --------      ---------

Cash and cash equivalents:
    Net change from:
        Operating, investing and financing
          activities ...........................         (438)       (19,217)       1,575          --          (18,080)
        Currency translation ...................         --           (2,649)        --            --           (2,649)
                                                     --------      ---------      -------      --------      ---------
                                                         (438)       (21,866)       1,575          --          (20,729)
    Balance at beginning of year ...............       13,853        134,928        6,172          --          154,953
                                                     --------      ---------      -------      --------      ---------

    Balance at end of year .....................     $ 13,415      $ 113,062      $ 7,747      $   --        $ 134,224
                                                     ========      =========      =======      ========      =========
</TABLE>

                                      F-56
<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 March 1, 2002  appearing  on page F-2 in the 2001 Annual  Report to
Shareholders on Form 10-K of NL Industries,  Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedules listed in Item
14(a) and (d) of this Form  10-K.  In our  opinion,  these  financial  statement
schedules  present fairly, in all material  respects,  the information set forth
therein  when  read in  conjunction  with  the  related  consolidated  financial
statements.




                                                      PricewaterhouseCoopers LLP

Houston, Texas
March 1, 2002

                                       S-1

<PAGE>



                      NL INDUSTRIES, INC. AND SUBSIDIARIES
            SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
            --------------------------------------------------------
                            Condensed Balance Sheets
                           December 31, 2001 and 2000
                                 (In thousands)
<TABLE>
<CAPTION>

                                                            2001         2000
                                                         ----------   ----------
                            ASSETS
<S>                                                      <C>          <C>
Current assets:
    Cash and cash equivalents ........................   $   10,413   $    3,632
    Restricted cash equivalents ......................       63,257       69,242
    Restricted marketable debt securities ............        3,583         --
    Accounts and notes receivable ....................        1,621          172
    Receivable from subsidiaries .....................        8,106        6,189
    Refundable income taxes ..........................         --         10,512
    Prepaid expenses .................................          551          347
    Deferred income taxes ............................        6,371        6,394
                                                         ----------   ----------

        Total current assets .........................       93,902       96,488
                                                         ----------   ----------

Other assets:
    Marketable equity securities .....................          216          452
    Notes receivable from subsidiary .................      194,000      194,000
    Investment in subsidiaries .......................    1,072,551      687,300
    Restricted marketable debt securities ............       16,121       17,942
    Prepaid pension cost .............................        2,368        1,772
    Other ............................................        1,318        1,739
                                                         ----------   ----------

        Total other assets ...........................    1,286,574      903,205
                                                         ----------   ----------

Property and equipment, net ..........................        3,725        4,425
                                                         ----------   ----------

                                                         $1,384,201   $1,004,118
                                                         ==========   ==========
             LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Accounts payable and accrued liabilities .........   $   23,544   $   24,098
    Payable to affiliates ............................        1,083        2,140
    Accrued environmental costs ......................       10,529        5,046
    Income taxes .....................................           96         --
                                                         ----------   ----------

        Total current liabilities ....................       35,252       31,284
                                                         ----------   ----------

Noncurrent liabilities:
    Long-term debt ...................................      194,000      194,000
    Notes payable to affiliates ......................      655,918      324,695
    Deferred income taxes ............................       78,708       70,985
    Accrued environmental costs ......................        7,489        6,729
    Accrued pension cost .............................        1,427        1,438
    Accrued postretirement benefits cost .............       16,806       15,039
    Other ............................................        7,658       15,460
                                                         ----------   ----------

        Total noncurrent liabilities .................      962,006      628,346
                                                         ----------   ----------

Shareholders' equity .................................      386,943      344,488
                                                         ----------   ----------

                                                         $1,384,201   $1,004,118
                                                         ==========   ==========
</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, 2001, 2000 and 1999

                                 (In thousands)

<TABLE>
<CAPTION>

                                                         2001         2000         1999
                                                       ---------    ---------    ---------

<S>                                                    <C>          <C>          <C>
Revenues and other income:
    Equity in income from continuing operations of
      subsidiaries .................................   $ 154,410    $ 173,620    $ 154,625
    Interest and dividends .........................       4,354        2,961        1,184
    Interest income from subsidiaries ..............      22,969       28,637       29,659
    Securities transactions, net ...................      (1,133)       8,356         --
    Litigation settlement gains, net ...............      11,730       69,465         --
    Other income, net ..............................       4,597        4,239        4,565
                                                       ---------    ---------    ---------

                                                         196,927      287,278      190,033
                                                       ---------    ---------    ---------
Costs and expenses:
    General and administrative .....................      13,831       25,381       16,037
    Interest .......................................      58,263       52,701       49,872
                                                       ---------    ---------    ---------

                                                          72,094       78,082       65,909
                                                       ---------    ---------    ---------

        Income before income taxes and extraordinary
          item .....................................     124,833      209,196      124,124

Income tax expense (benefit) .......................       3,426       53,855      (35,647)
                                                       ---------    ---------    ---------

        Income before extraordinary item ...........     121,407      155,341      159,771

Extraordinary item .................................        --           (732)        --
                                                       ---------    ---------    ---------

        Net income .................................   $ 121,407    $ 154,609    $ 159,771
                                                       =========    =========    =========
</TABLE>

                                      S-3

<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES

      SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
      --------------------------------------------------------------------

                       Condensed Statements of Cash Flows

                  Years ended December 31, 2001, 2000 and 1999

                                 (In thousands)

<TABLE>
<CAPTION>

                                                        2001         2000         1999
                                                     ---------    ---------    ---------

<S>                                                  <C>          <C>          <C>
Cash flows from operating activities:
    Net income ...................................   $ 121,407    $ 154,609    $ 159,771
    Equity in income of subsidiaries .............    (154,410)    (173,620)    (154,625)
    Distributions from subsidiaries ..............      30,500       55,000       50,000
    Noncash interest income, net .................      (3,113)        (932)        (390)
    Deferred income taxes ........................       7,498       71,837      (18,071)
    Securities gains, net ........................       1,133       (8,356)        --
    Litigation settlement gains, net .............     (10,307)     (69,465)        --
    Other, net ...................................       1,824       (4,399)      (3,164)
                                                     ---------    ---------    ---------

                                                        (5,468)      24,674       33,521

    Change in assets and liabilities, net ........       1,563      (12,356)      (4,779)
                                                     ---------    ---------    ---------

        Net cash provided (used) by operating
          activities .............................      (3,905)      12,318       28,742
                                                     ---------    ---------    ---------

Cash flows from investing activities:
    Change in restricted cash equivalents and
      restricted marketable debt securities, net .      18,539        4,480      (12,065)
    Capital expenditures .........................         (13)         (23)      (2,856)
    Purchase of Tremont Corporation common stock .        --        (26,040)        --
    Loans to affiliates ..........................        --         50,000         --
    Investments in subsidiaries ..................        --            (80)         (27)
    Proceeds from disposition of marketable equity
      securities .................................           4          158         --
    Other, net ...................................          20           29           10
                                                     ---------    ---------    ---------

        Net cash provided (used) by investing
          activities .............................      18,550       28,524      (14,938)
                                                     ---------    ---------    ---------
</TABLE>
                                      S-4

<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES

      SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
      --------------------------------------------------------------------

                 Condensed Statements of Cash Flows (Continued)

                  Years ended December 31, 2001, 2000 and 1999

                                 (In thousands)

<TABLE>
<CAPTION>

                                                           2001        2000        1999
                                                         --------    --------    --------

<S>                                                      <C>         <C>         <C>
Cash flows from financing activities:
    Dividends ........................................   $(39,758)   $(32,686)   $ (7,242)
    Treasury stock:
        Purchased ....................................    (15,502)    (30,886)     (7,210)
        Reissued .....................................        718       2,091         210
    Indebtedness - principal payments ................       --       (50,000)       --
    Loans from affiliates ............................     46,678      60,856        --
                                                         --------    --------    --------

        Net cash used by financing activities ........     (7,864)    (50,625)    (14,242)
                                                         --------    --------    --------

    Net change from operating, investing and financing
      activities .....................................      6,781      (9,783)       (438)
    Balance at beginning of year .....................      3,632      13,415      13,853
                                                         --------    --------    --------

    Balance at end of year ...........................   $ 10,413    $  3,632    $ 13,415
                                                         ========    ========    ========
</TABLE>

                                       S-5
<PAGE>


                      NL INDUSTRIES, INC. AND SUBSIDIARIES

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
     ----------------------------------------------------------------------

                    Notes to Condensed Financial Information


Note 1 - Basis of presentation:

        The  Consolidated  Financial  Statements  of NL  Industries,  Inc.  (the
"Company")  and the  related  Notes to  Consolidated  Financial  Statements  are
incorporated herein by reference.

Note 2 - Net receivable from (payable to) subsidiaries and affiliates:
<TABLE>
<CAPTION>

                                                            December 31,
                                                     ---------------------------
                                                        2001             2000
                                                     ---------        ---------
                                                           (In thousands)

<S>                                                  <C>              <C>
Current:
    Receivable from:
        Kronos:
            Income taxes .....................       $      64        $   1,260
            Other, net .......................           4,943            4,103
        Valhi - income taxes .................           2,194             --
        TIMET ................................             459                1
        CompX ................................              45               82
        Other ................................             401              743
                                                     ---------        ---------

                                                     $   8,106        $   6,189
                                                     =========        =========

    Payable to:

        Tremont ..............................       $    (553)       $  (1,925)
        EMS ..................................             (74)            (146)
        Other ................................            (456)             (69)
                                                     ---------        ---------

                                                     $  (1,083)       $  (2,140)
                                                     =========        =========

Noncurrent:
    Notes receivable from Kronos .............       $ 194,000        $ 194,000
                                                     =========        =========

    Notes payable to:
        Kronos ...............................       $(655,918)       $(301,695)
        EMS ..................................            --            (23,000)
                                                     ---------        ---------

                                                     $(655,918)       $(324,695)
                                                     =========        =========
</TABLE>

                                      S-6

<PAGE>



Note 3 - Long-term debt:

        See Note 11 of the Consolidated  Financial  Statements for a description
of the Notes.  The  Company's  $194 million of 11.75%  Senior  Secured  Notes at
December  31, 2001 are due October  2003.  The  Company has  guaranteed  Kronos'
non-U.S. dollar-denominated notes payable of $46 million.

Note 4 - Contingencies:

See Legal proceedings in Note 20 to the Consolidated Financial Statements.

                                      S-7
<PAGE>



                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                 (In thousands)
<TABLE>
<CAPTION>

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

<S>                                                <C>          <C>         <C>               <C>           <C>
Year ended December 31, 2001:
    Allowance for doubtful accounts and notes
      receivable ............................      $ 2,222      $  485      $   (245)(a)      $  (104)      $ 2,358
                                                   =======      ======      ========          =======       =======


    Amortization of intangibles .............      $  --        $ --        $   --            $  --         $  --
                                                   =======      ======      ========          =======       =======

Year ended December 31, 2000:
    Allowance for doubtful accounts and notes
      receivable ............................      $ 2,075      $  342      $    (67)(a)      $  (128)      $ 2,222
                                                   =======      ======      ========          =======       =======

    Amortization of intangibles .............      $22,095      $  113      $(20,429)         $(1,779)      $  --
                                                   =======      ======      ========          =======       =======

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

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

</TABLE>

(a)     Amounts written off, less recoveries.

Certain prior-year amounts have been reclassified to conform to the current year
presentation.



                                      S-8