<PAGE>
 
                    NALCO CHEMICAL COMPANY AND SUBSIDIARIES

                          APPENDIX TO 1996 FORM 10-K

                           GRAPHS AND IMAGE MATERIAL

                      1996 ANNUAL REPORT TO SHAREHOLDERS


The following is a list and narrative description of graphs included in those
portions of the 1996 Annual Report to Shareholders expressly incorporated herein
by reference.

In the portion of the Annual Report to Shareholders titled "Management's
Discussion and Analysis" the following graphs appear:

Sales, based on continuing operations, in millions of dollars. The amounts for
1992 - 1994 include the Company's petroleum chemical operations. The values
depicted in the graph are as follows:
<TABLE>
<CAPTION>
 
                    Year                            Amount
                    ----                            ------
                   <S>                            <C>
                    1992                            $1,287
                    1993                            $1,292
                    1994                            $1,247
                    1995                            $1,215
                    1996                            $1,304
 
Depreciation, in millions of dollars. 
The values depicted in the graph are as follows:

                    Year                            Amount
                    ----                            ------
                    1992                            $   76
                    1993                            $   83
                    1994                            $   85
                    1995                            $   85
                    1996                            $   92
</TABLE>

Earnings before income taxes, in millions of dollars. The amount for 1994
excludes a $68 million pretax provision for formation and consolidation
expenses.
The values depicted in the graph are as follows:
<TABLE>
<CAPTION>
 
                    Year                             Amount
                    ----                             ------
                   <S>                              <C>
                    1992                             $  209
                    1993                             $  211
                    1994                             $  206
                    1995                             $  213
                    1996                             $  229
</TABLE>
<PAGE>
 
                    NALCO CHEMICAL COMPANY AND SUBSIDIARIES

                          APPENDIX TO 1996 FORM 10-K

                           GRAPHS AND IMAGE MATERIAL

                      1996 ANNUAL REPORT TO SHAREHOLDERS


Market Value of Nalco Common Share at Year-End Closing Price, in dollars.
The values depicted in the graph are as follows:
<TABLE>
<CAPTION>
 
                    Year            Amount
                    ----            -------
<S>                 <C>             <C>
                    1992            $34.625
                    1993             $37.50
                    1994             $33.50
                    1995            $30.125
                    1996            $36.125
 
Shareholders' Equity, in millions of dollars.
The values depicted in the graph are as follows:
 
                    Year            Amount
                    ----            -------
                    1992             $576
                    1993             $551
                    1994             $544
                    1995             $580
                    1996             $655
 
Cash Provided by Operating Activities, in millions of dollars.
The values depicted in the graph are as follows:
 
                    Year             Amount
                    ----             -------
                    1992              $208
                    1993              $256
                    1994              $249
                    1995              $213
                    1996              $229

Return on Shareholders' Equity, based on continuing operations, excluding net
charge for formation and consolidation expenses in 1994, and before
extraordinary loss and effect of accounting change in 1993, in percentages.
The values depicted in the graph are as follows:

                    Year             Amount
                    ----             ------
                    1992              22.6%
                    1993              24.2%
                    1994              22.9%
                    1995              24.1%
                    1996              23.5%
</TABLE> 
<PAGE>
 
                    NALCO CHEMICAL COMPANY AND SUBSIDIARIES

                          APPENDIX TO 1996 FORM 10-K

                           GRAPHS AND IMAGE MATERIAL

                      1996 ANNUAL REPORT TO SHAREHOLDERS


Capital Additions, in millions of dollars.
The values depicted in the graph are as follows:

<TABLE>
<CAPTION>
 
                    Year            Amount
                    ----            ------
<S>                                 <C>
                    1992             $131
                    1993             $118
                    1994             $126
                    1995             $127
                    1996             $ 93
 
Dividends per Common Share, in dollars.
The values depicted in the graph are as follows:
 
                    Year             Amount
                    ----             ------
                    1992             $ 0.84
                    1993             $0.885
                    1994             $0.945
                    1995             $ 0.99
                    1996             $ 1.00
</TABLE>
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors
and Shareholders of
Nalco Chemical Company

In our opinion, the accompanying statements of consolidated financial condition
and the related consolidated statements of earnings, of cash flows and of common
shareholders' equity present fairly, in all material respects, the financial
position of Nalco Chemical Company and its subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.



Price Waterhouse LLP
Chicago, Illinois
February 3, 1997


R. R. Ross
Engagement Partner

                                     -17-

<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS

1996 vs 1995

Sales from continuing operations were $1,304 million in 1996, an increase of 7
percent over last year's sales of $1,215 million. Sales by Diversey Water
Technologies (DWT), a middle market water treatment business which was acquired
by the Company in mid-1996, accounted for slightly less than one-third of the
improvement. Sales for 1996 and 1995 by major operating unit were as follows:
<TABLE>
<CAPTION>

                                                          1996 vs 1995
              (in millions)         1996         1995         Increase
-----------------------------------------------------     -------------
<S>                             <C>          <C>          <C>
Water and Waste Treatment       $  409.6     $  373.1               10%
Process Chemicals                  349.5        316.9               10
Europe                             289.3        285.8                1
Latin America                      107.3         92.6               16
Pacific                            147.8        146.1                1
                                --------     --------
Total                           $1,303.5     $1,214.5                7
                                ========     ========
</TABLE>

The Water and Waste Treatment Division reported a 10 percent gain over 1995,
with a little more than half of the increase attributable to sales by DWT.
Modest improvements were posted by the other four marketing groups in the
Division. Sales by the Process Chemicals Division rose 10 percent over last
year, as the Pulp and Paper Group reported a double-digit gain and the other two
groups in the Division posted more modest increases. The Latin America Division
reported a 16 percent sales gain, as solid double-digit improvements were posted
by all but two of the operating units in the region. Reported sales by the
Pacific Division were up 1 percent over last year, which reflected business that
was transferred as of the beginning of 1996 to the Nalco/Exxon Energy Chemicals,
L.P. (Nalco/Exxon) joint venture. Pacific Division sales increased 12 percent,
excluding from 1995 sales the business transferred to Nalco/Exxon, as solid
double-digit improvements were posted by operations in Indonesia and Korea.
Sales by Nalco's former affiliate company in India, which became a majority
owned subsidiary in the fourth quarter of 1995, also contributed to the sales
growth in the Division. Sales by the Europe Division were up 1 percent over
1995. Higher sales in local currencies by most operating units in the region,
combined with sales by the European operations of DWT, were largely offset by
sales decreases due to the stronger U.S. dollar compared to last year and
business now with the Nalco/Exxon joint venture.

Cost of products sold was 43.6 percent of sales for 1996, compared with 43.7
percent of sales for 1995. This slight improvement was mainly attributable to
higher margins of the newly acquired DWT. Changes in product mix resulted in
slightly lower gross margins for the Company's existing North American
operations, and gross margins of the three International Divisions were also
slightly lower than last year on a combined basis.

Operating expenses in 1996 were up $41 million, or 8 percent over 1995, with
higher selling and service expenses accounting for most of this increase.
Expenses of DWT and other operations acquired since late 1995 contributed to
over half of the change in selling expense. Most of the remainder represented
increased spending to support growth in Latin America, the Pacific, and the
paper market.

Worldwide, research expenses increased $2 million, or 5 percent over 1995, as
higher expenses in North America and Latin America were partly offset by lower
expenses in Europe and the Pacific. The increase in research expenses in North
America was mainly attributable to higher salaries and employee benefits.

                                     -18-
<PAGE>
 
Administrative expenses for 1996 were up $5 million, or 12 percent over 1995, as
a result of higher provisions for incentive plans and employee benefit costs.

Interest and other income for 1996 was down $5 million from 1995. Contributing
to this decline were translation losses resulting from the devaluation of the
Venezuelan bolivar during the second quarter of 1996, lower interest income
reflecting a decrease in invested balances, and a gain on the sale of assets
recognized last year.

Interest expense of $14 million in 1996 was down $2 million from 1995, which was
mainly attributable to lower interest rates.

Nalco's equity in earnings of Nalco/Exxon was $25 million, an $8 million
increase over the $17 million reported in 1995. This increase reflects strong
growth in the joint venture's international operations, improved operating
efficiencies, and business transferred to the joint venture as of the beginning
of 1996.

The effective tax rate for 1996 was 36.4 percent, comparable to the effective
tax rate for 1995.

Earnings from continuing operations as a percent to sales was 11.2 percent in
1996, which was unchanged from the rate for 1995.

In late October 1996, the Company completed the sale of its discontinued
superabsorbent chemicals business, realizing a gain of $3 million, net of income
taxes. Earnings from the discontinued operation, exclusive of the $3 million net
gain on the sale, were $6 million in 1996 and $18 million in 1995. (See Note 3).

The Company makes limited use of derivative financial instruments such as
interest rate swaps and foreign exchange contracts. Interest rate swaps are used
to reduce the potential impact of increases in interest rates on floating rate
long-term debt, while foreign exchange contracts are used to minimize exposure
and reduce risk from exchange rate fluctuations. The Company does not hold or
issue financial instruments for trading purposes. (See Note 17).

The Company is involved in environmental clean-up activities in connection with
former waste disposal sites and plant locations and litigation in the normal
course of business. (See Note 19). This involvement has not had, nor is it
expected to have, a material effect on the Company's earnings or financial
position.
 
In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," which requires companies to account for employee stock-based
compensation plans using a fair value based method of accounting. However, SFAS
123 allows companies to continue to apply the intrinsic value based method
prescribed under Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees," provided certain pro forma
disclosures are made with respect to a fair value method. The Company adopted
the disclosure-only provisions of SFAS 123. (See Note 8).

                                     -19-

<PAGE>
 
1995 vs 1994

When the Nalco/Exxon joint venture partnership was formed during 1994, Nalco
transferred the business and sales volume of its U.S. Petroleum Chemicals
Division and certain petroleum chemical product lines of its international
operations to the joint venture. While this formation did not change Nalco's net
assets or results of operations, several historical captions in the consolidated
financial statements were affected. Because 1994 results have not been
reclassified to exclude petroleum chemical operations, the following unaudited
statement of consolidated earnings for the year ended December 31, 1994 is
presented. It reflects results of operations on a comparable basis with 1995;
that is, Nalco petroleum chemical operations are excluded for the first eight
months of 1994 and recognized as if they were accounted for by the equity
method.
<TABLE>
<CAPTION>
 
                                                                   Reclas-
                                                                    sified
(in millions)                                              1995       1994
--------------------------------------------------------------------------
<S>                                                    <C>        <C> 
Net Sales                                              $1,214.5   $1,110.0
Operating costs and expenses
 Cost of products sold                                    531.3      482.3
 Selling and service                                      399.5      364.3
 Research and development                                  39.8       39.6
 Administrative and general                                38.4       39.2
 Formation and consolidation                                  -       68.2
--------------------------------------------------------------------------
                                                        1,009.0      993.6
--------------------------------------------------------------------------
Operating Earnings                                        205.5      116.4
Interest and other income                                   7.2       16.5
Interest expense                                          (16.2)     (20.8)
Equity in earnings of partnership                          16.9       19.9
--------------------------------------------------------------------------
Earnings from Continuing Operations
 Before Income Taxes                                      213.4      132.0
Income taxes                                               77.7       58.8
--------------------------------------------------------------------------
Earnings from Continuing Operations                       135.7       73.2
Earnings from discontinued operations, net of taxes        18.0       23.9
--------------------------------------------------------------------------
Net Earnings                                           $  153.7   $   97.1
==========================================================================
</TABLE>

Sales from continuing operations were $1,215 million in 1995, a 3 percent
decline from reported sales of $1,247 million for 1994. On a comparable basis,
however, sales for 1995 were 9 percent higher than the year before. Sales for
1995 and 1994 by major operating unit were as follows:
<TABLE>
<CAPTION>

                                                     1995 vs 1994
                                                         Increase
(in millions)                       1995       1994    (Decrease)
---------------------------------------------------  ------------
<S>                              <C>       <C>       <C> 
Water and Waste Treatment        $  372.9  $  363.9          2%
Process Chemicals                   317.1     281.6         13
Europe                              285.8     259.0         10
Latin America                        92.6      80.4         15
Pacific                             146.1     125.1         17
--------------------------------------------------
                                  1,214.5   1,110.0          9
Petroleum Chemicals                     -     136.8          -
---------------------------------------------------
Total                            $1,214.5  $1,246.8         (3)
===================================================
</TABLE>
 
The following discussion of results of operations compares 1995 to the
reclassified 1994 results presented above.

Sales by the Water and Waste Treatment Division rose 2 percent. Solid
improvements were reported by the UNISOLV and WATERGY Groups, while a more
modest increase was reported by the Basic Industry Group. The Process Chemicals
Division posted a 13 percent sales improvement as double-digit gains were
reported by all three groups in the Division. Sales by the Europe Division were
up 10 percent. The weaker dollar compared to 1994 accounted for part of this
increase, but double-digit gains in local currencies 

                                     -20-
<PAGE>
 
were reported by subsidiaries in Italy and Spain, as well as the Division's pan-
European paper business. The Latin America Division turned in a 15 percent sales
improvement, as double-digit gains were reported by subsidiary companies in
Argentina, Brazil, and Chile. Slightly more than two-thirds of the increase for
the Division was attributable to Nalcomex (Mexico), a former affiliate, which
became a wholly owned subsidiary in the fourth quarter 1994. Sales by the
Pacific Division were up 17 percent, as double-digit gains were reported by all
but two of the subsidiary companies in the Division.

Cost of products sold was 43.7 percent of sales for 1995, compared with 43.5
percent of sales for 1994. Increased raw material costs, partly offset by higher
selling prices, accounted for slightly lower gross margins reported by
operations in North America in 1995.

Operating expenses in 1995 rose $35 million, or 8 percent over 1994, excluding
the $68 million charge in 1994 for formation and consolidation expenses
discussed below. Selling and service expenses accounted for this increase,
primarily to support growth in Latin America, the Pacific, and the worldwide
paper market. The increase was also partly attributable to the weaker dollar
used to translate expenses of most international subsidiaries, mainly those in
Europe.

Worldwide, research expenses were comparable to 1994, as increased expenses in
Europe and the Pacific were offset by lower expenses in the United States and
Latin America. Higher European and Pacific research costs reflect a full year of
operations in 1995 for new facilities opened during 1994. The reduction in
research expenses in the United States was mainly attributable to lower employee
benefit costs.

Administrative expenses for 1995 were down slightly from 1994 as a result of
lower provisions for incentive plans and employee benefit costs.

Primarily as a result of the formation of the Nalco/Exxon joint venture, the
Company adopted a worldwide consolidation plan for manufacturing and support
operations during 1994. As a result of this plan, the Company recorded a pretax
provision for formation and consolidation expenses of $68 million ($54 million
after tax, or 70 cents per share on a fully diluted basis) in 1994. (See Note
4).

Interest and other income for 1995 was down $9 million from 1994. This was
primarily attributable to a $5 million gain on the sale of the Company's
automotive paint spray booth business in 1994. Also contributing to the decrease
was a drop in interest income as a result of lower invested cash balances, and
lower realized exchange and unrealized translation gains reported by the
Company's subsidiary in Brazil.

Interest expense totaled $16 million in 1995, a decrease of $5 million from
1994, which was also mainly attributable to the Company's Brazilian subsidiary.
This change, along with the change in realized exchange and unrealized
translation gains discussed above, was the result of a monetary control program
instituted by the Brazilian government in mid-1994.

Nalco's equity in earnings of Nalco/Exxon was $17 million, a $3 million decline
from the $20 million combined earnings reported by Nalco petroleum chemical
operations from January to August 1994 and the Company's equity in the joint
venture's earnings. This decrease reflected the weak petroleum market in the
United States, as well as start-up and consolidation expenses for the joint
venture.

The effective tax rate for 1995 was 36.4 percent, comparable to the 1994
effective tax rate based on the reclassified results for 1994 presented
above, excluding the formation and consolidation expense of $68 million and
related net tax benefit of $14 million.

Earnings from continuing operations as a percent to sales was 11.2 percent in
1995. Based on the reclassified results above and excluding the net formation
and consolidation expense, earnings from continuing operations as a percent to
sales was 11.5 percent in 1994.

As previously discussed, the Company disposed of its superabsorbent chemicals
business in 1996, and reported its results as discontinued operations. Earnings
from the discontinued superabsorbent chemicals business were $18 million in
1995, down $6 million from the $24 million reported in 1994.

                                     -21-

<PAGE>
 
MANAGEMENT'S ANALYSIS--FINANCIAL CONDITION

Total assets increased $34 million, or 2 percent during 1996.

Accounts receivable were $13 million, or 6 percent higher than at the end of
1995. Over two-thirds of this increase was attributable to the accounts
receivable of DWT, which was acquired by the Company in mid-1996. (See Note 10).
Higher worldwide sales levels in the fourth quarter 1996 also contributed to the
increase.

Inventories decreased approximately $1 million, or 1 percent from year-ago
levels. Lower balances in North America and Latin America were partly offset by
inventories from the DWT acquisition.

Investment in and advances to partnership was unchanged during 1996, as Nalco's
$25 million of equity in the earnings of Nalco/Exxon was offset by borrowings
and distributions from the joint venture.

The $47 million net carrying amount of assets of discontinued operations at the
end of 1995 consisted primarily of buildings and manufacturing equipment of the
superabsorbent chemicals business which was sold in October 1996.

The $72 million increase in goodwill was mainly attributable to the acquisition
of DWT. In addition, the weaker U.S. dollar in relation to the British pound and
Australian dollar compared to the end of 1995 accounted for about 10 percent of
the increase in goodwill.

Total liabilities decreased $40 million, or 5 percent during 1996 primarily
because of a net decrease in short-term and long-term debt.

Shareholders' equity increased $74 million, or 13 percent during 1996, primarily
because net earnings of $155 million exceeded dividends totaling $79 million.
Common stock repurchases of 0.7 million shares at a cost of $26 million were
offset by treasury stock transactions for stock option, benefit, and other plans
totaling $16 million. The weaker U.S. dollar in relation to various
international currencies, most notably the British pound and Australian dollar,
compared to the end of 1995 resulted in an $8 million decrease in foreign
currency translation adjustments.

Nalco's return on average shareholders' equity was 23.5 percent in 1996,
slightly lower than the 24.1 percent in 1995 based on earnings from continuing
operations.

MANAGEMENT'S ANALYSIS--CASH FLOWS

One of Nalco's most significant financial strengths is its ability to
consistently generate strong cash flow from operations. Net cash provided by
operating activities was $229 million in 1996, which was generated primarily
from net earnings before noncash charges for depreciation and amortization.

Significant cash flow requirements in 1996 included capital investments of $93
million, business purchases of $83 million, dividends of $79 million, and $26
million for the reacquisition of common stock.

In 1995, cash from operations was $213 million compared to the 1994 total of
$249 million.

Over 60% of the 1996 capital investments of $93 million was attributable to
investments in North America, which included $18 million for PORTA-FEED units
and $10 million for transportation equipment. Investments in manufacturing
facilities and related support equipment for operations in Argentina and The
People's Republic of China totaled $8 million. The Company plans to continue to
invest in internal growth in 1997 and it is expected that capital investments
will exceed $100 million.

                                     -22-

<PAGE>
 
Other significant investing activities in 1996 included the acquisitions of DWT
and the water treatment chemicals business of Albright & Wilson U.K. Limited for
approximately $83 million net of cash acquired. Borrowings from Nalco/Exxon
totaled $23 million during 1996, and the Company received $41 million from the
sale of the discontinued superabsorbent chemicals business.

Over two-thirds of the 1995 capital investments of $127 million was attributable
to investments in the United States, which included $26 million for PORTA-FEED
units, $17 million for field equipment, and $13 million for transportation
equipment.

Other significant investing activities in 1995 included the acquisition of an
additional 25 percent interest of Nalco Chemical India, Ltd., a former
affiliated company, for approximately $10 million net of cash acquired, and the
purchase of the pulp and paper chemical business of Texo Corporation for $14
million. Additional cash investments in Nalco/Exxon totaled $8 million in 1995.

Investing activities in 1994 totaled $164 million, which included $126 million
for investments in property, plant, and equipment. Over 60 percent of the
capital spending in 1994 was for investments in the United States and included
$19 million for PORTA-FEED units, $18 million for field equipment, and $14
million for transportation equipment. The most significant investment overseas
was $18 million to complete the construction of the Nalco Europe Business and
Technical Center in the Netherlands, which was opened in mid-1994. Investing
activities in 1994 also included the purchase of the remaining 60 percent
interest of Nalcomex (Mexico), a former affiliated company, for approximately
$18 million, and cash investments in Nalco/Exxon of $26 million.

Net financing activities of $115 million in 1996 included dividends paid on
common stock of $67 million or $1.00 per share. Since the Company's founding in
1928, it has paid 274 consecutive quarterly dividends, and expects to continue
its policy of paying regular cash dividends. The Company continued its stock
repurchase program in 1996 by reacquiring 0.7 million shares of common stock at
a cost of $26 million. In 1995, the Company reacquired 1.3 million shares of
common stock at a cost of $42 million, and 1.8 million shares were repurchased
for $61 million in 1994. Management believes that the stock repurchase program
represents a sound economic investment for Nalco's shareholders. Other financing
activities in 1996 consisted primarily of a net decrease in short-term and long-
term debt of $22 million.

Among the most significant financing activities in 1995 and 1994 were payments
for cash dividends and the repurchase of common stock.

Management expects that internal growth in existing businesses will be financed
principally from internally generated funds. For general purposes and to support
the ESOP loans and the issuance of commercial paper, Nalco also had a $260
million Revolving Credit Agreement with ten banks. The credit arrangements were
unused at December 31, 1996. On January 31, 1997, the Revolving Credit Agreement
was increased to $350 million with eleven banks. (See Note 14). With the
agreement of the banks, with two weeks notice, this credit can be increased to
$600 million. In addition, most foreign subsidiaries have established short-term
borrowing facilities in local currency and use them as the need arises. Net debt
(short-term and long-term borrowings less cash and cash equivalents) totaled
$245 million, $278 million, and $222 million at December 31, 1996, 1995, and
1994, respectively.

Management believes that Nalco's strong cash flow, together with its unused debt
capacity, provides ample capability for the Company to pursue investment
opportunities ranging from internal growth to acquisitions and stock repurchase.

                                     -23-

<PAGE>
 
Statements of Consolidated Earnings
<TABLE>
<CAPTION>
 
                                                  Year Ended December 31
                                             -------------------------------
(in millions, except per share figures)        1996       1995       1994
----------------------------------------------------------------------------
<S>                                          <C>        <C>        <C>
Net Sales                                    $1,303.5   $1,214.5   $1,246.8
Operating costs and expenses
  Cost of products sold                         568.6      531.3      543.7
  Selling and service                           433.4      399.5      405.3
  Research and development                       41.9       39.8       45.7
  Administrative and general                     42.9       38.4       47.8
  Formation and consolidation                       -          -       68.2
                                             --------   --------   --------
                                              1,086.8    1,009.0    1,110.7
                                             --------   --------   --------
Operating Earnings                              216.7      205.5      136.1
Interest and other income                         2.6        7.2       16.6
Interest expense                                (14.4)     (16.2)     (21.8)
Equity in earnings of partnership                24.5       16.9        6.9
                                             --------   --------   --------
Earnings from Continuing Operations
  Before Income Taxes                           229.4      213.4      137.8
Income taxes                                     83.5       77.7       64.6
                                             --------   --------   --------
Earnings from Continuing Operations             145.9      135.7       73.2
Earnings from discontinued operations,
  net of taxes                                    8.6       18.0       23.9
                                             --------   --------   --------
Net Earnings                                 $  154.5   $  153.7   $   97.1
                                             ========   ========   ========
 
Earnings Per Common Share--Primary
  Earnings from continuing operations        $   1.99   $   1.83   $    .90
  Discontinued operations, net of taxes           .13        .27        .35
                                             --------   --------   --------
  Net earnings                               $   2.12   $   2.10   $   1.25
                                             ========   ========   ========
Earnings Per Common Share--Fully Diluted
  Earnings from continuing operations        $   1.86   $   1.71   $    .88
  Discontinued operations, net of taxes           .11        .24        .31
                                             --------   --------   --------
  Net earnings                               $   1.97   $   1.95   $   1.19
                                             ========   ========   ========
 
Average Shares Outstanding (in thousands)
  Primary                                      67,599     67,905     69,029
                                             ========   ========   ======== 

  Fully Diluted                                75,616     75,947     77,160
                                             ========   ========    =======
</TABLE>
  The notes to consolidated financial statements on pages 28 through 37 are an
integral part of these statements.

                                      -24-

<PAGE>
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------- 
Statements of Consolidated Financial Condition
                                                         December 31
                                                     --------------------
(in millions, except per share figures)                1996       1995
-------------------------------------------------------------------------
<S>                                                  <C>        <C>
Assets
Current Assets
Cash and cash equivalents                            $   38.8   $   38.1
Receivables, less allowances
  of $4.9 in 1996 and $4.4 in 1995                      233.4      220.3
Inventories
  Finished products                                      61.4       62.4
  Materials and work in process                          29.4       29.0
                                                     --------   --------
                                                         90.8       91.4
Prepaid expenses, taxes, and other current assets        22.2       20.2
                                                     --------   --------
Total Current Assets                                    385.2      370.0
Other Assets
Investment in and advances to partnership               126.0      126.2
Discontinued operations - net                               -       47.1
Goodwill, less accumulated amortization
  of $24.7 in 1996 and $18.6 in 1995                    202.5      131.0
Miscellaneous                                           158.8      166.2
                                                     --------   --------
Total Other Assets                                      487.3      470.5
Net Property, Plant, and Equipment                      522.0      520.0
                                                     --------   --------
Total Assets                                         $1,394.5   $1,360.5
                                                     ========   ========
 
 
Liabilities and Shareholders' Equity
Current Liabilities
Short-term debt                                      $   31.3   $   95.0
Accounts payable                                        114.6      126.9
Accrued compensation                                     32.3       27.3
Other accrued expenses                                   65.7       71.9
Income taxes                                             45.8       34.7
                                                     --------   --------
Total Current Liabilities                               289.7      355.8
Long-Term Debt                                          252.6      221.5
Deferred Income Taxes                                    42.9       53.3
Accrued Pension Benefits                                 38.6       37.3
Accrued Postretirement Benefits                          98.5       97.7
Other Liabilities                                        17.7       14.6
Commitments and Contingent Liabilities                      -          -
 
Shareholders' Equity
Preferred stock--par value $1.00 per share                0.4        0.4
  Capital in excess of par value of shares              188.6      191.7
  Unearned ESOP compensation                           (162.6)    (166.6)
                                                     --------   --------
                                                         26.4       25.5
Common stock--par value $.1875 per share;
  80.3 shares issued                                     15.1       15.1
  Capital in excess of par value of shares               31.2       27.8
Retained earnings                                       992.0      916.2
Minimum pension liability adjustment                     (6.1)      (6.0)
Foreign currency translation adjustments                (39.9)     (48.0)
Common stock reacquired--at cost                       (364.2)    (350.3)
                                                     --------   --------
Total Shareholders' Equity                              654.5      580.3
                                                     --------   --------
Total Liabilities and Shareholders' Equity           $1,394.5   $1,360.5
                                                     ========   ========
</TABLE>
The notes to consolidated financial statements on pages 28 through 37 are an
integral part of these statements.

                                     -25-

<PAGE>
 
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Statements of Consolidated Cash Flows 
                                                      Years Ended December 31
                                                    ----------------------------
(in millions)                                         1996      1995      1994
--------------------------------------------------------------------------------
<S>                                                 <C>       <C>       <C>
Cash Provided by (Used for) Operating Activities
Net earnings                                        $ 154.5   $ 153.7   $  97.1
Adjustments to reconcile net earnings to
  cash provided by operating activities
  Formation and consolidation expenses                    -         -      68.2
  Depreciation and amortization                        98.3      89.2      89.2
  Equity in earnings of partnership,
     net of distributions                             (14.0)    (10.8)     (6.9)
  Noncurrent deferred income taxes                     (9.0)    (13.0)     (3.8)
  Other--net                                            9.1       0.6       6.8
  Changes in current assets and liabilities
     Receivables                                        6.4     (20.5)     10.2
     Inventories                                       (0.1)    (10.2)    (19.3)
     Accounts payable                                 (15.9)     21.5      22.8
     Other                                             (0.4)      2.0     (15.2)
                                                    -------   -------   -------
Net Cash Provided by Operating Activities             228.9     212.5     249.1
                                                    -------   -------   -------
Cash Provided by (Used for) Investing Activities
Additions to property, plant, and equipment           (92.5)   (126.7)   (125.6)
Business purchases                                    (83.4)    (23.8)    (20.4)
(Investments in) advances from partnership             18.0      (8.2)    (26.3)
Proceeds from sale of business                         41.2         -       6.4
Other investing activities                              7.2       2.6       1.6
                                                    -------   -------   -------
Net Cash (Used for)
  Investing Activities                               (109.5)   (156.1)   (164.3)
                                                    -------   -------   -------
Cash Provided by (Used for) Financing Activities
Cash dividends, net of taxes                          (78.7)    (78.1)    (75.7)
Proceeds from long-term debt                           59.2       6.8       2.2
Payments of long-term debt                            (12.1)     (3.3)     (7.7)
Increase (decrease) in short-term debt                (69.5)     46.4       8.0
Common stock reacquired                               (26.3)    (42.4)    (61.3)
Other financing transactions                            9.9       9.8      13.4
                                                    -------   -------   -------
Net Cash (Used for) Financing Activities             (117.5)    (60.8)   (121.1)
Effect of foreign exchange rate changes
  on cash and cash equivalents                         (1.2)     (2.6)      3.3
                                                    -------   -------   -------
Increase(decrease) in cash
  and cash equivalents                                  0.7      (7.0)    (33.0)
Cash and cash equivalents at the
  beginning of the year                                38.1      45.1      78.1
                                                    -------   -------   -------
Cash and Cash Equivalents
  at the End of the Year                            $  38.8   $  38.1   $  45.1
                                                    =======   =======   =======
 
</TABLE>
The notes to consolidated financial statements on pages 28 through 37 are an
integral part of these statements.

                                     -26-

<PAGE>
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Statements of Consolidated Common Shareholders' Equity 
(in millions, except per share figures)
-------------------------------------------------------------------------------------------------------------------------
                                                                                                         Common Stock
                                                   Capital in               Minimum      Foreign          Reacquired
                                           Common  Excess of                Pension      Currency    -------------------- 
                                           Stock   Par Value   Retained    Liability   Translation     Number
                                           Issued  of Shares   Earnings   Adjustment   Adjustments   of Shares     Cost
                                           ------  ----------  ---------  -----------  ------------  ----------  --------
<S>                                        <C>     <C>         <C>        <C>          <C>           <C>         <C>
 
Balance at January 1, 1994                  $15.1      $ 10.6    $819.2        $(7.1)       $(49.3)       11.4   $(259.6)
 
  Net earnings                                                     97.1
  Dividends on preferred stock
     --net of tax benefit of $4.6                                 (11.0)
  Dividends on common stock
     ($0.945 per share)                                           (64.7)
  Treasury stock transactions                            12.3                                              1.5     (67.4)
  Stock issued under option,
     benefit, and other plans                             2.6                                             (0.5)      9.3
  Minimum pension liability adjustment                                           1.4
  Currency translation adjustments                                                            10.0
                                            -----      ------    ------        -----        ------        ----   -------
Balance at December 31, 1994                 15.1        25.5     840.6         (5.7)        (39.3)       12.4    (317.7)
 
  Net earnings                                                    153.7
  Dividends on preferred stock
     --net of tax benefit of $4.2                                 (11.2)
  Dividends on common stock
     ($0.99 per share)                                            (66.9)
  Treasury stock transactions                                                                              1.3     (42.4)
  Stock issued under option,
     benefit, and other plans                             2.3                                             (0.5)      9.8
  Minimum pension liability adjustment                                          (0.3)
  Currency translation adjustments                                                            (8.7)
                                            -----      ------    ------        -----        ------        ----   -------
Balance at December 31, 1995                 15.1        27.8     916.2         (6.0)        (48.0)       13.2    (350.3)
 
  Net earnings                                                    154.5
  Dividends on preferred stock
     --net of tax benefit of $3.9                                 (11.4)
  Dividends on common stock
     ($1.00 per share)                                            (67.3)
  Treasury stock transactions                                                                              0.7     (26.3)
  Stock issued under option,
     benefit, and other plans                             3.4                                             (0.6)     12.4
  Minimum pension liability adjustment                                          (0.1)
  Currency translation adjustments                                                             8.1
                                            -----      ------    ------        -----          ----        ----   -------
Balance at December 31, 1996                $15.1      $ 31.2    $992.0        $(6.1)       $(39.9)       13.3   $(364.2)
                                            =====      ======    ======        =====        ======        ====   ======= 
</TABLE>
The notes to consolidated financial statements on pages 28 through 37 are an
integral part of these statements.

                                     -27-

<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION POLICY--Nalco's consolidated financial statements include the
accounts of the parent company and its majority-owned subsidiaries. All
intercompany balances and transactions are eliminated. Investments in
partnerships and affiliated companies are reported on the equity method.

Certain amounts in the prior years' financial statements and notes thereto have
been reclassified to conform to the current year presentation.

USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK--Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed completely to
perform as contracted. Management believes the likelihood of incurring material
losses due to concentration of credit risk is remote. The principal financial
instruments subject to credit risk are as follows:

  Cash and cash equivalents, short-term marketable securities - Nalco has a
  formal policy of placing these instruments in investment grade companies or
  financial institutions and limiting the size of an investment with any single
  entity.

  Receivables - A large number of customers in diverse industries and
  geographies, as well as the practice of establishing reasonable credit lines,
  limits credit risk. The allowances for doubtful accounts are adequate to cover
  potential credit risk losses.

  Foreign exchange contracts and derivatives - The Company has formal policies
  which establish credit limits and investment grade credit criteria of "A" or
  better for all counterparties.

CASH AND CASH EQUIVALENTS--Cash and cash equivalents include all cash balances
and highly liquid investments with original maturities of three months or less.

DERIVATIVES--Gains and losses on hedges of existing assets or liabilities are
included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income as part of those carrying amounts. Gains and
losses related to qualifying hedges of firm commitments also are deferred and
are recognized in income or as adjustments of carrying amounts when the hedged
transaction occurs.

FOREIGN CURRENCY TRANSLATION--The local currency has been designated as the
functional currency in financial statements of companies which account for
approximately 89 percent of total foreign subsidiary net assets at the end of
1996. These financial statements are translated at current and average exchange
rates, with any resulting translation adjustments included in the currency
translation adjustment account in shareholders' equity. The remaining
subsidiaries operate in countries with highly inflationary environments and
their statements are translated using a combination of current, average, and
historical exchange rates, with the resulting translation impact included in
results of operations. Transactions executed in different currencies resulting
in exchange adjustments are included in results of operations. The impact of
foreign currency exchange transactions, included in interest and other income in
1996, 1995, and 1994, was not significant.

INVENTORY VALUATION--Inventories are valued at the lower of cost or market.
Approximately 36 percent of the inventories at the end of 1996 are valued using
the last-in, first-out (LIFO) method. The remaining inventories are valued using
the average cost or first-in, first-out (FIFO) method. If the FIFO method of
accounting had been used for all inventories, reported inventory amounts would
have been approximately $25 million higher at both December 31, 1996 and 1995.

GOODWILL--Goodwill consists of costs in excess of the fair value of net tangible
and identified intangible assets of acquired companies and is generally
amortized over 40 years using the straight-line method. The Company annually
evaluates whether the projected earnings and undiscounted cash flows of each of
the acquired companies is sufficient to recover the carrying value of the net
investment, including goodwill, in order to determine if an impairment has
occurred. Management is currently of the opinion that no such impairment exists.

STOCK-BASED COMPENSATION--Effective January 1, 1996, the Company adopted the
"disclosure method" provisions of Statement of Financial Accounting Standards
No. 123(SFAS 123) "Accounting for Stock-Based Compensation." As permitted under
SFAS 123, the Company continues to recognize stock-based compensation costs
under the intrinsic value based method of accounting as prescribed by Accounting
Principles Board Opinion No. 25(APB 25), "Accounting for Stock Issued to
Employees."

INCOME TAXES--Income taxes are recognized during the year in which transactions
enter into the determination of financial statement income, with deferred income
taxes being provided for the tax effect of temporary differences between the
carrying amount of assets and liabilities and their tax bases.

Deferred income taxes are provided on the undistributed earnings of foreign
subsidiaries and affiliated companies except to the extent such earnings are
considered to be permanently reinvested in the subsidiary or affiliate. Where it
is contemplated that earnings will be remitted, credit for foreign taxes already
paid generally will offset applicable U.S. income taxes. In cases where foreign
tax credits will not offset U.S. income taxes, appropriate provisions are
included in the Consolidated Statements of Earnings. Repatriation of permanently
reinvested earnings would not materially increase the Company's tax liabilities.

RETIREMENT PLANS--The cost of retirement plans is computed on the basis of
accepted actuarial methods (using the projected unit credit method for the
principal plan) and includes current service costs, amortization of increases in
prior service costs over the expected future service of active participants as
of the date such costs are first recognized, and amortization of the initial
unrecognized net pension asset or liability on a straight-line basis over 18
years.

                                     -28-

<PAGE>
 
The costs of health and life insurance postretirement benefits are accrued as
earned. Annual expense represents a combination of interest and service cost
provisions. Most postretirement benefits are not funded.

EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)--ESOP contribution expense is based upon
non-level debt payments made by the ESOP to meet the plan funding requirements.
An adjustment to increase expense is made when the computed amount is less than
80 percent of the cumulative expense that would be recognized under the "shares
allocated" method.

EARNINGS PER SHARE--Primary earnings per common share is computed by dividing
net earnings (after deducting preferred stock dividends, net of income taxes) by
the weighted average number of shares and share equivalents outstanding during
the year. Fully diluted earnings per share is based upon the weighted average
number of common shares and share equivalents, plus the weighted average number
of common shares resulting from the assumed conversion of the Series B ESOP
Convertible Preferred Stock (preferred stock). Earnings for purposes of
computing fully diluted earnings per share are reduced for additional ESOP debt
service expense resulting from the assumed replacement of preferred stock
dividends with common stock dividends, net of related tax benefits.

NOTE 2--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA

Nalco is engaged in the worldwide manufacture and sale of highly specialized
Service Chemical programs. This includes production and service related to the
sale and application of chemicals and technology used in water treatment,
pollution control, energy conservation, oil production and refining,
steelmaking, papermaking, mining, and other industrial processes.

Within Nalco, sales between geographic areas are made at prevailing market
prices to customers minus an amount intended to compensate the sister Nalco
company for providing quality customer service.

Operating earnings represent sales less cost of products sold and operating
expenses. In computing operating earnings by geographic area, none of the
following items is considered: general corporate expenses, interest income or
expense, equity in earnings of partnerships and affiliated companies, or income
taxes.

Identifiable assets are those directly associated with operations of the
geographic area. Corporate assets consist mainly of cash and cash equivalents;
marketable securities; investments in unconsolidated partnership, affiliates,
and leveraged leases; and capital assets used for corporate purposes. Corporate
assets for 1995 also include the net assets of discontinued operations, which
are classified as North American identifiable assets for the year 1994.

GEOGRAPHIC AREA DATA

<TABLE>
<CAPTION>
(in millions)                          1996       1995       1994
-----------------------------------------------------------------
<S>                                <C>        <C>        <C>
Sales
North America                      $  797.4   $  723.6   $  769.7
Europe                                289.3      285.8      288.9
Latin America                         107.3       92.6       90.6
Pacific                               147.8      146.1      127.7
Sales between areas                   (38.3)     (33.6)     (30.1)
                                   --------   --------   --------
                                   $1,303.5   $1,214.5   $1,246.8
                                   ========   ========   ========
 
Operating Earnings
North America                      $  154.4   $  132.9   $  111.7
Europe                                 34.6       38.9        8.3
Latin America                          21.7       22.1       16.6
Pacific                                20.4       22.9       19.8
Expenses not allocated to areas       (14.4)     (11.3)     (20.3)
                                   --------   --------   --------
                                   $  216.7   $  205.5   $  136.1
                                   ========   ========   ========
Identifiable Assets
North America                      $  550.9   $  526.1   $  485.2
Europe                                271.6      259.9      245.2
Latin America                          67.3       60.4       66.9
Pacific                               185.4      171.3      147.9
Corporate                             319.3      342.8      324.0
                                   --------   --------   --------
                                   $1,394.5   $1,360.5   $1,269.2
                                   ========   ========   ========
</TABLE>

Sales and operating earnings for 1994 include results for the Company's U.S.
Petroleum Chemicals Division and certain petroleum chemical product lines of its
international operations which were transferred to Nalco/Exxon effective
September 1, 1994. Sales included were approximately $137 million in 1994. (See
Note 11).

In 1994, operating earnings were reduced by a pretax provision of $68 million
for formation and consolidation expenses. (See Note 4). Of that amount,
approximately $34 million was included in European operations.

NOTE 3--DISCONTINUED OPERATIONS

In October 1996, the Company completed the sale of its discontinued
superabsorbent chemicals business. The gain on the sale was $3 million, net of
income taxes of $1 million.

The results of the superabsorbent chemicals business have been classified as
discontinued operations in the accompanying financial statements. Sales from the
discontinued operation, which are excluded from consolidated sales, amounted to
$63 million in 1996, $96 million in 1995, and $99 million in 1994. Excluding the
aforementioned gain on the sale, net earnings from discontinued operations
totaled $6 million in 1996, $18 million in 1995, and $24 million in 1994, which
included the pretax operating earnings of the discontinued operations, less
applicable income taxes of $4 million in 1996, $11 million in 1995, and $15
million in 1994. The effective income tax rate for discontinued operations
differs from the federal statutory rate primarily because of state income taxes,
net of federal tax benefit.

                                     -29-

<PAGE>
 
NOTE 4--FORMATION AND CONSOLIDATION EXPENSES

The Company adopted a worldwide consolidation plan for manufacturing and support
operations during 1994, primarily as a result of the formation of Nalco/Exxon
discussed in Note 11. The production volume reduction caused by redundancies
associated with the joint venture formation required the Company to down size,
close, and consolidate operations. In addition, certain support functions have
been or are being regionalized on a pan-European basis in order to more
efficiently serve customers. As a result, the Company recorded a pretax
provision of $68 million ($54 million after tax, or 70 cents per share on a
fully diluted basis) in 1994. Included in this provision was the cost of
termination benefits; costs associated with facility closings and the
disposition of certain assets; and payments for post-closure plant environmental
remediation, legal and consulting fees, and other exit costs. Cash expenditures
charged against the provision to date have been funded through operating cash
flows, and the Company anticipates that future cash expenditures will be
similarly funded. A tax benefit of $14 million, net of tax costs associated with
the contribution of assets to various joint venture entities, was included in
the Company's 1994 income tax provision related to the formation and
consolidation expenses.

Charges against the provision for formation and consolidation expenses totaled
$25 million in 1994, $20 million in 1995, and $12 million in 1996. Charges
against the provision in 1996 included cash payments of approximately $8 million
for termination benefits and $1 million for legal, consulting, and post-closure
plant environmental remediation expenses. Noncash asset write-downs totaling
approximately $3 million were also charged against the provision in 1996.

The balance of $11 million at December 31, 1996 will be used primarily for
remaining termination benefits.

NOTE 5--PENSION PLANS

The Company has several noncontributory defined benefit pension plans covering
most employees in the United States and those with six foreign subsidiaries. The
principal domestic plan represents approximately 68 percent of the projected
benefit obligation (PBO) and 80 percent of the total market value of assets.
This plan provides benefits that are based on years of service and the
employee's highest paid 48 months during the last 120 months before termination
of employment. Approximately 96 percent of the assets in the plan at December
31, 1996 was invested in stocks, bonds, and insurance contracts, and the
remaining assets were invested in professionally managed real estate trusts and
partnerships. No contributions have been made since 1984 due to the present
funded position of the plan and none are anticipated in 1997. Three of the six
foreign pension plans are unfunded, generally because amounts contributed are
not deductible for tax purposes.

Employees in the United States whose pension benefits exceed ERISA limitations
are covered by a supplementary non-qualified, unfunded pension plan which is
being provided for by charges to earnings sufficient to meet the projected
benefit obligation. The accruals for the cost of this plan are based on
substantially the same actuarial methods and economic assumptions as those used
for the principal plan.

Net pension expense for all defined benefit plans included in operating results
was comprised of:
<TABLE>
<CAPTION>
 
(in millions)                                                                            1996         1995       1994
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>         <C>          <C>
Service cost for benefits earned                                                    $    16.8     $   12.4   $   17.4
Interest costs on the PBO                                                                25.6         23.7       24.3
Actual return on plan assets                                                            (31.8)       (60.7)      (0.2)
Net amortizations and deferrals                                                           4.3         35.8      (23.7)
                                                                                    ---------     --------   --------
Net pension expense for defined benefit plans                                       $    14.9     $   11.2   $   17.8
                                                                                    =========     ========   ========
 
Assumptions for the plans as of the end of the last three years were as follows:
 
                                                                                                  U.S. Plans
                                                                                         ----------------------------
                                                                                         1996         1995       1994
---------------------------------------------------------------------------------------------------------------------
Weighted-average discount rates                                                           8.0%        7.25%       9.0%
Rates of increase in compensation levels                                                  4.0          4.0        4.8
Rates of return on plan assets                                                            9.5          9.5        9.0
---------------------------------------------------------------------------------------------------------------------
 
 
                                                                                                Foreign Plans
                                                                                         ---------------------------- 
                                                                                         1996         1995       1994
---------------------------------------------------------------------------------------------------------------------
Weighted-average discount rates                                                       6.5-9.0%     6.0-9.0%   7.0-9.0%
Rates of increase in compensation levels                                             4.0-6.25      4.0-6.5    4.5-6.5
Rates of return on plan assets                                                       6.5-9.75      6.0-9.5    7.0-9.5
---------------------------------------------------------------------------------------------------------------------
</TABLE>

The following table sets forth the funded status and amounts recognized in the
consolidated statements of financial condition at year end for plans in which
assets exceed the accumulated benefit obligation (ABO):

<TABLE>
<CAPTION>
 
(in millions)                                  1996     1995
------------------------------------------------------------
<S>                                          <C>      <C>
 
Actuarial present value of:
  Vested benefit obligation                  $220.5   $194.1
  Non-vested benefit obligation                17.6     15.6
                                             ------   ------
  Total ABO                                   238.1    209.7
  Effect of future salary increases            58.3     88.6
                                             ------   ------
  Total PBO                                   296.4    298.3
Plan assets at fair market value              322.8    311.1
                                             ------   ------
Plan assets in excess of the PBO               26.4     12.8
Unrecognized net (asset)
  from date of adoption                       (21.6)   (24.7)
Unrecognized prior service cost                 9.7     11.0
Unrecognized net actuarial losses (gains)      (2.2)    16.4
                                             ------   ------
Net pension assets recognized                $ 12.3   $ 15.5
                                             ======   ====== 
</TABLE>

                                      -30-

<PAGE>
 
The following table sets forth the funded status and amounts recognized in the
consolidated statements of financial condition at year end for plans in which
the ABO exceeds assets:
<TABLE>
<CAPTION>
 
(in millions)                                 1996     1995
-------------------------------------------------------------
<S>                                          <C>      <C>
 
Actuarial present value of:
  Vested benefit obligation                  $ 26.2   $ 26.5
  Non-vested benefit obligation                 4.7      3.2
                                             ------   ------
  Total ABO                                    30.9     29.7
  Effect of future salary increases            11.0     12.6
                                             ------   ------
  Total PBO                                    41.9     42.3
Plan assets at fair market value                  -        -
                                             ------   ------
Plan assets (less) than the PBO               (41.9)   (42.3)
Unrecognized net liability
  from date of adoption                         2.2      2.6
Unrecognized prior service cost                 6.6      7.4
Unrecognized net actuarial losses              12.8     14.3
Adjustment to recognize minimum liability     (18.3)   (19.3)
                                             ------   ------
Net pension (liabilities) recognized         $(38.6)  $(37.3)
                                             ======   ======
</TABLE>

The above table includes the supplementary non-qualified plan for employees in
the United States whose pension benefits exceed ERISA limitations and certain
foreign pension plans.

In accordance with SFAS 87, "Employers' Accounting for Pensions," the Company
has recorded a minimum pension liability for certain plans, representing the
excess of the ABO over plan assets and accrued pension costs. A corresponding
amount was recognized as an intangible asset, except to the extent that these
additional liabilities exceeded related unrecognized prior service cost and net
transition obligation, in which case the increase in liabilities was charged
directly to shareholders' equity. The excess minimum pension liability resulted
in after-tax charges to shareholders' equity of approximately $6 million, net of
income taxes of approximately $4 million, in 1996 and 1995.

NOTE 6--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS


Nalco has defined benefit postretirement plans that provide medical, dental, and
life insurance benefits for substantially all United States retirees and
eligible dependents. Nalco retains the right to change or terminate these
benefits.

Net postretirement benefit expense for all defined benefit plans included in
operating results was comprised of:

<TABLE>
<CAPTION>
 
(in millions)                                 1996           1995           1994
--------------------------------------------------------------------------------
<S>                                          <C>            <C>            <C>
Service cost for benefits earned            $  2.2         $  1.8         $  3.3

Interest cost                                  5.1            5.5            6.8

Net amortization                              (1.5)          (1.7)             -
                                            ------         ------         ------

                                            $  5.8         $  5.6         $ 10.1
                                            ======         ======         ======
</TABLE> 
 
The components of the accrued postretirement benefit liability as of the end of
the last two years were as follows.

<TABLE> 
<CAPTION> 

(in millions)                                                1996           1995
--------------------------------------------------------------------------------
<S>                                                         <C>            <C>
Actuarial present value of postretirement
  benefit obligations:
     Retirees                                              $ 32.8         $ 34.8

     Fully eligible active plan participants                  8.3            7.3

     Other active plan participants                          23.8           26.9
                                                           ------         ------

Accumulated postretirement benefit obligation                64.9           69.0

Unrecognized net gain                                        37.5           31.4
                                                           ------         ------
Accrued postretirement benefit liability                    102.4          100.4

Less current portion                                          3.9            2.7
                                                           ------         ------
Noncurrent liability                                       $ 98.5         $ 97.7
                                                           ======         ======
</TABLE>

The assumptions used to measure the accumulated postretirement benefit
obligation are as follows:

<TABLE>
<CAPTION>
 
                                             1996           1995          1994
--------------------------------------------------------------------------------
<S>                                          <C>            <C>            <C>
Weighted-average discount rate               8.0%           7.25%          9.0%

Health care cost trend rate                  7.5             8.0          11.0
</TABLE>

The health care cost trend rate will decrease 0.5 percent per year to an
ultimate rate of 5.0 percent. A one-percentage-point increase in the assumed
health care cost trend rate would have increased the 1996 postretirement benefit
expense by approximately $1 million and would have increased the 1996
accumulated postretirement benefit obligation by $7 million.

NOTE 7--EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)


Nalco's ESOP gives most United States employees an additional opportunity to
share in the ownership of the Company's stock. Preferred shares are allocated to
eligible employees based on a percentage of pretax earnings.

Selected information about the ESOP is as follows:
<TABLE>
<CAPTION>
 
(dollar in millions, shares in thousands)     1996           1995           1994
--------------------------------------------------------------------------------
<S>                                          <C>            <C>           <C>
Preferred stock dividends                    $ 15.3         $ 15.4        $ 15.6

Interest expense on ESOP debt                $  9.4         $ 11.2        $ 10.6

ESOP benefit expense                         $  3.2         $  2.5        $  1.9

ESOP contribution payments                   $  5.1         $  2.1        $  -

Preferred shares at year end:

  Allocated                                   124.2          107.2          88.0

  Committed-to-be-released                     24.9           23.6          23.9

  Suspense                                    243.8          268.6         292.3
</TABLE>
--------------------------------------------------------------------------------

                                     -31-

<PAGE>
 
NOTE 8--STOCK OPTION AND PERFORMANCE PLANS

Nalco's 1996 Stock Option Plan and its 1990 Stock Option Plan for key management
employees authorized the granting of stock options for the purchase of up to
8,000,000 shares and 6,000,000 shares, respectively, of Nalco common stock. The
Company's 1982 Stock Option Plan authorized the granting of either incentive
stock options or non-qualified options for the purchase of up to 6,000,000
shares of Nalco's common stock. No additional grants will be made under the 1982
plan. The option price under these plans cannot be less than the fair market
value on the date of grant. Options granted since 1989 generally become
exercisable ratably over the three years following the grant date, and will
expire ten years after the date granted. Options granted prior to 1989 have a
term of ten years, and were exercisable upon grant. Options may be exercised in
whole or in part for cash, shares of common stock, or a combination thereof.

The 1990 Stock Option Plan for Non-Employee Directors authorizes the granting of
stock options to outside directors for the purchase of up to 500,000 common
shares. The option price under the plan cannot be less than the fair market
value on the date of the grant. These options become exercisable upon grant, and
expire ten years from the grant date.

Information regarding these stock option plans for 1996, 1995, and 1994 is as
follows:

<TABLE>
<CAPTION>
                                         1996                             1995                               1994
                          -------------------------------    --------------------------------    ----------------------------------
                                         Weighted-Average                 Weighted-Average                   Weighted-Average
                             Shares      Exercise Price        Shares     Exercise Price           Shares    Exercise Price
                          ------------  -----------------    -----------  -------------------    ----------  ----------------------
<S>                       <C>           <C>                  <C>          <C>                    <C>         <C>
At the beginning of
  the year                6,657,723          $32.17          4,327,223        $29.73             4,383,477        $28.17

Granted                   1,595,200          $31.64          2,801,200        $34.43               439,700        $35.15

Exercised                  (500,460)         $20.54           (360,700)       $19.49              (413,655)       $17.70

Expired or cancelled       (279,100)         $34.04           (110,000)       $35.02               (82,299)       $35.71

At the end of the year    7,473,363          $32.77          6,657,723        $32.17             4,327,223        $29.73

Options exercisable at

  end of year             4,574,896          $32.33          3,584,024        $30.08             3,179,179        $27.46

Weighted-average fair

  value of options

  granted during

  the year                    $6.53                              $8.98
</TABLE>

The following table summarizes information about fixed stock options outstanding
at December 31, 1996:

<TABLE>
<CAPTION>

                                         Options Outstanding                                Options Exercisable
                         -------------------------------------------------------  -------------------------------------
                                              Weighted-Average
   Range of                    Number            Remaining      Weighted-Average        Number         Weighted-Average
Exercise Prices              Outstanding           Life          Exercise Price       Exercisable       Exercise Price
-----------------------  -------------------  ----------------  ----------------  -------------------  ----------------
<S>                      <C>                     <C>            <C>               <C>                  <C>
     $15.78 to $20.16            685,675           1.9 yrs.           $19.86              685,675            $19.86
     $23.38 to $29.82            210,400           4.5                $26.49              210,400            $26.49
     $31.69 to $34.44          4,281,200           8.4                $33.40            1,483,633            $33.45
     $35.75 to $36.31          2,296,088           5.6                $36.02            2,195,188            $36.03
                               ---------                                                ---------
     $15.78 to $36.31          7,473,363           6.9                $32.77            4,574,896            $32.33
                               =========                                                =========
</TABLE>

The Company applies APB 25 and related Interpretations in accounting for the
aforementioned stock plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans while compensation expense has been
recognized for its compensatory plans. Had compensation cost for the Company's
fixed stock option plans been determined based on the fair value based method,
as defined in SFAS 123, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
(in millions, except per share data)                                1996    1995
--------------------------------------------------------------------------------
<S>                      <C>                                      <C>     <C>
Net earnings             As reported                              $154.5  $153.7

                         Pro forma                                 146.1   149.0
--------------------------------------------------------------------------------
Earnings per share

  Primary                As reported                              $ 2.12  $ 2.10

                         Pro forma                                  1.99    2.03


  Fully diluted          As reported                                1.97    1.95

                         Pro forma                                  1.86    1.89
--------------------------------------------------------------------------------
</TABLE>

The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: dividend yield of 3.2 percent and
3.2 percent; expected volatility of 20.7 percent and 21.4 percent; risk-free
interest rate of 6.5 percent and 7.4 percent; and expected lives of 6.6 and 6.0
years.

The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as they do not include the effects of awards
granted prior to 1995, some of which would have had income statement effects in
1995 and 1996 due to the three-year vesting period associated with the fixed
stock option awards. Additionally, future amounts are likely to be affected by
the number of grants awarded since additional awards are generally expected to
be made at varying amounts.

In 1996, the Performance Share Plan for designated officers and other key
executives was amended and reapproved by the shareholders. It provides for the
annual assignment of performance shares which are contingent upon future
earnings growth of the Company. Performance awards shall be paid half in cash
and half in the Company's common stock, except that any payments made after
1,000,000 shares have been issued shall be made only in cash and only with
respect to contingent performance shares already assigned. The cash portion of
an award shall be paid after determination of the award; however, the right to
receive common shares shall not vest to a participant until three years after
the end of a performance period.

In 1996, $2 million was charged to earnings for compensatory stock related
plans. No significant charge to earnings was made for such plans in 1995 or
1994.

                                     -32-

<PAGE>
 
NOTE 9--INCOME TAXES


The sources of earnings from continuing operations before income taxes were as
follows:

<TABLE>
<CAPTION>
(in millions)                                    1996         1995         1994
--------------------------------------------------------------------------------
<S>                                           <C>          <C>          <C>
Domestic                                      $ 168.6      $ 162.1      $ 132.5
Foreign                                          60.8         51.3          5.3
                                              -------       ------      -------
Total                                         $ 229.4      $ 213.4      $ 137.8
                                              =======      =======      =======
</TABLE>

The lower level of foreign source earnings in 1994 is primarily attributable to
formation and consolidation expenses. (See Note 4).

The components of income tax provisions attributable to earnings from continuing
operations are summarized as follows:


<TABLE>
<CAPTION>
(in millions)                                    1996         1995         1994
--------------------------------------------------------------------------------
<S>                                           <C>          <C>          <C>
Current
  Federal                                      $ 50.9       $ 38.2       $ 41.7
  State                                          10.4          8.6         10.8
  Foreign                                        20.6         29.5         28.7
                                               ------       ------       ------
                                                 81.9         76.3         81.2
                                               ------       ------       ------
Deferred
  Federal                                        (3.0)         5.6         (3.0)
  State                                          (0.1)         0.1         (0.3)
  Foreign                                         4.7         (4.3)       (13.3)
                                               ------       ------       ------
                                                  1.6          1.4        (16.6)
                                               ------       ------       ------
Total                                          $ 83.5       $ 77.7       $ 64.6
                                               ======       ======       ======
</TABLE>

Current foreign taxes listed above include taxes withheld by foreign governments
on distributions from subsidiaries and affiliates (principally dividends and
service fees). Current foreign taxes in 1994 also include $11 million of taxes
on partnership formation.

Nalco made income tax payments of $84 million, $77 million, and $92 million
during 1996, 1995, and 1994, respectively.

The effective income tax rate varies from the federal statutory rate because of
the factors indicated below:

<TABLE>
<CAPTION>
                                                 1996         1995        1994
--------------------------------------------------------------------------------
<S>                                              <C>          <C>         <C> 
Statutory U.S. federal tax rate                  35.0%        35.0%       35.0%
 
State income taxes, net

  of federal tax benefit                          2.9          2.6         4.9

Foreign taxes on formation

  and consolidation                                 -            -         8.2

Other                                            (1.5)        (1.2)       (1.3)
                                                 ----         ----        ----
Effective tax rate                               36.4%        36.4%       46.8%
                                                 ====         ====        ====
</TABLE>

Details of the 1996 and 1995 deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
(in millions)                                                 1996         1995
--------------------------------------------------------------------------------
<S>                                                        <C>          <C>
Deferred tax assets:

  Postretirement benefits                                  $ 41.2        $ 40.8

  Formation and consolidation expenses                        3.9           9.0

  Other                                                      46.1          42.7
                                                           ------        ------
  Total                                                      91.2          92.5
                                                           ------        ------

Deferred tax liabilities:

  Depreciation                                               59.2          66.3

  Leveraged lease investments                                29.6          29.9

  Other                                                      29.0          26.1
                                                           ------        ------
  Total                                                     117.8         122.3
                                                           ------        ------
Net deferred tax liability                                 $ 26.6        $ 29.8
                                                           ======        ======

Included in:

  Prepaid expenses, taxes,

     and other current assets                              $ (7.1)       $ (9.0)

  Miscellaneous other assets                                 (6.5)         (8.8)

  Income taxes                                               (2.7)         (5.7)

  Deferred income taxes                                      42.9          53.3
                                                           ------        ------
                                                           $ 26.6        $ 29.8
                                                           ======        ======

</TABLE>

NOTE 10--ACQUISITIONS

On June 28, 1996, the Company completed the acquisition of DWT, a middle market
water treatment business. The acquisition was accounted for as a purchase and,
accordingly, the operating results of DWT subsequent to the date of acquisition
are included in the Company's consolidated financial statements.

In late December 1996, the Company completed the purchase of the water treatment
services chemicals business of Albright & Wilson, which serves customers such as
steel and electric utility companies throughout the United Kingdom.

The purchase price of these two businesses was $83 million, net of cash
acquired. The purchase price exceeded the fair value of the net tangible assets
acquired by $75 million, which was allocated to goodwill and other intangible
assets. The goodwill and other intangible assets are being amortized over
periods ranging from 15 to 40 years.

In October 1995, the Company purchased an additional 25 percent of the common
shares of Nalco Chemical India, Ltd. (Nalco India) from ICI India, Ltd. for
approximately $11 million. The purchase price exceeded the fair value of the net
tangible assets acquired by $9 million. Nalco already owned 40 percent of the
common shares of Nalco India and had been accounting for earnings on the equity
basis.

In November 1995, the Company purchased the pulp and paper chemical business of
Texo Corporation for $14 million. The purchase price exceeded the fair value of
the net tangible assets acquired by $13 million.

The pro forma impact as if these acquisitions had occurred at the beginning of
the respective years is not significant.

                                      -33-

<PAGE>
 
NOTE 11--INVESTMENT IN AND ADVANCES TO PARTNERSHIP

The Company's investment in partnership consists of its 60 percent interest in
Nalco/Exxon, a joint venture partnership which was formed on September 1, 1994.

The Company's investment in Nalco/Exxon of $126 million at December 31, 1996
included $23 million in demand notes payable to Nalco/Exxon. There were no
outstanding borrowings from the joint venture at December 31, 1995.

All significant management decisions of the joint venture require agreement by
both the Company and Exxon. In addition, certain provisions of the joint venture
agreement provide Exxon with an option to cause Nalco/Exxon to redeem a portion
of the Company's interest in Nalco/Exxon such that subsequent to such
redemption, the Company and Exxon shall share equally in the results of the
joint venture. As a result of the Company not exercising control over
Nalco/Exxon, its investment in the joint venture is accounted for by the equity
method.

The following table summarizes the Company's equity in earnings of Nalco/Exxon
and distributions from the partnership for the years 1996 and 1995 and its
initial four months of operations in 1994:

<TABLE>
<CAPTION>
(in millions)                                    1996         1995         1994
--------------------------------------------------------------------------------
<S>                                             <C>          <C>          <C>
Nalco/Exxon:
  Net sales                                    $436.6       $420.8       $156.0
  Earnings before income taxes                   42.4         32.4         12.8
  Net income                                     35.7         28.0         10.7
Nalco's equity interest                            60%          60%          60%
                                               ------       ------       ------
Nalco's equity in net income                     21.4         16.8          6.4
Amortization and income preference, net           3.1          0.1          0.5
                                               ------       ------       ------
Equity in earnings of partnership              $ 24.5       $ 16.9       $  6.9
                                               ======       ======       ======
Distributions received from partnership        $  8.4       $  6.1       $    -
                                               ======       ======       ======
</TABLE>

The Company's investment in Nalco/Exxon at December 31, 1996 included $5 million
for the net excess of the Company's investment over its equity in the joint
venture's net assets which is being amortized to equity earnings over the life
of the related assets. In addition, the Company received a 6 percent, 8 percent,
and 10 percent earnings preference in 1996, 1995, and 1994, respectively, which
has been included in equity earnings.

Condensed balance sheet information for the Nalco/Exxon joint venture at
December 31, 1996 and 1995 was as follows:

<TABLE>
<CAPTION>
(in millions)                                                 1996          1995
--------------------------------------------------------------------------------
<S>                                                         <C>           <C> 
Current assets                                              $159.6        $198.9

Noncurrent assets                                            171.9         124.8

Current liabilities                                           72.5          97.9

Noncurrent liabilities                                        38.1          31.0
--------------------------------------------------------------------------------
</TABLE>

The Company entered into a four year agreement with Nalco/Exxon on September 1,
1994 to provide certain administrative services to the partnership. Fees earned
by the Company in 1996, 1995, and 1994 were $15 million, $16 million, and $5
million, respectively.

In the normal course of business, the Company supplies Nalco/Exxon with certain
products, and purchases certain products from Nalco/Exxon. These transactions
are generally at cost and were not significant in 1996, 1995, or 1994.

NOTE 12--FINANCE SUBSIDIARIES

Nalco has four finance subsidiaries, one wholly-owned and three 80%-owned, which
were established to increase the return on financial assets. These subsidiaries
are the lessor of a diversified portfolio of leveraged leases involving
creditworthy lessees. Amounts related to the finance subsidiaries which are
included in the Statements of Consolidated Financial Condition and Earnings are
as follows:

<TABLE>
<CAPTION>
(in millions)                                    1996         1995         1994
--------------------------------------------------------------------------------
<S>                                             <C>          <C>          <C>
At Year End
Leveraged lease investments                    $ 33.8        $ 36.3       $ 44.1

Current liabilities                               0.8           1.1          1.7

Deferred income taxes and other                  29.6          29.9         34.8
                                               ------         -----        -----
Net assets                                     $  3.4        $  5.3       $  7.6
                                               ------        ------       ------
For the Year

Net earnings                                   $  1.5        $  2.3       $  1.4

Dividends received by Nalco                       0.2           0.3          0.3
--------------------------------------------------------------------------------
</TABLE>

Investments in leased property represent future rentals and residuals, net of
nonrecourse debt. The leased assets are financed primarily by nonrecourse loans
which are secured by the lessees' rental obligations and the leased property,
but ownership of the property is retained by the finance subsidiaries. Such
loans amounted to approximately $51 million at December 31, 1996 and 1995.
Income from leveraged lease transactions is reported on the financing method,
which requires income recognition over the life of the lease at a level rate of
return on the positive net investment.

NOTE 13--PROPERTY, PLANT, AND EQUIPMENT


Property, plant, and equipment (including major improvements) are recorded at
cost. Depreciation of buildings and equipment is calculated over their estimated
useful lives generally using the straight-line method. The estimated useful
lives of the major classes of depreciable assets are as follows: buildings 15 to
40 years; equipment 3 to 15 years.

Property, plant, and equipment consists of the following:


<TABLE>
<CAPTION>
(in millions)                                                  1996        1995
--------------------------------------------------------------------------------
<S>                                                         <C>          <C>
Land                                                        $   38.6   $   38.7

Buildings                                                      205.6      202.0

Equipment                                                      925.2      860.9
                                                            --------   --------
                                                             1,169.4    1,101.6
Allowances for depreciation                                   (647.4)    (581.6)
                                                            --------   --------
Net property, plant, and equipment                          $  522.0   $  520.0
                                                            ========   ========
</TABLE>

                                     -34-

<PAGE>
 
NOTE 14--SHORT-TERM DEBT

Short-term debt consists of the following:

<TABLE>
<CAPTION>
(in millions)                                                  1996    1995
-------------------------------------------------------------------------------
<S>                                                           <C>     <C>
Commercial paper borrowings                                   $ 3.0   $45.0
Current maturities of long-term debt                            6.4    28.2
Notes payable                                                  21.9    21.8
                                                              -----   -----
                                                              $31.3   $95.0
                                                              =====   ===== 
</TABLE>

The weighted average interest rate on short-term debt was 7.7 percent and 7.8
percent at December 31, 1996 and 1995, respectively.

For general purposes and to support the ESOP loans and the issuance of
commercial paper, Nalco had a $260 million Revolving Credit Agreement (RCA) with
ten banks. This agreement was structured as a five-year revolving credit.
Borrowings under the agreement would have been at rates which, at Nalco's
option, varied with the prime rate, CD rate, LIBOR, or money market rates. The
credit line carried a facility fee of .10 percent. The credit arrangements were
unused at December 31, 1996 and 1995.

The $260 million RCA was replaced effective January 31, 1997 with a $350 million
RCA with eleven banks. Terms of this new RCA are substantially similar to those
of the previous RCA, with a facility fee of .08 percent.

NOTE 15--LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
(in millions)                                                    1996     1995
-------------------------------------------------------------------------------
<S>                                                             <C>      <C>
ESOP loans                                                      $162.6   $171.9
Other                                                             96.4     77.8
                                                                ------   ------
                                                                 259.0    249.7
Less current portion                                              (6.4)   (28.2)
                                                                ------   ------
Total                                                           $252.6   $221.5
                                                                ======   ======
</TABLE>

In 1989, the ESOP borrowed $200 million to purchase preferred stock from the
Company. Nalco borrowed $66 million which was subsequently loaned to the ESOP,
and guaranteed the balance of $134 million. Borrowings related to the ESOP are
reflected as long-term debt with a corresponding reduction of shareholders'
equity (unearned ESOP compensation). The ESOP is repaying the loans and interest
over a projected 20-year period ending December 31, 2008 using Company
contributions and dividends from preferred stock. As the principal amount of the
borrowings is repaid, the debt and the unearned ESOP compensation are being
reduced. $88 million of borrowings are variable rate notes which are presently
remarketed on a monthly basis with a final maturity on December 31, 2008. Any
notes which cannot be successfully remarketed will be purchased by the Company
or one of its subsidiaries. The Company entered into an interest rate swap
agreement which effectively converted the $88 million of variable rate notes
into fixed-rate debt of 7.3 percent. The notional value of the swap agreement
decreased to $59 million in 1996, and will decrease to $51 million and $43
million in 1997 and 1998, respectively, with final maturity in 1999. The
remaining borrowings are comprised of a $38 million variable rate loan which
matures in 2008 and a $37 million loan with a fixed rate of 8.1 percent and a
final maturity in the year 2000.

The $96 million in other long-term debt includes $50 million of commercial paper
borrowings in the United States and $41 million owed by a foreign subsidiary at
a variable interest rate. The balance was borrowed by various foreign
subsidiaries.

Interest paid by Nalco was $14 million, $15 million, and $20 million in 1996,
1995, and 1994, respectively.

The following table presents the projected annual maturities of long-term debt
for the next five years after 1996:

<TABLE>
<CAPTION>
(in millions)
----------------------
<S>              <C>
1997             $ 6.4
1998              12.0
1999              12.8
2000              10.2
2001                --
</TABLE>

The amounts above include approximately $37 million in maturities related to the
ESOP loans.

NOTE 16--SHAREHOLDERS' EQUITY

Information on preferred and common shares is summarized in the following table:

<TABLE>
<CAPTION>
(dollars in millions, except per share amounts)                  1996     1995
--------------------------------------------------------------------------------
<S>                                                              <C>     <C>
Preferred stock, par value $1.00 per share;
  authorized 2,000,000 shares;
    Series B ESOP Convertible
      Preferred Stock--outstanding;
      392,851 shares--1996 and 399,423
      shares--1995                                               $ 0.4   $ 0.4
    Series A Junior Participating
      Preferred Stock--none issued at
      December 31, 1995
    Series C Junior Participating
      Preferred Stock--none issued at
      December 31, 1996
Common stock, par value $.1875 per share;
  authorized 200,000,000 shares;
    issued 80,287,568 shares                                      15.1    15.1
--------------------------------------------------------------------------------
</TABLE>
There were 13,263,648 shares and 13,163,155 shares held in treasury at December
31, 1996 and 1995, respectively.

                                     -35-

<PAGE>
 
In 1994, Nalco's Board of Directors authorized the repurchase of up to 2,000,000
shares of the Company's common stock. During 1996, the repurchase of those
shares was completed and the Board of Directors authorized the repurchase of an
additional 3,000,000 shares.

The Company issued 415,800 shares of preferred stock to the ESOP in 1989 for
$481.00 per share, the preference price upon liquidation. This preferred stock
ranks senior to Series C Junior Participating Preferred Stock and common stock
as to the payment of dividends and the distribution of assets on liquidation,
dissolution and winding up of Nalco. Dividends on each share of preferred stock
are cumulative and will be paid quarterly at the rate of 8 percent or $38.48 per
annum. Full conversion of preferred shares occurs upon a holder's retirement or
separation of service from the Company, and effective in 1999 participants in
the ESOP may partially convert their stock upon reaching age 55. The conversion
ratio and number of votes per share of preferred stock are subject to adjustment
under certain conditions. The preferred stock entitles a participant to 20 votes
per share, voting together with the holders of common stock and initially was
convertible into 20 shares of common stock. The shares of preferred stock are
redeemable by Nalco at $485.81 per share, declining to $481.00 per share on or
after May 15, 1997. Also, the shares of preferred stock may be required to be
redeemed by Nalco under certain circumstances. During 1996, 6,572 preferred
shares were converted to 132,179 common shares of Nalco stock. During 1995 and
1994, 4,801 and 3,582 preferred shares were converted to 96,212 and 72,212
common shares, respectively. Approximately 8,000,000 common shares have been
reserved for the conversion of preferred stock.

In 1996, the 1986 Preferred Share Purchase Rights expired and the Board of
Directors declared a dividend distribution of one Preferred Share Purchase Right
(Right) for each outstanding share of common stock. The Rights are not
exercisable or transferable apart from the common stock until a person or group
has acquired, or makes a tender offer for 15 percent or more of the common
stock. If Nalco is acquired in a merger or other business combination
transaction or 50 percent or more of Nalco's assets or earning power are sold,
each Right other than that held by the acquiring party will entitle the holder
to receive, upon exercise at a price of $125, subject to adjustment, common
stock of either Nalco or the acquiring company having a value equal to two times
that price. The Rights are redeemable at $.01 each at any time before a 15
percent or greater position has been acquired, and expire on August 31, 2006. In
connection with the expiration of the 1986 Preferred Share Purchase Rights and
the distribution of the 1996 Rights, the Company's Series A Junior Participating
Preferred Stock was cancelled and its Series C Junior Participating Preferred
Stock was authorized.

NOTE 17--FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Nalco has limited involvement with derivative financial instruments and does not
trade them. The Company does use derivatives to fix the cost of issuing debt and
to manage well defined interest rate and foreign exchange exposures.

Notional Amounts and Credit Exposures of Derivatives

  The notional amounts of derivatives summarized below do not represent amounts
  exchanged by the parties and, thus, are not a measure of the exposure of the
  Company through its use of derivatives. The amounts exchanged are calculated
  on the basis of the notional amounts and the other terms of the derivatives,
  which relate primarily to interest rates and foreign exchange rates.

  The Company is exposed to credit-related losses in the event of nonperformance
  by counterparties to financial instruments, but it does not expect any
  counterparties to fail to meet their obligations given their high credit
  ratings.

Interest Rate Risk Management

Interest rate swap agreements are used to reduce the potential impact of
increases in interest rates on floating rate long-term debt. As of December 31,
1996 the Company was a counterparty to one interest rate swap with a notional
value of $59 million at December 31, 1996 and $78 million at December 31, 1995.
This swap fixes interest payments on a corresponding amount of floating rate
ESOP notes at 7.3 percent until February 1999. The notional amount decreases to
$51 million and $43 million in 1997 and 1998, respectively. The average interest
rate received on this interest rate swap was 4.5 percent and 4.9 percent in 1996
and 1995, respectively.

At December 31, 1995, the Company was a counterparty to five additional interest
rate swaps. Three interest rate swaps entered into in 1991 were designed to fix
interest rate payments at 8.5 percent on $160 million of floating rate debt used
to acquire affiliated companies in that year. In 1993, with cash from the sale
of other subsidiaries, Nalco elected to repay the $160 million of debt, and
therefore entered into two interest rate swaps with an aggregate notional value
of $160 million which offset the three 1991 interest rate swaps. Nalco received
4.6 percent on these two swaps in exchange for paying a floating rate of
interest equal to the floating rate received on the 1991 swaps. All five of
these agreements matured in March 1996. The average interest rate received on
the 1991 interest rate swaps and the average rate paid on the 1993 interest rate
swaps was 5.4 percent in 1996 and 6.0 percent in 1995.

Foreign Exchange Risk Management

  The Company enters into various types of foreign exchange contracts in
  managing its intercompany foreign exchange risk, including currency swaps and
  forward exchange contracts.

                                     -36-

<PAGE>
 
  The Company's currency swap agreements were designed to hedge foreign currency
  intercompany loans that have maturities up to nine years. Gains and losses
  related to these swaps are offset with gains and losses on the underlying
  foreign currency loans. Forward exchange contracts are used to hedge various
  intercompany transactions with foreign subsidiaries and usually have
  maturities of six months, but occasionally may mature in one year.

  The Company had foreign exchange contracts with a notional value of $69
  million and $115 million at December 31, 1996 and 1995, respectively.

  Deferred realized and unrealized gains and losses from firm foreign currency
  commitments, based on dealer-quoted prices, are included in the Statements of
  Consolidated Financial Condition as either miscellaneous other assets or
  accounts payable. They are recognized in earnings as part of the underlying
  transaction when it is recognized. There was no net deferred realized and
  unrealized gain or loss at December 31, 1996 or December 31, 1995.

NOTE 18--FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                        1996            1995
                                -----------------------------------
                                Carrying   Fair   Carrying   Fair
(in millions)                    Amount   Value    Amount   Value
-------------------------------------------------------------------
<S>                             <C>       <C>     <C>       <C>
Nonderivatives:

  Cash and cash equivalents       $ 38.8  $ 38.8   $ 38.1   $ 38.1

  Short-term debt                   31.3    31.3     95.0     95.0

  Long-term debt                   252.6   253.8    221.5    224.4

Derivatives:

  Miscellaneous other assets         1.6       -      3.3      3.3

  Other liabilities                    -     2.7      3.1      7.7
--------------------------------------------------------------------------------
</TABLE>

The following methods and assumptions were used to estimate the fair values of
financial instruments:

  Cash and cash equivalents - The carrying amount approximates fair value
  because of the short-term maturities of such instruments.

  Short-term debt - The carrying amount approximates fair value because of the
  short-term maturities of such instruments.

  Long-term debt - The carrying amount of term borrowings at variable interest
  rates approximates fair value. The fair value of the Company's fixed-rate ESOP
  borrowings was estimated using discounted cash flow analyses, based on the
  Company's current borrowing rates for similar types of borrowing arrangements.

  Derivatives - The fair value of derivatives, including currency swaps, foreign
  currency forward exchange contracts, and interest rate swaps was estimated
  based on current settlement prices, quoted market prices of comparable
  contracts, and pricing models or formulas using current assumptions.

NOTE 19--CONTINGENCIES AND LITIGATION

Nalco has been named as a potentially responsible party (PRP) by the
Environmental Protection Agency (EPA) or state enforcement agencies at 14 waste
sites where some financial contribution is or may be required.

These agencies have also identified many other parties who may be responsible
for clean-up costs at the waste disposal sites. Nalco's financial contribution
to remediate these sites is expected to be minor. There has been no significant
financial impact on Nalco up to the present, nor is it anticipated that there
will be in the future, as a result of these matters. Nalco has and will continue
to make provisions for these costs if the Company's liability becomes probable
and when costs can be reasonably estimated. As of December 31, 1996, the Company
had undiscounted reserves of approximately $1 million for the maximum amount of
known environmental clean-up costs. The Company's 1996 expenditures relating to
environmental compliance and clean-up activities were not significant. These
environmental reserves represent management's current estimate of its
proportional clean-up costs and are based upon negotiation and agreement with
enforcement agencies, its previous experience with respect to clean-up
activities, a detailed review by the Company of known conditions, and
information about other PRPs. They are not reduced by any possible recoveries
from insurance companies or other PRPs not specifically identified. Although
management cannot determine whether or not a material effect on future
operations is reasonably likely to occur, given the evolving nature of
environmental regulations, it believes that the recorded reserve levels are
appropriate estimates of the potential liability. Although settlement will
require future cash outlays, it is not expected that such outlays will
materially impact the Company's liquidity position.

It is the Company's policy to accrue for estimated post-closure and site
remediation costs when the decision has been made by management to close a
facility.

In the ordinary course of its business, Nalco is also a party to a number of
lawsuits and is subject to various claims, the outcome of which, in the
opinion of management, should not have a material effect on the consolidated 
financial position of Nalco.

                                     -37-

<PAGE>
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Eleven Year Summary
(dollar amounts in millions,
except per share figures)                                                                         1996         1995        1994
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>        <C>            <C> 
Net Sales                                                                                      $1,303.5     $1,214.5   $1,246.8
Operating costs and expenses                                               
  Cost of products sold                                                                           568.6        531.3      543.7
  Selling and service                                                                             433.4        399.5      405.3
  Research and development                                                                         41.9         39.8       45.7
  Administrative and general                                                                       42.9         38.4       47.8
  Formation and consolidation                                                                         -            -       68.2
-------------------------------------------------------------------------------------------------------------------------------
Total Operating Costs and Expenses                                                              1,086.8      1,009.0    1,110.7
-------------------------------------------------------------------------------------------------------------------------------
Operating Earnings                                                                                216.7        205.5      136.1
Interest and other income                                                                           2.6          7.2       16.6
Interest expense                                                                                  (14.4)       (16.2)     (21.8)
Equity in earnings of partnership                                                                  24.5         16.9        6.9
-------------------------------------------------------------------------------------------------------------------------------
Earnings from Continuing                                
  Operations Before Income Taxes                                                                  229.4        213.4      137.8
Income taxes                                                                                       83.5         77.7       64.6
-------------------------------------------------------------------------------------------------------------------------------
Earnings from Continuing Operations                                                               145.9        135.7       73.2
Earnings from discontinued operations                                                               8.6         18.0       23.9
-------------------------------------------------------------------------------------------------------------------------------
Earnings before Extraordinary Loss and                  
  Effect of Accounting Change                                                                     154.5        153.7       97.1
Extraordinary loss from retirement of                   
  debt, net of taxes                                                                                  -            -          -
Cumulative effect of change in accounting               
  for postretirement benefits other than                
  pensions, net of taxes                                                                              -            -          -
-------------------------------------------------------------------------------------------------------------------------------
Net Earnings                                                                                   $  154.5     $  153.7   $   97.1
===============================================================================================================================
Per Share of Common Stock                               
Earnings from continuing operations--fully diluted                                             $   1.86     $   1.71   $    .88
Discontinued operations                                                                             .11          .24        .31
Extraordinary item                                                                                    -            -          -
Accounting change                                                                                     -            -          -
Net earnings                                                                                       1.97         1.95       1.19
Cash dividends paid                                                                                1.00          .99        .945
-------------------------------------------------------------------------------------------------------------------------------
Financial Ratios                                        
Earnings as a percent to sales*                                                                    11.2%        11.2%       5.9%
Earnings as a percent to shareholders' equity*                                                     23.5         24.1       13.2
Effective income tax rate*                                                                         36.4         36.4       46.8
Common stock dividends paid as a percent to earnings*                                              46.1         49.2       88.4
Research and development expenses as a percent to sales*                                            3.2          3.3        3.7
Current ratio                                                                                  1.3 to 1     1.0 to 1   1.3 to 1
-------------------------------------------------------------------------------------------------------------------------------
Financial Position Data                                          
Working capital                                                                               $    95.5     $   14.2   $   87.8
Total assets                                                                                    1,394.5      1,360.5    1,269.2
Property, plant, and equipment (cost)                                                           1,169.4      1,101.6    1,067.1
Long-term debt                                                                                    252.6        221.5      245.3
Deferred income taxes                                                                              42.9         53.3       56.8
Shareholders' equity                                                                              654.5        580.3      544.2
-------------------------------------------------------------------------------------------------------------------------------
Other Data                                                       
Working capital provided from operations                                                       $  237.2     $  219.2   $  250.1
Capital investments                                                                                92.5        126.7      125.6
Depreciation and amortization*                                                                     94.9         84.8       84.8
Dividends on common stock                                                                          67.3         66.9       64.7
Cost of common stock repurchased                                                                   26.3         42.4       61.3
Wages, salaries, commissions, and benefits                                                        427.9        387.4      411.1
Common shares outstanding at year end (thousands)                                                67,024       67,124     67,900
Market price per share of common stock at year end                                             $ 36.125     $ 30.125   $  33.50
Number of common shareholders of record                                                           5,349        5,669      6,005
Number of employees at year end                                                                   6,502        6,081      5,935
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>                                              
NOTE: Shares outstanding and per share amounts have been restated to reflect the
      two-for-one stock split in 1991.                
                                                       
NOTE: Certain assets have been reclassified for the years 1992 to 1995 to
      conform to the current year presentation.       
                                                       
* Based on earnings from continuing operations before extraordinary loss and
  effect of accounting change.
                                                      
                                     -38-

<PAGE>
 
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------- 
    1993         1992       1991       1990       1989       1988       1987       1986
---------------------------------------------------------------------------------------
<S>          <C>        <C>        <C>        <C>        <C>        <C>        <C>
$1,291.6     $1,286.9   $1,164.4   $1,013.1    $ 899.1    $ 843.0    $ 738.3   $  658.5
 
   555.0        557.4      513.1      449.8      406.2      388.4      341.7      298.3
   410.2        397.7      357.2      291.7      252.9      236.5      204.9      185.8
    49.7         47.5       45.7       40.2       35.5       32.3       30.7       29.2
    52.9         53.3       47.0       50.2       47.2       50.0       38.9       41.4
       -            -          -          -          -          -          -          -
---------------------------------------------------------------------------------------
 1,067.8      1,055.9      963.0      831.9      741.8      707.2      616.2      554.7
---------------------------------------------------------------------------------------
   223.8        231.0      201.4      181.2      157.3      135.8      122.1      103.8
    14.4         18.3       18.9       19.9       27.0       20.6       14.9       12.6
   (27.5)       (40.3)     (27.1)     (11.5)      (9.7)      (9.5)      (8.2)      (6.0)
      --           --         --         --         --         --         --         --
 ---------------------------------------------------------------------------------------
   210.7        209.0      193.2      189.6      174.6      146.9      128.8      110.4
    81.9         81.8       74.2       72.9       66.3       53.1       51.9       48.1
---------------------------------------------------------------------------------------
   128.8        127.2      119.0      116.7      108.3       93.8       76.9       62.3
    23.9         17.8       18.8       14.4       11.6       12.2        3.4        1.4
---------------------------------------------------------------------------------------
   152.7        145.0      137.8      131.1      119.9      106.0       80.3       63.7
 
   (10.6)          --         --         --         --         --         --         --
 
   (56.5)          --         --         --         --         --         --         --
---------------------------------------------------------------------------------------
$   85.6     $  145.0   $  137.8   $  131.1    $ 119.9    $ 106.0    $  80.3   .$  63.7
=======================================================================================
$   1.57     $   1.57   $   1.47   $   1.42    $  1.32    $  1.20    $   .97   $    .79
     .31          .22        .24        .18        .14        .15        .04        .02
    (.14)          --         --         --         --         --         --         --
    (.72)          --         --         --         --         --         --         --
    1.02         1.79       1.71       1.60       1.46       1.35       1.01        .81
     .885         .84        .83        .755       .68        .645       .60        .60
---------------------------------------------------------------------------------------
    10.0%         9.9%      10.2%      11.5%      12.0%      11.1%      10.4%       9.5%
    24.2         22.6       24.4       26.6       23.5       20.1       17.9       15.7
    38.9         39.1       38.4       38.4       38.0       36.1       40.3       43.6
    47.4         46.2       48.6       45.3       47.1       53.8       61.4       75.6
     3.8          3.7        3.9        4.0        3.9        3.8        4.2        4.4
2.0 to 1     2.5 to 1   2.0 to 1   2.3 to 1   2.3 to 1   2.1 to 1   1.8 to 1   1.7 to 1
---------------------------------------------------------------------------------------
$  185.4     $  314.3   $  256.3   $  229.7    $ 218.5    $ 174.4    $ 121.8   $   86.7
 1,202.3      1,338.2    1,324.4    1,037.0      938.5      838.9      781.8      621.9
 1,129.9      1,044.2      957.8      840.3      720.1      648.7      607.5      547.6
   252.1        413.8      394.1      282.2      214.0      100.8       72.8       38.4
    58.1        107.3       90.8       77.8       62.7       53.7       47.3       42.3
   550.6        576.3      528.7      455.6      443.7      477.5      446.8      407.5
---------------------------------------------------------------------------------------
$  245.6     $  226.7   $  218.5   $  192.4    $ 159.1    $ 148.4    $ 132.9   $  113.2
   117.8        131.0      136.8      114.9       86.4       61.6       57.2       63.6
    82.2         75.4       62.1       45.5       37.8       40.4       38.5       37.8
    61.1         58.8       57.8       52.9       51.0       50.5       47.2       47.1
    58.5         14.3         --       80.5      111.7       21.5       11.6         --
   413.6        403.7      376.6      326.0      282.5      263.8      231.3      203.7
  68,905       70,021     69,828     69,292     72,199     77,129     78,298     78,542
  $37.50     $ 34.625   $ 41.625   $  28.25    $ 24.75    $17.625    $16.625   $  13.75
   6,111        6,129      5,543      5,099      5,224      5,477      5,668      5,821
   6,802        6,714      6,832      5,862      5,489      5,381      5,085      4,868
---------------------------------------------------------------------------------------
</TABLE>

                                      -39-

<PAGE>
 
Quarterly Summary (Unaudited)

<TABLE>
<CAPTION>
                                                       1996                             1995
                                       ----------------------------------  ----------------------------------
(dollar amounts in millions,            First   Second    Third   Fourth    First   Second    Third   Fourth
except per share figures)              Quarter  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter  Quarter
-------------------------------------  -------  -------  -------  -------  -------  -------  -------  -------
<S>                                    <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
 
Sales                                   $301.9   $318.6   $343.3   $339.7   $292.5   $302.3   $310.0   $309.7
 
Gross earnings                           166.9    179.0    196.3    192.7    164.0    170.2    174.1    174.9
 
Earnings from continuing operations       30.0     34.5     41.0     40.4     32.9     32.4     35.5     34.9
 
Discontinued operations                    1.8      2.5      1.5      2.8      4.9      4.7      5.0      3.4
 
Net earnings                              31.8     37.0     42.5     43.2     37.8     37.1     40.5     38.3
 
Per common share
  Earnings-fully diluted
     Continuing operations                 .38      .44      .52      .52      .41      .41      .45      .45
     Discontinued operations               .02      .03      .02      .03      .07      .06      .07      .04
     Net earnings                          .40      .47      .54      .55      .48      .47      .52      .49
 
  Dividends                                .25      .25      .25      .25      .24      .25      .25      .25
 
  Market price
     High                                   33 1/4   32 7/8   36 1/4   39       35 5/8   38 1/8   38 5/8   34 3/8
     Low                                    28 1/8   29 1/8   28 1/2   34 1/2   33       32 7/8   32 5/8   28 1/8
-----------------------------------------------------------------------------------------------------------------
</TABLE>

                                     -40-

<PAGE>
 
CORPORATE OFFICERS

E. J. Mooney (55)
Chairman and CEO
28 years of service

Milford B. Harp (59)
Executive Vice President,
Operations
33 years of service

W. Steven Weeber (54)
Executive Vice President,
Operations Staff
30 years of service

Peter Dabringhausen (58)
Group Vice President,
President Process
Chemicals Division
27 years of service

George M. Brannon (45)
Group Vice President,
President Nalco Pacific
21 years of service

Stephen D. Newlin (44)
Group Vice President,
President Nalco Europe
21 years of service

Gilberto Pinzon (56)
Group Vice President, President
Nalco Latin America
27 years of service

J. David Tinsley (56)
Group Vice President,
President Water and Waste
Treatment Division
31 years of service

Ronald J. Allain (56)
Senior Vice President,
Research and Development
26 years of service

David R. Bertran (53)
Senior Vice President,
Manufacturing and Logistics
13 years of service

William E. Buchholz (54)
Senior Vice President,
Chief Financial Officer
4 years of service

James F. Lambe (51)
Senior Vice President,
Human Resources
28 years of service

John D. Berthoud (53)
Vice President, Marketing
and Quality Management
26 years of service

William E. Parry (46)
Vice President
General Counsel
2 years of service

Anthony J. Sadowski (58)
Vice President,
Environmental Health
and Safety
30 years of service

Dale W. Walker (60)
Vice President,
Corporate Sales
37 years of service

Robert L. Ratliff (48)
Controller
21 years of service

William G. Marshall (50)
Treasurer
16 years of service

Suzzanne J. Gioimo (53)
Secretary
27 years of service

Craig J. Holderness (44)
Assistant Treasurer
19 years of service

Elizabeth R. Ewing (37)
Assistant Treasurer
1 year of service

(As of March 1, 1997)

                                     -42-