TREMONT CORPORATION, 10-K, 1998-03-31

TREMONT CORPORATION
10-K, 1998-03-31
PRIMARY SMELTING & REFINING OF NONFERROUS METALS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10126

Tremont Corporation
(Exact name of registrant as specified in its charter)

Delaware 76-0262791
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

1999 Broadway, Suite 4300, Denver, Colorado 80202
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (303) 296-5652

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

Name of each exchange on
Title of each class which registered

Common Stock New York Stock Exchange
($1.00 par value per share) Pacific Stock Exchange
<PAGE>

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

None.

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

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

As of February 28, 1998, 6,766,208 shares of common stock were outstanding. The
aggregate market value of the 3.4 million shares of voting stock held by
nonaffiliates of Tremont Corporation as of such date approximated $193 million.

Documents incorporated by reference:

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

<PAGE>

Forward-Looking Information

The statements contained in this Annual Report on Form 10-K which are not
historical facts, including, but not limited to, statements found (i) under the
captions "Unconsolidated Affiliate - TIMET" and "Unconsolidated Affiliate - NL",
contained in Item 1 - "Business", (ii) under the caption "Legal Proceedings" in
Item 3, and (iii) under the captions "Results of Operations" and "Liquidity and
Capital Resources", both contained in Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations," are forward-looking
statements or discussions of trends which by their nature involve substantial
risks and uncertainties that could significantly impact expected results.
Actual results could differ materially from those described in such forward-
looking statements. Among the factors that could cause actual results to differ
materially are the risks and uncertainties discussed in this Annual Report,
including those in the portions referenced above and those described from time
to time in the Company's other filings with the Securities and Exchange
Commission, such as the cyclicality of NL's and TIMET's businesses, TIMET's
dependence on the aerospace industry, the sensitivity of NL's and TIMET's
businesses to global industry capacity, global economic conditions, changes in
product pricing, the possibility of labor disruptions, control by certain
stockholders and possible conflicts of interest, potential difficulties in
integrating acquisitions, uncertainties associated with new product development
and the supply of raw materials and services.

<PAGE>

PART I

ITEM 1: BUSINESS

GENERAL:

Tremont Corporation, headquartered in Denver, Colorado, is principally a
holding company with operations conducted through its 30%-owned affiliate,
Titanium Metals Corporation ("TIMET"), and its 18%-owned affiliate, NL
Industries, Inc. ("NL"). Contran Corporation ("Contran") and other entities
related to Harold C. Simmons hold approximately 49% of Tremont's outstanding
common stock and 75% of NL's outstanding common stock (including 18% of NL held
by Tremont). Mr. Simmons may be deemed to control each of Contran, NL and
Tremont. Tremont and its consolidated subsidiaries are referred to herein
collectively as the "Company." Business and geographic segment information is
included in Note 3 to the Consolidated Financial Statements, which information
is incorporated herein by reference.

In February 1996, TIMET acquired the titanium metals businesses (the "IMI
Titanium Acquisition") of IMI plc ("IMI") and, in June 1996, completed an
initial public offering of 6.2 million shares of its common stock (the "Stock
Offering"), of which 2.2 million shares were sold by the Company. These
transactions reduced Tremont's ownership in TIMET from 75% to 30%. See Note 4
to the Consolidated Financial Statements. As a result of its reduced ownership
level, the Company ceased to consolidate TIMET and instead reports its interest
in TIMET by the equity method of accounting. Tremont also holds an option,
received in connection with the IMI Titanium Acquisition, to purchase up to an
additional 1.5 million shares of TIMET's common stock from IMI for $12 million
($7.95 per TIMET share). The option expires February 15, 1999.

Tremont reports its 18% interest in NL by the equity method due to the fact
that Tremont and NL may be deemed to be under common control by reason of stock
<PAGE>

ownership and common directors and executive officers. See Note 4 to the
Consolidated Financial Statements.

As a result of the pending settlement of certain litigation filed in the
Court of Chancery of the State of Delaware, New Castle County
(~Kahn~v.~Tremont~Corp~., et al., No. 12339), in connection with Tremont's
purchase of 7.8 million shares of NL common stock from Valhi, Inc. in 1991,
Tremont may increase it ownership of NL. The settlement, which is subject to
final court approval and court proceedings, envisions that Valhi will transfer
to Tremont of 1.2 million shares of NL common stock (subject to adjustment based
upon market price) or pay cash in lieu thereof. The transfer is expected to be
completed in the second or third quarter of 1998. See Note 11 to the
Consolidated Financial Statements - "Commitments and Contingencies," which
information is incorporated herein by reference.

UNCONSOLIDATED AFFILIATE - TIMET:

TIMET files periodic reports with the Securities and Exchange Commission
(the "Commission") pursuant to the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). The following information with respect to TIMET
(Commission file number 0-28538) has been summarized from such reports which
contain more detailed information concerning the business, results of operations
and financial condition of TIMET.

~ General.~~~~~TIMET is the world's leading integrated producer of titanium
sponge and mill products and has the largest sales volume worldwide. TIMET is
the only integrated producer with major manufacturing facilities in both of the
world's principal markets for titanium, the United States and Europe. TIMET
estimates that in 1997 it accounted for approximately 25% of worldwide industry
shipments of mill products and approximately 15% of world sponge production.

<PAGE>

Titanium was first manufactured for commercial use in the 1950s.
Titanium's unique combination of corrosion resistance, elevated-temperature
performance and high strength-to-weight ratio makes it particularly desirable
for use in commercial and military aerospace applications in which these
qualities are essential design requirements for certain critical parts such as
wing supports and jet engine components. While aerospace applications have
historically accounted for a substantial portion of the worldwide demand for
titanium and were over 40% of industry mill product shipments in 1997, the
number of non-aerospace end-use markets for titanium has expanded substantially.
Today, numerous industrial uses for titanium exist, including chemical and
industrial power plants, desalination plants and pollution control equipment.
Demand for titanium is also increasing in diverse new and emerging uses such as
medical implants, sporting equipment, offshore oil and gas production
installations, geothermal facilities, military armor and automotive uses.

TIMET's products include: titanium sponge, the basic form of titanium
metal used in processed titanium products; titanium ingot and slab, the result
of melting sponge and titanium scrap, either alone or with various other
alloying elements; and forged and cast products produced from ingot or slab,
including billet, bar, flat products (plate, sheet, and strip), extrusions, wire
and castings. TIMET believes it is a low-cost producer of titanium sponge and
melt products due in part to its economies of scale, manufacturing expertise and
investment in technology. The titanium industry is comprised of several
manufacturers which, like TIMET, produce a relatively complete range of titanium
products and a significant number of producers worldwide that manufacture a
limited range of titanium mill products. TIMET believes that at least 90% of
the world's titanium sponge is produced by six companies.

TIMET intends to continue its focus on the following goals and objectives
to change the traditional way business is conducted.

<PAGE>

. Maximize the long-term value of its core aerospace business by focusing
on TIMET's basic strengths of sponge production, melting, forging and
casting of various shapes of titanium products and by entering into
strategic agreements with major titanium users to help mitigate
cyclicality of the aerospace business.

. Invest in strategic alliances, including joint ventures, acquisitions
and entrepreneurial arrangements, as well as new markets, applications
and products to help reduce dependence on the aerospace sector.

. Invest in technology, capacity and innovative projects aimed at reducing
costs and enhancing productivity, quality, customer service and
production capacity.

. Stabilize the cost and supply of raw materials.

. Maintain a strong balance sheet.

TIMET has taken a number of recent actions to further these objectives
including the items discussed below.

TIMET has an agreement with The Boeing Company under which TIMET will be
the principal supplier of titanium products to Boeing Commercial Airplane Group
("Boeing"), and its family of suppliers for a 10-year period beginning in 1998
(the "Boeing Agreement"). This innovative agreement with the world's largest
end user of titanium provides TIMET with a significantly higher market share of
Boeing titanium requirements than it might otherwise have and should help
mitigate cyclical fluctuations in aerospace prices and volumes. See
~Markets~and~Customer~Base.~

In order to meet the expected volume increases as a result of the Boeing
Agreement, TIMET is adding additional melting and forging capacity intended to
<PAGE>

be cost effective even in a market downturn. These capacity additions are
generally expected to be completed during the second half of 1998. TIMET has
also entered into a long-term agreement to purchase, beginning in 1998, of
titanium sponge produced in Kazakhstan to help stabilize both cost and supply of
this raw material. See ~Raw~Materials.
~

In 1997, TIMET combined its U.S. welded tube operations with those of
Valinox Welded, a French manufacturer of welded tubing, principally stainless
steel and titanium, with operations in France and China. The joint venture,
"ValTimet," is 46% owned by TIMET and 54% owned by Valinox Welded (a subsidiary
of Vallourec). The joint venture is intended to combine best manufacturing
practices and market coverage. TIMET is the principal supplier of titanium to
ValTimet.

TIMET has agreed to acquire for cash the titanium business of Loterios
S.p.A., one of Italy's largest fabricators and distributors of titanium
products, with 1997 sales of approximately $22 million. Loterios has emerged in
recent years as one of the premier producers and suppliers of titanium pipe and
fittings to the offshore oil and gas drilling and productions markets and is the
leading supplier of these products in the North Sea offshore market. The
acquisition of Loterios, scheduled to close in April 1998, is expected to
increase TIMET's market share in industrial markets and to provide increased
geographic sales coverage.

TIMET's strategy for investing in new markets and uses for titanium also
includes investing in emerging businesses. In this regard, during 1997 TIMET
acquired equity interests in Ti.Pro, LLC, Titanium Memory Systems, Inc. ("TMS")
and TiComp, Inc. Ti.Pro's focus is on developing the market for titanium in
automobile racing and other specialty vehicle applications, TMS is engaged in
development and production of a titanium substrate for use in computer hard disk

<PAGE>

drives, and TiComp is working on the development and production of layered
titanium and composite materials for a variety of potential applications.

~ TIMET~Acquisitions~and~Capital~Transactions~during~1996.~At the beginning
of 1996, TIMET was 75%-owned by Tremont and its operations were conducted
primarily in the United States. During 1996, among other things, TIMET expanded
both geographically and operationally as a result of the IMI Titanium
Acquisition, the acquisition of certain assets from Axel Johnson Metals, Inc.
("the "AJM Acquisition") and certain smaller acquisitions in Europe.

TIMET also significantly improved its liquidity and capital structure
during 1996 through the Stock Offering and the issuance of TIMET-obligated
mandatorily redeemable preferred securities (the "Convertible Preferred
Securities") through a subsidiary trust, TIMET Capital Trust I.

~Recent~Titanium~Industry~Conditions.~The titanium industry historically
has derived the majority of its business from the aerospace industry. The
cyclical nature of the aerospace industry has been the principal cause of the
historical fluctuations in performance of titanium companies and contributed to
cyclical peaks in titanium mill product shipments in 1980 and 1989 and cyclical
lows in 1983 and 1991. The titanium industry improved dramatically during the
last three years due to a combination of factors, including a resurgence in
commercial aerospace demand beginning in 1995, continuing and stable industrial
demand and the emergence of new uses for titanium in diverse sectors such as
military armor and consumer goods. Worldwide industry mill product shipments
increased in each of the last three years. Industry shipments of approximately
60,000 metric tons in 1997 were 65% above 1994 levels.

Aerospace demand for titanium products, which includes both jet engine
components such as rotor blades, discs, rings and engine cases, and air frame
components, such as bulkheads, tail sections and wing supports, can be separated
into commercial and military sectors. Industry shipments to the commercial
<PAGE>

aerospace sector in 1997 accounted for approximately 80% of total aerospace
demand (33% of total industry wide titanium demand).

According to the Airline Monitor, the commercial airline industry reported
operating income of over $16 billion (estimated) in 1997, up one-third from $12
billion in 1996, and substantially better than profitability levels of 1995 and
1994 and the significant losses during 1990 to 1993. Despite recent aircraft
deferrals and cancellations by some Asian airlines, most major carriers are
believed to be continuing to invest in upgrading and expanding their fleets.
TIMET understands commercial aircraft producers carry record backlogs with
deliveries not expected to peak until 2000. In addition, current generations of
airplanes use substantially more titanium than their predecessors. TIMET can
give no assurance as to the extent or duration of the current commercial
aerospace cycle or the extent to which it will result in demand for titanium
products.

Since titanium's initial application in the aerospace sector, the number
of end-use markets for titanium has expanded substantially. Existing industrial
uses for titanium include chemical plants, industrial power plants, desalination
plants, and pollution control equipment. Titanium is also experiencing increased
customer demand in new and emerging uses such as medical implants, sporting
equipment, offshore oil and gas production installations, geothermal facilities
and automotive uses. Several of these emerging applications represent potential
growth opportunities that TIMET believes may reduce the industry's historical
dependence on the aerospace market.

~ Products~and~Operations.~TIMET is a vertically integrated titanium
producer whose products include: titanium sponge, the basic form of titanium
metal used in processed titanium products; titanium ingot and slab, the result
of melting sponge and titanium scrap, either alone or with various other
alloying elements; and forged and cast products produced from ingot or slab,

<PAGE>

including billet, bar, flat products (plate, sheet, and strip), extrusions, wire
and castings. The titanium product chain is described below.

Titanium sponge (so called because of its appearance) is the commercially
pure, elemental form of titanium metal. The first step in sponge production
involves the chlorination of titanium-containing rutile ores, derived from beach
sand, with chlorine and coke to produce titanium tetrachloride. Titanium
tetrachloride is purified and then reacted with magnesium in a closed system,
producing titanium sponge and magnesium chloride as co-products. A portion of
TIMET's titanium sponge production capacity in Henderson, Nevada, incorporates
Vacuum Distillation Process ("VDP") technology, which removes the magnesium and
magnesium chloride residues by applying heat to the sponge mass while
maintaining vacuum in the chamber. The combination of heat and vacuum boils the
residues from the reactor mass into the condensing vessel. The titanium mass is
then mechanically pushed out of the original reactor, sheared and crushed, while
the residual magnesium chloride is electrolytically separated and recycled. The
balance of TIMET's sponge production capacity uses a leaching process rather
than distillation to remove residues.

Titanium ingots and slab are solid shapes (cylindrical and rectangular,
respectively) that weigh up to 8 metric tons in the case of ingots and up to 16
metric tons in the case of slabs. Each is formed by melting titanium sponge or
scrap or both, usually with various other alloying elements such as vanadium,
aluminum, molybdenum, tin and zirconium. Titanium scrap is a by-product of
milling and machining operations, and significant quantities of scrap are
generated in the production process for most finished titanium products. TIMET
closely monitors the melting process for ingots and slabs utilizing computer
control systems to maintain product quality and consistency and meet customer
specifications.

Titanium mill products result from forging, rolling, drawing and/or
extruding titanium ingots or slabs into products of various sizes and grades.
<PAGE>

These mill products include titanium billet, bar, rod, plate, sheet, strip and
extrusions. TIMET sends certain products to outside vendors for further
processing before being shipped to customers or to TIMET's service centers.
TIMET's customers usually process TIMET's products for their ultimate end-use or
for sale to third parties.

Titanium cast products are produced by remelting ingot or billet and
pouring molten metal into a cast, the cavity of which has been created in the
shape of the part to be produced. After the metal has cooled and solidified, the
part is removed from the cast and delivered to the customer or a third party for
finishing. The casting process provides significant flexibility in the shapes
that can be produced and is frequently utilized in forming tolerance-critical
components such as diffusers, fan frames, seal rings, fluid system components
and missile components.

During the production process and following the completion of products,
TIMET performs extensive testing on its products, including sponge, mill
products and castings. Testing may involve chemical analysis, mechanical
testing, ultrasonic and x-ray testing, and dye penetration testing. The
inspection process is critical to ensuring that TIMET's products meet the high
quality requirements of customers, particularly in aerospace components
production.

TIMET is dependent upon the services of outside processors to perform
important processing functions with respect to certain of its products. In
particular, TIMET currently relies upon a single processor to perform certain
rolling steps for some of its plate, sheet, and strip products, and upon a
single processor to perform certain finishing and conditioning steps for its
slab products. Although TIMET believes that there are other metal processors
with the capability to perform these same functions, arranging for alternative
processors or possibly acquiring or installing comparable capabilities, could
take several months and any interruption in these functions could have a
<PAGE>

material and adverse effect on TIMET's business, results of operations,
financial condition and cash flows in the short term. TIMET is exploring ways
to lessen its dependence on any individual processor.

In 1997 approximately 92% of TIMET's sales were generated from the sale of
titanium ingot, slab, a wide variety of mill products and sponge, 5% was
generated from titanium castings, and the balance from sales of titanium
tetrachloride and other by-products.

~TIMET~Facilities.~In addition to its U.S. sponge capacity discussed
below, TIMET's current worldwide melting capacity aggregates approximately
43,000 metric tons (25% of world capacity), and its mill products capacity
aggregates approximately 17,000 metric tons (28% of world capacity). During
1998, TIMET expects to operate its major production facilities at or near
practical capacity and to add additional melting and mill product capacity that
should become operational during the last half of 1998 or early 1999.

~ ~TIMET's VDP sponge facility in Henderson, Nevada operated at
approximately 85% of its annual practical capacity of 9,100 metric tons during
both 1997 and 1996. The plant produces VDP sponge principally as a raw material
for an ingot melting facility, also at the Nevada site, and for the cold hearth
melting facilities operated by TIMET's Titanium Hearth Technologies ("THT")
subsidiary. In connection with market demand for certain grades of sponge,
TIMET reopened its original Kroll-leach process sponge plant in Nevada in 1996
and increased Kroll-leach production to an annual rate of approximately 4,500
metric tons during 1997.

<PAGE>

TIMET's Henderson melting facility operated at about 90% of its 13,600
metric ton annual practical capacity in 1997 (1996 - 65%). THT operates four
electron beam cold hearth melting furnaces (aggregate 14,300 metric ton annual
capacities) located in Pennsylvania (two), Nevada, and California, raw materials
processing operations located in Pennsylvania, and a 700 metric ton annual
capacity vacuum induction melting furnace located in California. THT operated
at approximately full capacity in 1997, up from about 95% in 1996.

In the U.S., titanium mill products are principally produced at a forging
and rolling facility in Ohio, which receives titanium ingots from the Nevada
plant, titanium slabs from THT and titanium slabs and hot bands purchased from
outside vendors. The Ohio facility operated at about 85% of practical capacity
in 1997, up from about 80% in 1996. Certain sheet and plate mill products are
also produced at the Tennessee facility now owned by ValTimet. Such operations
are being relocated to Ohio in 1998.
TIMET Castings, with plants located in California and Oregon, produces
titanium castings used principally for aerospace applications. Melting
operations at the Pomona plant were reopened in 1997 and the castings business
remaining at this facility will be relocated to Oregon during 1998. The Oregon
castings plant operated at approximately 65% of annual capacity in 1997 compared
to 55% in 1996.

Significant U.S. capacity additions expected to be completed in 1998
include a new forge press in Ohio and additional melting capacity in
Pennsylvania.

TIMET UK operates an 8,800 metric ton practical capacity melting facility
in Witton, England. Ingots produced in Witton are sold to customers and used as
raw material feedstock for the forging and rolling operations in Witton, which
processes the ingots principally into billet and intermediate products used as
input stock to the facility in Waunarlwydd, Wales. TIMET UK's facility in Wales
principally produces bar and plate. TIMET UK purchases its requirements of
<PAGE>

sponge principally from suppliers located in Japan and the former Soviet Union
("FSU"). In 1997, the Witton facility operated at virtually full capacity and
the Wales facility operated at approximately 75%, compared to 90% and 60%,
respectively, in 1996. TIMET UK's Witton facilities are leased from IMI
pursuant to long-term capital leases.

TIMET Savoie, TIMET's 70%-owned French subsidiary, has the right, on a
long-term basis, to utilize portions of a plant in Ugine, France owned by CEZUS,
a French metals producer. CEZUS is the 30% minority owner of TIMET Savoie.
Capacity of TIMET Savoie is to a certain extent dependent upon the level of
activity in CEZUS' zirconium business, which may from time to time provide TIMET
Savoie with capacity in excess of that contractually required to be provided by
CEZUS. During 1997, TIMET Savoie operated at approximately 125% of the capacity
required to be provided by CEZUS (100% in 1996).

Significant European capacity additions expected to be completed in 1998
include additional forging and melting in England and additional rolling in
Wales.

~Distribution.~TIMET sells its products through its own sales force based
in the U.S. and Europe, and through independent agents worldwide. TIMET's
marketing and distribution system also includes eight TIMET-operated service
centers (five in the U.S., including one opened in March 1998, and three in
Europe), which sell TIMET's products on a just-in-time basis. A sixth U.S.
service center, principally to support the Boeing Agreement, is scheduled to
open during the fourth quarter of 1998. Loterios will operate as a fourth
service center in Europe, in addition to fabricating pipe spools, fittings and
pressure vessels.

TIMET believes that the location of its production plants and service
centers, which are in close proximity to major customers, enhance TIMET's
ability to provide customer service and provide a competitive sales and cost
advantage.
<PAGE>

Service centers primarily sell value-added and customized mill products
including bar and flat-rolled sheet and strip. TIMET believes its service
centers foster customer relationships by customizing products to suit specific
customer requirements and responding quickly to customer needs.

~ Raw~Materials.~The principal raw materials used in the production of
titanium mill and cast products are titanium sponge, titanium scrap and alloying
materials. TIMET is the only domestic integrated titanium products producer that
processes rutile ore into titanium tetrachloride and further processes the
titanium tetrachloride into titanium sponge. As a result, TIMET is less
susceptible to fluctuations in the market price of titanium sponge than its
competitors. In 1997, TIMET produced 11,100 metric tons of sponge, of which
approximately 20% was sold pursuant to a long-term agreement with the remainder
used internally.

While TIMET is one of six major worldwide producers of titanium sponge,
under current market conditions it cannot supply all of its needs for titanium
sponge internally and is dependent, therefore, on third parties for a portion of
its sponge needs (approximately one-half in 1997). TIMET obtains sponge from
suppliers in Japan and the FSU, both on a spot purchase basis and pursuant to
fixed price contracts.

TIMET has entered into a long-term agreement for the purchase of titanium
sponge produced in Kazakhstan. The sponge purchase agreement is for ten years
beginning in 1998, with firm pricing for the first five years (subject to
certain adjustments). Volumes purchased under the contract will be up to 10,000
metric tons annually. TIMET expects to have annual contracts with other sponge
suppliers which it believes will cover the balance of its 1998 needs.

The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke.
Titanium-containing rutile ore is currently available from a number of suppliers
<PAGE>

around the world, principally located in Australia, Africa (South Africa and
Sierra Leone), India and the United States. A majority of TIMET's supply of
rutile ore is currently purchased from Australian suppliers. TIMET believes the
availability of rutile ore will be adequate for the foreseeable future and does
not anticipate any interruptions of its raw material supplies, although
political or economic instability in the countries from which TIMET obtains its
raw materials could materially and adversely affect availability. In addition,
although TIMET believes that the availability of rutile ore is adequate in the
near-term, there can be no assurance that TIMET will not experience
interruptions. Chlorine is currently obtained from a single source near TIMET's
Henderson, Nevada plant, but alternative suppliers are available. Magnesium and
petroleum coke are generally available from a number of suppliers.

Various alloying elements used in the production of titanium ingot are
available from a number of suppliers. TIMET has long-term agreements with
certain suppliers for a substantial portion of its alloy requirements at fixed
and/or formula determined prices.

~ Markets~and~Customer~Base.~About 55% of TIMET's 1997 sales were to
customers within North America, with about 38% to European customers and the
balance to customers in other regions. No single customer represents more than
10% of TIMET's direct sales. However, in 1997, about 70% of TIMET's sales were
used by TIMET's customers to produce parts and other materials for the aerospace
industry. TIMET expects that while a majority of its 1998 sales will be to the
aerospace sector, industrial and consumer goods markets will continue to
represent a significant portion of sales.

The aerospace industry is dominated by two major manufacturers of
commercial aircraft and four major manufacturers of aircraft engines. Typically,
TIMET's sales are not made directly to the major aircraft and engine
manufacturers but rather to companies that use TIMET's titanium to produce parts
and other materials for such manufacturers. However, if any of the major
<PAGE>

aerospace manufacturers were to significantly reduce build rates, there could be
a material adverse effect on certain of TIMET's direct customers who supply to
such manufacturers and, therefore, an indirect adverse effect on TIMET.

TIMET entered into the Boeing Agreement to help mitigate the impact of
aerospace cyclicality. Under the terms of the Boeing Agreement, TIMET will
supply a minimum of 70% of Boeing's annual needs for titanium, depending upon
Boeing's requirements each year. TIMET's share of Boeing's total titanium
requirements will increase as Boeing's volume requirements decrease, down to a
minimum mutual commitment of 6.5 million pounds (3,000 metric tons) per year.
The agreement is effective for shipments beginning in 1998, but it is not
anticipated to reach expected volume levels until 1999.

Pricing under the Boeing Agreement is firm for the first five years and
will be reviewed annually for inflationary conditions for the next five years
based upon an aerospace-related index. The companies have also agreed to
utilize Boeing's Lean Manufacturing program to develop cost savings that will be
shared by both companies.

TIMET may also enter into similar long-term agreements with other key
aerospace customers.

TIMET's order backlog was approximately $530 million at December 31, 1997
compared to $440 million at December 31, 1996. Approximately 95% of the 1997
year end backlog is expected to be delivered during 1998. Although TIMET
believes that the backlog is a reliable indicator of near-term business
activity, conditions in the aerospace industry could change and result in future
cancellations or deferrals of existing aircraft orders and materially and
adversely affect TIMET's existing backlog, orders, and future financial
condition and operating results.

<PAGE>

As of December 31, 1997, the estimated firm order backlog for Boeing
(including McDonnell Douglas) and Airbus, as reported by The Airline Monitor,
was 2,753 planes versus 2,370 planes at the end of 1996 and 1,869 planes at the
end of 1995, an increase of 16% in 1997 following a 27% increase in 1996. The
newer wide body planes, such as the Boeing 777 and the Airbus A-330 and A-340,
tend to use a higher percentage of titanium in their frames, engines and parts
(as measured by total fly weight) than narrow body planes. "Fly weight" is the
empty weight of a finished aircraft with engines but without fuel or passengers.
The Boeing 777, for example, utilizes titanium for approximately 9% of total fly
weight, compared to between 2% to 3% on the older 737, 747 and 767 models. The
estimated firm order backlog for wide body planes at year end 1997 was 890 (32%
of total backlog) compared to 817 at the end of 1996 and 682 at the end of 1995.
Growth in firm order backlog for narrow body aircraft increased 35% during 1996
and 20% in 1997, to 1,863 at the end of the year.

Through various strategic relationships, TIMET seeks to gain access to
unique process technologies for the manufacture of its products and to expand
existing markets and create and develop new markets for titanium. TIMET has
explored and will continue to explore strategic arrangements in the areas of
product development, production and distribution. TIMET also will continue to
work with existing and potential customers to identify and develop new or
improved applications for titanium that take advantage of its unique qualities.
~ ~
~ Competition.~The titanium metals industry is highly competitive on a
worldwide basis. Producers of mill products are located primarily in the United
States, Japan, Europe, FSU and China. TIMET is one of four integrated producers
in the world. TIMET regards firms that produce at least both sponge and ingot as
integrated producers. A number of non-integrated producers exist that produce
mill products from purchased sponge, scrap or ingot. TIMET believes that U.S.,
European and Japanese producers are generally operating near practical capacity
levels while some unused capacity is available in the FSU.

<PAGE>

TIMET's principal competitors include Oregon Metallurgical Corporation
("OREMET") and Allegheny Teledyne, Inc. (which have proposed to combine) and RMI
Titanium Company. TIMET competes primarily on the basis of price, quality of
products, technical support and the availability of products to meet customers'
delivery schedules.

In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign titanium
products into the U.S. had not been significant. This was primarily attributable
to relative currency exchange rates, tariffs and, with respect to Japan and the
FSU, import duties (including antidumping duties). However, imports of titanium
sponge, scrap, and mill products, principally from the FSU, have increased in
recent years and have had a significant competitive impact on the U.S. titanium
industry. To the extent TIMET has been able to take advantage of the increased
availability of imports by purchasing sponge, scrap or intermediate mill
products for use in its own operations, the negative effect of increased imports
on TIMET has been somewhat diminished.

Generally, imports into the U.S. of titanium products from countries
designated as "most favored nations" are subject to a 15% tariff (45% for other
countries). Starting in 1993, imports of titanium mill products from Russia
were exempted from this duty under the "generalized system of preferences" or
"GSP" program designed to aid developing economies. In recent years, the GSP
program has been subject to annual review and renewal and is currently scheduled
to expire in June 1998.

In 1997, GSP benefits to Russian products were suspended when the level of
imports of Russian mill products reached 50% of all U.S. imports of titanium
mill products. A petition was filed in 1997 to restore duty-free status to
these products. In addition, a petition has also been filed to bring titanium
sponge and ingot under the GSP program, which would allow such products from the
countries of the FSU (notably Russia and, in the case of sponge, Kazakhstan) to
<PAGE>

be imported into the U.S. without the payment of regular duties. TIMET believes
these petitions are likely to be acted upon during the second quarter of 1998.

In addition to regular duties, titanium sponge imported from Russia,
Kazakhstan, and Ukraine has for many years been subject to substantial
antidumping penalties. However, beginning in 1996 these antidumping duties were
significantly reduced, and in one case eliminated altogether, for the two
principal importers of Russian sponge into the U.S. Regular annual reviews to
assess the appropriate level of antidumping duties with respect to titanium
sponge from Russia and Kazakhstan are currently underway. In March 1998, the
United States International Trade Commission ("ITC") initiated a changed
circumstances review of the antidumping duty orders on titanium sponge from the
FSU and Japan in order to determine whether revocation of the orders would
result in a recurrence of material injury to the United States titanium sponge
industry. If the ITC determines that injury would not recur, the orders will be
revoked in July 1998. In addition, proceedings will begin in 1998 to evaluate
the continuation generally of all outstanding U.S. antidumping orders, including
those covering titanium sponge.

Further reductions in, or the complete elimination of, all or any of these
tariffs could lead to increased imports of foreign sponge, ingot, and mill
products into the U.S. and an increase in the amount of such products on the
market generally, which could adversely affect pricing for titanium sponge and
mill products and thus the business, financial condition, results of operations
and cash flows of TIMET. However, TIMET has, in recent years, been one of the
largest importers of foreign titanium sponge and mill products into the U.S. To
the extent TIMET remains a substantial purchaser of these products, any adverse
effects on product pricing as a result of any reduction in, or elimination of,
any of these tariffs would be partially ameliorated by the decreased cost to
TIMET for these products to the extent TIMET currently bears the cost of the
import duties.

<PAGE>

Producers of other metal products, such as steel and aluminum, maintain
forging, rolling and finishing facilities that could be modified without
substantial expenditures to produce titanium products. TIMET believes, however,
that entry as a producer of titanium sponge would require a significant capital
investment and substantial technical expertise. Titanium mill products also
compete with stainless steels, nickel alloys, steel, plastics, aluminum and
composites in certain applications.

~Research~and~Development.~TIMET's research and development activities are
directed toward improving process technology, developing new alloys, enhancing
the performance of TIMET's products in current applications, and searching for
new uses of titanium products. For example, one of TIMET's proprietary alloys,
TIMETAL(R)21S, has been specified for a number of aerospace applications
including the Boeing 777. Additionally, TIMETAL LCB, a new low cost beta alloy,
is being tested for new non-aerospace applications; and TIMETAL 15-3 has been
introduced into the sporting goods markets. TIMET conducts the majority of its
research and development activities at its Nevada laboratory, which TIMET
believes is one of the largest titanium research and development centers in the
world. Additional research and development activities are performed at the
Witton, England facility. TIMET's research and development expenditures
approximated $3.6 million in 1997, up from $2 million during each of the two
prior years, and are expected to be $4 million to $5 million in 1998.

~ Patents~and~Trademarks.~TIMET holds U.S. and non-U.S. patents applicable
to certain of its titanium alloys and manufacturing technology. TIMET
continually evaluates whether patent protection with respect to its technical
base is advisable and in the past has occasionally entered into cross-licensing
arrangements with third parties. However, most of the titanium alloys and
manufacturing technology used by TIMET do not benefit from patent or other
intellectual property protection. TIMET believes that the trademarks TIMET(R)
and TIMETAL, which are protected by registration in the U.S. and other
countries, are significant to its business.
<PAGE>

~ Employees.~As of December 31, 1997, TIMET employed approximately 2,125
persons in the U.S. and approximately 900 persons in Europe, up 2.5% from a
total of 2,950 at the end of 1996. TIMET's production and maintenance workers in
Henderson, Nevada and its production, maintenance, clerical and technical
workers in Toronto, Ohio are represented by the United Steelworkers of America
("USWA") under contracts expiring in October 2000 and June 2003, respectively.
Employees at the Company's other U.S. facilities are not covered by collective
bargaining agreements. In February 1997, employees at TIMET Castings' Albany,
Oregon facility voted to not be represented by the USWA.

Substantially all of the salaried and hourly employees at TIMET's European
facilities are covered by collectively bargained labor agreements. In January
1998, new one-year agreements covering the U.K. and French union employees were
entered into, providing for modest wage increases in 1998.

The USWA engaged in a nine month work stoppage at TIMET's Henderson
facility in 1993 - 1994 and in a three month stoppage at the Toronto facility in
1994. While TIMET currently has long-term contracts with the USWA and considers
its employee relations to be satisfactory, it is possible that there could be
future work stoppages that could materially and adversely affect TIMET's
business, financial condition, results of operations or cash flows.

~ Regulatory~and~Environmental~Matters.~TIMET's operations are governed by
various Federal, state, local and foreign environmental and worker safety laws
and regulations. In the U.S., such laws include the Federal Clean Air Act, the
Clean Water Act and the Resource Conservation and Recovery Act. TIMET uses and
manufactures substantial quantities of substances that are considered hazardous
or toxic under environmental and worker safety and health laws and regulations.
In addition, at TIMET's Henderson, Nevada facility, TIMET uses substantial
quantities of titanium tetrachloride, a material classified as extremely
hazardous under Federal environmental laws. TIMET has used such substances
<PAGE>

during substantially the entire history of its operations. As a result, risk of
environmental damage is inherent in TIMET's operations. TIMET's operations pose
a continuing risk of accidental releases of, and worker exposure to, hazardous
or toxic substances. There is also a risk that government environmental
requirements, or enforcement thereof, may become more stringent in the future.
There can be no assurances that some, or all, of the risks discussed under this
heading will not result in liabilities that would be material to TIMET's
business, results of operations, financial condition or cash flows.

TIMET's operations in Europe are similarly subject to foreign laws and
regulations respecting environmental and worker safety matters, which laws are
generally less stringent than U.S. laws and which have not had, and are not
presently expected to have, a material adverse effect on TIMET. There can be no
assurance that such foreign laws will not become more stringent.

TIMET believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker safety laws.
TIMET's policy is to continually strive to improve environmental performance.
From time to time, TIMET may be subject to environmental regulatory enforcement
under various statutes, resolution of which typically involves the establishment
of compliance programs. Occasionally, resolution of these matters may result in
the payment of penalties, but to date no material penalties have been incurred.
TIMET incurred capital expenditures for safety, environmental protection and
compliance of approximately $3 million in 1997 and its capital budget provides
for approximately $7 million of such expenditures in 1998. However, the
imposition of more strict standards or requirements under environmental laws and
regulations could result in expenditures in excess of amounts estimated to be
required for such matters. See Note 11 to the Consolidated Financial Statements
- - "Commitments and Contingencies - Environmental Matters - TIMET," which
information is incorporated herein by reference.

UNCONSOLIDATED AFFILIATE - NL:
<PAGE>

NL files periodic reports with the Commission pursuant to the Exchange
Act, as amended. The following information with respect to NL (Commission file
number 1-640) has been summarized from such reports which contain more detailed
information concerning the business, results of operations and financial
condition of NL.
~
~G~eneral.~~ NL conducts its continuing operations through its principal
wholly-owned subsidiary, Kronos, Inc. In January 1998, the specialty chemicals
business of Rheox, Inc., a wholly-owned subsidiary of NL, was sold for $465
million to Elementis plc, including $20 million attributable to a five-year
agreement by NL not to compete in the rheological products business. See "Rheox
- - discontinued operations" for related discussion.

Kronos is the world's fourth largest producer of titanium dioxide pigments
("TiO2") with an estimated 12% share of worldwide TiO2 sales volume in 1997.
Approximately one-half of Kronos' 1997 sales volume was in Europe, where Kronos
is the second largest producer of TiO2.

NL's objective is to maximize total shareholder returns by (i) focusing on
continued cost control, (ii) acquiring additional TiO2 production capacity,
(iii) investing in certain cost effective debottlenecking projects to also
increase TiO2 production capacity and productivity and (iv) reducing outstanding
indebtedness.

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

<PAGE>

Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact NL's earnings and operating cash
flow. NL's average TiO2 selling prices increased during the last three quarters
of 1997, following a downturn in prices that began in the last half of 1995. NL
expects TiO2 prices will continue to increase during 1998 as the impact of
announced price increases take effect. Industry-wide demand for TiO2 continued
to grow in 1997, and Kronos' record 1997 sales volume was 10% higher than the
previous record set in 1996. NL's expectations as to the future prospects of
the TiO2 industry and prices are based upon a number of factors beyond NL's
control, including continued worldwide growth of gross domestic product,
competition in the market place, unexpected or earlier-than-expected capacity
additions and technological advances. If actual developments differ from NL's
expectations, industry and NL performance could be unfavorably affected.

Kronos has an estimated 18% share of European TiO2 sales volume and an
estimated 13% share of North American TiO2 sales volume. Consumption per capita
in the United States and Western Europe far exceeds that in other areas of the
world and these regions are expected to continue to be the largest consumers of
TiO2. A significant region for TiO2 consumption could emerge in Eastern Europe,
the Far East or China if the economies in these countries develop to the point
where quality-of-life products, including TiO2, are in greater demand. Kronos
believes that, due to its strong presence in Western Europe, it is well
positioned to participate in growth in consumption of TiO2 in Eastern Europe.

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

<PAGE>

will not materially alter the growth of the TiO2 business in the foreseeable
future.

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

Kronos is one of the world's leading producers and marketers of TiO2.
Kronos and its distributors and agents sell and provide technical services for
its products to over 4,000 customers with the majority of sales in Europe and
North America. Kronos' international operations are conducted through Kronos
International, Inc., a Germany-based holding company formed in 1989 to manage
and coordinate NL's manufacturing operations in Germany, Canada, Belgium and
Norway, and its sales and marketing activities in over 100 countries worldwide.
Kronos and its predecessors have produced and marketed TiO2 in North America and
Europe for over 70 years. As a result, Kronos believes that it has developed
considerable expertise and efficiency in the manufacture, sale, shipment and
service of its products in domestic and international markets. By volume,
approximately one-half of Kronos' 1997 TiO2 sales were to Europe, with 36% to
North America and the balance to export markets.

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

~TiO2~manufacturing~process,~properties~and~raw~materials.~~TiO2 is
manufactured by Kronos using both the chloride process and the sulfate process.
Approximately two-thirds of Kronos' current production capacity is based on its
<PAGE>

chloride process which generates less waste than the sulfate process. Although
most end-use applications can use pigments produced by either process, chloride-
process pigments are generally preferred in certain coatings and plastics
applications, and sulfate-process pigments are generally preferred for certain
paper, fibers and ceramics applications. Due to environmental factors and
customer considerations, the proportion of TiO2 industry sales represented by
chloride-process pigments has increased relative to sulfate-process pigments in
the past few years, and chloride-process production facilities in 1997
represented almost 60% of industry capacity.

Kronos currently operates four TiO2 facilities in Europe (Leverkusen and
Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In North
America, Kronos has a facility in Varennes, Quebec, Canada and, through the
manufacturing joint venture described below, a one-half interest in a plant in
Lake Charles, Louisiana. Certain of NL's properties collateralize long-term
debt agreements and NL's Nordenham TiO2 plant has liens on it that secure claims
by the City of Leverkusen and the German federal tax authorities, pending
resolution of certain tax litigation.

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

<PAGE>

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

Kronos produced a record 408,000 metric tons of TiO2 in 1997, compared to
373,000 metric tons produced in 1996 and 393,000 metric tons in 1995. Kronos'
production rates were increased to near full capacity in late 1996 and Kronos
maintained near full capacity production rates throughout 1997 in response to
strong demand. Kronos believes its current annual attainable production
capacity is approximately 420,000 metric tons, including its one-half interest
in the joint venture-owned Louisiana plant (see "TiO2 manufacturing joint
venture"). Kronos substantially completed a $34 million debottlenecking
expansion of its Leverkusen, Germany chloride-process plant in 1997 which
increased annual production capacity by approximately 20,000 metric tons.

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

<PAGE>

The primary raw materials used in the TiO2 sulfate production process are
sulfuric acid and titanium-containing feedstock derived primarily from rock and
beach sand ilmenite. Sulfuric acid is available from a number of suppliers.
Titanium-containing feedstock suitable for use in the sulfate process is
available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically-integrated producers of sulfate-
process pigments, Kronos operates a rock ilmenite mine in Norway which provided
all of Kronos' feedstock for its European sulfate-process pigment plants in
1997. For its Canadian plant, Kronos also purchases sulfate grade slag from
Q.I.T.-Fer et Titane Inc. under a long-term supply contract which expires in
2002.

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

~TiO~2~~manufacturing~joint~venture.~~Subsidiaries of Kronos and Tioxide
Group, Ltd. ("Tioxide"), a wholly-owned subsidiary of Imperial Chemicals
Industries plc ("ICI"), each own a 50%-interest in a manufacturing joint
venture, Louisiana Pigment Company ("LPC"). LPC owns and operates a chloride-
process TiO2 plant located in Lake Charles, Louisiana. Production from the
plant is shared equally by Kronos and Tioxide (the "Partners") pursuant to
separate offtake agreements. ICI has agreed to sell Tioxide's non-North
American operations to E.I. du Pont de Nemours & Co. ("DuPont"), subject to
regulatory approval. ICI has announced it intends to sell Tioxide's 50%
interest in LPC and its remaining North American operations in a separate
transaction. NL has advised ICI of its interest in acquiring the portion of LPC
it does not currently own.
<PAGE>

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

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

~Competition.~~~The TiO2 industry is highly competitive. During the early
1990s, supply of TiO2 exceeded demand, primarily due to new chloride-process
capacity coming on-stream. Relative supply/demand relationships, which had a
favorable impact on industry-wide prices during the late 1980s, had a negative
impact during the subsequent downturn. During 1994 and the first half of 1995,
strong demand growth improved industry capacity utilization and resulted in
increases in worldwide TiO2 prices. Kronos believes that the increased demand
was partially due to customers stocking inventories. In the second half of 1995
and first half of 1996, customers reduced inventory levels, which reduced
industry-wide demand. Demand improved in the second half of 1996 and throughout
1997, and selling prices of TiO2 began to increase during the last three
quarters of 1997. Additional price increases have been announced by most major
TiO2 producers, including Kronos, that are expected to be implemented during the
first half of 1998, and which Kronos expects to favorably impact operating
income comparisons in 1998 versus 1997. No assurance can be given that price
trends will conform to the Company's expectations.

<PAGE>

Capacity additions that are the result of construction of grassroot plants
in the worldwide TiO2 market require significant capital expenditures and
substantial lead time (typically three to five years in NL's experience) for,
among other things, planning, obtaining environmental approvals and
construction. No grassroot plants have been announced, but industry capacity
can be expected to increase as Kronos and its competitors complete
debottlenecking projects at existing plants. Based on the factors described
under the caption "~TiO2~products~and~operations~" above, NL expects that the
average annual increase in industry capacity from announced debottlenecking
projects will be less than the average annual demand growth for TiO2 during the
next three to five years.

Kronos competes primarily on the basis of price, product quality and
technical service, and the availability of high performance pigment grades.
Although certain TiO2 grades are considered specialty pigments, the majority of
grades and substantially all of Kronos' production are considered commodity
pigments with price generally being the most significant competitive factor.
During 1997 Kronos had an estimated 12% share of worldwide TiO2 sales volume,
and Kronos believes that it is the leading seller of TiO2 in a number of
countries, including Germany and Canada.

Kronos' principal competitors are DuPont; ICI (Tioxide); Millennium
Chemicals, Inc. (Millennium Inorganic Chemicals, Inc.); Kerr-McGee Corporation;
Kemira Oy; Ishihara Sangyo Kaisha, Ltd.; and Bayer AG. These seven competitors
have estimated individual shares of TiO2 production capacity ranging from 23% to
4%, and an estimated aggregate 74% share of worldwide TiO2 production volume.
DuPont has about one-half of total U.S. TiO2 production capacity and is Kronos'
principal North American competitor.

In July 1997 DuPont announced an agreement had been reached to acquire
Tioxide's TiO2 business in Europe, Asia and Africa, that it expects to close in
early 1998 subject to regulatory approval. In January 1998 Kerr-McGee announced
<PAGE>

an agreement to acquire approximately 80% of the European TiO2 business of
Bayer.

~ Rheox~-~discontinued~operations.~~~On January 30, 1998 the specialty
chemicals business of Rheox was sold to Elementis plc (formerly known as
Harrisons and Crosfield, plc) for $465 million, including $20 million
attributable to a five-year agreement by NL not to compete in the rheological
products business. As a result of the sale, NL has reported its Rheox
operations as discontinued operations. Following the sale, Rheox, Inc. was
renamed NL Capital Corporation. NL intends to use the after-tax proceeds of
about $400 million primarily to invest in additional TiO2 production capacity
and reduce its outstanding indebtedness.

~Research~and~development.~~NL's expenditures for research and development
and certain technical support programs, excluding discontinued operations, have
averaged approximately $8 million annually during the past three years.
Research and development activities are conducted principally at the Leverkusen,
Germany facility. Such activities are directed primarily toward improving both
the chloride and sulfate production processes, improving product quality and
strengthening Kronos' competitive position by developing new pigment
applications.

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

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

<PAGE>

~Foreign~operations.~~NL's chemical businesses have operated in
international markets since the 1920s. Most of Kronos' current production
capacity is located in Europe and Canada. Approximately three-quarters of NL's
1997 consolidated sales, excluding discontinued operations, were to non-U.S.
customers, including 13% to customers in areas other than Europe and Canada.
Sales to customers in Asia accounted for 5% of consolidated net sales. Foreign
operations are subject to, among other things, currency exchange rate
fluctuations and NL's results of operations have in the past been both favorably
and unfavorably affected by fluctuations in currency exchange rates. Effects of
fluctuations in currency exchange rates on NL's results of operations are
discussed in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

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

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

~ Employees.~~As of December 31, 1997 NL employed approximately 2,600
<PAGE>

persons, excluding the joint venture employees and discontinued operations, with
approximately 100 employees in the United States and approximately 2,500 at
sites outside the United States. Hourly employees in production facilities
worldwide, including the TiO2 manufacturing joint venture, are represented by a
variety of labor unions, with labor agreements having various expiration dates.
NL believes its labor relations are good.
~
~R~egulatory~and~environmental~matters~and~litigation~. Certain of NL's
businesses are and have been engaged in the handling, manufacture or use of
substances or compounds that may be considered toxic or hazardous within the
meaning of applicable environmental laws. As with other companies engaged in
similar businesses, certain past and current operations and products of NL have
the potential to cause environmental or other damage. NL has implemented and
continues to implement various policies and programs in an effort to minimize
these risks. The policy of NL is to achieve compliance with applicable
environmental laws and regulations at all its facilities and to strive to
improve its environmental performance. It is possible that future developments,
such as stricter requirements of environmental laws and enforcement policies
thereunder, could adversely affect NL's production, handling, use, storage,
transportation, sale or disposal of such substances as well as NL's consolidated
financial position, results of operations or liquidity.

NL's U.S. manufacturing operations are governed by federal environmental
and worker health and safety laws and regulations, principally the Resource
Conservation and Recovery Act, the Occupational Safety and Health Act, the Clean
Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic Substances
Control Act and the Comprehensive Environmental Response, Compensation and
Liability Act, as amended by the Superfund Amendments and Reauthorization Act
("CERCLA"), as well as the state counterparts of these statutes. NL believes
the Louisiana plant owned and operated by the joint venture is in substantial
compliance with applicable requirements of these laws or compliance orders
issued thereunder. Following the sale of its specialty chemicals business, NL
<PAGE>

has no U.S. plants other than LPC. From time to time, NL's facilities may be
subject to environmental regulatory enforcement under such statutes. Resolution
of such matters typically involves the establishment of compliance programs.
Occasionally, resolution may result in the payment of penalties, but to date
such penalties have not involved amounts having a material adverse effect on
NL's consolidated financial position, results of operations or liquidity.

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

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

NL has a contract with a third party to treat certain of its Leverkusen and
Nordenham, Germany sulfate-process effluents. Either party may terminate the
contract after giving four years advance notice with regard to the Nordenham
plant. After December 1998 and under certain circumstances, Kronos may
terminate the contract after giving six months notice with respect to treatment
of effluent from the Leverkusen plant.

In order to reduce sulfur dioxide emissions into the atmosphere consistent
with applicable environmental regulations, Kronos completed the installation of
off-gas desulfurization systems in 1997 at its Norwegian and German plants at an
<PAGE>

estimated cost of $30 million. The manufacturing joint venture completed the
installation of a $16 million off-gas desulfurization system at the Louisiana
plant in 1996.

NL's capital expenditures related to its ongoing environmental protection
and improvement programs are currently expected to be approximately $5 million
in each of 1998 and 1999.

NL has been named as a defendant, potentially responsible party ("PRP"), or
both, pursuant to CERCLA and similar state laws in approximately 75 governmental
and private actions associated with waste disposal sites, mining locations and
facilities currently or previously owned, operated or used by NL, or its
subsidiaries, or their predecessors, certain of which are on the U.S.
Environmental Protection Agency's ("U.S. EPA") Superfund National Priorities
List or similar state lists.

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

investigations, monitoring, studies, clean-up, removal and remediation. During
the first quarter of 1997 NL's accrual was increased by $30 million to include
legal fees and other costs of managing and monitoring environmental remediation
sites as required by the adoption of the AICPA's Statement of Position 96-1,
"Environmental Remediation Liabilities." See Note 2 to the Consolidated
Financial Statements. It is not possible to estimate the range of costs for
certain sites. NL has estimated that the upper end of the range of reasonably
possible costs to NL for sites for which it is possible to estimate costs is
approximately $175 million. NL's estimate of such liability has not been
discounted to present value and NL has not recognized any potential insurance
recoveries. No assurance can be given that actual costs will not exceed either
accrued amounts or the upper end of the range for sites for which estimates have
been made, and no assurance can be given that costs will not be incurred with
respect to sites as to which no estimate presently can be made. The imposition
of more stringent standards or requirements under environmental laws or
regulations, new developments or changes respecting site cleanup costs or
allocation of such costs among PRPs, or a determination that NL is potentially
responsible for the release of hazardous substances at other sites could result
in expenditures in excess of amounts currently estimated by NL to be required
for such matters. Further, there can be no assurance that additional
environmental matters will not arise in the future. More detailed descriptions
of certain legal proceedings relating to environmental matters are set forth
below.

In July 1991 the United States filed an action in the U.S. District Court
for the Southern District of Illinois against NL and others
(~United~States~of~America~v.~NL~Industries,~Inc.,~et~al.,~~Civ. No. 91-CV
00578) with respect to the Granite City, Illinois lead smelter, formerly owned
by NL. The complaint seeks injunctive relief to compel the defendants to comply
with an administrative order issued pursuant to CERCLA, and fines and treble
damages for the alleged failure to comply with the order. NL and the other
parties did not implement the order, believing that the remedy selected by the
<PAGE>

U.S. EPA was invalid, arbitrary, capricious and was not selected in accordance
with law. The complaint also seeks recovery of past costs and a declaration
that the defendants are liable for future costs. Although the action was filed
against NL and ten other defendants, there are 330 other PRPs who have been
notified by the U.S. EPA. Some of those notified were also respondents to the
administrative order. In February 1992 the court entered a case management
order directing that the remedy issues be tried before the liability aspects are
presented. In September 1995 the U.S. EPA released its amended decision
selecting cleanup remedies for the Granite City site. NL presently is
challenging portions of the U.S. EPA's selection of the remedy. In September
1997 the U.S. EPA informed NL that past and future cleanup costs are estimated
to total approximately $63.5 million. There is currently no allocation among the
PRPs for these costs.

At the Pedricktown, New Jersey lead smelter site (formerly owned by NL) the
U.S. EPA has divided the site into two operable units. Operable unit one
addresses contaminated ground water, surface water, soils and stream sediments.
In July 1994 the U.S. EPA issued the Record of Decision for operable unit one.
The U.S. EPA estimates the cost to complete operable unit one is $18.7 million.
In May 1996 certain PRPs, but not NL, entered into an administrative consent
order with the U.S. EPA to perform the remedial design phase of operable unit
one. In January 1998 NL and the other PRPs were informed that U.S. EPA would
begin negotiations in 1998 with respect to performance of the remedial action
phase of operable unit one. In addition, the U.S. EPA has indicated that it has
incurred approximately $6.2 million in past costs. The U.S. EPA issued an order
with respect to operable unit two in March 1992 to NL and 30 other PRPs
directing immediate removal activities including the cleanup of waste, surface
water and building surfaces. NL has complied with the order, and the work with
respect to operable unit two is completed. NL has paid approximately 50% of
operable unit two costs, or $2.5 million.

<PAGE>

Having completed the RIFS at NL's former Portland, Oregon lead smelter
site, NL conducted predesign studies to explore the viability of the U.S. EPA's
selected remedy pursuant to a June 1989 consent decree captioned
~U.S.~v.~NL~Industries,~Inc.,~~Civ. No. 89-408, United States District Court for
the District of Oregon. Subsequent to the completion of the predesign studies,
the U.S. EPA issued notices of potential liability to approximately 20 PRPs,
including the Company, directing them to perform the remedy, which was initially
estimated to cost approximately $17 million, exclusive of administrative and
overhead costs and any additional costs, for the disposition of recycled
materials from the site. In January 1992 the U.S. EPA issued unilateral
administrative orders to NL and six other PRPs directing the performance of the
remedy. NL and the other PRPs commenced performance of the remedy. In August
1994, the U.S. EPA authorized NL and the other PRPs to cease performing most
aspects of the selected remedy. In May 1997 the U.S. EPA issued an Amended
Record of Decision ("ARD") for the soils operable unit changing portions of the
cleanup remedy selected. The ARD requires construction of an onsite containment
facility estimated to cost between $10.5 million and $12 million, including
capital costs and operating and maintenance costs. NL and certain other PRPs
have entered into a consent decree to perform the remedial action in the ARD.
In November 1991 Gould, Inc., the current owner of the site, filed an action,
~Gould,~Inc.~v.~NL~Industries,~Inc.~, No. 91-1091, United States District Court
for the District of Oregon, against NL for damages for alleged fraud in the sale
of the smelter, rescission of the sale, past CERCLA response costs and a
declaratory judgment allocating future response costs and punitive damages. In
February 1998 NL and the other defendants reached an agreement in principle to
settle the litigation by agreeing to pay a portion of future costs, which are
estimated to be within previously-accrued amounts.

NL and other PRPs entered into an administrative consent order with the
U.S. EPA requiring the performance of a RIFS at two sites in Cherokee County,
Kansas, where NL and others formerly mined lead and zinc. A former subsidiary
of NL mined at the Baxter Springs subsite, where it is the largest viable PRP.
<PAGE>

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

In January 1989 the State of Illinois brought an action against NL and
several other subsequent owners and operators of the former plant in Chicago,
Illinois (~People~of~the~State~of~Illinois~v.~NL~Industries,~et~al.~, No. 88-CH-
11618, Circuit Court, Cook County). The complaint seeks recovery of $2.3
million of cleanup costs expended by the Illinois Environmental Protection
Agency, plus penalties and treble damages. In October 1992 the Supreme Court of
Illinois reversed the Appellate Division, which had affirmed the trial court's
earlier dismissal of the complaint, and remanded the case for further
proceedings. In December 1993 the trial court denied the State's petition to
reinstate the complaint, and dismissed the case with prejudice. In November
1996 the appeals court reversed the dismissal. In August 1997 the trial court
again dismissed the case and the state has appealed. The U.S. EPA has issued an
order to NL to perform a removal action at NL's former facility involved in the
~State~of~Illinois~case. NL is complying with the order.

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

complaint, denying liability. In December 1994 the jury returned a verdict in
favor of NL. Plaintiffs appealed to the Pennsylvania Superior Court and in
September 1996 the Superior Court affirmed the judgment in favor of NL. In
December 1996 plaintiffs filed a petition for allowance of appeal to the
Pennsylvania Supreme Court, which was declined. Residents also filed
consolidated actions in the United States District Court for the Eastern
District of Pennsylvania,
~Shinozaki~v.~Anzon,~Inc.~and~Wagner~and~Antczak~v.~Anzon~and~NL~Industries,~Inc
~. Nos. 87-3441, 87-3502, 87-4137 and 87-5150. The consolidated action is a
putative class action seeking CERCLA response costs, including cleanup and
medical monitoring, declaratory and injunctive relief and civil penalties for
alleged violations of the Resource Conservation and Recovery Act ("RCRA"), and
also asserting pendent common law claims for strict liability, trespass,
nuisance and punitive damages. The court dismissed the common law claims
without prejudice, dismissed two of the three RCRA claims as against NL with
prejudice, and stayed the case pending the outcome of the state court
litigation.

In July 1991 a complaint was filed in the United States District Court for
the Central District of California,
~United~States~of~America~v.~Peter~Gull~and~NL~Industries,~Inc.~, Civ. No. 91-
4098, seeking recovery of $2 million in costs incurred by the United States in
response to the alleged release of hazardous substances into the environment
from a facility located in Norco, California, treble damages and $1.8 million in
penalties for NL's alleged failure to comply with the U.S. EPA's administrative
order No. 88-13. The order, which alleged that NL arranged for the treatment or
disposal of materials at the Norco site, directed the immediate removal of
hazardous substances from the site. NL carried out a portion of the remedy at
the Norco site, but did not complete the ordered activities because it believed
they were in conflict with California law. The court ruled that NL was liable
for approximately $2.7 million in response costs plus approximately $3.6 million
in penalties for failure to comply with the administrative order. In April 1994
<PAGE>

the court entered final judgment in this matter directing NL to pay $6.3 million
plus interest. Both NL and the government have appealed. In February 1998 the
parties reached agreement in principle to settle this matter within previously-
accrued amounts.

At a municipal and industrial waste disposal site in Batavia, New York, NL
and 50 others have been identified as PRPs. The U.S. EPA has divided the site
into two operable units. Pursuant to an administrative consent order entered
into with the U.S. EPA, NL conducted a RIFS for operable unit one, the closure
of the industrial waste disposal section of the landfill. NL's RIFS costs were
approximately $2 million. In June 1995 the U.S. EPA issued the record of
decision for operable unit one, which is estimated by the U.S. EPA to cost
approximately $12.3 million. In September 1995 the U.S. EPA and certain PRPs
entered into an administrative order on consent for the remedial design phase of
the remedy for operable unit one and the design phase is proceeding. NL and
other PRPs entered into an interim cost sharing arrangement for this phase of
work. NL and the other PRPs have completed the work comprising operable unit
two (the extension of the municipal water supply) with the exception of annual
operation and maintenance. The U.S. EPA has also demanded approximately $.9
million in past costs from the PRPs.

~Lead~pigment~litigation.~~~NL was formerly involved in the manufacture of
lead pigments for use in paint and lead-based paint. NL has been named as a
defendant or third party defendant in various legal proceedings alleging that NL
and other manufacturers are responsible for personal injury and property damage
allegedly associated with the use of lead pigments. NL is vigorously defending
such litigation. Considering NL's previous involvement in the lead pigment and
lead-based paint businesses, there can be no assurance that additional
litigation, similar to that described below, will not be filed. In addition,
various legislation and administrative regulations have, from time to time, been
enacted or proposed that seek to (a) impose various obligations on present and
former manufacturers of lead pigment and lead-based paint with respect to
<PAGE>

asserted health concerns associated with the use of such products and (b)
effectively overturn court decisions in which NL and other pigment manufacturers
have been successful. Examples of such proposed legislation include bills which
would permit civil liability for damages on the basis of market share, rather
than requiring plaintiffs to prove that the defendant's product caused the
alleged damage. While no legislation or regulations have been enacted to date
which are expected to have a material adverse effect on NL's consolidated
financial position, results of operations or liquidity, the imposition of market
share liability could have such an effect. NL has not accrued any amounts for
the pending lead pigment and lead-based paint litigation. There is no assurance
that NL will not incur future liability in respect of this pending litigation in
view of the inherent uncertainties involved in court and jury rulings in pending
and possible future cases. However, based on, among other things, the results
of such litigation to date, NL believes that the pending lead pigment and lead-
based paint litigation is without merit. Liability that may result, if any,
cannot reasonably be estimated.

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

for summary judgment in several of the remaining cases. After such grant, only
two cases remain pending and have been inactive since 1992, Hall v. HANO, et al.
(No 89-3552) and Allen v. HANO, et al. (No. 89-427) Civil District Court for the
Parish of Orleans, State of Louisiana.

In June 1989 a complaint was filed in the Supreme Court of the State of New
York, County of New York, against the pigment manufacturers and the LIA.
Plaintiffs seek damages, contribution and/or indemnity in an amount in excess of
$50 million for monitoring and abating alleged lead paint hazards in public and
private residential buildings, diagnosing and treating children allegedly
exposed to lead paint in city buildings, the costs of educating city residents
to the hazards of lead paint, and liability in personal injury actions against
the City and the Housing Authority based on alleged lead poisoning of city
residents
(~The~City~of~New~York,~the~New~York~City~Housing~Authority~and~the~New~York~Cit
y~Health~and~Hospitals~Corp.~v.~Lead~Industries~Association,~Inc.,~et~al.~, No.
89-4617). In December 1991 the court granted the defendants' motion to dismiss
claims alleging negligence and strict liability and denied the remainder of the
motion. In January 1992 defendants appealed the denial. NL has answered the
remaining portions of the complaint denying all allegations of wrongdoing. In
May 1993 the Appellate Division of the Supreme Court affirmed the denial of the
motion to dismiss plaintiffs' fraud, restitution and indemnification claims. In
May 1994 the trial court granted the defendants' motion to dismiss the
plaintiffs' restitution and indemnification claims, and plaintiffs appealed. In
June 1996 the Appellate Division reversed the trial court's dismissal of
plaintiffs' restitution and indemnification claims, reinstating those claims.
Defendants' motion for summary judgment on the fraud claim was denied in August
1995. In December 1995 defendants moved for summary judgment on the basis that
the fraud claim was time-barred. In February 1996 the motion was denied. In
July 1997 the denial of defendants' two summary judgment motions on the fraud
claim were affirmed by the Appellate Division. Discovery is proceeding.

<PAGE>

In August 1992 NL was served with an amended complaint
in~Jackson,~et~al.~v.~The~Glidden~Co.,~et~al.~, Court of Common Pleas, Cuyahoga
County, Cleveland, Ohio (Case No. 236835). Plaintiffs seek compensatory and
punitive damages for personal injury caused by the ingestion of lead, and an
order directing defendants to abate lead-based paint in buildings. Plaintiffs
purport to represent a class of similarly situated persons throughout the State
of Ohio. The amended complaint identifies 18 other defendants who allegedly
manufactured lead products or lead-based paint, and asserts causes of action
under theories of strict liability, negligence per se, negligence, breach of
express and implied warranty, fraud, nuisance, restitution, and negligent
infliction of emotional distress. The complaint asserts several theories of
liability including joint and several, market share, enterprise and alternative
liability. In October 1992 NL and the other defendants moved to dismiss the
complaint with prejudice. In July 1993 the court dismissed the complaint. In
December 1994 the Ohio Court of Appeals reversed the trial court dismissal and
remanded the case to the trial court. In July 1996 the trial court granted
defendants' motion to dismiss the property damage and enterprise liability
claims, but denied the remainder of the motion. Discovery is proceeding with
respect to class certification.

In November 1993 NL was served with a complaint
in~Brenner,~et~al.~v.~American~Cyanamid,~et~al.~, (No. 12596-93) Supreme Court,
State of New York, Erie County alleging injuries to two children purportedly
caused by lead pigment. The complaint seeks $24 million in compensatory and $10
million in punitive damages for alleged negligent failure to warn, strict
liability, fraud and misrepresentation, concert of action, civil conspiracy,
enterprise liability, market share liability, and alternative liability. In
January 1994 NL answered the complaint, denying liability. Discovery is
proceeding.

In January 1995 NL was served with complaints in
~Wright~(Alvin)~and~Wright~(Allen)~v.~Lead~Industries,~et.~al.~, (Nos. 94-363042
<PAGE>

and 363043), Circuit Court, Baltimore City, Maryland. Plaintiffs are two
brothers (one deceased) who allege injuries due to exposure to lead pigment.
The complaints, as amended in April 1995, seek more than $100 million in
compensatory and punitive damages for alleged strict liability, negligence,
conspiracy, fraud and unfair and deceptive trade practices claims. In July 1995
the trial court granted, in part, the defendants' motion to dismiss, and
dismissed the plaintiffs' fraud and unfair and deceptive trade practices claims.
In June 1996 the trial court granted defendants' motions for summary judgement
on plaintiffs' conspiracy claim, and dismissed NL and certain other defendants
from the cases. In September 1996 the trial court granted the remaining
defendants' motions for summary judgment and in October 1997 the Maryland
Special Court of Appeals affirmed. Plaintiffs did not seek further review of
the dismissal of the conspiracy claims against NL and other defendants.
Plaintiffs' request for review of the affirmance of the dismissal of the
remaining defendants was denied by the Maryland Court of Appeals in February
1998.

In January 1996 NL was served with a complaint on behalf of individual
intervenors in~German,~et.~al.~v.~Federal~Home~Loan~Mortgage~Corp.,~et.~al.~,
(U.S. District Court, Southern District of New York, Civil Action No. 93 Civ.
6941 (RWS)). This alleged class action lawsuit had originally been brought
against the City of New York and other landlord defendants. The intervenors'
complaint alleges claims against NL and other former manufacturers of lead
pigment for medical monitoring, property abatement, and other injunctive relief,
based on various causes of action, including negligent product design, negligent
failure to warn, strict liability, fraud and misrepresentation, concert of
action, civil conspiracy, enterprise liability, market share liability, breach
of express and implied warranties, and nuisance. The intervenors purport to
represent a class of children and pregnant women who reside in New York City.
In May 1996 NL and the other former manufacturers of lead pigments filed motions
to dismiss the intervenors' complaint. In May 1997 plaintiffs moved for class
certification and defendants moved for summary judgment. In June 1997 the Court
<PAGE>

stayed all further activity in the case pending reconsideration of its 1995
decision permitting filing of the complaint against the manufacturer defendants
and joinder of the new complaint with the pre-existing complaint against New
York City and other landlords.

In April 1996 NL was served with a complaint in
~Gates~v.~American~Cyanamid~Co.,~et~al.,~(No. I1996-2114) Supreme Court, State
of New York, Erie County, alleging personal injury arising out of exposure to
lead pigment. Plaintiff seeks compensatory and punitive damages from NL, other
former lead pigment manufacturers and the LIA based on claims of negligence,
strict liability, fraud, concert of action, civil conspiracy, enterprise
liability, market share liability and alternative liability. Plaintiff also
asserts claims against the landlords of the apartments in which plaintiff has
lived since 1977. In July 1996 NL filed an answer denying plaintiff's
allegations of wrongdoing and liability. In November 1997 plaintiffs dismissed
this case with prejudice as to all defendants.

In April 1997 NL was served with a complaint in
~Parker~v.~NL~Industries,~et~al.~(Circuit~Court,~Baltimore~City,~Maryland,~No.~9
7085060~CC915).~Plaintiff, now an adult, and his wife, seek compensatory and
punitive damages from NL, another former manufacturer of lead paint and a local
paint retailer, based on claims of negligence, strict liability and fraud, for
plaintiff's alleged ingestion of lead paint as a child. In June 1997 NL
answered the complaint denying liability. In February 1998 the Court dismissed
the fraud claim. The case is set for trial in July 1998.

In January 1998 NL was served with an amended complaint
in~Adams~v.~NL~Industries,~Inc.,~et~al.,~(No.~A9701785)~, Court of Common Pleas,
Hamilton County, Ohio, alleging injury to a minor arising out of exposure to
lead, and seeking compensatory and punitive damages from NL, and other former
manufacturers of lead products and the LIA based on claims of negligence, strict
liability, breach of warranty, failure to warn, and nuisance. The amended
<PAGE>

complaint also asserts various claims against plaintiff's landlord. In February
1998 NL filed a motion to dismiss the action on procedural grounds. In March
1998 plaintiffs informed the Court that they intend to dismiss the complaint.

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

NL has filed actions seeking declaratory judgment and other relief against
various insurance carriers with respect to costs of defense and indemnity
coverage for certain of its environmental and lead pigment
litigation.~NL~Industries,~Inc.~v.~Commercial~Union~Insurance~Cos.,~et~al.~,
Nos. 90-2124, -2125 (HLS) (District Court of New Jersey). The action relating to
lead pigment litigation defense costs filed in May 1990 against Commercial Union
Insurance Company ("Commercial Union") seeks to recover defense costs incurred
in the ~City~of~New~York~lead pigment case and two other cases which have since
been resolved in NL's favor. In July 1991 the court granted NL's motion for
summary judgment and ordered Commercial Union to pay NL's reasonable defense
costs for such cases. In June 1992 NL filed an amended complaint in the United
States District Court for the District of New Jersey against Commercial Union
seeking to recover costs incurred in defending four additional lead pigment
cases which have since been resolved in NL's favor. In August 1993 the court
granted NL's motion for summary judgment and ordered Commercial Union to pay the
reasonable costs of defending those cases. In July 1994 the court entered
judgment on the order requiring Commercial Union to pay previously-incurred NL
costs in defending those cases. In September 1995 the U.S. Court of Appeals for
the Third Circuit reversed and remanded for further consideration the decision
by the trial court that Commercial Union was obligated to pay NL's reasonable
defense costs in certain of the lead pigment cases. The trial court had made
its decision applying New Jersey law; the appeals court concluded that New York
and not New Jersey law applied and remanded the case to the trial court for a
determination under New York law. On remand from the Court of Appeals, the
<PAGE>

trial court in April 1996 granted NL's motion for summary judgment, finding that
Commercial Union had a duty to defend NL in the four lead paint cases which were
the subject of NL's second amended complaint. The court also issued a partial
ruling on Commercial Union's motion for summary judgment in which it sought
allocation of defense costs and contribution from NL and two other insurance
carriers in connection with the three lead paint actions on which the court had
granted NL summary judgment in 1991. The court ruled that Commercial Union is
entitled to receive such contribution from NL and the two carriers, but reserved
ruling with respect to the relative contributions to be made by each of the
parties, including contributions by NL that may be required with respect to
periods in which it was self-insured and contributions from one carrier which
were reinsured by a former subsidiary of NL, the reinsurance costs of which NL
may ultimately be required to bear.

In June 1997 NL reached a settlement in principle with its insurers
regarding allocation of defense costs in the lead pigment cases in which
reimbursement of defense costs had been sought.

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

<PAGE>

~Other~litigation.~~Rhodes,~et~al.~v.~ACF~Industries,~Inc.,~et~al.~(Circuit
Court of Putnam County, West Virginia, No. 95-C-261). Twelve plaintiffs brought
this action against NL and various other defendants in July 1995. Plaintiffs
allege that they were employed by demolition and disposal contractors, and claim
that as a result of the defendants' negligence they were exposed to asbestos
during demolition and disposal of materials from defendants' premises in West
Virginia. Plaintiffs allege personal injuries and seek compensatory damages
totaling $18.5 million and punitive damages totaling $55.5 million. An
agreement has been reached settling this matter, with NL being indemnified by
another party.

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

In March 1997 NL was served with a complaint in
~Ernest~Hughes,~et~al.~v.~Owens-Corning~Fiberglass,~Corporation,~et~al.,~No.~97-
C-051,~filed in the Fifth Judicial District Court of Cass County, Texas, on
behalf of approximately 4,000 plaintiffs and their spouses alleging injury due
to exposure to asbestos and seeking compensatory and punitive damages. NL has
filed an answer denying the material allegations. The case has been stayed, and
the plaintiffs are refiling their cases in Ohio. NL is also a defendant in
approximately 1,000 additional asbestos cases pending in Ohio, the first of
which are scheduled for trial in the third quarter of 1998.

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

OTHER ITEMS:
~
~N~LI~Insurance~Limited~of~Vermont.~ The Company's captive insurance
subsidiary, NL Insurance Limited of Vermont ("NLIV"), reinsured certain
comprehensive general liability, auto liability, workers' compensation and
employers' liability risks to the Company, Baroid, NL and their respective
subsidiaries, and also participated on various third party reinsurance treaties.
As described in Note 10 to the Consolidated Financial Statements, Baroid and NL
have entered into insurance sharing agreements with NLIV whereby Baroid and NL,
respectively, would, among other things, reimburse NLIV for certain loss
payments and reserves. NLIV currently provides certain property and liability
insurance coverage to Tremont, TIMET and NL. However, the risk associated with
these policies are completely reinsured into the commercial reinsurance market.
All of the Company's unrelated reinsurance business is in run-off. In 1994,
Baroid was acquired by Dresser.

~Other~joint~ventures.~Prior to October 1995, TIMET held 32% of the
outstanding common stock of Basic Investments, Inc. ("BII"). Through its
subsidiaries, including Basic Management, Inc. ("BMI") and Victory Valley Land
Company, L.P. ("VVLC"), BII provides utility services to, and owns property (the
"BMI Complex") adjacent to, TIMET's plant in Henderson, Nevada, a suburb of Las
Vegas. BII, through VVLC, is actively engaged in efforts to develop for
commercial, industrial, and residential purposes approximately 3,000 acres of
land surrounding the BMI Complex. TIMET had a 12% limited partnership interest
in VVLC, which it acquired in exchange for certain water rights transferred to
VVLC. A wholly-owned subsidiary of BII and the other stockholders of BII own
the balance of the partnership interests in VVLC. In October 1995, TIMET made a
pro rata distribution to its shareholders of a newly formed entity ("TRECO")
which held all of its interest in BII and VVLC, and certain real estate in
Nevada. As a result, Tremont holds a 75% equity interest in TRECO.

<PAGE>

REGULATORY AND ENVIRONMENTAL MATTERS:

Regulatory and environmental matters for TIMET and NL are discussed in
their respective business sections contained elsewhere herein and in Item 3 -
"Legal Proceedings." In addition, the information included in Note 11 to the
Consolidated Financial Statements is incorporated herein by reference.

In 1993, the Company entered into a settlement agreement with the Arkansas
Division of Pollution Control and Ecology in connection with certain alleged
water discharge permit violations at one of several abandoned barite mining
sites in Arkansas. The settlement agreement, in addition to requiring the
payment in 1993 of a $20,000 penalty, required the Company to undertake a
remediation/reclamation program which is nearing completion at a total cost of
approximately $2 million. Another of the sites is currently being evaluated by
the U.S. EPA. Based upon its evaluation, the U.S. EPA could require the owners
to take investigatory or remedial action at this site, however, the Company
believes that to the extent it has any liability for remediation at this site,
it is only one of a number of apparently solvent PRPs that would ultimately
share in such costs. As of December 31, 1997, the Company had accrued $5.3
million related to these matters.

that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance
that additional environmental matters will not arise in the future. However,
the Company currently believes the disposition of all environmental matters,
individually or in the aggregate, should not have a material adverse effect on
the Company's business, results of operations, financial condition, or cash
flow.

The Company, TIMET and NL adopted the recognition and disclosure
requirements of AICPA's Statement of Position No. 96-1, "Environmental
Remediation Liabilities" ("SOP 96-1"), in 1997. SOP 96-1, among other things,
expands the types of costs which must be considered in determining environmental
remediation accruals. The effect of adopting SOP 96-1 by Tremont and TIMET was
not material. NL's effect of adopting SOP 96-1 is discussed above under
"Unconsolidated Affiliate - NL - Regulatory and Environmental Matters", and in
Note 11 to the Consolidated Financial Statements, which information is
incorporated herein by reference.

<PAGE>

ITEM 2: PROPERTIES

The Company's principal executive offices are leased and located at 1999
Broadway, Suite 4300, Denver, Colorado 80202.

The principal properties used in the operations of TIMET and NL are
described in their respective business sections of Item 1 - "Business." The
Company believes, and understands that TIMET and NL believe, that their
respective facilities are adequate and suitable for their respective uses.

ITEM 3: LEGAL PROCEEDINGS

The Company, TIMET and NL are involved in various legal proceedings.
Information called for by this Item, except for information regarding certain of
TIMET's and NL's legal proceedings that have been summarized, is included in
Item 1 and Note 11 to the Company's Consolidated Financial Statements, which
information is incorporated herein by reference. Information called for by this
Item regarding TIMET's and NL's legal proceedings that have been summarized in
Item 1 and Note 11 to the Company's Consolidated Financial Statements is
included in Item 3 of TIMET's and NL's Annual Report on Form 10-K for the year
ended December 31, 1997 as Exhibits 99.1 and 99.2, respectively, of this Annual
Report on Form 10-K, and are incorporated herein by reference.

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

No matters were submitted to a vote of security holders during the quarter
ended December 31, 1997.

<PAGE>

PART II

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

Tremont's common stock is traded on the New York and Pacific Stock
Exchanges (symbol: TRE). As of February 28, 1998, there were approximately
6,700 holders of record of Tremont common stock. On March 25, 1998, the closing
price of the Company's common stock according to the New York Stock Exchange
Composite Tape was $59.00 per share. The high and low sales prices for the
Company's common stock, according to the NYSE Composite Tape, are set forth
below.

<PAGE>

<TABLE>
<CAPTION>
<S> High Low
~Year~ended~December~31,~1997:~ <C> <C>
First quarter 36.875 30.250
Second quarter 44.875 34.875
Third quarter 58.500 42.750
Fourth quarter 58.500 49.625

~Year~ended~December~31,~1996:~
First quarter $34.000 $15.500
Second quarter 40.750 28.000
Third quarter 36.000 31.125
Fourth quarter 39.125 32.000
</TABLE>

<PAGE>

The Company has not declared any cash dividends on its common stock since
1992. Any payment of future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, the
Company's earnings, financial condition, cash requirements for its businesses,
cash availability and contractual restrictions with respect to payment of
dividends.

ITEM 6: SELECTED HISTORICAL FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<PAGE>

<TABLE>
<CAPTION>
<S> Years ended December 31,

1993 1994 1995 1996 1997
(In millions)
INCOME STATEMENT DATA:
Equity in earnings (loss) of: <C> <C> <C> <C> <C>
TIMET $ (20.2) $ (31.6) $ (3.2) $ 16.0 $25.2
NL Industries (44.8) (7.6) 11.4 (1.8) (5.1)
Other joint ventures - - - 2.5 5.2

$ (65.0) $ (39.2) $ 8.2 $ 16.7 $25.3

Gain on sale of TIMET stock $ - $ - $ - $ 27.6 $ -

Income (loss) from:
Continuing operations $ (60.1) $ (42.9) $ 5.4 $ 30.0 $13.6
Discontinued operations (a) 7.5 - - - -
Extraordinary item (b) (5.0) - - - -
Cumulative effect of changes in
accounting principles (c) - (.8) - - -

$ (57.6) $ (43.7) $ 5.4 $ 30.0 $13.6

Earnings per basic share:
Continuing operations $ (8.18) $ (5.83) $ .73 $ 4.05 $ 1.92
<PAGE>

Net income (loss) (7.84) (5.93) .73 4.05 1.92

Earnings per diluted share:
Continuing operations $ (8.18) $ (5.83) $ .70 $ 3.90 $ 1.76
Net income (loss) (7.84) (5.93) .70 3.90 1.76

Cash dividends declared $ - $ - $ - $ - $ -

BALANCE SHEET DATA (at year end):
Cash and cash equivalents $ 2.2 $ 3.8 $ 2.7 $ 68.0 $ 38.0
Total assets 161.4 116.8 134.9 223.5 215.0
Indebtedness - - 6.0 - -
Stockholders' equity 118.4 76.0 83.7 158.0 136.3
____________________
<FN>
(a) The Company's bentonite mining business was sold during 1993.
(b) Represents the Company's equity in NL's extraordinary item related to early extinguishment of debt.
(c) Represents the Company's equity in a TIMET accounting change.
</TABLE>

<PAGE>

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

RESULTS OF OPERATIONS

Tremont Corporation is principally a holding company with operations
conducted through TIMET and NL. The Company's 1997 reported earnings declined
primarily because 1996 included a one-time gain on sale of TIMET common stock in
the TIMET Stock Offering. However, the Company's net equity in earnings of
affiliates increased over 1996 due to improved results at TIMET and higher land
sales at VVLC, offset in part by a loss at NL. NL's 1997 loss included a $30
million noncash charge related to the implementation of SOP 96-1. The Company's
1996 reported earnings improved significantly from 1995 primarily due to
improved earnings of TIMET and the gain on the sale of TIMET common stock. The
results of TIMET, NL, general corporate and other items are discussed below.

~TIMET:
~
The Company's 30% interest in TIMET is reported by the equity method.
Tremont's equity in TIMET's 1996 earnings differs from the amount that would be
expected by applying Tremont's current 30%-ownership percentage to TIMET's
separately-reported earnings because of changes in Tremont's level of ownership
in TIMET from 75% to 30% during 1996. The information included below relating
to the financial position, results of operations and liquidity and capital
resources of TIMET has been summarized from reports filed with the Commission by
TIMET (File No. 0-28538), which reports contain more detailed information
concerning TIMET, including complete financial statements.

<PAGE>

~General.~~~The aerospace industry in recent history has accounted for
approximately two-thirds of U.S. and 40% to 50% of worldwide titanium mill
products consumption, and has had a significant effect on the overall sales and
profitability of the titanium industry. The aerospace industry, and
consequently the titanium metals industry, is highly cyclical. TIMET and the
industry were significantly and adversely affected during the early 1990s by
excess worldwide production capacity, depressed levels of spending for both
military and commercial aircraft, and depressed selling prices resulting from,
among other things, weak demand and relatively inexpensive titanium scrap,
sponge and other mill products, principally from the FSU. TIMET estimates that
worldwide industry shipments of titanium mill products were relatively flat in
the period between 1991 and 1994, increased 21% in 1995, 18% in 1996 and further
increased 14% in 1997, to approximately 60,000 metric tons. TIMET also
estimates that industry mill product shipments to the commercial aerospace
market in 1997 approximated 20,000 metric tons, a 20% increase over 1996 levels
following a 34% increase in 1996.

TIMET's order backlog increased to approximately $530 million at December
31, 1997, from $440 million at December 31, 1996.

Beginning in the second half of 1995 and continuing through 1997, TIMET
experienced a significant increase in requests for quotations, increased orders
and increased prices on accepted orders resulting in an increase in average mill
product prices of 14% in 1997 following a 16% increase in 1996. Prices for 1998
have generally flattened, in part due to the price stabilizing influence of the
Boeing Agreement. Growth in TIMET's earnings over the next few years is
expected to be primarily dependent upon volume increases and productivity
improvements rather than higher prices.

TIMET expects to operate its plants at or near practical capacity in 1998.
Due to the volume increases that TIMET expects as a result of the Boeing
Agreement, expected continued growth in industrial markets and emerging uses of
<PAGE>

titanium, TIMET is adding additional melting and forging capacity during 1998
that should be more cost effective than certain present capacity and would
replace existing equipment in the event of a downturn.

While aircraft production rates and backlogs appear to indicate a longer,
flatter aerospace cycle than previous cycles, TIMET believes that customers have
built inventories based on expected further increases in aircraft production
rates that were later modified. As a result, TIMET believes there is some
excess titanium in the aerospace production system that could result in push out
of some shipments to customers and some order cancellations as customers adjust
their inventories in the short term.

Certain current initiatives to invest in TIMET's future are expected to
result in higher expenses in 1998, with benefits not fully realized until 1999
or beyond. Spending in 1998 for research and development, other corporate
development activities related to development of new markets and expenses
related to TIMET's enterprise-wide business process/information systems (SAP)
project and related upgrade of information technology infrastructure are
expected to be higher than in 1997.

As a result of certain systems being designed to use two digits rather
than four to define the applicable year, certain of TIMET's information and
manufacturing systems have date-sensitive software and hardware that may
recognize a date using "00" as the year 1900 rather than the year 2000 (the
"Year 2000 Issue"). This could result in system failures or miscalculations
resulting in disruptions of manufacturing or other normal business activities.

Many of TIMET's information systems are being replaced in connection with
the implementation of SAP which is expected to be completed in 1999. SAP is
Year 2000 compliant. TIMET is in process of expediting its remaining portfolios
of non-compliant software and hardware and expects to complete this process in
1999. TIMET preliminarily estimates that the costs, excluding the
<PAGE>

implementation of SAP, to address the Year 2000 Issue could be over $6 million,
which is expected to be incurred primarily from mid-1998
through mid-1999.

<PAGE>

<TABLE>
<CAPTION> Years ended December 31,

1995 1996 1997
(In millions)
<S> <C> <C> <C>
Net Sales $ 184.7 $ 507.1 $ 733.6

Operating income $ 5.4 $ 59.8 $ 133.0
General corporate income, net 1.0 1.0 4.2
Interest expense 10.4 9.0 2.0

Pretax income (loss) (4.0) 51.8 135.2

Income taxes .2 2.3 41.0
Minority interest - Convertible Preferred Securities - .8 8.9
Other minority interest - 1.1 2.3

Net income (loss) $ (4.2) $ 47.6 $ 83.0

Tremont's equity in TIMET's income (loss) $ (3.2) $ 16.0 $ 25.2

</TABLE>

<PAGE>

~ Sales~and~Operating~Income.~~~All mill products price and volume
comparisons in this discussion are pro forma assuming the IMI Titanium
Acquisition and the AJM Acquisition, both completed during 1996, had occurred at
the beginning of 1995. The pro forma effect of other acquisitions on price and
volume information is not material.

The significant improvements in sales, operating income and operating
margins in 1997 over 1996 and in 1996 over 1995 were driven by price and volume
increases for titanium products in both commercial aerospace and other markets.
Sales volume of titanium mill products increased 15% in 1997, to approximately
15,000 metric tons, following a 27% increase in 1996. Average selling prices in
1997 were approximately 14% over 1996, which were up approximately 16% over
1995. The selling price increases reflect both the pass-through of cost
increases, particularly raw material costs, and real price improvement
associated with increased market demand.

Operating levels at TIMET's plants in both 1997 and 1996 were generally
higher than in the respective prior year and contributed to the improved
operating results. The VDP titanium sponge plant operated at approximately 85%
of its annual practical capacity in both 1997 and 1996 and 75% in 1995. TIMET
restarted production of titanium sponge at its original Kroll-leach facility
during the second quarter of 1996 in response to demand for certain grades of
titanium sponge, and further increased production levels in 1997. In 1997,
TIMET's worldwide mill product capacity utilization approximated 85%, up from
80% in 1996 and 45% in 1995.

TIMET has substantial operations and assets located in Europe, principally
the United Kingdom. The U.S. dollar value of TIMET's foreign sales and
operating costs are subject to currency exchange rate fluctuations which may
slightly impact reported earnings and may affect the comparability of period-to-
period operating results. Approximately one-half of TIMET's European sales are
<PAGE>

denominated in currencies other than the U.S. dollar, principally major European
currencies. Certain purchases of raw materials, principally titanium sponge,
for TIMET's European operations are denominated in U.S. dollars, while labor and
other production costs are primarily denominated in local currencies.

~ Interest~Expense.~~~Interest expense declined in both 1997 and 1996
principally due to relative average borrowing levels.

~ Minority~Interest.~~~Annual dividend expense related to the 6.625%
Convertible Preferred Securities, issued in November 1996, approximates $13.6
million, including amortization of financing costs, and is reported as minority
interest net of allocable income taxes. Other minority interest relates
primarily to the 30% interest in TIMET Savoie held by CEZUS.
~
~ ~Income~Taxes.~~TIMET's income tax rate in 1997 and 1996 varied from the
U.S. statutory rate principally due to reductions in the deferred tax valuation
allowance related to current year utilization of tax attributes and, in 1996, a
$10 million reduction in the deferred tax valuation allowance resulting from a
change in estimate of the net operating loss carryforwards and alternative
minimum tax carryforwards that would more likely than not be realized in the
future. TIMET's effective income tax rate in 1995 varied from the U.S.
statutory rate due primarily to losses for which recognition of a deferred tax
asset was not considered appropriate at the time.

~ ~TIMET operates in several tax jurisdictions and is subject to varying
income tax rates. For financial reporting purposes, TIMET has recognized
substantially all of its carryforwards and, accordingly, expects that its
effective income tax rate beginning in 1998 will increase and more closely
approximate the U.S. federal statutory rate.

<PAGE>

~NL~INDUSTRIES,~INC.:
~
The Company's 18% interest in NL is reported by the equity method. Tremont
reports its 18% interest in NL by the equity method due to the fact that Tremont
and NL may be deemed to be under common control by reason of stock ownership and
common directors and executive officers. Valhi, Inc. and Tremont together may
be deemed to control NL. The information included below relating to the
financial position, results of operations and liquidity and capital resources of
NL has been summarized from reports filed with the Commission by NL (File No. 1-
640), which reports contain more detailed information concerning NL, including
complete financial statements on NL's historical basis of accounting.

Tremont's equity in earnings of NL differs from the amount that would be
expected by applying Tremont's ownership percentage to NL's separately-reported
earnings because of the effect of amortization of purchase accounting
adjustments made by Tremont in conjunction with the acquisitions of its interest
in NL. Amortization of such basis differences generally reduces earnings, and
increases losses, attributable to NL as reported by Tremont.

NL's continuing operations are conducted by Kronos in the TiO2 business
segment. As discussed below, average TiO2 selling prices declined in 1996 and
1997 compared to the prior year, but average selling prices increased during
each of the last three quarters of 1997 compared to the immediately preceding
quarter. Kronos' operating income and margins declined during 1996, but
improved in 1997.

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

<PAGE>

<TABLE><CAPTION>
Years ended December 31, Change

1995 1996 1997 1995-96 1996-97
(In millions)
<S> <C> <C> <C> <C> <C>
Net sales - Kronos $ 894.1 $ 851.2 $837.2 -5% -2%

Operating income - Kronos $ 161.2 $ 71.6 $ 82.5 -56% +15%
General corporate items:
Securities earnings 7.4 4.7 5.4
Corporate expenses, net (26.6) (17.2) (49.8)
Interest expense (75.7) (69.3) (65.8)

Pretax income (loss) 66.3 (10.2) (27.7) $ 76.5 $ (17.5)

Income taxes (.3) 1.5 2.3
Minority interest .1 - (.1)
Discontinued operations - Rheox 19.1 22.5 20.4

Net income (loss) $ 85.6 $ 10.8 $ (9.5) $ 74.8 $ (20.3)

Tremont's equity in
earnings (loss) of NL,
including amortization of
basis differences $ 11.4 $ (1.8) $ (5.1) $ 13.2 $ (3.3)

Percent change in TiO2

<PAGE>

Sales volume +6% +10%
Average selling prices (in billing -9% -4%
currencies)

</TABLE>

<PAGE>

Kronos' operating income for 1997 increased on record production and sales
volumes and $12.9 million of income resulting from the refunds of German trade
capital taxes related to prior years, offset by lower average TiO2 selling
prices compared to 1996. In billing currency terms, Kronos' 1997 average TiO2
selling prices were 4% lower than in 1996. Average selling prices in the fourth
quarter of 1997 were 10% higher than the fourth quarter of 1996 and were 5%
higher than the third quarter of 1997. Selling prices at the end of 1997 were
12% higher than year-end 1996 levels, 7% higher than the average for 1997 and
were 1% higher than the average selling prices for the fourth quarter of 1997.
Kronos' operating income in 1996 was lower than 1995, primarily due to 9% lower
average TiO2 selling prices, partially offset by higher sales volumes.

Kronos' 1997 operating income includes $12.9 million of income resulting
from German trade capital tax refunds related to prior years, including
interest. The German tax authorities were required to remit refunds based on
(i) recent court decisions which resulted in reducing the trade capital tax base
and (ii) prior agreements between NL and the German tax authorities regarding
payment of disputed taxes.

<PAGE>

Kronos' cost of sales in 1997 was lower than 1996 due to the favorable
effects of foreign currency translation and lower unit costs, primarily due to
higher production levels, partially offset by higher sales volumes. Kronos'
cost of sales in 1996 was higher than 1995 due to higher sales volumes and
higher unit costs, primarily due to lower production levels. As a percentage of
net sales, cost of sales decreased in 1997 primarily due to lower unit costs and
increased in 1996 primarily due to the impact on net sales of decreased average
selling prices.

Kronos' selling, general and administrative expenses declined in 1997 from
the previous year due to favorable effects of foreign currency translation and
German trade capital tax refunds, partially offset by higher distribution
expenses associated with higher 1997 sales volumes, while 1996 expenses were
lower than 1995 as a result of continuing cost containment efforts.

Record sales volume of 427,000 metric tons of TiO2 in 1997 was 10% higher
than 1996, with improvements in all major markets, including a 12% increase in
Europe. Approximately one-half of Kronos' 1997 TiO2 sales, by volume, were
attributable to markets in Europe with approximately 36% attributable to North
America, approximately 5% to Asia and the balance to other regions.

Strong demand growth during 1994 and the first half of 1995 allowed Kronos
to maintain full capacity production rates in 1995. Kronos believes that the
increased demand was partially due to customers stocking inventories. In the
second half of 1995 and first half of 1996, customers reduced inventory levels,
which reduced industry-wide demand and Kronos responded by reducing production
rates. Kronos' average capacity utilization was approximately 95% in 1996.
Demand improved in the second half of 1996 and throughout 1997. Kronos produced
at near full capacity in 1997.

<PAGE>

Pricing of TiO2 has historically been cyclical. Kronos anticipates its
TiO2 operating income and margins will continue to improve in 1998 compared to
1997 as the impact of announced TiO2 price increases take effect. Demand for
TiO2 in 1997 increased over 1996 and Kronos expects demand will increase in
1998, although Kronos' 1998 sales volume is expected to be slightly lower as a
result of Kronos' lower inventory levels at the beginning of the year. Kronos
believes continued growth in demand should result in significant improvement in
average selling prices over the longer term.

<PAGE>

NL has substantial operations and assets located outside the United States
(principally Germany, Norway, Belgium and Canada). The U.S. dollar translated
value of NL's foreign sales and operating costs is subject to currency exchange
rate fluctuations which may slightly impact reported earnings and may affect the
comparability of period-to-period revenues and expenses. A significant amount
of NL's sales are denominated in currencies other than the U.S. dollar (67% in
1997), principally major European currencies and the Canadian dollar. Certain
purchases of raw materials, primarily titanium-containing feedstocks, are
denominated in U.S. dollars, while labor and other production costs are
primarily denominated in local currencies. Fluctuations in the value of the
U.S. dollar relative to other currencies decreased sales by $12 million and $58
million during 1996 and 1997, respectively, compared to the year-earlier period.
Fluctuation in the value of the U.S. dollar relative to other currencies
similarly impacted NL's operating expenses and the net impact of currency
exchange rate fluctuations on operating income comparisons was not significant
in 1996 or 1997.

Securities earnings fluctuate in part based upon the amount of funds
invested and yields thereon. Corporate expenses, net in 1997 exceeded that of
1996, primarily due to the $30 million noncash charge related to NL's adoption
of SOP 96-1. Corporate expenses, net in 1996 were lower than 1995 due to lower
provisions for environmental remediation cost. In 1998 NL expects corporate
expenses, net will be lower than 1997 due to the absence of the $30 million
noncash charge.

Interest expense declined in 1997 from 1996 due to lower levels of Kronos'
Deutsche mark-denominated debt, partially offset by higher variable interest
rates on such debt. Interest expense in 1996 declined compared to 1995
principally due to lower interest rates on variable rate debt, principally
Kronos' DM-denominated debt, partially offset by higher levels of such debt.
Interest expense in 1998 is expected to be lower compared to 1997 due to lower

<PAGE>

expected levels of outstanding indebtedness, including required payments on the
DM term loan and anticipated prepayments of the joint venture term loan.

NL's operations are conducted on a worldwide basis and the geographic mix
of income can significantly impact NL's effective income tax rate. In 1996 and
1997, the geographic mix of income, including losses in certain jurisdictions
for which no current refund was available and recognition of a deferred tax
asset was not considered appropriate, contributed to NL's effective tax rate
varying from a normally-expected rate.

Due to NL's higher U.S. earnings before taxes in 1995, NL changed its
estimate of the future tax benefit of certain U.S. tax credits which NL believes
satisfies the "more-likely-than-not" recognition criteria. Accordingly, NL's
valuation allowance was reduced by approximately $10 million. During 1995 NL
also recorded deferred tax benefits of $6.6 million due to the reduction in
dividend withholding tax rates pursuant to ratification of the U.S./Canada
income tax treaty.

~TREMONT:
~
The Company's per share net carrying amount of its investment in NL at
December 31, 1997 was about $1.74 per share, compared to a quoted per share
market value of $13.625 at that date. The Company's per share net carrying
value of its investment in TIMET at December 31, 1997 was about $13.00 per
share, compared to a quoted per share market price of $28.875 at that date.

~Corporate~expenses,~net~and~other~items.~~Tremont's corporate expenses,
net for 1997 include $2.7 million of interest earned on short-term investments
and a $1.2 million gain on sale of a certain oil and gas production well
interest. Tremont's corporate expenses, net for 1996 include a $2 million
special compensation accrual to an executive officer of the Company as approved

<PAGE>

by the Company's Board of Directors. Certain amounts of this award have been
deferred under an agreement between the Company and the executive officer.~
~
In connection with TIMET's Stock Offering in June 1996, the Company sold
2.2 million shares of TIMET common stock with net proceeds of approximately $47
million, resulting in a pre-tax gain of $27.6 million.

~Income~taxes.~The Company's income tax rate in 1997 varied from the U.S.
statutory rate principally due to no tax benefit being recognizable on equity in
losses from its investment in NL. The variance in rates in 1996 was principally
due to a reduction in the deferred tax valuation allowance to reflect the
current utilization of its U.S. NOLs and in 1995 to a reduction in the valuation
allowance related to no income tax provision being required on equity in
earnings of NL.

LIQUIDITY AND CAPITAL RESOURCES

~Tremont~Corporation~

The Company had cash and cash equivalents of $38 million at December 31,
1997, down from $68 million at the end of 1996. The $30 million decrease in
cash during 1997 was the result of cash used in the stock repurchase program
discussed below.

Tremont's 9.5 million shares of TIMET common stock and 9.1 million shares
of NL common stock had a quoted market value of about $275 million and $124
million, respectively, at December 31,1997. Tremont also has the right to
acquire 1.5 million shares of TIMET common stock from IMI (such shares had a
year-end market value of $43 million) for a purchase price of $12 million. At
December 31, 1997, Tremont also had approximately $15 million of letters of
credit outstanding under a third party credit agreement.

<PAGE>

The Company's equity in earnings of affiliates are primarily noncash. The
Company received a $1 million cash distribution from VVLC in 1997 primarily to
cover taxes associated with VVLC's income from land sales. NL paid no cash
dividends in 1995 or 1997 and paid three quarterly cash dividends during 1996 at
the rate of $.10 per NL share per quarter aggregating $2.7 million. NL is
currently unable to pay dividends due to restrictions under certain of its debt
agreements. TIMET did not pay any cash dividends during 1995, 1996 or 1997.
TIMET's bank credit agreement generally limits dividend payments to
approximately 25% of net income and TIMET's Convertible Preferred Securities may
also, under certain circumstances, limit TIMET's ability to pay dividends. See
Note 4 to the Consolidated Financial Statements.

In February 1997, Tremont's Board of Directors authorized the repurchase
of up to 2 million shares of Tremont common stock in open market or privately
negotiated transactions. Such shares represented approximately 27% of the
Company's 7.5 million shares then outstanding. During 1997 the Company
repurchased 787,100 common shares of its stock for approximately $32.1 million
($40.77 average per share) pursuant to this repurchase program. The repurchased
shares will be added to the Company's treasury and could be used for future
acquisitions or other corporate purposes.

The Company's $65 million increase in cash and cash equivalents during 1996
was primarily the result of the Company's sale of TIMET common stock and TIMET's
repayment of loans to the Company from proceeds of TIMET's Stock Offering.

In 1995, Tremont borrowed $2.5 million under a margin loan with an
investment bank which was repaid in 1996. Tremont also entered into a $15
million revolving credit agreement with Contran Corporation in 1995. Tremont
repaid the loan from Contran in 1996 and terminated the agreement.

The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
<PAGE>

alternative uses of capital, its debt service requirements, the cost of debt and
equity capital, and estimated future operating cash flows. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, modify its dividend policy, restructure ownership interests
of subsidiaries and affiliates, incur indebtedness, repurchase shares of capital
stock, consider the sale of interests in subsidiaries, affiliates, marketable
securities or other assets, or take a combination of such steps or other steps
to increase or manage its liquidity and capital resources. In the normal course
of business, the Company may investigate, evaluate, discuss and engage in
acquisition, joint venture and other business combination opportunities. In the
event of any future acquisition or joint venture opportunities, the Company may
consider using available cash, issuing equity securities or incurring
indebtedness.

As previously reported, based upon the technical provisions of the
Investment Company Act of 1940 (the "1940 Act") and Tremont's ceasing to own a
majority of TIMET's common stock following the IMI Titanium Acquisition by TIMET
in February 1996, Tremont might arguably be deemed to have become an "investment
company" under the 1940 Act, despite the fact that Tremont does not now engage,
nor has it engaged or intended to engage in the business of investing,
reinvesting, owning, holding or trading of securities. Tremont has taken the
steps necessary to give itself the benefits of a temporary exemption under the
1940 Act and has sought an order from the Commission that Tremont is primarily
engaged, through TIMET and NL, in a non-investment company business. The
Company believes another exemption may be currently available to it under the
1940 Act should the Commission deny Tremont's application for an exemptive
order.

See "Results of Operations" and Note 11 to the Consolidated Financial
Statements for additional matters affecting the Company's liquidity and capital
resources.
~
<PAGE>

TIMET
~
Summarized balance sheet and cash flow information of TIMET is presented
below.

<PAGE>

<TABLE>
<CAPTION>
December 31,

1996 1997

(In millions)
<S> <C> <C>
Cash and cash equivalents $ 86.5 $ 69.0
Other current assets 284.5 344.8
Goodwill and other intangible assets 86.7 77.7
Other noncurrent assets 25.7 39.2
Property and equipment, net 219.6 262.4

$ 703.0 $ 793.1

Current liabilities $ 112.8 $ 123.8
Long-term debt and capital lease obligations 12.8 11.5
Accrued OPEB cost 27.5 26.2
Other noncurrent liabilities 18.3 14.8
Minority interest - Convertible Preferred Securities 201.2 201.2
Other minority interest 4.2 6.7
Stockholders' equity 326.2 408.9

$ 703.0 $ 793.1

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Years ended December 31,

1995 1996 1997

<S> In millions)
Net cash provided (used) by: <C> <C> <C>
Operating activities $ (6.1) $ (.7) $ 72.6
Investing activities:
Capital expenditures (3.0) (21.7) (66.3)
Business acquisitions - (109.9) (.5)
Other, net .5 .2 (13.0)
Financing activities:
Net borrowings (repayments) 7.5 (108.2) (5.8)
Issuance of common stock, net - 131.5 -
Issuance of Convertible Preferred
Securities, net - 192.4 -
Other, net 1.1 (.6) (4.0)
Cash acquired and currency translation - 3.5 (.6)

$ - $ 86.5 $ (17.6)

Cash paid for:
Interest expense $ 10.0 $ 9.0 $ 2.2
Convertible Preferred Securities dividends - - 13.5
Income taxes .1 6.3 22.5

</TABLE>

<PAGE>

At December 31, 1997, TIMET had $69 million of cash and equivalents and
$220 million of borrowing availability under its U.S. and European bank credit
lines. Indebtedness consisted primarily of capital lease obligations related to
certain of its European manufacturing facilities and a relatively nominal amount
of European working capital borrowings. The Convertible Preferred Securities do
not require principal amortization and TIMET has the right to defer interest
payments for one or more periods of up to 20 consecutive quarters.

~Operating~Activities.~Reflecting improved operating results, cash provided
by operating activities (before changes in assets and liabilities) was $121
million in 1997 compared to $53 million in 1996 and $4 million in 1995. Changes
in assets and liabilities used $49 million of cash in 1997, $54 million in 1996
and $10 million in 1995 reflecting the higher levels of working capital
necessary to support the higher production and sales levels. One of TIMET's
goals is to better manage working capital such that both "days sales
outstanding" in receivables and "days sales in inventory" improve in 1998 over
1997.

~Investing~Activities.~~~~~TIMET's capital expenditures were $66 million in
1997, up from $22 million in 1996 and $3 million in 1995. About one-third of
capital expenditures in 1997 relate to capacity expansion projects, the largest
of which include a 10,000 metric ton annual capacity electron beam furnace in
the U.S. and a rotary forge press in the U.K., both to be completed by the
second half of 1998. Capital spending in 1997 related to the major SAP project
to implement integrated information systems throughout TIMET, expected to be
completed in 1999, approximated $12 million. Certain significant costs
associated with the SAP systems project, including training and reengineering,
are expensed as incurred. The companies acquired during 1996 accounted for $10
million of the $19 million increase in capital spending over 1995, with much of
the remaining increase resulting from projects deferred in prior years.

<PAGE>

TIMET estimates capital expenditures in 1998 will total $110 million to
$120 million, approximately 60% of which is related to the capacity expansion
projects associated with volume expected under long-term customer agreements.
In addition, the $24 million Loterios acquisition is expected to close in April
1998.

Other cash investments in 1997 include $8 million of cash contributions in
connection with the formation of ValTimet and otherwise consist principally of
TIMET's investments in companies developing new markets and uses for titanium.

Acquisitions, principally the IMI Titanium Acquisition and AJM acquisition,
aggregated $180 million in 1996 ($110 million cash; $70 million stock). TIMET
believes these acquisitions augmented TIMET's scale and geographic reach and
increased its production flexibility. In addition, the acquisition of the scrap
processing business enhanced TIMET's flexibility in optimizing its mix of its
raw material purchases.

~Financing~Activities.~Debt repayments in 1997 relate primarily to
reductions in European working capital borrowings, including amounts due to
TIMET's minority partner in Timet Savoie.

TIMET's net proceeds from the initial public offering in June 1996
approximated $131 million. TIMET used approximately $125 million of such net
proceeds to repay existing indebtedness, including amounts owed to Tremont.
TIMET received net proceeds of approximately $192 million from the sale of the
Convertible Preferred Securities by TIMET Capital Trust I in November 1996.
TIMET used approximately $96 million of such net proceeds to prepay indebtedness
incurred in conjunction with the AJM Acquisition.

Reductions of indebtedness in 1995 included installments on bank term debt
and payment of the final installment due on the note associated with TIMET's
purchase of its original 50% interest in THT in 1992.
<PAGE>

TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, its debt service requirements, the cost of debt and equity capital,
and estimated future operating cash flows. As a result of this process, TIMET
has in the past and may in the future seek to raise additional capital, modify
its dividend policy, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of capital stock, sell assets, or
take a combination of such steps or other steps to increase or manage its
liquidity and capital resources. In the normal course of business, TIMET
investigates, evaluates, discusses and engages in acquisition, joint venture,
strategic relationship and other business combination opportunities in the
titanium, specialty metal and related industries. In the event of any future
acquisition or joint venture opportunities, TIMET may consider using available
cash, issuing equity securities or incurring additional indebtedness.
~
NL~Industries
~ Summarized balance sheet and cash flow information of NL is presented
below.

<PAGE>

<TABLE>
<CAPTION>
December 31,

1996 1997

(In millions)
<S> <C> <C> <C>
Cash and cash equivalents $ 114.1 $ 106.1
Other current assets 386.1 348.4
Noncurrent securities 23.7 17.3
Investment in joint ventures 181.5 172.7
Other noncurrent assets 49.9 42.5
Property and equipment, net 466.0 411.2

$ 1,221.3 $ 1,098.2

Current liabilities $ 290.4 $ 276.4
Long-term debt 737.1 666.8
Deferred income taxes 151.2 132.8
Accrued postretirement benefits cost 55.9 51.0
Environmental liabilities 106.8 125.5
Other noncurrent liabilities 83.2 67.7
Minority interest .2 .3
Shareholders' deficit:
Capital and retained earnings (84.3) (92.8)
Adjustments, principally foreign
currency translation (119.2) (129.5)

(203.5) (222.3)

<PAGE>

$ 1,221.3 $ 1,098.2

Years ended December 31,

1995 1996 1997

(In millions)
Net cash provided (used) by:
Operating activities $ 71.5 $ 16.5 $ 89.2
Investing activities:
Capital expenditures (60.7) (64.2) (28.3)
Other, net (1.5) (3.4) 16.0
Financing activities:
Net borrowings (repayments) 26.9 65.1 (182.2)
Dividends and other, net (30.2) (38.5) 99.6
Currency translations 4.2 (2.7) (2.3)

$ 10.2 $ (27.2) $ (8.0)

Cash paid for:
Interest, net of amounts capitalized $ 62.1 $ 51.7 $ 55.9
Income taxes, net 28.0 50.4 6.9
</TABLE>

<PAGE>

The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly impact the earnings and operating cash flows of NL.
Although average selling prices were 4% lower in 1997 compared to 1996, average
selling prices in each of the last three quarters of 1997 were higher than the
preceding quarter, reflecting the impact of industry-wide price increases
announced beginning in late 1996. The upturn in prices follows a downward trend
in prices that began in the last half of 1995. Operating cash flows were
favorably impacted in 1997 versus 1996 due to higher production and sales
volumes and $12.9 million of refunds of German trade capital taxes related to
prior years. NL expects prices will continue to increase in 1998; however, no
assurance can be given that price trends will conform to NL's expectations and
future cash flows could be adversely affected should prices trend downward.

Changes in NL's inventories, receivables and payables (excluding the effect
of currency translation) also contributed to the cash provided by operations in
1996 and 1997. Such changes used cash in 1995 primarily due to increased
inventory levels. In 1995 net proceeds of $26 million from the sale of trading
securities is included in cash provided from operations. Certain German income
tax payments, discussed below, significantly decreased cash flows from operating
activities in 1996.

<PAGE>

NL sold its specialty chemicals business to Elementis plc in January 1998
for cash proceeds of $465 million, including $20 million attributable to a five-
year agreement by NL not to compete in the rheological products business, and
expects to recognize an after-tax gain of approximately $300 million in the
first quarter of 1998. With the after-tax net proceeds of about $400 million,
NL prepaid and terminated its $117.5 million Rheox credit facility and
terminated the related interest rate collar agreements. With the remaining
proceeds, NL intends to reduce outstanding indebtedness and invest in additional
TiO2 production capacity. NL has advised ICI of its interest in acquiring the
portion of LPC it does not currently own.

The indentures under which NL's Senior Secured Notes and Senior Secured
Discount Notes (collectively, the "Senior Notes") were issued provide that, if
by November 1998 NL has not applied the net cash proceeds from the sale of its
specialty chemicals business in a manner permitted by the indentures, NL must
use the proceeds not so applied to offer to acquire the Senior Notes for cash on
a pro rata basis at par value. Permitted uses of the proceeds include the
acquisition of additional TiO2 capacity and the permanent reduction of certain
debt other than the Senior Notes. The Senior Secured Discount Notes can first
be redeemed at the option of NL in October 1998 at a price of 106% of their
principal amount, which NL presently intends to do, depending on market
conditions, availability of resources and other factors. NL may acquire Senior
Notes in the open market. NL has notified the lender of its joint venture term
loan that it intends to prepay the $42.4 million balance in March 1998.

NL's capital expenditures during the past three years include an aggregate
of $58 million ($6 million in 1997) for NL's ongoing environmental protection
and compliance programs, including German and Norwegian off-gas desulfurization
systems. NL's estimated 1998 and 1999 capital expenditures are $30 million for
each year and include $5 million for each year in the area of environmental
protection and compliance primarily related to the off-gas desulfurization
systems.
<PAGE>

In the last three years NL spent $34 million ($7 million in 1997) in
capital expenditures related to its substantially-completed debottlenecking
project at its Leverkusen, Germany chloride-process TiO2 facility. The
debottlenecking project increased NL's annual attainable production by
approximately 20,000 metric tons, and NL estimates its worldwide annual
attainable capacity is 420,000 metric tons. Capital expenditures of the
manufacturing joint venture and NL's discontinued operations are not included in
NL's capital expenditures.

In 1997 NL prepaid DM 207 million ($127 million when paid) of its DM term
loan, repaid DM 43 million ($26 million when paid) of its DM revolving credit
facility, repaid $15 million of its joint venture term loan and repaid DM 15
million ($9 million when paid) of its short-term DM-denominated notes payable.
In the first quarter of 1997 Rheox refinanced its debt obtaining $125 million of
new long-term financing and, with the proceeds, repaid a note payable to NL.

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

At December 31, 1997 NL had cash and cash equivalents aggregating $106
million (45% held by non-U.S. subsidiaries) including restricted cash
equivalents of $10 million. Excluding cash and cash equivalents of discontinued
operations, NL had $97 million in cash and cash equivalents (44% held by non-
U.S. subsidiaries) including restricted cash equivalents of $10 million. At
<PAGE>

December 31, 1997 NL's subsidiaries, excluding discontinued operations, had $84
million available for borrowing under non-U.S. credit facilities. At
December 31, 1997 NL had complied with all financial covenants governing its
debt agreements.

No dividends were paid in 1995 or 1997. Dividends paid during 1996 totaled
$15.3 million. At December 31, 1997 NL was unable to pay dividends due to
certain restrictions under the indentures of the Senior Notes.

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

Certain of NL's tax returns in various U.S. and non-U.S. jurisdictions are
being examined and tax authorities have proposed or may propose tax
deficiencies. NL previously reached an agreement with the German tax
authorities and paid certain tax deficiencies of approximately DM 44 million
($28 million when paid), including interest, which resolved significant tax
contingencies for years through 1990. During 1997 NL reached a tentative
agreement with the German tax authorities regarding the years 1991 through
1994, and expects to pay DM 9 million ($5 million at December 31, 1997)
during 1998 in settlement of certain tax issues. Certain other significant
German tax contingencies remain outstanding for the years 1990 through 1996
and will continue to be litigated. With respect to these contingencies, NL
has received certain revised tax assessments aggregating DM 119 million
($66 million at December 31, 1997), including non-income tax related items
and interest, for years through 1996. NL
<PAGE>

expects to receive tax assessments for an additional DM 20 million ($11 million
at December 31, 1997), including non-income tax related items and interest, for
the years 1991 through 1994. No payments of tax or interest deficiencies
related to these assessments are expected until the litigation is resolved.

During 1997 a German tax court proceeding involving a tax issue
substantially the same as that involved in NL's primary remaining tax
contingency was decided in favor of the taxpayer. The German tax authorities
have appealed that decision to the German Supreme Court; NL believes that the
decision by the German Supreme Court will be rendered within two years and will
become a legal precedent which will likely determine the outcome of NL's primary
dispute with the German tax authorities which assessments, including non-income
tax related items and interest, aggregate DM 121 million. Although NL believes
that it will ultimately prevail, NL has granted a DM 94 million ($53 million at
December 31, 1997) lien on its Nordenham, Germany TiO2 plant in favor of the
City of Leverkusen, and a DM 5 million ($3 million at December 31, 1997) lien in
favor of the German federal tax authorities.

During 1997 NL received a tax assessment from the Norwegian tax authorities
proposing tax deficiencies of NOK 51 million ($7 million at December 31, 1997)
relating to 1994. NL has appealed this assessment and expects to litigate this
issue.

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

At December 31, 1997 NL had net deferred tax liabilities of $132 million.
<PAGE>

NL operates in numerous tax jurisdictions, in certain of which it has temporary
differences that net to deferred tax assets (before valuation allowance). NL
has provided a deferred tax valuation allowance of $189 million at December 31,
1997, principally related to the U.S. and Germany, partially offsetting deferred
tax assets which NL believes do not currently meet the "more-likely-than-not"
recognition criteria.

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

<PAGE>

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

As discussed above, NL has substantial operations located outside the
United States for which the functional currency is not the U.S. dollar. As a
result, the reported amount of NL's assets and liabilities related to its non-
U.S. operations, and therefore NL's consolidated net assets, will fluctuate
based upon changes in currency exchange rates. The carrying value of NL's net
investment in its German operations is a net liability due principally to its DM
credit facility, while its net investment in its other non-U.S. operations are
net assets.
<PAGE>

As a result of certain computer programs being written using two digits
rather than four to define the applicable year, certain of NL's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities.

NL has completed the process of evaluating the modifications to critical
software required to mitigate the Year 2000 Issue. NL is in the process of
communicating with its significant customers and suppliers to determine the
extent to which NL is vulnerable to those third parties' failure to minimize
their own Year 2000 Issue. NL is utilizing both internal and external resources
to reprogram or replace and test its software and expects to complete
substantially all of the requirements by the first quarter of 1999. However, if
such modifications are not made or are not completed timely, the Year 2000 Issue
could have a material adverse impact on the operations of NL. In addition,
there can be no assurance that the systems of other companies on which NL's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with NL's systems, would not have
a material adverse effect on NL. NL's estimate of the costs to complete the
modifications to critical software required to address the Year 2000 Issue is
not significant.

<PAGE>

The date on which NL plans to complete any necessary Year 2000 Issue
modifications is based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.

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

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

<PAGE>

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

Not applicable.

PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11: EXECUTIVE COMPENSATION

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

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

<PAGE>

The information required by this Item is incorporated by reference to the
Tremont Proxy Statement. See also Note 10 to the Consolidated Financial
Statements.

PART IV

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) and (d) Financial Statements and Schedules

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

~50~percent-or-less~owned~persons
~
Consolidated financial statements of Titanium Metals Corporation (30%
owned), with independent auditors report thereon, pages F-1 through F-
27 inclusive of TIMET's Annual Report on Form 10-K for the year ended
December 31, 1997 (Commission File No. 0-28538) included herein as
Exhibit 99.1, are filed as part of this Annual Report.

Consolidated financial statements of NL Industries, Inc. (18% owned),
with independent auditors report thereon, pages F-1 through F-43
inclusive of NL's Annual Report on Form 10-K for the year ended
December 31, 1997 (Commission File No. 1-640) included herein as
Exhibit 99.2, are filed as part of this Annual Report.

<PAGE>

(b) Reports on Form 8-K

Reports on Form 8-K filed by the Registrant for the quarter ended
December 31, 1997 and the months of January and February, 1998:

October 21, 1997 - reported items 5 and 7
January 26, 1998 - reported items 5 and 7
February 6, 1998 - reported items 5 and 7
February 17, 1998 - reported items 5 and 7

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

Item No. Exhibit Index

3.1 Restated Certificate of Incorporation of Tremont Corporation
("Tremont", formerly Baroid Corporation), incorporated by reference to
Exhibit 3.1 of Tremont's Annual Report on Form 10-K for the year ended
December 31, 1990.

3.2 By-Laws of Tremont, as amended May 14, 1991, incorporated by reference
to Exhibit 3.2 of Tremont's Annual Report on Form 10-K for the year
ended December 31, 1991.

<PAGE>

3.3 Certificate of Amendment to Restated Certificate of Incorporation of
Tremont, incorporated by reference to Exhibit 3.3 of Tremont's Annual
Report on Form 10-K for the year ended December 31, 1991.

4.1 Plan of Restructuring between Baroid Corporation ("Baroid", formerly
New Baroid Corporation) and Tremont, incorporated by reference to
Exhibit 2.01 of Baroid's registration statement on Form 10 (No. 1-
10624), filed with the Commission on August 31, 1990.

4.2 Registration Rights Agreement, dated October 30, 1991, by and between
NL Industries, Inc. and Tremont, incorporated by reference to Exhibit
10.27 of Tremont's Annual Report on Form 10-K for the year ended
December 31, 1991.

4.3 Indenture dated October 20, 1993 governing NL's 11 3/4% Senior Secured
Notes due 2003, including form of Senior Note, incorporated by reference
to Exhibit 4.1 of NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 1993.

4.4 Indenture dated October 20, 1993 governing NL's 13% Senior Secured
Discount Notes due 2005, including form of Discount Note, incorporated
by reference to Exhibit 4.6 of NL's Quarterly Report on Form 10-Q
(File No. 1-640) for the quarter ended September 30, 1993.

4.5 Certificate of Trust of TIMET Capital Trust I, dated November 13, 1996,
incorporated by reference to Exhibit 4.1 of Titanium Metals
Corporation's Current Report on Form 8-K filed with the Commission on
December 5, 1996.

4.6 Amended and Restated Declaration of Trust of TIMET Capital Trust I,
dated as of November 20, 1996, among Titanium Metals Corporation, as
Sponsor, The Chase Manhattan Bank, as Property Trustee, Chase Manhattan
<PAGE>

Bank (Delaware), as Delaware Trustee and Joseph S. Compofelice, Robert
E. Musgraves and Mark A. Wallace, as Regular Trustees, incorporated by
reference to Exhibit 4.2 of Titanium Metals Corporation's Current
Report on Form 8-K filed with the Commission on December 5, 1996.

4.7 Indenture for the 6 5/8% Convertible Subordinated Debentures, dated as
of November 20, 1996, among Titanium Metals Corporation and The Chase
Manhattan Bank, as Trustee, incorporated by reference to Exhibit 4.3 of
Titanium Metals Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.

4.8 Form of 6 5/8% Convertible Preferred Securities (included in Exhibit
4.5 above), incorporated by reference to Exhibit 4.5 of Titanium Metals
Corporation's Current Report on Form 8-K filed with the Commission on
December 5, 1996.

4.9 Form of 6 5/8% Convertible Subordinated Debentures (included in Exhibit
4.6 above), incorporated by reference to Exhibit 4.5 of Titanium Metals
Corporation's Current Report on Form 8-K filed with the Commission on
December 5, 1996.

4.10 Form of 6 5/8% Trust Common Securities (included in Exhibit 4.6 above),
incorporated by reference to Exhibit 4.5 of Titanium Metals
Corporation's Current Report on Form 8-K filed with the Commission on
December 5, 1996.

4.11 Convertible Preferred Securities Guarantee, dated as of November 20,
1996, between Titanium Metals Corporation, as Guarantor, and The Chase
Manhattan Bank, as Guarantee Trustee, incorporated by reference to
Exhibit 4.6 of Titanium Metals Corporation's Current Report on Form 8-K
filed with the Commission on December 5, 1996.

<PAGE>

9.1 Shareholders' Agreement, dated February 15, 1996, among Titanium Metals
Corporation, Tremont Corporation, IMI plc, IMI Kynoch Ltd., and IMI
Americas, Inc., incorporated by reference to Exhibit 2.2 of Tremont
Corporation's Current Report on Form 8-K filed with the Commission on
March 1, 1996.

9.2 Amendment to the Shareholders' Agreement, dated March 29, 1996, among
Titanium Metals Corporation, Tremont Corporation, IMI plc, IMI Kynoch
Ltd., and IMI Americas, Inc., incorporated by reference to Exhibit 10.30
of Tremont Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995.

10.1 Amended and Restated 1988 Long Term Performance Incentive Plan of
Tremont, incorporated by reference to Exhibit 10.1 of Tremont's Annual
Report on Form 10-K for the year ended December 31, 1994.

10.2 Form of Insurance Sharing Agreement between NL Industries, Inc., NL
Insurance, Ltd., Tremont and Baroid, incorporated by reference to
Exhibit 10.6 of Baroid's registration statement on Form 10 (No. 1-
10624), filed with the Commission on August 31, 1990.

10.3 Form of Employee Benefit Plan Assumption Agreement between Baroid and
Tremont, incorporated by reference to Exhibit 10.14 of Baroid's
registration statement on Form 10 (No. 1-10624), filed with the
Commission on August 31, 1990.

10.4 Indemnification Agreement between Baroid, Tremont and NL Insurance,
Ltd., dated September 26, 1990, incorporated by reference to Exhibit
10.35 of Baroid's registration statement on Form 10 (No. 1-10624),
filed with the Commission on August 31, 1990.

<PAGE>

10.5 Intercorporate Services Agreement between Contran Corporation and
Tremont effective as of January 1, 1997, incorporated by reference
to Exhibit 10.6 of Tremont's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.

10.6 Intercorporate Services Agreement between Tremont and NL effective as
of January 1, 1997, incorporated by reference to Exhibit 10.4 of NL's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.

10.7* Agreement to Defer Bonus Payment between Tremont and J. Landis Martin,
dated August 23, 1996, and the Trust Agreement, dated August 23, 1996,
related thereto, incorporated by reference to Exhibit 10.1 of Tremont's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.

10.8* 1992 Non-Employee Director Stock Option Plan of Tremont Corporation,
incorporated by reference to Exhibit 10.21 of Tremont's Annual Report
on Form 10-K for the year ended December 31, 1991.

10.9 Acquisition Agreement, dated February 15, 1996, by and between Titanium
Metals Corporation, IMI Kynoch Ltd. and IMI Americas, Inc., incorporated
by reference to Exhibit 2.1 of Tremont's Current Report on Form 8-K
filed with the Commission on March 1, 1996.
<PAGE>

10.10 Sponge Purchase Agreement, dated May 30, 1990, between Titanium Metals
Corporation and Union Titanium Sponge Corporation and Amendments No. 1
and 2, incorporated by reference to Exhibit 10.25 of Tremont's Annual
Report on Form 10-K for the year ended December 31, 1991.

10.11 Amendment No. 3 to the Sponge Purchase Agreement, dated December 31,
1993, between Titanium Metals Corporation and Union Titanium Sponge
Corporation, incorporated by reference to Exhibit 10.33 of Tremont's
Annual Report on Form 10-K for the year ended December 31, 1993.

10.12 Amendment No. 4 to the Sponge Purchase Agreement, dated May 2, 1996,
between Titanium Metals Corporation and Union Titanium Sponge
Corporation, incorporated by reference to Exhibit 10.1 of Tremont's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.

10.13 Lease Agreement, dated January 1, 1996, between Holford Estates Ltd.
and IMI Titanium Ltd. related to the building known as Titanium Number
2 Plant at Witton, England, incorporated by reference to Exhibit 10.23
of Tremont's Annual Report on Form 10-K for the year ended
December 31, 1995.

10.14 Intercorporate Services Agreement between Titanium Metals Corporation
and Tremont Corporation, effective as of January 1, 1997, incorporated
by reference to Exhibit 10.2 of Titanium Metals Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.

10.15* 1996 Long Term Performance Incentive Plan of Titanium Metals
Corporation, incorporated by reference to Exhibit 10.19 of Titanium
Metals Corporation's Amendment No. 1 to Registration Statement on Form
S-1 (No. 333-18829).

<PAGE>

10.16* 1996 Amended and Restated Non-employee Director Compensation Plan of
Titanium Metals Corporation incorporated by reference to Exhibit 10.8*
of Titanium Metals Corporations's Annual Report on Form 10-K for the
year ended December 31, 1997.

10.17* Employment Agreement between Andrew R. Dixey and Titanium Metals
Corporation, dated February 13, 1996, incorporated by reference to
Exhibit 10.21 of Titanium Metals Corporation's Registration Statement
on Form S-1 (No. 333-2940).

10.18 Agreement, dated June 28, 1995, among Titanium Metals Corporation,
Tremont Corporation and Union Titanium Sponge Corporation, incorporated
by reference to Exhibit 10.24 of Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).

10.19 Asset Purchase Agreement, dated October 1, 1996, by and between
Titanium Metals Corporation and Axel Johnson Metals, Inc., incorporated
by reference to Exhibit 2.1 of Titanium Metals Corporation's Current
Report on Form 8-K filed with the Commission on October 16, 1996.

10.20 Purchase Agreement, dated November 20, 1996, between Titanium Metals
Corporation, TIMET Capital Trust I, Salomon Brothers Inc, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co.
Incorporated, as Initial Purchasers, incorporated by reference to
Exhibit 99.1 of Titanium Metals Corporation's Current Report on Form
8-K filed with the Commission on December 5, 1996.

10.21 Registration Agreement, dated November 20, 1996, between TIMET Capital
Trust I and Salomon Brothers Inc, as Representative of the Initial
Purchasers, incorporated by reference to Exhibit 99.1 to Titanium
Metals Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
<PAGE>

10.22 $200,000,000 Credit Agreement among Titanium Metals Corporation and
various lending institutions dated as of July 30,1997 incorporated by
reference to Exhibit 10.1 of a Current Report on Form 8-K dated July
30, 1997 filed by Titanium Metals Corporation.

10.23 Amended and Restated Loan Agreement dated as of October 15, 1993, among
Kronos International, Inc., the Banks set forth therein, Hypobank
International S.A., as Agent and Banque Paribas, as Co-Agent,
incorporated by reference to Exhibit 10.17 of NL's Quarterly Report on
Form 10-Q (File No. 1-640) for the quarter ended September 30, 1993.

10.24 Second Amended and Restated Loan Agreement dated as of January 31, 1997
among Kronos International, Inc., Hypobank International S.A., as
Agent, and the banks set forth therein, incorporated by reference to
Exhibit 10.2 of NL's Annual Report on Form 10-K for the year ended
December 31, 1996.

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

10.26 Second Amended and Restated Liquidity Undertaking dated January 31,
1997 by NL, Kronos, Inc. and Kronos International, Inc. to and in favor
of Hypobank International S.A., as Agent, and the Banks set forth
therein, incorporated by reference to Exhibit 10.4 of NL's Annual
Report on Form 10-K for the year ended December 31, 1996.

10.27 Guaranty dated as of January 31, 1997 made by NL in favor of Hypobank
International S.A., as Agent, incorporated by reference to Exhibit
<PAGE>

10.5 of NL's Annual Report on Form 10-K for the year ended December 31,
1996.

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

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

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

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

10.32 Sixth and Seventh Amendments to the Credit Agreement, dated September
23, 1995 and February 2, 1996, respectively, between Rheox, Inc. and
Subsidiary Guarantors and the Chase Manhattan Bank (National
<PAGE>

Association) and the Nippon Credit Bank, Ltd. as Co-agents,
incorporated by reference to Exhibit 10.7 of NL's Annual Report on Form
10-K for the year ended December 31, 1995.

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

10.34 Amended and Restated Credit Agreement dated as of January 30, 1997
between Rheox, Inc., the Subsidiary Guarantors Party thereto, the
Lenders Party thereto, the Chase Manhattan Bank, as Administrative
Agent, and Bankers Trust Company, as Documentation Agent, incorporated
by reference to Exhibit 10.12 of NL's Annual Report on Form 10-K for
the year ended December 31, 1996.

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

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

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

<PAGE>

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

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

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

10.41 Lease Contract dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof), incorporated
by reference to Exhibit 10.14 of NL's Annual Report on Form 10-K (File
No. 1-640) for the year ended December 31, 1985.

10.42 Contract on Supplies and Services among Bayer AG, Kronos Titan-GmbH and
Kronos International, Inc. dated June 30, 1995 (English translation
from German language document), incorporated by reference to Exhibit
10.1 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1995.

10.43 Richards Bay Slag Sales Agreement dated May 1, 1995 between Richards
Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc.,
incorporated by reference to Exhibit 10.17 of NL's Annual Report on
Form 10-K (File No. 1-640) for the year ended December 31, 1995.
<PAGE>

10.44 Formation Agreement dated as of October 18, 1993 among Tioxide Americas
Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P.,
incorporated by reference to Exhibit 10.2 of NL's Quarterly Report on
Form 10-Q (File No. 1-640) for the quarter ended September 30, 1993.

10.45 Joint Venture Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Kronos Louisiana, Inc., incorporated by reference to
Exhibit 10.3 of NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 1993.

10.46 Kronos Offtake Agreement dated as of October 18, 1993 between Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P., incorporated by
reference to Exhibit 10.4 of NL's Quarterly Report on Form 10-Q (File
No. 1-640) for the quarter ended September 30, 1993.

10.47 Amendment No. 1 to Kronos Offtake Agreement dated as of December 20,
1995 between Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P., incorporated by reference to Exhibit 10.22 of NL's Annual Report
on Form 10-K (File No. 1-640) for the year ended December 31, 1995.

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

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

<PAGE>

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

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

10.52 Master Technology Exchange Agreement dated as of October 18, 1993 among
Kronos, Inc., Kronos Louisiana, Inc., Kronos International, Inc.,
Tioxide Group Limited and Tioxide Group Services Limited, incorporated
by reference to Exhibit 10.8 of NL's Quarterly Report on Form 10-Q
(File No. 1-640) for the quarter ended September 30, 1993.

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

10.54 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas, Inc., ICI American Holdings, Inc., Kronos, Inc. and Kronos
Louisiana, Inc., incorporated by reference to Exhibit 10.10 of NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the quarter ended
September 30, 1993.

10.55* 1985 Long Term Performance Incentive Plan of NL Industries, Inc., as
adopted by the Board of Directors on February 27, 1985, incorporated by
reference to Exhibit A of NL's Proxy Statement on Schedule 14A (File
No. 1-640) for the annual meeting of shareholders held on April 24,
1985.
<PAGE>

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

10.57* 1989 Long Term Performance Incentive Plan of NL Industries, Inc.,
incorporated by reference to Exhibit B of NL's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May 8,
1996.

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

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

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

10.61 Incorporate Services Agreement between Valhi, Inc. and NL effective as
of January 1, 1997, incorporated by reference to Exhibit 10.3 of NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the quarter ended
March 31, 1997.

10.62 Intercorporate Services Agreement by and between Contran Corporation
and NL effective as of January 1, 1997, incorporated by reference to

<PAGE>

Exhibit 10.2 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended March 31, 1997.

10.63 Intercorporate Service Agreement by and between Titanium Metals
Corporation and NL effective January 1, 1997, incorporated by
reference to Exhibit 10.5 of NL's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.

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

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

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

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

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

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

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

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

21.1 Subsidiaries of the Registrant.

23.1 Consent of Independent Accountants.

27.1 Restated Financial Data Schedule for the year ended December 31, 1995.

27.2 Restated Financial Data Schedules for the year-to-date periods ending
March 31, 1996, June 30, 1996, September 30, 1996 and December 31,
1996.

27.3 Restated Financial Data Schedules for the year-to-date periods ending
March 31, 1997, June 30, 1997 and September 30, 1997 and Financial Data
Schedule for the year ended December 31, 1997.

99.1 Titanium Metals Corporation (File No. 0-28538) Annual Report on Form
10-K for the year ended December 31, 1997, Item 3 - "Legal Proceedings"
<PAGE>

and Item 8 - "Financial Statements and Supplementary Data" (pages F-1
to F-27).

99.2 NL Industries, Inc. (File No. 1-640) Annual Report on Form 10-K for
the year ended December 31, 1997, Item 3 - "Legal Proceedings" and Item
8 - "Financial Statements and Supplementary Data" (pages F-1 to F-43).

* Management contract, compensatory plan or arrangement.

SIGNATURES

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

TREMONT CORPORATION
(Registrant)

By /s/ J. Landis Martin
J. Landis Martin, March 31, 1998
(Chairman of the Board, President
and Chief Executive Officer)

<PAGE>

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

/s/ Susan E. Alderton /s/ Harold C. Simmons
Susan E. Alderton, March 31, 1998 Harold C. Simmons, March 31, 1998
(Director) (Director)

/s/ Richard J. Boushka /s/ Thomas P. Stafford
Richard J. Boushka, March 31, 1998 Thomas P. Stafford, March 31, 1998
(Director) (Director)

/s/ J. Landis Martin /s/ Avy H. Stein
J. Landis Martin, March 31, 1998 Avy H. Stein, March 31, 1998
(Chairman of the Board, President (Director)
and Chief Executive Officer)

/s/ Glenn R. Simmons /s/ J. Thomas Montgomery, Jr.
Glenn R. Simmons, March 31, 1998 J. Thomas Montgomery, March 31, 1998
(Director) (Vice President-Controller and
Treasurer)
(Principal Finance and Accounting Officer)

<PAGE>

TREMONT CORPORATION

ANNUAL REPORT ON FORM 10-K

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

INDEX OF FINANCIAL STATEMENTS AND SCHEDULES

Page
FINANCIAL STATEMENTS

Report of Independent Accountants F-2

Consolidated Balance Sheets - December 31, 1996 and 1997 F-3/F-4

Consolidated Statements of Income - Years ended December 31, 1995,
1996, and 1997 F-5

Consolidated Statements of Stockholders' Equity - Years ended December 31,
1995, 1996, and 1997 F-6

Consolidated Statements of Cash Flows - Years ended December 31, 1995,
1996 and 1997 F-7/F-8

Notes to Consolidated Financial Statements F-9/F-25

FINANCIAL STATEMENT SCHEDULES

Report of Independent Accountants S-1

<PAGE>

Schedule II - Valuation and Qualifying Accounts S-2

Schedules I, III and IV are omitted because they are not applicable.

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of Tremont Corporation:

We have audited the accompanying consolidated balance sheets of Tremont
Corporation as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tremont
Corporation as of December 31, 1996 and 1997, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.

<PAGE>

COOPERS
& LYBRAND L.L.P.

Denver, Colorado
January 26, 1998

<PAGE>

TREMONT CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 1996 and 1997

(In thousands, except per share data)

<PAGE>

<TABLE>
<CAPTION>
ASSETS 1996 1997

<S> <C> <C>
Current assets:
Cash and cash equivalents $ 68,035 $ 37,959
Accounts and notes receivable 6,445 5,544
Receivable from related parties 1,026 2,277
Prepaid expenses 1,785 1,206

Total current assets 77,291 46,986

Other assets:
Investment in TIMET 98,479 123,521
Investment in NL 26,724 15,737
Investment in joint ventures 6,937 10,509
Receivable from related parties 4,722 4,019
Other 8,656 13,550

Total other assets 145,518 167,336

Property and equipment
Land 330 330
Buildings 877 893
Equipment 172 172

1,379 1,395
Less accumulated depreciation 665 721

<PAGE>

Net property and equipment 714 674

$ 223,523 $ 214,996

</TABLE>

<PAGE>

TREMONT CORPORATION

CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31, 1996 and 1997

(In thousands, except per share data)

<PAGE>

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997

<S> <C> <C>
Current liabilities:
Accrued liabilities $ 7,336 $ 5,714
Payable to related parties 225 62
Income taxes 112 212

Total current liabilities 7,673 5,988

Noncurrent liabilities:
Insurance claims and claim expenses 12,867 17,000
Accrued postretirement benefit cost 22,072 21,730
Deferred income taxes 16,319 25,766
Other 4,677 4,978

Total noncurrent liabilities 55,935 69,474

Minority interest 1,886 3,206

Stockholders' equity:
Preferred stock, $1.00 par value; 1,000 shares authorized; none issued - -
Common stock, $1.00 par value; 14,000 shares authorized;
7,640 and 7,690 shares issued, respectively 7,640 7,690
Additional paid-in capital 273,780 274,736
Accumulated deficit (116,834) (103,277)
Adjustments:
Currency translation (2,764) (7,831)
<PAGE>

Marketable securities 702 732
Pension liabilities (899) -

161,625 172,050
Less treasury stock, at cost (173 and 960 shares, respectively) 3,596 35,722

Total stockholders' equity 158,029 136,328

$223,523 $214,996

<FN>
Commitments and contingencies (Notes 10 and 11).

<FN>
See accompanying notes to consolidated financial statements.
</TABLE>

<PAGE>

TREMONT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 1995, 1996 and 1997

(In thousands, except per share data)

<PAGE>

<TABLE>
<CAPTION>
1995 1996 1997

<S> <c <C> <C>
Equity in earnings (loss) of:
TIMET $ (3,163) $ 15,965 $ 25,137
NL Industries 11,411 (1,778) (5,085)
Other joint ventures - 2,476 5,231

8,248 16,663 25,283

Gain on sale of TIMET stock - 27,599 -
Corporate income (expense), net (2,696) (4,052) 1,139
Interest expense (163) (274) -

Income before income taxes
and minority interest 5,389 39,936 26,422

Income tax expense 4 9,335 11,545
Minority interest - 639 1,320

Net income $ 5,385 $ 29,962 $ 13,557

Earnings per share:
Basic $ .73 $ 4.05 $ 1.92
Diluted $ .70 $ 3.90 $ 1.76

Weighted average shares outstanding:

<PAGE>

Basic 7,354 7,406 7,058
Diluted 7,514 7,665 7,246

<FN>
See accompanying notes to consolidated financial statements.

</TABLE>

<PAGE>

TREMONT CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years ended December 31, 1995, 1996, 1997
(In thousands)

<PAGE>

<TABLE>
<CAPTION>
Additional
Common Stock Common paid-in Accumulated
Shares Treasury Stock capital deficit
Issued Shares

<S> <C> <C> <C> <C> <C>
Balance at December 7,526 173 $ 7,526 $ 231,628 $ (152,181)
December 31, 1994

Net income - - - - 5,385
Common stock issued 24 - 24 187 -
Adjustments - - - - -

Balance at December 7,550 173 7,550 231,815 (146,796)
31, 1995

Net income - - - - 29,962
Reduction of
interest in
TIMET, net (Note - - - 40,227 -
1)
Common stock issued 90 - 90 1,562 -
Adjustments - - - - -
Other - - - 176 -

Balance at December 7,640 173 7,640 273,780 (116,834)
31, 1996
<PAGE>

Net income - - - - 13,557
Repurchases of - 787 - - -
common stock
Common stock issued 50 - 50 828 -
Adjustments - - - - -
Other - - - 128 -

Balance at December 7,690 960 $ 7,690 $ 274,736 $ (103,277)
31, 1997

<FN>
See accompanying notes to consolidated financial statements.
F-6

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S>
Adjustments Total
Currency Marketable Pension Treasury stockholders'
translation securities liabilies stock equity

<C> <C> <C> <C> <C>
$ (4,981) $ (1) $ (2,418) $ (3,596) $ 75,977
- - - - 5,385
- - - - 211
1,836 (61) 311 - 2,086

(3,145) (62) (2,107) (3,596) 83,659

- - - - 29,962

(179) - 898 - 40,946
- - - - 1,652
560 764 310 - 1,634
- - - - 176

(2,764) 702 (899) (3,596) 158,029

- - - - 13,557
- - - (32,126) (32,126)
- - - - 878
(5,067) 30 899 - (4,138)
<PAGE>

- - - - 128

$ (7,831) $ 732 $ - $ (35,722) $ 136,328

<FN>
See accompanying notes to consolidated financial statements.
F-6

</TABLE>

<PAGE>

TREMONT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 1995, 1996 and 1997

(In thousands)

<PAGE>

<TABLE>
<CAPTION>
1995 1996 1997

<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,385 $ 29,962 $ 13,557
Earnings of affiliates in excess
of distributions (8,248) (13,649) (23,664)
Gain on sale of TIMET stock - (27,599) -
Deferred income taxes - 7,811 11,707
Minority interest - 639 1,320
Other, net (520) (3) (1,529)
Change in assets and liabilities:
Accounts and notes receivable 211 (462) 278
Accounts with related parties (1,629) (244) (380)
Accrued liabilities (308) 2,738 (1,586)
Income taxes (6) 337 101
Other, net (593) (1,577) 225
Sales of marketable trading securities 3,322 - -

Net cash provided (used) by operating activities (2,386) (2,047) 29

Cash flows from investing activities:
Loans to (collections from) TIMET (5,500) 22,460 -
Proceeds from disposition of:
TIMET common stock, net - 46,898 -
Property held for sale 1,140 3,000 -
Oil and gas production well interest - - 1,206
Other, net (574) (631) (63)

<PAGE>

Net cash provided (used) by investing activities (4,934) 71,727 1,143

</TABLE>

<PAGE>

TREMONT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 1995, 1996 and 1997

(In thousands)

<PAGE>

<TABLE>
<CAPTION>
1995 1996 1997

<S> <C> <C> <C>
Cash flows from financing activities:
Repurchases of common stock $ - $ $ (32,126)
-
Borrowings from related parties 3,450 50 -
Related party loan repayments - (3,500) -
Borrowings (repayments) of indebtedness 2,500 (2,500) -
Other, net 211 1,655 878

Net cash provided (used) by financing activities 6,161 (4,295) (31,248)

Cash and cash equivalents:
Net increase (decrease) (1,159) 65,385 (30,076)
Balance at beginning of year 3,809 2,650 68,035

Balance at end of year $ 2,650 $ 68,035 $ 37,959

Supplemental disclosures - cash paid (received) for:
Interest expense $ 155 $ 334 $ -
Income taxes 10 1,189 (263)

<PAGE>

<FN>
See accompanying notes to consolidated financial statements.
</TABLE>

<PAGE>

TREMONT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and basis of presentation:

Tremont Corporation is principally a holding company with operations
conducted through its 30%-owned affiliate, Titanium Metals Corporation
("TIMET"), and 18%-owned affiliate, NL Industries, Inc. ("NL"). Contran
Corporation and other entities related to Harold C. Simmons hold approximately
49% of Tremont's outstanding common stock and 75% of NL's outstanding common
stock (including 18% of NL held by Tremont). Mr. Simmons may be deemed to
control each of Contran, NL and Tremont. See Note 10.

In February 1996, TIMET acquired the titanium metals businesses (the "IMI
Titanium Acquisition") of IMI plc ("IMI") and, in June 1996, completed an
initial public offering of 6.2 million shares of its common stock (the "Stock
Offering"), in which the Company sold 2.2 million shares of TIMET common stock.
These transactions reduced Tremont's ownership in TIMET from 75% at December 31,
1995 to 30%. See Note 4. As a result of its reduced ownership level, Tremont
ceased to consolidate TIMET and instead reports its interest in TIMET by the
equity method of accounting. For comparative purposes, TIMET is presented on
the equity method for all periods presented. Tremont accounted for its equity
in TIMET's capital transactions as a reduction of ownership interest in an
affiliate and, accordingly, recorded a $41 million net increase to stockholders'
equity in 1996. The change in stockholders' equity resulted from the difference
between the book values of Tremont's current 30% interest in TIMET and its 75%
interest in TIMET before the IMI Titanium Acquisition and Stock Offering.

Note 2 - Summary of significant accounting policies:

<PAGE>

~ Principles~of~consolidation.~~~The accompanying consolidated financial
statements include the accounts of Tremont and its majority-owned subsidiaries
(collectively, the "Company"). All material intercompany accounts and balances
have been eliminated. Certain prior year amounts have been reclassified to
conform to the current year presentation.

~ 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 amount of revenues and expenses
during the reporting period. Ultimate actual results may, in some instances,
differ from previously estimated amounts.

~ Cash~and~cash~equivalents.~~~Cash equivalents include highly liquid
investments with original maturities of three months or less. At December 31,
1997, substantially all of the Company's cash and cash equivalents were held by
one financial institution.
~
~ ~Marketable~and~other~securities~and~securities~transactions.~~~The
Company's equity in unrealized gain and loss adjustments of investments held by
less than majority-owned affiliates are accumulated in the marketable securities
adjustment component of stockholders' equity, net of related deferred income
taxes. Realized gains and losses on the Company's securities are based upon the
specific identification of the securities sold.

~Investments~in~TIMET,~NL~and~joint~ventures.~~~ Investments in TIMET, NL
and more than 20%-owned but less than majority-owned entities are accounted for
by the equity method. The Company's 18% investment in NL is reported by the
equity method due to the fact that Tremont and NL may be deemed to be under
common control by reason of stock ownership and common directors and executive
<PAGE>

officers. Differences between the cost of each such investment and the
underlying equity in the historical carrying amounts of the entity's net assets
are allocated among the respective assets and liabilities based upon estimated
relative fair values. Such differences are charged or credited to income as the
entities depreciate, amortize or dispose of the related net assets. At December
31, 1997, the unamortized net difference relating to NL was approximately $55
million, of which $25 million is goodwill being amortized over 40 years, with
substantially all of the remainder attributable to NL's property and equipment.
The unamortized net basis difference at December 31, 1997 is greater than the
Company's $16 million net carrying amount of its investment in NL because NL
reported a shareholders' deficit on its separate historical basis of accounting.

~ Property,~equipment~and~depreciation~. Property and equipment are stated
at cost. Maintenance, repairs and minor renewals are expensed; major
improvements are capitalized. Depreciation is computed on the straight-line
method over estimated useful lives of 10-20 years.

~Employee~benefit~plans.~~~Accounting and funding policies for
postretirement benefits other than pensions ("OPEB") are described in Note 8.

The Company, TIMET and NL have elected the disclosure alternative
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" and to account for stock-based
employee compensation in accordance with Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and its various
interpretations. Under APB No. 25, no compensation cost is generally recognized
for fixed stock options in which the exercise price is not less than the market
price on the grant date. See Note 9.~
~ ~
~I~ncome~taxes.~~~Deferred income tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the
income tax and financial reporting carrying amounts of assets and liabilities,
<PAGE>

including investments in subsidiaries and unconsolidated affiliates not included
in the consolidated tax group.
~
~E~arnings~per~share.~~~In 1997, the Company retroactively adopted the
provisions of SFAS No. 128, "Earnings per Share." See Note 14.

Note 3 - Business and geographic segments:

Tremont is principally a holding company with operations conducted through
its equity affiliates, TIMET and NL. Substantially all of Tremont's assets are
located in the U.S.

TIMET is a vertically integrated titanium producer whose products include
titanium sponge, ingot, slab, forged and/or rolled mill products, and cast
products for aerospace, industrial and other markets. TIMET's production
facilities are located in the U.S. and Europe, while its products are sold
throughout the world.

NL is a producer of titanium dioxide pigments ("TiO2") and, during the
three years ended December 31, 1997, rheological additives. TiO2 is a chemical
product used in a wide range of "quality-of-life" type products. NL's
production facilities are located in Europe and North America and its products
are sold throughout the world. On January 30, 1998, NL sold its rheological
additives business for $465 million. See Note 15.

The Company's captive insurance subsidiary, NL Insurance Limited of Vermont
("NLIV"), reinsured certain risks of the Company, Baroid, NL and their
respective subsidiaries and also participated on various third party reinsurance
treaties. NLIV currently provides certain property and liability insurance
coverage to Tremont, TIMET and NL, however, the risk associated with these
<PAGE>

policies are reinsured into the commercial reinsurance market. All of the
Company's unrelated reinsurance business is in run-off. Results of the
Company's captive insurance operations, which are not significant, are included
in corporate expenses, net. See Note 10.

Note 4 - Investment in TIMET, NL and other joint ventures:

See Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of this Annual Report on Form 10-K for summarized
information relating to the results of operations, financial position and cash
flows of TIMET and NL, which information is incorporated herein by reference.

~TIMET.~~~At December 31, 1997, Tremont held 9.5 million shares, or 30%, of
TIMET's outstanding common stock. See Note 1. At December 31, 1997, the net
carrying amount of the Company's investment in TIMET was approximately $13.00
per share while the market price per share of TIMET common stock on that date
was $28.875. Tremont also holds an option, received in connection with the IMI
Titanium Acquisition by TIMET, to purchase up to an additional 1.5 million
shares of TIMET's common stock from IMI for $12 million ($7.95 per TIMET share).
The option expires February 15, 1999.

In November 1996, TIMET issued $201 million of 6.625% TIMET-obligated
mandatorily redeemable preferred securities (the "Convertible Preferred
Securities"). The Convertible Preferred Securities pay cumulative preferred
distributions of 6.625% per annum, compounded quarterly, and are convertible, at
the option of the holder, into TIMET common stock at the rate of 1.339 shares of
common stock per Convertible Preferred Security (an equivalent price of $37.34
per share), for an aggregate of 5.4 million common shares if fully converted.
The Convertible Preferred Securities mature December 2026 and are redeemable at
TIMET's option beginning December 1999. TIMET has the right to defer interest
payments for up to 20 consecutive quarters ("Extension Period") on one or more
occasions. In the event TIMET exercises this right, it would be unable during
<PAGE>

any Extension Period to, among other things, pay dividends on or reacquire its
capital stock.

~NL~Industries.~~~Tremont holds 9.1 million shares, or 18%, of NL's
outstanding common stock. At December 31, 1997, the net carrying amount of the
Company's investment in NL was about $1.74 per share while the market price per
share of NL common stock on December 31, 1997 was $13.625 per share. Certain of
NL's debt agreements presently prohibit NL from paying dividends on its common
stock.
~
~
~Joint~Ventures.~~~ Investment in joint ventures, held by the Company's
75%-owned subsidiary, TRECO, L.L.C., are principally comprised of a (i) 32%
equity interest in Basic Investments, Inc. ("BII"), which, among other things,
provides utility services in the industrial park where one of TIMET's plants is
located, and a (ii)12% interest in Victory Valley Land Company, L.P. ("VVLC"),
which is actively engaged in efforts to develop certain real estate. BII,
through a wholly-owned subsidiary, owns an additional 50% interest in VVLC.

Note 5 - Other noncurrent assets:

<PAGE>

<TABLE>
<CAPTION>
December 31,

1996 1997

(In thousands)
<S> <C> <C>
Restricted securities $ 6,025 $ 6,302
Other 2,631 7,248

$ 8,656 $ 13,550

</TABLE>

<PAGE>

Note 6 - Accrued liabilities:

<PAGE>

<TABLE>
<CAPTION>
December 31,

1996 1997

(In thousands)
<S> <C> <C>
Accrued liabilities:
Postretirement benefit cost $ 1,924 $ 1,887
Other employee benefits 1,107 242
Environmental cost 300 299
Legal costs 796 838
Miscellaneous taxes 256 134
Other 2,953 2,314

$ 7,336 $ 5,714

</TABLE>

<PAGE>

Note 7 - Income taxes:

Summarized below are (i) the difference between the income tax expense
attributable to the income before income taxes and minority interest ("pretax
income") and the amounts that would be expected using the U.S. federal statutory
income tax rate of 35%, (ii) the components of the income tax expense
attributable to the pretax income, and (iii) the components of the comprehensive
tax expense. Substantially all of the Company's income is derived from the U.S.

<PAGE>

<TABLE>
<CAPTION>
Years ended December 31,

1995 1996 1997

(In thousands)
<S> <C> <C> <C>
Expected income tax expense $ 1,886 $ 13,977 $ 9,247
Incremental tax and rate differences on equity in
Income of companies not included in the
Consolidated tax group - (1,071) 961
Valuation allowance (1,835) (3,495) 895
U.S. state income taxes, net 3 78 41
Other, net (50) (154) 401

$ 4 $ 9,335 $ 11,545

Income tax expense (benefit):
Current income taxes:
U.S. federal $ - $ 1,404 $ (225)
U.S. state 4 120 63
Deferred income taxes - 7,811 11,707

$ 4 $ 9,335 $ 11,545

Comprehensive tax expense allocable to:
Pretax income $ 4 $ 9,335 $ 11,545
Stockholders' equity:
<PAGE>

Reduction of interest in TIMET - 7,878 -
Foreign currency translation and other 890 880 (2,258)

$ 894 $ 18,093 $ 9,287

</TABLE>

<PAGE>

The components of deferred taxes are summarized below.

<PAGE>

<TABLE>
<CAPTION>
December 31,

1996 1997

Assets Liabilities Assets Liabilities

(In millions)
<S> <C> <C> <C> <C>
Temporary differences relating to net
assets:
Property and equipment $ .1 $ - $ .1 $ -
Accrued OPEB cost 8.4 - 8.3 -
Accrued liabilities and other deductible 6.8 - 5.9 -
differences
Other taxable differences - (3.8) - (4.2)
Investments in subsidiaries and
affiliates
including foreign currency translation
adjustments 10.1 - 2.8 -
Tax loss and credit carryforwards - - .1 -
Valuation allowance (37.9) - (38.8) -

Gross deferred tax assets (liabilities) (12.5) (3.8) (21.6) (4.2)

Netting 12.5 (12.5) 21.6 (21.6)

Total deferred taxes - (16.3) - (25.8)
Less current deferred taxes - - - -

<PAGE>

Net noncurrent deferred taxes $ - $ (16.3) $ - $ (25.8)

</TABLE>

<PAGE>

The Company has a deferred tax valuation allowance of $ 38.8 million at
December 31, 1997 offsetting deferred tax assets, principally related to the
Company's interest in NL, which the Company believes did not meet the "more-
likely-than-not" recognition criteria at that date. The Company's valuation
allowance decreased by $4.8 million in 1995, decreased by $13 million in 1996
and increased by $.9 million in 1997. During 1995, the valuation allowance
reduction was due primarily to a net increase in the bases differences of the
Company's investments in unconsolidated affiliates. In 1996, the valuation
allowance decreased due to utilization of NOLs and the Company's reduction of
its ownership interest in TIMET. In 1997, the valuation allowance increased
primarily due to the Company's equity in losses in NL as partially offset by
adjustments to certain corporate items. During 1996, the Company utilized $14
million of U.S. federal income tax net operating loss carryforwards.

Note 8 - Postretirement benefits other than pensions ("OPEB"):

Tremont retained the obligations for certain postretirement health care and
life insurance benefits provided to eligible petroleum services employees who
retired prior to the separation of the petroleum services businesses and
titanium metals businesses from Baroid Corporation in 1990. The Company funds
such benefits as they are incurred, net of any contributions by the retirees.

The components of net periodic OPEB costs and accumulated OPEB obligations
are set forth below. The rates used in determining the actuarial present value
of the accumulated OPEB obligations at December 31 were (i) discount rate --
7.0% in 1997 and 7.75% in 1996, and (ii) rate of increase in future health care
costs -- 10% in 1998, gradually declining to 5.25% in 2016 and thereafter. If
the health care cost trend rate was increased by one percentage point for each
year, OPEB expense would have increased approximately $.1 million in 1997, and
the actuarial present value of accumulated OPEB obligations at December 31, 1997
<PAGE>

would have increased approximately $1.2 million. The accrued OPEB cost is
sensitive to changes in these estimated rates and actual results may differ from
the obligations noted below.

<PAGE>

<TABLE>
<CAPTION>
December 31,

1996 1997

(In thousands)
<S> <C> <C>
Actuarial present value of accumulated OPEB
obligations attributable solely to retiree benefits $ 19,160 $ 20,479
Unrecognized net loss from experience
different from actuarial assumptions (1,137) (2,395)
Unrecognized prior service credits 5,973 5,533

Total accrued OPEB cost 23,996 23,617
Less current portion 1,924 1,887

Noncurrent accrued OPEB cost $ 22,072 $ 21,730

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Years ended December 31,

1995 1996 1997

(In thousands)
<S> <C> <C> <C>
Interest cost on accumulated OPEB obligations $ 1,422 $ 1,463 $ 1,441
Net amortization and deferrals (441) (441) (441)

OPEB expense $ 981 $ 1,022 $ 1,000

</TABLE>

<PAGE>

Note 9 - Stockholders' equity:

Tremont has a long-term performance incentive plan that provides for
discretionary grants of restricted stock, stock options and stock appreciation
rights. Options generally vest ratably over a five year period and expire ten
years from the date of grant.

Tremont's 1992 Non-Employee Director Stock Option Plan provides that
options to purchase 1,000 shares of Tremont common stock are automatically
granted once a year to each non-employee director. Options are granted at a
price equal to the fair market value of such stock on the date of grant,
generally vest in one year and expire five years from date of grant.

Changes in options outstanding under the Company's long-term performance
incentive and non-employee Director plans are summarized in the table below.
Fair values were estimated using the Black-Scholes model and the assumptions
listed below. At December 31, 1997, options to purchase 149,080 shares were
exercisable at a weighted average exercise price per share of $11.57 and options
to purchase an additional 52,060 shares become exercisable in 1998. Outstanding
options at December 31, 1997 had a weighted average remaining life of 5.4 years.
At December 31, 1997, 484,681 shares were available for future grant under the
Company's long-term performance incentive plan and 32,000 shares were available
for future grant under the Company's non-employee Director plan.

<PAGE>

<TABLE>
<CAPTION>
Weighted Fair
average value at
Exercise Amount payable exercise grant
Shares price per upon exercise price date
share
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 442 $4.69-$22.2 $ 4,597 $ 10.40
1994

Granted 3 13.25 40 13.25 $ 5.04
Exercised (24) 8.63-18.56 (211) 8.79
Canceled (2) 8.13-18.56 (19) 9.50

Outstanding at December 31, 419 4.69-22.22 4,407 10.52
1995

Granted 3 22.75 68 22.75 9.51
Exercised (86) 4.69-18.75 (936) 10.88

Outstanding at December 31, 336 8.00-22.75 3,539 10.54
1996

Granted 3 30.88 93 30.88 $ 13.30
Exercised (50) 8.00-18.75 (544) 10.90
Canceled (52) 8.13-18.75 (531) 10.20

<PAGE>

Outstanding at December 31, 237 $8.00-30.88 $2,557 10.80
1997

</TABLE>

<PAGE>

Assumptions:
Expected life (years) 4.7 - 7.5
Risk free interest rate 5% - 8.75%
Volatility 40%
Dividend yield 0%

Had the Company elected to account for stock-based employee compensation
for all awards granted beginning in 1995 in accordance with the fair value
based accounting method of SFAS No. 123, the Company's pretax income, net
income and diluted earnings per share for 1995 would have been reduced by
$.5 million, $.3 million and $.04, respectively. The impact would not have
been material for 1996 and 1997.

In February 1997, the Company's Board of Directors authorized the
repurchase of up to 2 million shares of its common stock in open market or
privately negotiated transactions. Such shares represented approximately 27% of
the Company's 7.5 million shares then outstanding. As of December 31, 1997 and
February 28, 1998 the Company had repurchased 787,100 common shares of its stock
for approximately $32.1 million ($40.77 average per share) pursuant to this
repurchase program. The repurchased shares will be added to the Company's
treasury and could be used for future acquisitions or other corporate purposes.

Note 10 - Related party transactions:

The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with
Mr. Simmons sometimes engage in (i) intercorporate transactions with related
companies such as guarantees, management and expense sharing arrangements,
shared fee arrangements, joint ventures, partnerships, loans, options, advances
of funds on open account, and sales, leases and exchanges of assets, including
<PAGE>

securities issued by both related and unrelated parties and (ii) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates, and understands that
Contran and other entities related to Mr. Simmons consider, review and evaluate
such transactions. Depending upon the business, tax, and other objectives then
relevant, it is possible that the Company might be a party to one or more such
transactions in the future. In connection with these activities, the Company
may consider issuing additional equity securities or incurring additional
indebtedness. The Company's acquisition activities have in the past and may in
the future include participation in the acquisition or restructuring activities
conducted by Contran, NL and other companies that may be deemed to be controlled
by Harold C. Simmons.

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

The Company is a party to intercorporate services agreements with Contran
and Valhi, Inc. (a majority-owned subsidiary of Contran) pursuant to which Valhi
and Contran agreed to provide certain services to Tremont on a fee basis. Fees
for services provided under such agreements were $.2 million in 1995 and 1996
and $.5 million in 1997.

The Company is a party to an intercorporate services agreement with NL
pursuant to which NL provides certain management and financial services to
Tremont on a fee basis. Fees for services provided by NL were $.1 million in
each of the last three years.
<PAGE>

The Company has an intercorporate services agreement with TIMET whereby
TIMET will provide certain management, financial and other services to the
Company for approximately $.4 million in 1996 and 1997, subject to renewal for
future years. Charges from TIMET approximated $.9 million in 1995 pursuant to
similar arrangements for compensation and intercorporate services.

NL and NLIV are parties to an insurance sharing agreement with respect to
certain loss payments and reserves established by NLIV that (i) arise out of
claims against other entities for which NL is responsible and (ii) are subject
to payment by NLIV. under certain reinsurance contracts. Also, NLIV will credit
NL with respect to certain underwriting profits or credit recoveries that NLIV
receives from independent reinsurers that relate to retained liabilities.
Baroid entered into an insurance sharing agreement with NLIV containing, with
respect to liabilities for which it may be responsible, substantially the same
terms and conditions as the insurance sharing agreement between NL and NLIV.

At December 31, 1997, Tremont had approximately $9 million of outstanding
letters of credit issued under a Dresser Industries, Inc. credit agreement. The
Company reimburses Dresser for any fees and expenses related to these letters of
credit and for any amounts drawn thereunder.

In 1995, Tremont entered into a $15 million revolving credit agreement with
Contran maturing in January 1998 and collateralized by 2.5 million shares of NL
common stock. During 1996, Tremont repaid all $3.5 million of outstanding debt
at December 31, 1995 and terminated the agreement.

Current receivables from related parties at December 31, 1996 and 1997 are
principally related to amounts due from TIMET for exercises of Tremont stock
options and for OPEB benefit payments. Noncurrent receivables from related
<PAGE>

parties principally include amounts due under insurance loss sharing agreements
with NL and Baroid. Current payables to related parties principally represent
amounts due under intercorporate service arrangements.

Note 11 - Commitments and contingencies:

~Long-term~agreements~. TIMET has a long-term supply agreement with The
Boeing Company under which TIMET will be the principal supplier of titanium
products to Boeing Commercial Airplane Group ("Boeing") and its family of
suppliers for the next ten years.

Under the terms of the agreement, TIMET will supply a minimum of 70% of
Boeing's annual needs for titanium, depending upon Boeing's requirements each
year. TIMET's share of Boeing's total titanium requirements will increase as
Boeing's volume requirements decrease, down to a minimum mutual commitment of
6.5 million pounds (3,000 metric tons) per year. The agreement is effective for
shipments beginning in 1998, but it is not anticipated to reach expected volume
levels until 1999.

Pricing under the Boeing agreement is firm for the first five years and
will be reviewed annually for inflationary conditions for the next five years
based upon an aerospace-related index. The companies have also agreed to
utilize Boeing's Lean Manufacturing program to develop cost savings that will be
shared by both companies.

<PAGE>

TIMET has a long-term agreement for the purchase of titanium sponge
produced in Kazakhstan. The sponge purchase agreement is for ten years
beginning in 1998, with firm pricing for the first five years (subject to
certain adjustments). Volumes purchased under the contract will be up to 10,000
metric tons annually.

TIMET may enter into long-term agreements with other customers and
suppliers.
~
~L~egal~proceedings~and~contingencies~

~Tremont~and~consolidated~subsidiaries~

~Kahn.~~~In November 1991, a purported shareholder derivative suit was
filed in the Courtof Chancery of the State of Delaware, New Castle County (~Kahn
v. Tremont.,et al.,~No. 12339), in connection with Tremont's purchase of 7.8
million shares of NL's outstanding Common Stock from Valhi in 1991. The
complaint named as defendants Valhi and all the members of the Board of
Directors of Tremont, and alleged that Tremont's purchase of the NL shares
constituted a waste of Tremont's assets and a breach of fiduciary duties by
Tremont's Board. A trial in this matter was held in June 1995. In March 1996,
the court issued its opinion ruling in favor of the defendants, concluding that
the purchase of the interest in NL was entirely fair to Tremont. Plaintiff
appealed this decision and, upon appeal, the Delaware Supreme Court reversed and
remanded the case to the Chancery Court for further consideration of the
fairness of the transaction. In March 1998, Tremont and Valhi executed and
filed with the court a proposed stipulation of settlement to the case. Under
the proposed settlement, which is subject to court approval, Valhi agreed to
transfer to Tremont 1.2 million shares of NL common stock, subject to adjustment
depending upon the average sales price of the shares during a fifteen trading
day period ending five trading days prior to the transfer, up to a maximum of
1.4 million shares and down to a minimum of 1 million shares. Valhi has the
option, in lieu of transferring the shares, of transferring cash or cash
equivalents equal to the product of the number of shares that would otherwise
have been transferred to Tremont and the average price. If approved by the
court, the transfer of shares or cash is expected to occur in the second or
third quarter of 1998. Pursuant to the proposed settlement and subject to court
approval, Tremont will reimburse plaintiffs for attorneys' fees of up to $5
million and related costs.

~Other~. The Company is involved in various other environmental,
contractual, and other claims and disputes incidental to its business.

<PAGE>

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

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

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

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

<PAGE>

~Seinfeld.~~~In September 1996, a purported shareholder derivative suit
was filed in the Chancery Division of the New Jersey Superior Court, Bergen
County(~Seinfeld v. Simmons et al.,~ Civ. Action No. C-336-96) challenging
NL's 1991 purchase of approximately 10.9 million shares of NL Common Stock
from Valhi in connection with a "Dutch auction" tender offer to all
shareholders. The complaint names as defendants NL, Valhi, and seven persons
who served on NL' Board of Directors in 1991. The complaint alleges, among
other things, that the NL purchase of the shares in the Dutch auction was an
unfair and wasteful expenditure of NL funds that constituted a breach of the
defendants' fiduciary duties to NL's stockholders. The complaint seeks, among
other things, rescission of the purchase from Valhi pursuant to the Dutch
auction and plaintiff has stated that damages sought are $149 million. NL and
the other defendants answered the complaint and denied all allegations of
wrongdoing. In February 1998, NL and Valhi exe uted and filed with the court
a proposed stipulation of settlement of the case. Underthe proposed settlement,
which is subject to court approval, Valhi agreed to transferto NL 750,000
shares of Common Stock, subject to adjustment depending on the average sales
price of the shares during a fifteen trading day period ending five trading
days prior to the transfer, up to a maximum of 825,000 sahres and down to a
minimum of 675,000 shares. Valhi ahs the option, in lieu of transferring
the shares, of transferring cash or cash equivalents equal to the product
of the number of shares that would otherwise have been transferred to NL and
the average price. If approved by the court, the transfer of shares or cash
is expected to occur in the second or third quarter of 1998. Pursuant to the
proposed settlement and subject to court approval, NL will reimburse
plaintiffs for attorneys' fees of up to $3 million and related costs. The
company is not a party to this action.

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

<PAGE>

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

In addition to litigation referred to above, certain information relating
to regulatory and environmental matters pertaining to NL is included in Item 1 -
"Business - Unconsolidated Affiliate - NL " of this Annual Report on Form 10-K.
~
~E~nvironmental~matters~

~Tremont~and~consolidated~subsidiaries~

The Company's non-operating facilities are governed by various federal,
state, local and foreign environmental laws and regulations. The Company's
policy is to achieve compliance with environmental laws and regulations at all
of its non-operating facilities and to continually strive to improve
environmental performance. The Company believes that it is in substantial
compliance with applicable requirements of environmental laws. From time to
time, the Company may be subject to environmental regulatory enforcement under
various statutes, resolution of which typically involves the establishment of
compliance programs. Occasionally, resolution of these matters may result in
the payment of penalties, but to date such penalties have not involved amounts
having a material adverse effect on the Company.

~ Arkansas~Division~of~Pollution~Control~and~Ecology.~~~~~In 1993, the
Company entered into a settlement agreement with the Arkansas Division of
Pollution Control and Ecology in connection with certain alleged water discharge
permit violations at one of several abandoned barite mining sites in Arkansas.
The settlement agreement, in addition to requiring the payment in 1993 of a
$20,000 penalty, required the Company to undertake a remediation/reclamation
program, which is nearing completion at a total cost of approximately $2
million. Another of the sites is currently being evaluated by the U.S.
<PAGE>

Environmental Protection Agency. Based upon its evaluation, the EPA could
require the owners to take investigatory or remedial action at this site,
however, the Company believes that to the extent it has any additional liability
for remediation at this site, it is only one of a number of apparently solvent
potentially responsible parties that would ultimately share in any such costs.
As of December 31, 1997, the Company had accrued $5.3 million related to these
matters.

The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are not discounted to
their present value. It is not possible to estimate the range of costs for
certain sites. The imposition of more stringent standards or requirements under
environmental laws or regulations, the results of future testing and analysis
undertaken by the Company at its non-operating facilities, or a determination
that the Company is potentially responsible for the release of hazardous
substances at other sites, could result in expenditures in excess of amounts
currently estimated to be required for such matters. No assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further there can be no assurance
that additional environmental matters will not arise in the future. However,
the Company currently believes the disposition of all environmental matters,
individually or in the aggregate, should not have a material adverse effect on
the Company's business, results of operations, financial condition, or cash
flow.

The Company, TIMET and NL adopted the recognition and disclosure
requirements of AICPA's Statement of Position No. 96-1, "Environmental
Remediation Liabilities," ("SOP 96-1") in 1997. The effect of adopting SOP 96-1

<PAGE>

by Tremont and TIMET was not material. NL's effect of adopting SOP 96-1 is
discussed below.

~~~~TIMET
~ ~
~ ~BMI~Companies.~TIMET and certain other companies, including Kerr-McGee
Chemical Corporation, Chemstar Lime Company and Pioneer Chlor Alkali, Inc.
(successor to Stauffer Chemical Company) operate facilities in a complex (the
"BMI Complex") owned by BMI, adjacent to TIMET's Henderson, Nevada plant. In
1993, TIMET and each of such companies, along with certain other companies who
previously operated facilities in the common areas of the BMI Complex
(collectively the "BMI Companies") completed a Phase I environmental assessment
of the common areas of the BMI Complex and each of the individual company sites
pursuant to consent agreements with the Nevada Division of Environmental
Protection ("NDEP"). In July 1996, TIMET signed a consent agreement with NDEP
regarding implementation of the Phase II assessment of the TIMET property within
the BMI Complex. A report regarding the Phase II assessment of the common areas
of the BMI Complex was submitted to NDEP in August 1996. Until completion of
the sampling and analysis involved in the Phase II assessment of the TIMET
property and any further Phase II testing that NDEP may require for the BMI
Complex common areas, it is not possible to provide a reasonable estimate of the
additional remediation costs, if any, or TIMET 's likely share of any such
costs.

~ Pomona~facility.~TIMET has conducted an additional study and assessment
work as required by the California Regional Water Quality Control Board--
Los Angeles Region (the "Water Quality Board") related to soil and possible
groundwater contamination at TIMET Castings' Pomona, California facility. The
site is near an area that has been designated as a U.S. Environmental Protection
Agency "Superfund" site. Although TIMET does not believe it will incur a
material liability with respect to the Pomona facility, the Water Quality Board
has not completed its review.
<PAGE>

~Henderson~facility.~During 1997, TIMET was issued a Notice of Violation
by the U.S. Environmental Protection Agency ("EPA") in connection with the
permitting for, and operation of, a carbon monoxide burner at the Henderson,
Nevada facility. In December 1997, the EPA indicated that it was seeking
approximately $.9 million in penalties. TIMET believes it substantially
complied with applicable regulations and intends to vigorously defend this
matter, which is still in discussion with the EPA.

At December 31, 1997, TIMET had accrued an aggregate of approximately $1.3
million for the environmental matters discussed above under
~BMI~Companies,~Pomona~facility~and~Henderson~facility~. TIMET records
liabilities related to environmental remediation obligations when estimated
future expenditures are probable and reasonably estimable. Such accruals are
adjusted as further information becomes available or circumstances change.
Estimated future expenditures are not discounted to their present value. It is
not possible to estimate the range of costs for certain sites. The imposition
of more stringent standards or requirements under environmental laws or
regulations, the results of future testing and analysis undertaken by TIMET at
its operating facilities, or a determination that TIMET is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated to be required for such
matters. No assurance can be given that actual costs will not exceed accrued
amounts or that costs will not be incurred with respect to sites as to which no
problem is currently known or where no estimate can presently be made. Further,
there can be no assurance that additional environmental matters will not arise
in the future.

~Other.~~~~~TIMET is involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business.

<PAGE>

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

In addition to litigation referred to above, certain information relating
to regulatory and environmental matters pertaining to TIMET is included in Item
I - "Business - Unconsolidated Affiliate - TIMET" of this Annual Report on Form
10-K.

~NL~Industries~

Some of NL's current and former facilities, including several divested
secondary lead smelters and former mining locations, are the subject of civil
litigation, administrative proceedings or investigations arising under federal
and state environmental laws. Additionally, in connection with past disposal
practices, NL has been named a potentially responsible party ("PRP") pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA") in
approximately 75 governmental and private actions associated with hazardous
waste sites and former mining locations, certain of which are on the U.S.
Environmental Protection Agency's Superfund National Priorities List. These
actions seek cleanup costs, damages for personal injury or property damage
and/or damages for injury to natural resources. While NL may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who are also jointly and severally liable. In addition, NL is a party to a
number of lawsuits filed in various jurisdictions alleging CERCLA or other
environmental claims. At December 31, 1997, NL had accrued $135 million for
those environmental matters which are reasonably estimable. It is not possible
to estimate the range of costs for certain sites. The upper end of the range of
reasonably possible costs to NL for sites which it is possible to estimate costs
is approximately $175 million. NL's estimates of such liabilities have not been
discounted to present value, and NL has not recognized any potential insurance
<PAGE>

recoveries. The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, or a determination that NL
is potentially responsible for the release of hazardous substances at other
sites could result in expenditures in excess of amounts currently estimated by
NL to be required for such matters. No assurance can be given that actual costs
will not exceed accrued amounts or the upper end of the range for sites for
which estimates have been made and no assurance can be given that costs will not
be incurred with respect to sites as to which no estimate presently can be made.
Further, there can be no assurance that additional environmental matters will
not arise in the future. NL adopted SOP 96-1 in the first quarter of 1997,
increasing its environmental liability by $30 million.

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

~Income~taxes~

NL is undergoing examination of certain of its income tax returns in
various U.S. and non-U.S. jurisdictions, including Germany, and tax authorities
have proposed or may propose tax deficiencies. The Company understands that NL
<PAGE>

believes that it has provided adequate accruals for additional income taxes and
related interest expense which may ultimately result from such examinations and
believes that the ultimate disposition of all such examinations should not have
a material adverse effect on its consolidated financial position, results of
operations or liquidity.

~Concentration~of~credit~and~other~risks.
~
~~~~~~Substantially all of TIMET's sales and operating income are derived from
operations based in the U.S., the U.K. and France. TIMET's sales to customers
in the U.S. accounted for 73% of sales in 1995, 62% in 1996 and 55% in 1997.
Sales to customers in Europe accounted for 18% of sales in 1995, 31% in 1996 and
38% in 1997. The majority of TIMET's sales are to customers in the aerospace
industry (including airframe and engine construction). Such concentration of
customers may impact TIMET's overall exposure to credit and other risks, either
positively or negatively, in that such customers may be similarly affected by
economic or other conditions. TIMET's ten largest customers accounted for about
one-third of net sales in each of the past three years.

Sales of TiO2 accounted for more than 90% of NL's net sales from continuing
operations during each of the past three years. TiO2 is sold to the paint,
plastics and paper industries. Such markets are generally considered "quality-
of-life" markets whose demand for TiO2 is influenced by the relative economic
well-being of the various geographic regions. TiO2 is sold to over 4,000
customers, none of which represents a significant portion of net sales. In each
of the past three years, approximately one-half of NL's TiO2 sales by volume
were to Europe and approximately 36% in 1995, 37% in 1996 and 36% in 1997 of
sales were attributable to North America.

Note 12 - Quarterly results of operations (unaudited):

<PAGE>

<TABLE>
<CAPTION>
Quarters ended

March 31 June 30 Sept. 30 Dec. 31

(In millions, except per share data)
<S> <C> <C> <C> <C>
~Year~ended~December~31,~1997:~
Equity in earnings (loss) of:
TIMET $ 4.8 $ 6.1 $ 6.5 $ 7.8
NL (7.2) (0.4) 0.9 1.6

Net income (loss) (2.4) 4.4 5.1 6.5

Basic earnings per share $ (.32) $ .62 $ .74 $ .96
Diluted earnings per share (.33) .58 .68 .89

~Year~ended~December~31,~1996:~
Equity in earnings (loss) of:
TIMET $ 1.3 $ 3.3 $ 4.1 $ 7.3
NL 1.4 1.3 (1.7) (2.8)
Gain on sale of TIMET stock - 27.6 - -

Net income 2.2 24.1 2.2 1.5

Basic earnings per share $ .30 $ 3.26 $ .29 $ .20
Diluted earnings per share .29 3.14 .28 .18

</TABLE>

<PAGE>

Note 13 - New accounting principles not yet adopted:

The Company is required to adopt SFAS No. 130, "Reporting Comprehensive
Income," ~~~ in the first quarter of 1998. Upon adoption of SFAS No. 130, the
Company will present a new Consolidated Statement of Comprehensive Income which
will report all changes in the Company's stockholders' equity other than
transactions with stockholders. Comprehensive income pursuant to SFAS No. 130
would include net income, as reported in the Consolidated Statement of Income,
plus the net changes in the foreign currency translation, marketable securities
and pension liabilities components of stockholders' equity.

The Company is required to adopt SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," ~~~ in the fourth quarter of 1998.
SFAS No. 131 will supersede the business segment disclosure requirements
currently in effect under SFAS No. 14. SFAS No. 131, among other things,
establishes standards regarding the information a company is required to
disclose about its operating segments and provides guidance regarding what
constitutes a reportable operating segment. The Company currently believes
segment disclosures pursuant to SFAS No. 131 will not be materially different
from the current disclosures pursuant to SFAS No. 14.

The Company is required to adopt the disclosure requirements of SFAS No.
132, "Employer's Disclosures about Pensions and Other Postretirement Benefits,"
~~~ in the fourth quarter of 1998. SFAS No. 132 revises disclosure requirements
for such pension and postretirement benefit plans to, among other things,
standardize certain disclosures and eliminate certain other disclosures no
longer deemed useful. SFAS No. 132 does not change the measurement or
recognition criteria for such plans.

Note 14 - Earnings per share:
<PAGE>

A reconciliation of the numerator and denominator used in the calculation
of basic and diluted earnings per share is presented below. In 1995, the
effect of dilutive securities of equity investees relates to NL options. The
effect of conversion of TIMET's Convertible Preferred Securities would be a net
reduction of the Company's equity in earnings of TIMET. The reduction results
from dilution of the Company's ownership percentage offset in part by increased
TIMET net income resulting from elimination of dividends on the Convertible
Preferred Securities. TIMET's Convertible Preferred Securities were issued in
November 1996. Stock options omitted from the denominator because they were
antidilutive were not material.

<PAGE>

<TABLE>
<CAPTION>
1995 1996 1997
(in thousands)
<S> <C> <C> <C>
Numerator:
Net income $ 5,385 $ 29,962 $ 13,557
Effect of dilutive securities of equity (103) (36) (875)
investees

Diluted net income $ 5,282 $ 29,926 $ 12,682

Denominator:
Average common shares outstanding 7,353 7,406 7,058
Average dilutive stock options 161 259 188

Diluted shares 7,514 7,665 7,246

</TABLE>

<PAGE>

Note 15 - Subsequent event:

NL's specialty chemical business, Rheox, was sold for $465 million in
January 1998, including $20 million attributable to a five-year agreement by NL
not to compete in the rheological products business. NL expects to recognize an
after-tax gain of approximately $300 million on the disposal of this business
segment in the first quarter of 1998.

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

To the Stockholders and Board of Directors of Tremont Corporation:

Our report on the consolidated financial statements of Tremont Corporation
as of December 31, 1996 and 1997 and for each of the three years in the period
ended December 31, 1997 is included on page F-2 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page F-1 of this
Annual Report on Form 10-K.

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

~~COOPERS~&~LYBRAND~L.~L.~P.~

Denver, Colorado
January 26, 1998

<PAGE>

TREMONT CORPORATION AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(In thousands)

<PAGE>

<TABLE>
<CAPTION>
<S> Additions
charged
Balance at (credited) to Balance
Description Beginning costs and at end
of year expenses Deductions Other of year

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

Allowance for doubtful $ 2,663 $ - $ - $ - $ 2,663
accounts

Valuation allowance for
deferred
income taxes $ 37,899 $ 895 $ - $ - $ 38,794

Year ended December 31, 1996:

Allowance for doubtful $ 2,663 $ - $ - $ - $ 2,663
accounts

Valuation allowance for
deferred
income taxes $ 50,923 $ (3,495) $ - $ (9,529) (a) $ 37,899

<PAGE>

Year ended December 31, 1995:

Allowance for doubtful $ 2,663 $ - $ - $ - $ 2,663
accounts

Valuation allowance for
deferred
income taxes $ 55,701 $ (1,835) $ - $ (2,943) (b) $ 50,923

<FN>
(a)Represents reduction in valuation allowance principally attributable to the Company's reduction of its ownership interest in
TIMET.

(b)Represents direct offset to the decrease in gross deferred income tax assets due to the expiration of certain U.S. tax credit
carryforwards and changes in estimate in tax bases differences.
</TABLE>

<PAGE>

EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT

Jurisdiction of % of Voting
Incorporation or Securities Held at
Name of Corporation Organization December 31, 1997~
~
TRECO L.L.C. Nevada 75
Basic Investments, Inc. Nevada 28
Victory Valley Land Company L.P. Nevada 50
Victory Valley Land Company L.P. Nevada 12

TRE Holding Corporation Delaware 100

TRE Management Company Delaware 100

Titanium Metals Corporation Delaware 30

NL Insurance Limited of Vermont Vermont 100

NL Industries, Inc. New Jersey 18

<PAGE>

~CONSENT~OF~INDEPENDENT~ACCOUNTANTS
~

We consent to the incorporation by reference in the Registration Statements
on Form S-8 and related Prospectus with respect to the Amended and Restated 1988
Long-term Performance Incentive Plan of Tremont Corporation and the 1992 Non-
Employee Director Stock Option Plan of Tremont Corporation of our reports dated
January 26, 1998, on our audits of the consolidated financial statements and
financial statement schedule of Tremont Corporation as of December 31, 1996 and
1997, and for each of the three years in the period ended December 31, 1997, our
report dated February 11, 1998 on our audits of the consolidated balance sheets
of NL Industries, Inc. as of December 31, 1996 and 1997 and the related
consolidated statements of operations, shareholders' deficit and cash flows for
each of the three years in the period ended December 31, 1997, and our report
dated January 22, 1998 on our audits of the consolidated balance sheets of
Titanium Metals Corporation as of December 31, 1996 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997, which reports are
included in this Annual Report on Form 10-K.

COOPERS & LYBRAND L.L.P.

Denver, Colorado
March 30, 1998

<PAGE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tremont
Corporation's Consolidated Financial Statements for the year-to-date period
ended December 31, 1995 and is qualified in its entirety by reference to such
consolidated financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,650
<SECURITIES> 0
<RECEIVABLES> 4,603
<ALLOWANCES> 2,663
<INVENTORY> 0
<CURRENT-ASSETS> 7,510
<PP&E> 1,369
<DEPRECIATION> 655
<TOTAL-ASSETS> 134,878
<CURRENT-LIABILITIES> 7,622
<BONDS> 2,500
0
0
<COMMON> 7,550
<OTHER-SE> 76,109
<TOTAL-LIABILITY-AND-EQUITY> 134,878
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 163
<INCOME-PRETAX> 5,389
<INCOME-TAX> 4
<INCOME-CONTINUING> 5,385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,385
<EPS-PRIMARY> .73
<EPS-DILUTED> .70

</TABLE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tremont
Corporation's Consolidated Financial Statements for the year-to-date periods
ended March 31, 1996, June 30, 1996, September 30, 1996 and December 31, 1996,
and is qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 2,228 69,003 68,132 68,035
<SECURITIES> 0 0 0 0
<RECEIVABLES> 7,743 7,602 7,894 7,471
<ALLOWANCES> 2,663 2,663 2,663 2,663
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 7,542 74,083 73,477 77,291
<PP&E> 1,369 1,369 1,369 1,379
<DEPRECIATION> 627 639 652 665
<TOTAL-ASSETS> 146,077 211,843 213,332 223,523
<CURRENT-LIABILITIES> 4,474 9,081 6,374 7,673
<BONDS> 3,500 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 7,550 7,586 7,586 7,640
<OTHER-SE> 90,502 143,701 146,219 150,389
<TOTAL-LIABILITY-AND-EQUITY> 146,077 211,843 213,332 223,523
<SALES> 0 0 0 0
<TOTAL-REVENUES> 0 0 0 0
<CGS> 0 0 0 0
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 130 274 274 0274
<INCOME-PRETAX> 2,278 32,573 35,466 39,936
<INCOME-TAX> 0 6,053 6,611 0
<INCOME-CONTINUING> 2,221 26,338 28,474 29,962
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,221 26,338 28,474 29,962
<EPS-PRIMARY> .30 3.56 3.85 4.05
<EPS-DILUTED> .29 3.45 3.72 3.90

</TABLE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tremont
Corporation's consolidated financial statements for the year-to-date periods
ended March 31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997,
and is qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 61,039 49,984 45,455 37,959
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 2,663 2,663 2,663 2,663
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 69,467 57,214 53,139 46,986
<PP&E> 1,394 1,394 1,394 1,395
<DEPRECIATION> 678 692 707 721
<TOTAL-ASSETS> 213,886 206,651 210,521 214,996
<CURRENT-LIABILITIES> 6,601 6,118 6,935 5,988
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 7,668 7,685 7,688 7,690
<OTHER-SE> 138,184 129,635 129,846 128,638
<TOTAL-LIABILITY-AND-EQUITY> 213,886 206,651 210,521 214,996
<SALES> 0 0 0 0
<TOTAL-REVENUES> 0 0 0 0
<CGS> 0 0 0 0
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 00 0
<INCOME-PRETAX> 1,523 8,716 16,457 26,422
<INCOME-TAX> 2,948 5,606 8,182 11,545
<INCOME-CONTINUING> (2,414) 2,027 7,083 13,557
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (2,414) 2,027 7,083 13,557
<EPS-PRIMARY> (.32) .28 .99 1.92
<EPS-DILUTED> (.33) .24 .90 1.76

</TABLE>

ITEM 3: LEGAL PROCEEDINGS

From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. See Note
14 of the Consolidated Financial Statements, which information is incorporated
herein by reference.

TITANIUM METALS CORPORATION

ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)

INDEX OF FINANCIAL STATEMENTS AND SCHEDULES

Page
FINANCIAL STATEMENTS

Report of Independent Accountants F-2

Consolidated Statements of Operations for the Years ended F-3
December 31, 1995, 1996 and 1997

Consolidated Balance Sheets at December 31, 1996 and 1997 F-4/F-5

Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1996 and 1997 F-6/F-7

Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1995, 1996 and 1997 F-8

Notes to Consolidated Financial Statements F-9/F-27

FINANCIAL STATEMENT SCHEDULES

Report of Independent Accountants S-1

Schedule II-Valuation and qualifying accounts S-2
<PAGE>

Schedules I, III and IV are omitted because they are not applicable.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of Titanium Metals Corporation:

We have audited the accompanying consolidated balance sheets of Titanium
Metals Corporation as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Titanium Metals
Corporation as of December 31, 1996 and 1997, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
<PAGE>

COOPERS & LYBRAND L.L.P.

Denver, Colorado
January 22, 1998

TITANIUM METALS CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

Years ended December 31, 1995, 1996 and 1997
(In thousands, except per share data)

<PAGE>

<TABLE>
<CAPTION>
1995 1996 1997

<S> <C> <C> <C>
Revenues and other income:
Net sales $ 184,723 $ 507,074 $ 733,577
Other, net 5,293 7,286 3,517

190,016 514,360 737,094

Costs and expenses:
Cost of sales 170,699 418,775 554,546
Selling, general, administrative and development 14,065 29,917 45,319
Special charges (credit) (1,200) 4,824 -
Interest 10,414 8,953 2,066

193,978 462,469 601,931

Income (loss) before income taxes and minority interest (3,962) 51,891 135,163

Income tax expense 255 2,336 41,004
Minority interest - Convertible Preferred Securities - 826 8,840
Other minority interest - 1,085 2,309

Net income (loss) $ (4,217) $ 47,644 $ 83,010

Diluted net income (loss) $ (4,217) $ 48,470 $ 91,850

<PAGE>

Earnings per share:
Basic $ (.27) $ 1.72 $ 2.64

Diluted (.27) 1.72 2.49

Weighted average shares outstanding:
Basic 15,383 27,623 31,457
Diluted 15,383 28,142 36,955
</TABLE>

<PAGE>

TITANIUM METALS CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 1996 and 1997
(In thousands, except per share data)

<PAGE>

<TABLE>
<CAPTION>
ASSETS 1996 1997

<S> <C> <C>
Current assets:
Cash and cash equivalents $ 86,526 $ 68,957
Accounts and other receivables, less
allowance of $4,788 and $2,218 114,100 155,678
Receivable from related parties 1,676 15,844
Inventories 155,488 153,818
Prepaid expenses and other 12,510 13,253
Deferred income taxes 718 6,219

Total current assets 371,018 413,769

Other assets:
Investment in joint ventures 270 23,270
Goodwill 67,430 59,771
Other intangible assets 19,314 17,889
Other 13,799 15,341
Deferred income taxes 11,618 593

Total other assets 112,431 116,864

Property and equipment:
Land 6,129 6,545
Buildings 32,929 26,823
Equipment 207,046 222,845
Construction in progress 17,513 58,740

263,617 314,953
Less accumulated depreciation 44,048 52,527
<PAGE>

Net property and equipment 219,569 262,426

$ 703,018 $ 793,059

</TABLE>

<PAGE>

TITANIUM METALS CORPORATION

CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31, 1996 and 1997
(In thousands, except per share data)

<PAGE>

<TABLE>
<CAPTION>
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY 1996 1997

<S> <C> <C>
Current liabilities:
Notes payable $ 7,992 $ 3,372
Current maturities of long-term debt and capital lease obligations 469 1,354
Accounts payable 49,628 59,501
Accrued liabilities 46,173 46,809
Payable to related parties 1,577 1,298
Income taxes 6,638 11,482
Deferred income taxes 348 -

Total current liabilities 112,825 123,816

Noncurrent liabilities:
Long-term debt 1,158 451
Capital lease obligations 11,562 10,996
Payable to related parties 996 847
Accrued OPEB cost 27,512 26,192
Accrued pension cost 2,743 836
Deferred income taxes 10,629 11,620
Other 3,920 1,441

Total noncurrent liabilities 58,520 52,383

Minority interest - Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
subordinated debt securities ("Convertible Preferred Securities") 201,250 201,250
Other minority interest 4,207 6,663

<PAGE>

Stockholders' equity:
Preferred stock $.01 par value; 1 million shares authorized,
none outstanding - -
Common stock, $.01 par value; 99 million shares authorized,
31.5 million shares issued and outstanding 315 315
Additional paid-in capital 346,133 346,723
Retained earnings (deficit) (25,009) 58,001
Currency translation adjustment 5,635 3,908
Pension liabilities adjustment (858) -

Total stockholders' equity 326,216 408,947

$ 703,018 $ 793,059

Commitments and contingencies (Notes 13 and 14)
</TABLE>

<PAGE>

TITANIUM METALS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 1995, 1996 and 1997
(In thousands)

<PAGE>

<TABLE>
<CAPTION>
1995 1996 1997

<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,217) $ 47,644 $ 83,010
Depreciation and amortization 13,218 18,974 28,384
Earnings of joint ventures in excess of (3,824) (5,992) 1,013
distributions
Deferred income taxes - (10,416) 6,578
Other minority interest - 1,085 2,309
Other, net (1,286) 1,753 (36)

3,891 53,048 121,258
Change in assets and liabilities, net of
acquisitions:
Receivables (870) (29,998) (41,781)
Inventories (15,477) (13,309) 294
Prepaid expenses 19 (6,207) 1,600
Accounts payable and accrued liabilities 6,036 (106) 1,231
Income taxes 165 4,521 5,526
Accounts with related parties (275) (8,412) (13,292)
Other, net 396 (269) (2,266)

Net cash provided (used) by operating activities (6,115) (732) 72,570

Cash flows from investing activities:
Capital expenditures (2,981) (21,679) (66,295)
Business acquisitions - (109,934) (476)
Other investments - - (13,020)
<PAGE>

Other, net 421 213 -

Net cash used by investing activities (2,560) (131,400) (79,791)

Cash flows from financing activities:
Indebtedness:
Borrowings 9,371 113,793 -
Reductions (7,371) (179,480) (4,833)
Deferred financing costs - (579) (2,230)
Related parties loans (repayments) 5,500 (42,521) (930)
Proceeds from issuance of:
Common stock, net - 131,488 -
Convertible Preferred Securities, net - 192,409 -
Other, net 1,148 - (1,830)

Net cash provided (used) by financing activities 8,648 215,110 (9,823)

$ (27) $ 82,978 $ (17,044)

</TABLE>

<PAGE>

TITANIUM METALS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 1995, 1996 and 1997
(In thousands)

<PAGE>

<TABLE>
<CAPTION>
1995 1996 1997

<S> <C> <C> <C>
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ (27) $ 82,978 $ (17,044)
Cash acquired - 3,053 -
Currency translation 51 471 (525)

24 86,502 (17,569)
Balance at beginning of year - 24 86,526

Balance at end of year $ 24 $ 86,526 $ 68,957

Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 9,970 $ 8,958 $ 2,159
Convertible Preferred Securities dividends - - 13,531
Income taxes 112 6,348 22,483

Acquisitions:
Cash and cash equivalents $ $ 3,053 $
- -
Goodwill and other intangibles - 85,158 577
Other noncash assets - 180,847 3,503
Liabilities - (89,124) (3,604)
Common stock issued to IMI plc - (70,000) -

<PAGE>

Cash paid $ - $109,934 $ 476

Noncash assets contributed to joint venture $ - $ - $ 11,287

</TABLE>

<PAGE>

TITANIUM METALS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years ended December 31, 1995, 1996 and 1997
(In thousands)

<PAGE>

<TABLE>
<CAPTION>
<S> Additional
Common Common paid-in
shares stock capital

<C> <C> <C>
Balance at December 31, 1994 15,066 $ 150 $ 135,709
Net loss - - -
Conversion of stockholder indebtedness 568 6 10,846
Cash contribution 59 1 1,147
Noncash distribution to stockholders - - (4,982)
Adjustments, net - - -

Balance at December 31, 1995 15,693 157 142,720
Net income - - -
Common stock issued:
IMI Titanium Acquisition (Note 3) 9,561 96 69,904
Stock Offering (Note 10) 6,200 62 132,926
Other 1 - 28
Other, net - - 555
Adjustments, net - - -

Balance at December 31, 1996 31,455 315 346,133
Net income - - -
Other, net 3 - 590
Adjustments, net - - -

Balance at December 31, 1997 31,458 $ 315 $ 346,723

<PAGE>

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S> Retained Adjustments

Earnings Currency Pension
(deficit) translation liabilities Total

<C> <C> <C> <C>
$ (68,436) $ 160 $ (2,835) $ 64,748
(4,217) - - (4,217)
- - - 10,852
- - - 1,148
- - - (4,982)
- 123 456 579

(72,653) 283 (2,379) 68,128
47,644 - - 47,644

- - - 70,000
- - - 132,988
- - - 28
- - - 555
- 5,352 1,521 6,873

(25,009) 5,635 (858) 326,216
83,010 - - 83,010
- - - 590
- (1,727) 858 (869)

$ 58,001 $ 3,908 $ - $ 408,947

<PAGE>

</TABLE>

<PAGE>

TITANIUM METALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1--Summary of significant accounting policies:

~ Principles~of~consolidation.~~~~~The accompanying consolidated financial
statements include the accounts of Titanium Metals Corporation ("TIMET") and its
majority-owned subsidiaries (collectively, the "Company"). All material
intercompany accounts and balances have been eliminated. Certain prior year
amounts have been reclassified to conform to the current year presentation.

~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 amount of revenues and expenses
during the reporting period. Ultimate actual results may, in some instances,
differ from previously estimated amounts.

~Translation~of~foreign~currencies.~~~~~Assets and liabilities of
subsidiaries whose functional currency is deemed to be other than the
U.S. dollar are translated at year end rates of exchange and revenues and
expenses are translated at average exchange rates prevailing during the year.
Resulting translation adjustments are accumulated in the currency translation
adjustments component of stockholders' equity, net of related deferred income
taxes. Currency transaction gains and losses are recognized in income
currently.

~Net~sales.~~~ Sales are recognized when products are shipped.

<PAGE>

~Inventories~and~cost~of~sales.~~~~~Inventories are stated at the lower of
cost or market. The first-in, first-out ("FIFO") method and last-in, first-out
("LIFO") method are each used to determine the cost of approximately one-half of
inventories.

~Cash~and~cash~equivalents.~~~ Cash equivalents include highly liquid
investments with original maturities of three months or less.

~Investment~in~joint~ventures.~~~~~Investments in 20% to 50%-owned joint
ventures are accounted for by the equity method. Differences between the
Company's investment and it's pro rata share of the investee's reported equity
is amortized by the straight-line method over not more than 15 years.
~
~ ~Intangible~assets~and~amortization.~~~~~Goodwill, representing the excess
of cost over the fair value of individual net assets acquired in business
combinations accounted for by the purchase method, is amortized by the straight
line method over 15 years and is stated net of accumulated amortization of $9.5
million at December 31, 1997 (1996 - $1.6 million). Patents and other
intangible assets, except intangible pension assets, are amortized by the
straight-line method over the periods expected to be benefited, generally nine
years.

~ Property,~equipment~and~depreciation.~~~~~Property and equipment are
stated at cost. Maintenance, repairs and minor renewals are expensed; major
improvements are capitalized. Interest costs related to major, long-term
capital projects are capitalized as a component of construction costs and were
$1.0 million in 1997 (nil in 1995 and 1996). Depreciation is computed
principally on the straight-line method over the estimated useful lives of 15 to
40 years for buildings and three to 25 years for machinery and equipment.

Software development costs are capitalized and amortized over the
software's estimated useful life, generally three to five years. Training,
reengineering and similar costs are expensed as incurred.

<PAGE>

~Employee~benefit~plans.~~~ Accounting and funding policies for
retirement plans and postretirement benefits other than pensions ("OPEB") are
described in Note 12.

S~tock-based~compensation.~~~~~The Company has elected the disclosure
alternative prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," and to account for the
Company's stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and its various interpretations. Under APB No. 25, no compensation
cost is generally recognized for fixed stock options for which the exercise
price is not less than the market price of the Company's common stock on the
grant date. See Note 10.

~Research~and~development.~~~~~Research and development expense
approximated $3.6 million in 1997 ($2 million in each of 1995 and 1996).

~Advertising~costs.~~~ Advertising costs, which are not significant, are
expensed as incurred.

~Income~taxes.~~~ Deferred income tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the income tax and financial reporting carrying amounts of assets and
liabilities, including investments in subsidiaries not included in TIMET's
consolidated U.S. tax group.

~Stock~split~and~earnings~per~share.~~~~~Common shares outstanding for all
periods presented have been adjusted to reflect the 65-for-1 split (the "Stock
Split") of the Company's common stock effected in connection with TIMET's June
1996 initial public offering of common stock (the "Stock Offering"). The
<PAGE>

Company retroactively adopted SFAS No. 128, "Earnings per Share," in 1997.
Diluted earnings per share reflects the assumed conversion of the Convertible
Preferred Securities and the dilutive effect of common stock options. See Note
17.

~Fair~value~of~financial~instruments.~~~The Company's bank debt reprices
with changes in market interest rates and, accordingly, the carrying amount of
such debt approximates market value. The fair value of the Convertible
Preferred Securities based on quoted market prices approximated $200 million at
December 31, 1997 and $220 million at December 31, 1996 (book value at both
dates - $201 million).

At December 31, 1997, the fair value of the Company's common equity, based
on the quoted market price at that date of $28.88 per share, was approximately
$908 million (book value - $409 million).

Note 2--Business and geographic segments:

The Company's operations are conducted in one business segment, titanium
metals operations. The Company is a vertically integrated producer of titanium
sponge, ingot, slab, forged and/or rolled mill products, and cast products for
aerospace, industrial and other markets. The Company's production facilities
are located principally in the United States, United Kingdom, and France with
its products sold throughout the world.

<PAGE>

<TABLE>
<CAPTION>
<S> 1995 1996 1997

(In thousands)
<C> <C> <C>
Sales $ 184,723 $ 507,074 $ 733,577

Operating income $ 5,378 $ 59,849 $ 132,962
General corporate income, net 1,074 995 4,267
Interest expense (10,414) (8,953) (2,066)

Income (loss) before income taxes $ (3,962) $ 51,891 $ 135,163

~Geographic~segments~
Net sales - point of origin:
United States $ 174,802 $ 354,651 $ 534,440
Europe 13,862 186,063 288,196
Eliminations (3,941) (33,640) (89,059)

$ 184,723 $ 507,074 $ 733,577

Net sales - point of destination:
United States $ 135,421 $ 312,640 $ 401,217
Europe 33,520 155,364 276,419
Other 15,782 39,070 55,941

$ 184,723 $ 507,074 $ 733,577

Operating income:
<PAGE>

United States $ 4,408 $ 39,014 $ 76,434
Europe 970 20,835 56,528

$ 5,378 $ 59,849 $ 132,962

Identifiable assets:
United States $ 235,844 $ 442,163 $ 511,199
Europe 12,940 173,210 221,006
General corporate - 87,645 60,854

$ 248,784 $ 703,018 $ 793,059

</TABLE>

<PAGE>

Export sales from U.S. based operations approximated $40 million in 1995,
$58 million in 1996 and $97 million in 1997. At December 31, 1997, the net
assets of non-U.S. subsidiaries included in consolidated net assets approximated
$124 million.

General corporate assets consist principally of cash equivalents and
general corporate income in 1996 and 1997 consists principally of interest
income thereon. In 1995, general corporate income consists principally of the
Company's equity in earnings of Basic Investments, Inc. ("BII") and Victory
Valley Land Company L.P. ("VVLC").

Operating income in 1995 includes a restructuring credit of $1.2 million
resulting from prior years restructuring charges being less than originally
estimated. Operating income in 1996 includes $4.8 million of special charges
principally related to the IMI Titanium Acquisition.

Note 3--Business combinations:

~IMI~Titanium~Acquisition.~~~~~In February 1996, the Company acquired the
titanium metals businesses of IMI plc and affiliates (the "IMI Titanium
Acquisition"). IMI previously conducted its titanium business principally
through its wholly owned United Kingdom subsidiary, IMI Titanium Ltd. (now
known as TIMET UK), and its U.S. subsidiary, IMI Titanium, Inc. (now known as
TIMET Castings). IMI conveyed all of its titanium-related businesses to the
Company in exchange for 9.6 million newly issued shares of the Company's common
stock valued at $70 million. In addition, the Company issued $20 million of the
Company's subordinated debt to IMI in exchange for a like amount of debt
previously owed to IMI by its U.K. subsidiary.

<PAGE>

The Company accounted for the IMI Titanium Acquisition by the purchase
method of accounting (purchase price approximately $72 million, including
transaction costs). The Company has included the results of operations of the
IMI titanium business in its consolidated results of operations effective at the
beginning of 1996 with preacquisition earnings of approximately $.4 million
deducted in determining net income for 1996. Preacquisition sales of the IMI
titanium business included in consolidated sales for 1996 approximated
$11.7 million.

~Axel~Johnson~Metals~Acquisition.~~~~~In October 1996, the Company acquired
substantially all of the assets and assumed substantially all of the liabilities
of Axel Johnson Metals, Inc. ("AJM") for approximately $97 million cash (the
"AJM Acquisition"). The AJM Acquisition was completed through a newly formed
subsidiary, Titanium Hearth Technologies, Inc. ("THT"), and included the
acquisition of the 50% interest in the Titanium Hearth Technologies partnership
that TIMET did not previously own. THT operates titanium scrap processing
facilities and electron beam cold hearth melting furnaces.

The Company accounted for the AJM Acquisition by the purchase method and
consolidated THT's results effective October 1, 1996; revenues for the fourth
quarter of 1996 approximated $21 million. Prior to the AJM Acquisition, the
Company accounted for its 50% interest in the THT partnership by the equity
method.

~Other~European~acquisitions.~~~~~During the last half of 1996 and January
1997, the Company completed three acquisitions in Europe for an aggregate cash
cost of approximately $12 million, all of which were accounted for by the
purchase method.

In August 1996, TIMET and Compagnie Europeenne du Zirconium - CEZUS, S.A.
("CEZUS") completed an agreement to form a new jointly-owned French company
("TIMET Savoie") to manufacture and sell titanium products. TIMET Savoie is
<PAGE>

70%-owned by TIMET and 30%-owned by CEZUS. TIMET Savoie manufactures products
inside CEZUS' production facility in Ugine, France both directly, utilizing its
own personnel and equipment, and, for melting and forging and certain other
operations, indirectly by subcontracting to CEZUS under a long-term
manufacturing agreement. In July 1996, TIMET purchased the 74% equity interest
in TISTO, a German distributor of titanium products, that it did not already
own. In January 1997, the Company purchased LASAB Laser Applikations-und
Bearbeitungs GmbH, which is in the titanium and stainless steel laser-welded
tube and pipe and laser cutting business.

~Proforma~financial~information~(unaudited).~On a proforma basis assuming
the IMI Titanium Acquisition and the AJM Acquisition occurred at the beginning
of 1996, net sales for 1996 were $564.4 million, operating income was $59.8
million, net income was $43.2 million and basic earnings per share was $1.50.
The proforma effect of the other transactions is not material. The pro forma
financial information is not necessarily indicative of the operating results
that might have occurred if the IMI and AJM transactions had been completed at
such earlier dates or the operating results which may occur in the future.

Note 4 - Joint ventures:

<PAGE>

<TABLE>
<CAPTION>
<S> December 31,

1996 1997

(in thousands)
<C> <C>
ValTimet $ - $ 19,845
Other 270 3,425

$ 270 $ 23,270

</TABLE>

<PAGE>

Effective in July 1997, TIMET combined its Tennessee-based welded tubing
operations with those of Valinox Welded, a French manufacturer of welded tubing,
principally stainless steel and titanium, with operations in France and China.
The joint venture, "ValTimet", is 46% owned by TIMET and 54% owned by Valinox
Welded. For the six months ended December 31, 1997, ValTimet reported sales of
$56.6 million and net income of $.1 million. At December 31, 1997, ValTimet
reported total assets of $80.1 million and equity of $28.7 million.

TIMET's strategy for developing new markets and uses for titanium includes
providing funds to third parties to prove out a new use or uses of titanium.
Other joint ventures consist principally of such investments.

Note 5--Inventories:

<PAGE>

<TABLE>
<CAPTION>
<S> December 31,

1996 1997

(In thousands)
<C> <C>
Raw materials $ 27,463 $ 23,925
Work-in-process 82,707 91,884
Finished products 39,089 31,230
Supplies 6,229 6,779

$ 155,488 $ 153,818

</TABLE>

<PAGE>

The average cost of LIFO inventories exceeded the net carrying amount of
such inventories by approximately $32 million at each of December 31, 1996 and
1997.

Note 6--Accrued liabilities:

<PAGE>

<TABLE>
<CAPTION>
<S> December 31,

1996 1997

(In thousands)
<C> <C>
OPEB cost $ 2,024 $ 2,102
Pension cost 1,507 1,072
Other employee benefits 21,360 25,869
Environmental cost 1,643 1,762
Taxes, other than income 2,292 3,062
Accrued dividends - Convertible Preferred Securities 1,270 1,103
Other 16,077 11,839

$ 46,173 $ 46,809

</TABLE>

<PAGE>

Note 7--Intangible and other noncurrent assets:

<PAGE>

<TABLE>
<CAPTION>
<S> December 31,

1996 1997

(In thousands)
<C> <C>
Intangible assets:
Patents $ 14,103 $ 14,333
Covenants not to compete 5,000 5,000
Intangible pension assets 1,199 1,997

20,302 21,330
Less accumulated amortization 988 3,441

$ 19,314 $ 17,889

Other noncurrent assets:
Deferred financing costs $ 8,775 $ 8,482
Prepaid pension costs 1,340 2,228
Other 3,684 4,631

$ 13,799 $ 15,341

</TABLE>

<PAGE>

Note 8--Notes payable, long-term debt and capital lease obligations:

<PAGE>

<TABLE>
<CAPTION>
<S> December 31,

1996 1997

(In thousands)
<C> <C>
Notes payable - non U.S. credit agreements $ 7,992 $ 3,372

Long-term debt:
Bank credit agreement $ - $ -

Other 1,555 1,612
Less current maturities 397 1,161

$ 1,158 $ 451

Capital lease obligations $ 11,634 $ 11,189
Less current maturities 72 193

$ 11,562 $ 10,996

</TABLE>

<PAGE>

~Non-U.S.~credit~agreements.~TIMET UK has a Pounds15.5 million ($26
million) overdraft/revolving bank credit facility through January 1998 which has
been extended pending completion of renewal negotiations. Borrowings are
collateralized by TIMET UK's inventories and receivables and currently generally
bear interest at the bank's base rate plus 1.5% (8% at December 31, 1997). At
December 31, 1997, aggregate unused borrowing availability under TIMET UK's bank
credit agreement and a short-term bank credit agreement in France approximated
$26 million.

TIMET UK's credit agreement is expected to be renewed on a longer term
basis with lower interest rates than the current agreement.

~Long-term~bank~credit~agreement.~~~TIMET has a $200 million revolving
bank credit facility expiring in July 2002. Borrowings bear interest initially
at LIBOR plus 0.50% and are collateralized by substantially all of TIMET's
assets. The credit agreement generally limits dividends on TIMET's common stock
to 25% of net income, limits additional indebtedness and transactions with
affiliates, requires the maintenance of certain financial ratios and contains
other covenants customary in transactions of this type. At December 31, 1997,
approximately $135 million was available for dividends on, or repurchase of,
common stock.

~Capital~lease~obligations.~In connection with the IMI Titanium
Acquisition, TIMET UK entered into long-term leases with IMI principally
covering production facilities within England. In connection with the TIMET
Savoie transaction, TIMET Savoie entered into long-term leases with CEZUS
covering machinery and equipment. The terms of these capital leases range from
10-30 years. The UK rentals are subject to adjustment every five years based on
changes in certain published price indexes. TIMET has guaranteed TIMET UK's
obligations under its leases. Assets held under capital leases included in

<PAGE>

buildings and equipment at December 31, 1997 were $10.6 million and $.8 million,
respectively, with related aggregate accumulated depreciation of $.8 million.

Aggregate maturities of long-term debt and capital lease obligations:

<PAGE>

<TABLE>
<CAPTION>
<S> Capital Long-term
Leases Debt

(In thousands)
<C> <C>
Years ending December 31,
1998 $ 1,189 $ 1,161
1999 1,189 86
2000 1,189 86
2001 1,189 86
2002 1,189 86
2003 and thereafter 25,114 107
Less amounts representing interest (19,870) -

$ 11,189 $ 1,612

</TABLE>

<PAGE>

Note 9--Minority interest:

~Convertible~Preferred~Securities.~In November 1996, TIMET Capital Trust I
(the "Trust"), a wholly-owned subsidiary of TIMET, issued $201 million of 6.625%
Company-obligated mandatorily redeemable preferred securities and $6 million of
6.625% common securities. TIMET holds all of the outstanding common securities
of the Trust. The Trust used the proceeds from such issuance to purchase from
the Company $207 million principal amount of TIMET's 6.625% convertible junior
subordinated debentures due 2026 (the "Subordinated Debentures"). TIMET's
guarantee of payment of the Convertible Preferred Securities (in accordance with
the terms thereof) and its obligations under the Trust documents, in the
aggregate, constitute a full and unconditional guarantee by the Company of the
Trust's obligations under the Convertible Preferred Securities. The sole assets
of the Trust are the Subordinated Debentures. The Convertible Preferred
Securities represent undivided beneficial ownership interests in the Trust, are
entitled to cumulative preferred distributions from the Trust of 6.625% per
annum, compounded quarterly, and are convertible, at the option of the holder,
into TIMET common stock at the rate of 1.339 shares of common stock per
Convertible Preferred Security (an equivalent price of $37.34 per share), for an
aggregate of approximately 5.4 million common shares if fully converted.

The Convertible Preferred Securities mature December 2026 and are
redeemable at the Company's option beginning December 1999, initially at
approximately 104.6% of principal amount declining to 100% from December 2006.
The Company has the right to defer dividend payments for up to 20 consecutive
quarters ("Extension Period") on one or more occasions. In the event the
Company exercises this right, it would be unable during any Extension Period to,
among other things, pay dividends on or reacquire its capital stock.

<PAGE>

Dividends on the Convertible Preferred Securities are reported in the
Consolidated Statement of Operations as minority interest, net of allocable
income tax benefit.

~Other.~~~~~~Other minority interest relates principally to TIMET Savoie.

Note 10--Stockholders' equity:

~Common~stock.~~~~~In June 1996, the Company completed the sale of
6.2 million shares of its common stock in the Stock Offering at an initial price
to the public of $23 per share. In connection with the Stock Offering, the
Company effected the Stock Split, increased its authorized common shares to
99 million shares, increased its authorized preferred stock to 1 million shares,
and reserved up to 3.1 million shares to be issued under the 1996 Long Term
Incentive Plan (the "TIMET Incentive Plan"). The Company's net proceeds from
the Stock Offering approximated $131 million. The Company used approximately
$42.5 million of the net proceeds to repay existing indebtedness to stockholders
($22.5 million to Tremont and $20 million to IMI) and $82 million to repay bank
indebtedness.

Certain key executive officers of the Company received shares (the
"Management Shares") of the Company's common stock and cash payments with a
combined value of approximately $3 million in consideration for their services
in connection with the IMI Titanium Acquisition, which cost was expensed as
incurred. The Management Shares were converted into 93,000 shares of the
Company's common stock in connection with the Stock Offering.

~Preferred~stock.~~~~~The Company is authorized to issue 1 million shares
of preferred stock. The rights of preferred stock as to, among other things,
dividends, liquidation, redemption, conversions, and voting rights are
determined by the Board of Directors.

<PAGE>

~Common~stock~options.~The TIMET Incentive Plan provides for the
discretionary grant of restricted common stock, stock options, stock
appreciation rights and other incentive compensation to officers and other key
employees of the Company. Options vest over five years and expire ten years
from date of grant.

Additionally, a plan for TIMET's nonemployee directors provides for
eligible directors to annually be granted options to purchase 1,500 shares (625
shares prior to 1998) of the Company's common stock at a price equal to the
market price on the date of grant and to receive, as partial payment of director
fees, annual grants of 400 shares of common stock. Options granted to
nonemployee directors vest in one year and expire ten years from date of grant
(five year expiration for grants prior to 1998).

The weighted average remaining life of options outstanding at December 31,
1997 was 8.7 years. At December 31, 1997, options to purchase 1,250 shares were
exercisable at an average exercise price of $23 per share and approximately
190,000 options become exercisable in 1998.

At December 31, 1997, approximately 1.7 million shares and 56,350 shares
were available for future grant under the TIMET Incentive Plan and the
nonemployee director plan, respectively.

The following table summarizes information about the Company's stock
options.

<PAGE>

<TABLE>
<CAPTION>
<S> Amount
Payable Weighted
Exercise Upon Weighted Average fair
price per Exercise Average value at
Shares share (thousands) exercise Grant date
price

<C> <C> <C> <C> <C>
Outstanding at December 31, - $ - $ - $ -
1995

Granted:
At market 370,275 23.00-31.25 9,110 24.60 $ 12.46

Above market 167,000 26.00-29.00 4,592 27.50 10.22

Canceled (1,000) 23.00 (23) 23.00

Outstanding at December 31, 536,275 23.00-31.25 13,679 25.51
1996

Granted:
At market 230,075 25.94-29.50 6,414 27.88 $ 12.72

Above market 134,000 31.00-34.00 4,355 32.50 11.29

Exercised (1,250) 23.00-29.50 (33) 26.25

<PAGE>

Canceled (79,100) 23.00-34.00 (2,045) 25.86

Outstanding at December 31, 820,000 $23.00-34.00 $ 22,370 $ 27.28
1997

</TABLE>

<PAGE>

Weighted average fair values of options at grant date were estimated using
the Black-Scholes model and assumptions listed below.

Assumptions: 1996 1997
Expected life (years) 6 6
Risk-free interest rate 6.67% 6.00%
Volatility 40% 35%
Dividend yield 0% 0%

Had stock-based compensation cost been determined based on the estimated
fair values of options granted and recognized as compensation expense over the
vesting period of the grants in accordance with SFAS No. 123, the Company's
pretax income, net income and diluted earnings per share for 1997 would have
been reduced by $3.7 million, $2.4 million and $.06 per share, respectively, and
for 1996 would have been reduced by $1.1 million, $.7 million and $.02 per
share, respectively.

Note 11--Income taxes:

Summarized below are (i) the components of income (loss) before income
taxes and minority interest ("pretax income"), (ii) the difference between the
income tax expense attributable to pretax income and the amounts that would be
expected using the U.S. federal statutory income tax rate of 35%, and (iii) the
components of the income tax expense attributable to pretax income.

<PAGE>

<TABLE>
<CAPTION>
<S> 1995 1996 1997

(In thousands)
<C> <C> <C>
Expected income tax expense (benefit) $ (1,387) $ 18,161 $ 47,307
Non-U.S. tax rates 37 (464)
U.S. state income taxes, net - 848 126
Adjustment of deferred tax valuation allowance 1,502 (16,519) (5,785)
Other, net 140 (191) (180)

$ 255 $ 2,336 $ 41,004

Income tax expense:
Current income taxes:
U.S. $ $ 6,516 $ 17,146
-
Non-U.S. 255 6,236 17,280

255 12,752 34,426

Deferred income taxes (benefit):
U.S. - (10,809) 5,998
Non-U.S. - 393 580

- (10,416) 6,578

$ 255 $ 2,336 $ 41,004

<PAGE>

Pretax income (loss):
U.S. $ (4,589) $ 33,941 $ 81,766
Non-U.S. 627 17,950 53,397

$ (3,962) $ 51,891 $135,163

Comprehensive tax provision allocable to:
Pretax income $ 255 $ 2,336 $ 41,004
Minority interest - Convertible Preferred - (444) (4,760)
Securities
Stockholders' equity, principally deferred taxes
allocable to adjustment components - 2,500 (533)

$ 255 $ 4,392 $ 35,711

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S> December 31,

1996 1997

Assets Liabilitie Assets Liabilitie
s s

(In millions)
Temporary differences relating to net assets: <C> <C> <C> <C>
Inventories $ - $ (4.9) $ .1 $ (5.5)

Property and equipment - (16.0) .2 (17.8)
Accrued OPEB cost 11.4 - 11.7 -
Accrued liabilities and other deductible 10.9 - 8.7 -
differences
Other taxable differences - (5.5) - (7.7)
Tax loss and credit carryforwards 11.7 - 5.9 -
Valuation allowance (6.2) - (.4) -

Gross deferred tax assets (liabilities) 27.8 (26.4) 26.2 (31.0)
Netting (15.5) 15.5 (19.4) 19.4

Total deferred taxes 12.3 (10.9) 6.8 (11.6)
Less current deferred taxes .7 (.3) 6.2 -

Net noncurrent deferred taxes $ 11.6 $ (10.6) $ .6 $ (11.6)

</TABLE>

<PAGE>

The Company's valuation allowance (nominal at December 31, 1997) decreased
in the aggregate (including amounts allocated to items other than pretax income)
by $.9 million in 1995, $16.5 million in 1996 and $5.8 million in 1997. The
1996 reduction included $10 million due to a change in estimate of the future
tax benefits of certain tax net operating loss carryforwards ("NOLs") and
alternative minimum tax credit ("AMT") carryforwards that will more likely than
not be realized.

At December 31, 1997, the Company had, for U.S. federal income tax
purposes, NOLs of approximately $9.4 million expiring in 2008 and 2009. At
December 31, 1997, the Company had an AMT credit carryforward of approximately
$2 million, which can be utilized to offset regular income taxes payable in
future years. The AMT carryforward has an indefinite carryforward period. The
utilization of the Company's NOLs and AMT carryforwards is subject to an annual
limitation.

Note 12--Employee benefit plans:

~Variable~compensation~plans.~~~~~Approximately 85% of the Company's total
worldwide employees, including a significant portion of its domestic hourly
employees, participate in compensation programs which provide for variable
compensation based upon the financial performance of the Company and, in certain
circumstances, the individual performance of the employee. The cost of these
plans was $.3 million in 1995, $12 million in 1996 and $11 million in 1997.

~Defined~contribution~plans.~~All of the Company's domestic hourly and
salaried employees (70% of total worldwide employees at December 31, 1997) are
eligible to participate in contributory savings plans with partial matching
employer contributions. Company matching contributions are based on company
profitability for 60% of eligible employees. Approximately 40% of the Company's
total employees at December 31, 1997 also participate in a defined contribution
<PAGE>

pension plan with contributions based, beginning in 1996, upon a fixed
percentage of the employee's eligible earnings. The cost of these pension and
savings plans was insignificant in 1995, $3 million in 1996 and $3 million in
1997.

~Defined~benefit~pension~plans.~~~~~The Company maintains contributory and
noncontributory defined benefit pension plans covering substantially all
European employees and a minority of its domestic workforce. Defined pension
benefits are generally based on years of service and compensation, and the
related expense is based upon independent actuarial valuations. The Company's
funding policy for U.S. plans is to contribute annually amounts satisfying the
funding requirements of the Employee Retirement Income Security Act of 1974, as
amended. Non-U.S. defined benefit pension plans are funded in accordance with
applicable statutory requirements. The defined benefit pension plans were
closed to new participants prior to 1997 and, in some cases, benefit levels have
been frozen.

The funded status of the Company's defined benefit pension plans and the
components of net periodic defined benefit pension cost are set forth below.
The rates used in determining the actuarial present value of benefit obligations
at December 31, 1997 were: (i) discount rates -- 7% to 7.25% (1996 - 7% to
8.75%), and (ii) rates of increase in future compensation levels -- 3% to 5%
(1996 - 3% to 6.5%). The expected long-term rates of return on assets used was
7% to 9% (1996 - 7% to 9.75%). The benefit obligations are sensitive to changes
in these estimated rates and actual results may differ from the obligations
noted below. At December 31, 1997, the assets of the plans are primarily
comprised of government obligations, corporate stocks and bonds.

<PAGE>

<TABLE>
<CAPTION>
<S> Assets exceed Accumulated benefits
Accumulated benefits exceed assets
December 31, December 31,

1996 1997 1996 1997

(In thousands)
<C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligations $ 47,733 $ 69,033 $ 34,424 $ 28,820
Nonvested benefits 3,040 3,767 1,448 1,639

Accumulated benefit obligations 50,773 72,800 35,872 30,459
Effect of projected salary increases 27,766 32,905 114 203

Projected benefit obligations 78,539 105,705 35,986 30,662
Plan assets at fair value 82,118 108,199 31,624 28,628

Plan assets over (under) projected benefit
obligations 3,579 2,494 (4,362) (2,034)
Unrecognized net gain (loss) from
experience
different from actuarial assumptions (2,674) (778) 1,981 787
Unrecognized prior service cost 1,269 1,068 1,199 2,009
Unrecognized net assets being amortized
over 14 years (834) (556) (1,011) (673)
Adjustment to recognize minimum liability - - (2,057) (1,997)

Total prepaid (accrued) pension cost 1,340 2,228 (4,250) (1,908)
Current portion - - (1,507) (1,072)

<PAGE>

Noncurrent prepaid (accrued) pension $ 1,340 $ 2,228 $ (2,743) $ (836)
cost

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S> 1995 1996 1997

(In thousands)
<C> <C> <C>
Service cost benefits earned $ 630 $ 3,260 $ 3,906
Interest cost on projected benefit obligations 3,959 7,696 9,201
Actual return on plan assets (9,560) (7,256) (20,555)
Net amortization and deferrals 5,910 (1,951) 9,724

Net pension expense $ 939 $ 1,749 $ 2,276

</TABLE>

<PAGE>

~Postretirement~benefits~other~than~pensions.~~~~~The Company provides
certain postretirement health care and life insurance benefits to certain of its
domestic retired employees. The Company funds such benefits as they are
incurred, net of any contributions by the retirees. Under plans currently in
effect, a majority of TIMET's active domestic employees would become eligible
for these benefits if they reach normal retirement age while working for TIMET.
These plans have been revised to discontinue employer-paid health care coverage
for future retirees once they become Medicare-eligible.

The components of the periodic OPEB cost and accumulated OPEB obligations
are set forth below. The rates used in determining the actuarial present value
of the accumulated OPEB obligations at December 31, 1997 were: (i) discount
rate--7% (1996 - 7.75%), (ii) rate of increase in future compensation levels --
3% and (iii) rate of increase in future health care costs--10% in 1998,
gradually declining to 5.25% in 2016 and thereafter. If the health care cost
trend rate was increased by one percentage point for each year, OPEB expense
would have increased approximately $.2 million in 1997, and the actuarial
present value of accumulated OPEB obligations at December 31, 1997 would have
increased approximately $2.6 million. The accrued OPEB cost is sensitive to
changes in these estimated rates and actual results may differ from the
obligations noted below.

<PAGE>

<TABLE>
<CAPTION>
<S> December 31,

1996 1997

(In thousands)
<C> <C>
Actuarial present value of accumulated OPEB obligations:
Retiree benefits $ 16,266 $ 16,514
Other fully eligible active plan participants 1,236 1,420
Other active plan participants 3,750 4,363

21,252 22,297
Unrecognized net gain from experience different from
actuarial assumptions 4,536 2,673
Unrecognized prior service credits 3,748 3,324

Total accrued OPEB cost 29,536 28,294
Less current portion 2,024 2,102

Noncurrent accrued OPEB cost $ 27,512 $ 26,192

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S> 1995 1996 1997

(In thousands)
<C> <C> <C>
Service cost benefits earned $ 242 $ 407 $ 357
Interest cost on accumulated OPEB obligations 2,060 1,567 1,613
Net amortization and deferrals (475) (653) (635)

Net OPEB expense $ 1,827 $ 1,321 $ 1,335

</TABLE>

<PAGE>

Note 13--Related party transactions:

TIMET was a 75%-owned subsidiary of Tremont Corporation during 1995 with
the remaining 25% held by Union Titanium Sponge Corporation ("UTSC"), a
consortium of Japanese companies. In February 1996, TIMET acquired the titanium
businesses of IMI for stock and in June 1996 completed the Stock Offering which
together reduced Tremont's ownership in TIMET to 30% and UTSC's ownership to
10%. In 1997, UTSC reduced its ownership to less than 5%. In connection with
the IMI Titanium Acquisition, Tremont holds an option expiring in February 1999
to purchase up to 1.5 million shares of the Company's common stock from IMI for
$12 million ($7.95 per share) and UTSC holds a like option to purchase .5
million shares from IMI at the same price per share.

Contran Corporation and other entities related to Harold C. Simmons hold
an aggregate of approximately 49% of Tremont's outstanding common stock.
Mr. Simmons may be deemed to control each of Contran, Tremont and TIMET.
Corporations that may be deemed to be controlled by or affiliated with
Mr. Simmons sometimes engage in (i) intercorporate transactions with related
companies such as guarantees, management and expense sharing arrangements,
shared fee arrangements, joint ventures, partnerships, loans, options, advances
of funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (ii) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates, and understands that
Contran, Tremont and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives then
<PAGE>

relevant, it is possible that the Company might be a party to one or more such
transactions in the future.

TIMET supplies titanium strip product to ValTimet under a long-term
contract as the preferred supplier. Sales to ValTimet were $22 million in 1997
and receivables from related parties at December 31, 1997 relate principally to
sales to ValTimet.

In connection with the construction and financing of TIMET's vacuum
distillation process ("VDP") titanium sponge plant, UTSC licensed certain
technology to TIMET in exchange for the right to acquire up to 20% of TIMET's
annual production capacity of VDP sponge at agreed-upon prices through early
1997 and higher formula-determined prices based on cost thereafter through 2008.
A discount from market value represents TIMET's consideration to UTSC for the
licensed technology. Sales to UTSC approximated $9 million in 1995, $12 million
in 1996 and $17 million in 1997.

The Company has an intercorporate services agreement with Tremont whereby
the Company provides certain management, financial and other services to Tremont
for approximately $.4 million in each of 1996 and 1997, subject to renewal for
future years. Charges from Tremont approximated $.9 million in 1995 pursuant to
similar arrangements for compensation and intercorporate services.

TIMET's purchases from THT approximated $10 million in 1995 and $9 million
in 1996 prior to the AJM Acquisition.

Prior to October 1995, TIMET owned (i) a 32% equity interest in BII,
which, among other things, provides utility services in the industrial park
<PAGE>

where one of TIMET's plants is located, and (ii) a 12% interest in VVLC, which
is actively engaged in efforts to develop certain real estate. BII, through a
wholly-owned subsidiary, owned an additional 50% interest in VVLC. In October
1995, TIMET made a pro rata distribution to its shareholders consisting of its
interest in BII and VVLC, and certain real estate. The Company distributed the
assets at their net carrying amount, which approximated $5 million. The Company
purchases certain utility services from Basic Management, Inc. ("BMI"), a
subsidiary of BII. The amount paid to BMI approximated $1 million in each of
the past three years.

Interest expense on related party indebtedness approximated $2.1 million
in 1995, $2 million in 1996 and nil in 1997. The subordinated debt to both IMI
and Tremont accrued interest at 10.4% and was repaid in 1996 with proceeds from
the Stock Offering. During 1997, TIMET Savoie repaid amounts outstanding under
a revolving line of credit provided by CEZUS and terminated the facility.

CEZUS has the right to sell its interest in TIMET Savoie to the Company
for 30% of TIMET Savoie's registered capital and the Company has the right to
purchase CEZUS' 30% interest in TIMET Savoie for 30% of TIMET Savoie's equity
determined under French accounting principles.

TIMET completed a recapitalization in 1995 under which, among other
things, (i) Tremont made a $1 million cash capital contribution to TIMET and
exchanged $8 million of TIMET subordinated debt into TIMET common equity,
(ii) TIMET made a $1 million cash prepayment of accrued interest to UTSC, and
(iii) UTSC exchanged $3 million of interest owed by TIMET to UTSC into TIMET
common equity. In connection with the recapitalization, TIMET issued .5 million
shares of common stock pro rata to its then-existing shareholders.

In connection with amendments of a TIMET credit facility during 1995,
Tremont advanced the Company $8 million as additional subordinated TIMET debt
($5.5 million advanced in 1995), guaranteed $5 million of the term loans,
<PAGE>

collateralized such guarantee with approximately 600,000 shares of NL
Industries, Inc. common stock held by Tremont, and agreed to pledge additional
NL shares as necessary to meet certain market value thresholds. NL is an
indirect subsidiary of Contran. Contran entered into an agreement with TIMET's
lenders whereby Contran was obligated to purchase the pledged shares from
TIMET's lenders under certain conditions. In connection with the Stock
Offering, the security arrangements between the Company's lenders and Tremont
and Contran were terminated.

<PAGE>

Note 14--Commitments and contingencies:

~Long-term~agreements.~TIMET has a long-term supply agreement with The
Boeing Company under which TIMET will be the principal supplier of titanium
products to Boeing Commercial Airplane Group ("Boeing") and its family of
suppliers for the next ten years.

The Company may enter into long-term agreements with other customers and
suppliers.

<PAGE>

~Operating~leases.~~~~~The Company leases certain manufacturing and office
facilities and various equipment. Most of the leases contain purchase and/or
various term renewal options at fair market and fair rental values,
respectively. In most cases management expects that, in the normal course of
business, leases will be renewed or replaced by other leases. Net rent expense
was approximately $1.4 million in 1995, $2.7 million in 1996 and $3.6 million in
1997.

At December 31, 1997, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:

<PAGE>

<TABLE>
<CAPTION>
<S> Amount

(In thousands)

Years ending December 31, <C>
1998 $ 4,871
1999 3,192
2000 1,970
2001 1,333
2002 1,139
2003 and thereafter 884
13,389
Less sublease income 90
$ 13,299

</TABLE>

<PAGE>

~Environmental~matters.~

~ BMI~Companies.~TIMET and certain other companies, including Kerr-McGee
Chemical Corporation, Chemstar Lime Company and Pioneer Chlor Alkali, Inc.
(successor to Stauffer Chemical Company) operate facilities in a complex (the
"BMI Complex") owned by BMI, adjacent to TIMET's Henderson, Nevada plant. In
1993, TIMET and each of such companies, along with certain other companies who
previously operated facilities in the common areas of the BMI Complex
(collectively the "BMI Companies") completed a Phase I environmental assessment
of the common areas of the BMI Complex and each of the individual company sites
pursuant to consent agreements with the Nevada Division of Environmental
Protection ("NDEP"). In July 1996, the Company signed a consent agreement with
NDEP regarding implementation of the Phase II assessment of the Company property
within the BMI Complex. A report regarding the Phase II assessment of the
common areas of the BMI Complex was submitted to NDEP in August 1996. Until
completion of the sampling and analysis involved in the Phase II assessment of
the Company property and any further Phase II testing that NDEP may require for
the BMI Complex common areas, it is not possible to provide a reasonable
estimate of the additional remediation costs, if any, or the Company's likely
share of any such costs.

~ Pomona~facility.~The Company has conducted an additional study and
assessment work as required by the California Regional Water Quality Control
Board--Los Angeles Region (the "Water Quality Board") related to soil and
possible groundwater contamination at TIMET Castings' Pomona, California
facility. The site is near an area that has been designated as a
U.S. Environmental Protection Agency "Superfund" site. Although the Company
does not believe it will incur a material liability with respect to the Pomona
facility, the Water Quality Board has not completed its review.
<PAGE>

The Company adopted the requirements of AICPA Statement of Position No.
96-1, "Environmental Remediation Liabilities" in 1997, the effect of which was
not material. At December 31, 1997, the Company had accrued an aggregate of
approximately $1.3 million for the environmental matters discussed above under
~BMI~Companies,~Pomona~facility~and~Henderson~facility~. The Company records
liabilities related to environmental remediation obligations when estimated
future expenditures are probable and reasonably estimable. Such accruals are
adjusted as further information becomes available or circumstances change.
Estimated future expenditures are not discounted to their present value. It is
not possible to estimate the range of costs for certain sites. The imposition
of more stringent standards or requirements under environmental laws or
regulations, the results of future testing and analysis undertaken by the
Company at its operating facilities, or a determination that the Company is
potentially responsible for the release of hazardous substances at other sites,
could result in expenditures in excess of amounts currently estimated to be
required for such matters. No assurance can be given that actual costs will not
exceed accrued amounts or that costs will not be incurred with respect to sites
as to which no problem is currently known or where no estimate can presently be
made. Further, there can be no assurance that additional environmental matters
will not arise in the future.

<PAGE>

~Other.~~~~~The Company is involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
business.

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

~Concentration~of~credit~and~other~risks.~~~~~Substantially all of the
Company's sales and operating income are derived from operations based in the
U.S., the U.K. and France. The majority of the Company's sales are to customers
in the aerospace industry (including airframe and engine construction). Such
concentration of customers may impact the Company's overall exposure to credit
and other risks, either positively or negatively, in that such customers may be
similarly affected by economic or other conditions. The Company's ten largest
customers accounted for about one-third of net sales in each of the past three
years.

Note 15 - New accounting principles not yet adopted:

The Company is required to adopt SFAS No. 130, "Reporting Comprehensive
Income," ~~~ in the first quarter of 1998. Upon adoption of SFAS No. 130, the
Company will present a new Consolidated Statement of Comprehensive Income which
will report all changes in the Company's stockholders' equity other than
transactions with stockholders. Comprehensive income pursuant to SFAS No. 130
would include net income, as reported in the Consolidated Statement of
Operations, plus the net changes in the foreign currency translation and pension
liabilities components of stockholders' equity.

currently in effect under SFAS No. 14. SFAS No. 131, among other things,
establishes standards regarding the information a company is required to
disclose about its operating segments and provides guidance regarding what
constitutes a reportable operating segment. The Company currently believes
segment disclosures pursuant to SFAS No. 131 will not be materially different
from the current disclosures pursuant to SFAS No. 14.

Note 16--Quarterly results of operations (unaudited):

<PAGE>

<TABLE>
<CAPTION>
<S> Quarters ended

March 31 June 30 Sept. 30 Dec. 31

(In millions, except per share data)
<C> <C> <C> <C>
~Year~ended~December~31,~1997:~

Net sales $ 167.1 $ 181.4 $ 177.2 $ 207.9
Operating income 26.5 32.8 33.3 40.4
Net income 15.8 20.3 21.3 25.6

Net income per share:
Basic $ .50 $ .65 $ .68 $ .81
Diluted .49 .61 .64 .75

~Year~ended~December~31,~1996:~

Net sales $ 107.6 $ 118.8 $ 123.4 $ 157.3
Operating income 6.8 13.8 17.8 21.4
Net income 2.1 8.1 13.3 24.1

Net income per share:
Basic $ .10 $ .30 $ .42 $ .77
Diluted .10 .30 .42 .75

</TABLE>

<PAGE>

Due to the timing of the issuance of common stock, such as the Stock
Offering, and rounding in calculations the sum of quarterly earnings per share
is different than earnings per share for the full year.

Note 17 - Earnings per share:

A reconciliation of the numerator and denominator used in the calculation
of basic and diluted earnings per share is presented below. The Convertible
Preferred Securities were issued in November 1996. Antidilutive stock options
omitted from the denominator were not material.

<PAGE>

<TABLE>
<CAPTION>
<S> 1995 1996 1997
(in thousands)
<C> <C> <C>
Numerator:
Net income (loss) $ (4,217) $ 47,644 $ 83,010
Minority interest - Convertible
Preferred Securities - 826 8,840

Diluted net income $ (4,217) $ 48,470 $ 91,850

Denominator:
Average common shares outstanding 15,383 27,623 31,457
Convertible Preferred Securities - 491 5,389
Average dilutive stock options - 28 107

Diluted shares 15,383 28,142 36,954

</TABLE>

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

To the Stockholders and Board of Directors of Titanium Metals Corporation:

Our report on the consolidated financial statements of Titanium Metals
Corporation as of December 31, 1996 and 1997 and for each of the three years in
the period ended December 31, 1997 is included on page F-2 of this Form 10-K.
In connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page F-1 of this
Annual Report on Form 10-K.

COOPERS & LYBRAND L.L.P.

Denver, Colorado
January 22, 1998

<PAGE>

TITANIUM METALS CORPORATION

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(In thousands)

<PAGE>

<TABLE>
<CAPTION>
<S> Additions
charged
Balance at (credited) to
Description Beginning costs and
of year expenses

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

Allowance for doubtful accounts $ 4,788 $ 2

Valuation allowance for deferred
Income taxes $ 6,158 $ (5,785)

Reserve for excess and slow
Moving inventories $ 7,719 $ (1,427)

Year ended December 31, 1996:

Allowance for doubtful accounts $ 3,620 $ 4,695

Valuation allowance for deferred
Income taxes $ 22,677 $ (16,519)

Reserve for excess and slow
Moving inventories $ 6,000 $ (2,500)

<PAGE>

Year ended December 31, 1995:

Allowance for doubtful accounts $ 3,143 $ 2,453

Valuation allowance for deferred
Income taxes $ 23,599 $ (922)

Reserve for excess and slow
Moving inventories $ 5,000 $ 1,000

</TABLE>

<PAGE>

Balance
at end
Deductions Other of year

$ (2,572) (a) $ $ 2,218

$ - $ $ 373

$ - $ $ 6,292

$ (4,598) (a) $ 1,071 (b) $ 4,788

$ - $ $ 6,158

$ - $ 4,219 (b) $ 7,719

<PAGE>

$ (1,976) (a) $ $ 3,620

$ - $ $ 22,677

$ - $ $ 6,000

</TABLE>

<PAGE>

(a) Amounts written off, less recoveries.
(b) Represents the effect of the IMI Titanium Acquisition and the AJM
Acquisition.

ITEM 3. LEGAL PROCEEDINGS

Lead pigment litigation

The Company was formerly involved in the manufacture of lead pigments for
use in paint and lead-based paint. The Company has been named as a defendant or
third party defendant in various legal proceedings alleging that the Company and
other manufacturers are responsible for personal injury and property damage
allegedly associated with the use of lead pigments. The Company is vigorously
defending such litigation. Considering the Company's previous involvement in the
lead pigment and lead-based paint businesses, there can be no assurance that
additional litigation, similar to that described below, will not be filed. In
addition, various legislation and administrative regulations have, from time to
time, been enacted or proposed that seek to (a) impose various obligations on
present and former manufacturers of lead pigment and lead-based paint with
respect to asserted health concerns associated with the use of such products and
(b) effectively overturn court decisions in which the Company and other pigment

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<PAGE>

manufacturers have been successful. Examples of such proposed legislation
include bills which would permit civil liability for damages on the basis of
market share, rather than requiring plaintiffs to prove that the defendant's
product caused the alleged damage. While no legislation or regulations have been
enacted to date which are expected to have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity,
the imposition of market share liability could have such an effect. The Company
has not accrued any amounts for the pending lead pigment and lead-based paint
litigation. There is no assurance that the Company will not incur future
liability in respect of this pending litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. However, based on, among other things, the results of such litigation to
date, the Company believes that the pending lead pigment and lead-based paint
litigation is without merit. Liability that may result, if any, cannot
reasonably be estimated.

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

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<PAGE>

denial of the motion to dismiss plaintiffs' fraud, restitution and
indemnification claims. In May 1994 the trial court granted the defendants'
motion to dismiss the plaintiffs' restitution and indemnification claims, and
plaintiffs appealed. In June 1996 the Appellate Division reversed the trial
court's dismissal of plaintiffs' restitution and indemnification claims,
reinstating those claims. Defendants' motion for summary judgment on the fraud
claim was denied in August 1995. In December 1995 defendants moved for summary
judgment on the basis that the fraud claim was time-barred. In February 1996 the
motion was denied. In July 1997 the denial of defendants' two summary judgment
motions on the fraud claim were affirmed by the Appellate Division. Discovery is
proceeding.

In August 1992 the Company was served with an amended complaint in
Jackson, et al. v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga
County, Cleveland, Ohio (Case No. 236835). Plaintiffs seek compensatory and
punitive damages for personal injury caused by the ingestion of lead, and an
order directing defendants to abate lead-based paint in buildings. Plaintiffs
purport to represent a class of similarly situated persons throughout the State
of Ohio. The amended complaint identifies 18 other defendants who allegedly
manufactured lead products or lead-based paint, and asserts causes of action
under theories of strict liability, negligence per se, negligence, breach of
express and implied warranty, fraud, nuisance, restitution, and negligent
infliction of emotional distress. The complaint asserts several theories of
liability including joint and several, market share, enterprise and alternative
liability. In October 1992 the Company and the other defendants moved to dismiss
the complaint with prejudice. In July 1993 the court dismissed the complaint. In
December 1994 the Ohio Court of Appeals reversed the trial court dismissal and
remanded the case to the trial court. In July 1996 the trial court granted
defendants' motion to dismiss the property damage and enterprise liability
claims, but denied the remainder of the motion. Discovery is proceeding with
respect to class certification.

In November 1993 the Company was served with a complaint in Brenner, et
al. v. American Cyanamid, et al., (No. 12596-93) Supreme Court, State of New
York, Erie County alleging injuries to two children purportedly caused by lead
pigment. The complaint seeks $24 million in compensatory and $10 million in
punitive damages for alleged negligent failure to warn, strict liability, fraud
and misrepresentation, concert of action, civil conspiracy, enterprise
liability, market share liability, and alternative liability. In January 1994
the Company answered the complaint, denying liability. Discovery is proceeding.

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

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<PAGE>

conspiracy claim, and dismissed the Company and certain other defendants from
the cases. In September 1996 the trial court granted the remaining defendants'
motions for summary judgment and in October 1997 the Maryland Special Court of
Appeals affirmed. Plaintiffs did not seek further review of the dismissal of the
conspiracy claims against the Company and other defendants. Plaintiffs' request
for review of the affirmance of the dismissal of the remaining defendants was
denied by the Maryland Court of Appeals in February 1998.

In January 1996 the Company was served with a complaint on behalf of
individual intervenors in German, et. al. v. Federal Home Loan Mortgage Corp.,
et. al., (U.S. District Court, Southern District of New York, Civil Action No.
93 Civ. 6941 (RWS)). This alleged class action lawsuit had originally been
brought against the City of New York and other landlord defendants. The
intervenors' complaint alleges claims against the Company and other former
manufacturers of lead pigment for medical monitoring, property abatement, and
other injunctive relief, based on various causes of action, including negligent
product design, negligent failure to warn, strict liability, fraud and
misrepresentation, concert of action, civil conspiracy, enterprise liability,
market share liability, breach of express and implied warranties, and nuisance.
The intervenors purport to represent a class of children and pregnant women who
reside in New York City. In May 1996 the Company and the other former
manufacturers of lead pigments filed motions to dismiss the intervenors'
complaint. In May 1997 plaintiffs moved for class certification and defendants
moved for summary judgment. In June 1997 the Court stayed all further activity
in the case pending reconsideration of its 1995 decision permitting filing of
the complaint against the manufacturer defendants and joinder of the new
complaint with the pre-existing complaint against New York City and other
landlords.

In April 1996 the Company was served with a complaint in Gates v. American
Cyanamid Co., et al., (No. I1996-2114) Supreme Court, State of New York, Erie
County, alleging personal injury arising out of exposure to lead pigment.
Plaintiff seeks compensatory and punitive damages from the Company, other former
lead pigment manufacturers and the LIA based on claims of negligence, strict
liability, fraud, concert of action, civil conspiracy, enterprise liability,
market share liability and alternative liability. Plaintiff also asserts claims
against the landlords of the apartments in which plaintiff has lived since 1977.
In July 1996 the Company filed an answer denying plaintiff's allegations of
wrongdoing and liability. In November 1997 plaintiffs dismissed this case with
prejudice as to all defendants.

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

-12-

<PAGE>

In January 1998 the Company was served with an amended complaint in Adams
v. NL Industries, Inc., et at., (No. A9701785), Court of Common Pleas, Hamilton
County, Ohio, alleging injury to a minor arising out of exposure to lead, and
seeking compensatory and punitive damages from the Company, and other former
manufacturers of lead products and the LIA based on claims of negligence, strict
liability, breach of warranty, failure to warn, and nuisance. The amended
complaint also asserts various claims against plaintiff's landlord. In February
1998 the Company filed a motion to dismiss the action on procedural grounds. In
March 1998 plaintiffs informed the Court that they intend to dismiss the
complaint.

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

The Company has filed actions seeking declaratory judgment and other
relief against various insurance carriers with respect to costs of defense and
indemnity coverage for certain of its environmental and lead pigment litigation.
NL Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124,
- -2125 (HLS) (District Court of New Jersey). The action relating to lead pigment
litigation defense costs filed in May 1990 against Commercial Union Insurance
Company ("Commercial Union") seeks to recover defense costs incurred in the City
of New York lead pigment case and two other cases which have since been resolved
in the Company's favor. In July 1991 the court granted the Company's motion for
summary judgment and ordered Commercial Union to pay the Company's reasonable
defense costs for such cases. In June 1992 the Company filed an amended
complaint in the United States District Court for the District of New Jersey
against Commercial Union seeking to recover costs incurred in defending four
additional lead pigment cases which have since been resolved in the Company's
favor. In August 1993 the court granted the Company's motion for summary
judgment and ordered Commercial Union to pay the reasonable costs of defending
those cases. In July 1994 the court entered judgment on the order requiring
Commercial Union to pay previously-incurred Company costs in defending those
cases. In September 1995 the U.S. Court of Appeals for the Third Circuit
reversed and remanded for further consideration the decision by the trial court
that Commercial Union was obligated to pay the Company's reasonable defense
costs in certain of the lead pigment cases. The trial court had made its
decision applying New Jersey law; the appeals court concluded that New York and
not New Jersey law applied and remanded the case to the trial court for a
determination under New York law. On remand from the Court of Appeals, the trial
court in April 1996 granted the Company's motion for summary judgment, finding
that Commercial Union had a duty to defend the Company in the four lead paint
cases which were the subject of the Company's second amended complaint. The
court also issued a partial ruling on Commercial Union's motion for summary
judgment in which it sought allocation of defense costs and contribution from
the Company and two other insurance carriers in connection with the three lead
paint actions on which the court had granted the Company summary judgment in
1991. The court ruled that Commercial Union is entitled to receive such
contribution from the Company and the two carriers, but reserved ruling with
respect to the relative contributions to be made by each of the parties,
including contributions by the Company that may be required with respect to
periods in which it was self-insured

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<PAGE>

and contributions from one carrier which were reinsured by a former subsidiary
of the Company, the reinsurance costs of which the Company may ultimately be
required to bear.

In June 1997 the Company reached a settlement in principle with its
insurers regarding allocation of defense costs in the lead pigment cases in
which reimbursement of defense costs had been sought.

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

Environmental matters and litigation

The Company has been named as a defendant, PRP, or both, pursuant to
CERCLA and similar state laws in approximately 75 governmental and private
actions associated with waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by the Company, or its
subsidiaries, or their predecessors, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. These proceedings
seek cleanup costs, damages for personal injury or property damage, and/or
damages for injury to natural resources. Certain of these proceedings involve
claims for substantial amounts. Although the Company may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.

The extent of CERCLA liability cannot accurately be determined until the
Remedial Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA
issues a record of decision and costs are allocated among PRPs. The extent of
liability under analogous state cleanup statutes and for common law equivalents
are subject to similar uncertainties. The Company believes it has provided
adequate accruals for reasonably estimable costs for CERCLA matters and other
environmental liabilities. At December 31, 1997 the Company had accrued $135
million for those environmental matters which are reasonably estimable. The
Company determines the amount of accrual on a quarterly basis by analyzing and
estimating the range of possible costs to the Company. Such costs include, among
other things, remedial investigations, monitoring, studies, clean-up, removal
and remediation. During the first quarter of 1997 the Company's accrual was
increased by $30 million to include legal fees and other costs of managing and
monitoring environmental remediation sites as required by the adoption of the
AICPA's Statement of Position 96-1, "Environmental Remediation Liabilities." See
Note 2 to the Consolidated Financial Statements. It is not possible to estimate

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<PAGE>

the range of costs for certain sites. The Company has estimated that the upper
end of the range of reasonably possible costs to the Company for sites for which
it is possible to estimate costs is approximately $175 million. The Company's
estimate of such liability has not been discounted to present value and the
Company has not recognized any potential insurance recoveries. No assurance can
be given that actual costs will not exceed either accrued amounts or the upper
end of the range for sites for which estimates have been made, and no assurance
can be given that costs will not be incurred with respect to sites as to which
no estimate presently can be made. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs, or
a determination that the Company is potentially responsible for the release of
hazardous substances at other sites could result in expenditures in excess of
amounts currently estimated by the Company to be required for such matters.
Further, there can be no assurance that additional environmental matters will
not arise in the future. More detailed descriptions of certain legal proceedings
relating to environmental matters are set forth below.

In July 1991 the United States filed an action in the U.S. District Court
for the Southern District of Illinois against the Company and others (United
States of America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578) with
respect to the Granite City, Illinois lead smelter formerly owned by the
Company. The complaint seeks injunctive relief to compel the defendants to
comply with an administrative order issued pursuant to CERCLA, and fines and
treble damages for the alleged failure to comply with the order. The Company and
the other parties did not implement the order, believing that the remedy
selected by the U.S. EPA was invalid, arbitrary, capricious and was not selected
in accordance with law. The complaint also seeks recovery of past costs and a
declaration that the defendants are liable for future costs. Although the action
was filed against the Company and ten other defendants, there are 330 other PRPs
who have been notified by the U.S. EPA. Some of those notified were also
respondents to the administrative order. In February 1992 the court entered a
case management order directing that the remedy issues be tried before the
liability aspects are presented. In September 1995 the U.S. EPA released its
amended decision selecting cleanup remedies for the Granite City site. The
Company presently is challenging portions of the U.S. EPA's selection of the
remedy. In September 1997 the U.S. EPA informed the Company that past and future
cleanup costs are estimated to total approximately $63.5 million. There is
currently no allocation among the PRPs for these costs.

At the Pedricktown, New Jersey lead smelter site formerly owned by the
Company the U.S. EPA has divided the site into two operable units. Operable unit
one addresses contaminated ground water, surface water, soils and stream
sediments. In July 1994 the U.S. EPA issued the Record of Decision for operable
unit one. The U.S. EPA estimates the cost to complete operable unit one is $18.7
million. In May 1996 certain PRPs, but not the Company, entered into an
administrative consent order with the U.S. EPA to perform the remedial design
phase of operable unit one. In January 1998 the Company and the other PRPs were
informed that U.S. EPA would begin negotiations in 1998 with respect to
performance of the remedial action phase of operable unit one. In addition, the
U.S. EPA has indicated that it has incurred approximately $6.2 million in past

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<PAGE>

costs. The U.S. EPA issued an order with respect to operable unit two in March
1992 to the Company and 30 other PRPs directing immediate removal activities
including the cleanup of waste, surface water and building surfaces. The Company
has complied with the order, and the work with respect to operable unit two is
completed. The Company has paid approximately 50% of operable unit two costs, or
$2.5 million.

Having completed the RIFS at the Company's former Portland, Oregon lead
smelter site, the Company conducted predesign studies to explore the viability
of the U.S. EPA's selected remedy pursuant to a June 1989 consent decree
captioned U.S. v. NL Industries, Inc., Civ. No. 89-408, United States District
Court for the District of Oregon. Subsequent to the completion of the predesign
studies, the U.S. EPA issued notices of potential liability to approximately 20
PRPs, including the Company, directing them to perform the remedy, which was
initially estimated to cost approximately $17 million, exclusive of
administrative and overhead costs and any additional costs, for the disposition
of recycled materials from the site. In January 1992 the U.S. EPA issued
unilateral administrative orders to the Company and six other PRPs directing the
performance of the remedy. The Company and the other PRPs commenced performance
of the remedy. In August 1994, the U.S. EPA authorized the Company and the other
PRPs to cease performing most aspects of the selected remedy. In May 1997 the
U.S. EPA issued an Amended Record of Decision ("ARD") for the soils operable
unit changing portions of the cleanup remedy selected. The ARD requires
construction of an onsite containment facility estimated to cost between $10.5
million and $12 million, including capital costs and operating and maintenance
costs. The Company and certain other PRPs have entered into a consent decree to
perform the remedial action in the ARD. In November 1991 Gould, Inc., the
current owner of the site, filed an action, Gould, Inc. v. NL Industries, Inc.,
No. 91-1091, United States District Court for the District of Oregon, against
the Company for damages for alleged fraud in the sale of the smelter, rescission
of the sale, past CERCLA response costs and a declaratory judgment allocating
future response costs and punitive damages. In February 1998 the Company and the
other defendants reached an agreement in principle to settle the litigation by
agreeing to pay a portion of future costs, which are estimated to be within
previously-accrued amounts.

The Company and other PRPs entered into an administrative consent order
with the U.S. EPA requiring the performance of a RIFS at two sites in Cherokee
County, Kansas, where the Company and others formerly mined lead and zinc. A
former subsidiary of the Company mined at the Baxter Springs subsite, where it
is the largest viable PRP. In August 1997 the U.S. EPA issued the record of
decision for the Baxter Springs and Treece subsites. The U.S. EPA has estimated
that the selected remedy will cost an aggregate of approximately $7.1 million
for both subsites ($5.4 million for the Baxter Springs subsite). In addition,
the Company received a notice in March 1998 from the U.S. EPA that it may be a
PRP in three additional subsites in Cherokee County.

In January 1989 the State of Illinois brought an action against the
Company and several other subsequent owners and operators of the former plant in
Chicago, Illinois (People of the State of Illinois v. NL Industries, et al., No.
88-CH- 11618, Circuit Court, Cook County). The complaint seeks recovery of $2.3
million

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<PAGE>

of cleanup costs expended by the Illinois Environmental Protection Agency, plus
penalties and treble damages. In October 1992 the Supreme Court of Illinois
reversed the Appellate Division, which had affirmed the trial court's earlier
dismissal of the complaint, and remanded the case for further proceedings. In
December 1993 the trial court denied the State's petition to reinstate the
complaint, and dismissed the case with prejudice. In November 1996 the appeals
court reversed the dismissal. In August 1997 the trial court again dismissed the
case and the state has appealed. The U.S. EPA has issued an order to the Company
to perform a removal action at the Company's former facility involved in the
State of Illinois case. The Company is complying with the order.

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

In July 1991 a complaint was filed in the United States District Court for
the Central District of California, United States of America v. Peter Gull and
NL Industries, Inc., Civ. No. 91-4098, seeking recovery of $2 million in costs
incurred by the United States in response to the alleged release of hazardous
substances into the environment from a facility located in Norco, California,
treble damages and $1.8 million in penalties for the Company's alleged failure
to comply with the U.S. EPA's administrative order No. 88-13. The order, which
alleged that the Company arranged for the treatment or disposal of materials at
the Norco site, directed the immediate removal of hazardous substances from the
site. The Company carried out a portion of the remedy at the Norco site, but did
not complete the ordered activities because it believed they were in conflict
with California law. The court ruled that the Company was liable for
approximately $2.7 million in response costs plus approximately $3.6 million in

-17-

<PAGE>

penalties for failure to comply with the administrative order. In April 1994 the
court entered final judgment in this matter directing the Company to pay $6.3
million plus interest. Both the Company and the government have appealed. In
February 1998 the parties reached agreement in principle to settle this matter
within previously-accrued amounts.

At a municipal and industrial waste disposal site in Batavia, New York,
the Company and 50 others have been identified as PRPs. The U.S. EPA has divided
the site into two operable units. Pursuant to an administrative consent order
entered into with the U.S. EPA, the Company conducted a RIFS for operable unit
one, the closure of the industrial waste disposal section of the landfill. The
Company's RIFS costs were approximately $2 million. In June 1995 the U.S. EPA
issued the record of decision for operable unit one, which is estimated by the
U.S. EPA to cost approximately $12.3 million. In September 1995 the U.S. EPA and
certain PRPs entered into an administrative order on consent for the remedial
design phase of the remedy for operable unit one and the design phase is
proceeding. The Company and other PRPs entered into an interim cost sharing
arrangement for this phase of work. The Company and the other PRPs have
completed the work comprising operable unit two (the extension of the municipal
water supply) with the exception of annual operation and maintenance. The U.S.
EPA has also demanded approximately $.9 million in past costs from the PRPs.

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

Other litigation

Rhodes, et al. v. ACF Industries, Inc., et al. (Circuit Court of Putnam
County, West Virginia, No. 95-C-261). Twelve plaintiffs brought this action
against the Company and various other defendants in July 1995. Plaintiffs allege
that they were employed by demolition and disposal contractors, and claim that
as a result of the defendants' negligence they were exposed to asbestos during
demolition and disposal of materials from defendants' premises in West Virginia.
Plaintiffs allege personal injuries and seek compensatory damages totaling $18.5
million and punitive damages totaling $55.5 million. An agreement has been
reached settling this matter, with the Company being indemnified by another
party.

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

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

-18-

<PAGE>

are refiling their cases in Ohio. The Company is also a defendant in
approximately 1,000 additional asbestos cases pending in Ohio, the first of
which is scheduled for trial in the third quarter of 1998.

Plaintiff brought the complaint in Frank D. Seinfeld v. Harold C. Simmons,
et al. (Superior Court of New Jersey, Bergen County, Chancery Division, No.
C-336-96) in September 1996 on behalf of himself and derivatively, on behalf of
the Company, against the Company, Valhi and certain current and former members
of the Company's Board of Directors. The complaint alleges, among other things,
that the Company's purchase of shares in an August 1991 "Dutch auction" tender
offer was an unfair and wasteful expenditure of the Company's funds that
constituted a breach of the defendants' fiduciary duties to the Company's
shareholders. Plaintiff seeks, among other things, to rescind the Company's
purchase of approximately 10.9 million shares of its common stock from Valhi
pursuant to the Dutch auction, and plaintiff has stated that damages sought are
$149 million. The Company and the other defendants have answered the complaint
and have denied all allegations of wrongdoing. In March 1998 Valhi reached an
agreement to settle this matter. Under the stipulation of settlement, in which
the defendants denied any wrongdoing, Valhi would transfer to the Company
750,000 shares of the Company's common stock held by Valhi, subject to
adjustment based upon the market price of the Company's shares at the time of
closing, up to a maximum of 825,000 shares of the Company and a minimum of
675,000 shares of the Company. Valhi may, at its option, transfer cash or cash
equivalents in lieu of all or a portion of such shares of the Company based on
the market price of the Company's common stock at the time of transfer. The
settlement is subject to, among other things, approval by the court and, if
approved, is expected to close in the second or third quarter of 1998. Pursuant
to the agreement and subject to court approval, the Company will reimburse
plaintiffs for attorneys' fees of up to $3 million and related costs. There can
be no assurance that any such settlement will become effective.

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

<PAGE>

NL INDUSTRIES, INC.

ANNUAL REPORT ON FORM 10-K

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

Index of Financial Statements and Schedules

Financial Statements Pages

Report of Independent Accountants F-2

Consolidated Balance Sheets - December 31, 1996 and 1997 F-3 / F-4

Consolidated Statements of Operations - Years ended
December 31, 1995, 1996 and 1997 F-5

Consolidated Statements of Shareholders' Deficit - Years
ended December 31, 1995, 1996 and 1997 F-6

Consolidated Statements of Cash Flows - Years ended
December 31, 1995, 1996 and 1997 F-7 / F-9

Notes to Consolidated Financial Statements F-10 / F-43

Financial Statement Schedules

Report of Independent Accountants S-1

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

Schedule II - Valuation and qualifying accounts S-8

F-1

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of NL
Industries, Inc. as of December 31, 1996 and 1997, and the related consolidated
statements of operations, shareholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1997. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NL Industries,
Inc. as of December 31, 1996 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.

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

COOPERS & LYBRAND L.L.P.

Houston, Texas
February 11, 1998

F-2

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 1996 and 1997

(In thousands, except per share data)

ASSETS
1996 1997
---------- ----------

<S> <C> <C>
Current assets:
Cash and cash equivalents, including
restricted cash of $10,895 and $9,751 ......... $ 114,115 $ 106,145
Accounts and notes receivable, less
allowance of $3,813 and $2,828 ................ 138,538 148,676
Refundable income taxes ........................ 9,267 1,941
Inventories .................................... 232,510 192,780
Prepaid expenses ............................... 4,219 3,348
Deferred income taxes .......................... 1,597 1,642
---------- ----------

Total current assets ....................... 500,246 454,532
---------- ----------

Other assets:
Marketable securities .......................... 23,718 17,270
Investment in joint ventures ................... 181,479 172,721
Prepaid pension cost ........................... 24,821 23,848
Deferred income taxes .......................... 223 110
Other .......................................... 24,825 18,482
---------- ----------

Total other assets ......................... 255,066 232,431
---------- ----------

Property and equipment:
Land ........................................... 21,963 19,479
Buildings ...................................... 165,479 150,090
Machinery and equipment ........................ 660,333 616,309
Mining properties .............................. 95,891 88,617
Construction in progress ....................... 13,231 2,577
---------- ----------
956,897 877,072

Less accumulated depreciation and depletion .... 490,851 465,843
---------- ----------

Net property and equipment ................. 466,046 411,229
---------- ----------

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

F-3

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31, 1996 and 1997

(In thousands, except per share data)

LIABILITIES AND SHAREHOLDERS' DEFICIT
1996 1997
----------- -----------

<S> <C> <C>
Current liabilities:
Notes payable ................................ $ 25,732 $ 13,968
Current maturities of long-term debt ......... 91,946 77,374
Accounts payable and accrued liabilities ..... 153,904 161,730
Payable to affiliates ........................ 10,204 11,512
Income taxes ................................. 5,664 10,910
Deferred income taxes ........................ 2,895 891
----------- -----------

Total current liabilities ................ 290,345 276,385
----------- -----------

Noncurrent liabilities:
Long-term debt ............................... 737,100 666,779
Deferred income taxes ........................ 151,221 132,797
Accrued pension cost ......................... 57,941 44,389
Accrued postretirement benefits cost ......... 55,935 50,951
Other ........................................ 132,048 148,903
----------- -----------

Total noncurrent liabilities ............. 1,134,245 1,043,819
----------- -----------

Minority interest .............................. 249 257
----------- -----------

Shareholders' deficit:
Preferred stock - 5,000 shares authorized,
no shares issued or outstanding ............. -- --
Common stock - $.125 par value; 150,000
shares authorized; 66,839 shares issued ..... 8,355 8,355
Additional paid-in capital ................... 759,281 759,281
Adjustments:
Currency translation ....................... (118,629) (133,810)
Pension liabilities ........................ (1,822) --
Marketable securities ...................... 1,278 4,297
Accumulated deficit .......................... (485,948) (495,421)
Treasury stock, at cost (15,721 and 15,572 ...
shares) ..................................... (365,996) (364,971)
----------- -----------

Total shareholders' deficit .............. (203,481) (222,269)
----------- -----------

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

Commitments and contingencies (Notes 13 and 17)

See accompanying notes to consolidated financial statements.

F-4

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 1995, 1996 and 1997

(In thousands, except per share data)
<TABLE>
<CAPTION>

1995 1996 1997
-------- -------- --------

<S> <C> <C> <C>
Revenues and other income:
Net sales $894,149 $851,179 $837,240
Other, net 21,518 27,669 19,367
-------- -------- --------

915,667 878,848 856,607
-------- -------- --------

Costs and expenses:
Cost of sales 611,882 668,605 649,945
Selling, general and administrative 161,753 151,144 168,592
Interest 75,759 69,333 65,759
-------- -------- --------

849,394 889,082 884,296
-------- -------- --------
Income (loss) from continuing
operations before income
taxes and minority interest 66,273 (10,234) (27,689)

Income tax expense (benefit) (278) 1,496 2,244
-------- -------- --------

Income (loss) from continuing
operations before minority
interest 66,551 (11,730) (29,933)

Minority interest 56 5 (58)
-------- -------- --------

Income (loss) from continuing
operations 66,495 (11,735) (29,875)

Discontinued operations 19,114 22,552 20,402
-------- -------- --------

Net income (loss) $ 85,609 $ 10,817 $ (9,473)
======== ======== ========

Earnings per common share:
Basic:
Income (loss) from continuing
operations $ 1.30 $ (.23) $ (.58)
======== ======== ========
Net income (loss) $ 1.68 $ .21 $ (.19)
======== ======== ========
Diluted:
Income (loss) from continuing
operations $ 1.29 $ (.23) $ (.58)
======== ======== ========
Net income (loss) $ 1.66 $ .21 $ (.19)
======== ======== ========

Weighted average common shares and potential common shares outstanding:
Basic 51,006 51,103 51,152
Diluted 51,512 51,103 51,152

</TABLE>

See accompanying notes to consolidated financial statements.

F-5

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

Years ended December 31, 1995, 1996 and 1997

(In thousands)

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

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

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

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

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

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

Net loss ................... -- -- -- -- -- (9,473) -- (9,473)
Treasury stock reissued .... -- -- -- -- -- -- 1,025 1,025
Adjustments ................ -- -- (15,181) 1,822 3,019 -- -- (10,340)
--------- --------- --------- --------- --------- --------- --------- ---------

Balance at December 31, 1997 $ 8,355 $ 759,281 $(133,810) $ -- $ 4,297 $(495,421) $(364,971) $(222,269)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 1995, 1996 and 1997

(In thousands)

1995 1996 1997
-------- -------- --------

<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................ $ 85,609 $ 10,817 $ (9,473)
Depreciation, depletion and
amortization ............................ 35,696 36,285 34,887
Noncash interest expense ................. 18,610 20,442 23,092
Deferred income taxes .................... (28,327) 297 (5,627)
Minority interest ........................ 56 5 (58)
Net (gains) losses from:
Securities transactions ................ (1,175) -- (2,657)
Disposition of property and
equipment ............................. 2,695 2,236 (1,735)
Pension cost, net ........................ (7,833) (8,018) (5,112)
Other postretirement benefits, net ....... (3,973) (4,962) (4,799)
Change in accounting for environmental
remediation costs ....................... -- -- 30,000
Discontinued operations .................. (19,114) (22,552) (20,402)
Other, net ............................... (434) (67) --
-------- -------- --------

81,810 34,483 38,116

Rheox, net ............................... 17,551 20,705 31,506
Change in assets and liabilities:
Accounts and notes receivable .......... (103) 3,083 (14,925)
Inventories ............................ (52,883) 7,192 22,872
Prepaid expenses ....................... 996 (1,355) 96
Accounts payable and accrued
liabilities ........................... (19,560) (1,949) 9,347
Income taxes ........................... 14,010 (36,414) 12,978
Accounts with affiliates ............... (2,805) 3,408 (3,915)
Other noncurrent assets ................ 1,022 236 (269)
Other noncurrent liabilities ........... 5,183 (12,851) (6,640)
Marketable trading securities:
Purchases ............................ (762) -- --
Dispositions ......................... 27,102 -- --
-------- -------- --------

Net cash provided by operating
activities ........................ 71,561 16,538 89,166
-------- -------- --------
</TABLE>

F-7

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 1995, 1996 and 1997

(In thousands)

1995 1996 1997
--------- --------- ---------

<S> <C> <C> <C>
Cash flows from investing activities:
Capital expenditures .................. $ (60,732) $ (64,241) $ (28,220)
Proceeds from disposition of
marketable available-for-sale
securities ........................... -- -- 6,875
Investment in joint venture, net ...... 1,993 3,934 8,364
Proceeds from disposition of
property and equipment ............... 159 76 3,049
Rheox, net ............................ (3,641) (7,376) (2,314)
--------- --------- ---------

Net cash used by investing
activities ....................... (62,221) (67,607) (12,246)
--------- --------- ---------

Cash flows from financing activities:
Indebtedness:
Borrowings .......................... 57,556 97,503 --
Principal payments .................. (30,629) (32,362) (182,215)
Deferred financing costs ............ -- -- (2,343)
Dividends paid ........................ -- (15,333) --
Rheox, net ............................ (30,499) (23,492) 100,940
Other, net ............................ 264 249 1,023
--------- --------- ---------

Net cash provided (used) by
financing activities ............. (3,308) 26,565 (82,595)
--------- --------- ---------

Net change during the year from
operating, investing and
financing activities ............. $ 6,032 $ (24,504) $ (5,675)
========= ========= =========

</TABLE>

F-8

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 1995, 1996 and 1997

(In thousands)

1995 1996 1997
--------- --------- ---------

<S> <C> <C> <C>
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing
activities ......................... $ 6,032 $ (24,504) $ (5,675)
Currency translation ................ 4,177 (2,714) (2,295)
--------- --------- ---------

10,209 (27,218) (7,970)
Balance at beginning of year .......... 131,124 141,333 114,115
--------- --------- ---------

Balance at end of year ................ $ 141,333 $ 114,115 $ 106,145
========= ========= =========

Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 62,078 $ 51,678 $ 55,908
Income taxes ........................ 27,965 50,400 6,875

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

</TABLE>

See accompanying notes to consolidated financial statements.
F-9

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and basis of presentation:

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

At December 31, 1997 Valhi, Inc. and Tremont Corporation, each affiliates
of Contran Corporation, held 57% and 18%, respectively, of NL's outstanding
common stock, and together may be deemed to control the Company. At December 31,
1997 Contran and other entities related to Harold C. Simmons held approximately
93% of Valhi's and 49% of Tremont's outstanding common stock. Substantially all
of Contran's outstanding voting stock is held by trusts established for the
benefit of certain children and grandchildren of Mr. Simmons, of which Mr.
Simmons is the sole trustee. Mr. Simmons, the Chairman of the Board of NL and
the Chairman of the Board, President, and Chief Executive Officer of Contran and
Valhi and a director of Tremont, may be deemed to control each of such
companies.

Note 2 - Summary of significant accounting policies:

Principles of consolidation and management's estimates

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

Translation of foreign currencies

Assets and liabilities of subsidiaries whose functional currency is deemed
to be other than the U.S. dollar are translated at year-end rates of exchange
and revenues and expenses are translated at weighted average exchange rates
prevailing during the year. Resulting translation adjustments and the related
income tax effects are accumulated in the currency translation adjustment
component of shareholders' deficit. Currency transaction gains and losses are
recognized in income currently.

F-10

<PAGE>

Cash and cash equivalents

Cash equivalents, including restricted cash, include U.S. Treasury
securities purchased under short-term agreements to resell and bank deposits
with original maturities of three months or less. Cash equivalents of
approximately $6 million in 1996 and $5 million in 1997 is restricted under the
Company's joint venture indebtedness agreement and, in addition, cash
equivalents of approximately $5 million in 1996 and 1997 secures undrawn letters
of credit.

Marketable securities and securities transactions

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

Inventories

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

Investment in joint ventures

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

Intangible assets

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

Property, equipment, depreciation and depletion

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

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

F-11

<PAGE>

Long-term debt

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

Employee benefit plans

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

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

Environmental remediation costs

Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures are not discounted to present value. Recoveries of remediation
costs from other parties, if any, are reported as receivables when their receipt
is deemed probable. At December 31, 1996 and 1997 no receivables for recoveries
have been recognized.

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

Net sales

Sales are recognized as products are shipped.

F-12

<PAGE>

Income taxes

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

Interest rate swaps and contracts

The Company periodically uses interest rate swaps and contracts (such as
caps and floors) to manage interest rate risk with respect to financial assets
or liabilities. The Company does not enter into these contracts for speculative
purposes. Income or expense on swaps and contracts designated as hedges of
assets or liabilities is recorded as an adjustment to interest income or
expense. If the swap or contract is terminated, the resulting gain or loss is
deferred and amortized over the remaining life of the underlying asset or
liability. If the hedged instrument is disposed of, the swap or contract
agreement is marked to market with any resulting gain or loss included with the
gain or loss from the disposition. Any cost associated with the swap or contract
is deferred and amortized over the life of the agreement.

Earnings per common share

The Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings per Share", in the fourth quarter of 1997 and retroactively
restated its reported earnings per common share. The new accounting standard
requires both "basic" and "diluted" earnings per share presentation. Basic
earnings per share is based on the weighted average number of common shares
outstanding during each period. Diluted earnings per share is based on the
weighted average common shares outstanding and the dilutive impact of
outstanding stock options. The weighted average number of shares resulting from
outstanding stock options which were excluded from the calculation of diluted
earnings per share because their impact would have been antidilutive aggregated
1,878,000, 2,483,000 and 2,709,000 in 1995, 1996 and 1997, respectively. There
were no adjustments to income (loss) from continuing operations or net income
(loss) in the computation of earnings per common share. Both basic and diluted
earnings per share from discontinued operations were $.37 per share, $.44 per
share and $.40 per share in 1995, 1996 and 1997, respectively.

New accounting principles not yet adopted

The Company will adopt SFAS No. 130, "Reporting Comprehensive Income," in
the first quarter of 1998. Upon adoption of SFAS No. 130, the Company will
present a new Statement of Comprehensive Income which will report all changes in
the Company's shareholders' deficit other than transactions with its
shareholders. Comprehensive income pursuant to SFAS No. 130 would include the
Company's consolidated net income (loss), as reported in the Consolidated

F-13

<PAGE>

Statement of Operations, plus the net change in the currency translation,
pension liabilities and marketable securities components of shareholders'
deficit.

The Company will adopt SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," no later than the fourth quarter of 1998.
SFAS No. 131 will supersede the business segment disclosure requirements
currently in effect under SFAS No. 14. SFAS No. 131, among other things,
establishes standards regarding the information a company is required to
disclose about its operating segments. SFAS No. 131 also provides guidance
regarding what constitutes a reportable operating segment. The Company expects
to have one operating segment pursuant to SFAS No. 131, the same one segment
currently in effect under SFAS No. 14. Accordingly, segment disclosures pursuant
to SFAS No. 131 are not expected to be materially different from the current
disclosures pursuant to SFAS No. 14.

The Company will adopt the disclosure requirements of SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," in
the fourth quarter of 1998. SFAS No. 132 revises disclosure requirements for
such pension and postretirement benefit plans to, among other things,
standardize certain disclosures and eliminate certain other disclosures no
longer deemed useful. SFAS No. 132 does not change the measurement or
recognition criteria for such plans.

Note 3 - Business and geographic segments:

The Company's operations are conducted by Kronos in one operating business
segment - TiO2. Titanium dioxide pigments are used to impart whiteness,
brightness and opacity to a wide variety of products, including paints,
plastics, paper, fibers and ceramics. General corporate assets consists
principally of cash, cash equivalents and marketable securities. Discontinued
operations consists of the Company's specialty chemicals business owned by Rheox
which was sold in January 1998. See Note 20. At December 31, 1996 and 1997 the
net assets of non-U.S. subsidiaries included in consolidated net assets
approximated $124 million and $287 million, respectively.

Years ended December 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Business segments

Operating income - Kronos ............. $ 161,175 $ 71,606 $ 82,501

General corporate income (expense):
Securities earnings ................. 7,419 4,708 5,393
Expenses, net ....................... (26,562) (17,215) (49,824)
Interest expense .................... (75,759) (69,333) (65,759)
--------- --------- ---------

$ 66,273 $ (10,234) $ (27,689)
========= ========= =========

Capital expenditures:
Kronos .............................. $ 60,699 $ 64,201 $ 28,193
General corporate ................... 33 40 27
--------- --------- ---------

$ 60,732 $ 64,241 $ 28,220
========= ========= =========
</TABLE>

F-14

<PAGE>

Years ended December 31,
1995 1996 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Depreciation, depletion and
amortization:
Kronos .............................. $ 35,502 $ 36,091 $ 34,684
General corporate ................... 194 194 203
--------- --------- ---------

$ 35,696 $ 36,285 $ 34,887
========= ========= =========

Geographic areas

Net sales - point of origin:
United States ....................... $ 246,474 $ 252,448 $ 258,300
Europe .............................. 647,635 594,824 584,339
Canada .............................. 134,361 134,199 145,160
Eliminations ........................ (134,321) (130,292) (150,559)
--------- --------- ---------

$ 894,149 $ 851,179 $ 837,240
========= ========= =========

Net sales - point of destination:
United States ....................... $ 209,236 $ 222,710 $ 230,923
Europe .............................. 529,464 471,948 442,043
Canada .............................. 55,492 51,292 58,231
Asia ................................ 47,230 43,842 41,328
Other ............................... 52,727 61,387 64,715
--------- --------- ---------

$ 894,149 $ 851,179 $ 837,240
========= ========= =========

Operating income:
United States ....................... $ 45,652 $ 37,797 $ 30,514
Europe .............................. 94,815 21,024 40,882
Canada .............................. 20,708 12,785 11,105
--------- --------- ---------

$ 161,175 $ 71,606 $ 82,501
========= ========= =========

</TABLE>
<TABLE>
<CAPTION>

December 31,
------------------------------------------
1995 1996 1997
---------- ---------- ----------
(In thousands)

<S> <C> <C> <C>
Identifiable assets
Business segments:
Kronos ....................... $1,063,369 $1,064,285 $ 961,635
General corporate ............ 124,664 66,978 47,922
Discontinued operations ...... 83,620 90,095 88,635
---------- ---------- ----------

$1,271,653 $1,221,358 $1,098,192
========== ========== ==========

Geographic segments:
United States ................ $ 257,164 $ 252,331 $ 268,518
Europe ....................... 662,997 681,380 562,454
Canada ....................... 143,208 130,574 130,663
General corporate ............ 124,664 66,978 47,922
Discontinued operations ...... 83,620 90,095 88,635
---------- ---------- ----------

$1,271,653 $1,221,358 $1,098,192
========== ========== ==========
</TABLE>

F-15
<PAGE>

Note 4 - Marketable securities and securities transactions:

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

<S> <C> <C>
Available-for-sale securities -
noncurrent marketable equity securities:
Unrealized gains ............................... $ 3,516 $ 6,939
Unrealized losses .............................. (1,550) (328)
Cost ........................................... 21,752 10,659
-------- --------

Aggregate market ........................... $ 23,718 $ 17,270
======== ========
</TABLE>
<TABLE>
<CAPTION>

Years ended December 31,
--------------------------
1995 1996 1997
------ ---- ----
(In thousands)

<S> <C> <C> <C>
Securities transactions gains on
trading securities (in 1995) and
available-for-sale securities (in 1997):
Unrealized ............................... $1,125 $ - $ -
Realized ................................. 50 - 2,657
------ --- ------

$1,175 $ - $2,657
====== === ======
</TABLE>
Note 5 - Inventories:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
-------- --------
(In thousands)

<S> <C> <C>
Raw materials ............................ $ 43,284 $ 45,844
Work in process .......................... 10,356 8,018
Finished products ........................ 142,091 107,427
Supplies ................................. 36,779 31,491
-------- --------

$232,510 $192,780
======== ========
</TABLE>
Note 6 - Investment in joint ventures:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
-------- --------
(In thousands)

<S> <C> <C>
TiO2 manufacturing joint venture ............... $179,195 $170,830
Other .......................................... 2,284 1,891
-------- --------
$181,479 $172,721
======== ========
</TABLE>

Kronos Louisiana, Inc. ("KLA"), a wholly-owned subsidiary of Kronos, owns
a 50% interest in Louisiana Pigment Company, L.P. ("LPC"). LPC is a
manufacturing joint venture that is also 50%-owned by Tioxide Group, Ltd.
("Tioxide"), a wholly-owned subsidiary of Imperial Chemicals Industries PLC

F-16

<PAGE>

("ICI"). LPC owns and operates a chloride-process TiO2 plant in Lake Charles,
Louisiana. ICI has agreed to sell Tioxide's non-North American operations to
E.I. du Pont de Nemours & Co., subject to regulatory approval. ICI has announced
it intends to sell Tioxide and the remaining North American operations in a
separate transaction. The Company had advised ICI of its interest in acquiring
the portion of LPC it does not currently own.

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

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

Summary balance sheets of LPC are shown below.

December 31,
----------------------
1996 1997
-------- --------
(In thousands)

ASSETS

<S> <C> <C>
Current assets ..................................... $ 47,861 $ 41,602
Other assets ....................................... 1,224 764
Property and equipment, net ........................ 325,617 309,989
-------- --------

$374,702 $352,355
======== ========

LIABILITIES AND PARTNERS' EQUITY

Long-term debt, including current portion:
Kronos tranche ................................... $ 57,858 $ 42,429
Tioxide tranche .................................. 16,800 7,200
Note payable to Tioxide .......................... 21,000 9,000
Other liabilities, primarily current ............... 14,084 8,466
-------- --------
109,742 67,095

Partners' equity ................................... 264,960 285,260
-------- --------

$374,702 $352,355
======== ========
</TABLE>

F-17

<PAGE>

Summary income statements of LPC are shown below.

Years ended December 31,
------------------------------------
1995 1996 1997
-------- -------- --------
(In thousands)

<S> <C> <C> <C>
Revenues and other income:
Kronos ............................. $ 76,365 $ 74,916 $ 82,171
Tioxide ............................ 75,241 73,774 80,512
Interest income .................... 653 518 636
-------- -------- --------

152,259 149,208 163,319
-------- -------- --------
Cost and expenses:
Cost of sales ...................... 140,103 140,361 156,811
General and administrative ......... 385 377 355
Interest ........................... 11,771 8,470 6,153
-------- -------- --------

152,259 149,208 163,319
-------- -------- --------

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

Note 7 - Other noncurrent assets:

December 31,
---------------------
1996 1997
------- -------
(In thousands)

<S> <C> <C>
Deferred financing costs, net ...................... $ 9,791 $ 9,973
Intangible assets, net of accumulated
amortization of $22,207 and $22,366 ............... 7,939 4,228
Other .............................................. 7,095 4,281
------- -------

$24,825 $18,482
======= =======
</TABLE>

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

December 31,
---------------------------
1996 1997
-------- --------
(In thousands)
<S> <C> <C>
Accounts payable ......................... $ 60,648 $ 64,698
-------- --------
Accrued liabilities:
Employee benefits ...................... 34,618 40,110
Environmental costs .................... 6,000 9,000
Interest ............................... 9,429 6,966
Miscellaneous taxes .................... 4,073 330
Other .................................. 39,136 40,626
-------- --------

93,256 97,032
-------- --------

$153,904 $161,730
======== ========
</TABLE>

F-18

<PAGE>

Note 9 - Other noncurrent liabilities:

December 31,
--------------------------
1996 1997
-------- --------
(In thousands)

<S> <C> <C>
Environmental costs ........................ $106,849 $125,502
Insurance claims expense ................... 11,673 11,436
Employee benefits .......................... 11,960 10,835
Other ...................................... 1,566 1,130
-------- --------

$132,048 $148,903
======== ========
</TABLE>

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

December 31,
---------------------
1996 1997
-------- --------
(In thousands)

<S> <C> <C>
Notes payable (DM 40,000 and DM 25,000,
respectively) ....................................... $ 25,732 $ 13,968
======== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes ...................... $250,000 $250,000
13% Senior Secured Discount Notes ................ 149,756 169,857
-------- --------

399,756 419,857
-------- --------
Kronos:
DM bank credit facility (DM 539,971, and
DM 288,322, respectively) ....................... 347,362 161,085
LPC term loan .................................... 57,858 42,429
Other ............................................ 9,125 3,282
-------- --------

414,345 206,796
-------- --------
Rheox:
Bank term loan ................................... 14,659 117,500
Other ............................................ 286 --
-------- --------
14,945 117,500
-------- --------
829,046 744,153
Less current maturities ............................ 91,946 77,374
-------- --------
$737,100 $666,779
======== ========
</TABLE>

The Company's $250 million principal amount of 11.75% Senior Secured Notes
due 2003 and $188 million principal amount at maturity ($100 million proceeds at
issuance) of 13% Senior Secured Discount Notes due 2005 (collectively, the
"Notes") are collateralized by a series of intercompany notes from Kronos
International, Inc. ("KII"), a wholly-owned subsidiary of Kronos, to NL, the
interest rate and payment terms of which mirror those of the respective Notes
(the "Mirror Notes"). The Senior Secured Notes are also collateralized by a
first priority lien on the stock of Kronos and a second priority lien on the
stock of Rheox.

F-19

<PAGE>

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

The Senior Secured Notes and the Senior Secured Discount Notes are
redeemable, at the Company's option, after October 2000 and October 1998,
respectively. The redemption prices range from 101.5% (starting October 2000)
declining to 100% (after October 2001) of the principal amount for the Senior
Secured Notes and range from 106% (starting October 1998) declining to 100%
(after October 2001) of the accreted value of the Senior Secured Discount Notes.
The Company presently intends to redeem the Senior Secured Discount Notes in
October 1998, depending on market conditions, availability of resources and
other factors. In the event of a Change of Control, as defined, the Company
would be required to make an offer to purchase the Notes at 101% of the
principal amount of the Senior Secured Notes and 101% of the accreted value of
the Senior Secured Discount Notes. The Notes are issued pursuant to indentures
which contain a number of covenants and restrictions which, among other things,
restrict the ability of the Company and its subsidiaries to incur debt, incur
liens, pay dividends or merge or consolidate with, or sell or transfer all or
substantially all of their assets to, another entity. At December 31, 1997 no
amounts were available for payment of dividends pursuant to the terms of the
indentures.

Rheox sold its specialty chemicals business in January 1998. See Note 20.
Under the terms of the indentures, the Company is required to make an offer to
tender for a portion of the Notes, on a pro rata basis, (at par value for the
Senior Secured Notes and at accreted value for the Senior Secured Discount
Notes) to the extent that the amount of the net proceeds from the disposal of
Rheox, as defined, are not used to either permanently pay down certain
indebtedness of the Company or its subsidiaries or invest in additional
productive assets by November 1998.

The Senior Secured Discount Notes do not require semiannual cash interest
payments until April 1999. The net carrying value of the Senior Secured Discount
Notes per $100 principal amount at maturity was $79.87 and $90.59 at December
31, 1996 and 1997, respectively. At December 31, 1997 the quoted market price of
the Senior Secured Notes was $111.17 per $100 principal amount and the quoted
market price of the Senior Secured Discount Notes was $99.59 per $100 principal
amount (1996 - $106.08 and $86.34, respectively).

At December 31, 1997 the DM credit facility consisted of a DM 188 million
term loan and a DM 230 million revolving credit facility, of which DM 100
million is outstanding. Borrowings bear interest at DM LIBOR plus 2.75% (1.625%
margin at December 31, 1996) (4.76% and 6.28% at December 31, 1996 and 1997,
respectively), and are collateralized by the stock of certain KII subsidiaries,
pledges of certain Canadian and German assets and NL has guaranteed the
facility. The term loan is due in semiannual installments commencing in
September 1998 through September 1999 and the revolver is due in 2000. In
accordance with the provisions of the DM credit agreement and as a result of
higher than expected operating income in 1997 for KII, the Company intends to
prepay in March 1998

F-20

<PAGE>

DM 81 million ($45 million at December 31, 1997) of the term loan, of which DM
49 million ($27 million at December 31, 1997) will satisfy the September 1998
scheduled term loan payment and the remaining DM 32 million ($18 million at
December 31, 1997) will reduce the March 1999 scheduled term loan payment.

Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities, including the DM facility, approximated $84 million
at December 31, 1997.

Borrowings under KLA's tranche of LPC's term loan bear interest at U.S.
LIBOR plus 1.625% (7.245% and 7.438% at December 31, 1996 and 1997,
respectively) and are repayable in quarterly installments through September
2000. The Company has notified the lender that it intends to prepay the loan in
March 1998.

Notes payable at December 31, 1996 and 1997 consists of DM 40 million and
DM 25 million, respectively, of short-term borrowings due within one year from
non-U.S. banks with interest rates ranging from 3.25% to 3.70% in 1996 and from
3.75% to 3.875% in 1997.

The Company used a portion of the net proceeds from the January 1998 sale
of substantially all of Rheox's net assets to prepay and terminate the Rheox
bank credit facility. See Note 20. At December 31, 1997 this facility consisted
of a $117.5 million term loan due in quarterly installments through January 2004
and a $25 million revolver (nil outstanding) due no later than January 2004.
Borrowings bore interest at LIBOR plus a margin of .75% to 1.75%, depending upon
the level of a certain Rheox financial ratio (the margin was 1.5% at December
31, 1997 resulting in a rate of 7.3%), and were collateralized principally by
the stock of Rheox and its U.S. subsidiaries. The interest rate on outstanding
prime-rate borrowings under a prior Rheox bank credit facility at December 31,
1996 was 9.8%.

The aggregate maturities of long-term debt at December 31, 1997 on a
historical and a pro forma basis, giving effect for the January 1998 sale of
Rheox described above and in Note 20, are shown in the table below.

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

<S> <C> <C>
1998 $ 77,374 $ 62,374
1999 91,077 76,077
2000 82,936 67,936
2001 22,909 409
2002 25,000 -
2003 and thereafter 462,500 437,500
-------- --------

761,796 644,296
Less unamortized original issue discount
on the Senior Secured Discount Notes 17,643 17,643
-------- --------

$744,153 $626,653
======== ========

</TABLE>

F-21

<PAGE>

Note 11 - Employee benefit plans:

Company-sponsored pension plans

The Company maintains various defined benefit and defined contribution
pension plans covering substantially all employees. Personnel employed by
non-U.S. subsidiaries are covered by separate plans in their respective
countries and U.S. employees are covered by various plans including the
Retirement Programs of NL Industries, Inc. (the "NL Pension Plan").

A majority of U.S. employees are eligible to participate in a contributory
savings plan. The Company partially matches employee contributions to the Plan,
and, beginning in 1996, the Company contributes to each employee's account an
amount equal to approximately 3% of the employee's annual eligible earnings. The
Company also has an unfunded defined contribution plan covering certain
executives, and contributions are based on a formula involving eligible
earnings. The Company's expense related to these plans included in continuing
operations was $.7 million in 1995, $.8 million in 1996 and $.7 million in 1997.
Expense related to these plans included in discontinued operations was $.5
million in each of 1995, 1996 and 1997.

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

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

Years ended December 31,
-----------------------------------------
1995 1996 1997
---------- --------- ----------
(Percentages)

<S> <C> <C> <C>
Discount rate 7.0 to 8.5 6.5 to 8.5 6.0 to 8.5
Rate of increase in future
compensation levels 3.5 to 6.0 3.5 to 6.0 3.0 to 6.0
Long-term rate of return on
plan assets 8.0 to 9.0 7.0 to 9.0 6.0 to 9.0
</TABLE>

During 1996 the Company curtailed certain U.S. employee pension benefits
and recognized a gain of $4.6 million, of which $2.7 million is included in
discontinued operations. Plan assets are comprised primarily of investments in
U.S. and non-U.S. corporate equity and debt securities, short-term investments,
mutual funds and group annuity contracts.

SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. Variances
from actuarially-assumed rates, including the rate of return on pension plan

F-22

<PAGE>

assets, will result in additional increases or decreases in accrued pension
liabilities, pension expense and funding requirements in future periods. At
December 31, 1997 77% of the projected benefit obligations in excess of plan
assets relate to non-U.S. plans. The funded status of the Company's defined
benefit pension plans is set forth below.
<TABLE>
<CAPTION>

Assets exceed Accumulated benefits
accumulated benefits exceed assets
-------------------- ---------------------
December 31, December 31,
-------------------- ---------------------
1996 1997 1996 1997
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits ................. $ 48,953 $ 51,474 $ 167,411 $ 157,556
Nonvested benefits .............. 4,075 4,483 9,466 8,442
--------- --------- --------- ---------
Accumulated benefit obligations . 53,028 55,957 176,877 165,998
Effect of projected salary
increases ...................... 7,598 6,691 25,741 22,726
--------- --------- --------- ---------
Projected benefit obligations
("PBO") ........................ 60,626 62,648 202,618 188,724
Plan assets at fair value ......... 78,511 73,446 126,580 125,925
--------- --------- --------- ---------
Plan assets over (under) PBO ...... 17,885 10,798 (76,038) (62,799)
Unrecognized net loss from
experience different from
actuarial assumptions ............ 3,567 9,778 11,414 8,375
Unrecognized prior service cost ... 3,838 3,799 262 399
Unrecognized transition obligations
(assets) being amortized over 15
to 18 years ...................... (469) (527) 2,043 1,530
Adjustment required to recognize
minimum liability ................ -- -- (1,822) --
--------- --------- --------- ---------
Total prepaid (accrued)
pension cost ............... 24,821 23,848 (64,141) (52,495)
Less current portion .............. -- -- (6,200) (8,106)
--------- --------- --------- ---------
Noncurrent prepaid (accrued)
pension cost ............... $ 24,821 $ 23,848 $(57,941) $(44,389)
========= ========= ======== ========
</TABLE>

The components of the net periodic defined benefit pension cost, excluding
curtailment gain and discontinued operations, are set forth below. The net
periodic defined benefit pension cost included in discontinued operations was
$.6 million in 1995, $.3 million in 1996 and nil in 1997.
<TABLE>
<CAPTION>

Years ended December 31,
------------------------------------
1995 1996 1997
-------- -------- --------
(In thousands)

<S> <C> <C> <C>
Service cost benefits ................ $ 3,582 $ 3,131 $ 4,067
Interest cost on PBO ................. 16,721 15,439 15,335
Return on plan assets ................ (14,843) (15,112) (16,194)
Net amortization and deferrals ....... (2,890) 48 869
-------- -------- --------

$ 2,570 $ 3,506 $ 4,077
======== ======== ========
</TABLE>
F-23

<PAGE>

Incentive bonus programs

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

Postretirement benefits other than pensions

In addition to providing pension benefits, the Company currently provides
certain health care and life insurance benefits for eligible retired employees.
Certain of the Company's U.S. and Canadian employees may become eligible for
such postretirement health care and life insurance benefits if they reach
retirement age while working for the Company. In 1989, the Company began phasing
out such benefits for currently active U.S. employees over a ten-year period.
The majority of all retirees are required to contribute a portion of the cost of
their benefits and certain current and future retirees are eligible for reduced
health care benefits at age 65. The Company's policy is to fund medical claims
as they are incurred, net of any contributions by the retirees.

For measuring the OPEB liability at December 31, 1997, the expected rate
of increase in health care costs is 7% in 1998, 6% in 1999 and 5% in 2000 and
years thereafter. Other assumptions used to measure the liability and expense
are presented below.

Years ended December 31,
------------------------
1995 1996 1997
---- ---- ----
(Percentages)

<S> <C> <C> <C>
Discount rate ....................................... 7.5 7.5 7.0
Long-term rate for compensation increases ........... 4.5 6.0 6.0
Long-term rate of return on plan assets ............. 9.0 9.0 9.0
</TABLE>

Variances from actuarially-assumed rates will result in additional
increases or decreases in accrued OPEB liabilities, net periodic OPEB expense
and funding requirements in future periods. If the health care cost trend rate
was increased by one percentage point for each year, postretirement benefit
expense would have increased approximately $.1 million in 1997, and the
actuarial present value of accumulated benefit obligations at December 31, 1997
would have increased by approximately $1.2 million. During 1996 the Company
curtailed certain Canadian employee OPEB benefits and recognized a $1.3 million
gain.

F-24

<PAGE>

<TABLE>
<CAPTION>
December 31,
-------------------
1996 1997
------- -------
(In thousands)
<S> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Retiree benefits ..................................... $41,768 $34,173
Other fully eligible active plan participants ........ 840 799
Other active plan participants ....................... 2,152 2,022
------- -------
44,760 36,994

Plan assets at fair value .............................. 6,689 6,527
------- -------
Accumulated postretirement benefit obligations
in excess of plan assets .............................. 38,071 30,467
Unrecognized net gain from experience different
from actuarial assumptions ............................ 7,083 11,722
Unrecognized prior service credit ...................... 16,259 14,171
------- -------
Total accrued postretirement benefits cost ......... 61,413 56,360
Less current portion ................................... 5,478 5,409
------- -------
Noncurrent accrued postretirement benefits
cost .............................................. $55,935 $50,951
======= =======
</TABLE>

The components of the Company's net periodic postretirement benefit cost,
excluding curtailment gain and discontinued operations, are set forth below. The
net periodic postretirement benefit costs included in discontinued operations
was $.3 million in each of 1995 and 1996 and $.2 million in 1997.

Years ended December 31,
-----------------------------
1995 1996 1997
------- ------- -------
(In thousands)

<S> <C> <C> <C>
Interest cost on accumulated benefit
obligations .................................. $ 4,194 $ 3,777 $ 2,972
Service cost benefits earned during the year .. 50 52 39
Return on plan assets ......................... (637) (596) (584)
Net amortization and deferrals ................ (1,905) (1,460) (2,380)
------- ------- -------

$ 1,702 $ 1,773 $ 47
======= ======= =======
</TABLE>

F-25

<PAGE>

Note 12 - Shareholders' deficit:

Common stock

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

<S> <C> <C> <C>
Balance at December 31, 1994 66,839 15,787 51,052
Treasury shares reissued - (39) 39
------ ------ ------

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

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

Balance at December 31, 1997 66,839 15,572 51,267
====== ====== ======
</TABLE>

Common stock options

The 1989 Long Term Performance Incentive Plan of NL Industries, Inc. (the
"NL Option Plan") provides for the discretionary grant of restricted common
stock, stock options, stock appreciation rights ("SARs") and other incentive
compensation to officers and other key employees of the Company. Although
certain stock options granted pursuant to a similar plan which preceded the NL
Option Plan ("the Predecessor Option Plan") remain outstanding at December 31,
1997, no additional options may be granted under the Predecessor Option Plan.

Up to five million shares of NL common stock may be issued pursuant to the
NL Option Plan and at December 31, 1997, an aggregate of 1.9 million shares were
available for future grants. The NL Option Plan provides for the grant of
options that qualify as incentive options and for options which are not so
qualified. Generally, stock options and SARs (collectively, "options") are
granted at a price equal to or greater than 100% of the market price at the date
of grant, vest over a five year period and expire ten years from the date of
grant. Restricted stock, forfeitable unless certain periods of employment are
completed, is held in escrow in the name of the grantee until the restriction
period expires. No SARs have been granted under the NL Option Plan.

In addition to the NL Option Plan, the Company maintains a stock option
plan for its nonemployee directors. At December 31, 1997 there were options to
acquire 9,000 shares of common stock outstanding of which 7,000 were fully
vested.

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

F-26

<PAGE>

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

<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 2,374 $ 4.81 $ 24.19 $ 26,773

Granted ...................... 94 11.81 14.81 1,150
Exercised .................... (39) 5.00 10.78 (278)
Forfeited .................... (36) 5.00 11.81 (324)
----- --------- --------- --------

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

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

Outstanding at December 31, 1996 2,573 4.81 24.19 30,278
----- --------- --------- --------

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

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

</TABLE>

At December 31, 1995, 1996 and 1997 options to purchase 1,189,907,
1,660,068 and 1,801,955 shares, respectively, were exercisable and options to
purchase 301,002 shares become exercisable in 1998. Of the exercisable options
at December 31, 1997, options to purchase 1,380,296 shares had exercise prices
less than the Company's December 31, 1997 quoted market price of $13.625 per
share. Outstanding options at December 31, 1997 expire at various dates through
2007, with a weighted-average remaining life of five years.

The pro forma information required by SFAS No. 123, "Accounting for
Stock-Based Compensation," is based on an estimation of the fair value of
options issued during 1995, 1996 and 1997. The weighted average fair values of
options granted during 1995, 1996 and 1997 were $6.02, $8.38 and $6.35 per
share, respectively. The fair values of employee stock options were calculated
using the Black-Scholes stock option valuation model with the following weighted
average assumptions for grants in 1995, 1996 and 1997: stock price volatility of
31%, 42% and 37% in 1995, 1996 and 1997, respectively; risk-free rate of return
of 5%; no dividend yield; and an expected term of 9 years. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period.

F-27

<PAGE>

The Company's pro forma net income (loss) and basic net income (loss) per
common share were as follows. The pro forma impact on earnings per common share
for 1995, 1996 and 1997 is not necessarily indicative of future effects on
earnings per share.
<TABLE>
<CAPTION>

Years Ended December 31,
------------------------------
1995 1996 1997
------- ------- --------
(In thousands except per share
amounts)

<S> <C> <C> <C>
Net income (loss)- as reported $85,609 $10,817 $ (9,473)
Net income (loss)- pro forma $85,450 $10,085 $(11,057)
Net income (loss) per basic common
share - as reported $ 1.68 $ .21 $ (.19)
Net income (loss) per basic common
share - pro forma $ 1.68 $ .20 $ (.22)
</TABLE>

Preferred stock

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

F-28

<PAGE>

Note 13 - Income taxes:

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

Years ended December 31,
--------------------------------
1995 1996 1997
-------- -------- --------
(In thousands)

<S> <C> <C> <C>
Pretax income (loss):
U.S ...................................... $ 17,943 $ 20,481 $ (9,308)
Non-U.S .................................. 48,330 (30,715) (18,381)
-------- -------- --------
$ 66,273 $(10,234) $(27,689)
======== ======== ========
Expected tax expense (benefit) ............. $ 23,196 $ (3,581) $ (9,692)
Non-U.S. tax rates ......................... (7,268) (6) (784)
Rate change adjustment of deferred taxes ... (6,593) -- --
Valuation allowance ........................ (9,588) 3,013 8,704
Incremental tax on income of companies not
included in the NL Tax Group .............. 795 3,423 3,886
U.S. state income taxes .................... (639) (569) 231
Other, net ................................. (181) (784) (101)
-------- -------- --------
$ (278) $ 1,496 $ 2,244
======== ======== ========
Provision for income taxes:
Current income tax expense (benefit):
U.S. federal ........................... $ (8,245) $ (3,539) $ (6,881)
U.S. state ............................. (258) (460) 681
Non-U.S ................................ 36,552 5,198 14,071
-------- -------- --------
28,049 1,199 7,871
-------- -------- --------
Deferred income tax expense (benefit):
U.S. federal ........................... (8,827) (6,493) 1,224
U.S. state ............................. (726) (668) (450)
Non-U.S ................................ (18,774) 7,458 (6,401)
-------- -------- --------
(28,327) 297 (5,627)
-------- -------- --------
$ (278) $ 1,496 $ 2,244
======== ======== ========
Comprehensive tax provision allocable to:
Pretax income (loss) ..................... $ (278) $ 1,496 $ 2,244
Shareholders' deficit, principally
deferred income taxes allocable to
currency translation and marketable
securities adjustments .................. 10 329 2,036
-------- -------- --------
$ (268) $ 1,825 $ 4,280
======== ======== ========
</TABLE>

F-29

<PAGE>

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

December 31,
-------------------------------------------------
1996 1997
---- ----
Deferred tax Deferred tax
----------------------- ----------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Tax effect of temporary
differences relating to:
Inventories .............. $ 4,130 $ (4,967) $ 4,223 $ (2,674)
Property and equipment ... 512 (109,963) -- (105,806)
Accrued postretirement
benefits cost ........... 21,396 -- 19,682 --
Accrued (prepaid) pension
cost .................... 6,308 (17,579) 5,296 (16,697)
Accrued environmental
costs ................... 36,670 -- 45,242 --
Other accrued liabilities
and deductible
differences ............. 33,464 -- 42,393 --
Other taxable differences -- (102,578) -- (85,139)
Tax on unremitted earnings
of non-U.S. subsidiaries .. -- (18,048) -- (17,551)
Tax loss and tax credit
carryforwards ............. 205,476 -- 167,680 --
Valuation allowance ........ (207,117) -- (188,585) --
--------- --------- --------- ---------
Gross deferred tax assets
(liabilities) ........... 100,839 (253,135) 95,931 (227,867)

Reclassification,
principally netting by
tax jurisdiction .......... (99,019) 99,019 (94,179) 94,179
--------- --------- --------- ---------
Net total deferred tax
assets (liabilities) .... 1,820 (154,116) 1,752 (133,688)
Net current deferred tax
assets (liabilities) .... 1,597 (2,895) 1,642 (891)
--------- --------- --------- ---------
Net noncurrent deferred
tax assets (liabilities) $ 223 $(151,221) $ 110 $(132,797)
========= ========= ========= =========

</TABLE>

F-30

<PAGE>

Changes in the Company's deferred income tax valuation allowance during
the past three years are summarized below.

Years ended December 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
(In thousands)

<S> <C> <C> <C>
Balance at the beginning of year ......... $ 164,500 $ 195,569 $ 207,117

Increase in certain deductible temporary
differences which the Company believes
do not meet the "more-likely-than-not"
recognition criteria .................. -- 3,013 8,704
Change in estimate of the future tax
benefit of certain tax credits which
the Company believes satisfies the
"more-likely-than-not" recognition
criteria .............................. (9,588) -- --
Foreign currency translation ........... 6,451 (5,937) (12,339)
Offset to the increase in gross
deferred income tax assets resulting
from recharacterization of certain
tax attributes due primarily to
changes in certain tax return
elections ............................. 34,206 -- --
Offset to the change in gross deferred
income tax assets due to dual
residency status of a Company
subsidiary and redetermination of
certain U.S. tax attributes ........... -- 14,472 (14,897)
--------- --------- ---------
Balance at the end of year ............... $ 195,569 $ 207,117 $ 188,585
========= ========= =========
</TABLE>

Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies. The Company previously reached an agreement with the
German tax authorities and paid certain tax deficiencies of approximately DM 44
million ($28 million when paid), including interest, which resolved significant
tax contingencies for years through 1990. During 1997 the Company received DM 19
million ($11 million when received) in trade capital tax refunds based on (i)
recent court decisions which resulted in reducing the trade capital tax base and
(ii) prior agreements between the Company and the German tax authorities
regarding payment of disputed taxes. The Company also reached a tentative
agreement with the German tax authorities regarding the years 1991 through 1994,
and expects to pay DM 9 million ($5 million at December 31, 1997) during 1998 in
settlement of certain tax issues. Certain other significant German tax
contingencies remain outstanding for the years 1990 through 1996 and will
continue to be litigated. With respect to these contingencies, the Company has
received certain revised tax assessments aggregating DM 119 million ($66 million
at December 31, 1997), including non-income tax related items and interest, for
years through 1996. The Company expects to receive tax assessments for an
additional DM 20 million ($11 million at December 31, 1997), including
non-income tax related items and interest, for the years 1991 through 1994. No
payments of

F-31

<PAGE>

tax or interest deficiencies related to these assessments are expected until the
litigation is resolved.

During 1997 a German tax court proceeding involving a tax issue
substantially the same as that involved in the Company's primary remaining tax
contingency was decided in favor of the taxpayer. The German tax authorities
have appealed that decision to the German Supreme Court; the Company believes
that the decision by the German Supreme Court will be rendered within two years
and will become a legal precedent which will likely determine the outcome of the
Company's primary dispute with the German tax authorities, which assessments,
including non-income tax related items and interest, aggregate DM 121 million.
Although the Company believes that it will ultimately prevail, the Company has
granted a DM 94 million ($53 million at December 31, 1997) lien on its
Nordenham, Germany TiO2 plant in favor of the City of Leverkusen, and a DM 5
million ($3 million at December 31, 1997) lien in favor of the German federal
tax authorities.

During 1997 the Company received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at December
31, 1997) relating to 1994. The Company has appealed this assessment and expects
to litigate this issue.

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

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

The Company utilized foreign tax credit carryforwards of $11 million in
1995, $2 million in 1996 and $5 million in 1997, and utilized U.S. net operating
loss carryforwards of $8 million in 1995 and $26 million in 1997, to reduce U.S.
federal income tax expense. At December 31, 1997 for U.S. federal income tax
purposes, the Company had approximately $19 million of unutilized foreign tax
credit carryforwards expiring during 1998 through 2001 and approximately $12
million of alternative minimum tax credit carryforwards with no expiration date.
The Company also had approximately $350 million of income tax loss carryforwards
in Germany with no expiration date.

F-32

<PAGE>

Note 14 - Other income, net:

Years ended December 31,
----------------------------------
1995 1996 1997
-------- -------- --------
(In thousands)

<S> <C> <C> <C>
Securities earnings:
Interest and dividends ................. $ 6,244 $ 4,708 $ 2,736
Securities transactions ................ 1,175 -- 2,657
-------- -------- --------
7,419 4,708 5,393
Currency transaction gains, net .......... 293 5,890 5,919
Trade interest income .................... 2,522 1,613 2,983
Disposition of property and equipment .... (2,695) (2,236) 1,735
Technology fee income .................... 10,660 8,743 --
Pension and OPEB curtailment gains ....... -- 3,240 --
Litigation settlement gains .............. -- 2,756 --
Other, net ............................... 3,319 2,955 3,337
-------- -------- --------
$ 21,518 $ 27,669 $ 19,367
======== ======== ========
</TABLE>

Technology fee income was amortized by the straight-line method over a
three-year period ending October 1996.

Note 15 - Other items:

Advertising costs included in continuing operations, expensed as incurred,
were $1 million in each of 1995, 1996 and 1997.

Research, development and certain sales technical support costs included
in continuing operations, expensed as incurred, approximated $9 million in 1995,
$8 million in 1996 and $7 million in 1997.

Interest capitalized related to continuing operations in connection with
long-term capital projects was $1 million in 1995 and $2 million in each of 1996
and 1997.

Note 16 - Related party transactions:

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

F-33

<PAGE>

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

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

The Company is a party to an intercorporate services agreement with
Contran (the "Contran ISA") whereby Contran provides certain management services
to the Company on a fee basis. Management services fee expense related to the
Contran ISA was $.4 million in each of 1995 and 1996 and $.5 million in 1997.

The Company is a party to an intercorporate services agreement with Valhi
(the "Valhi ISA") whereby Valhi and the Company provide certain management,
financial and administrative services to each other on a fee basis. Net
management services fee expense (income) related to the Valhi ISA was $.1
million in each of 1995 and 1996 and $(.1) million in 1997.

The Company is party to an intercorporate services agreement with Tremont
(the "Tremont ISA"). Under the terms of the contract, the Company provides
certain management and financial services to Tremont on a fee basis. Management
services fee income related to the Tremont ISA was $.1 million in each of 1995
and 1996 and $.2 million in 1997.

The Company is party to an intercorporate services agreement (the "Timet
ISA") with Titanium Metals Corporation ("Timet"), approximately 30% of the
outstanding common stock of which is held by Tremont. Under the terms of the
contract, the Company provides certain management and financial services to
Timet on a fee basis. Management services fee income related to the Timet ISA
was $.3 million in 1997.

Purchases from LPC were $69.7 million in 1995, $69.8 million in 1996 and
$78.1 million in 1997.

Certain employees of the Company have been granted options to purchase
Valhi common stock under the terms of Valhi's stock option plans. The Company
and Valhi have agreed that the Company will pay Valhi the aggregate difference
between the option price and the market value of Valhi's common stock on the
exercise date of such options. For financial reporting purposes, the Company
accounts for the related expense (income) ($(25,000) in 1995, $1,000 in 1996 and
$68,000 in 1997) in a manner similar to accounting for SARs. At December 31,
1997 an employee of the Company held vested options to purchase 15,000 shares of
Valhi common stock at an exercise price of $14.66 per share which exceeded
Valhi's December 31, 1997 quoted market price per share of $9.4375.

F-34

<PAGE>

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

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

December 31,
----------------------------
1996 1997
-------- --------
(In thousands)

<S> <C> <C>
Tremont Corporation .................... $ 3,529 $ 3,354
LPC .................................... 6,677 8,513
Other, net ............................. (2) (355)
-------- --------
$ 10,204 $ 11,512
======== ========
</TABLE>

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

Note 17 - Commitments and contingencies:

Leases

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

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

F-35

<PAGE>

Net rent expense included in continuing operations aggregated $7 million
in 1995, $8 million in 1996 and $7 million in 1997. At December 31, 1997 minimum
rental commitments under the terms of noncancellable operating leases, excluding
discontinued operations, were as follows:

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

<S> <C> <C>
1998 $ 1,744 $ 1,962
1999 1,555 854
2000 1,056 345
2001 1,046 129
2002 1,031 47
2003 and thereafter 18,608 87
------- ------
$25,040 $3,424
======= ======
</TABLE>

Capital expenditures

At December 31, 1997 the estimated cost to complete capital projects in
process approximated $4 million, including $2 million to complete a
debottlenecking expansion project at the Company's Leverkusen, Germany
chloride-process TiO2 facility.

Purchase commitments

The Company has long-term supply contracts that provide for the Company's
chloride feedstock requirements through 2000. The agreements require the Company
purchase certain minimum quantities of feedstock with average minimum annual
purchase commitments aggregating approximately $101 million.

Legal proceedings

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

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

F-36

<PAGE>

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

Environmental matters and litigation. Some of the Company's current and
former facilities, including several divested secondary lead smelters and former
mining locations, are the subject of civil litigation, administrative
proceedings or investigations arising under federal and state environmental
laws. Additionally, in connection with past disposal practices, the Company has
been named a potential responsible party ("PRP") pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act ("CERCLA") in approximately 75
governmental and private actions associated with hazardous waste sites and
former mining locations, certain of which are on the U.S. Environmental
Protection Agency's Superfund National Priorities List. These actions seek
cleanup costs, damages for personal injury or property damage and/or damages for
injury to natural resources. While the Company may be jointly and severally
liable for such costs, in most cases it is only one of a number of PRPs who are
also jointly and severally liable. In addition, the Company is a party to a
number of lawsuits filed in various jurisdictions alleging CERCLA or other
environmental claims. At December 31, 1997 the Company had accrued $135 million
for those environmental matters which are reasonably estimable. It is not
possible to estimate the range of costs for certain sites. The upper end of the
range of reasonably possible costs to the Company for sites which it is possible
to estimate costs is approximately $175 million. The Company's estimates of such
liabilities have not been discounted to present value, and the Company has not
recognized any potential insurance recoveries. The imposition of more stringent
standards or requirements under environmental laws or regulations, new
developments or changes respecting site cleanup costs or allocation of such
costs among PRPs, or a determination that the Company is potentially responsible
for the release of hazardous substances at other sites could result in
expenditures in excess of amounts currently estimated by the Company to be
required for such matters. No assurance can be given that actual costs will not
exceed accrued amounts or the upper end of the range for sites for which
estimates have been made and no assurance can be given that costs will not be
incurred with respect to sites as to which no estimate presently can be made.
Further, there can be no assurance that additional environmental matters will
not arise in the future. As discussed in Note 2, the Company adopted the AICPA's
Statement of Position 96-1, "Environmental Remediation Liabilities," in the
first quarter of 1997, increasing its environmental liability by $30 million.

Certain of the Company's businesses are and have been engaged in the
handling, manufacture or use of substances or compounds that may be considered
toxic or hazardous within the meaning of applicable environmental laws. As with
other companies engaged in similar businesses, certain operations and products
of the Company have the potential to cause environmental or other damage. The
Company continues to implement various policies and programs in an effort to
minimize these risks. The Company's policy is to comply with environmental laws

F-37

<PAGE>

and regulations at all of its facilities and to continually strive to improve
environmental performance in association with applicable industry initiatives.
It is possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could affect the
Company's production, handling, use, storage, transportation, sale or disposal
of such substances as well as the Company's consolidated financial position,
results of operations or liquidity.

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

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

Concentrations of credit risk

Sales of TiO2 accounted for more than 90% of net sales from continuing
operations during each of the past three years. TiO2 is sold to the paint,
plastics and paper industries. Such markets are generally considered
"quality-of-life" markets whose demand for TiO2 is influenced by the relative
economic well-being of the various geographic regions. TiO2 is sold to over
4,000 customers, none of which represents a significant portion of net sales. In
each of the past three years, approximately one-half of the Company's TiO2 sales
by volume were to Europe and approximately 36% in 1995, 37% in 1996 and 36% in
1997 of sales were attributable to North America.

Consolidated cash, cash equivalents and restricted cash includes $63
million and $53 million invested in U.S. Treasury securities purchased under
short-term agreements to resell at December 31, 1996 and 1997, respectively, of
which $53 million and $45 million, respectively, of such securities are held in
trust for the Company by a single U.S. bank.

F-38

<PAGE>

Note 18 - Financial instruments:

Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.

December 31, December 31,
1996 1997
------------------ ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- -------
(In millions)

<S> <C> <C> <C> <C>
Cash and cash equivalents, including
restricted cash ......................... $ 114.1 $ 114.1 $ 106.1 $ 106.1
Marketable securities - classified as
available-for-sale ...................... 23.7 23.7 17.3 17.3

Notes payable and long-term debt:
Fixed rate with market quotes:
Senior Secured Notes ................. $ 250.0 $ 265.2 $ 250.0 $ 277.9
Senior Secured Discount Notes ........ 149.8 161.9 169.9 186.7
Variable rate debt ..................... 455.0 455.0 338.3 338.3

Common shareholders' equity (deficit) .... $ (203.5) $ 555.9 $ (222.3) $ 698.5
</TABLE>

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

In connection with its credit facility, Rheox entered into interest rate
collar agreements in 1997 which effectively set minimum and maximum U.S. LIBOR
interest rates of 5.25% and 8%, respectively, on $50 million principal amount of
its variable-rate bank term loan through May 2001. The margin on such borrowings
ranged from .75% to 1.75%, depending upon the level of a certain Rheox financial
ratio. The Company was exposed to interest rate risk in the event of
nonperformance by the other parties to the agreements. At December 31, 1997 the
estimated fair value of such agreements was estimated to be a $.1 million
payable. Such fair value represented the amount the Company would pay if it
terminated the collar agreements at that date, and is based upon quotes obtained
from the counter party financial institutions. The Company terminated these
agreements in the first quarter of 1998 concurrently with the prepayment and
termination of the underlying credit facility. See Note 20. The Company held no
derivative financial instruments at December 31, 1996.

F-39

<PAGE>

Note 19 - Quarterly financial data (unaudited):

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

<S> <C> <C> <C> <C>
Year ended December 31, 1996:

Net sales .................... $ 206,368 $ 228,229 $ 215,038 $ 201,544
Cost of sales ................ 152,333 177,396 175,864 163,012
Operating income ............. 29,472 25,443 9,640 7,051
Income (loss) from
continuing operations ....... 6,314 6,134 (9,724) (14,459)
Net income (loss) ............ $ 13,444 $ 11,919 $ (4,249) $ (10,297)
========= ========= ========= =========

Basic and diluted
earnings per common
share:
Income (loss) from
continuing operations ..... $ .12 $ .12 $ (.19) $ (.28)
========= ========= ========= =========
Net income (loss) .......... $ .26 $ .23 $ (.08) $ (.20)
========= ========= ========= =========
Weighted average common shares
and potential common shares
outstanding:
Basic ...................... 51,006 51,105 51,118 51,118
Diluted .................... 51,519 51,496 51,118 51,118

Year ended December 31, 1997:

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

</TABLE>

F-40

<PAGE>

Note 20 - Subsequent event:

The specialty chemical business of Rheox was sold to Elementis plc for
$465 million in January 1998, including $20 million attributable to a five-year
agreement by the Company not to compete in the rheological products business. A
portion of the net proceeds were used to prepay and terminate Rheox's bank
credit facility. The Company expects to recognize an after-tax gain of
approximately $300 million on the disposal of this business segment in the first
quarter of 1998. Had the sale occurred at December 31, 1997, the Company's pro
forma unaudited cash and cash equivalents would have been $326 million; notes
payable and long-term debt, including the current portion, would have been $641
million; and shareholders' equity would have been $40 million. As a result of
the sale, the Company has presented the results of this business segment as
discontinued operations for all periods presented. Following the sale, Rheox,
Inc. was renamed NL Capital Corporation.

Condensed income statements related to discontinued operations for 1995,
1996 and 1997 are as follows. Interest expense has been allocated to
discontinued operations based on the amount of debt specifically attributed to
Rheox's operations.
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
(In thousands)

<S> <C> <C> <C>
Net sales ................................ $ 129,790 $ 134,895 $ 147,199
Other income (expense), net .............. 723 2,811 (200)
--------- --------- ---------
130,513 137,706 146,999
--------- --------- ---------
Cost of sales ............................ 64,302 69,843 73,583
Selling, general and administrative ...... 27,724 26,310 29,231
Interest expense ......................... 5,858 5,706 11,207
--------- --------- ---------
97,884 101,859 114,021
--------- --------- ---------
Income before income taxes and
minority interest ................... 32,629 35,847 32,978

Income tax expense ....................... 12,949 13,337 12,475
Minority interest ........................ 566 (42) 101
--------- --------- ---------
$ 19,114 $ 22,552 $ 20,402
========= ========= =========
</TABLE>

F-41

<PAGE>

Condensed balance sheets related to discontinued operations included in
the Company's consolidated balance sheets at December 31, 1996 and 1997 are as
follows.
<TABLE>
<CAPTION>

ASSETS 1996 1997
--------- ---------
(In thousands)

<S> <C> <C>
Cash and cash equivalents ........................ $ 9,269 $ 9,137
Accounts and notes receivable .................... 14,725 15,415
Inventories ...................................... 18,015 19,921
Other current assets ............................. 8,183 6,443
--------- ---------
Current assets ............................... 50,192 50,916

Property, plant and equipment, net ............... 31,436 30,308
Other assets ..................................... 8,467 7,411
--------- ---------
$ 90,095 $ 88,635
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT

Current portion of long-term debt ................ $ 14,892 $ 15,000
Other current liabilities ........................ 11,277 19,129
--------- ---------
26,169 34,129
--------- ---------
Long-term debt ................................... 53 102,500
Note payable to parent ........................... 105,801 --
Deferred income taxes ............................ 3,248 2,485
Other noncurrent liabilities ..................... 2,875 4,489
--------- ---------
111,977 109,474
--------- ---------
Stockholder's deficit ............................ (48,051) (54,968)
--------- ---------
$ 90,095 $ 88,635
========= =========

</TABLE>

F-42

<PAGE>

Condensed cash flow data for Rheox (excluding dividends paid to,
contributions received from and intercompany loans with NL) is presented below.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
(In thousands)

<S> <C> <C> <C>
Cash flows from operating activities .... $ 17,551 $ 20,705 $ 31,506
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .................. (3,464) (2,665) (2,330)
Purchase of minority interests ........ -- (5,168) --
Other, net ............................ (177) 457 16
--------- --------- ---------
(3,641) (7,376) (2,314)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness, net ..................... (30,499) (23,041) 100,940
Other, net ............................ -- (451) --
--------- --------- ---------
(30,499) (23,492) 100,940
--------- --------- ---------
$ (16,589) $ (10,163) $ 130,132
========= ========= =========
</TABLE>

F-43

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES

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

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

As discussed in Note 1 to the Condensed Financial Information on Schedule
I, the Company changed its method of accounting for environmental remediation
costs in 1997 in accordance with Statement of Position No. 96-1.

COOPERS & LYBRAND L.L.P.

Houston, Texas
February 11, 1998

S-1

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Condensed Balance Sheets

December 31, 1996 and 1997

(In thousands)
<TABLE>
<CAPTION>

1996 1997
--------- ---------

<S> <C> <C>
Current assets:
Cash and cash equivalents, including
restricted cash of $4,833 and $4,934 .......... $ 12,135 $ 16,541
Accounts and notes receivable .................. 356 7,119
Receivable from subsidiaries ................... 9,542 10,625
Prepaid expenses ............................... 445 256
--------- ---------
Total current assets ....................... 22,478 34,541
--------- ---------
Other assets:
Marketable securities .......................... 23,718 17,270
Notes receivable from subsidiary ............... 505,557 573,218
Investment in subsidiaries ..................... (175,063) (216,264)
Other .......................................... 6,680 5,778
--------- ---------
Total other assets ......................... 360,892 380,002
--------- ---------
Property and equipment, net ...................... 3,396 3,221
--------- ---------
$ 386,766 $ 417,764
========= =========

Current liabilities:
Accounts payable and accrued liabilities ....... $ 24,929 $ 35,636
Payable to affiliates .......................... 2,813 3,218
Income taxes ................................... 3,024 5,051
Deferred income taxes .......................... 1,908 1,640
--------- ---------
Total current liabilities .................. 32,674 45,545
--------- ---------
Noncurrent liabilities:
Long-term debt ................................. 399,756 419,857
Deferred income taxes .......................... 9,736 12,856
Accrued pension cost ........................... 10,974 7,019
Accrued postretirement benefits cost ........... 34,396 31,117
Other .......................................... 102,711 123,639
--------- ---------
Total noncurrent liabilities ............... 557,573 594,488
--------- ---------
Shareholders' deficit ............................ (203,481) (222,269)
--------- ---------
$ 386,766 $ 417,764
========= =========
</TABLE>

Contingencies (Note 4)

S-2

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

Condensed Statements of Operations

Years ended December 31, 1995, 1996 and 1997

(In thousands)

1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues and other income:
Equity in income (loss) from
continuing operations of
subsidiaries .......................... $ 80,620 $ (4,316) $ (1,019)
Interest and dividends ................. 2,739 1,461 1,246
Interest income from subsidiaries:
Continuing ........................... 45,551 47,097 57,851
Discontinued ......................... -- 2,641 1,189
Securities transactions ................ 1,175 -- 2,657
Other income, net ...................... 460 1,873 523
-------- -------- --------

130,545 48,756 62,447
-------- -------- --------
Costs and expenses:
General and administrative ............. 27,079 18,094 49,502
Interest ............................... 45,842 47,940 50,319
-------- -------- --------
72,921 66,034 99,821
-------- -------- --------
Income (loss) from continuing
operations before income taxes .... 57,624 (17,278) (37,374)

Income tax benefit ....................... 8,871 5,543 7,499
-------- -------- --------
Income (loss) from continuing
operations ........................ 66,495 (11,735) (29,875)

Discontinued operations .................. 19,114 22,552 20,402
-------- -------- --------
Net income (loss) .................. $ 85,609 $ 10,817 $ (9,473)
======== ======== ========

</TABLE>

S-3

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

Condensed Statements of Cash Flows

Years ended December 31, 1995, 1996 and 1997

(In thousands)

1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................ $ 85,609 $ 10,817 $ (9,473)
Equity in (income) loss of subsidiaries:
Continuing ............................. (80,620) 4,316 1,019
Discontinued ........................... (19,114) (22,552) (20,402)
Distributions from subsidiaries:
Continuing ............................. 15,000 20,000 35,000
Discontinued ........................... -- -- 30,000
Noncash interest expense ................. 842 842 (7,523)
Deferred income taxes .................... 1,411 (1,443) 1,224
Securities transactions .................. (1,175) -- (2,657)
Change in accounting for environmental
remediation costs ....................... -- -- 30,000
Other, net ............................... (5,819) (3,291) (2,544)
-------- -------- --------
(3,866) 8,689 54,644

Change in assets and liabilities, net .... 8,042 (8,593) 789
Marketable trading securities:
Purchases .............................. (762) -- --
Dispositions ........................... 27,102 -- --
-------- -------- --------
Net cash provided by operating
activities .......................... 30,516 96 55,433
-------- -------- --------
Cash flows from investing activities:
Investments in and loans to subsidiaries . (9,062) (12,941) (58,900)
Proceeds from disposition of securities .. -- -- 6,875
Capital expenditures ..................... (33) (40) (15)
Other, net ............................... 10 11 (12)
-------- -------- --------
Net cash used by investing
activities .......................... (9,085) (12,970) (52,052)
-------- -------- --------
</TABLE>

S-4

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

Condensed Statements of Cash Flows (Continued)

Years ended December 31, 1995, 1996 and 1997

(In thousands)

1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Dividends ................................ $ -- $(15,333) $ --
Other, net ............................... 278 262 1,025
-------- -------- --------
Net cash provided (used) by
financing activities ................ 278 (15,071) 1,025
-------- -------- --------
Cash and cash equivalents:
Increase (decrease) from:
Operating activities ................... 30,516 96 55,433
Investing activities ................... (9,085) (12,970) (52,052)
Financing activities ................... 278 (15,071) 1,025
-------- -------- --------
Net change from operating, investing
and financing activities ................ 21,709 (27,945) 4,406
Balance at beginning of year ............. 18,371 40,080 12,135
-------- -------- --------
Balance at end of year ................... $ 40,080 $ 12,135 $ 16,541
======== ======== ========
</TABLE>

S-5

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

Notes to Condensed Financial Information

Note 1 - Basis of presentation:

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

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

December 31,
--------------------------
1996 1997
--------- ---------
(In thousands)
<S> <C> <C>
Current:
Tremont Corporation ........................ $ (3,529) $ (3,354)
Other, net ................................. (2) 356
Kronos and Rheox:
Income taxes ............................. (836) 3,381
Other, net ............................... 11,096 7,024
--------- ---------
$ 6,729 $ 7,407
========= =========

Noncurrent - notes receivable from:
Kronos ..................................... $ 399,756 $ 573,218
Rheox ...................................... 105,801 --
--------- ---------
$ 505,557 $ 573,218
========= =========
</TABLE>

Note 3 - Long-term debt:

December 31,
------------------------
1996 1997
-------- --------
(In thousands)

<S> <C> <C>
11.75% Senior Secured Notes .................... $250,000 $250,000
13% Senior Secured Discount Notes .............. 149,756 169,857
-------- --------
$399,756 $419,857
======== ========
</TABLE>

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

S-6

<PAGE>

The aggregate maturities of the Company's long-term debt at December 31,
1997 are shown in the table below.

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

<S> <C>
Senior Secured Notes due 2003 .................................. $250,000
Senior Secured Discount Notes due 2005 ......................... 187,500
--------
437,500
Less unamortized original issue discount on the
Senior Secured Discount Notes ................................. 17,643
--------
$419,857
========
</TABLE>

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

Note 4 - Contingencies:

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

S-7

<PAGE>

NL INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(In thousands)
<TABLE>
<CAPTION>

Balance at Charged to Currency
beginning costs and translation Balance at
Description of year expenses Deductions adjustments Other end of year
----------- ---------- ---------- ---------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful
accounts and notes receivable $ 3,813 $ 382 $(1,153)(a) $ (214) $ - $ 2,828
======== ====== ======= ======= ===== ========
Amortization of intangibles $ 22,207 $2,862 $ - $(2,703) $ - $ 22,366
======== ====== ======= ======= ===== ========
Year ended December 31, 1996:
Allowance for doubtful
accounts and notes receivable $ 4,039 $ 1,274 $(1,331)(a) $ (169) $ - $ 3,813
======== ====== ======= ======= ===== ========
Amortization of intangibles $ 20,562 $ 3,152 $ - $(1,507) $ - $ 22,207
======== ====== ======= ======= ===== ========
Year ended December 31, 1995:
Allowance for doubtful
accounts and notes receivable $ 3,749 $ 289 $ (166)(a) $ 167 $ - $ 4,039
======== ====== ======= ======= ===== ========
Amortization of intangibles $ 16,149 $ 3,241 $ - $ 1,172 $ - $ 20,562
======== ====== ======= ======= ===== ========
</TABLE>

(a) Amounts written off, less recoveries.

S-8

<PAGE>