SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549



                                    Form 8-K


                                 CURRENT REPORT



                     Pursuant to Section 13 or 15(d) of the

                         Securities Exchange Act of 1934



                                  June 8, 1998
               (Date of Report - Date of earliest event reported)



                             KERR-MCGEE CORPORATION
             (Exact name of registrant as specified in its charter)


            Delaware                 1-3939                     73-0311467     
            (State of       (Commission File Number)           (IRS Employer
         Incorporation)                                   Identification No.)



    Kerr-McGee Center
    Oklahoma City, Oklahoma                                       73125        
(Address of principal executive offices)                        (Zip Code)



                                 (405) 270-1313
                         (Registrant's telephone number)



Item 5.       Other Events

         The  company  committed  to  formal  plans  for the  sale  of its  coal
operations in the second quarter of 1998 and began  reporting coal operations as
discontinued  operations.  The  company  hereby  incorporates  by  reference  in
Attachment A the restated  financial  information and statements at December 31,
1997, 1996 and 1995 and for the years then ended.



                                  ATTACHMENT A


Management's Discussion and Analysis

Results of Consolidated Operations

     Net income (loss) and per-share  amounts for each of the three years in the
period ended December 31, 1997, were as follows:

     (Millions of dollars, except per-share amounts)    1997    1996    1995
     -----------------------------------------------    ----    ----    ----

     Net income (loss)                                  $194    $220   $(31)
     Income from continuing operations
         excluding special items                         151     174     88
     Earnings (loss) per share -
         Net income (loss) -
                  Basic                                 4.06    4.45   (.60)
                  Diluted                               4.04    4.43   (.60)
         Income from continuing operations
              excluding special items -
                  Basic                                 3.17    3.52   1.70
                  Diluted                               3.15    3.50   1.70

     Net income  (loss) was affected by a number of special items in each of the
years. In 1997,  special items were principally  nonoperating that increased net
income by $10 million. The 1996 special items resulted in a charge to net income
of $10 million and were both operating and nonoperating.  In 1995, special items
related primarily to the company's adoption of Statement of Financial Accounting
Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived  Assets to be Disposed Of." The following table reconciles income
from continuing operations excluding special items to net income:
<TABLE>
<CAPTION>

     (Millions of dollars)                                   1997       1996       1995
     ---------------------                                   ----       ----       ----

     <S>                                                     <C>        <C>       <C>
     Net income from continuing operations excluding
         special items                                       $151       $174      $  88
                                                             ----       ----      -----
     Special items, net of income taxes -
         Gains on the sale of equity securities                12         15         --
         Settlements with insurance carriers                    8         44         --
         Gains on the sale of nonstrategic oil and
              gas properties                                    4          8         --
         Net provision for environmental reclamation
              and remediation of inactive sites               (13)       (28)       (16)
         Pending/settled litigation                            (1)       (21)        --
         Asset impairment                                      --        (16)      (125)
         Restructuring                                         (1)        (7)        (4)
         Other, net                                             1         (5)        (1)
                                                            -----       -----      -----
              Total                                            10        (10)      (146)
                                                            -----       -----      -----

     Income from discontinued operations,
         net of income taxes                                   33         56         27
                                                            -----     ------      -----

     Net income (loss)                                       $194       $220       $(31)
                                                             ====       ====       ====
</TABLE>

     The merger of the company's  North American  onshore  properties into Devon
Energy Corporation  (Devon) was effective December 31, 1996. This merger affects
the comparability of the periods  presented since the company's  approximate 31%
investment in Devon is accounted for by the equity method (see Note 4). In 1995,
the  company  completed  the  sale  of  substantially  all of its  refining  and
marketing operations and completed the sale of the remaining assets in 1996. The
sales of the coal  operations  were  completed in 1998.  Therefore,  all amounts
related  to  refining  and  marketing  and  coal are  shown in the  Consolidated
Statement of Income as discontinued operations.
     Income from continuing operations excluding special items for 1997 declined
$23 million from the prior year,  due to declines in  operating  profit for both
business units.  Excluding special items,  exploration and production  operating
profit for 1997 was 25% lower than the prior year,  while chemical  results were
lower by 7%. The $86 million increase in 1996 income from continuing  operations
excluding  special  items,  compared with 1995, was primarily due to oil and gas
exploration  and  production  results  that more than  doubled the prior  year's
results,  partially  offset by a 26% decline in earnings from the chemical unit.
Operating profit excluding special items was $262 million, $326 million and $235
million for 1997, 1996 and 1995, respectively.

     Following is a discussion  of the major  changes in various  items shown in
the Consolidated Statement of Income.

     Consolidated sales from continuing  operations were $1.4 billion,  compared
with $1.6 billion for 1996 and $1.4  billion for 1995.  Sales for 1997 were less
than the prior year due to lower crude oil prices and volumes, lower natural gas
volumes  and  lower  average  prices  for  titanium  dioxide  pigment.   Primary
contributors  to the decline in oil and gas volumes were the merger of the North
American onshore properties into Devon,  divestitures of nonstrategic properties
and  significantly  lower sales of natural  gas  purchased  from third  parties.
Partially  offsetting  these  declines  were  higher  prices for natural gas and
increased  pigment  volumes.  The  increase  in 1996  sales  over 1995  resulted
primarily  from  higher  crude oil and  natural  gas prices and higher  sales of
purchased  third-party  natural  gas,  partially  offset by declines in titanium
dioxide pigment sales prices and lower crude oil volumes.

     Costs and  operating  expenses  were $739  million,  $804  million and $745
million for 1997,  1996 and 1995,  respectively.  The 1997 amount was lower than
the prior  year,  primarily  due to the  absence of North  American  onshore and
divested oil and gas properties and  significantly  lower volumes of natural gas
purchased for resale,  partially offset by higher  production costs for pigment.
Costs and  operating  expenses for 1996 were higher than 1995,  primarily due to
increased  purchases of natural gas for resale and higher  feedstock and utility
costs for titanium dioxide pigment.

     Following are general and administrative expenses for 1997, 1996 and 1995:
<TABLE>
<CAPTION>

     (Millions of dollars)                                1997       1996      1995
     ---------------------                                ----       ----      ----

     <S>                                                  <C>        <C>       <C>
     General and administrative expenses
         excluding special items                          $109       $106      $113
                                                          ----       ----      ----
     Special items -
         Net provision for environmental reclamation
              and remediation of inactive sites             20         43        27
         Pending/settled litigation                          2         29        --
         Restructuring                                       2         10         7
         Other, net                                          3          9        --
                                                          ----      -----      ----
                  Total                                     27         91        34
                                                          ----      -----      ----

     General and administrative expenses                  $136       $197      $147
                                                          ====       ====      ====
</TABLE>

     Net provisions for  environmental  reclamation  and remediation of inactive
sites primarily represent additional  provisions  established for the removal of
low-level radioactive materials from the company's inactive facility and offsite
areas  in West  Chicago,  Illinois.  Restructuring  represents  charges  for the
relocation  of the  exploration  and  production  unit to  Houston,  Texas,  and
severance associated with the divestiture program and the Devon merger.

     Asset  impairments  totaled $25 million in 1996 and related  principally to
certain  exploration  and  production  properties  in the Gulf of  Mexico.  This
compares with $204 million for  continuing  operations in 1995,  which  resulted
from the company's  adoption of FAS 121 and the writedowns  associated  with the
oil and gas divestiture program (see Note 11).

     Exploration costs for 1997, 1996 and 1995 were $65 million, $74 million and
$80 million, respectively. Lower dry hole costs in the North Sea, offset in part
by higher  costs in China,  were the primary  reason for the reduced 1997 costs.
Also  contributing to the reduction was lower  undeveloped  lease  amortization,
partially offset by higher geophysical cost. In 1996, the company had lower Gulf
of Mexico  undeveloped  lease  amortization and lower geological and geophysical
costs, partially offset by higher dry hole expense, compared with 1995.

     Interest and debt expense  totaled $47 million in 1997, $52 million in 1996
and $60 million in 1995.  Decreased debt was the principal  reason for the lower
1997 expense, compared with the prior year. The decrease in 1996 expense was due
to both lower debt and lower average borrowing costs.

     Other income was as follows for each of the years in the three-year  period
ended December 31, 1997:

     (Millions of dollars)                         1997      1996       1995
     ---------------------                        -----     -----      -----

     Other income excluding special items         $  47     $  29      $  27

     Special items -
         Gains on sales of equity securities         18        23         --
         Settlements with insurance carriers         12        67         --
         Gains on the sale of nonstrategic
              oil and gas properties                  6        13         --
         Other, net                                   7        --          2
                                                  -----     -----      -----
                  Total                              43       103          2
                                                  -----     -----      -----

     Other income                                 $  90      $132      $  29
                                                  =====      ====      =====

     Equity  income from Devon was the primary  reason for the increase in other
income  excluding  special  items for 1997  compared  with the prior year.  Also
contributing were lower foreign currency  transaction losses and higher interest
income.

Transactions Subsequent to Year-End 1997

     The company  continuously  reviews each  business unit in an effort to find
innovative ways to maximize shareholder value through existing operations and/or
new opportunities  worldwide.  In a strategy approved by the Board of Directors,
the company's future efforts will be concentrated on oil and gas exploration and
production and titanium dioxide pigments, the principal chemical business.

     The company announced its intent to exit the coal business in January 1998.
The sales were  completed  in mid-1998 for $600  million  cash,  resulting in an
after-tax  gain of $257 million.  Therefore,  coal  operations  are presented as
discontinued  operations  in all  periods.  The  gain on the  sale  and the cash
proceeds  will be  reflected  in the 1998  Consolidated  Statement of Income and
Consolidated Statement of Cash Flows.

     Over the  three-year  period  ended  December 31,  1997,  coal  contributed
operating profit excluding  special items and net cash flow (after-tax cash flow
less cash capital expenditures) of $185 million and $150 million,  respectively.
The absence of the coal  operations  will  contribute to a higher  effective tax
rate due to the absence of statutory allowances for coal depletion.

     The company  also  disposed of its  ammonium  perchlorate  operation in the
first  half of  1998 in a $39  million  cash  sale.  The  gain on the  sale  was
immaterial.  In January 1998, the company signed a letter of intent to negotiate
the sale of  substantially  all of the  remaining  electrolytic  and specialty -
chemical businesses. The discussions were terminated mid-1998.

     Pigment  production  capacity was  significantly  expanded in 1998 with the
acquisition  of  an  initial  80%  interest  in  Bayer  AG's  European   pigment
operations.  The company has the option to acquire the  remaining  20%  interest
over a two-year period  beginning in 2001. The $97 million cash  transaction was
effective March 31, 1998.

     The company  acquired  additional  interest in the United Kingdom sector of
the  North Sea with the  acquisition  of the  North  Sea  assets of Gulf  Canada
Resources  Limited (Gulf  Canada) for Cdn $590 million  (U.S.  $419 million) and
assumed debt.  The  transaction  was effective  March 31, 1998.  The  additional
production  from  these   properties  will  increase  the  company's  North  Sea
production and reserves in excess of 80% and 75%, respectively, of the company's
North Sea average production rates and proved reserves at year-end 1997.

     In the 1998 fourth  quarter,  the company  and Oryx Energy  Company  (Oryx)
announced  a  strategic  merger,  which  will  create the  fourth  largest  U.S.
independent oil and gas exploration and production  company.  Oryx  shareholders
will receive 0.369 shares of newly issued Kerr-McGee common stock for each share
of Oryx common stock. Approximately 39 million shares of Kerr-McGee common stock
will be  issued  to the  Oryx  stockholders  in  total,  bringing  total  shares
outstanding to approximately  86 million.  The transaction will be accounted for
as a pooling of interest and be tax-free to Oryx stockholders. The existing Oryx
debt (approximately $1.3 billion) will become the company's obligation. The Oryx
7-1/2%  convertible  debentures due 2014 will become  convertible into shares of
Kerr-McGee  common stock at a conversion  rate  adjusted to reflect the exchange
ratio. The combined companies will have total capitalization of approximately $6
billion and a Board of Directors numbering 14. Nine of the of the directors will
be from the company's  current board and five from the Oryx board. The merger is
expected  to be  consummated  in early  1999,  pending  shareholder  and certain
regulatory approvals.

     Each of these  transactions are independent  steps in an ongoing  strategic
plan. Management  anticipates that each of these transactions will have positive
long-term impacts on operating profit, cash flow and liquidity that will enhance
shareholder value.

Segment Operations

     Operating  profit from each of the company's  segments is summarized in the
following table:

     (Millions of dollars)                             1997     1996      1995
     ---------------------                             ----     ----     -----

     Operating profit excluding special items -
         Exploration and production                    $178     $236      $113
         Chemicals                                       84       90       122
                                                       ----     ----      ----
              Total                                     262      326       235
     Special items                                       (6)     (37)     (210)
                                                       ----     ----      ----
     Operating profit                                  $256     $289      $ 25
                                                       ====     ====      ====

Exploration and Production
     The company merged its North American  onshore  exploration  and production
assets into Devon  effective  December 31, 1996, and accounts for the investment
on the  equity  basis.  Therefore,  income  from Devon is not  included  in 1997
operating profit, and the company's proportionate interest in Devon's volumes is
not included in the 1997 production and sales shown in the following table.
<TABLE>
<CAPTION>

     (Millions of dollars, except per-unit amounts)           1997        1996        1995
                                                            ------      ------      ------

     <S>                                                    <C>         <C>         <C> 
     Sales                                                    $628        $874        $690
     Operating profit excluding special items                 $178        $236        $113
     Special items                                              (3)        (32)       (210)
     Operating profit (loss)                                  $175        $204        $(97)
     Proprietary crude oil and condensate produced
         (thousands of barrels per day)                         57          69          70
     Average price of crude oil sold (per barrel)           $18.51      $19.16      $15.99
     Proprietary natural gas sold (MMCF per day)               184         281         291
     Average price of natural gas sold (per MCF)             $2.56       $2.12       $1.52
</TABLE>

     Special  items in 1997  consisted  primarily  of  additional  costs for the
unit's  restructuring and relocation to Houston. The 1996 special items were $22
million for asset  impairments  and $10 million  for  restructuring,  due to the
December 1996 merger of the North American onshore properties into Devon and the
announcement of the relocation to Houston. The 1995 special items related to FAS
121 asset  impairments  and  writedowns  associated  with the  program to divest
nonstrategic and marginal properties and restructuring charges.

     Equity  accounting for the merged properties and lower average sales prices
for crude oil,  partially  offset by increased  sales prices for natural gas and
lower  exploration  expenses,  were the primary reasons for lower 1997 operating
profit excluding  special items.  Improvement in 1996 operating profit excluding
special items,  compared with 1995, resulted primarily from increases of 20% and
39% in the  company's  average  sales  prices  for  crude oil and  natural  gas,
respectively, and a decrease in exploration expenses.

Chemicals
     Chemical operating profit and sales were as follows.  Special items in 1997
were  primarily  for  the  writeoff  of  obsolete  equipment  and  in  1996  for
impairments  and  shutdown  costs  for  a  crosstie-treating  facility  and  the
elimination of a product line at a specialty plant.

     (Millions of dollars)                           1997     1996     1995
     ---------------------                          -----    -----    -----

     Sales                                          $ 760    $ 692     $707

     Operating profit excluding special items       $  84    $  90     $122
         Special items                                 (3)      (5)      --
                                                    -----    -----    -----

     Operating profit                               $  81    $  85     $122
                                                    =====    =====     ====

     The  increase  in 1997  sales,  compared  with 1996,  was due to  increased
titanium  dioxide  pigment and ammonium  perchlorate  sales  volumes.  Partially
offsetting  these increases were lower average  pigment prices.  Although prices
strengthened  considerably in the last half of the year, average prices received
in 1997 were less than those received in the prior year. The higher 1997 pigment
volumes  resulted  from  the  completion  of  the  expansion  at  the  Hamilton,
Mississippi,  plant and a full  year's  production  from the 1996  expansion  in
Western  Australia.  The  decrease in 1996 sales from 1995  resulted  from lower
pigment sales prices.  Operating profit in both 1997 and 1996 was also adversely
affected by higher per-unit  production costs for pigment than in the respective
prior years.

Financial Condition

     (Millions of dollars)                        1997      1996      1995
     ---------------------                      ------    ------    ------

     Current ratio                                 1.3       1.7       1.3
     Working capital                            $  166    $  320    $  189
     Total debt                                    579       663       735
     Total debt less cash                          396       542       648
     Stockholders' equity                       $1,440    $1,367    $1,416
     Total debt to total capitalization             29%       33%       34%
     Floating-rate debt to total debt               11        66        64

Cash Flow
     Net  cash  provided  by  operating  activities  was $569  million  in 1997,
compared with $645 million in 1996 and $369 million in 1995.

     The  decrease  in 1997  resulted  primarily  from lower net  income,  lower
noncash  charges,  higher cash  environmental  expenditures  and lower  deferred
income  taxes,  partially  offset by  working  capital  and other  changes  that
increased  net cash  provided by  operating  activities.  Cash flow  provided by
operating activities in 1997 was also adversely affected by the company's merger
of  its  North  American   onshore  oil  and  gas  properties   into  Devon,  as
undistributed earnings from equity affiliates represent a noncash item.

     The increase in 1996 net cash  provided by operating  activities,  compared
with 1995,  was primarily  attributable  to the company's  record net income and
temporary  changes in working  capital and other,  which decreased 1995 net cash
provided by operating  activities  by $211  million.  Although a net loss of $31
million was incurred in 1995, the special charges,  totaling $260 million before
income taxes, were all noncash and did not adversely affect net cash provided by
operations.

     In each of the  years  1997,  1996 and 1995,  cash  provided  by  operating
activities was supplemented by other sources of cash that were used primarily to
reduce debt and purchase the company's common stock (see Note 14). In 1997, cash
available increased $21 million from the sale of equity securities,  $18 million
from  the  sale  of  nonstrategic   and  marginal   exploration  and  production
properties, $17 million from the sale of other assets and $21 million related to
insurance  settlements.  During 1996, the company  received cash proceeds of $48
million from the divestiture of nonstrategic, marginal and other exploration and
production properties; $43 million related to insurance settlements; $29 million
from the sale of equity  securities;  $13 million from the sale of the remaining
refining and  marketing  assets;  and $11 million from the sale of other assets,
including the company's West Virginia coal mining  operation.  Proceeds from the
sale of  substantially  all of the company's  refining and marketing  operations
increased cash available by $419 million in 1995.

     Total debt  declined to $579 million at year-end  1997 from $735 million at
year-end  1995.  In 1995,  the company's  Board of Directors  authorized a stock
purchase  program of up to $300  million.  The program was  completed  in August
1997.  Expenditures  were $60  million  in 1997,  $195  million  in 1996 and $45
million  in 1995,  with a total of 4.8  million  shares  purchased  through  the
program.

     On January 14, 1997, the company's Board of Directors  approved an increase
in the quarterly dividend payable April 1, 1997, to $.45 per share from $.41 per
share.  In 1995, the Board increased the quarterly  dividend  payable January 2,
1996, to $.41 per share from $.38 per share.

Liquidity
     The  company's  strong  balance  sheet  reflects  a solid  working  capital
position and low debt to  capitalization.  The company's debt has been rated "A"
or "A-" by various rating agencies, resulting in low debt costs. At December 31,
1997,  the company's net working  capital  position was $166 million,  a decline
from the 1996  year-end  position.  The merger of the company's  North  American
onshore exploration and production  properties  contributed to the lower working
capital position since certain components of working capital were converted into
the Devon  equity  investment.  The 1996 net  working  capital  position of $320
million was an increase of $131 million from the prior year.  This  increase was
the  result of the other  cash  inflows  discussed  previously,  which were used
primarily to repay  short-term  borrowings and fund the company's stock purchase
program.

     The  percentage of total debt to total  capitalization  was 29% at December
31, 1997, 33% at December 31, 1996, and 34% at year-end 1995.  This  improvement
is the direct result of the company's  repayment of debt, which more than offset
the effect of the stock purchase program on total capitalization.

     In October 1997, the company  replaced the majority of its then outstanding
floating-rate  debt with $300  million of  fixed-rate  securities.  The  company
issued $150 million of 7.125%  (effective rate 7.01%) debentures due October 15,
2027,  and $150 million of 6.625%  (effective  rate 6.54%) notes due October 15,
2007.

     Additionally,  the company and/or its subsidiaries  have several  revolving
credit  agreements.  At year-end 1997, $37 million was outstanding  under one of
the agreements with interest payable at varying rates. At December 31, 1997, the
company  had unused  lines of credit and  revolving  credit  facilities  of $714
million.  Of this  amount,  $340 million and $265 million can be used to support
the commercial paper borrowings of Kerr-McGee Credit  Corporation and Kerr-McGee
Oil (U.K.) PLC, respectively, both wholly owned subsidiaries.

     Two  revolving  credit  agreements  were amended in 1997.  The $105 million
revolving  credit  agreement  between  the  company's  wholly  owned  subsidiary
Kerr-McGee China Petroleum Ltd. and several banks was extended to March 6, 2000.
The $37 million  outstanding  at  year-end  1997 was under this  agreement.  The
revolving  credit  agreement  among the  company,  its wholly  owned  subsidiary
Kerr-McGee  Oil (U.K.) PLC and several  banks was amended  from $230  million to
$225 million and separated into two loan facilities. Under one arrangement, $150
million may be borrowed  through April 28, 2000. Under the other, $75 million is
available  through April 28, 1998,  with the provision that one-year  extensions
may be requested.  Interest is payable at varying rates for all of the revolving
credit agreements.

     The company  finances capital  expenditures  through  internally  generated
funds and various  borrowings.  Cash capital  expenditures  were $341 million in
1997,  $392 million in 1996 and $484  million in 1995, a total of $1.2  billion.
During this same  period,  $1.7  billion of net cash was  provided by  operating
activities  (exclusive  of  working  capital  and  other  changes),   which  was
approximately $200 million in excess of cash capital  expenditures and dividends
paid during the period.

     Management  anticipates  that 1998  cash  capital  requirements,  currently
estimated at $520 million (including $60 million for the coal business), and the
capital  expenditures  programs  for the next  several  years can continue to be
provided  through  internally  generated funds and selective  short-term  and/or
long-term borrowings.

Market Risks

     The company is exposed to a variety of market risks,  including the effects
of movements in foreign  currency  exchange  rates,  interest  rates and certain
commodity prices.  The company addresses its risks through a controlled  program
of risk  management that includes the use of derivative  financial  instruments.
The company does not hold or issue derivative financial  instruments for trading
purposes.  See  Notes  1 and 16 to the  Consolidated  Financial  Statements  for
additional  discussion  of  the  company's  financial  instruments  and  hedging
activities.

Foreign Currency Exchange
     The  U.S.  dollar  is the  functional  currency  for  all of the  company's
operations.  It is the  company's  intent  to hedge a  portion  of its  monetary
assets,   liabilities  and  commitments   denominated  in  foreign   currencies.
Periodically,  the company  purchases  foreign  currency  forward  contracts  to
provide funds for operating and capital  expenditure  requirements  that will be
denominated  in foreign  currencies,  primarily  Australian  dollars and British
pounds  sterling.  These  contracts  generally have durations of less than three
years.  The company also enters into forward  contracts to sell various  foreign
currencies  as  hedges,  principally  for  accounts  receivable  generated  from
titanium  dioxide  pigment  sales  denominated  in  foreign  currencies.   These
contracts are principally  for European  currencies and generally have durations
of less than a year.  Since these  contracts  qualify as hedges and correlate to
currency movements, any gains or losses resulting from exchange rate changes are
deferred and recognized as adjustments of the  transaction  when the hedged item
occurs.

     At year-end  1997,  the company's  derivative  financial  instruments  were
comprised only of foreign currency forward contracts. Following are the notional
amounts at the contract exchange rates,  weighted-average  contractual  exchange
rates and estimated  fair value by contract  maturity for open foreign  currency
contracts at year-end 1997. All amounts are U.S. dollar equivalents.
<TABLE>
<CAPTION>

                                                                                                    Dec. 31, 1997
                                                              Notional      Weighted-Average       Estimated Fair
     (Millions of dollars, except average contract rate)       Amount         Contract Rate             Value    

     <S>                                                          <C>            <C>                     <C>
     Forward contracts to purchase (sell) currencies -
         Maturing in 1998 -
              Australian dollar                                   $63              .7507                 $55
              British pound sterling                               12             1.5897                  12
              German mark                                          (3)            1.7721                  (3)
              British pound sterling                               (1)             .6137                  (1)
              Belgian franc                                        (1)           36.0382                  (1)
         Maturing in 1999 -
              Australian dollar                                    39              .7377                  35
</TABLE>

Interest Rates
     The company's  exposure to changes in interest  rates relates  primarily to
long-term debt obligations.  At year-end 1997, the company's  long-term debt was
comprised of 93%  fixed-rate  instruments,  which minimize  earnings  volatility
related to interest  expense.  The company  does not  currently  participate  in
interest rate-related derivative financial instruments.

     The table below  presents  principal  amounts and related  weighted-average
interest rates by maturity date for the company's  long-term  debt  obligations.
All borrowings are in U.S. dollars.
<TABLE>
<CAPTION>

                                                                                     There-            Fair Value
(Millions of dollars)                     1998     1999     2000     2001     2002    after    Total    12/31/97
---------------------                     ----------------------------------------------------------------------

<S>                                        <C>     <C>      <C>      <C>      <C>     <C>      <C>        <C>
Fixed-rate debt -
     Principal amount                        $2      $8      $10      $12      $10    $475     $517       $632
     Weighted-average interest rate        9.49%   9.00%    9.61%    9.61%    9.61%   7.05%    7.25%
Variable-rate debt -
     Principal amount                        --      --      $37       --       --      --      $37        $37
     Weighted-average interest rate          --      --     6.04%      --       --      --     6.04%
</TABLE>

Commodity Prices
     Although no such  contracts  were entered into during 1997, the company has
periodically  used commodity  futures and option contracts to hedge a portion of
its crude oil and natural gas sales and natural gas purchased for  operations in
order to minimize the price risks  associated  with the production and marketing
of crude oil and natural gas.  These  contracts  generally had maturities of one
year or less.  Since the contracts  qualified as hedges and  correlated to price
movements of crude oil and natural  gas,  any gain or loss from these  contracts
was explicitly deferred and recognized as part of the hedged transaction.

     In 1997,  approximately  70% of the  company's  coal  sales  resulted  from
contracts with durations of at least three years.  At year-end 1997, the average
contract price was in excess of spot prices.

Other
     As a global energy and inorganic chemical company, Kerr-McGee is subject to
the volatility of crude oil, natural gas and titanium dioxide pigment prices and
risks  associated  with  operations  outside the United States.  The company has
announced  its  intention  to  concentrate  on two primary  businesses - oil and
natural gas  exploration  and  production  and the  production  and marketing of
titanium dioxide pigments.

     Oil and gas  prices  in 1998 are  below  those  received  in 1997.  Company
management  continuously  monitors the underlying global pricing fundamentals of
these commodities and factors those conditions into its projections and economic
forecasts. In addition, more than 15% of the company's year-end 1997 proprietary
oil  production was from  Southeast  Asia,  which is in the midst of an economic
crisis.  The company is taking steps to provide  reasonable  assurance  that its
level of risk  remains  manageable,  such as  requiring  letters of credit  from
buyers when management deems appropriate.

     Pigment prices have increased from 1997 levels,  and the industry continues
to  consolidate.  Management  anticipates  that the  consolidation  trends  will
continue  in the near future and that the  company's  status as one of only four
companies that own the preferred  chloride  technology,  along with its low cost
position, will benefit operating profit, cash flow and liquidity.

Environmental Matters

     The  company's  operations  are subject to various  environmental  laws and
regulations. Under these laws, the company is subject to possible obligations to
remove or mitigate the effects on the  environment of the disposal or release of
certain  chemical,  petroleum or  low-level  radioactive  substances  at various
sites,  including  sites that have been  designated  Superfund sites by the U.S.
Environmental   Protection   Agency   (EPA)   pursuant   to  the   Comprehensive
Environmental  Response,  Compensation  and Liability Act of 1980  (CERCLA),  as
amended. At December 31, 1997, the company had received notices that it has been
named a potentially  responsible  party (PRP) with respect to the remediation of
16 existing  EPA  Superfund  sites and may share  liability  at certain of these
sites.  In 1996,  the company  signed a Consent Decree with respect to a site at
Slidell,  Louisiana.  In  addition,  the company  and/or its  subsidiaries  have
executed consent orders,  operate under a license or have reached  agreements to
perform or have performed remediation or remedial investigations and feasibility
studies on sites not included as EPA Superfund sites.

     The  company  does not  consider  the number of sites for which it has been
named a PRP to be a  relevant  measure  of  liability.  Because  of  continually
changing  environmental  laws  and  regulations,  the  nature  of the  company's
businesses,  the large number of other PRPs, the present state of the law, which
imposes joint and several liability on all PRPs under CERCLA,  and pending legal
proceedings,  the  company is  uncertain  as to its  involvement  in many of the
sites.  Therefore,  the company is unable to  reliably  estimate  the  potential
liability  and the  timing of future  expenditures  that may arise  from many of
these  environmental  sites.  Reserves have been established for the remediation
and  reclamation  of active and inactive  sites where it is probable that future
costs will be incurred and the liability is estimable.  In 1997, $41 million was
added to the reserve for active and inactive  sites.  At December 31, 1997,  the
company's reserve for these sites totaled $243 million. In addition, at year-end
1997,  the  company had  reserves  of $68  million for the future  costs for the
abandonment and removal of offshore well and production facilities at the end of
their productive lives and $23 million for the  decommissioning  and reclamation
of coal mining locations. In the Consolidated Balance Sheet, $251 million of the
total reserve is classified as a deferred credit,  and the remaining $83 million
is included in current liabilities.

     Expenditures for the environmental protection and cleanup of existing sites
for each of the last three years and for the  three-year  period ended  December
31, 1997, are as follows:

     (Millions of dollars)                   1997     1996     1995      Total
     ---------------------                   ----     ----     ----      -----

     Charges to environmental reserves       $ 94      $56     $ 61       $211
     Recurring expenses                        20       19       23         62
     Capital expenditures                      17       15       20         52
                                             ----     ----     ----      -----
         Total                               $131      $90     $104       $325
                                             ====     ====     ====      =====

     The  company  has  not  recorded  in  the  financial  statements  potential
reimbursements  from governmental  agencies or other third parties (see Notes 10
and 13).  The  following  table  reflects  the  company's  portion  of the known
estimated  cost  of  investigation  and/or  remediation  that  is  probable  and
estimable. The table includes all EPA Superfund sites where the company has been
notified it is a PRP under CERCLA and other sites for which the company believes
it had some ongoing financial involvement in investigation and/or remediation at
year-end 1997.


<TABLE>
<CAPTION>


                                                                                  Total Known              Total
                                                                                    Estimated       Expenditures        Total Number
                                                                                         Cost       Through 1997     of Identifiable
Location of Site                    State of Investigation/Remediation                   (Millions of dollars)                  PRPs

<S>  <C>                            <C>                                                <C>                 <C>                   <C>
EPA Superfund sites

     Milwaukee, Wis.                Executed consent decree to remediate
                                    the site of a former wood-treating
                                    facility.  Awaiting approval of proposed
                                    remedy; installed and operating a free-
                                    product recovery system                            $   19              $   7                   3

     West Chicago, Ill.,            Began cleanup of a portion of one site
     two sites outside              in 1995, and cleanup of the second site
     the facility                   began in 1997 (see Note 10).                           43                 29                   1

     Slidell, La., Chicago, Ill.,   Various stages of investigation/remediation            30                 26                 492
     and 11 sites individually                                                         ------              -----               -----
     not material                                                                          92                 62                 496
                                                                                       ------              -----               -----
     

Non-EPA Superfund sites
under consent order, license
or agreement

     West Chicago, Ill.,            Reached agreement with the City of West
     facility                       Chicago.  Decommissioning is in progress
                                    under State of Illinois supervision while
                                    awaiting state license amendment (see
                                    Note 10).  Began shipments to a
                                    permanent disposal facility in 1994.                  348                185

     Cleveland/Cushing, Okla.       Began cleanup in 1996                                  48                 36

     Cimarron, Okla.                Remediation is complete and monitoring
                                    continues.                                             36                 34
                                                                                       ------              -----
                                                                                          432                255
                                                                                       ------              -----

Non-EPA Superfund sites
individually not material                                                                 154                118
                                                                                       ------              -----

Total for all sites                                                                      $678               $435
                                                                                         ====               ====

</TABLE>

     Although  management  believes  adequate  reserves  have been  provided for
environmental  and all other known  contingencies,  it is  possible,  due to the
previously noted  uncertainties,  that additional  reserves could be required in
the future.

Other

     The use by many existing  computer  systems of a two-digit year date format
rather than four digits - the Year 2000 issue - impacts the  company's  business
systems and facilities.  In 1996, a formal program was initiated and a number of
project  teams were formed and charged with the  responsibility  of  identifying
areas of  potential  concern and  ensuring  that timely  corrective  actions are
taken. At year-end 1997, the  implementation  of new or modification of existing
business systems was approximately  two-thirds complete, and the review of plant
and facility process controls was under way. Management anticipates modification
or  replacement  of systems will be  essentially  complete by year-end 1998. The
company is also working with key suppliers, vendors and customers to ensure Year
2000  compliance.  The  ultimate  outcome  of the Year  2000  project  cannot be
guaranteed;  however,  the  company  believes  that the  program  under way will
provide a smooth  transition into the year 2000 and reduces risk to a manageable
level.  The cost of  addressing  the Year  2000  issue  is not  material  to the
consolidated results of operations or financial condition of the company.

     During 1997 and early 1998, the Financial Accounting Standards Board issued
several  pronouncements  related to  financial  statement  disclosure  that will
affect the company's 1998  financial  statement  presentation.  There will be no
effect  on net  income  as a result  of  these  pronouncements.  Following  is a
discussion of the new standards.

     FAS No. 130, "Reporting  Comprehensive  Income," establishes  standards for
the reporting and display of  comprehensive  income and its components as a part
of the basic financial statements.  At the beginning of 1998, the company had no
significant items to be reported as other comprehensive income.  However,  prior
years'  information will be presented.  The disclosures will be required for the
1998 year-end financial statements, and abbreviated information will be required
for the first quarter.

     FAS No.  131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information,"  establishes  standards  for  determining  segments and  reporting
information about a company's business segments in annual financial  statements.
Also  required  is  selected  information  about  operating  segments in interim
financial  reports  issued to  shareholders.  The  company  does not foresee any
material  change  to the  operating  segments  currently  reported  in Note  24,
"Reporting by Business Segments." However, the financial  information  presented
will differ.  Quarterly information will be presented in the first 1998 quarter,
and prior periods will be restated.

     FAS  No.   132,   "Employers'   Disclosures   about   Pensions   and  Other
Postretirement Benefits," was issued in February 1998. This statement, effective
for year-end 1998 financial  statements,  revises disclosures about pensions and
other  postretirement  benefit  plans.  It does not  change the  measurement  or
recognition of costs associated with those plans.

     In March 1998,  the  American  Institute of  Certified  Public  Accountants
issued  Statement  of  Position  (SOP) No.  98-1,  "Accounting  for the Costs of
Computer Software  Developed or Obtained for Internal Use." Amounts  capitalized
or expensed by the company for internal-use  software  projects are not expected
to differ  materially as a result of the SOP,  since the  prescribed  accounting
treatment is fairly consistent with the company's current accounting policy. The
SOP, the effect of which is to be  recognized  prospectively,  is effective  for
1999 financial statements.

Responsibility for Financial Reporting

     The company's  management is responsible  for the integrity and objectivity
of the financial data  contained in the financial  statements.  These  financial
statements have been prepared in conformity with generally  accepted  accounting
principles  appropriate  under the circumstances  and, where necessary,  reflect
informed   judgments  and  estimates  of  the  effects  of  certain  events  and
transactions based on currently available  information at the date the financial
statements were prepared.

     The  company's  management  depends  on the  company's  system of  internal
accounting  controls  to  assure  itself  of the  reliability  of the  financial
statements.  The  internal  control  system is  designed  to provide  reasonable
assurance, at appropriate cost, that assets are safeguarded and transactions are
executed  in  accordance  with  management's  authorizations  and  are  recorded
properly to permit the  preparation of financial  statements in accordance  with
generally accepted accounting principles.  Periodic reviews are made of internal
controls by the company's staff of internal  auditors,  and corrective action is
taken if needed.

     The Board of Directors reviews and monitors  financial  statements  through
its audit committee,  which is composed solely of directors who are not officers
or employees  of the company.  The audit  committee  meets with the  independent
public  accountants,   internal  auditors  and  management  to  review  internal
accounting controls, auditing and financial reporting matters.

     The independent  public accountants are engaged to provide an objective and
independent  review of the  company's  financial  statements  and to  express an
opinion  thereon.  Their  audits are  conducted  in  accordance  with  generally
accepted auditing standards, and their report is included below.


Report of Independent Public Accountants

To the Stockholders and Board of Directors of Kerr-McGee Corporation:

     We have audited the accompanying  consolidated  balance sheet of Kerr-McGee
Corporation (a Delaware corporation) and subsidiary companies as of December 31,
1997 and 1996,  and the  related  consolidated  statements  of income,  retained
earnings 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 financial position of Kerr-McGee  Corporation and
subsidiary  companies as of December 31, 1997 and 1996, and the 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.

Oklahoma City, Oklahoma,
    November 6, 1998

                               ARTHUR ANDERSEN LLP



<TABLE>
                                                                                                   
Consolidated Statement of Income
<CAPTION>

(Millions of dollars, except per-share amounts)                           1997         1996          1995  
-----------------------------------------------                          -------      --------      -------

<S>                                                                       <C>           <C>          <C>   
Sales                                                                     $1,388        $1,566       $1,401
                                                                          ------        ------       ------
Costs and Expenses
     Costs and operating expenses                                            739           804          745
     General and administrative expenses                                     136           197          147
     Depreciation and depletion                                              239           267          275
     Asset impairment                                                         --            25          204
     Exploration, including dry holes and amortization of
         undeveloped leases                                                   65            74           80
     Taxes, other than income taxes                                           20            30           29
     Interest and debt expense                                                47            52           60
                                                                         -------      --------      -------
              Total Costs and Expenses                                     1,246         1,449        1,540
                                                                         -------      --------      -------
                                                                             142           117         (139)
Other Income                                                                  90           132           29
                                                                         -------      --------      -------

Income (Loss) from Continuing Operations before Income Taxes                 232           249         (110)
Provision (Benefit) for Income Taxes                                          71            85          (52)
                                                                         -------      --------      -------
Income (Loss) from Continuing Operations                                     161           164          (58)
Income from Discontinued Operations, net of taxes of $12 in 1997,
     $18 in 1996 and $3 in 1995                                               33            56           27
                                                                         -------      --------      -------
Net Income (Loss)                                                        $   194      $    220      $   (31)
                                                                         =======      ========      =======

Earnings (Loss) per Common Share
Basic -
     Continuing operations                                               $  3.38      $   3.32       $(1.12)
     Discontinued operations                                                 .68          1.13          .52
                                                                         -------      --------      -------
              Total                                                      $  4.06      $   4.45      $  (.60)
                                                                         =======      ========      =======
Diluted -
     Continuing operations                                               $  3.36      $   3.30       $(1.12)
     Discontinued operations                                                 .68          1.13          .52
                                                                         -------      --------      -------
              Total                                                      $  4.04      $   4.43      $  (.60)
                                                                         =======      ========      =======
</TABLE>

<TABLE>

Consolidated Statement of Retained Earnings
<CAPTION>

(Millions of dollars, except per-share amounts)                           1997         1996          1995  
-----------------------------------------------                          -------      --------      -------

<S>                                                                       <C>           <C>          <C>   
Balance at Beginning of Year                                              $1,348        $1,209       $1,320
     Net income (loss)                                                       194           220          (31)
     Dividends declared (per common share - $1.80 in 1997,
         $1.64 in 1996 and $1.55 in 1995)                                    (86)          (81)         (80)
                                                                         -------      --------      -------

Balance at End of Year                                                    $1,456        $1,348       $1,209
                                                                          ======        ======       ======

</TABLE>



The accompanying notes are an integral part of these statements.


<TABLE>


Consolidated Balance Sheet
<CAPTION>

(Millions of dollars)                                                                1997              1996  
---------------------                                                               --------          -------

<S>                                                                                 <C>               <C>
ASSETS
Current Assets
     Cash                                                                           $    183          $   121
     Accounts receivable, net of allowance for doubtful
         accounts of $5 in both 1997 and 1996                                            274              375
     Inventories                                                                         172              218
     Deposits and prepaid expenses                                                        60               91
                                                                                    --------          -------
              Total Current Assets                                                       689              805
Investments
     Equity affiliates                                                                   273              244
     Other assets                                                                         60               74
Property, Plant and Equipment - Net                                                    1,998            1,948
Deferred Charges                                                                          76               53
                                                                                    --------          -------
              Total Assets                                                            $3,096           $3,124
                                                                                      ======           ======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
     Accounts payable                                                               $    247          $   262
     Short-term borrowings                                                                25               37
     Long-term debt due within one year                                                    2               --
     Taxes on income                                                                      36                5
     Taxes, other than income taxes                                                       17               26
     Accrued liabilities                                                                 196              155
                                                                                    --------          -------
              Total Current Liabilities                                                  523              485
                                                                                    --------          -------

Long-Term Debt                                                                           552              626
                                                                                    --------          -------

Deferred Credits and Reserves
     Income taxes                                                                        159              131
     Other                                                                               422              515
                                                                                    --------          -------
              Total Deferred Credits and Reserves                                        581              646
                                                                                    --------          -------

Stockholders' Equity
     Common stock, par value $1.00 - 150,000,000 shares authorized,
         54,120,747 shares issued in 1997 and 53,862,347 shares issued in 1996            54               54
     Capital in excess of par value                                                      346              334
     Preferred stock purchase rights                                                       1                1
     Retained earnings                                                                 1,456            1,348
     Unrealized gain on available-for-sale securities                                     --               12
     Common stock in treasury, at cost - 6,434,465 shares in 1997 and
         5,568,815 shares in 1996                                                       (363)            (306)
     Deferred compensation                                                               (54)             (76)
                                                                                    --------          -------
              Total Stockholders' Equity                                               1,440            1,367
                                                                                    --------          -------

                  Total Liabilities and Stockholders' Equity                          $3,096           $3,124
                                                                                      ======           ======

</TABLE>


The  "successful  efforts"  method of accounting for oil and gas exploration and
production activities has been followed in preparing this balance sheet.

The accompanying notes are an integral part of this balance sheet.

<TABLE>

Consolidated Statement of Cash Flows
<CAPTION>

(Millions of dollars)                                                               1997              1996             1995
                                                                                    ----              ----             ----

<S>                                                                                 <C>               <C>
Cash Flow from Operating Activities
     Net income (loss)                                                              $194              $220             $(31)
     Adjustments to reconcile to net cash provided by operating activities -
     Deferred income taxes                                                            36                68              (51)
     Depreciation, depletion and amortization                                        271               307              334
     Asset impairment                                                                 --                25              227
     Provision for environmental reclamation and remediation of inactive sites        20                43               54
     Realized gain on available-for-sale securities                                  (18)              (23)              --
     Gain on sale of refining and marketing operations, net of income taxes           --                --               (2)
     Gain on sale of exploration and production properties                            (6)              (21)              --
     Retirements and gain on sale of other assets                                     (4)               (3)              (1)
     Noncash items affecting net income                                                1                18               50
     Changes in current  assets  and  liabilities  and other,  net of effects of
         discontinued refining and marketing operations sold -
              Decrease in accounts receivable                                        132                48               75
              (Increase) decrease in inventories                                      40                 1               (1)
              (Increase) decrease in deposits and prepaids                            13                59              (50)
              Decrease in accounts payable and accrued liabilities                   (16)              (37)            (121)
              Increase (decrease) in taxes payable                                    31               (22)             (56)
              Other                                                                 (125)              (38)             (58)
                                                                                    ----              ----            -----
                  Net cash provided by operating activities                          569               645              369
                                                                                    ----              ----            -----

Cash Flow from Investing Activities
     Capital expenditures                                                           (341)             (392)            (484)
     Proceeds from sale of available-for-sale securities                              21                29               --
     Proceeds from sale of refining and marketing operations                          --                13              419
     Proceeds from sale of exploration and production properties                      18                48               --
     Proceeds from sale of other assets                                               17                11               17
     Proceeds from sale of long-term investments                                      13                17               61
     Purchase of long-term investments                                               (14)               (6)              (8)
                                                                                    ----              ----            -----
                  Net cash provided by (used in) investing activities               (286)             (280)               5
                                                                                    ----              ----            -----

Cash Flow from Financing Activities
     Decrease in short-term borrowings                                               (12)              (57)            (218)
     Repayment of long-term debt                                                    (375)              (36)             (35)
     Issuance of long-term debt                                                      299                24               --
     Issuance of common stock                                                         12                16                9
     Dividends paid                                                                  (85)              (83)             (79)
     Purchase of treasury stock                                                      (60)             (195)             (45)
                                                                                    ----              ----            -----
                  Net cash used in financing activities                             (221)             (331)            (368)
                                                                                    ----              ----             ----

Net Increase in Cash and Cash Equivalents                                             62                34                6
Cash and Cash Equivalents at Beginning of Year                                       121                87               81
                                                                                    ----              ----            -----
Cash and Cash Equivalents at End of Year                                            $183              $121            $  87
                                                                                    ====              ====            =====

</TABLE>

The accompanying notes are an integral part of this statement.


Notes to Financial Statements


1.       Significant Accounting Policies

Basis of Presentation
     The  consolidated   financial   statements  include  the  accounts  of  all
subsidiary companies that are more than 50% owned and the proportionate share of
joint  ventures in which the company has an undivided  interest.  Investments in
affiliated  companies  that are 20% to 50% owned are  carried as  Investments  -
Equity affiliates in the Consolidated  Balance Sheet at cost adjusted for equity
in  undistributed  earnings.   Except  for  dividends,   changes  in  equity  in
undistributed earnings are included in the Consolidated Statement of Income. All
material intercompany transactions have been eliminated.

     In connection  with the  restructuring  of the  exploration  and production
operations,  certain  operating and exploration  expenses for 1996 and 1995 have
been reclassified to general and administrative expense in order to conform with
the  current  year's  presentation.  This  reclassification  had  no  effect  on
exploration and production  operating  profit or consolidated  net income (loss)
for either  period.  Certain  information  in Note 24,  "Reporting  by  Business
Segments," and in the  supplemental  oil and gas  information  shown in Notes 25
through 29 has also been adjusted to reflect this reclassification.

     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,  the
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting period.
Actual  results  could  differ from those  estimates as  additional  information
becomes known.

Foreign Currencies
     As the U.S. dollar has been adopted as the functional  currency for each of
the company's  international  operations,  foreign currency transaction gains or
losses are recognized in the period  incurred.  The company recorded net foreign
currency  transaction  losses of $9 million in 1996.  The net  foreign  currency
transaction losses in 1997 and 1995 were immaterial.

Earnings (Loss) per Common Share
     Basic  earnings per share  includes no dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares  outstanding  for the period.  Diluted  earnings per share is computed by
dividing net income by the weighted-average  number of common shares outstanding
for the period and common stock equivalents.

     The  weighted-average  number of shares used to compute basic  earnings per
share was 47,807,916 in 1997,  49,419,993 in 1996 and 51,669,285 in 1995.  After
adding the dilutive effect of the conversion of options to the  weighted-average
number of shares  outstanding,  the shares used to compute diluted  earnings per
share were  48,000,082 in 1997 and  49,657,890 in 1996.  For 1995,  there was no
dilution since the company incurred a loss from continuing operations.

     Not included in the calculation of the denominator for diluted earnings per
share were 157,000 and 153,000  employee  stock options  outstanding at year-end
1997 and 1996,  respectively.  The  inclusion of these  options  would have been
anti-dilutive  since they were not "in the  money" at the end of the  respective
years.  See  Note  18,  "Employee  Stock  Option  Plans,"  for a  discussion  of
transactions that occurred after year-end 1997.

Cash Equivalents
         The company  considers  all  investments  purchased  with a maturity of
three  months  or less to be cash  equivalents.  Cash  includes  time  deposits,
certificates  of deposit and U.S.  government  securities,  all of which totaled
$132 million in 1997 and $89 million in 1996.

Inventories
     The  costs of the  company's  product  inventories  are  determined  by the
first-in,  first-out (FIFO) method.  Inventory  carrying values include material
costs, labor and indirect manufacturing expenses associated therewith. Materials
and supplies are valued at average cost.

Property, Plant and Equipment
     Oil and Gas - Exploration  expenses,  including  geological and geophysical
costs,  rentals  and  exploratory  dry  holes,  are  charged  against  income as
incurred.  Costs of  successful  wells  and  related  production  equipment  and
developmental  dry  holes  are  capitalized  and  amortized  by field  using the
unit-of-production method as the oil and gas are produced.

     Undeveloped  acreage  costs are  capitalized  and  amortized  at rates that
provide full  amortization  on  abandonment  of  unproductive  leases.  Costs of
abandoned leases are charged to the accumulated amortization accounts, and costs
of productive leases are transferred to the developed property accounts.

     Other - Property,  plant and  equipment is stated at cost less reserves for
depreciation,  depletion and amortization.  Maintenance and repairs are expensed
as  incurred,  except that costs of  replacements  or renewals  that  improve or
extend the lives of existing  properties are capitalized.  Costs of nonproducing
mineral acreage  surrendered or otherwise  disposed of are charged to expense at
the time of disposition.

     Depreciation  and Depletion - Property,  plant and equipment is depreciated
or depleted over its estimated life by application of the  unit-of-production or
the  straight-line  method.  In arriving  at rates under the  unit-of-production
method,   the  quantities  of  recoverable  oil,  gas  and  other  minerals  are
established based on estimates made by the company's geologists and engineers.

     Retirements and Sales - The costs and related  depreciation,  depletion and
amortization  reserves are removed from the respective  accounts upon retirement
or sale of property, plant and equipment. The resulting gain or loss is included
in other income.

     Interest  Capitalized  - The company  capitalizes  interest  costs on major
projects  that  require  a  considerable  length of time to  complete.  Interest
capitalized in 1997,  1996 and 1995 was $8 million,  $9 million and $11 million,
respectively.

Impairment of Long-Lived Assets
     The company  adopted the  provisions  of Statement of Financial  Accounting
Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," during the 1995 third quarter.

     Proved  oil  and  gas   properties   are  reviewed  for   impairment  on  a
field-by-field  basis when facts and circumstances  indicate that their carrying
amount may not be recoverable.  In performing this review, future cash flows are
estimated by applying  estimated  future oil and gas prices to estimated  future
production,  less  estimated  future  expenditures  to develop  and  produce the
reserves.  If the sum of these  estimated  future cash flows  (undiscounted  and
without interest  charges) is less than the carrying amount of the property,  an
impairment  loss is  recognized  for the excess of the carrying  amount over the
estimated fair value of the property. Prior to the third quarter of 1995, proved
properties  were  evaluated  on an  area-of-interest  basis  and  impaired  when
capitalized  costs  exceeded  estimated  future  revenues,  computed by applying
current oil and gas prices to estimated future production, less estimated future
expenditures to develop and produce the reserves.

     Other  assets are  reviewed  for  impairment  by asset  group for which the
lowest level of  independent  cash flows can be  identified  and impaired in the
same  manner as proved  oil and gas  properties.  Prior to the third  quarter of
1995,  individual  properties were written down when  impairments were deemed to
have occurred.

Income Taxes
     Deferred  income taxes are provided to reflect the future tax  consequences
of  differences  between  the tax  basis of  assets  and  liabilities  and their
reported amounts in the financial statements.

Site Dismantlement, Reclamation and Remediation Costs
         The company  provides for the estimated cost at current prices of final
reclamation and land restoration at coal mining locations and the  dismantlement
and removal of oil and gas  production  and related  facilities.  Such costs are
accumulated  over  the  estimated  lives  of the  facilities  by the  use of the
unit-of-production method. As sites of environmental concern are identified, the
company  assesses  the existing  conditions,  claims and  assertions,  generally
related to former operations,  and records an estimated  undiscounted  liability
when  environmental  assessments  and/or  remedial  efforts are probable and the
associated costs can be reasonably estimated.

Gas-Balancing Arrangements
     Gas-balancing arrangements with partners in natural gas wells are accounted
for by the entitlements method. At December 31, 1997 and 1996, both the quantity
and dollar  amount of such  arrangements  recorded in the  Consolidated  Balance
Sheet were immaterial.

Lease Commitments
     The  company  utilizes   various  leased   properties  in  its  operations,
principally for office space.  Net lease rental expense was $14 million in 1997,
$13 million in 1996 and $12 million in 1995.

     The aggregate minimum annual rentals under  noncancelable  leases in effect
on December 31, 1997, totaled $59 million,  of which $11 million is due in 1998,
$9 million in 1999,  $17 million in the period 2000 through 2002 and $22 million
thereafter.

Employee Stock Option Plans
     The  company  accounts  for its  employee  stock  option  plans  using  the
intrinsic value method in accordance with  Accounting  Principles  Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees."

Futures, Forward and Option Contracts
     The  company  hedges a portion  of its  monetary  assets,  liabilities  and
commitments  denominated  in  foreign  currencies.   Periodically,  the  company
purchases  foreign currency forward contracts to provide funds for operating and
capital expenditure  requirements that will be denominated in foreign currencies
and sells foreign currency forward contracts to convert receivables that will be
paid in foreign  currencies to U.S.  dollars.  Since these contracts  qualify as
hedges and  correlate to currency  movements,  any gain or loss  resulting  from
market  changes  will be offset by gains or  losses  on the  hedged  receivable,
capital item or operating cost.

     In 1996 and 1995,  the company also entered into foreign  currency  forward
contracts to sell various foreign currencies in anticipation of titanium dioxide
pigment  sales   denominated  in  foreign   currencies.   These  contracts  were
marked-to-market  with the  resulting  gain or loss  reflected  in income in the
period in which the change  occurred.  There were no open  contracts at year-end
1997. Open contracts at year-end 1996 matured between January and December 1997.
Net gains and losses on these contracts in 1997, 1996 and 1995 were immaterial.

     Although no such  contracts  were entered into during 1997, the company has
periodically used commodities futures and option contracts to hedge a portion of
its crude oil and natural gas sales and natural gas purchased for  operations in
order to minimize the price risks  associated  with the production and marketing
of crude oil and natural gas. These  contracts  generally have had maturities of
one year or less.  Since the  contracts  qualified as hedges and  correlated  to
price  movements  of crude oil and  natural  gas,  any gain or loss  from  these
contracts  was  explicitly  deferred  and  recognized  as  part  of  the  hedged
transaction.  Prior to the sale of the refining and  marketing  operations,  the
company  also  hedged a  portion  of its  refined-product  sales  and  crude oil
purchased for the refineries.

     Management of price risks must consider market conditions and availability.
As these factors change,  the company adjusts its hedging  strategy and modifies
its futures, forward and option contract positions.

2.       Cash Flow Information

     Net cash  provided by  operating  activities  reflects  cash  payments  for
interest and income taxes as follows:

         (Millions of dollars)                 1997       1996         1995
         ---------------------                 ----       ----         ----

         Interest paid                          $47        $60          $68
         Income taxes paid                       15         17           75

     Noncash  transactions not reflected in the  Consolidated  Statement of Cash
Flows  include  capital  expenditures  for  which  payment  will  be made in the
subsequent  year  totaling $19  million,  $4 million and $24 million at year-end
1997, 1996 and 1995, respectively;  transactions during 1997 associated with the
assignments  of  interest  of  certain  North  Sea oil and gas  properties;  the
revaluation  of certain  investments  to fair value and  transactions  affecting
deferred compensation  associated with the Employee Stock Ownership Plan in each
of the three years. See Notes 16 and 20.

     Effective  December 31, 1996, the company merged its North American onshore
exploration and production  operations into Devon Energy Corporation  (Devon) in
exchange  for  9,954,000  shares  of Devon  common  stock  (see  Note  4).  This
transaction was not reflected in the Consolidated Statement of Cash Flows due to
its noncash nature.

     The effect of foreign currency  exchange rate fluctuations on cash and cash
equivalents was immaterial.

3.       Inventories

     Major categories of inventories at year-end 1997 and 1996 are:

     (Millions of dollars)                            1997              1996
     ---------------------                            ----              ----

     Chemicals and other products                     $119              $163
     Materials and supplies                             48                49
     Crude oil                                           5                 6
                                                      ----              ----
         Total                                        $172              $218
                                                      ====              ====

4.       Investments - Equity Affiliates

     At December  31, 1997 and 1996,  investments  in equity  affiliates  are as
follows:

     (Millions of dollars)                            1997              1996
     ---------------------                            ----              ----

     Devon Energy Corporation                         $217              $193
     Javelina Company                                   32                27
     National Titanium Dioxide Company Limited          12                12
     Other                                              12                12
                                                      ----              ----

         Total                                        $273              $244
                                                      ====              ====

     Effective  December 31, 1996, the company merged its North American onshore
exploration and production  operations into Devon, a publicly traded oil and gas
exploration and production  company.  The company  received  9,954,000 shares of
Devon common stock  representing an ownership interest in Devon of approximately
31%.  This initial  investment  in Devon was recorded at the value of the assets
given  up  in  accordance   with  APB  No.  29,   "Accounting   for  Nonmonetary
Transactions."  The market value of the  company's  investment in Devon was $383
million at December 31, 1997, based on the closing price of Devon's common stock
as reported in The Wall Street Journal.

     Javelina Company and National  Titanium  Dioxide Company Limited  represent
the company's  investment of 40% and 25%,  respectively,  in non-exploration and
production joint ventures or partnerships.

     Following  are  financial  summaries of the  company's  equity  affiliates.
Financial  information  related  to  investments  that are shown as Other in the
preceding table has been excluded.

     (Millions of dollars)                          1997       1996        1995
     ---------------------                          ----       ----        ----

     Results of operations -
         Net sales(1)                               $570       $207        $250
         Total costs and expenses                    413        183         171
         Net income                                  105         22          66

         Financial position -
         Current assets                              198        153
         Property, plant and equipment - net         990        962
         Total assets                              1,215      1,135
         Current liabilities                         123        130
         Total liabilities                           470        484
         Stockholders' equity                        745        651

     (1)Includes net sales to the company of $26 million,  $44  million  and $47
        million for 1997, 1996 and 1995, respectively.

5.       Investments - Other Assets

     Investments  in other assets  consist of the following at December 31, 1997
and 1996:

     (Millions of dollars)                                      1997       1996
     ---------------------                                      ----       ----

     Net deferred tax asset                                      $22        $23
     U.S. government obligations                                  19         --
     Patents                                                       6          5
     Long-term notes receivable, net of $9 allowance for
         doubtful notes in both 1997 and 1996                      5         17
     Equity securities                                             2         24
     Other                                                         6          5
                                                                ----       ----

              Total                                              $60        $74
                                                                 ===        ===

6.       Property, Plant and Equipment

     Fixed assets and related  reserves by business segment at December 31, 1997
and 1996, are as follows:
<TABLE>
<CAPTION>


                                                                             Reserves for
                                                                           Depreciation and
                                                 Gross Property                Depletion              Net Property(1)  
     (Millions of dollars)                     1997         1996         1997          1996         1997         1996  
     ---------------------                    -------      -------      --------      -------      -------      -------

     <S>                                       <C>          <C>           <C>          <C>          <C>          <C>   
     Exploration and production                $2,888       $3,192        $1,677       $2,005       $1,211       $1,187
     Chemicals                                  1,020          946           506          459          514          487
     Other                                        147          153            90           98           57           55
     Discontinued coal operations                 547          546           331          327          216          219
                                              -------      -------      --------      -------      -------      -------

         Total                                 $4,602       $4,837        $2,604       $2,889       $1,998       $1,948
                                               ======       ======        ======       ======       ======       ======
</TABLE>

     (1)Includes net assets  held  for sale of $126  million  for  chemicals  at
       December 31,  1997,  and $9 million for  exploration  and  production  at
       December 31, 1996.  The coal segment was disposed of in 1998.  (See Notes
       11 and 21).

7.       Deferred Charges

     Deferred charges are as follows at year-end 1997 and 1996:

     (Millions of dollars)                        1997              1996
     ---------------------                        ----              ----

     Pension plan prepayment                       $42               $33
     Preoperating and startup costs                  8                 4
     Intangible assets                               6                 3
     Other                                          20                13
                                                  ----              ----

         Total                                     $76               $53
                                                  ====              ====

8.       Debt

Lines of Credit and Short-Term Borrowings
     At year-end 1997, the company had available unused bank lines of credit and
revolving credit  facilities of $714 million.  Of this amount,  $340 million and
$265 million can be used to support  commercial paper borrowing  arrangements of
Kerr-McGee Credit Corporation and Kerr-McGee Oil (U.K.) PLC, respectively.

     The company has arrangements to maintain compensating balances with certain
banks that  provide  credit.  At year-end  1997,  the  aggregate  amount of such
compensating balances was immaterial, and the company was not legally restricted
from withdrawing all or a portion of such balances at any time during the year.

     Short-term  borrowings at year-end 1997  consisted of a note payable of $25
million (5.98% interest  rate).  Outstanding at year-end 1996 were notes payable
totaling $15 million (5.97% average interest rate) and commercial paper totaling
$22 million (5.84% average interest rate).

Long-Term Debt
     The company's  policy is to classify  certain  borrowings  under  revolving
credit  facilities and commercial  paper as long-term debt since the company has
the ability under certain revolving credit agreements and the intent to maintain
these  obligations  for longer than one year.  At year-end  1997 and 1996,  debt
totaling $37 million and $400 million, respectively, was classified as long-term
consistent with this policy.


     Long-term debt consisted of the following at year-end 1997 and 1996:
<TABLE>
<CAPTION>

     (Millions of dollars)                                           1997             1996
     ---------------------                                           ----             ----

     <S>                                                             <C>              <C>
     Debentures -
         7.125% Debentures due October 15, 2027
              (7.01% effective rate)                                 $150             $ --
         7% Debentures due November 1, 2011,
              net of unamortized debt discount of
              $108 million in 1997 and $111 million in
              1996 (14.25% effective rate)                            142              139
         8-1/2% Sinking fund debentures due June 1, 2006               22               34
     Commercial paper                                                  --              266
     Guaranteed Debt of Employee Stock Ownership Plan -
         9.61% Series B notes due in installments
         through January 2, 2005                                       51               51
     Notes payable -
         6.625% Notes due October 15, 2007
              (6.54% effective rate)                                  150               --
         Variable interest rate revolving credit agreements
         with banks due March 6, 2000 (6.04% average
         rate at December 31, 1997)                                    37              114
         Other                                                          2               22

                                                                      554              626
                                                                     ----             ----
     Long-term debt due within one year                                (2)              --
                                                                     ----             ----

                  Total                                              $552             $626
                                                                     ====             ====
</TABLE>


     Maturities of long-term debt due after December 31, 1997, are $2 million in
1998, $8 million in 1999,  $47 million in 2000, $12 million in 2001, $10 million
in 2002 and $475 million thereafter.

     At year-end  1997, the company  guaranteed no debt or other  liabilities of
its  unconsolidated  equity affiliates.  However,  at year-end 1996, the company
guaranteed its ratable portion of the debt of  unconsolidated  equity affiliates
totaling $7 million.  These borrowings,  which are not included in the preceding
table,  were paid in full by the  unconsolidated  equity affiliates during 1997,
and the company was released as the guarantor.

     Additional  information  regarding  the major  changes  in debt  during the
periods and unused  commitments  for  financing  is  included  in the  Financial
Condition discussion in Management's Discussion and Analysis.

9.       Other Financial Information

     Condensed  financial  information  relating  to  the  company's  previously
unconsolidated, wholly owned finance subsidiary is summarized below:

     (Millions of dollars)               1997            1996           1995
     ---------------------               ----            ----           ----

     Results of operations -
         Interest income                   17            $ 25            $25
         Net income                         4               6              5

     Financial position -
         Assets                          $116            $367
         Liabilities                       (3)           (258)
                                        -----            ----
              Stockholder's equity       $113            $109
                                         ====            ====

10.      Contingencies

West Chicago
     In 1973, a wholly owned subsidiary, Kerr-McGee Chemical Corporation (KMCC),
closed the facility located in West Chicago,  Illinois,  that processed  thorium
ores.  Operations  resulted in some low-level  radioactive  contamination at the
site,  and in 1979,  KMCC filed a plan with the  Nuclear  Regulatory  Commission
(NRC) to decommission  the facility.  The NRC  transferred  jurisdiction of this
site to the State of Illinois (the State) in 1990.  The following  discusses the
current status of various matters associated with the West Chicago site.

     Closed  Facility - In 1994,  KMCC,  the City of West Chicago (the City) and
the  State  reached  agreement  on Phase I of the  decommissioning  plan for the
closed West Chicago facility,  and KMCC began shipping material from the site to
a licensed permanent disposal facility.

     In February 1997,  KMCC executed an agreement with the City as to the terms
and conditions for completing the final phase of decommissioning  work, the bulk
of which is expected to be completed about four to six years after receiving the
necessary license amendment. The State has indicated approval of this agreement,
and KMCC expects the State to issue a license amendment that will enable KMCC to
complete the final phase of decommissioning work.

     In 1992, the State enacted legislation imposing an annual storage fee equal
to $2 per cubic foot of byproduct  material located at the closed facility.  The
storage fee cannot  exceed $26 million  per year,  and any storage fee  payments
must be reimbursed to KMCC as decommissioning costs are incurred.  KMCC has been
fully reimbursed for all storage fees paid pursuant to this legislation. In June
1997, the legislation was amended to provide that future storage fee obligations
are to be offset against decommissioning costs incurred but not yet reimbursed.

     Offsite Areas - The U.S.  Environmental  Protection Agency (EPA) has listed
four areas in the vicinity of the West Chicago facility on the National Priority
List that the EPA promulgates under authority of the Comprehensive Environmental
Response,  Compensation  and Liability Act of 1980 and has designated  KMCC as a
potentially  responsible  party in these four areas.  The EPA issued  unilateral
administrative  orders for two of these areas  (referred  to as the  residential
area and  Reed-Keppler  Park),  which require KMCC to conduct removal actions to
excavate  contaminated soils and ship the soils elsewhere for disposal.  Without
waiving any of its rights or  defenses,  KMCC has begun the cleanup of these two
sites.

     Judicial  Proceedings  - In December  1996, a lawsuit was filed against the
company  and its  subsidiary,  KMCC,  in  Illinois  state  court on  behalf of a
purported class of present and former West Chicago residents.  The lawsuit seeks
damages for alleged  diminution in property  values and the  establishment  of a
medical  monitoring  fund to benefit those  allegedly  exposed to thorium wastes
originating from the former facility.  The case was removed to federal court and
is being vigorously defended.

     Government  Reimbursement - Pursuant to Title X of the Energy Policy Act of
1992 (Title X), the U.S. Department of Energy is obligated to reimburse KMCC for
certain  decommissioning  and cleanup costs in recognition of the fact that much
of  the  facility's   production  was  dedicated  to  United  States  government
contracts.  Title X was amended in 1996 to increase the amount authorized to $65
million plus  inflation  adjustments.  As of December  31,  1997,  KMCC has been
reimbursed approximately $40 million under Title X.

Other Matters
     The plants and facilities of the company and its  subsidiaries  are subject
to various  environmental laws and regulations.  The company or its subsidiaries
have been notified that they may be responsible in varying degrees for a portion
of the costs to clean up certain waste disposal sites and former plant sites. As
of December 31, 1997, the company's  estimate for the cost to investigate and/or
remediate all presently identified sites of former or current operations,  based
on currently known facts and circumstances, totaled $243 million, which includes
$163  million  for the former  West  Chicago  facility  and $14  million for the
residential area and Reed-Keppler Park.  Reserves have been established based on
these estimates.  Actual costs will be reduced by the amounts  recoverable under
Title X and other  government  programs.  Expenditures  from  inception  through
December 31, 1997, totaled $435 million for currently known sites.

     In addition to the environmental issues previously  discussed,  the company
or its  subsidiaries  are also a party to a number  of other  legal  proceedings
pending in  various  courts or  agencies  in which the  company or a  subsidiary
appears as plaintiff or defendant.  The ultimate costs to decommission presently
known sites are  difficult to estimate  because of the  numerous  contingencies,
which  include  continually  changing  laws and  regulations,  the nature of the
company's  businesses and pending legal  proceedings.  Actual costs could differ
from those currently  estimated as information  becomes available for sites that
are not now included in the reserve,  if  contamination  is not as expected,  or
field conditions or other variables differ significantly from those that are now
assumed. Therefore, it is not possible to reliably estimate the amount or timing
of all future  expenditures  relating to environmental and other  contingencies.
The company provides for costs related to contingencies  when a loss is probable
and the amount or range of amounts is reasonably estimable. Management believes,
after  consultation  with general  counsel,  that  adequate  reserves  have been
provided for all known contingencies.  However, the ultimate cost will depend on
the outcomes of the previously-noted uncertainties.  Therefore,  it is  possible
that additional reserves could be required in the future.

11.      Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Assets to Be Held and Used
     In 1996 and 1995,  certain  oil and gas  fields in the  United  States  and
Canada and certain coal and other assets were deemed to be impaired  because the
assets were not expected to recover their entire  carrying  value through future
cash flows.  The impairment  loss is included in the  Consolidated  Statement of
Income as Asset  impairment  and was  determined as the  difference  between the
carrying value and the estimated  fair value.  The fair value for these impaired
assets was generally  determined based on the estimated  present value of future
cash flows. No impairments  were recognized  during 1997. The impairment loss by
segment for 1996 and 1995 was as follows.  Not  included is $23 million for coal
in 1995, which is included in discontinued operations.

     (Millions of dollars)                          1996              1995
     ---------------------                          ----              ----

     Exploration and production                      $22              $ 99
     Other                                            --                 1
                                                    ----              ----
         Total                                       $22              $100
                                                     ===              ====

Assets to Be Disposed Of
     During  1997  the  company's  exploration  and  production  operating  unit
completed  the program to divest a number of crude oil and natural gas producing
properties considered to be nonstrategic.  The majority of these properties were
located onshore in the United States; however,  certain of these properties were
located in the Gulf of Mexico, Canada and the North Sea. Net gains recognized on
the sales of properties  included in the divestiture  program totaled $6 million
in 1997 and $13 million in 1996.  The  divestiture  program  properties  did not
constitute  a  material  portion  of the  company's  year-end  1996  oil and gas
reserves or oil and gas  production  or cash flows from  operations  for 1997 or
1996. At year-end 1995,  these  properties  comprised  approximately  10% of the
company's oil and gas reserves,  10% of oil and gas production volumes and 5% of
the company's 1995 cash flows from operations.

     As a result of the  divestiture  program,  these  nonstrategic  oil and gas
properties  were reduced in 1995 to their  estimated fair value less the cost to
sell if the carrying  value of the property  exceeded such fair value net of the
estimated cost of selling the property.  The carrying  value of the  divestiture
program  properties was $172 million prior to the  recognition of the impairment
loss on the  properties  for which a loss was  indicated.  The  impairment  loss
totaled  $104  million and has been  included in the  Consolidated  Statement of
Income as Asset impairment.  There were no subsequent revisions to the estimated
fair values of these properties.

     Certain  chemical   facilities  were  closed  during  1996.  A  $3  million
impairment loss was recognized in 1996,  which reduced the carrying value of the
assets to nil.

     Also held for sale at December  31,  1995,  were the net  long-term  assets
totaling $5 million of a wholly owned coal mining  operation  in West  Virginia.
This sale was completed in February 1996. The gain on the sale was immaterial.

     Following  are the sales and pretax income (loss) for assets to be disposed
of at  December  31,  1997,  1996 and  1995,  as  included  in the  Consolidated
Statement  of Income in each of the last three  years.  Any  impairment  loss is
included in the pretax amounts.

     (Millions of dollars)                       1997         1996         1995
     ---------------------                       ----         ----        -----

     Sales -
         Chemicals                               $166         $160        $ 158
         Exploration and production                --           42           64
                                                 ----         ----        -----
              Total                              $166         $202        $ 222
                                                 ====         ====        =====
     Income (Loss) -
         Chemicals                                $22         $ 17        $  23
         Exploration and production                --            9         (108)
                                                  ---          ---        -----
              Total                               $22          $26        $ (85)
                                                  ===          ===        =====

     The company  withdrew from the ammonium  perchlorate  business in 1998 (see
Management's  Discussion and  Analysis).  The carrying value of these assets was
approximately  $9 million at year-end 1997, which did not exceed fair value. The
gain on the sale was immaterial. In January 1998, the company signed a letter of
intent to  dispose  of the  remaining  electrolytic  and  specialty  -  chemical
operations.  Discussions were terminated in mid-1998, and the operations are  no
longer considered to be held for sale. The company also exited the coal business
in 1998 (see  Management's  Discussion  and Analysis and Note 21,  "Discontinued
Operations").

12.      Income Taxes

     The taxation of a company that has operations in several countries involves
many complex variables, such as differing tax structures from country to country
and the effect on U.S. taxation of international earnings. These complexities do
not  permit  meaningful  comparisons  between  the  domestic  and  international
components of income before income taxes and the provision for income taxes, and
disclosures  of  these  components  do  not  provide   reliable   indicators  of
relationships in future periods. Income (loss) from continuing operations before
income taxes is composed of the following:

     (Millions of dollars)          1997             1996              1995
     ---------------------          ----             ----             -----

     Domestic                       $132             $142             $(166)
     International                   100              107                56
                                    ----             ----             -----
         Total                      $232             $249             $(110)
                                    ====             ====             =====

     Effective  April 1, 1997,  the  corporate  tax rate in the  United  Kingdom
decreased  from 33% to 31%.  Effective  January 1, 1995,  the income tax rate in
Australia increased from 33% to 36%. The deferred income tax liability and asset
balances were adjusted to reflect these revised rates,  which decreased the 1997
and 1995 international deferred provision for income taxes by $8 and $2 million,
respectively.  The 1997,  1996 and 1995 provision  (benefit) for income taxes on
income from continuing operations is summarized below:

     (Millions of dollars)           1997             1996              1995
     ---------------------           ----             ----              ----
     U.S. Federal -
         Current                     $  5             $ 19              $(11)
         Deferred                      34               25               (64)
                                     ----             ----              ----
                                       39               44               (75)
                                     ----             ----              ----
     International -
         Current                       32                5                 9
         Deferred                      (1)              32                 9
                                     ----             ----              ----
                                       31               37                18
                                     ----             ----              ----
     State                              1                4                 5
                                     ----             ----              ----
              Total                  $ 71              $85              $(52)
                                     ====              ===              ====
     At December 31, 1997,  the net deferred tax asset  includes the benefit for
$80 million in net operating loss  carryforwards  that have no expiration dates.
At December 31, 1997,  the company had  additional  foreign net  operating  loss
carryforwards totaling $12 million that expire in 2001. These loss carryforwards
offset a portion of the foreign net deferred tax  liability.  Realization of net
operating  loss  carryforwards  is dependent on  generating  sufficient  taxable
income.  Although  realization is not assured,  the company  believes it is more
likely than not that all of the net deferred tax asset will be realized.

     The net deferred tax asset,  which is  classified  as  Investments  - Other
assets in the Consolidated  Balance Sheet,  represents the net deferred taxes in
certain foreign  jurisdictions.  Deferred tax liabilities and assets at December
31, 1997 and 1996, are composed of the following:
<TABLE>
<CAPTION>

     (Millions of dollars)                                                          1997              1996
     ---------------------                                                          ----              ----

     <S>                                                                            <C>               <C>
     Net deferred tax liability -
         Accelerated depreciation                                                   $240              $259
         Exploration and development                                                  72                65
         Undistributed earnings of foreign subsidiaries                               28                23
         Postretirement benefits                                                     (47)              (46)
         Dismantlement, reclamation, remediation and other reserves                  (69)             (113)
         Foreign operating loss carryforward                                          (4)              (10)
         Other                                                                       (61)              (47)
                                                                                    ----              ----
                                                                                     159               131
                                                                                    ----              ----

     Net deferred tax asset -
         Accelerated depreciation                                                     13                16
         Foreign operating loss carryforward                                         (29)              (36)
         Other                                                                        (6)               (3)
                                                                                    ----              ----
                                                                                     (22)              (23)
                                                                                    ----              ----
              Total                                                                 $137              $108
                                                                                    ====              ====
</TABLE>

     In the following  table,  the U.S. Federal income tax rate is reconciled to
the  company's  effective  tax rates for income from  continuing  operations  as
reflected in the Consolidated Statement of Income.
<TABLE>
<CAPTION>

                                                                         1997              1996           1995
                                                                         ----              ----          -----

     <S>                                                                 <C>               <C>           <C>
     U.S. statutory rate                                                 35.0%             35.0%         (35.0)%
         Increases (decreases) resulting from -
              Taxation of foreign operations                              2.5               1.1           (1.3)
              State income taxes                                          1.2               1.1           (1.3)
              Adjustment of prior years' accruals                        (1.9)               .3           (1.3)
              Federal income tax credits                                   --               (.3)          (2.5)
              Dividends paid on Employee Stock Ownership Plan             (.7)              (.6)          (1.3)
              Foreign equity income                                        --                --           (1.6)
              Contribution of appreciated equity securities               (.4)             (1.8)            --
              Adjustment of deferred tax balances due to
                  tax rate changes                                       (3.4)              --            (1.9)
              Other - net                                                (1.6)              (.5)          (1.0)
                                                                        -----              ----          -----
                      Total                                              30.7%             34.3%         (47.2)%
                                                                         ====              ====          =====
</TABLE>

     The Internal Revenue Service has examined the company's  Federal income tax
returns for all years through 1994, and the years have been closed through 1992.
The company  believes that it has made adequate  provision for income taxes that
may become payable with respect to open tax years.

13.      Other Deferred Credits and Reserves

         Other  deferred  credits  and  reserves  consist  of the  following  at
year-end 1997 and 1996:
<TABLE>
<CAPTION>

     (Millions of dollars)                                                          1997              1996
     ---------------------                                                          ----             -----

     <S>                                                                            <C>               <C> 
     Reserves for site dismantlement, reclamation and remediation                   $251              $345
     Postretirement benefit obligations                                              120               117
     Other                                                                            51                53
                                                                                   -----             -----
         Total                                                                      $422              $515
                                                                                    ====              ====
</TABLE>

         The company provided for  environmental  reclamation and remediation of
former plant sites,  net of  reimbursements  received,  during each of the years
1997, 1996 and 1995 as follows:

     (Millions of dollars)                     1997        1996         1995
     ---------------------                     ----        ----         ----

     Provision, net of reimbursements           $18         $43          $54
     Reimbursements received                     12          10           11

         The  reimbursements,  which  pertain  to the  former  facility  in West
Chicago,  Illinois, were received pursuant to the Energy Policy Act of 1992 (see
Note 10).  An  additional  $49 million was  provided  in 1995 for  refining  and
marketing-related  sites and included in the  discontinued  operations (see Note
21).

14.      Stockholders' Equity

     Changes in common stock,  capital in excess of par value and treasury stock
for 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>


                                                  Common Stock               Capital in          Treasury Stock
     (Millions of dollars and                     Shares       Par            Excess of
     thousands of shares)                         Issued       Value          Par Value          Shares     Cost

     <S>                                           <C>         <C>              <C>              <C>       <C>  
     Balance December 31, 1994                     53,304      $53              $309             1,610     $  63
         Exercise of stock options and
              stock appreciation rights               210        1                 9                --        --
         Stock purchase program                        --       --                --               835        48
     Balance December 31, 1995                     53,514       54               318             2,445      $111
         Exercise of stock options and
              stock appreciation rights               348       --                16                --        --
         Issuance of shares for
              achievement awards                       --       --                --                (3)       --
         Stock purchase program                        --       --                --             3,127       195
                                                   ------      ---              ----             -----      ----
     Balance December 31, 1996                     53,862       54               334             5,569       306
         Exercise of stock options and
              stock appreciation rights               259       --                12                --        --
         Issuance of shares for
              achievement awards                       --       --                --                (2)       --
         Stock purchase program                        --       --                --               867        57
                                                   ------      ---              ----             -----      ----
     Balance December 31, 1997                     54,121      $54              $346             6,434      $363
                                                   ======      ===              ====             =====      ====
</TABLE>

     The  company has 40 million  shares of  preferred  stock  without par value
authorized, and none is issued.

     During 1995, the Board of Directors authorized management to purchase up to
$300 million of the common stock of the  company.  The program was  completed in
August 1997 with a total of 4,829,000 shares acquired at a cost of $300 million.

     In  1996,   the  company's   Board  of  Directors   replaced  the  existing
stockholder-rights  plan,  which  expired in July 1996,  with a new rights  plan
dated July 9, 1996.  Such rights were  distributed  as a dividend at the rate of
one right for each share of the company's  common stock.  Generally,  the rights
become  exercisable  the earlier of 10 days after a public  announcement  that a
person or group has  acquired,  or a tender offer has been made for, 15% or more
of the company's  then-outstanding  stock. If either of these events occur, each
right would  entitle the holder (other than the 15% holder) to buy the number of
shares  of the  company's  common  stock  having a market  value  two  times the
exercise  price.  The  exercise  price is $215.  Generally,  the  rights  may be
redeemed at $.01 per right until a person or group has  acquired  15% or more of
the company's stock. The rights expire in July 2006.

15.      Other Income

     Other  income is as  follows  during  each of the  years in the  three-year
period ended December 31, 1997:

     (Millions of dollars)                            1997      1996      1995
     ---------------------                            ----      ----      ----

     Income from unconsolidated affiliates             $32       $14       $12
     Gain on sale of available-for-sale securities      18        23        --
     Settlements with insurance carriers                12        67        --
     Interest                                           12         9        15
     Gain on sale of assets                             10        24         2
     Other                                               6        (5)       --
                                                      ----      ----      ----

         Total                                         $90      $132       $29
                                                       ===      ====       ===

16.      Financial Instruments and Hedging Activities

Investments in Certain Debt and Equity Securities
     The company has certain investments that are considered to be available for
sale. These financial  instruments are carried in the Consolidated Balance Sheet
at fair value,  which is based on quoted  market  prices.  The  company  held no
securities  classified  as held to maturity or trading at December  31, 1997 and
1996.  At December 31, 1997 and 1996,  available-for-sale  securities  for which
fair value can be estimated were as follows:

<TABLE>
<CAPTION>

                                                           1997                                        1996                 
                                         ---------------------------------------       -------------------------------------
                                          Fair                 Gross Unrealized         Fair               Gross Unrealized
(Millions of dollars)                     Value    Cost          Holding Gains          Value    Cost        Holding Gains
                                          -------------          -------------          -------------        -------------

<S>                                         <C>     <C>               <C>                 <C>     <C>             <C>
U.S. government obligations -
     Maturing within one year               $ 8     $ 8               $--                 $26     $26             $--
     Maturing between one year
         and four years                      19      19                --                  --      --              --
     Equity securities                       --      --                --                  22       3              19
                                            ---     ---               ---                 ---     ---             ---
              Total                         $27     $27               $--                 $48     $29             $19
                                            ===     ===               ===                 ===     ===             ===

</TABLE>


     U.S. government  obligations are carried in the Consolidated  Balance Sheet
as  Current  Assets or as  Investments  - Other  assets,  depending  upon  their
maturity. Equity securities are carried as Investments - Other assets.

     During  1997  and  1996,   the  company  sold   available-for-sale   equity
securities.  Proceeds from the sales totaled $21 million in 1997 and $29 million
in 1996. The average cost of the securities was used in the determination of the
realized gains, which totaled $18 million in 1997 and $23 million in 1996 before
income taxes.  Also during 1997 and 1996,  the company  donated a portion of its
available-for-sale  equity securities to Kerr-McGee  Foundation  Corporation,  a
tax-exempt   entity   whose   purpose  is  to   contribute   to   not-for-profit
organizations. The fair value of these donated shares totaled $3 million in 1997
and $16  million in 1996,  which  included  appreciation  of $3 million  and $13
million before income taxes, respectively.

The change in unrealized  holding  gains,  net of income taxes,  as shown in the
separate  component of stockholders'  equity during the three-year  period ended
December 31, 1997, is as follows:

     (Millions of dollars)                              1997    1996     1995
     ---------------------                              ----    ----     ----

     Beginning balance                                   $12     $26      $12
         Net unrealized holding gains                      2       9       14
         Net realized gains                              (12)    (15)      --
         Net appreciation of donated securities           (2)     (8)      --
                                                        ----    ----     ----
     Ending balance                                      $--     $12      $26
                                                        ====    ====     ====

Financial Instruments for Other than Trading Purposes
     In addition to the investments  previously discussed,  the company holds or
issues financial  instruments for other than trading  purposes.  At December 31,
1997 and 1996,  the carrying  amount and estimated  fair value of such financial
instruments for which fair value can be determined are as follows:
<TABLE>
<CAPTION>

                                                                  1997                           1996        
                                                         ----------------------         ---------------------
                                                          Carrying       Fair            Carrying       Fair
     (Millions of dollars)                                 Amount        Value            Amount        Value

     <S>                                                    <C>          <C>                <C>         <C> 
     Cash and cash equivalents                              $183         $183               $121        $121
     Long-term notes receivable                                5            5                 17          17
     Contracts to sell foreign currencies                     --            8                 13          33
     Contracts to purchase foreign currencies                 --          102                 --          29
     Short-term borrowings                                    25           25                 37          37
     Total long-term debt                                    554          669                626         737
</TABLE>

     The carrying amount of cash and cash equivalents approximates fair value of
those  instruments  due to  their  short  maturity.  The  fair  value  of  notes
receivable  is based on  discounted  cash  flows or the fair value of the note's
collateral.  The fair value of the company's  short-term  and long-term  debt is
based on the quoted  market prices for the same or similar debt issues or on the
current rates offered to the company for debt with the same remaining  maturity.
The fair value of foreign  currency forward  contracts  represents the aggregate
replacement cost based on financial institutions' quotes.

Hedging Activities
     Most of the company's foreign currency contracts are hedges principally for
chemicals'  accounts  receivable  generated from titanium  dioxide pigment sales
denominated in foreign currencies ($65 million hedged in 1997 and $68 million in
1996) and the operating costs and capital expenditures of international chemical
operations ($50 million hedged in 1997 and $28 million in 1996).  The purpose of
these  foreign  currency  hedging  activities is to protect the company from the
risk that the eventual U.S.  dollar amounts from sales to foreign  customers and
purchases  from  foreign  suppliers  could be  adversely  affected by changes in
foreign  currency  exchange rates.  The company  recognized net foreign currency
hedging gains of $4 million in 1997, $3 million in 1996 and $8 million in 1995.

     At December 31, 1997, the company had foreign currency  contracts  maturing
between January 1998 and December 1999 to purchase $137 million Australian and 8
million British pounds sterling for $102 million and $12 million,  respectively.
Additionally,  at December  31, 1997,  the company had  contracts to sell for $8
million various foreign currencies,  principally European,  which mature between
January and April 1998. At December 31, 1996,  the company had foreign  currency
contracts that matured between January and December 1997 to purchase $36 million
Australian for $25 million.  Additionally, at December 31, 1996, the company had
contracts  to sell  for $34  million  various  foreign  currencies,  principally
European,  which  matured  between  January and  December  1997.  This  included
contracts  totaling  $14  million  for  anticipated   pigment  sales  that  were
marked-to-market.  Net unrealized  losses on foreign currency  contracts totaled
$13 million at year-end 1997. Net unrealized gains on foreign currency contracts
totaled $4 million at year-end 1996 and $3 million at year-end 1995.

     Although  no oil or natural gas futures or option  contracts  were  entered
into during 1997, the company has periodically  used these types of contracts to
reduce the effect of the price  volatility of crude oil,  natural gas and, prior
to the sale of the refining and  marketing  operations,  refined  products.  The
futures contracts permitted settlement by delivery of commodities.

     During 1996,  the company sold forward 10 million  barrels of crude oil and
37 billion cubic feet of natural gas representing  approximately  40% and 36% of
its worldwide  crude oil and natural gas production,  respectively.  Net hedging
losses on crude oil and natural gas recognized in 1996 totaled $37 million.  The
effect of the losses was to reduce the  company's  1996 average gross margin for
crude oil and natural gas by $1.04 per barrel and $.11 per MCF, respectively. At
year-end 1996, there were no open crude oil or natural gas contracts.

     During 1995,  the company sold forward 13 million  barrels of crude oil and
19 billion cubic feet of natural gas representing  approximately  49% and 18% of
its worldwide crude oil and natural gas production, respectively, and 35% of the
refined-product  sales of the  discontinued  refining and marketing  operations.
Hedging gains and losses recognized for 1995 were immaterial.  At year-end 1995,
open crude oil and natural gas contracts had an aggregate value of $151 million,
and the unrecognized loss on these contracts totaled $14 million.

     Contract amounts do not quantify risk or represent assets or liabilities of
the  company  but are used in the  calculation  of cash  settlements  under  the
contracts.  These financial  instruments  limit the company's  market risks, are
with major financial institutions, expose the company to credit risks and may at
times be  concentrated  with  certain  institutions  or groups of  institutions.
However,  the credit  worthiness of these  institutions is subject to continuing
review, and full performance is anticipated.  Additional  information  regarding
market  risk is included  in the  quantitative  and  qualitative  disclosure  in
Management's Discussion and Analysis.

     Year-end hedge  positions and activities  during a particular  year are not
necessarily indicative of future activities and results.


17.      Taxes, Other than Income Taxes

     Taxes,  other than income taxes,  during the years ended December 31, 1997,
1996 and 1995, are composed of the following:

         (Millions of dollars)             1997        1996         1995
         ---------------------             ----        ----         ----

         Payroll                            $11         $11          $11
         Property                             4           8            8
         Production/severance                 3           9            8
         Other                                2           2            2
                                           ----        ----         ----

              Total                         $20         $30          $29
                                           ====        ====         ====

18.      Employee Stock Option Plans

     The 1987 Long Term Incentive Program (1987 Program) authorized the issuance
of shares of the company's  common stock through  December 31, 2002, in the form
of stock options,  restricted stock or long-term performance awards. The options
may be accompanied by stock appreciation rights. The 1987 Program was amended in
May 1995 to restore the number of shares  available to be granted to  1,000,000,
bringing the total number of shares authorized to be granted through the program
to 2,740,000.

     The company's employee stock options are fixed-price options granted at the
fair  market  value of the  underlying  common  stock on the date of the  grant.
Generally,  one-third  of  each  grant  vests  and  becomes  exercisable  over a
three-year  period  immediately  following  the grant date and  expires 10 years
after the grant date.
     The 1984 Employee Stock Option Plan authorized the granting of options over
a 10-year  period for up to 1,000,000  shares of common  stock and  accompanying
stock  appreciation  rights.  The 1984 plan was terminated on May 3, 1988. After
that date, no further options could be granted under this plan, although options
and any accompanying stock appreciation rights outstanding at that time could be
exercised prior to their respective expiration dates.

     Transactions  during the past three years under these plans are  summarized
below:
<TABLE>
<CAPTION>


                                                       1987 Incentive Program             1984 Stock Option Plan
                                                       ----------------------             ----------------------
                                                                Weighted-Average                   Weighted-Average
                                                                  Exercise Price                     Exercise Price
                                                       Options        per Option          Options        per Option

<S>                                                  <C>                <C>               <C>              <C>          
Balance outstanding December 31, 1994                1,178,403          $45.11             33,000          $27.58
     Options granted                                   409,000           49.31                 --              --
     Options exercised                                (206,821)          43.81             (3,000)          27.06
     Options surrendered upon exercise
         of stock appreciation rights                   (6,850)          39.80            (20,000)          27.91
     Options forfeited                                 (49,369)          45.87                 --              --
                                                     ---------                           --------
Balance outstanding December 31, 1995                1,324,363           46.61             10,000           27.06
     Options granted                                   310,800           63.56                 --              --
     Options exercised                                (333,594)          46.40                 --              --
     Options surrendered upon exercise
         of stock appreciation rights                  (48,634)          43.63            (10,000)          27.06
     Options forfeited                                  (6,469)          53.00                 --              --
                                                     ---------                           --------
Balance outstanding December 31, 1996                1,246,466           50.98                 --              --
     Options granted                                   325,200           68.90                 --              --
     Options exercised                                (256,986)          45.93                 --              --
     Options surrendered upon exercise
     of stock appreciation rights                       (5,000)          32.38                 --              --
     Options forfeited                                  (6,703)          57.46                 --              --
     Options expired                                      (400)          54.06                 --              --
                                                     ---------                           --------
Balance outstanding December 31, 1997                1,302,577           56.48                 --              --
                                                     =========                           ========

Options exercisable -
     December 31, 1995                                 626,759           44.87             10,000           27.06
     December 31, 1996                                 623,461           46.44                 --              --
     December 31, 1997                                 750,894           50.87                 --              --

</TABLE>

     Following is the range of exercise  prices and  weighted-average  remaining
life  of  all  stock  options   outstanding   at  December  31,  1997,  and  the
weighted-average  price within each price range of those options outstanding and
those options exercisable at year-end 1997.

<TABLE>
<CAPTION>


                      Options Outstanding at December 31, 1997                      Options Exercisable at December 31, 1997
     ---------------------------------------------------------------------------    ----------------------------------------
                         Range of         Weighted-Average      Weighted-Average                                  Weighted-Average
                  Exercise Prices                Remaining        Exercise Price                                    Exercise Price
       Options         per Option         Contractual Life            per Option          Options                       per Option

     <S>            <C>    <C>                         <C>                <C>             <C>                              <C>   
        38,900      $32.38-$39.57                      2.7                $38.00           38,900                           $38.00
       418,518       40.81- 49.25                      5.6                 45.49          385,183                            45.56
       230,657       50.56- 54.50                      6.9                 53.14          170,169                            52.77
       457,502       61.00- 64.88                      8.7                 63.96          138,642                            63.96
       157,000       73.50- 73.50                      9.0                 73.50           18,000                            73.50
     ---------                                                                            -------
     1,302,577       32.38- 73.50                      7.2                 56.48          750,894                            50.87
     =========                                                                            =======
</TABLE>


     FAS No.  123,  "Accounting  for  Stock-Based  Compensation,"  prescribes  a
fair-value   method  of  accounting  for  employee  stock  options  under  which
compensation  expense is  measured  based on the  estimated  fair value of stock
options at the grant date and recognized  over the period that the options vest.
The  company,  however,  chooses to account for its stock  option plan under the
optional  intrinsic value method of APB No. 25,  "Accounting for Stock Issued to
Employees," whereby no compensation  expense is recognized for fixed-price stock
options.  Compensation cost for stock appreciation  rights,  which is recognized
under both accounting methods, was immaterial for 1997, 1996 and 1995.

     Had  compensation  expense been  determined in accordance with FAS No. 123,
the estimated  weighted-average,  grant-date  fair value would have been $14.37,
$13.17 and $14.54 per option for those options  granted in 1997,  1996 and 1995,
respectively,  and the  resulting  compensation  expense would have affected net
income  (loss) and per share  amounts  as shown in the  following  table.  These
amounts may not be representative of compensation expense that might be expected
to result in future years using the fair-value method of accounting for employee
stock options,  as the number of options granted in a particular year may not be
indicative of the number of options granted in future years,  and the fair-value
method of accounting has not been applied to options granted prior to January 1,
1995.
<TABLE>
<CAPTION>

     (Millions of dollars, except per share amounts)           1997             1996              1995
     -----------------------------------------------           ----             ----              ----

     <S>                                                       <C>              <C>              <C>
     Net Income (Loss) -
              As reported                                      $194             $220             $(31)
              Pro forma                                         191              218              (32)

     Earnings (Loss) per Share -
         Basic -
              As reported                                     $4.06            $4.45            $(.60)
              Pro forma                                        4.00             4.42             (.62)

         Diluted -
              As reported                                      4.04             4.43             (.60)
              Pro forma                                        3.99             4.40             (.62)
</TABLE>


     The fair value of each option granted in 1997,  1996 and 1995 was estimated
as of the date of grant using the  Black-Scholes  option  pricing model with the
following weighted-average assumptions.

                                          1997        1996         1995
                                          ----        ----         ----

         Expected life (years)             5.8         5.8         10.0
         Risk-free interest rate           6.3%        6.1%         7.1%
         Expected dividend yield           3.1         3.1          3.1
         Expected volatility              17.5        17.9         19.4

     The number of the  company's  common shares issued upon exercise of options
after year-end 1997 was not material.

     In January 1998, the Board of Directors approved a broad-based stock option
plan (BSOP) that  provides for the granting of options to purchase the company's
common stock to all full-time  employees,  except officers. A total of 1,500,000
shares  of  common  stock  is  authorized  to be  issued  under  the  BSOP,  and
approximately 465,000 options were granted in January 1998.

     The Board of Directors, subject to stockholder ratification,  also approved
the 1998 Long Term  Incentive  Plan (the 1998 Plan) to be  effective  January 1,
1998. This plan provides for the granting of options, restricted stock and other
awards to key employees.  Stock  appreciation  rights may be associated with the
options. A total of 2,300,000 shares of the company's common stock is authorized
to be issued  under the 1998 Plan,  and in January  1998,  185,000  options were
granted.

     The 1987 Program terminated upon stockholder ratification of the 1998 Plan.
No further options can be granted under the 1987 Program after its  termination,
although options and any accompanying stock  appreciation  rights outstanding at
that time may be exercised prior to their respective expiration dates.

     Options  under either the BSOP or the 1998 Plan are granted at prices equal
to the fair market value of the underlying common stock at the time of grant.

     Also in January 1998, the Board of Directors  approved  provisions to amend
and restate the Executive  Deferred  Compensation Plan (EDCP).  The amendment of
the EDCP adds the company's  common stock as an investment  alternative,  allows
stock option gains to be deferred pretax and implements  certain  administrative
changes.  A total of 500,000  shares of common stock is  authorized to be issued
through the EDCP and periodically  transferred from the company's treasury stock
or purchased in open-market transactions.

     Earnings  per share for 1997 would have been lower had these  plans been in
existence and had shares been  transferred to the EDCP prior to year-end 1997 or
if any options  granted  under the BSOP or the 1998 Plan had been "in the money"
at year-end.  The impact on basic and diluted earnings per share would have been
dependent  on the  number  of shares  transferred  to the  EDCP,  while  diluted
earnings per share would have been further impacted by the number of incremental
shares   included  in  the   denominator   of  the  diluted   earnings-per-share
computation.

19.      Restructuring Charges

     Restructuring  of the exploration  and production  operating unit continued
during  1997  with  the  relocation  of the unit to  Houston,  Texas.  This,  in
conjunction with the unit's merger of its North American onshore properties into
Devon (see Note 4) and the 1995  reorganization,  resulted in approximately  300
employees terminating their employment, most of whom were terminated by year-end
1997.

     During the three-year period ended December 31, 1997, the company accrued a
total of $19 million for the cost of special  termination  benefits for retiring
employees  to  be  paid  from  retirement  plan  assets,   future  compensation,
relocation,  lease  cancellation  and  outplacement.  The $2 million  reserve at
December 31, 1997,  primarily  represents  remaining  severance costs, which are
expected  to be paid and  charged to the  reserve  during  1998.  The  accruals,
expenditures and reserve balances are set forth below:

     (Millions of dollars)                                     1997      1996
     ---------------------                                     ----      ----

     Beginning balance                                          $10      $  5
         Accruals                                                 2        10
         Retirement benefits to be paid from plan assets         --        (2)
         Payments                                               (10)       (3)
                                                               ----      ----

     Ending balance                                            $  2       $10
                                                               ====       ===

20.      Employee Stock Ownership Plan

     In 1989,  the company's  Board of Directors  approved a leveraged  Employee
Stock  Ownership  Plan  (ESOP)  into  which  is  paid  the  company's   matching
contribution  for the employees'  contributions  to the  Kerr-McGee  Corporation
Savings  Investment Plan (SIP). Most of the company's  employees are eligible to
participate  in both the ESOP  and the  SIP.  Although  the ESOP and the SIP are
separate  plans,  matching   contributions  to  the  ESOP  are  contingent  upon
participants' contributions to the SIP.

     In 1989,  the ESOP  trust  borrowed  $125  million  from a group of lending
institutions  and used the  proceeds  to  purchase  2.7  million  shares  of the
company's treasury stock. The company used the $125 million in proceeds from the
sale of the stock to  acquire  shares of its  common  stock in  open-market  and
privately  negotiated  transactions.  In  1996,  a  portion  of the  third-party
borrowings was replaced with a note payable to the company (sponsor  financing).
The  third-party  borrowings  are guaranteed by the company and are reflected in
the Consolidated  Balance Sheet as Long-Term Debt,  while the sponsor  financing
does  not  appear  in  the  company's  balance  sheet.  Deferred   compensation,
representing the unallocated  ESOP shares discussed in the following  paragraph,
is reflected as a reduction of stockholders' equity.

     The company  stock  acquired  by the ESOP trust is held in a loan  suspense
account. The company's matching contribution and dividends on the shares held by
the ESOP trust are used to repay the loan,  and stock is released  from the loan
suspense  account as the  principal  and  interest  are paid.  The stock is then
allocated  to  participants'  accounts  at  market  value  as the  participants'
contributions  are  made to the  SIP.  Deferred  compensation  reflected  in the
company's  Consolidated  Balance  Sheet is reduced as shares  are  allocated  to
participants'  accounts.  Long-term  debt is reduced as payments are made on the
third-party financing.  Dividends paid on the common stock held in participants'
accounts  are also used to repay the loans,  and stock with a market value equal
to the amount of dividends is allocated to participants' accounts.

     At  December  31,  1997 and  1996,  the ESOP  trust  held  shares  of stock
allocated to participants' accounts and in the loan suspense account as follows:

     (Thousands of shares)                     1997              1996
     ---------------------                     ----------------------

     Participants' accounts                   1,343             1,251
     Loan suspense account                    1,110             1,290

     The shares  allocated  to  participants  at  December  31,  1997,  included
approximately  15,000 shares  released in January 1998. The shares  allocated to
participants at December 31, 1996, included approximately 14,000 shares released
in January 1997.

     All  ESOP  shares  are  considered   outstanding   for   earnings-per-share
calculations. Dividends on ESOP shares are charged to retained earnings.

     Compensation expense is recognized using the cost method and is reduced for
dividends  paid  on  the  unallocated  ESOP  shares.   The  company   recognized
ESOP-related  expense of $10 million,  $12 million and $14 million in 1997, 1996
and 1995,  respectively.  These amounts include interest expense incurred on the
third-party ESOP debt of $5 million, $6 million and $8 million in 1997, 1996 and
1995,  respectively.  The company  contributed  $1  million,  $9 million and $15
million to the ESOP in 1997, 1996 and 1995, respectively. The cash contributions
are net of $4 million for the  dividends  paid on the company  stock held by the
ESOP trust in each of the years 1997, 1996 and 1995.

21.      Discontinued Operations

     During 1995, the company disposed of substantially  all of its refining and
marketing  operations,  which had been  conducted by wholly owned  subsidiaries,
Kerr-McGee Refining Corporation and Cato Oil and Grease Co. The 1995 gain on the
sale was $2 million,  net of $1 million for income  taxes.  All of the crude oil
and  refined-product  inventories  of the  discontinued  refining and  marketing
operations  were valued using the last-in,  first-out  (LIFO)  method until sold
during 1995.  LIFO reserves of $12 million were reversed at the time of the sale
of these  inventories.  The sales of the remaining refining and marketing assets
were completed during 1996, and the resulting gains and losses were immaterial.

     The  company  exited  from the coal  business in 1998 with the sales of its
mining operations at Galatia,  Illinois, and Kerr-McGee Coal Corporation,  which
held Jacobs Ranch Mine in Wyoming.  The cash sales  resulted in proceeds of $600
million and a gain of $257 million,  net of $149 for income taxes. These amounts
will be reflected in the  Consolidated  Statement of Income and the Consolidated
Statement of Cash Flows for the year ended  December  31, 1998.  Coal assets and
liabilities at December 31, 1997, are included as part of the  appropriate  line
items in the  Consolidated  Balance  Sheet.  Included at December 31, 1997,  are
current assets $50 million;  long-term assets $221 million;  current liabilities
$40 million; and long-term liabilities $73 million.

     The  operating  results  of both the  discontinued  coal and  refining  and
marketing  operations are reported  separately in the Consolidated  Statement of
Income. Revenues applicable to all discontinued operations were as follows:

     (Millions of dollars)             1997             1996              1995
     ---------------------             ----            -----            ------

     Coal                              $323             $365            $  353
     Refining and marketing              --               --             1,127
                                      -----            -----            ------

                                       $323             $365            $1,480
                                       ====             ====            ======

22.      Postretirement Benefits

     The company sponsors  contributory plans to provide certain health care and
life insurance benefits for retired  employees.  Substantially all the company's
employees may become  eligible for these  benefits if they reach  retirement age
while  working  for the  company;  however,  benefits  available  and  costs  to
individual  employees vary  depending on the  employee's  date of retirement and
date of employment with the company.

     At December 31, 1997 and 1996, the actuarial and recorded  liabilities  for
postretirement benefits, none of which has been funded, are as follows:
<TABLE>
<CAPTION>

                                                              1997                               1996         
                                                     ----------------------             ----------------------
(Millions of dollars)                                Health            Life             Health            Life
<S>                                                  <C>               <C>               <C>              <C>    
Actuarial present value of accumulated
     postretirement benefit obligations -
         Retirees                                     $(77)            $(19)             $(69)            $(18)
         Fully eligible active participants             (9)              (2)              (11)              (1)
         Other active participants                     (21)              (3)              (18)              (4)
                                                     -----             ----              ----             ----
              Total                                   (107)             (24)              (98)             (23)
Unrecognized net (gain) loss                             6               (3)               --               (4)
                                                     -----             ----              ----             ----
         Accrued postretirement expense              $(101)            $(27)             $(98)            $(27)
                                                     =====             ====              ====             ====
</TABLE>

     For the years ended December 31, 1997, 1996 and 1995, the components of net
periodic expense for postretirement benefits were as follows:
<TABLE>
<CAPTION>

                                                                     1997             1996              1995    
                                                                 ------------     -------------    -------------
(Millions of dollars)                                            Health  Life     Health   Life     Health  Life
                                                                 ------  ----     ------   ----     ------  ----

<S>                                                                <C>     <C>      <C>      <C>      <C>     <C>
Service cost - benefits earned during the period                   $1      $1       $1       $1       $1      $1
Interest cost on accumulated postretirement
     benefit obligations                                            8       1        8        1        8       1
                                                                   --      --       --       --       --      --

         Net postretirement expense                                $9      $2       $9       $2       $9      $2
                                                                   ==      ==       ==       ==       ==      ==
</TABLE>

     The following  assumptions  were used in estimating  the actuarial  present
value of the  accumulated  postretirement  benefit  obligations and net periodic
postretirement benefit expense:

                                                  1997        1996       1995
                                                  ----        ----       ----

     Future compensation increases                5.0%        5.0%       5.00%
     Discount rate                                7.0         7.5        7.25

     The  health  care cost  trend  rate used to  determine  the  year-end  1997
accumulated   postretirement  benefit  obligation  was  8%  in  1998,  gradually
declining to 5% in the year 2009 and thereafter.

     A 1% increase  in the  assumed  health care cost trend rate for each future
year would increase the  accumulated  postretirement  benefit  obligation by $13
million at December 31,  1997.  In  addition,  the  aggregate of the service and
interest cost components of net periodic  postretirement  expense for 1997 would
increase by $1 million.

23.      Retirement Plans

     Most  of  the  company's   employees  are  covered  under   noncontributory
retirement plans of the company and certain of its subsidiaries. The benefits of
these plans are based primarily on years of service and employees'  remuneration
near  retirement.  The  company's  policy  is to fund  the  minimum  amounts  as
permitted by the Employee Retirement Income Security Act of 1974 (ERISA).

     The funded status of plans with assets in excess of accumulated benefits at
December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>

     (Millons of dollars)                                                           1997              1996
     --------------------                                                           ----              ----

     <S>                                                                            <C>               <C> 
     Plan assets at fair value                                                      $639              $538
                                                                                    ----              ----
     Actuarial present value of accumulated benefit obligations -
         Vested                                                                     (354)             (322)
         Nonvested                                                                   (16)              (13)
                                                                                    ----             -----
              Total                                                                 (370)             (335)
                                                                                    ----              ----
              Plan assets in excess of accumulated benefit obligations              $269              $203
                                                                                    ====              ====

     Plan assets at fair value                                                      $639              $538
                                                                                    ----              ----
     Projected benefit obligations -
         Actuarial present value of accumulated benefit obligations                 (370)             (335)
         Projected salary increases                                                  (54)              (46)
                                                                                    ----             -----
              Total                                                                 (424)             (381)
                                                                                    ----              ----
              Plan assets in excess of projected benefit obligations                 215               157
     Unrecognized net asset at January 1, 1987                                       (13)              (17)
     Unrecognized prior service costs                                                 11                12
     Unrecognized net gain                                                          (171)             (119)
                                                                                    ----              ----
              Pension prepayment at end of year                                     $ 42             $  33
                                                                                    ====             =====
</TABLE>

     The net periodic  pension credit,  excluding  charges of $2 million in 1996
and $1 million in 1995 related to the  restructuring  program (see Note 19), for
each of the past three years is summarized as follows:
<TABLE>
<CAPTION>

     (Millions of dollars)                                         1997             1996              1995
     ---------------------                                         ----             ----             -----

     <S>                                                          <C>               <C>              <C>  
     Service cost - benefits earned during the period             $  10             $  9             $   8
     Interest cost on projected benefit obligations                  28               27                27
     Return on plan assets                                         (126)             (70)             (115)
     Net amortization and deferral                                   79               27                71
                                                                  -----             ----             -----

         Net pension credit                                       $  (9)            $ (7)            $  (9)
                                                                  =====             ====             =====
</TABLE>

     The amount of benefits  that can be covered by the funded  plans is limited
by ERISA and the  Internal  Revenue  Code.  Therefore,  the company has unfunded
supplemental  plans designed to maintain  benefits for all employees at the plan
formula  level  and to  provide  senior  executives  with  benefits  equal  to a
specified percentage of their final average compensation.  The projected benefit
obligation  for these  unfunded  plans  totaled  $14  million and $19 million at
December  31,  1997 and 1996,  respectively.  To reflect the amount by which the
accumulated  benefit  obligation  exceeded the accrued pension expense for these
plans, an additional  liability is recorded in the Consolidated Balance Sheet at
both December 31, 1997 and 1996. Offsetting is an intangible asset (see Note 7).
Although not considered plan assets,  a grantor trust was established from which
payments  for  certain  of these  supplemental  plans are made.  The trust had a
balance  of  $7  million  and  $12  million  at  December  31,  1997  and  1996,
respectively.  Excluding  $6 million  in 1997  related  to the  settlement  of a
significant  portion of the liabilities of the unfunded  supplemental plans, net
periodic  pension expense for these plans was $3 million for 1997 and $4 million
for each of the years 1996 and 1995.

     The following  assumptions  were used in estimating  the actuarial  present
value of the projected benefit obligation and net periodic pension costs:

                                                  1997       1996        1995
                                                  ----       ----        ----

     Future compensation increases                5.0%       5.0%        5.00%
     Discount rate                                7.0        7.5         7.25
     Long-term rate of return on plan assets      9.0        9.0         9.00


24.      Reporting by Business Segments

     The company is an international  energy and chemical company. The principal
areas of oil and gas  exploration  and  production  are the Gulf of Mexico,  the
United Kingdom sector of the North Sea, China,  Southeast Asia, Yemen and, prior
to December  31,  1996,  onshore in North  America.  The  company  has  domestic
chemical  operations and interests in chemical  operations in Western  Australia
and Saudi Arabia.
<TABLE>
<CAPTION>

     (Millions of dollars)                                         1997             1996              1995
     ---------------------                                         ---------------------------------------

     <S>                                                         <C>              <C>               <C>
     Sales -
         Exploration and production(1)                           $  628           $  874            $  690
         Chemicals                                                  760              692               707
         All other                                                   --               --                 4
                                                                 ------           ------            ------
                  Total                                          $1,388           $1,566            $1,401
                                                                 ======           ======            ======

     Operating profit (loss)(2) -
         Exploration and production                              $  175           $  204            $  (97)
         Chemicals                                                   81               85               122
                                                                 ------           ------            ------
                  Total                                          $  256           $  289            $   25
                                                                 ======           ======            ======

     Net operating profit (loss)(2) -
         Exploration and production                              $  107           $  136            $  (56)
         Chemicals                                                   52               53                81
                                                                 ------           ------            ------
                  Total                                             159              189                25

     Net interest expense                                           (24)             (29)              (29)
     Net nonoperating income (expense)(2)                            26                4               (55)
     Income from discontinued operations,
         net of income tax                                           33               56                27
                                                                 ------           ------            ------
     Net income (loss)                                           $  194           $  220            $  (31)
                                                                 ======           ======            ======

     Sales -
     U.S. operations(3)                                          $  889           $1,026            $  884
                                                                 ------           ------            ------
     International operations(4) -
         North Sea - exploration and production                     215              289               272
         China - exploration and production                          56               25                --
         Australia - chemicals                                      185              151               158
         Other                                                       43               75                87
                                                                 ------           ------            ------
                                                                    499              540               517
                                                                 ------           ------            ------
                  Total                                          $1,388           $1,566            $1,401
                                                                 ======           ======            ======

     Operating profit (loss)(2) -
     U.S. operations                                             $  159           $  174            $  (44)
                                                                 ------           ------            ------
     International operations -
         North Sea - exploration and production                      80               93               108
         China - exploration and production                           4                2                (5)
         Australia - chemicals                                       13                9                24
         Other                                                       --               11               (58)
                                                                 ------           ------            ------
                                                                     97              115                69
                                                                 ------           ------            ------
                  Total                                          $  256           $  289            $   25
                                                                 ======           ======            ======
</TABLE>

     (1)Includes  primarily  crude oil sales to the  discontinued  refining  and
        marketing operations of $112 million in 1995.
     (2)Includes special items.  Refer to Management's Discussion and Analysis.
     (3)Includes U.S. crude oil sales to the discontinued refining and marketing
        operations of $105 million in 1995.
     (4)Includes  international crude oil sales to the discontinued refining and
        marketing operations of $7 million in 1995.

<TABLE>
<CAPTION>


     (Millions of dollars)                                         1997             1996              1995
     ---------------------                                         ----             ----              ----

     <S>                                                         <C>              <C>               <C>
     Depreciation, depletion and amortization -
         Exploration and production                              $  186           $  218            $  231
         Chemicals                                                   55               55                52
         All other                                                    5                4                 6
         Discontinued operations                                     25               30                45
                                                                 ------           ------            ------
                  Total                                          $  271           $  307            $  334
                                                                 ======           ======            ======

     Cash capital expenditures -
         Exploration and production                                $213             $239              $371
         Chemicals                                                   91              118                69
         All other                                                   10                6                 2
         Discontinued operations                                     27               29                42
                                                                 ------           ------            ------
                  Total                                             341              392               484
                                                                 ------           ------            ------

     Exploration expenses -
         Petroleum exploration and production -
              Dry hole costs                                         25               37                34
              Amortization of undeveloped leases                      8               10                14
              Other                                                  30               25                31
                                                                 ------           ------            ------
                  Total                                              63               72                79
         Minerals and other                                           2                2                 1
                                                                 ------           ------            ------

                  Total exploration expenses                         65               74                80
         Less - Amortization of oil and gas and minerals
              leases and other noncash expenses                      (8)             (14)              (19)
                                                                 ------           ------            ------
                                                                     57               60                61
                                                                 ------           ------            ------
                  Total cash capital expenditures and
                      cash exploration expenses                  $  398           $  452            $  545
                                                                 ======           ======            ======

     Identifiable assets -
         Exploration and production                              $1,681           $1,667            $1,748
         Chemicals                                                  875              886               802
                                                                 ------           ------            ------
                  Total                                           2,556            2,553             2,550
     Corporate and other assets                                     270              295               297
     Discontinued operations                                        270              276               366
                                                                 ------           ------            ------
                  Total                                          $3,096           $3,124            $3,213
                                                                 ======           ======            ======

     Identifiable assets -
         U.S. operations                                         $1,362           $1,390            $1,317
                                                                 ------           ------            ------
         International operations -
              North Sea - exploration and production                699              651               669
              China - exploration and production                    183              180               149
              Australia - chemicals                                 243              268               260
              Other                                                  69               64               155
                                                                 ------           ------            ------
                                                                  1,194            1,163             1,233
                                                                 ------           ------            ------
                  Total                                          $2,556           $2,553            $2,550
                                                                 ======           ======            ======

     Net assets -
         U.S. operations                                         $  617           $  582            $  623
                                                                 ------           ------            ------
         International operations -
              North Sea - exploration and production                475              413               409
              China - exploration and production                    134              109               106
              Australia - chemicals                                 152              211               199
              Other                                                  62               52                79
                                                                 ------           ------            ------
                                                                    823              785               793
                                                                 ------           ------            ------
              Total                                              $1,440           $1,367            $1,416
                                                                 ======           ======            ======

</TABLE>


25.      Results of Operations from Crude Oil and Natural Gas Activities

     The results of operations from crude oil and natural gas activities for the
three years ended December 31, 1997, consist of the following:

<TABLE>
<CAPTION>

                                                                                                                        Interest
                                                                                                            Results of  in Equity
                                       Production    Other                Depreciation   Asset  Income Tax  Operations  Affiliate's
                               Gross    (Lifting)   Related  Exploration and Depletion  Impair- Expenses    Producing  Results of
(Millions of dollars)       Revenues(1)   Costs    Costs(2)  Expenses(2)   Expenses       ment  (Benefits)  Activities Operations(3)
---------------------          -----------------------------------------------------------------------------------------------------

<S>                               <C>     <C>          <C>       <C>          <C>        <C>       <C>        <C>          <C>  
1997 -
   Domestic                       $309    $  50        $25       $25          $105         $--     $ 39        $ 65        $25
   North Sea                       190       49          7        13            53          --       27          41         --
   China                            56       11          6        16            19          --       --           4         --
   Other international               3        1          6         9             1          --       (4)        (10)         3
                                  ----     ----        ---       ---          ----         ---     ----        ----        ---
     Total crude oil and
       natural gas activities      558      111         44        63           178          --       62         100         28
   Other(4)                         70       55          2        --            --          --        6           7         --
                                  ----     ----        ---       ---          ----         ---     ----        ----        ---
         Total                    $628     $166        $46       $63          $178         $--     $ 68        $107        $28
                                  ====     ====        ===       ===          ====         ===     ====        ====        ===

1996 -
   Domestic                       $397    $  83        $31       $26          $127         $22      $35        $ 73       $ --
   North Sea                       240       57          8        36            57          --       30          52         --
   China                            25        8          5         2             8          --        1           1         --
   Other international              32       10          6         8            15          --       (2)         (5)        --
                                  ----     ----        ---       ---          ----         ---     ----        ----        ---
     Total crude oil and
       natural gas activities      694      158         50        72           207          22       64         121         --
   Other(4)                        180      159          1        --             1          --        4          15         --
                                  ----     ----        ---       ---          ----         ---     ----        ----        ---
         Total                    $874     $317        $51       $72          $208         $22     $ 68        $136        $--
                                  ====     ====        ===       ===          ====         ===     ====        ====        ===

1995 -
   Domestic                       $294      $92        $17       $57          $128        $144     $(58)       $(86)       $--
   North Sea                       242       57          8        15            66          --       32          64         --
   Other international              40       11         12         7            20          53      (20)        (43)        --
                                 -----    -----       ----      ----         -----       -----     ----        ----        ---
     Total crude oil and
       natural gas activities      576      160         37        79           214         197      (46)        (65)        --
   Other(4)                        114       88          3        --             3           6        5           9         --
                                 -----    -----       ----      ----         -----       -----     ----        ----        ---
         Total                    $690     $248        $40       $79          $217        $203     $(41)       $(56)        --
                                  ====     ====        ===       ===          ====        ====     ====        ====        ===

</TABLE>


      (1)Gross revenues for 1995 include sales to affiliated  entities  totaling
        $112 million. Of this amount, $97 million and $7 million were applicable
        to Domestic and North Sea gross revenues,  respectively,  and $8 million
        was from other activities.

      (2)Includes  restructuring  charges  of $2  million,  $10  million  and $7
        million  in  1997,  1996  and  1995,  respectively.  These  charges  are
        classified  as Other  Related  Costs,  with the  exception of $1 million
        classified as Exploration Expenses in 1995 (see Note 19).

      (3)The equity  affiliate  follows the "full cost" method of accounting for
        oil and gas exploration and production activities.

      (4)Includes gas  marketing,  gas  processing  plants,  pipelines and other
        items  that do not fit the  definition  of  crude  oil and  natural  gas
        activities  but have been  included  above to  reconcile  to the segment
        presentations.


     The table below  presents the  company's  average  per-unit  sales price of
proprietary  crude oil and  natural gas and  production  costs per barrel of oil
equivalent  for each of the past three years.  Natural gas  production  has been
converted to a barrel of oil equivalent  based on approximate  relative  heating
value (6 MCF equals 1 barrel).

                                                1997       1996        1995
                                              ------     ------      ------
Average sales price -
     Crude oil (per barrel)
         Domestic                             $18.53     $19.36      $15.69
         North Sea                             18.77      19.08       16.31
         China                                 17.71      19.53          --
         Other international                   18.59      17.69       15.21
              Average                          18.51      19.16       15.99

     Natural gas (per MCF)
         Domestic                               2.57       2.16        1.56
         North Sea                              2.52       2.64        2.66
         Other international                      --       1.14         .85
              Average                           2.56       2.12        1.52

Production costs -
     (Per barrel of oil equivalent)
         Domestic                               2.75       3.32        3.78
         North Sea                              4.70       4.33        3.91
         China                                  3.50       5.92          --
         Other international                    4.55       3.41        2.39
              Average                           3.48       3.72        3.68

26.      Capitalized Costs of Crude Oil and Natural Gas Activities

     Capitalized  costs of crude oil and natural gas  activities and the related
reserves for  depreciation,  depletion and  amortization  at the end of 1997 and
1996 are set forth in the table  below.  Not  included in the amounts  shown are
$221 million and $209 million that represent the company's proportional interest
in an equity  affiliate's net  capitalized  costs at December 31, 1997 and 1996,
respectively  (see Note 4). The equity affiliate  follows the "full cost" method
of accounting for oil and gas exploration and production activities.
<TABLE>
<CAPTION>

     (Millions of dollars)                                             1997              1996
     ---------------------                                          -------           -------

     <S>                                                             <C>               <C>
     Capitalized costs -
         Proved properties                                           $2,709            $3,054
         Unproved properties                                            134               104
         Other                                                           45                34
                                                                    -------           -------
                                                                      2,888             3,192
                                                                    -------           -------
     Reserves for depreciation, depletion and amortization -
         Proved properties                                            1,623             1,953
         Unproved properties                                             30                29
         Other                                                           24                23
                                                                    -------           -------
                                                                      1,677             2,005
                                                                    -------           -------

              Net capitalized costs                                  $1,211            $1,187
                                                                     ======            ======

</TABLE>


27.      Standardized  Measure  of and  Reconciliation of Changes in  Discounted
         Future Net Cash Flows (Unaudited)

     The  standardized  measure  of  future  net  cash  flows  presented  in the
following  table was computed using year-end prices and costs and a 10% discount
factor.  The future income tax expense was computed by applying the  appropriate
year-end  statutory  rates,  with  consideration  of future  tax  rates  already
legislated,  to the  future  pretax  net cash  flows  less the tax  basis of the
properties  involved.  However, the company cautions that actual future net cash
flows  may vary  considerably  from  these  estimates.  Although  the  company's
estimates of total reserves,  development  costs and production rates were based
upon the best information  available,  the development and production of the oil
and gas reserves may not occur in the periods  assumed.  Actual prices  realized
and costs  incurred  may vary  significantly  from those used.  Therefore,  such
estimated  future  net  cash  flow  computations  should  not be  considered  to
represent the company's  estimate of the expected  revenues or the current value
of existing proved reserves.

<TABLE>
<CAPTION>


                                                                                                   Standardized       Proportional
                                                  Future                                             Measure of Interest in Equity
                                             Development                                   10%       Discounted        Affiliate's
                                 Future   and Production         Future  Future Net     Annual       Future Net       Standardized
(Millions of dollars)      Cash Inflows            Costs   Income Taxes  Cash Flows   Discount    Cash Flows(1)            Measure
----------------------------------------------------------------------------------------------------------------------------------

<S>                            <C>                <C>           <C>        <C>            <C>           <C>                   <C> 
1997 -
     Domestic                  $1,407             $  403        $  290     $  714         $242          $  472                $205
     North Sea                  1,807                813           266        728          266             462                  --
     China                        401                171            42        188           45             143                  --
     Other international          304                153            55         96           42              54                  19
                               ------             ------        ------     ------         ----          ------                ----
         Total                 $3,919             $1,540        $  653     $1,726         $595          $1,131                $224
                               ======             ======        ======     ======         ====          ======                ====

1996 -
     Domestic                  $2,217             $  435        $  552     $1,230         $411          $  819                $336
     North Sea                  2,610                841           638      1,131          382             749                  --
     China                        658                248            95        315           91             224                  --
     Other international          246                147            38         61           26              35                  28
                               ------             ------        ------     ------         ----          ------                ----
         Total                 $5,731             $1,671        $1,323     $2,737         $910          $1,827                $364
                               ======             ======        ======     ======         ====          ======                ====

1995 -
     Domestic                  $2,320             $  910        $  350     $1,060         $339          $  721              $   --
     North Sea                  1,494                418           328        748          254             494                  --
     China                        551                179            96        276           81             195                  --
     Other international          297                 94            62        141           54              87                  --
                               ------             ------        ------     ------         ----          ------              ------
         Total                 $4,662             $1,601        $  836     $2,225         $728          $1,497              $   --
                               ======             ======        ======     ======         ====          ======              ======

</TABLE>

      (1)Includes  $(8) million in 1996 and $51 million in 1995 from  properties
held for sale (see Note 11).

     The  changes  in the  standardized  measure  of future  net cash  flows are
presented below for each of the past three years:
<TABLE>
<CAPTION>

(Millions of dollars)                                                    1997              1996             1995
---------------------                                                  ------            ------           ------

<S>                                                                   <C>                <C>              <C> 
Net change in sales, transfer prices and production costs             $(1,121)           $  847           $  451
Changes in estimated future development costs                             (64)               45             (165)
Sales and transfers less production costs                                (446)             (516)            (402)
Purchases of reserves in place                                             --                 1               62
Changes due to extensions, discoveries, etc.                              108               474               58
Changes due to revisions in quantity estimates                             37               116               17
Changes due to sales of reserves in place                                  (8)             (139)             (86)
Changes due to reserves merged into equity affiliate                       --              (511)              --
Current period development costs                                          152               155              243
Accretion of discount                                                     261               199              167
Changes in income taxes                                                   384              (289)            (124)
Timing and other                                                            1               (52)             (19)
                                                                       ------            ------           ------
     Net change                                                          (696)              330              202
Total at beginning of year                                              1,827             1,497            1,295
                                                                       ------            ------           ------
Total at end of year                                                  $ 1,131            $1,827           $1,497
                                                                       ======             =====           ======

</TABLE>


28.      Crude Oil, Condensate and Natural Gas Net Reserves (Unaudited)

     The  estimates  of proved  reserves  have been  prepared  by the  company's
geologists and engineers.  Such estimates include reserves on certain properties
that are partially  undeveloped  and reserves that may be obtained in the future
by improved recovery operations now in operation or for which successful testing
has been  demonstrated.  The  company  has no proved  reserves  attributable  to
long-term  supply  agreements with  governments or consolidated  subsidiaries in
which there are  significant  minority  interests.  At December  31,  1996,  the
company merged its North American  onshore  properties into an equity  affiliate
(see Note 4).

     The following table  summarizes the changes in the estimated  quantities of
the company's  crude oil and  condensate  and natural gas reserves for the three
years ended December 31, 1997.
<TABLE>
<CAPTION>



                                                           Crude Oil and Condensate                            Natural Gas
                                                             (Millions of barrels)                      (Billions of cubic feet)   
                                                              North           Interna-                       North  Interna-
                                                 Domestic      Sea     China   tional   Total   Domestic      Sea    tional    Total

<S>                                                 <C>        <C>       <C>      <C>     <C>      <C>         <C>     <C>     <C> 
Proved developed and
     undeveloped reserves -
         Balance December 31, 1994                   77         75       26       13      191       568        199      82      849
              Revisions of previous estimates         2          1        4        1        8        (6)        --       3       (3)
              Purchases of reserves in place          1         --       --       --        1        45         --      --       45
              Sales of reserves in place             (5)        --       --       --       (5)      (31)        --      (1)     (32)
              Extensions, discoveries and
                  other additions                     1         --       --       --        1        25         --       1       26
              Production                            (10)       (14)      --       (2)     (26)      (82)        (8)    (16)    (106)
                                                    ---        ---       --       --      ---      ----        ---     ---     ----

         Balance December 31, 1995(1)                66         62       30       12      170       519        191      69      779
              Revisions of previous estimates        12         (1)      --       (1)      10        (1)       (10)     (1)     (12)
              Purchases of reserves in place         --         --       --       --       --         1         --      --        1
              Sales of reserves in place            (10)        --       --       (1)     (11)      (28)        --     (18)     (46)
              Reserves merged into
                  equity affiliate                  (16)        --       --       (9)     (25)     (122)        --     (41)    (163)
              Extensions, discoveries and
                  other additions                     3         39       --        7       49        27          2      39       68
              Production                            (11)       (11)      (2)      (1)     (25)      (84)       (11)     (9)    (104)
                                                    ---        ---       --       --      ---      ----        ---     ---     ----

         Balance December 31, 1996(1)                44         89       28        7      168       312        172      39      523
              Revisions of previous estimates         5          1       --        1        7        (1)        29       3       31
              Sales of reserves in place             --         (1)      --       --       (1)      (27)        --      --      (27)
              Extensions, discoveries and
                  other additions                     7         --       --        4       11        37         --       4       41
              Production                             (9)        (8)      (3)      (1)     (21)      (56)       (12)     --      (68)
                                                    ---        ---       --       --      ---      ----        ---     ---     ----
         Balance December 31, 1997                   47         81       25       11      164       265        189      46      500
                                                    ===        ===       ==       ==      ===      ====        ===     ===     ====

         Proportional interest in
              equity affiliate's reserves
                  December 31, 1996                  22         --       --        3       25       172         --      13      185
                  December 31, 1997                  22         --       --        3       25       175         --      15      190
Proved developed reserves -
         December 31, 1995(1)                        45         50       --       12      107       329        156      65      550
         December 31, 1996(1)                        26         45       20       --       91       183        161      --      344
         December 31, 1997                           28         33       25       11       97       166        147      --      313
         Proportional interest in
              equity affiliate's reserves
                  December 31, 1996                  20         --       --        3       23       164         --      13      177
                  December 31, 1997                  20         --       --        2       22       142         --      14      156

</TABLE>


      (1)Includes 1 million  barrels of oil and 3 billion  cubic feet of natural
        gas held for sale at December  31, 1996,  and 12 million  barrels of oil
        and 57 billion  cubic feet of natural gas held for sale at December  31,
        1995 (see Note 11).

     The  following  presents  the  company's  barrel of oil  equivalent  proved
developed and undeveloped  reserves based on approximate  relative heating value
(6 MCF equals 1 barrel).
<TABLE>
<CAPTION>

                                                            North                          Other
     (Millions of equivalent barrels)        Domestic        Sea         China         International      Total

     <S>                                        <C>          <C>           <C>             <C>             <C>           
     December 31, 1995(1)                       152           94           30              24              300
     December 31, 1996(1)                        96          118           28              14              256
     December 31, 1997                           91          112           25              19              247

     Proportional interest in
         equity affiliate's reserves
              December 31, 1996                  51           --           --               5               56
              December 31, 1997                  52           --           --               5               57
</TABLE>

      (1)Includes 2 million  barrels of oil equivalent and 21 million barrels of
        oil equivalent held for sale at December 31, 1996 and 1995, respectively
        (see Note 11).

29.      Costs Incurred in Crude Oil and Natural Gas Activities

     Total  expenditures,  both  capitalized  and  expensed,  for  crude oil and
natural gas property acquisition, exploration and development activities for the
three years ended December 31, 1997, are reflected in the following table:
<TABLE>
<CAPTION>


                                                              Property
                                                             Acquisition         Exploration         Development
     (Millions of dollars)                                    Costs(1)            Costs(2)            Costs(3)     

     <S>                                                         <C>                <C>                <C>
     1997 -
         Proprietary costs -
              Domestic                                           $ 29               $ 31               $  45
              North Sea                                            --                 15                  86
              China                                                --                 26                   8
              Other international                                   2                 13                  13
                                                                 ----              -----               -----
                  Total                                          $ 31               $ 85               $ 152
                                                                 ====              =====               =====

         Proportional interest in equity affiliate's costs -
              Domestic                                           $  6               $  6               $  25
              Other international                                  --                 --                   2
                                                                 ----               ----               -----
                  Total                                          $  6               $  6               $  27
                                                                 ====               ====               =====

     1996 -
         Proprietary costs -
              Domestic                                           $  6              $  53               $  99
              North Sea                                            --                 49                  21
              China                                                 1                  6                  25
              Other international                                  --                  9                  10
                                                                 ----              -----               -----
                  Total                                          $  7               $117                $155
                                                                 ====               ====                ====

     1995 -
              Proprietary costs -
              Domestic                                            $84              $  58                $128
              North Sea                                             7                 28                  23
              China                                                 1                  2                  82
              Other international                                   1                 11                  10
                                                                 ----              -----               -----
                  Total                                           $93              $  99                $243
                                                                  ===              =====                ====
</TABLE>


      (1)Includes $29 million applicable to purchases of reserves in place in
        1995.

      (2)Exploration  costs include delay rentals,  exploratory  dry holes,  dry
        hole and bottom hole  contributions,  geological and geophysical  costs,
        costs  of  carrying  and  retaining   properties,   etc.,   and  capital
        expenditures,  such  as  costs  of  drilling  and  equipping  successful
        exploratory wells, etc.

      (3)Development  costs  include  costs  incurred to obtain access to proved
        reserves  (surveying,  clearing ground,  building roads, etc.), to drill
        and  equip  development  wells and to  acquire,  construct  and  install
        production  facilities and improved recovery systems.  Development costs
        also include costs of developmental dry holes.

30.      Supplementary Mineral Ore Reserve and Price Data (Unaudited)

     The following table presents selected  statistics  related to the company's
mineral operations.  Mineral reserves presented in the following table represent
those  estimated  quantities  of proved and probable ore that,  under  presently
anticipated  conditions,  may be  profitably  recovered  and  processed  for the
extraction of their mineral  content.  Future  production of these  resources is
dependent  on  many  factors,   including  market  conditions  and  governmental
regulations.
<TABLE>
<CAPTION>

(Thousands of tons)                                1997         1996          1995         1994         1993
-------------------                                ---------------------------------------------------------

<S>                                                <C>          <C>          <C>          <C>          <C>    
Proved and probable (demonstrated)
     reserves, December 31 -
         Coal(1)                                   506,000      810,400      833,700      864,200      887,900
         Heavy minerals                            6,500(2)       5,500        5,700        6,000        8,000
Production -
         Coal                                       32,100       31,300       31,100       25,600       23,300
         Heavy minerals                                234          149          238          268          263
Average market price (per ton) -
         Coal                                        $8.93       $10.48       $10.12       $10.73       $13.78
         Heavy minerals                             127.20       142.60       104.40        85.43        69.47
</TABLE>

      (1)The company withdrew from the coal business in 1998.  See Management's 
        Discussion and Analysis and Note 11.

      (2)Represents  177 million tons of sand  containing 3.7% heavy minerals in
        Western Australia. The percentages of valuable heavy minerals within the
        heavy-mineral   concentrate  are  4.5%  rutile,  61.3%  ilmenite,   3.3%
        leucoxene and 11.1% zircon.


31.      Quarterly Financial Information (Unaudited)

     A summary of quarterly  consolidated results for 1997 and 1996 is presented
below. Refer to Management's  Discussion and Analysis for information about 1997
and 1996 special items.

<TABLE>
<CAPTION>
                                                                                                Diluted Earnings per
                                                               Income (Loss)         Net                Common Share       
                                               Operating      From Continuing      Income        Continuing           Net
                                    Sales       Profit          Operations         (Loss)        Operations         Income

<S>                               <C>            <C>               <C>              <C>            <C>             <C>   
1997 Quarter Ended -
     March 31                     $  384         $ 83              $ 58             $ 70           $1.21           $1.45
     June 30                         335           54                37               42             .76             .87
     September 30                    324           57                31               37             .65             .77
     December 31                     345           62                35               45             .74             .95
                                  ------         ----              ----             ----           -----           -----
         Total                    $1,388         $256              $161             $194           $3.36           $4.04
                                  ======         ====              ====             ====           =====           =====

1996 Quarter Ended -
     March 31                     $  365         $ 65              $ 35             $ 48           $ .69           $ .94
     June 30                         379           62                37               51             .73            1.01
     September 30                    389           67                46               62             .94            1.27
     December 31                     433           95                46               59             .94            1.21
                                  ------         ----              ----             ----           ------          -----
         Total                    $1,566         $289              $164             $220           $3.30           $4.43
                                  ======         ====              ====             ====           ======          =====

</TABLE>


         The company's  common stock is listed for trading on the New York Stock
Exchange and was held by approximately 11,300 stockholders of record at year-end
1997.  The ranges of sales  prices and  dividends  declared  during the last two
years are as follows:

                                      Market Prices
                         --------------------------------------- 
                                                                     Dividends
                                 1997               1996             per Share 
                         ------------------  ------------------   --------------
                         High       Low       High         Low     1997     1996
                         -------------------------------------------------------

Quarter Ended -
     March 31                75     61 7/8    65 3/4      59 3/8   $.45     $.41
     June 30             67 1/4     55 1/2    67 3/8      56 5/8    .45      .41
     September 30      69 15/16   59 13/16    63 3/8      55 3/4    .45      .41
     December 31         71 1/2     60 1/8    74 1/8      60 5/8    .45      .41

<TABLE>
Five-Year Financial Summary
<CAPTION>

(Millions of dollars, except per-share amounts)       1997         1996         1995         1994         1993
----------------------------------------------        --------------------------------------------------------

<S>                                                 <C>          <C>          <C>          <C>          <C>    
Summary of Net Income (Loss)
Sales                                               $1,388       $1,566       $1,401       $1,272       $1,118
                                                    ------       ------       ------       ------       ------
Operating costs and expenses                         1,199        1,397        1,480        1,187        1,020
Interest and debt expense                               47           52           60           59           46
                                                    ------       ------       ------       ------       ------
         Total costs and expenses                    1,246        1,449        1,540        1,246        1,066
                                                    ------       ------       ------       ------       ------
                                                       142          117         (139)          26           52
Other income                                            90          132           29           27           17
Provision (benefit) for income taxes                    71           85          (52)          18           33
                                                    ------       ------       ------       ------       ------
Income (loss) from continuing operations
     before extraordinary charge and cumulative
     effect of accounting changes                      161          164          (58)          35           36
Income from discontinued operations                     33           56           27           55           41
                                                    ------       ------       ------       ------       ------
Net income (loss)                                   $  194       $  220       $  (31)      $   90       $   77
                                                    ======       ======       ======       ======       ======

Common Stock Information, per Share
Diluted earnings (loss) per common share -
     Continuing operations                          $3.36        $3.30        $(1.12)     $.67         $.74
     Discontinued operations                          .68         1.13           .52         1.07          .83
         Total                                      $4.04        $4.43      $(.60)          $1.74        $1.57
Dividends declared                                   1.80         1.64          1.55         1.52         1.52
Stockholders' equity                                30.09        28.10         27.52        29.82        29.24
Market high for the year                            75.00        74.13         64.00        51.00        56.00
Market low for the year                             55.50        55.75         44.00        40.00        41.75
Market price at year-end                           $63.31       $72.00        $63.50       $46.25       $45.25
Shares outstanding at year-end (thousands)         47,686       48,294        51,069       51,694       51,655

Balance Sheet Information
Working capital                                       $166         $320         $189          $52         $102
Property, plant and equipment - net                  1,998        1,948        2,210        2,489        2,446
Total assets                                         3,096        3,124        3,213        3,696        3,506
Long-term debt                                         552          626          632          673          590
Total debt                                             579          663          735          993          859
Stockholders' equity                                 1,440        1,367        1,416        1,543        1,512

Cash Flow Information
Net cash provided by operating activities              569          645          369          356          427
Cash capital expenditures                              341          392          484          410          449
Dividends paid                                          85           83           79           78           73
Purchase of treasury stock                             $60         $195          $45          $--          $--

Ratios and Percentage
Current ratio                                          1.3          1.7          1.3          1.1          1.1
Average price/earnings ratio                          16.2         14.7           NM         26.1         31.1
Total debt to total capitalization                      29%          33%          34%          39%          36%

Employees
Total wages and benefits                              $285         $289         $314         $319         $319
Number of employees at year-end                      3,746        3,851        3,976        5,524        5,812

</TABLE>

<TABLE>
Six-Year Operating Summary
<CAPTION>

                                        1997          1996         1995         1994         1993         1992
                                        ----------------------------------------------------------------------
<S>                                   <C>           <C>          <C>          <C>          <C>          <C>
Exploration and Production
    Net proprietary production of
      crude oil and condensate -
       (thousands of barrels per day)
              Domestic                  24.2          30.6         28.9         25.5         27.8         25.5
              North Sea                 23.4          30.9         36.7         34.3         16.7         16.0
              China                      8.8           3.7           --           --           --           --
              Other international         .5           3.4          4.8          7.5          8.7          9.0
                                      ------        ------       ------       ------       ------       ------
                  Total                 56.9          68.6         70.4         67.3         53.2         50.5

Average price of crude oil sold
    (per barrel) -
              Domestic                $18.53        $19.36       $15.69       $14.64       $15.76       $18.17
              North Sea                18.77         19.08        16.31        15.15        15.90        18.71
              China                    17.71         19.53           --           --           --           --
              Other international      18.59         17.69        15.21        13.79        14.80        16.83
                  Average             $18.51        $19.16       $15.99       $14.81       $15.64       $18.11
Proprietary natural gas sales
    (MMCF per day)                       184           281          291          271          286          296
Average price of natural gas
    sold (per MCF)                     $2.56         $2.12        $1.52        $1.76        $1.92        $1.56

Net exploratory wells drilled -
         Productive                     2.65          4.91         3.71         9.61         2.22         2.59
         Dry                            4.42          3.52         9.16         8.47        10.09         5.53
                                      ------        ------       ------       ------       ------       ------
                  Total                 7.07          8.43        12.87        18.08        12.31         8.12

Net development wells drilled -
         Productive                     9.78         21.33        40.86        22.27        43.90        27.26
         Dry                              --          1.04         2.95         4.63         2.33         3.05
                                      ------        ------       ------       ------       ------       ------
                  Total                 9.78         22.37        43.81        26.90        46.23        30.31

Undeveloped net acreage (thousands) -
         Domestic                        319           265          472          499          523          620
         North Sea                       391           428          358          363          243          184
         China                         2,184           925          341          282           --           --
         Other international          10,124           927        1,424        1,463        2,087          401
                                      ------        ------       ------       ------       ------       ------
                  Total               13,018         2,545        2,595        2,607        2,853        1,205

Developed net acreage (thousands) -
         Domestic                        155           209          537          542          539          549
         North Sea                        24            33           22           21           21           18
         China                            19            19           19           19           19           --
         Other international             104           104          159          165          180          187
                                      ------        ------       ------       ------       ------       ------
                  Total                  302           365          737          747          759          754

Estimated proved reserves
    (millions of equivalent barrels)     247           256          300          332          317          302

Chemicals
Industrial and specialty chemical
    sales (thousands of tons)            488           446          445          381          331          314

</TABLE>


Item 7.       Financial Statements, Pro Forma Financial Information and Exhibits

              (c)        Exhibits

              23.0       Consent of Independent Public Accountant

              27.0       Financial Data Schedule




                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned hereunto duly authorized.


                                                KERR-MCGEE CORPORATION



                                           By: (Deborah A. Kitchens)
                                               ---------------------            
                                                Deborah A. Kitchens
                                                Vice President and Controller

Dated: November 13, 1998
       -----------------

<PAGE>



                                  EXHIBIT INDEX


     Exhibit No.    Description
     -----------    -----------

         23.0       Consent of Independent Public Accountant

         27.0       Financial Data Schedule
[{"type": "8-K", "sequence": "1", "description": "CURRENT REPORT", "secsgml_size_bytes": 226193}]
{"company-data": {"conformed-name": "KERR MCGEE CORP", "cik": "0000055458", "assigned-sic": "1311", "irs-number": "730311467", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "001-03939", "film-number": "98746657"}, "business-address": {"street1": "KERR MCGEE CTR", "street2": "123 ROBERT S KERR", "city": "OKLAHOMA CITY", "state": "OK", "zip": "73102", "phone": "4052701313"}, "mail-address": {"street1": "P O BOX 25861", "city": "OKLAHOMA CITY", "state": "OK", "zip": "73125"}, "former-company": {"former-conformed-name": "KERR MCGEE OIL INDUSTRIES INC", "date-changed": "19671227"}}
SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    Form 8-K

                                 CURRENT REPORT

                     Pursuant to Section 13 or 15(d) of the

                         Securities Exchange Act of 1934

                                  June 8, 1998
               (Date of Report - Date of earliest event reported)

                             KERR-MCGEE CORPORATION
             (Exact name of registrant as specified in its charter)

            Delaware                 1-3939                     73-0311467     
            (State of       (Commission File Number)           (IRS Employer
         Incorporation)                                   Identification No.)

    Kerr-McGee Center
    Oklahoma City, Oklahoma                                       73125        
(Address of principal executive offices)                        (Zip Code)

                                 (405) 270-1313
                         (Registrant's telephone number)

Item 5.       Other Events

         The  company  committed  to  formal  plans  for the  sale  of its  coal
operations in the second quarter of 1998 and began  reporting coal operations as
discontinued  operations.  The  company  hereby  incorporates  by  reference  in
Attachment A the restated  financial  information and statements at December 31,
1997, 1996 and 1995 and for the years then ended.

                                  ATTACHMENT A

Management's Discussion and Analysis

Results of Consolidated Operations

     Net income (loss) and per-share  amounts for each of the three years in the
period ended December 31, 1997, were as follows:

     (Millions of dollars, except per-share amounts)    1997    1996    1995
     -----------------------------------------------    ----    ----    ----

     Net income (loss)                                  $194    $220   $(31)
     Income from continuing operations
         excluding special items                         151     174     88
     Earnings (loss) per share -
         Net income (loss) -
                  Basic                                 4.06    4.45   (.60)
                  Diluted                               4.04    4.43   (.60)
         Income from continuing operations
              excluding special items -
                  Basic                                 3.17    3.52   1.70
                  Diluted                               3.15    3.50   1.70

     Net income  (loss) was affected by a number of special items in each of the
years. In 1997,  special items were principally  nonoperating that increased net
income by $10 million. The 1996 special items resulted in a charge to net income
of $10 million and were both operating and nonoperating.  In 1995, special items
related primarily to the company's adoption of Statement of Financial Accounting
Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived  Assets to be Disposed Of." The following table reconciles income
from continuing operations excluding special items to net income:
(Millions of dollars)                                   1997       1996       1995
     ---------------------                                   ----       ----       ----
Net income from continuing operations excluding
         special items                                       $151       $174      $  88
                                                             ----       ----      -----
     Special items, net of income taxes -
         Gains on the sale of equity securities                12         15         --
         Settlements with insurance carriers                    8         44         --
         Gains on the sale of nonstrategic oil and
              gas properties                                    4          8         --
         Net provision for environmental reclamation
              and remediation of inactive sites               (13)       (28)       (16)
         Pending/settled litigation                            (1)       (21)        --
         Asset impairment                                      --        (16)      (125)
         Restructuring                                         (1)        (7)        (4)
         Other, net                                             1         (5)        (1)
                                                            -----       -----      -----
              Total                                            10        (10)      (146)
                                                            -----       -----      -----

     Income from discontinued operations,
         net of income taxes                                   33         56         27
                                                            -----     ------      -----

     Net income (loss)                                       $194       $220       $(31)
                                                             ====       ====       ====
The merger of the company's  North American  onshore  properties into Devon
Energy Corporation  (Devon) was effective December 31, 1996. This merger affects
the comparability of the periods  presented since the company's  approximate 31%
investment in Devon is accounted for by the equity method (see Note 4). In 1995,
the  company  completed  the  sale  of  substantially  all of its  refining  and
marketing operations and completed the sale of the remaining assets in 1996. The
sales of the coal  operations  were  completed in 1998.  Therefore,  all amounts
related  to  refining  and  marketing  and  coal are  shown in the  Consolidated
Statement of Income as discontinued operations.
     Income from continuing operations excluding special items for 1997 declined
$23 million from the prior year,  due to declines in  operating  profit for both
business units.  Excluding special items,  exploration and production  operating
profit for 1997 was 25% lower than the prior year,  while chemical  results were
lower by 7%. The $86 million increase in 1996 income from continuing  operations
excluding  special  items,  compared with 1995, was primarily due to oil and gas
exploration  and  production  results  that more than  doubled the prior  year's
results,  partially  offset by a 26% decline in earnings from the chemical unit.
Operating profit excluding special items was $262 million, $326 million and $235
million for 1997, 1996 and 1995, respectively.

     Following is a discussion  of the major  changes in various  items shown in
the Consolidated Statement of Income.

     Consolidated sales from continuing  operations were $1.4 billion,  compared
with $1.6 billion for 1996 and $1.4  billion for 1995.  Sales for 1997 were less
than the prior year due to lower crude oil prices and volumes, lower natural gas
volumes  and  lower  average  prices  for  titanium  dioxide  pigment.   Primary
contributors  to the decline in oil and gas volumes were the merger of the North
American onshore properties into Devon,  divestitures of nonstrategic properties
and  significantly  lower sales of natural  gas  purchased  from third  parties.
Partially  offsetting  these  declines  were  higher  prices for natural gas and
increased  pigment  volumes.  The  increase  in 1996  sales  over 1995  resulted
primarily  from  higher  crude oil and  natural  gas prices and higher  sales of
purchased  third-party  natural  gas,  partially  offset by declines in titanium
dioxide pigment sales prices and lower crude oil volumes.

     Costs and  operating  expenses  were $739  million,  $804  million and $745
million for 1997,  1996 and 1995,  respectively.  The 1997 amount was lower than
the prior  year,  primarily  due to the  absence of North  American  onshore and
divested oil and gas properties and  significantly  lower volumes of natural gas
purchased for resale,  partially offset by higher  production costs for pigment.
Costs and  operating  expenses for 1996 were higher than 1995,  primarily due to
increased  purchases of natural gas for resale and higher  feedstock and utility
costs for titanium dioxide pigment.

     Following are general and administrative expenses for 1997, 1996 and 1995:
(Millions of dollars)                                1997       1996      1995
     ---------------------                                ----       ----      ----
General and administrative expenses
         excluding special items                          $109       $106      $113
                                                          ----       ----      ----
     Special items -
         Net provision for environmental reclamation
              and remediation of inactive sites             20         43        27
         Pending/settled litigation                          2         29        --
         Restructuring                                       2         10         7
         Other, net                                          3          9        --
                                                          ----      -----      ----
                  Total                                     27         91        34
                                                          ----      -----      ----

     General and administrative expenses                  $136       $197      $147
                                                          ====       ====      ====
Net provisions for  environmental  reclamation  and remediation of inactive
sites primarily represent additional  provisions  established for the removal of
low-level radioactive materials from the company's inactive facility and offsite
areas  in West  Chicago,  Illinois.  Restructuring  represents  charges  for the
relocation  of the  exploration  and  production  unit to  Houston,  Texas,  and
severance associated with the divestiture program and the Devon merger.

     Asset  impairments  totaled $25 million in 1996 and related  principally to
certain  exploration  and  production  properties  in the Gulf of  Mexico.  This
compares with $204 million for  continuing  operations in 1995,  which  resulted
from the company's  adoption of FAS 121 and the writedowns  associated  with the
oil and gas divestiture program (see Note 11).

     Exploration costs for 1997, 1996 and 1995 were $65 million, $74 million and
$80 million, respectively. Lower dry hole costs in the North Sea, offset in part
by higher  costs in China,  were the primary  reason for the reduced 1997 costs.
Also  contributing to the reduction was lower  undeveloped  lease  amortization,
partially offset by higher geophysical cost. In 1996, the company had lower Gulf
of Mexico  undeveloped  lease  amortization and lower geological and geophysical
costs, partially offset by higher dry hole expense, compared with 1995.

     Interest and debt expense  totaled $47 million in 1997, $52 million in 1996
and $60 million in 1995.  Decreased debt was the principal  reason for the lower
1997 expense, compared with the prior year. The decrease in 1996 expense was due
to both lower debt and lower average borrowing costs.

     Other income was as follows for each of the years in the three-year  period
ended December 31, 1997:

     (Millions of dollars)                         1997      1996       1995
     ---------------------                        -----     -----      -----

     Other income excluding special items         $  47     $  29      $  27

     Special items -
         Gains on sales of equity securities         18        23         --
         Settlements with insurance carriers         12        67         --
         Gains on the sale of nonstrategic
              oil and gas properties                  6        13         --
         Other, net                                   7        --          2
                                                  -----     -----      -----
                  Total                              43       103          2
                                                  -----     -----      -----

     Other income                                 $  90      $132      $  29
                                                  =====      ====      =====

     Equity  income from Devon was the primary  reason for the increase in other
income  excluding  special  items for 1997  compared  with the prior year.  Also
contributing were lower foreign currency  transaction losses and higher interest
income.

Transactions Subsequent to Year-End 1997

     The company  continuously  reviews each  business unit in an effort to find
innovative ways to maximize shareholder value through existing operations and/or
new opportunities  worldwide.  In a strategy approved by the Board of Directors,
the company's future efforts will be concentrated on oil and gas exploration and
production and titanium dioxide pigments, the principal chemical business.

     The company announced its intent to exit the coal business in January 1998.
The sales were  completed  in mid-1998 for $600  million  cash,  resulting in an
after-tax  gain of $257 million.  Therefore,  coal  operations  are presented as
discontinued  operations  in all  periods.  The  gain on the  sale  and the cash
proceeds  will be  reflected  in the 1998  Consolidated  Statement of Income and
Consolidated Statement of Cash Flows.

     Over the  three-year  period  ended  December 31,  1997,  coal  contributed
operating profit excluding  special items and net cash flow (after-tax cash flow
less cash capital expenditures) of $185 million and $150 million,  respectively.
The absence of the coal  operations  will  contribute to a higher  effective tax
rate due to the absence of statutory allowances for coal depletion.

     The company  also  disposed of its  ammonium  perchlorate  operation in the
first  half of  1998 in a $39  million  cash  sale.  The  gain on the  sale  was
immaterial.  In January 1998, the company signed a letter of intent to negotiate
the sale of  substantially  all of the  remaining  electrolytic  and specialty -
chemical businesses. The discussions were terminated mid-1998.

     Pigment  production  capacity was  significantly  expanded in 1998 with the
acquisition  of  an  initial  80%  interest  in  Bayer  AG's  European   pigment
operations.  The company has the option to acquire the  remaining  20%  interest
over a two-year period  beginning in 2001. The $97 million cash  transaction was
effective March 31, 1998.

     The company  acquired  additional  interest in the United Kingdom sector of
the  North Sea with the  acquisition  of the  North  Sea  assets of Gulf  Canada
Resources  Limited (Gulf  Canada) for Cdn $590 million  (U.S.  $419 million) and
assumed debt.  The  transaction  was effective  March 31, 1998.  The  additional
production  from  these   properties  will  increase  the  company's  North  Sea
production and reserves in excess of 80% and 75%, respectively, of the company's
North Sea average production rates and proved reserves at year-end 1997.

     In the 1998 fourth  quarter,  the company  and Oryx Energy  Company  (Oryx)
announced  a  strategic  merger,  which  will  create the  fourth  largest  U.S.
independent oil and gas exploration and production  company.  Oryx  shareholders
will receive 0.369 shares of newly issued Kerr-McGee common stock for each share
of Oryx common stock. Approximately 39 million shares of Kerr-McGee common stock
will be  issued  to the  Oryx  stockholders  in  total,  bringing  total  shares
outstanding to approximately  86 million.  The transaction will be accounted for
as a pooling of interest and be tax-free to Oryx stockholders. The existing Oryx
debt (approximately $1.3 billion) will become the company's obligation. The Oryx
7-1/2%  convertible  debentures due 2014 will become  convertible into shares of
Kerr-McGee  common stock at a conversion  rate  adjusted to reflect the exchange
ratio. The combined companies will have total capitalization of approximately $6
billion and a Board of Directors numbering 14. Nine of the of the directors will
be from the company's  current board and five from the Oryx board. The merger is
expected  to be  consummated  in early  1999,  pending  shareholder  and certain
regulatory approvals.

     Each of these  transactions are independent  steps in an ongoing  strategic
plan. Management  anticipates that each of these transactions will have positive
long-term impacts on operating profit, cash flow and liquidity that will enhance
shareholder value.

Segment Operations

     Operating  profit from each of the company's  segments is summarized in the
following table:

     (Millions of dollars)                             1997     1996      1995
     ---------------------                             ----     ----     -----

     Operating profit excluding special items -
         Exploration and production                    $178     $236      $113
         Chemicals                                       84       90       122
                                                       ----     ----      ----
              Total                                     262      326       235
     Special items                                       (6)     (37)     (210)
                                                       ----     ----      ----
     Operating profit                                  $256     $289      $ 25
                                                       ====     ====      ====

Exploration and Production
     The company merged its North American  onshore  exploration  and production
assets into Devon  effective  December 31, 1996, and accounts for the investment
on the  equity  basis.  Therefore,  income  from Devon is not  included  in 1997
operating profit, and the company's proportionate interest in Devon's volumes is
not included in the 1997 production and sales shown in the following table.
(Millions of dollars, except per-unit amounts)           1997        1996        1995
                                                            ------      ------      ------
Sales                                                    $628        $874        $690
     Operating profit excluding special items                 $178        $236        $113
     Special items                                              (3)        (32)       (210)
     Operating profit (loss)                                  $175        $204        $(97)
     Proprietary crude oil and condensate produced
         (thousands of barrels per day)                         57          69          70
     Average price of crude oil sold (per barrel)           $18.51      $19.16      $15.99
     Proprietary natural gas sold (MMCF per day)               184         281         291
     Average price of natural gas sold (per MCF)             $2.56       $2.12       $1.52
Special  items in 1997  consisted  primarily  of  additional  costs for the
unit's  restructuring and relocation to Houston. The 1996 special items were $22
million for asset  impairments  and $10 million  for  restructuring,  due to the
December 1996 merger of the North American onshore properties into Devon and the
announcement of the relocation to Houston. The 1995 special items related to FAS
121 asset  impairments  and  writedowns  associated  with the  program to divest
nonstrategic and marginal properties and restructuring charges.

     Equity  accounting for the merged properties and lower average sales prices
for crude oil,  partially  offset by increased  sales prices for natural gas and
lower  exploration  expenses,  were the primary reasons for lower 1997 operating
profit excluding  special items.  Improvement in 1996 operating profit excluding
special items,  compared with 1995, resulted primarily from increases of 20% and
39% in the  company's  average  sales  prices  for  crude oil and  natural  gas,
respectively, and a decrease in exploration expenses.

Chemicals
     Chemical operating profit and sales were as follows.  Special items in 1997
were  primarily  for  the  writeoff  of  obsolete  equipment  and  in  1996  for
impairments  and  shutdown  costs  for  a  crosstie-treating  facility  and  the
elimination of a product line at a specialty plant.

     (Millions of dollars)                           1997     1996     1995
     ---------------------                          -----    -----    -----

     Sales                                          $ 760    $ 692     $707

     Operating profit excluding special items       $  84    $  90     $122
         Special items                                 (3)      (5)      --
                                                    -----    -----    -----

     Operating profit                               $  81    $  85     $122
                                                    =====    =====     ====

     The  increase  in 1997  sales,  compared  with 1996,  was due to  increased
titanium  dioxide  pigment and ammonium  perchlorate  sales  volumes.  Partially
offsetting  these increases were lower average  pigment prices.  Although prices
strengthened  considerably in the last half of the year, average prices received
in 1997 were less than those received in the prior year. The higher 1997 pigment
volumes  resulted  from  the  completion  of  the  expansion  at  the  Hamilton,
Mississippi,  plant and a full  year's  production  from the 1996  expansion  in
Western  Australia.  The  decrease in 1996 sales from 1995  resulted  from lower
pigment sales prices.  Operating profit in both 1997 and 1996 was also adversely
affected by higher per-unit  production costs for pigment than in the respective
prior years.

Financial Condition

     (Millions of dollars)                        1997      1996      1995
     ---------------------                      ------    ------    ------

     Current ratio                                 1.3       1.7       1.3
     Working capital                            $  166    $  320    $  189
     Total debt                                    579       663       735
     Total debt less cash                          396       542       648
     Stockholders' equity                       $1,440    $1,367    $1,416
     Total debt to total capitalization             29%       33%       34%
     Floating-rate debt to total debt               11        66        64

Cash Flow
     Net  cash  provided  by  operating  activities  was $569  million  in 1997,
compared with $645 million in 1996 and $369 million in 1995.

     The  decrease  in 1997  resulted  primarily  from lower net  income,  lower
noncash  charges,  higher cash  environmental  expenditures  and lower  deferred
income  taxes,  partially  offset by  working  capital  and other  changes  that
increased  net cash  provided by  operating  activities.  Cash flow  provided by
operating activities in 1997 was also adversely affected by the company's merger
of  its  North  American   onshore  oil  and  gas  properties   into  Devon,  as
undistributed earnings from equity affiliates represent a noncash item.

     The increase in 1996 net cash  provided by operating  activities,  compared
with 1995,  was primarily  attributable  to the company's  record net income and
temporary  changes in working  capital and other,  which decreased 1995 net cash
provided by operating  activities  by $211  million.  Although a net loss of $31
million was incurred in 1995, the special charges,  totaling $260 million before
income taxes, were all noncash and did not adversely affect net cash provided by
operations.

     In each of the  years  1997,  1996 and 1995,  cash  provided  by  operating
activities was supplemented by other sources of cash that were used primarily to
reduce debt and purchase the company's common stock (see Note 14). In 1997, cash
available increased $21 million from the sale of equity securities,  $18 million
from  the  sale  of  nonstrategic   and  marginal   exploration  and  production
properties, $17 million from the sale of other assets and $21 million related to
insurance  settlements.  During 1996, the company  received cash proceeds of $48
million from the divestiture of nonstrategic, marginal and other exploration and
production properties; $43 million related to insurance settlements; $29 million
from the sale of equity  securities;  $13 million from the sale of the remaining
refining and  marketing  assets;  and $11 million from the sale of other assets,
including the company's West Virginia coal mining  operation.  Proceeds from the
sale of  substantially  all of the company's  refining and marketing  operations
increased cash available by $419 million in 1995.

     Total debt  declined to $579 million at year-end  1997 from $735 million at
year-end  1995.  In 1995,  the company's  Board of Directors  authorized a stock
purchase  program of up to $300  million.  The program was  completed  in August
1997.  Expenditures  were $60  million  in 1997,  $195  million  in 1996 and $45
million  in 1995,  with a total of 4.8  million  shares  purchased  through  the
program.

     On January 14, 1997, the company's Board of Directors  approved an increase
in the quarterly dividend payable April 1, 1997, to $.45 per share from $.41 per
share.  In 1995, the Board increased the quarterly  dividend  payable January 2,
1996, to $.41 per share from $.38 per share.

Liquidity
     The  company's  strong  balance  sheet  reflects  a solid  working  capital
position and low debt to  capitalization.  The company's debt has been rated "A"
or "A-" by various rating agencies, resulting in low debt costs. At December 31,
1997,  the company's net working  capital  position was $166 million,  a decline
from the 1996  year-end  position.  The merger of the company's  North  American
onshore exploration and production  properties  contributed to the lower working
capital position since certain components of working capital were converted into
the Devon  equity  investment.  The 1996 net  working  capital  position of $320
million was an increase of $131 million from the prior year.  This  increase was
the  result of the other  cash  inflows  discussed  previously,  which were used
primarily to repay  short-term  borrowings and fund the company's stock purchase
program.

     The  percentage of total debt to total  capitalization  was 29% at December
31, 1997, 33% at December 31, 1996, and 34% at year-end 1995.  This  improvement
is the direct result of the company's  repayment of debt, which more than offset
the effect of the stock purchase program on total capitalization.

     In October 1997, the company  replaced the majority of its then outstanding
floating-rate  debt with $300  million of  fixed-rate  securities.  The  company
issued $150 million of 7.125%  (effective rate 7.01%) debentures due October 15,
2027,  and $150 million of 6.625%  (effective  rate 6.54%) notes due October 15,
2007.

     Additionally,  the company and/or its subsidiaries  have several  revolving
credit  agreements.  At year-end 1997, $37 million was outstanding  under one of
the agreements with interest payable at varying rates. At December 31, 1997, the
company  had unused  lines of credit and  revolving  credit  facilities  of $714
million.  Of this  amount,  $340 million and $265 million can be used to support
the commercial paper borrowings of Kerr-McGee Credit  Corporation and Kerr-McGee
Oil (U.K.) PLC, respectively, both wholly owned subsidiaries.

     Two  revolving  credit  agreements  were amended in 1997.  The $105 million
revolving  credit  agreement  between  the  company's  wholly  owned  subsidiary
Kerr-McGee China Petroleum Ltd. and several banks was extended to March 6, 2000.
The $37 million  outstanding  at  year-end  1997 was under this  agreement.  The
revolving  credit  agreement  among the  company,  its wholly  owned  subsidiary
Kerr-McGee  Oil (U.K.) PLC and several  banks was amended  from $230  million to
$225 million and separated into two loan facilities. Under one arrangement, $150
million may be borrowed  through April 28, 2000. Under the other, $75 million is
available  through April 28, 1998,  with the provision that one-year  extensions
may be requested.  Interest is payable at varying rates for all of the revolving
credit agreements.

     The company  finances capital  expenditures  through  internally  generated
funds and various  borrowings.  Cash capital  expenditures  were $341 million in
1997,  $392 million in 1996 and $484  million in 1995, a total of $1.2  billion.
During this same  period,  $1.7  billion of net cash was  provided by  operating
activities  (exclusive  of  working  capital  and  other  changes),   which  was
approximately $200 million in excess of cash capital  expenditures and dividends
paid during the period.

     Management  anticipates  that 1998  cash  capital  requirements,  currently
estimated at $520 million (including $60 million for the coal business), and the
capital  expenditures  programs  for the next  several  years can continue to be
provided  through  internally  generated funds and selective  short-term  and/or
long-term borrowings.

Market Risks

     The company is exposed to a variety of market risks,  including the effects
of movements in foreign  currency  exchange  rates,  interest  rates and certain
commodity prices.  The company addresses its risks through a controlled  program
of risk  management that includes the use of derivative  financial  instruments.
The company does not hold or issue derivative financial  instruments for trading
purposes.  See  Notes  1 and 16 to the  Consolidated  Financial  Statements  for
additional  discussion  of  the  company's  financial  instruments  and  hedging
activities.

Foreign Currency Exchange
     The  U.S.  dollar  is the  functional  currency  for  all of the  company's
operations.  It is the  company's  intent  to hedge a  portion  of its  monetary
assets,   liabilities  and  commitments   denominated  in  foreign   currencies.
Periodically,  the company  purchases  foreign  currency  forward  contracts  to
provide funds for operating and capital  expenditure  requirements  that will be
denominated  in foreign  currencies,  primarily  Australian  dollars and British
pounds  sterling.  These  contracts  generally have durations of less than three
years.  The company also enters into forward  contracts to sell various  foreign
currencies  as  hedges,  principally  for  accounts  receivable  generated  from
titanium  dioxide  pigment  sales  denominated  in  foreign  currencies.   These
contracts are principally  for European  currencies and generally have durations
of less than a year.  Since these  contracts  qualify as hedges and correlate to
currency movements, any gains or losses resulting from exchange rate changes are
deferred and recognized as adjustments of the  transaction  when the hedged item
occurs.

     At year-end  1997,  the company's  derivative  financial  instruments  were
comprised only of foreign currency forward contracts. Following are the notional
amounts at the contract exchange rates,  weighted-average  contractual  exchange
rates and estimated  fair value by contract  maturity for open foreign  currency
contracts at year-end 1997. All amounts are U.S. dollar equivalents.
Dec. 31, 1997
                                                              Notional      Weighted-Average       Estimated Fair
     (Millions of dollars, except average contract rate)       Amount         Contract Rate             Value
Forward contracts to purchase (sell) currencies -
         Maturing in 1998 -
              Australian dollar                                   $63              .7507                 $55
              British pound sterling                               12             1.5897                  12
              German mark                                          (3)            1.7721                  (3)
              British pound sterling                               (1)             .6137                  (1)
              Belgian franc                                        (1)           36.0382                  (1)
         Maturing in 1999 -
              Australian dollar                                    39              .7377                  35
Interest Rates
     The company's  exposure to changes in interest  rates relates  primarily to
long-term debt obligations.  At year-end 1997, the company's  long-term debt was
comprised of 93%  fixed-rate  instruments,  which minimize  earnings  volatility
related to interest  expense.  The company  does not  currently  participate  in
interest rate-related derivative financial instruments.

     The table below  presents  principal  amounts and related  weighted-average
interest rates by maturity date for the company's  long-term  debt  obligations.
All borrowings are in U.S. dollars.
There-            Fair Value
(Millions of dollars)                     1998     1999     2000     2001     2002    after    Total    12/31/97
---------------------                     ----------------------------------------------------------------------
Fixed-rate debt -
     Principal amount                        $2      $8      $10      $12      $10    $475     $517       $632
     Weighted-average interest rate        9.49%   9.00%    9.61%    9.61%    9.61%   7.05%    7.25%
Variable-rate debt -
     Principal amount                        --      --      $37       --       --      --      $37        $37
     Weighted-average interest rate          --      --     6.04%      --       --      --     6.04%
Commodity Prices
     Although no such  contracts  were entered into during 1997, the company has
periodically  used commodity  futures and option contracts to hedge a portion of
its crude oil and natural gas sales and natural gas purchased for  operations in
order to minimize the price risks  associated  with the production and marketing
of crude oil and natural gas.  These  contracts  generally had maturities of one
year or less.  Since the contracts  qualified as hedges and  correlated to price
movements of crude oil and natural  gas,  any gain or loss from these  contracts
was explicitly deferred and recognized as part of the hedged transaction.

     In 1997,  approximately  70% of the  company's  coal  sales  resulted  from
contracts with durations of at least three years.  At year-end 1997, the average
contract price was in excess of spot prices.

Other
     As a global energy and inorganic chemical company, Kerr-McGee is subject to
the volatility of crude oil, natural gas and titanium dioxide pigment prices and
risks  associated  with  operations  outside the United States.  The company has
announced  its  intention  to  concentrate  on two primary  businesses - oil and
natural gas  exploration  and  production  and the  production  and marketing of
titanium dioxide pigments.

     Oil and gas  prices  in 1998 are  below  those  received  in 1997.  Company
management  continuously  monitors the underlying global pricing fundamentals of
these commodities and factors those conditions into its projections and economic
forecasts. In addition, more than 15% of the company's year-end 1997 proprietary
oil  production was from  Southeast  Asia,  which is in the midst of an economic
crisis.  The company is taking steps to provide  reasonable  assurance  that its
level of risk  remains  manageable,  such as  requiring  letters of credit  from
buyers when management deems appropriate.

     Pigment prices have increased from 1997 levels,  and the industry continues
to  consolidate.  Management  anticipates  that the  consolidation  trends  will
continue  in the near future and that the  company's  status as one of only four
companies that own the preferred  chloride  technology,  along with its low cost
position, will benefit operating profit, cash flow and liquidity.

Environmental Matters

     The  company's  operations  are subject to various  environmental  laws and
regulations. Under these laws, the company is subject to possible obligations to
remove or mitigate the effects on the  environment of the disposal or release of
certain  chemical,  petroleum or  low-level  radioactive  substances  at various
sites,  including  sites that have been  designated  Superfund sites by the U.S.
Environmental   Protection   Agency   (EPA)   pursuant   to  the   Comprehensive
Environmental  Response,  Compensation  and Liability Act of 1980  (CERCLA),  as
amended. At December 31, 1997, the company had received notices that it has been
named a potentially  responsible  party (PRP) with respect to the remediation of
16 existing  EPA  Superfund  sites and may share  liability  at certain of these
sites.  In 1996,  the company  signed a Consent Decree with respect to a site at
Slidell,  Louisiana.  In  addition,  the company  and/or its  subsidiaries  have
executed consent orders,  operate under a license or have reached  agreements to
perform or have performed remediation or remedial investigations and feasibility
studies on sites not included as EPA Superfund sites.

     The  company  does not  consider  the number of sites for which it has been
named a PRP to be a  relevant  measure  of  liability.  Because  of  continually
changing  environmental  laws  and  regulations,  the  nature  of the  company's
businesses,  the large number of other PRPs, the present state of the law, which
imposes joint and several liability on all PRPs under CERCLA,  and pending legal
proceedings,  the  company is  uncertain  as to its  involvement  in many of the
sites.  Therefore,  the company is unable to  reliably  estimate  the  potential
liability  and the  timing of future  expenditures  that may arise  from many of
these  environmental  sites.  Reserves have been established for the remediation
and  reclamation  of active and inactive  sites where it is probable that future
costs will be incurred and the liability is estimable.  In 1997, $41 million was
added to the reserve for active and inactive  sites.  At December 31, 1997,  the
company's reserve for these sites totaled $243 million. In addition, at year-end
1997,  the  company had  reserves  of $68  million for the future  costs for the
abandonment and removal of offshore well and production facilities at the end of
their productive lives and $23 million for the  decommissioning  and reclamation
of coal mining locations. In the Consolidated Balance Sheet, $251 million of the
total reserve is classified as a deferred credit,  and the remaining $83 million
is included in current liabilities.

     Expenditures for the environmental protection and cleanup of existing sites
for each of the last three years and for the  three-year  period ended  December
31, 1997, are as follows:

     (Millions of dollars)                   1997     1996     1995      Total
     ---------------------                   ----     ----     ----      -----

     Charges to environmental reserves       $ 94      $56     $ 61       $211
     Recurring expenses                        20       19       23         62
     Capital expenditures                      17       15       20         52
                                             ----     ----     ----      -----
         Total                               $131      $90     $104       $325
                                             ====     ====     ====      =====

     The  company  has  not  recorded  in  the  financial  statements  potential
reimbursements  from governmental  agencies or other third parties (see Notes 10
and 13).  The  following  table  reflects  the  company's  portion  of the known
estimated  cost  of  investigation  and/or  remediation  that  is  probable  and
estimable. The table includes all EPA Superfund sites where the company has been
notified it is a PRP under CERCLA and other sites for which the company believes
it had some ongoing financial involvement in investigation and/or remediation at
year-end 1997.
Total Known              Total
                                                                                    Estimated       Expenditures        Total Number
                                                                                         Cost       Through 1997     of Identifiable
Location of Site                    State of Investigation/Remediation                   (Millions of dollars)                  PRPs
EPA Superfund sites

     Milwaukee, Wis.                Executed consent decree to remediate
                                    the site of a former wood-treating
                                    facility.  Awaiting approval of proposed
                                    remedy; installed and operating a free-
                                    product recovery system                            $   19              $   7                   3

     West Chicago, Ill.,            Began cleanup of a portion of one site
     two sites outside              in 1995, and cleanup of the second site
     the facility                   began in 1997 (see Note 10).                           43                 29                   1

     Slidell, La., Chicago, Ill.,   Various stages of investigation/remediation            30                 26                 492
     and 11 sites individually                                                         ------              -----               -----
     not material                                                                          92                 62                 496
                                                                                       ------              -----               -----
     

Non-EPA Superfund sites
under consent order, license
or agreement

     West Chicago, Ill.,            Reached agreement with the City of West
     facility                       Chicago.  Decommissioning is in progress
                                    under State of Illinois supervision while
                                    awaiting state license amendment (see
                                    Note 10).  Began shipments to a
                                    permanent disposal facility in 1994.                  348                185

     Cleveland/Cushing, Okla.       Began cleanup in 1996                                  48                 36

     Cimarron, Okla.                Remediation is complete and monitoring
                                    continues.                                             36                 34
                                                                                       ------              -----
                                                                                          432                255
                                                                                       ------              -----

Non-EPA Superfund sites
individually not material                                                                 154                118
                                                                                       ------              -----

Total for all sites                                                                      $678               $435
                                                                                         ====               ====
Although  management  believes  adequate  reserves  have been  provided for
environmental  and all other known  contingencies,  it is  possible,  due to the
previously noted  uncertainties,  that additional  reserves could be required in
the future.

Other

     The use by many existing  computer  systems of a two-digit year date format
rather than four digits - the Year 2000 issue - impacts the  company's  business
systems and facilities.  In 1996, a formal program was initiated and a number of
project  teams were formed and charged with the  responsibility  of  identifying
areas of  potential  concern and  ensuring  that timely  corrective  actions are
taken. At year-end 1997, the  implementation  of new or modification of existing
business systems was approximately  two-thirds complete, and the review of plant
and facility process controls was under way. Management anticipates modification
or  replacement  of systems will be  essentially  complete by year-end 1998. The
company is also working with key suppliers, vendors and customers to ensure Year
2000  compliance.  The  ultimate  outcome  of the Year  2000  project  cannot be
guaranteed;  however,  the  company  believes  that the  program  under way will
provide a smooth  transition into the year 2000 and reduces risk to a manageable
level.  The cost of  addressing  the Year  2000  issue  is not  material  to the
consolidated results of operations or financial condition of the company.

     During 1997 and early 1998, the Financial Accounting Standards Board issued
several  pronouncements  related to  financial  statement  disclosure  that will
affect the company's 1998  financial  statement  presentation.  There will be no
effect  on net  income  as a result  of  these  pronouncements.  Following  is a
discussion of the new standards.

     FAS No. 130, "Reporting  Comprehensive  Income," establishes  standards for
the reporting and display of  comprehensive  income and its components as a part
of the basic financial statements.  At the beginning of 1998, the company had no
significant items to be reported as other comprehensive income.  However,  prior
years'  information will be presented.  The disclosures will be required for the
1998 year-end financial statements, and abbreviated information will be required
for the first quarter.

     FAS No.  131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information,"  establishes  standards  for  determining  segments and  reporting
information about a company's business segments in annual financial  statements.
Also  required  is  selected  information  about  operating  segments in interim
financial  reports  issued to  shareholders.  The  company  does not foresee any
material  change  to the  operating  segments  currently  reported  in Note  24,
"Reporting by Business Segments." However, the financial  information  presented
will differ.  Quarterly information will be presented in the first 1998 quarter,
and prior periods will be restated.

     FAS  No.   132,   "Employers'   Disclosures   about   Pensions   and  Other
Postretirement Benefits," was issued in February 1998. This statement, effective
for year-end 1998 financial  statements,  revises disclosures about pensions and
other  postretirement  benefit  plans.  It does not  change the  measurement  or
recognition of costs associated with those plans.

     In March 1998,  the  American  Institute of  Certified  Public  Accountants
issued  Statement  of  Position  (SOP) No.  98-1,  "Accounting  for the Costs of
Computer Software  Developed or Obtained for Internal Use." Amounts  capitalized
or expensed by the company for internal-use  software  projects are not expected
to differ  materially as a result of the SOP,  since the  prescribed  accounting
treatment is fairly consistent with the company's current accounting policy. The
SOP, the effect of which is to be  recognized  prospectively,  is effective  for
1999 financial statements.

Responsibility for Financial Reporting

     The company's  management is responsible  for the integrity and objectivity
of the financial data  contained in the financial  statements.  These  financial
statements have been prepared in conformity with generally  accepted  accounting
principles  appropriate  under the circumstances  and, where necessary,  reflect
informed   judgments  and  estimates  of  the  effects  of  certain  events  and
transactions based on currently available  information at the date the financial
statements were prepared.

     The  company's  management  depends  on the  company's  system of  internal
accounting  controls  to  assure  itself  of the  reliability  of the  financial
statements.  The  internal  control  system is  designed  to provide  reasonable
assurance, at appropriate cost, that assets are safeguarded and transactions are
executed  in  accordance  with  management's  authorizations  and  are  recorded
properly to permit the  preparation of financial  statements in accordance  with
generally accepted accounting principles.  Periodic reviews are made of internal
controls by the company's staff of internal  auditors,  and corrective action is
taken if needed.

     The Board of Directors reviews and monitors  financial  statements  through
its audit committee,  which is composed solely of directors who are not officers
or employees  of the company.  The audit  committee  meets with the  independent
public  accountants,   internal  auditors  and  management  to  review  internal
accounting controls, auditing and financial reporting matters.

     The independent  public accountants are engaged to provide an objective and
independent  review of the  company's  financial  statements  and to  express an
opinion  thereon.  Their  audits are  conducted  in  accordance  with  generally
accepted auditing standards, and their report is included below.

Report of Independent Public Accountants

To the Stockholders and Board of Directors of Kerr-McGee Corporation:

     We have audited the accompanying  consolidated  balance sheet of Kerr-McGee
Corporation (a Delaware corporation) and subsidiary companies as of December 31,
1997 and 1996,  and the  related  consolidated  statements  of income,  retained
earnings 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 financial position of Kerr-McGee  Corporation and
subsidiary  companies as of December 31, 1997 and 1996, and the 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.

Oklahoma City, Oklahoma,
    November 6, 1998

                               ARTHUR ANDERSEN LLP

                                                                                                   
Consolidated Statement of Income
(Millions of dollars, except per-share amounts)                           1997         1996          1995  
-----------------------------------------------                          -------      --------      -------
Sales                                                                     $1,388        $1,566       $1,401
                                                                          ------        ------       ------
Costs and Expenses
     Costs and operating expenses                                            739           804          745
     General and administrative expenses                                     136           197          147
     Depreciation and depletion                                              239           267          275
     Asset impairment                                                         --            25          204
     Exploration, including dry holes and amortization of
         undeveloped leases                                                   65            74           80
     Taxes, other than income taxes                                           20            30           29
     Interest and debt expense                                                47            52           60
                                                                         -------      --------      -------
              Total Costs and Expenses                                     1,246         1,449        1,540
                                                                         -------      --------      -------
                                                                             142           117         (139)
Other Income                                                                  90           132           29
                                                                         -------      --------      -------

Income (Loss) from Continuing Operations before Income Taxes                 232           249         (110)
Provision (Benefit) for Income Taxes                                          71            85          (52)
                                                                         -------      --------      -------
Income (Loss) from Continuing Operations                                     161           164          (58)
Income from Discontinued Operations, net of taxes of $12 in 1997,
     $18 in 1996 and $3 in 1995                                               33            56           27
                                                                         -------      --------      -------
Net Income (Loss)                                                        $   194      $    220      $   (31)
                                                                         =======      ========      =======

Earnings (Loss) per Common Share
Basic -
     Continuing operations                                               $  3.38      $   3.32       $(1.12)
     Discontinued operations                                                 .68          1.13          .52
                                                                         -------      --------      -------
              Total                                                      $  4.06      $   4.45      $  (.60)
                                                                         =======      ========      =======
Diluted -
     Continuing operations                                               $  3.36      $   3.30       $(1.12)
     Discontinued operations                                                 .68          1.13          .52
                                                                         -------      --------      -------
              Total                                                      $  4.04      $   4.43      $  (.60)
                                                                         =======      ========      =======
Consolidated Statement of Retained Earnings
(Millions of dollars, except per-share amounts)                           1997         1996          1995  
-----------------------------------------------                          -------      --------      -------
Balance at Beginning of Year                                              $1,348        $1,209       $1,320
     Net income (loss)                                                       194           220          (31)
     Dividends declared (per common share - $1.80 in 1997,
         $1.64 in 1996 and $1.55 in 1995)                                    (86)          (81)         (80)
                                                                         -------      --------      -------

Balance at End of Year                                                    $1,456        $1,348       $1,209
                                                                          ======        ======       ======
The accompanying notes are an integral part of these statements.

Consolidated Balance Sheet
(Millions of dollars)                                                                1997              1996  
---------------------                                                               --------          -------
ASSETS
Current Assets
     Cash                                                                           $    183          $   121
     Accounts receivable, net of allowance for doubtful
         accounts of $5 in both 1997 and 1996                                            274              375
     Inventories                                                                         172              218
     Deposits and prepaid expenses                                                        60               91
                                                                                    --------          -------
              Total Current Assets                                                       689              805
Investments
     Equity affiliates                                                                   273              244
     Other assets                                                                         60               74
Property, Plant and Equipment - Net                                                    1,998            1,948
Deferred Charges                                                                          76               53
                                                                                    --------          -------
              Total Assets                                                            $3,096           $3,124
                                                                                      ======           ======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
     Accounts payable                                                               $    247          $   262
     Short-term borrowings                                                                25               37
     Long-term debt due within one year                                                    2               --
     Taxes on income                                                                      36                5
     Taxes, other than income taxes                                                       17               26
     Accrued liabilities                                                                 196              155
                                                                                    --------          -------
              Total Current Liabilities                                                  523              485
                                                                                    --------          -------

Long-Term Debt                                                                           552              626
                                                                                    --------          -------

Deferred Credits and Reserves
     Income taxes                                                                        159              131
     Other                                                                               422              515
                                                                                    --------          -------
              Total Deferred Credits and Reserves                                        581              646
                                                                                    --------          -------

Stockholders' Equity
     Common stock, par value $1.00 - 150,000,000 shares authorized,
         54,120,747 shares issued in 1997 and 53,862,347 shares issued in 1996            54               54
     Capital in excess of par value                                                      346              334
     Preferred stock purchase rights                                                       1                1
     Retained earnings                                                                 1,456            1,348
     Unrealized gain on available-for-sale securities                                     --               12
     Common stock in treasury, at cost - 6,434,465 shares in 1997 and
         5,568,815 shares in 1996                                                       (363)            (306)
     Deferred compensation                                                               (54)             (76)
                                                                                    --------          -------
              Total Stockholders' Equity                                               1,440            1,367
                                                                                    --------          -------

                  Total Liabilities and Stockholders' Equity                          $3,096           $3,124
                                                                                      ======           ======
The  "successful  efforts"  method of accounting for oil and gas exploration and
production activities has been followed in preparing this balance sheet.

The accompanying notes are an integral part of this balance sheet.

Consolidated Statement of Cash Flows
(Millions of dollars)                                                               1997              1996             1995
                                                                                    ----              ----             ----
Cash Flow from Operating Activities
     Net income (loss)                                                              $194              $220             $(31)
     Adjustments to reconcile to net cash provided by operating activities -
     Deferred income taxes                                                            36                68              (51)
     Depreciation, depletion and amortization                                        271               307              334
     Asset impairment                                                                 --                25              227
     Provision for environmental reclamation and remediation of inactive sites        20                43               54
     Realized gain on available-for-sale securities                                  (18)              (23)              --
     Gain on sale of refining and marketing operations, net of income taxes           --                --               (2)
     Gain on sale of exploration and production properties                            (6)              (21)              --
     Retirements and gain on sale of other assets                                     (4)               (3)              (1)
     Noncash items affecting net income                                                1                18               50
     Changes in current  assets  and  liabilities  and other,  net of effects of
         discontinued refining and marketing operations sold -
              Decrease in accounts receivable                                        132                48               75
              (Increase) decrease in inventories                                      40                 1               (1)
              (Increase) decrease in deposits and prepaids                            13                59              (50)
              Decrease in accounts payable and accrued liabilities                   (16)              (37)            (121)
              Increase (decrease) in taxes payable                                    31               (22)             (56)
              Other                                                                 (125)              (38)             (58)
                                                                                    ----              ----            -----
                  Net cash provided by operating activities                          569               645              369
                                                                                    ----              ----            -----

Cash Flow from Investing Activities
     Capital expenditures                                                           (341)             (392)            (484)
     Proceeds from sale of available-for-sale securities                              21                29               --
     Proceeds from sale of refining and marketing operations                          --                13              419
     Proceeds from sale of exploration and production properties                      18                48               --
     Proceeds from sale of other assets                                               17                11               17
     Proceeds from sale of long-term investments                                      13                17               61
     Purchase of long-term investments                                               (14)               (6)              (8)
                                                                                    ----              ----            -----
                  Net cash provided by (used in) investing activities               (286)             (280)               5
                                                                                    ----              ----            -----

Cash Flow from Financing Activities
     Decrease in short-term borrowings                                               (12)              (57)            (218)
     Repayment of long-term debt                                                    (375)              (36)             (35)
     Issuance of long-term debt                                                      299                24               --
     Issuance of common stock                                                         12                16                9
     Dividends paid                                                                  (85)              (83)             (79)
     Purchase of treasury stock                                                      (60)             (195)             (45)
                                                                                    ----              ----            -----
                  Net cash used in financing activities                             (221)             (331)            (368)
                                                                                    ----              ----             ----

Net Increase in Cash and Cash Equivalents                                             62                34                6
Cash and Cash Equivalents at Beginning of Year                                       121                87               81
                                                                                    ----              ----            -----
Cash and Cash Equivalents at End of Year                                            $183              $121            $  87
                                                                                    ====              ====            =====
The accompanying notes are an integral part of this statement.

Notes to Financial Statements

1.       Significant Accounting Policies

Basis of Presentation
     The  consolidated   financial   statements  include  the  accounts  of  all
subsidiary companies that are more than 50% owned and the proportionate share of
joint  ventures in which the company has an undivided  interest.  Investments in
affiliated  companies  that are 20% to 50% owned are  carried as  Investments  -
Equity affiliates in the Consolidated  Balance Sheet at cost adjusted for equity
in  undistributed  earnings.   Except  for  dividends,   changes  in  equity  in
undistributed earnings are included in the Consolidated Statement of Income. All
material intercompany transactions have been eliminated.

     In connection  with the  restructuring  of the  exploration  and production
operations,  certain  operating and exploration  expenses for 1996 and 1995 have
been reclassified to general and administrative expense in order to conform with
the  current  year's  presentation.  This  reclassification  had  no  effect  on
exploration and production  operating  profit or consolidated  net income (loss)
for either  period.  Certain  information  in Note 24,  "Reporting  by  Business
Segments," and in the  supplemental  oil and gas  information  shown in Notes 25
through 29 has also been adjusted to reflect this reclassification.

     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,  the
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting period.
Actual  results  could  differ from those  estimates as  additional  information
becomes known.

Foreign Currencies
     As the U.S. dollar has been adopted as the functional  currency for each of
the company's  international  operations,  foreign currency transaction gains or
losses are recognized in the period  incurred.  The company recorded net foreign
currency  transaction  losses of $9 million in 1996.  The net  foreign  currency
transaction losses in 1997 and 1995 were immaterial.

Earnings (Loss) per Common Share
     Basic  earnings per share  includes no dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares  outstanding  for the period.  Diluted  earnings per share is computed by
dividing net income by the weighted-average  number of common shares outstanding
for the period and common stock equivalents.

     The  weighted-average  number of shares used to compute basic  earnings per
share was 47,807,916 in 1997,  49,419,993 in 1996 and 51,669,285 in 1995.  After
adding the dilutive effect of the conversion of options to the  weighted-average
number of shares  outstanding,  the shares used to compute diluted  earnings per
share were  48,000,082 in 1997 and  49,657,890 in 1996.  For 1995,  there was no
dilution since the company incurred a loss from continuing operations.

     Not included in the calculation of the denominator for diluted earnings per
share were 157,000 and 153,000  employee  stock options  outstanding at year-end
1997 and 1996,  respectively.  The  inclusion of these  options  would have been
anti-dilutive  since they were not "in the  money" at the end of the  respective
years.  See  Note  18,  "Employee  Stock  Option  Plans,"  for a  discussion  of
transactions that occurred after year-end 1997.

Cash Equivalents
         The company  considers  all  investments  purchased  with a maturity of
three  months  or less to be cash  equivalents.  Cash  includes  time  deposits,
certificates  of deposit and U.S.  government  securities,  all of which totaled
$132 million in 1997 and $89 million in 1996.

Inventories
     The  costs of the  company's  product  inventories  are  determined  by the
first-in,  first-out (FIFO) method.  Inventory  carrying values include material
costs, labor and indirect manufacturing expenses associated therewith. Materials
and supplies are valued at average cost.

Property, Plant and Equipment
     Oil and Gas - Exploration  expenses,  including  geological and geophysical
costs,  rentals  and  exploratory  dry  holes,  are  charged  against  income as
incurred.  Costs of  successful  wells  and  related  production  equipment  and
developmental  dry  holes  are  capitalized  and  amortized  by field  using the
unit-of-production method as the oil and gas are produced.

     Undeveloped  acreage  costs are  capitalized  and  amortized  at rates that
provide full  amortization  on  abandonment  of  unproductive  leases.  Costs of
abandoned leases are charged to the accumulated amortization accounts, and costs
of productive leases are transferred to the developed property accounts.

     Other - Property,  plant and  equipment is stated at cost less reserves for
depreciation,  depletion and amortization.  Maintenance and repairs are expensed
as  incurred,  except that costs of  replacements  or renewals  that  improve or
extend the lives of existing  properties are capitalized.  Costs of nonproducing
mineral acreage  surrendered or otherwise  disposed of are charged to expense at
the time of disposition.

     Depreciation  and Depletion - Property,  plant and equipment is depreciated
or depleted over its estimated life by application of the  unit-of-production or
the  straight-line  method.  In arriving  at rates under the  unit-of-production
method,   the  quantities  of  recoverable  oil,  gas  and  other  minerals  are
established based on estimates made by the company's geologists and engineers.

     Retirements and Sales - The costs and related  depreciation,  depletion and
amortization  reserves are removed from the respective  accounts upon retirement
or sale of property, plant and equipment. The resulting gain or loss is included
in other income.

     Interest  Capitalized  - The company  capitalizes  interest  costs on major
projects  that  require  a  considerable  length of time to  complete.  Interest
capitalized in 1997,  1996 and 1995 was $8 million,  $9 million and $11 million,
respectively.

Impairment of Long-Lived Assets
     The company  adopted the  provisions  of Statement of Financial  Accounting
Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," during the 1995 third quarter.

     Proved  oil  and  gas   properties   are  reviewed  for   impairment  on  a
field-by-field  basis when facts and circumstances  indicate that their carrying
amount may not be recoverable.  In performing this review, future cash flows are
estimated by applying  estimated  future oil and gas prices to estimated  future
production,  less  estimated  future  expenditures  to develop  and  produce the
reserves.  If the sum of these  estimated  future cash flows  (undiscounted  and
without interest  charges) is less than the carrying amount of the property,  an
impairment  loss is  recognized  for the excess of the carrying  amount over the
estimated fair value of the property. Prior to the third quarter of 1995, proved
properties  were  evaluated  on an  area-of-interest  basis  and  impaired  when
capitalized  costs  exceeded  estimated  future  revenues,  computed by applying
current oil and gas prices to estimated future production, less estimated future
expenditures to develop and produce the reserves.

     Other  assets are  reviewed  for  impairment  by asset  group for which the
lowest level of  independent  cash flows can be  identified  and impaired in the
same  manner as proved  oil and gas  properties.  Prior to the third  quarter of
1995,  individual  properties were written down when  impairments were deemed to
have occurred.

Income Taxes
     Deferred  income taxes are provided to reflect the future tax  consequences
of  differences  between  the tax  basis of  assets  and  liabilities  and their
reported amounts in the financial statements.

Site Dismantlement, Reclamation and Remediation Costs
         The company  provides for the estimated cost at current prices of final
reclamation and land restoration at coal mining locations and the  dismantlement
and removal of oil and gas  production  and related  facilities.  Such costs are
accumulated  over  the  estimated  lives  of the  facilities  by the  use of the
unit-of-production method. As sites of environmental concern are identified, the
company  assesses  the existing  conditions,  claims and  assertions,  generally
related to former operations,  and records an estimated  undiscounted  liability
when  environmental  assessments  and/or  remedial  efforts are probable and the
associated costs can be reasonably estimated.

Gas-Balancing Arrangements
     Gas-balancing arrangements with partners in natural gas wells are accounted
for by the entitlements method. At December 31, 1997 and 1996, both the quantity
and dollar  amount of such  arrangements  recorded in the  Consolidated  Balance
Sheet were immaterial.

Lease Commitments
     The  company  utilizes   various  leased   properties  in  its  operations,
principally for office space.  Net lease rental expense was $14 million in 1997,
$13 million in 1996 and $12 million in 1995.

     The aggregate minimum annual rentals under  noncancelable  leases in effect
on December 31, 1997, totaled $59 million,  of which $11 million is due in 1998,
$9 million in 1999,  $17 million in the period 2000 through 2002 and $22 million
thereafter.

Employee Stock Option Plans
     The  company  accounts  for its  employee  stock  option  plans  using  the
intrinsic value method in accordance with  Accounting  Principles  Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees."

Futures, Forward and Option Contracts
     The  company  hedges a portion  of its  monetary  assets,  liabilities  and
commitments  denominated  in  foreign  currencies.   Periodically,  the  company
purchases  foreign currency forward contracts to provide funds for operating and
capital expenditure  requirements that will be denominated in foreign currencies
and sells foreign currency forward contracts to convert receivables that will be
paid in foreign  currencies to U.S.  dollars.  Since these contracts  qualify as
hedges and  correlate to currency  movements,  any gain or loss  resulting  from
market  changes  will be offset by gains or  losses  on the  hedged  receivable,
capital item or operating cost.

     In 1996 and 1995,  the company also entered into foreign  currency  forward
contracts to sell various foreign currencies in anticipation of titanium dioxide
pigment  sales   denominated  in  foreign   currencies.   These  contracts  were
marked-to-market  with the  resulting  gain or loss  reflected  in income in the
period in which the change  occurred.  There were no open  contracts at year-end
1997. Open contracts at year-end 1996 matured between January and December 1997.
Net gains and losses on these contracts in 1997, 1996 and 1995 were immaterial.

     Although no such  contracts  were entered into during 1997, the company has
periodically used commodities futures and option contracts to hedge a portion of
its crude oil and natural gas sales and natural gas purchased for  operations in
order to minimize the price risks  associated  with the production and marketing
of crude oil and natural gas. These  contracts  generally have had maturities of
one year or less.  Since the  contracts  qualified as hedges and  correlated  to
price  movements  of crude oil and  natural  gas,  any gain or loss  from  these
contracts  was  explicitly  deferred  and  recognized  as  part  of  the  hedged
transaction.  Prior to the sale of the refining and  marketing  operations,  the
company  also  hedged a  portion  of its  refined-product  sales  and  crude oil
purchased for the refineries.

     Management of price risks must consider market conditions and availability.
As these factors change,  the company adjusts its hedging  strategy and modifies
its futures, forward and option contract positions.

2.       Cash Flow Information

     Net cash  provided by  operating  activities  reflects  cash  payments  for
interest and income taxes as follows:

         (Millions of dollars)                 1997       1996         1995
         ---------------------                 ----       ----         ----

         Interest paid                          $47        $60          $68
         Income taxes paid                       15         17           75

     Noncash  transactions not reflected in the  Consolidated  Statement of Cash
Flows  include  capital  expenditures  for  which  payment  will  be made in the
subsequent  year  totaling $19  million,  $4 million and $24 million at year-end
1997, 1996 and 1995, respectively;  transactions during 1997 associated with the
assignments  of  interest  of  certain  North  Sea oil and gas  properties;  the
revaluation  of certain  investments  to fair value and  transactions  affecting
deferred compensation  associated with the Employee Stock Ownership Plan in each
of the three years. See Notes 16 and 20.

     Effective  December 31, 1996, the company merged its North American onshore
exploration and production  operations into Devon Energy Corporation  (Devon) in
exchange  for  9,954,000  shares  of Devon  common  stock  (see  Note  4).  This
transaction was not reflected in the Consolidated Statement of Cash Flows due to
its noncash nature.

     The effect of foreign currency  exchange rate fluctuations on cash and cash
equivalents was immaterial.

3.       Inventories

     Major categories of inventories at year-end 1997 and 1996 are:

     (Millions of dollars)                            1997              1996
     ---------------------                            ----              ----

     Chemicals and other products                     $119              $163
     Materials and supplies                             48                49
     Crude oil                                           5                 6
                                                      ----              ----
         Total                                        $172              $218
                                                      ====              ====

4.       Investments - Equity Affiliates

     At December  31, 1997 and 1996,  investments  in equity  affiliates  are as
follows:

     (Millions of dollars)                            1997              1996
     ---------------------                            ----              ----

     Devon Energy Corporation                         $217              $193
     Javelina Company                                   32                27
     National Titanium Dioxide Company Limited          12                12
     Other                                              12                12
                                                      ----              ----

         Total                                        $273              $244
                                                      ====              ====

     Effective  December 31, 1996, the company merged its North American onshore
exploration and production  operations into Devon, a publicly traded oil and gas
exploration and production  company.  The company  received  9,954,000 shares of
Devon common stock  representing an ownership interest in Devon of approximately
31%.  This initial  investment  in Devon was recorded at the value of the assets
given  up  in  accordance   with  APB  No.  29,   "Accounting   for  Nonmonetary
Transactions."  The market value of the  company's  investment in Devon was $383
million at December 31, 1997, based on the closing price of Devon's common stock
as reported in The Wall Street Journal.

     Javelina Company and National  Titanium  Dioxide Company Limited  represent
the company's  investment of 40% and 25%,  respectively,  in non-exploration and
production joint ventures or partnerships.

     Following  are  financial  summaries of the  company's  equity  affiliates.
Financial  information  related  to  investments  that are shown as Other in the
preceding table has been excluded.

     (Millions of dollars)                          1997       1996        1995
     ---------------------                          ----       ----        ----

     Results of operations -
         Net sales(1)                               $570       $207        $250
         Total costs and expenses                    413        183         171
         Net income                                  105         22          66

         Financial position -
         Current assets                              198        153
         Property, plant and equipment - net         990        962
         Total assets                              1,215      1,135
         Current liabilities                         123        130
         Total liabilities                           470        484
         Stockholders' equity                        745        651

     (1)Includes net sales to the company of $26 million,  $44  million  and $47
        million for 1997, 1996 and 1995, respectively.

5.       Investments - Other Assets

     Investments  in other assets  consist of the following at December 31, 1997
and 1996:

     (Millions of dollars)                                      1997       1996
     ---------------------                                      ----       ----

     Net deferred tax asset                                      $22        $23
     U.S. government obligations                                  19         --
     Patents                                                       6          5
     Long-term notes receivable, net of $9 allowance for
         doubtful notes in both 1997 and 1996                      5         17
     Equity securities                                             2         24
     Other                                                         6          5
                                                                ----       ----

              Total                                              $60        $74
                                                                 ===        ===

6.       Property, Plant and Equipment

     Fixed assets and related  reserves by business segment at December 31, 1997
and 1996, are as follows:
Reserves for
                                                                           Depreciation and
                                                 Gross Property                Depletion              Net Property(1)  
     (Millions of dollars)                     1997         1996         1997          1996         1997         1996  
     ---------------------                    -------      -------      --------      -------      -------      -------
Exploration and production                $2,888       $3,192        $1,677       $2,005       $1,211       $1,187
     Chemicals                                  1,020          946           506          459          514          487
     Other                                        147          153            90           98           57           55
     Discontinued coal operations                 547          546           331          327          216          219
                                              -------      -------      --------      -------      -------      -------

         Total                                 $4,602       $4,837        $2,604       $2,889       $1,998       $1,948
                                               ======       ======        ======       ======       ======       ======
(1)Includes net assets  held  for sale of $126  million  for  chemicals  at
       December 31,  1997,  and $9 million for  exploration  and  production  at
       December 31, 1996.  The coal segment was disposed of in 1998.  (See Notes
       11 and 21).

7.       Deferred Charges

     Deferred charges are as follows at year-end 1997 and 1996:

     (Millions of dollars)                        1997              1996
     ---------------------                        ----              ----

     Pension plan prepayment                       $42               $33
     Preoperating and startup costs                  8                 4
     Intangible assets                               6                 3
     Other                                          20                13
                                                  ----              ----

         Total                                     $76               $53
                                                  ====              ====

8.       Debt

Lines of Credit and Short-Term Borrowings
     At year-end 1997, the company had available unused bank lines of credit and
revolving credit  facilities of $714 million.  Of this amount,  $340 million and
$265 million can be used to support  commercial paper borrowing  arrangements of
Kerr-McGee Credit Corporation and Kerr-McGee Oil (U.K.) PLC, respectively.

     The company has arrangements to maintain compensating balances with certain
banks that  provide  credit.  At year-end  1997,  the  aggregate  amount of such
compensating balances was immaterial, and the company was not legally restricted
from withdrawing all or a portion of such balances at any time during the year.

     Short-term  borrowings at year-end 1997  consisted of a note payable of $25
million (5.98% interest  rate).  Outstanding at year-end 1996 were notes payable
totaling $15 million (5.97% average interest rate) and commercial paper totaling
$22 million (5.84% average interest rate).

Long-Term Debt
     The company's  policy is to classify  certain  borrowings  under  revolving
credit  facilities and commercial  paper as long-term debt since the company has
the ability under certain revolving credit agreements and the intent to maintain
these  obligations  for longer than one year.  At year-end  1997 and 1996,  debt
totaling $37 million and $400 million, respectively, was classified as long-term
consistent with this policy.

     Long-term debt consisted of the following at year-end 1997 and 1996:
(Millions of dollars)                                           1997             1996
     ---------------------                                           ----             ----
Debentures -
         7.125% Debentures due October 15, 2027
              (7.01% effective rate)                                 $150             $ --
         7% Debentures due November 1, 2011,
              net of unamortized debt discount of
              $108 million in 1997 and $111 million in
              1996 (14.25% effective rate)                            142              139
         8-1/2% Sinking fund debentures due June 1, 2006               22               34
     Commercial paper                                                  --              266
     Guaranteed Debt of Employee Stock Ownership Plan -
         9.61% Series B notes due in installments
         through January 2, 2005                                       51               51
     Notes payable -
         6.625% Notes due October 15, 2007
              (6.54% effective rate)                                  150               --
         Variable interest rate revolving credit agreements
         with banks due March 6, 2000 (6.04% average
         rate at December 31, 1997)                                    37              114
         Other                                                          2               22

                                                                      554              626
                                                                     ----             ----
     Long-term debt due within one year                                (2)              --
                                                                     ----             ----

                  Total                                              $552             $626
                                                                     ====             ====
Maturities of long-term debt due after December 31, 1997, are $2 million in
1998, $8 million in 1999,  $47 million in 2000, $12 million in 2001, $10 million
in 2002 and $475 million thereafter.

     At year-end  1997, the company  guaranteed no debt or other  liabilities of
its  unconsolidated  equity affiliates.  However,  at year-end 1996, the company
guaranteed its ratable portion of the debt of  unconsolidated  equity affiliates
totaling $7 million.  These borrowings,  which are not included in the preceding
table,  were paid in full by the  unconsolidated  equity affiliates during 1997,
and the company was released as the guarantor.

     Additional  information  regarding  the major  changes  in debt  during the
periods and unused  commitments  for  financing  is  included  in the  Financial
Condition discussion in Management's Discussion and Analysis.

9.       Other Financial Information

     Condensed  financial  information  relating  to  the  company's  previously
unconsolidated, wholly owned finance subsidiary is summarized below:

     (Millions of dollars)               1997            1996           1995
     ---------------------               ----            ----           ----

     Results of operations -
         Interest income                   17            $ 25            $25
         Net income                         4               6              5

     Financial position -
         Assets                          $116            $367
         Liabilities                       (3)           (258)
                                        -----            ----
              Stockholder's equity       $113            $109
                                         ====            ====

10.      Contingencies

West Chicago
     In 1973, a wholly owned subsidiary, Kerr-McGee Chemical Corporation (KMCC),
closed the facility located in West Chicago,  Illinois,  that processed  thorium
ores.  Operations  resulted in some low-level  radioactive  contamination at the
site,  and in 1979,  KMCC filed a plan with the  Nuclear  Regulatory  Commission
(NRC) to decommission  the facility.  The NRC  transferred  jurisdiction of this
site to the State of Illinois (the State) in 1990.  The following  discusses the
current status of various matters associated with the West Chicago site.

     Closed  Facility - In 1994,  KMCC,  the City of West Chicago (the City) and
the  State  reached  agreement  on Phase I of the  decommissioning  plan for the
closed West Chicago facility,  and KMCC began shipping material from the site to
a licensed permanent disposal facility.

     In February 1997,  KMCC executed an agreement with the City as to the terms
and conditions for completing the final phase of decommissioning  work, the bulk
of which is expected to be completed about four to six years after receiving the
necessary license amendment. The State has indicated approval of this agreement,
and KMCC expects the State to issue a license amendment that will enable KMCC to
complete the final phase of decommissioning work.

     In 1992, the State enacted legislation imposing an annual storage fee equal
to $2 per cubic foot of byproduct  material located at the closed facility.  The
storage fee cannot  exceed $26 million  per year,  and any storage fee  payments
must be reimbursed to KMCC as decommissioning costs are incurred.  KMCC has been
fully reimbursed for all storage fees paid pursuant to this legislation. In June
1997, the legislation was amended to provide that future storage fee obligations
are to be offset against decommissioning costs incurred but not yet reimbursed.

     Offsite Areas - The U.S.  Environmental  Protection Agency (EPA) has listed
four areas in the vicinity of the West Chicago facility on the National Priority
List that the EPA promulgates under authority of the Comprehensive Environmental
Response,  Compensation  and Liability Act of 1980 and has designated  KMCC as a
potentially  responsible  party in these four areas.  The EPA issued  unilateral
administrative  orders for two of these areas  (referred  to as the  residential
area and  Reed-Keppler  Park),  which require KMCC to conduct removal actions to
excavate  contaminated soils and ship the soils elsewhere for disposal.  Without
waiving any of its rights or  defenses,  KMCC has begun the cleanup of these two
sites.

     Judicial  Proceedings  - In December  1996, a lawsuit was filed against the
company  and its  subsidiary,  KMCC,  in  Illinois  state  court on  behalf of a
purported class of present and former West Chicago residents.  The lawsuit seeks
damages for alleged  diminution in property  values and the  establishment  of a
medical  monitoring  fund to benefit those  allegedly  exposed to thorium wastes
originating from the former facility.  The case was removed to federal court and
is being vigorously defended.

     Government  Reimbursement - Pursuant to Title X of the Energy Policy Act of
1992 (Title X), the U.S. Department of Energy is obligated to reimburse KMCC for
certain  decommissioning  and cleanup costs in recognition of the fact that much
of  the  facility's   production  was  dedicated  to  United  States  government
contracts.  Title X was amended in 1996 to increase the amount authorized to $65
million plus  inflation  adjustments.  As of December  31,  1997,  KMCC has been
reimbursed approximately $40 million under Title X.

Other Matters
     The plants and facilities of the company and its  subsidiaries  are subject
to various  environmental laws and regulations.  The company or its subsidiaries
have been notified that they may be responsible in varying degrees for a portion
of the costs to clean up certain waste disposal sites and former plant sites. As
of December 31, 1997, the company's  estimate for the cost to investigate and/or
remediate all presently identified sites of former or current operations,  based
on currently known facts and circumstances, totaled $243 million, which includes
$163  million  for the former  West  Chicago  facility  and $14  million for the
residential area and Reed-Keppler Park.  Reserves have been established based on
these estimates.  Actual costs will be reduced by the amounts  recoverable under
Title X and other  government  programs.  Expenditures  from  inception  through
December 31, 1997, totaled $435 million for currently known sites.

     In addition to the environmental issues previously  discussed,  the company
or its  subsidiaries  are also a party to a number  of other  legal  proceedings
pending in  various  courts or  agencies  in which the  company or a  subsidiary
appears as plaintiff or defendant.  The ultimate costs to decommission presently
known sites are  difficult to estimate  because of the  numerous  contingencies,
which  include  continually  changing  laws and  regulations,  the nature of the
company's  businesses and pending legal  proceedings.  Actual costs could differ
from those currently  estimated as information  becomes available for sites that
are not now included in the reserve,  if  contamination  is not as expected,  or
field conditions or other variables differ significantly from those that are now
assumed. Therefore, it is not possible to reliably estimate the amount or timing
of all future  expenditures  relating to environmental and other  contingencies.
The company provides for costs related to contingencies  when a loss is probable
and the amount or range of amounts is reasonably estimable. Management believes,
after  consultation  with general  counsel,  that  adequate  reserves  have been
provided for all known contingencies.  However, the ultimate cost will depend on
the outcomes of the previously-noted uncertainties.  Therefore,  it is  possible
that additional reserves could be required in the future.

11.      Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Assets to Be Held and Used
     In 1996 and 1995,  certain  oil and gas  fields in the  United  States  and
Canada and certain coal and other assets were deemed to be impaired  because the
assets were not expected to recover their entire  carrying  value through future
cash flows.  The impairment  loss is included in the  Consolidated  Statement of
Income as Asset  impairment  and was  determined as the  difference  between the
carrying value and the estimated  fair value.  The fair value for these impaired
assets was generally  determined based on the estimated  present value of future
cash flows. No impairments  were recognized  during 1997. The impairment loss by
segment for 1996 and 1995 was as follows.  Not  included is $23 million for coal
in 1995, which is included in discontinued operations.

     (Millions of dollars)                          1996              1995
     ---------------------                          ----              ----

     Exploration and production                      $22              $ 99
     Other                                            --                 1
                                                    ----              ----
         Total                                       $22              $100
                                                     ===              ====

Assets to Be Disposed Of
     During  1997  the  company's  exploration  and  production  operating  unit
completed  the program to divest a number of crude oil and natural gas producing
properties considered to be nonstrategic.  The majority of these properties were
located onshore in the United States; however,  certain of these properties were
located in the Gulf of Mexico, Canada and the North Sea. Net gains recognized on
the sales of properties  included in the divestiture  program totaled $6 million
in 1997 and $13 million in 1996.  The  divestiture  program  properties  did not
constitute  a  material  portion  of the  company's  year-end  1996  oil and gas
reserves or oil and gas  production  or cash flows from  operations  for 1997 or
1996. At year-end 1995,  these  properties  comprised  approximately  10% of the
company's oil and gas reserves,  10% of oil and gas production volumes and 5% of
the company's 1995 cash flows from operations.

     As a result of the  divestiture  program,  these  nonstrategic  oil and gas
properties  were reduced in 1995 to their  estimated fair value less the cost to
sell if the carrying  value of the property  exceeded such fair value net of the
estimated cost of selling the property.  The carrying  value of the  divestiture
program  properties was $172 million prior to the  recognition of the impairment
loss on the  properties  for which a loss was  indicated.  The  impairment  loss
totaled  $104  million and has been  included in the  Consolidated  Statement of
Income as Asset impairment.  There were no subsequent revisions to the estimated
fair values of these properties.

     Certain  chemical   facilities  were  closed  during  1996.  A  $3  million
impairment loss was recognized in 1996,  which reduced the carrying value of the
assets to nil.

     Also held for sale at December  31,  1995,  were the net  long-term  assets
totaling $5 million of a wholly owned coal mining  operation  in West  Virginia.
This sale was completed in February 1996. The gain on the sale was immaterial.

     Following  are the sales and pretax income (loss) for assets to be disposed
of at  December  31,  1997,  1996 and  1995,  as  included  in the  Consolidated
Statement  of Income in each of the last three  years.  Any  impairment  loss is
included in the pretax amounts.

     (Millions of dollars)                       1997         1996         1995
     ---------------------                       ----         ----        -----

     Sales -
         Chemicals                               $166         $160        $ 158
         Exploration and production                --           42           64
                                                 ----         ----        -----
              Total                              $166         $202        $ 222
                                                 ====         ====        =====
     Income (Loss) -
         Chemicals                                $22         $ 17        $  23
         Exploration and production                --            9         (108)
                                                  ---          ---        -----
              Total                               $22          $26        $ (85)
                                                  ===          ===        =====

     The company  withdrew from the ammonium  perchlorate  business in 1998 (see
Management's  Discussion and  Analysis).  The carrying value of these assets was
approximately  $9 million at year-end 1997, which did not exceed fair value. The
gain on the sale was immaterial. In January 1998, the company signed a letter of
intent to  dispose  of the  remaining  electrolytic  and  specialty  -  chemical
operations.  Discussions were terminated in mid-1998, and the operations are  no
longer considered to be held for sale. The company also exited the coal business
in 1998 (see  Management's  Discussion  and Analysis and Note 21,  "Discontinued
Operations").

12.      Income Taxes

     The taxation of a company that has operations in several countries involves
many complex variables, such as differing tax structures from country to country
and the effect on U.S. taxation of international earnings. These complexities do
not  permit  meaningful  comparisons  between  the  domestic  and  international
components of income before income taxes and the provision for income taxes, and
disclosures  of  these  components  do  not  provide   reliable   indicators  of
relationships in future periods. Income (loss) from continuing operations before
income taxes is composed of the following:

     (Millions of dollars)          1997             1996              1995
     ---------------------          ----             ----             -----

     Domestic                       $132             $142             $(166)
     International                   100              107                56
                                    ----             ----             -----
         Total                      $232             $249             $(110)
                                    ====             ====             =====

     Effective  April 1, 1997,  the  corporate  tax rate in the  United  Kingdom
decreased  from 33% to 31%.  Effective  January 1, 1995,  the income tax rate in
Australia increased from 33% to 36%. The deferred income tax liability and asset
balances were adjusted to reflect these revised rates,  which decreased the 1997
and 1995 international deferred provision for income taxes by $8 and $2 million,
respectively.  The 1997,  1996 and 1995 provision  (benefit) for income taxes on
income from continuing operations is summarized below:

     (Millions of dollars)           1997             1996              1995
     ---------------------           ----             ----              ----
     U.S. Federal -
         Current                     $  5             $ 19              $(11)
         Deferred                      34               25               (64)
                                     ----             ----              ----
                                       39               44               (75)
                                     ----             ----              ----
     International -
         Current                       32                5                 9
         Deferred                      (1)              32                 9
                                     ----             ----              ----
                                       31               37                18
                                     ----             ----              ----
     State                              1                4                 5
                                     ----             ----              ----
              Total                  $ 71              $85              $(52)
                                     ====              ===              ====
     At December 31, 1997,  the net deferred tax asset  includes the benefit for
$80 million in net operating loss  carryforwards  that have no expiration dates.
At December 31, 1997,  the company had  additional  foreign net  operating  loss
carryforwards totaling $12 million that expire in 2001. These loss carryforwards
offset a portion of the foreign net deferred tax  liability.  Realization of net
operating  loss  carryforwards  is dependent on  generating  sufficient  taxable
income.  Although  realization is not assured,  the company  believes it is more
likely than not that all of the net deferred tax asset will be realized.

     The net deferred tax asset,  which is  classified  as  Investments  - Other
assets in the Consolidated  Balance Sheet,  represents the net deferred taxes in
certain foreign  jurisdictions.  Deferred tax liabilities and assets at December
31, 1997 and 1996, are composed of the following:
(Millions of dollars)                                                          1997              1996
     ---------------------                                                          ----              ----
Net deferred tax liability -
         Accelerated depreciation                                                   $240              $259
         Exploration and development                                                  72                65
         Undistributed earnings of foreign subsidiaries                               28                23
         Postretirement benefits                                                     (47)              (46)
         Dismantlement, reclamation, remediation and other reserves                  (69)             (113)
         Foreign operating loss carryforward                                          (4)              (10)
         Other                                                                       (61)              (47)
                                                                                    ----              ----
                                                                                     159               131
                                                                                    ----              ----

     Net deferred tax asset -
         Accelerated depreciation                                                     13                16
         Foreign operating loss carryforward                                         (29)              (36)
         Other                                                                        (6)               (3)
                                                                                    ----              ----
                                                                                     (22)              (23)
                                                                                    ----              ----
              Total                                                                 $137              $108
                                                                                    ====              ====
In the following  table,  the U.S. Federal income tax rate is reconciled to
the  company's  effective  tax rates for income from  continuing  operations  as
reflected in the Consolidated Statement of Income.
1997              1996           1995
                                                                         ----              ----          -----
U.S. statutory rate                                                 35.0%             35.0%         (35.0)%
         Increases (decreases) resulting from -
              Taxation of foreign operations                              2.5               1.1           (1.3)
              State income taxes                                          1.2               1.1           (1.3)
              Adjustment of prior years' accruals                        (1.9)               .3           (1.3)
              Federal income tax credits                                   --               (.3)          (2.5)
              Dividends paid on Employee Stock Ownership Plan             (.7)              (.6)          (1.3)
              Foreign equity income                                        --                --           (1.6)
              Contribution of appreciated equity securities               (.4)             (1.8)            --
              Adjustment of deferred tax balances due to
                  tax rate changes                                       (3.4)              --            (1.9)
              Other - net                                                (1.6)              (.5)          (1.0)
                                                                        -----              ----          -----
                      Total                                              30.7%             34.3%         (47.2)%
                                                                         ====              ====          =====
The Internal Revenue Service has examined the company's  Federal income tax
returns for all years through 1994, and the years have been closed through 1992.
The company  believes that it has made adequate  provision for income taxes that
may become payable with respect to open tax years.

13.      Other Deferred Credits and Reserves

         Other  deferred  credits  and  reserves  consist  of the  following  at
year-end 1997 and 1996:
(Millions of dollars)                                                          1997              1996
     ---------------------                                                          ----             -----
Reserves for site dismantlement, reclamation and remediation                   $251              $345
     Postretirement benefit obligations                                              120               117
     Other                                                                            51                53
                                                                                   -----             -----
         Total                                                                      $422              $515
                                                                                    ====              ====
The company provided for  environmental  reclamation and remediation of
former plant sites,  net of  reimbursements  received,  during each of the years
1997, 1996 and 1995 as follows:

     (Millions of dollars)                     1997        1996         1995
     ---------------------                     ----        ----         ----

     Provision, net of reimbursements           $18         $43          $54
     Reimbursements received                     12          10           11

         The  reimbursements,  which  pertain  to the  former  facility  in West
Chicago,  Illinois, were received pursuant to the Energy Policy Act of 1992 (see
Note 10).  An  additional  $49 million was  provided  in 1995 for  refining  and
marketing-related  sites and included in the  discontinued  operations (see Note
21).

14.      Stockholders' Equity

     Changes in common stock,  capital in excess of par value and treasury stock
for 1997, 1996 and 1995 are as follows:
Common Stock               Capital in          Treasury Stock
     (Millions of dollars and                     Shares       Par            Excess of
     thousands of shares)                         Issued       Value          Par Value          Shares     Cost
Balance December 31, 1994                     53,304      $53              $309             1,610     $  63
         Exercise of stock options and
              stock appreciation rights               210        1                 9                --        --
         Stock purchase program                        --       --                --               835        48
     Balance December 31, 1995                     53,514       54               318             2,445      $111
         Exercise of stock options and
              stock appreciation rights               348       --                16                --        --
         Issuance of shares for
              achievement awards                       --       --                --                (3)       --
         Stock purchase program                        --       --                --             3,127       195
                                                   ------      ---              ----             -----      ----
     Balance December 31, 1996                     53,862       54               334             5,569       306
         Exercise of stock options and
              stock appreciation rights               259       --                12                --        --
         Issuance of shares for
              achievement awards                       --       --                --                (2)       --
         Stock purchase program                        --       --                --               867        57
                                                   ------      ---              ----             -----      ----
     Balance December 31, 1997                     54,121      $54              $346             6,434      $363
                                                   ======      ===              ====             =====      ====
The  company has 40 million  shares of  preferred  stock  without par value
authorized, and none is issued.

     During 1995, the Board of Directors authorized management to purchase up to
$300 million of the common stock of the  company.  The program was  completed in
August 1997 with a total of 4,829,000 shares acquired at a cost of $300 million.

     In  1996,   the  company's   Board  of  Directors   replaced  the  existing
stockholder-rights  plan,  which  expired in July 1996,  with a new rights  plan
dated July 9, 1996.  Such rights were  distributed  as a dividend at the rate of
one right for each share of the company's  common stock.  Generally,  the rights
become  exercisable  the earlier of 10 days after a public  announcement  that a
person or group has  acquired,  or a tender offer has been made for, 15% or more
of the company's  then-outstanding  stock. If either of these events occur, each
right would  entitle the holder (other than the 15% holder) to buy the number of
shares  of the  company's  common  stock  having a market  value  two  times the
exercise  price.  The  exercise  price is $215.  Generally,  the  rights  may be
redeemed at $.01 per right until a person or group has  acquired  15% or more of
the company's stock. The rights expire in July 2006.

15.      Other Income

     Other  income is as  follows  during  each of the  years in the  three-year
period ended December 31, 1997:

     (Millions of dollars)                            1997      1996      1995
     ---------------------                            ----      ----      ----

     Income from unconsolidated affiliates             $32       $14       $12
     Gain on sale of available-for-sale securities      18        23        --
     Settlements with insurance carriers                12        67        --
     Interest                                           12         9        15
     Gain on sale of assets                             10        24         2
     Other                                               6        (5)       --
                                                      ----      ----      ----

         Total                                         $90      $132       $29
                                                       ===      ====       ===

16.      Financial Instruments and Hedging Activities

Investments in Certain Debt and Equity Securities
     The company has certain investments that are considered to be available for
sale. These financial  instruments are carried in the Consolidated Balance Sheet
at fair value,  which is based on quoted  market  prices.  The  company  held no
securities  classified  as held to maturity or trading at December  31, 1997 and
1996.  At December 31, 1997 and 1996,  available-for-sale  securities  for which
fair value can be estimated were as follows:
1997                                        1996                 
                                         ---------------------------------------       -------------------------------------
                                          Fair                 Gross Unrealized         Fair               Gross Unrealized
(Millions of dollars)                     Value    Cost          Holding Gains          Value    Cost        Holding Gains
                                          -------------          -------------          -------------        -------------
U.S. government obligations -
     Maturing within one year               $ 8     $ 8               $--                 $26     $26             $--
     Maturing between one year
         and four years                      19      19                --                  --      --              --
     Equity securities                       --      --                --                  22       3              19
                                            ---     ---               ---                 ---     ---             ---
              Total                         $27     $27               $--                 $48     $29             $19
                                            ===     ===               ===                 ===     ===             ===
U.S. government  obligations are carried in the Consolidated  Balance Sheet
as  Current  Assets or as  Investments  - Other  assets,  depending  upon  their
maturity. Equity securities are carried as Investments - Other assets.

     During  1997  and  1996,   the  company  sold   available-for-sale   equity
securities.  Proceeds from the sales totaled $21 million in 1997 and $29 million
in 1996. The average cost of the securities was used in the determination of the
realized gains, which totaled $18 million in 1997 and $23 million in 1996 before
income taxes.  Also during 1997 and 1996,  the company  donated a portion of its
available-for-sale  equity securities to Kerr-McGee  Foundation  Corporation,  a
tax-exempt   entity   whose   purpose  is  to   contribute   to   not-for-profit
organizations. The fair value of these donated shares totaled $3 million in 1997
and $16  million in 1996,  which  included  appreciation  of $3 million  and $13
million before income taxes, respectively.

The change in unrealized  holding  gains,  net of income taxes,  as shown in the
separate  component of stockholders'  equity during the three-year  period ended
December 31, 1997, is as follows:

     (Millions of dollars)                              1997    1996     1995
     ---------------------                              ----    ----     ----

     Beginning balance                                   $12     $26      $12
         Net unrealized holding gains                      2       9       14
         Net realized gains                              (12)    (15)      --
         Net appreciation of donated securities           (2)     (8)      --
                                                        ----    ----     ----
     Ending balance                                      $--     $12      $26
                                                        ====    ====     ====

Financial Instruments for Other than Trading Purposes
     In addition to the investments  previously discussed,  the company holds or
issues financial  instruments for other than trading  purposes.  At December 31,
1997 and 1996,  the carrying  amount and estimated  fair value of such financial
instruments for which fair value can be determined are as follows:
1997                           1996        
                                                         ----------------------         ---------------------
                                                          Carrying       Fair            Carrying       Fair
     (Millions of dollars)                                 Amount        Value            Amount        Value
Cash and cash equivalents                              $183         $183               $121        $121
     Long-term notes receivable                                5            5                 17          17
     Contracts to sell foreign currencies                     --            8                 13          33
     Contracts to purchase foreign currencies                 --          102                 --          29
     Short-term borrowings                                    25           25                 37          37
     Total long-term debt                                    554          669                626         737
The carrying amount of cash and cash equivalents approximates fair value of
those  instruments  due to  their  short  maturity.  The  fair  value  of  notes
receivable  is based on  discounted  cash  flows or the fair value of the note's
collateral.  The fair value of the company's  short-term  and long-term  debt is
based on the quoted  market prices for the same or similar debt issues or on the
current rates offered to the company for debt with the same remaining  maturity.
The fair value of foreign  currency forward  contracts  represents the aggregate
replacement cost based on financial institutions' quotes.

Hedging Activities
     Most of the company's foreign currency contracts are hedges principally for
chemicals'  accounts  receivable  generated from titanium  dioxide pigment sales
denominated in foreign currencies ($65 million hedged in 1997 and $68 million in
1996) and the operating costs and capital expenditures of international chemical
operations ($50 million hedged in 1997 and $28 million in 1996).  The purpose of
these  foreign  currency  hedging  activities is to protect the company from the
risk that the eventual U.S.  dollar amounts from sales to foreign  customers and
purchases  from  foreign  suppliers  could be  adversely  affected by changes in
foreign  currency  exchange rates.  The company  recognized net foreign currency
hedging gains of $4 million in 1997, $3 million in 1996 and $8 million in 1995.

     At December 31, 1997, the company had foreign currency  contracts  maturing
between January 1998 and December 1999 to purchase $137 million Australian and 8
million British pounds sterling for $102 million and $12 million,  respectively.
Additionally,  at December  31, 1997,  the company had  contracts to sell for $8
million various foreign currencies,  principally European,  which mature between
January and April 1998. At December 31, 1996,  the company had foreign  currency
contracts that matured between January and December 1997 to purchase $36 million
Australian for $25 million.  Additionally, at December 31, 1996, the company had
contracts  to sell  for $34  million  various  foreign  currencies,  principally
European,  which  matured  between  January and  December  1997.  This  included
contracts  totaling  $14  million  for  anticipated   pigment  sales  that  were
marked-to-market.  Net unrealized  losses on foreign currency  contracts totaled
$13 million at year-end 1997. Net unrealized gains on foreign currency contracts
totaled $4 million at year-end 1996 and $3 million at year-end 1995.

     Although  no oil or natural gas futures or option  contracts  were  entered
into during 1997, the company has periodically  used these types of contracts to
reduce the effect of the price  volatility of crude oil,  natural gas and, prior
to the sale of the refining and  marketing  operations,  refined  products.  The
futures contracts permitted settlement by delivery of commodities.

     During 1996,  the company sold forward 10 million  barrels of crude oil and
37 billion cubic feet of natural gas representing  approximately  40% and 36% of
its worldwide  crude oil and natural gas production,  respectively.  Net hedging
losses on crude oil and natural gas recognized in 1996 totaled $37 million.  The
effect of the losses was to reduce the  company's  1996 average gross margin for
crude oil and natural gas by $1.04 per barrel and $.11 per MCF, respectively. At
year-end 1996, there were no open crude oil or natural gas contracts.

     During 1995,  the company sold forward 13 million  barrels of crude oil and
19 billion cubic feet of natural gas representing  approximately  49% and 18% of
its worldwide crude oil and natural gas production, respectively, and 35% of the
refined-product  sales of the  discontinued  refining and marketing  operations.
Hedging gains and losses recognized for 1995 were immaterial.  At year-end 1995,
open crude oil and natural gas contracts had an aggregate value of $151 million,
and the unrecognized loss on these contracts totaled $14 million.

     Contract amounts do not quantify risk or represent assets or liabilities of
the  company  but are used in the  calculation  of cash  settlements  under  the
contracts.  These financial  instruments  limit the company's  market risks, are
with major financial institutions, expose the company to credit risks and may at
times be  concentrated  with  certain  institutions  or groups of  institutions.
However,  the credit  worthiness of these  institutions is subject to continuing
review, and full performance is anticipated.  Additional  information  regarding
market  risk is included  in the  quantitative  and  qualitative  disclosure  in
Management's Discussion and Analysis.

     Year-end hedge  positions and activities  during a particular  year are not
necessarily indicative of future activities and results.

17.      Taxes, Other than Income Taxes

     Taxes,  other than income taxes,  during the years ended December 31, 1997,
1996 and 1995, are composed of the following:

         (Millions of dollars)             1997        1996         1995
         ---------------------             ----        ----         ----

         Payroll                            $11         $11          $11
         Property                             4           8            8
         Production/severance                 3           9            8
         Other                                2           2            2
                                           ----        ----         ----

              Total                         $20         $30          $29
                                           ====        ====         ====

18.      Employee Stock Option Plans

     The 1987 Long Term Incentive Program (1987 Program) authorized the issuance
of shares of the company's  common stock through  December 31, 2002, in the form
of stock options,  restricted stock or long-term performance awards. The options
may be accompanied by stock appreciation rights. The 1987 Program was amended in
May 1995 to restore the number of shares  available to be granted to  1,000,000,
bringing the total number of shares authorized to be granted through the program
to 2,740,000.

     The company's employee stock options are fixed-price options granted at the
fair  market  value of the  underlying  common  stock on the date of the  grant.
Generally,  one-third  of  each  grant  vests  and  becomes  exercisable  over a
three-year  period  immediately  following  the grant date and  expires 10 years
after the grant date.
     The 1984 Employee Stock Option Plan authorized the granting of options over
a 10-year  period for up to 1,000,000  shares of common  stock and  accompanying
stock  appreciation  rights.  The 1984 plan was terminated on May 3, 1988. After
that date, no further options could be granted under this plan, although options
and any accompanying stock appreciation rights outstanding at that time could be
exercised prior to their respective expiration dates.

     Transactions  during the past three years under these plans are  summarized
below:
1987 Incentive Program             1984 Stock Option Plan
                                                       ----------------------             ----------------------
                                                                Weighted-Average                   Weighted-Average
                                                                  Exercise Price                     Exercise Price
                                                       Options        per Option          Options        per Option
Balance outstanding December 31, 1994                1,178,403          $45.11             33,000          $27.58
     Options granted                                   409,000           49.31                 --              --
     Options exercised                                (206,821)          43.81             (3,000)          27.06
     Options surrendered upon exercise
         of stock appreciation rights                   (6,850)          39.80            (20,000)          27.91
     Options forfeited                                 (49,369)          45.87                 --              --
                                                     ---------                           --------
Balance outstanding December 31, 1995                1,324,363           46.61             10,000           27.06
     Options granted                                   310,800           63.56                 --              --
     Options exercised                                (333,594)          46.40                 --              --
     Options surrendered upon exercise
         of stock appreciation rights                  (48,634)          43.63            (10,000)          27.06
     Options forfeited                                  (6,469)          53.00                 --              --
                                                     ---------                           --------
Balance outstanding December 31, 1996                1,246,466           50.98                 --              --
     Options granted                                   325,200           68.90                 --              --
     Options exercised                                (256,986)          45.93                 --              --
     Options surrendered upon exercise
     of stock appreciation rights                       (5,000)          32.38                 --              --
     Options forfeited                                  (6,703)          57.46                 --              --
     Options expired                                      (400)          54.06                 --              --
                                                     ---------                           --------
Balance outstanding December 31, 1997                1,302,577           56.48                 --              --
                                                     =========                           ========

Options exercisable -
     December 31, 1995                                 626,759           44.87             10,000           27.06
     December 31, 1996                                 623,461           46.44                 --              --
     December 31, 1997                                 750,894           50.87                 --              --
Following is the range of exercise  prices and  weighted-average  remaining
life  of  all  stock  options   outstanding   at  December  31,  1997,  and  the
weighted-average  price within each price range of those options outstanding and
those options exercisable at year-end 1997.
Options Outstanding at December 31, 1997                      Options Exercisable at December 31, 1997
     ---------------------------------------------------------------------------    ----------------------------------------
                         Range of         Weighted-Average      Weighted-Average                                  Weighted-Average
                  Exercise Prices                Remaining        Exercise Price                                    Exercise Price
       Options         per Option         Contractual Life            per Option          Options                       per Option
38,900      $32.38-$39.57                      2.7                $38.00           38,900                           $38.00
       418,518       40.81- 49.25                      5.6                 45.49          385,183                            45.56
       230,657       50.56- 54.50                      6.9                 53.14          170,169                            52.77
       457,502       61.00- 64.88                      8.7                 63.96          138,642                            63.96
       157,000       73.50- 73.50                      9.0                 73.50           18,000                            73.50
     ---------                                                                            -------
     1,302,577       32.38- 73.50                      7.2                 56.48          750,894                            50.87
     =========                                                                            =======
FAS No.  123,  "Accounting  for  Stock-Based  Compensation,"  prescribes  a
fair-value   method  of  accounting  for  employee  stock  options  under  which
compensation  expense is  measured  based on the  estimated  fair value of stock
options at the grant date and recognized  over the period that the options vest.
The  company,  however,  chooses to account for its stock  option plan under the
optional  intrinsic value method of APB No. 25,  "Accounting for Stock Issued to
Employees," whereby no compensation  expense is recognized for fixed-price stock
options.  Compensation cost for stock appreciation  rights,  which is recognized
under both accounting methods, was immaterial for 1997, 1996 and 1995.

     Had  compensation  expense been  determined in accordance with FAS No. 123,
the estimated  weighted-average,  grant-date  fair value would have been $14.37,
$13.17 and $14.54 per option for those options  granted in 1997,  1996 and 1995,
respectively,  and the  resulting  compensation  expense would have affected net
income  (loss) and per share  amounts  as shown in the  following  table.  These
amounts may not be representative of compensation expense that might be expected
to result in future years using the fair-value method of accounting for employee
stock options,  as the number of options granted in a particular year may not be
indicative of the number of options granted in future years,  and the fair-value
method of accounting has not been applied to options granted prior to January 1,
1995.
(Millions of dollars, except per share amounts)           1997             1996              1995
     -----------------------------------------------           ----             ----              ----
Net Income (Loss) -
              As reported                                      $194             $220             $(31)
              Pro forma                                         191              218              (32)

     Earnings (Loss) per Share -
         Basic -
              As reported                                     $4.06            $4.45            $(.60)
              Pro forma                                        4.00             4.42             (.62)

         Diluted -
              As reported                                      4.04             4.43             (.60)
              Pro forma                                        3.99             4.40             (.62)
The fair value of each option granted in 1997,  1996 and 1995 was estimated
as of the date of grant using the  Black-Scholes  option  pricing model with the
following weighted-average assumptions.

                                          1997        1996         1995
                                          ----        ----         ----

         Expected life (years)             5.8         5.8         10.0
         Risk-free interest rate           6.3%        6.1%         7.1%
         Expected dividend yield           3.1         3.1          3.1
         Expected volatility              17.5        17.9         19.4

     The number of the  company's  common shares issued upon exercise of options
after year-end 1997 was not material.

     In January 1998, the Board of Directors approved a broad-based stock option
plan (BSOP) that  provides for the granting of options to purchase the company's
common stock to all full-time  employees,  except officers. A total of 1,500,000
shares  of  common  stock  is  authorized  to be  issued  under  the  BSOP,  and
approximately 465,000 options were granted in January 1998.

     The Board of Directors, subject to stockholder ratification,  also approved
the 1998 Long Term  Incentive  Plan (the 1998 Plan) to be  effective  January 1,
1998. This plan provides for the granting of options, restricted stock and other
awards to key employees.  Stock  appreciation  rights may be associated with the
options. A total of 2,300,000 shares of the company's common stock is authorized
to be issued  under the 1998 Plan,  and in January  1998,  185,000  options were
granted.

     The 1987 Program terminated upon stockholder ratification of the 1998 Plan.
No further options can be granted under the 1987 Program after its  termination,
although options and any accompanying stock  appreciation  rights outstanding at
that time may be exercised prior to their respective expiration dates.

     Options  under either the BSOP or the 1998 Plan are granted at prices equal
to the fair market value of the underlying common stock at the time of grant.

     Also in January 1998, the Board of Directors  approved  provisions to amend
and restate the Executive  Deferred  Compensation Plan (EDCP).  The amendment of
the EDCP adds the company's  common stock as an investment  alternative,  allows
stock option gains to be deferred pretax and implements  certain  administrative
changes.  A total of 500,000  shares of common stock is  authorized to be issued
through the EDCP and periodically  transferred from the company's treasury stock
or purchased in open-market transactions.

     Earnings  per share for 1997 would have been lower had these  plans been in
existence and had shares been  transferred to the EDCP prior to year-end 1997 or
if any options  granted  under the BSOP or the 1998 Plan had been "in the money"
at year-end.  The impact on basic and diluted earnings per share would have been
dependent  on the  number  of shares  transferred  to the  EDCP,  while  diluted
earnings per share would have been further impacted by the number of incremental
shares   included  in  the   denominator   of  the  diluted   earnings-per-share
computation.

19.      Restructuring Charges

     Restructuring  of the exploration  and production  operating unit continued
during  1997  with  the  relocation  of the unit to  Houston,  Texas.  This,  in
conjunction with the unit's merger of its North American onshore properties into
Devon (see Note 4) and the 1995  reorganization,  resulted in approximately  300
employees terminating their employment, most of whom were terminated by year-end
1997.

     During the three-year period ended December 31, 1997, the company accrued a
total of $19 million for the cost of special  termination  benefits for retiring
employees  to  be  paid  from  retirement  plan  assets,   future  compensation,
relocation,  lease  cancellation  and  outplacement.  The $2 million  reserve at
December 31, 1997,  primarily  represents  remaining  severance costs, which are
expected  to be paid and  charged to the  reserve  during  1998.  The  accruals,
expenditures and reserve balances are set forth below:

     (Millions of dollars)                                     1997      1996
     ---------------------                                     ----      ----

     Beginning balance                                          $10      $  5
         Accruals                                                 2        10
         Retirement benefits to be paid from plan assets         --        (2)
         Payments                                               (10)       (3)
                                                               ----      ----

     Ending balance                                            $  2       $10
                                                               ====       ===

20.      Employee Stock Ownership Plan

     In 1989,  the company's  Board of Directors  approved a leveraged  Employee
Stock  Ownership  Plan  (ESOP)  into  which  is  paid  the  company's   matching
contribution  for the employees'  contributions  to the  Kerr-McGee  Corporation
Savings  Investment Plan (SIP). Most of the company's  employees are eligible to
participate  in both the ESOP  and the  SIP.  Although  the ESOP and the SIP are
separate  plans,  matching   contributions  to  the  ESOP  are  contingent  upon
participants' contributions to the SIP.

     In 1989,  the ESOP  trust  borrowed  $125  million  from a group of lending
institutions  and used the  proceeds  to  purchase  2.7  million  shares  of the
company's treasury stock. The company used the $125 million in proceeds from the
sale of the stock to  acquire  shares of its  common  stock in  open-market  and
privately  negotiated  transactions.  In  1996,  a  portion  of the  third-party
borrowings was replaced with a note payable to the company (sponsor  financing).
The  third-party  borrowings  are guaranteed by the company and are reflected in
the Consolidated  Balance Sheet as Long-Term Debt,  while the sponsor  financing
does  not  appear  in  the  company's  balance  sheet.  Deferred   compensation,
representing the unallocated  ESOP shares discussed in the following  paragraph,
is reflected as a reduction of stockholders' equity.

     The company  stock  acquired  by the ESOP trust is held in a loan  suspense
account. The company's matching contribution and dividends on the shares held by
the ESOP trust are used to repay the loan,  and stock is released  from the loan
suspense  account as the  principal  and  interest  are paid.  The stock is then
allocated  to  participants'  accounts  at  market  value  as the  participants'
contributions  are  made to the  SIP.  Deferred  compensation  reflected  in the
company's  Consolidated  Balance  Sheet is reduced as shares  are  allocated  to
participants'  accounts.  Long-term  debt is reduced as payments are made on the
third-party financing.  Dividends paid on the common stock held in participants'
accounts  are also used to repay the loans,  and stock with a market value equal
to the amount of dividends is allocated to participants' accounts.

     At  December  31,  1997 and  1996,  the ESOP  trust  held  shares  of stock
allocated to participants' accounts and in the loan suspense account as follows:

     (Thousands of shares)                     1997              1996
     ---------------------                     ----------------------

     Participants' accounts                   1,343             1,251
     Loan suspense account                    1,110             1,290

     The shares  allocated  to  participants  at  December  31,  1997,  included
approximately  15,000 shares  released in January 1998. The shares  allocated to
participants at December 31, 1996, included approximately 14,000 shares released
in January 1997.

     All  ESOP  shares  are  considered   outstanding   for   earnings-per-share
calculations. Dividends on ESOP shares are charged to retained earnings.

     Compensation expense is recognized using the cost method and is reduced for
dividends  paid  on  the  unallocated  ESOP  shares.   The  company   recognized
ESOP-related  expense of $10 million,  $12 million and $14 million in 1997, 1996
and 1995,  respectively.  These amounts include interest expense incurred on the
third-party ESOP debt of $5 million, $6 million and $8 million in 1997, 1996 and
1995,  respectively.  The company  contributed  $1  million,  $9 million and $15
million to the ESOP in 1997, 1996 and 1995, respectively. The cash contributions
are net of $4 million for the  dividends  paid on the company  stock held by the
ESOP trust in each of the years 1997, 1996 and 1995.

21.      Discontinued Operations

     During 1995, the company disposed of substantially  all of its refining and
marketing  operations,  which had been  conducted by wholly owned  subsidiaries,
Kerr-McGee Refining Corporation and Cato Oil and Grease Co. The 1995 gain on the
sale was $2 million,  net of $1 million for income  taxes.  All of the crude oil
and  refined-product  inventories  of the  discontinued  refining and  marketing
operations  were valued using the last-in,  first-out  (LIFO)  method until sold
during 1995.  LIFO reserves of $12 million were reversed at the time of the sale
of these  inventories.  The sales of the remaining refining and marketing assets
were completed during 1996, and the resulting gains and losses were immaterial.

     The  company  exited  from the coal  business in 1998 with the sales of its
mining operations at Galatia,  Illinois, and Kerr-McGee Coal Corporation,  which
held Jacobs Ranch Mine in Wyoming.  The cash sales  resulted in proceeds of $600
million and a gain of $257 million,  net of $149 for income taxes. These amounts
will be reflected in the  Consolidated  Statement of Income and the Consolidated
Statement of Cash Flows for the year ended  December  31, 1998.  Coal assets and
liabilities at December 31, 1997, are included as part of the  appropriate  line
items in the  Consolidated  Balance  Sheet.  Included at December 31, 1997,  are
current assets $50 million;  long-term assets $221 million;  current liabilities
$40 million; and long-term liabilities $73 million.

     The  operating  results  of both the  discontinued  coal and  refining  and
marketing  operations are reported  separately in the Consolidated  Statement of
Income. Revenues applicable to all discontinued operations were as follows:

     (Millions of dollars)             1997             1996              1995
     ---------------------             ----            -----            ------

     Coal                              $323             $365            $  353
     Refining and marketing              --               --             1,127
                                      -----            -----            ------

                                       $323             $365            $1,480
                                       ====             ====            ======

22.      Postretirement Benefits

     The company sponsors  contributory plans to provide certain health care and
life insurance benefits for retired  employees.  Substantially all the company's
employees may become  eligible for these  benefits if they reach  retirement age
while  working  for the  company;  however,  benefits  available  and  costs  to
individual  employees vary  depending on the  employee's  date of retirement and
date of employment with the company.

     At December 31, 1997 and 1996, the actuarial and recorded  liabilities  for
postretirement benefits, none of which has been funded, are as follows:
1997                               1996         
                                                     ----------------------             ----------------------
(Millions of dollars)                                Health            Life             Health            Life
Actuarial present value of accumulated
     postretirement benefit obligations -
         Retirees                                     $(77)            $(19)             $(69)            $(18)
         Fully eligible active participants             (9)              (2)              (11)              (1)
         Other active participants                     (21)              (3)              (18)              (4)
                                                     -----             ----              ----             ----
              Total                                   (107)             (24)              (98)             (23)
Unrecognized net (gain) loss                             6               (3)               --               (4)
                                                     -----             ----              ----             ----
         Accrued postretirement expense              $(101)            $(27)             $(98)            $(27)
                                                     =====             ====              ====             ====
For the years ended December 31, 1997, 1996 and 1995, the components of net
periodic expense for postretirement benefits were as follows:
1997             1996              1995    
                                                                 ------------     -------------    -------------
(Millions of dollars)                                            Health  Life     Health   Life     Health  Life
                                                                 ------  ----     ------   ----     ------  ----
Service cost - benefits earned during the period                   $1      $1       $1       $1       $1      $1
Interest cost on accumulated postretirement
     benefit obligations                                            8       1        8        1        8       1
                                                                   --      --       --       --       --      --

         Net postretirement expense                                $9      $2       $9       $2       $9      $2
                                                                   ==      ==       ==       ==       ==      ==
The following  assumptions  were used in estimating  the actuarial  present
value of the  accumulated  postretirement  benefit  obligations and net periodic
postretirement benefit expense:

                                                  1997        1996       1995
                                                  ----        ----       ----

     Future compensation increases                5.0%        5.0%       5.00%
     Discount rate                                7.0         7.5        7.25

     The  health  care cost  trend  rate used to  determine  the  year-end  1997
accumulated   postretirement  benefit  obligation  was  8%  in  1998,  gradually
declining to 5% in the year 2009 and thereafter.

     A 1% increase  in the  assumed  health care cost trend rate for each future
year would increase the  accumulated  postretirement  benefit  obligation by $13
million at December 31,  1997.  In  addition,  the  aggregate of the service and
interest cost components of net periodic  postretirement  expense for 1997 would
increase by $1 million.

23.      Retirement Plans

     Most  of  the  company's   employees  are  covered  under   noncontributory
retirement plans of the company and certain of its subsidiaries. The benefits of
these plans are based primarily on years of service and employees'  remuneration
near  retirement.  The  company's  policy  is to fund  the  minimum  amounts  as
permitted by the Employee Retirement Income Security Act of 1974 (ERISA).

     The funded status of plans with assets in excess of accumulated benefits at
December 31, 1997 and 1996, is as follows:
(Millons of dollars)                                                           1997              1996
     --------------------                                                           ----              ----
Plan assets at fair value                                                      $639              $538
                                                                                    ----              ----
     Actuarial present value of accumulated benefit obligations -
         Vested                                                                     (354)             (322)
         Nonvested                                                                   (16)              (13)
                                                                                    ----             -----
              Total                                                                 (370)             (335)
                                                                                    ----              ----
              Plan assets in excess of accumulated benefit obligations              $269              $203
                                                                                    ====              ====

     Plan assets at fair value                                                      $639              $538
                                                                                    ----              ----
     Projected benefit obligations -
         Actuarial present value of accumulated benefit obligations                 (370)             (335)
         Projected salary increases                                                  (54)              (46)
                                                                                    ----             -----
              Total                                                                 (424)             (381)
                                                                                    ----              ----
              Plan assets in excess of projected benefit obligations                 215               157
     Unrecognized net asset at January 1, 1987                                       (13)              (17)
     Unrecognized prior service costs                                                 11                12
     Unrecognized net gain                                                          (171)             (119)
                                                                                    ----              ----
              Pension prepayment at end of year                                     $ 42             $  33
                                                                                    ====             =====
The net periodic  pension credit,  excluding  charges of $2 million in 1996
and $1 million in 1995 related to the  restructuring  program (see Note 19), for
each of the past three years is summarized as follows:
(Millions of dollars)                                         1997             1996              1995
     ---------------------                                         ----             ----             -----
Service cost - benefits earned during the period             $  10             $  9             $   8
     Interest cost on projected benefit obligations                  28               27                27
     Return on plan assets                                         (126)             (70)             (115)
     Net amortization and deferral                                   79               27                71
                                                                  -----             ----             -----

         Net pension credit                                       $  (9)            $ (7)            $  (9)
                                                                  =====             ====             =====
The amount of benefits  that can be covered by the funded  plans is limited
by ERISA and the  Internal  Revenue  Code.  Therefore,  the company has unfunded
supplemental  plans designed to maintain  benefits for all employees at the plan
formula  level  and to  provide  senior  executives  with  benefits  equal  to a
specified percentage of their final average compensation.  The projected benefit
obligation  for these  unfunded  plans  totaled  $14  million and $19 million at
December  31,  1997 and 1996,  respectively.  To reflect the amount by which the
accumulated  benefit  obligation  exceeded the accrued pension expense for these
plans, an additional  liability is recorded in the Consolidated Balance Sheet at
both December 31, 1997 and 1996. Offsetting is an intangible asset (see Note 7).
Although not considered plan assets,  a grantor trust was established from which
payments  for  certain  of these  supplemental  plans are made.  The trust had a
balance  of  $7  million  and  $12  million  at  December  31,  1997  and  1996,
respectively.  Excluding  $6 million  in 1997  related  to the  settlement  of a
significant  portion of the liabilities of the unfunded  supplemental plans, net
periodic  pension expense for these plans was $3 million for 1997 and $4 million
for each of the years 1996 and 1995.

     The following  assumptions  were used in estimating  the actuarial  present
value of the projected benefit obligation and net periodic pension costs:

                                                  1997       1996        1995
                                                  ----       ----        ----

     Future compensation increases                5.0%       5.0%        5.00%
     Discount rate                                7.0        7.5         7.25
     Long-term rate of return on plan assets      9.0        9.0         9.00

24.      Reporting by Business Segments

     The company is an international  energy and chemical company. The principal
areas of oil and gas  exploration  and  production  are the Gulf of Mexico,  the
United Kingdom sector of the North Sea, China,  Southeast Asia, Yemen and, prior
to December  31,  1996,  onshore in North  America.  The  company  has  domestic
chemical  operations and interests in chemical  operations in Western  Australia
and Saudi Arabia.
(Millions of dollars)                                         1997             1996              1995
     ---------------------                                         ---------------------------------------
Sales -
         Exploration and production(1)                           $  628           $  874            $  690
         Chemicals                                                  760              692               707
         All other                                                   --               --                 4
                                                                 ------           ------            ------
                  Total                                          $1,388           $1,566            $1,401
                                                                 ======           ======            ======

     Operating profit (loss)(2) -
         Exploration and production                              $  175           $  204            $  (97)
         Chemicals                                                   81               85               122
                                                                 ------           ------            ------
                  Total                                          $  256           $  289            $   25
                                                                 ======           ======            ======

     Net operating profit (loss)(2) -
         Exploration and production                              $  107           $  136            $  (56)
         Chemicals                                                   52               53                81
                                                                 ------           ------            ------
                  Total                                             159              189                25

     Net interest expense                                           (24)             (29)              (29)
     Net nonoperating income (expense)(2)                            26                4               (55)
     Income from discontinued operations,
         net of income tax                                           33               56                27
                                                                 ------           ------            ------
     Net income (loss)                                           $  194           $  220            $  (31)
                                                                 ======           ======            ======

     Sales -
     U.S. operations(3)                                          $  889           $1,026            $  884
                                                                 ------           ------            ------
     International operations(4) -
         North Sea - exploration and production                     215              289               272
         China - exploration and production                          56               25                --
         Australia - chemicals                                      185              151               158
         Other                                                       43               75                87
                                                                 ------           ------            ------
                                                                    499              540               517
                                                                 ------           ------            ------
                  Total                                          $1,388           $1,566            $1,401
                                                                 ======           ======            ======

     Operating profit (loss)(2) -
     U.S. operations                                             $  159           $  174            $  (44)
                                                                 ------           ------            ------
     International operations -
         North Sea - exploration and production                      80               93               108
         China - exploration and production                           4                2                (5)
         Australia - chemicals                                       13                9                24
         Other                                                       --               11               (58)
                                                                 ------           ------            ------
                                                                     97              115                69
                                                                 ------           ------            ------
                  Total                                          $  256           $  289            $   25
                                                                 ======           ======            ======
(1)Includes  primarily  crude oil sales to the  discontinued  refining  and
        marketing operations of $112 million in 1995.
     (2)Includes special items.  Refer to Management's Discussion and Analysis.
     (3)Includes U.S. crude oil sales to the discontinued refining and marketing
        operations of $105 million in 1995.
     (4)Includes  international crude oil sales to the discontinued refining and
        marketing operations of $7 million in 1995.
(Millions of dollars)                                         1997             1996              1995
     ---------------------                                         ----             ----              ----
Depreciation, depletion and amortization -
         Exploration and production                              $  186           $  218            $  231
         Chemicals                                                   55               55                52
         All other                                                    5                4                 6
         Discontinued operations                                     25               30                45
                                                                 ------           ------            ------
                  Total                                          $  271           $  307            $  334
                                                                 ======           ======            ======

     Cash capital expenditures -
         Exploration and production                                $213             $239              $371
         Chemicals                                                   91              118                69
         All other                                                   10                6                 2
         Discontinued operations                                     27               29                42
                                                                 ------           ------            ------
                  Total                                             341              392               484
                                                                 ------           ------            ------

     Exploration expenses -
         Petroleum exploration and production -
              Dry hole costs                                         25               37                34
              Amortization of undeveloped leases                      8               10                14
              Other                                                  30               25                31
                                                                 ------           ------            ------
                  Total                                              63               72                79
         Minerals and other                                           2                2                 1
                                                                 ------           ------            ------

                  Total exploration expenses                         65               74                80
         Less - Amortization of oil and gas and minerals
              leases and other noncash expenses                      (8)             (14)              (19)
                                                                 ------           ------            ------
                                                                     57               60                61
                                                                 ------           ------            ------
                  Total cash capital expenditures and
                      cash exploration expenses                  $  398           $  452            $  545
                                                                 ======           ======            ======

     Identifiable assets -
         Exploration and production                              $1,681           $1,667            $1,748
         Chemicals                                                  875              886               802
                                                                 ------           ------            ------
                  Total                                           2,556            2,553             2,550
     Corporate and other assets                                     270              295               297
     Discontinued operations                                        270              276               366
                                                                 ------           ------            ------
                  Total                                          $3,096           $3,124            $3,213
                                                                 ======           ======            ======

     Identifiable assets -
         U.S. operations                                         $1,362           $1,390            $1,317
                                                                 ------           ------            ------
         International operations -
              North Sea - exploration and production                699              651               669
              China - exploration and production                    183              180               149
              Australia - chemicals                                 243              268               260
              Other                                                  69               64               155
                                                                 ------           ------            ------
                                                                  1,194            1,163             1,233
                                                                 ------           ------            ------
                  Total                                          $2,556           $2,553            $2,550
                                                                 ======           ======            ======

     Net assets -
         U.S. operations                                         $  617           $  582            $  623
                                                                 ------           ------            ------
         International operations -
              North Sea - exploration and production                475              413               409
              China - exploration and production                    134              109               106
              Australia - chemicals                                 152              211               199
              Other                                                  62               52                79
                                                                 ------           ------            ------
                                                                    823              785               793
                                                                 ------           ------            ------
              Total                                              $1,440           $1,367            $1,416
                                                                 ======           ======            ======
25.      Results of Operations from Crude Oil and Natural Gas Activities

     The results of operations from crude oil and natural gas activities for the
three years ended December 31, 1997, consist of the following:
Interest
                                                                                                            Results of  in Equity
                                       Production    Other                Depreciation   Asset  Income Tax  Operations  Affiliate's
                               Gross    (Lifting)   Related  Exploration and Depletion  Impair- Expenses    Producing  Results of
(Millions of dollars)       Revenues(1)   Costs    Costs(2)  Expenses(2)   Expenses       ment  (Benefits)  Activities Operations(3)
---------------------          -----------------------------------------------------------------------------------------------------
1997 -
   Domestic                       $309    $  50        $25       $25          $105         $--     $ 39        $ 65        $25
   North Sea                       190       49          7        13            53          --       27          41         --
   China                            56       11          6        16            19          --       --           4         --
   Other international               3        1          6         9             1          --       (4)        (10)         3
                                  ----     ----        ---       ---          ----         ---     ----        ----        ---
     Total crude oil and
       natural gas activities      558      111         44        63           178          --       62         100         28
   Other(4)                         70       55          2        --            --          --        6           7         --
                                  ----     ----        ---       ---          ----         ---     ----        ----        ---
         Total                    $628     $166        $46       $63          $178         $--     $ 68        $107        $28
                                  ====     ====        ===       ===          ====         ===     ====        ====        ===

1996 -
   Domestic                       $397    $  83        $31       $26          $127         $22      $35        $ 73       $ --
   North Sea                       240       57          8        36            57          --       30          52         --
   China                            25        8          5         2             8          --        1           1         --
   Other international              32       10          6         8            15          --       (2)         (5)        --
                                  ----     ----        ---       ---          ----         ---     ----        ----        ---
     Total crude oil and
       natural gas activities      694      158         50        72           207          22       64         121         --
   Other(4)                        180      159          1        --             1          --        4          15         --
                                  ----     ----        ---       ---          ----         ---     ----        ----        ---
         Total                    $874     $317        $51       $72          $208         $22     $ 68        $136        $--
                                  ====     ====        ===       ===          ====         ===     ====        ====        ===

1995 -
   Domestic                       $294      $92        $17       $57          $128        $144     $(58)       $(86)       $--
   North Sea                       242       57          8        15            66          --       32          64         --
   Other international              40       11         12         7            20          53      (20)        (43)        --
                                 -----    -----       ----      ----         -----       -----     ----        ----        ---
     Total crude oil and
       natural gas activities      576      160         37        79           214         197      (46)        (65)        --
   Other(4)                        114       88          3        --             3           6        5           9         --
                                 -----    -----       ----      ----         -----       -----     ----        ----        ---
         Total                    $690     $248        $40       $79          $217        $203     $(41)       $(56)        --
                                  ====     ====        ===       ===          ====        ====     ====        ====        ===
(1)Gross revenues for 1995 include sales to affiliated  entities  totaling
        $112 million. Of this amount, $97 million and $7 million were applicable
        to Domestic and North Sea gross revenues,  respectively,  and $8 million
        was from other activities.

      (2)Includes  restructuring  charges  of $2  million,  $10  million  and $7
        million  in  1997,  1996  and  1995,  respectively.  These  charges  are
        classified  as Other  Related  Costs,  with the  exception of $1 million
        classified as Exploration Expenses in 1995 (see Note 19).

      (3)The equity  affiliate  follows the "full cost" method of accounting for
        oil and gas exploration and production activities.

      (4)Includes gas  marketing,  gas  processing  plants,  pipelines and other
        items  that do not fit the  definition  of  crude  oil and  natural  gas
        activities  but have been  included  above to  reconcile  to the segment
        presentations.

     The table below  presents the  company's  average  per-unit  sales price of
proprietary  crude oil and  natural gas and  production  costs per barrel of oil
equivalent  for each of the past three years.  Natural gas  production  has been
converted to a barrel of oil equivalent  based on approximate  relative  heating
value (6 MCF equals 1 barrel).

                                                1997       1996        1995
                                              ------     ------      ------
Average sales price -
     Crude oil (per barrel)
         Domestic                             $18.53     $19.36      $15.69
         North Sea                             18.77      19.08       16.31
         China                                 17.71      19.53          --
         Other international                   18.59      17.69       15.21
              Average                          18.51      19.16       15.99

     Natural gas (per MCF)
         Domestic                               2.57       2.16        1.56
         North Sea                              2.52       2.64        2.66
         Other international                      --       1.14         .85
              Average                           2.56       2.12        1.52

Production costs -
     (Per barrel of oil equivalent)
         Domestic                               2.75       3.32        3.78
         North Sea                              4.70       4.33        3.91
         China                                  3.50       5.92          --
         Other international                    4.55       3.41        2.39
              Average                           3.48       3.72        3.68

26.      Capitalized Costs of Crude Oil and Natural Gas Activities

     Capitalized  costs of crude oil and natural gas  activities and the related
reserves for  depreciation,  depletion and  amortization  at the end of 1997 and
1996 are set forth in the table  below.  Not  included in the amounts  shown are
$221 million and $209 million that represent the company's proportional interest
in an equity  affiliate's net  capitalized  costs at December 31, 1997 and 1996,
respectively  (see Note 4). The equity affiliate  follows the "full cost" method
of accounting for oil and gas exploration and production activities.
(Millions of dollars)                                             1997              1996
     ---------------------                                          -------           -------
Capitalized costs -
         Proved properties                                           $2,709            $3,054
         Unproved properties                                            134               104
         Other                                                           45                34
                                                                    -------           -------
                                                                      2,888             3,192
                                                                    -------           -------
     Reserves for depreciation, depletion and amortization -
         Proved properties                                            1,623             1,953
         Unproved properties                                             30                29
         Other                                                           24                23
                                                                    -------           -------
                                                                      1,677             2,005
                                                                    -------           -------

              Net capitalized costs                                  $1,211            $1,187
                                                                     ======            ======
27.      Standardized  Measure  of and  Reconciliation of Changes in  Discounted
         Future Net Cash Flows (Unaudited)

     The  standardized  measure  of  future  net  cash  flows  presented  in the
following  table was computed using year-end prices and costs and a 10% discount
factor.  The future income tax expense was computed by applying the  appropriate
year-end  statutory  rates,  with  consideration  of future  tax  rates  already
legislated,  to the  future  pretax  net cash  flows  less the tax  basis of the
properties  involved.  However, the company cautions that actual future net cash
flows  may vary  considerably  from  these  estimates.  Although  the  company's
estimates of total reserves,  development  costs and production rates were based
upon the best information  available,  the development and production of the oil
and gas reserves may not occur in the periods  assumed.  Actual prices  realized
and costs  incurred  may vary  significantly  from those used.  Therefore,  such
estimated  future  net  cash  flow  computations  should  not be  considered  to
represent the company's  estimate of the expected  revenues or the current value
of existing proved reserves.
Standardized       Proportional
                                                  Future                                             Measure of Interest in Equity
                                             Development                                   10%       Discounted        Affiliate's
                                 Future   and Production         Future  Future Net     Annual       Future Net       Standardized
(Millions of dollars)      Cash Inflows            Costs   Income Taxes  Cash Flows   Discount    Cash Flows(1)            Measure
----------------------------------------------------------------------------------------------------------------------------------
1997 -
     Domestic                  $1,407             $  403        $  290     $  714         $242          $  472                $205
     North Sea                  1,807                813           266        728          266             462                  --
     China                        401                171            42        188           45             143                  --
     Other international          304                153            55         96           42              54                  19
                               ------             ------        ------     ------         ----          ------                ----
         Total                 $3,919             $1,540        $  653     $1,726         $595          $1,131                $224
                               ======             ======        ======     ======         ====          ======                ====

1996 -
     Domestic                  $2,217             $  435        $  552     $1,230         $411          $  819                $336
     North Sea                  2,610                841           638      1,131          382             749                  --
     China                        658                248            95        315           91             224                  --
     Other international          246                147            38         61           26              35                  28
                               ------             ------        ------     ------         ----          ------                ----
         Total                 $5,731             $1,671        $1,323     $2,737         $910          $1,827                $364
                               ======             ======        ======     ======         ====          ======                ====

1995 -
     Domestic                  $2,320             $  910        $  350     $1,060         $339          $  721              $   --
     North Sea                  1,494                418           328        748          254             494                  --
     China                        551                179            96        276           81             195                  --
     Other international          297                 94            62        141           54              87                  --
                               ------             ------        ------     ------         ----          ------              ------
         Total                 $4,662             $1,601        $  836     $2,225         $728          $1,497              $   --
                               ======             ======        ======     ======         ====          ======              ======
(1)Includes  $(8) million in 1996 and $51 million in 1995 from  properties
held for sale (see Note 11).

     The  changes  in the  standardized  measure  of future  net cash  flows are
presented below for each of the past three years:
(Millions of dollars)                                                    1997              1996             1995
---------------------                                                  ------            ------           ------
Net change in sales, transfer prices and production costs             $(1,121)           $  847           $  451
Changes in estimated future development costs                             (64)               45             (165)
Sales and transfers less production costs                                (446)             (516)            (402)
Purchases of reserves in place                                             --                 1               62
Changes due to extensions, discoveries, etc.                              108               474               58
Changes due to revisions in quantity estimates                             37               116               17
Changes due to sales of reserves in place                                  (8)             (139)             (86)
Changes due to reserves merged into equity affiliate                       --              (511)              --
Current period development costs                                          152               155              243
Accretion of discount                                                     261               199              167
Changes in income taxes                                                   384              (289)            (124)
Timing and other                                                            1               (52)             (19)
                                                                       ------            ------           ------
     Net change                                                          (696)              330              202
Total at beginning of year                                              1,827             1,497            1,295
                                                                       ------            ------           ------
Total at end of year                                                  $ 1,131            $1,827           $1,497
                                                                       ======             =====           ======
28.      Crude Oil, Condensate and Natural Gas Net Reserves (Unaudited)

     The  estimates  of proved  reserves  have been  prepared  by the  company's
geologists and engineers.  Such estimates include reserves on certain properties
that are partially  undeveloped  and reserves that may be obtained in the future
by improved recovery operations now in operation or for which successful testing
has been  demonstrated.  The  company  has no proved  reserves  attributable  to
long-term  supply  agreements with  governments or consolidated  subsidiaries in
which there are  significant  minority  interests.  At December  31,  1996,  the
company merged its North American  onshore  properties into an equity  affiliate
(see Note 4).

     The following table  summarizes the changes in the estimated  quantities of
the company's  crude oil and  condensate  and natural gas reserves for the three
years ended December 31, 1997.
Crude Oil and Condensate                            Natural Gas
                                                             (Millions of barrels)                      (Billions of cubic feet)   
                                                              North           Interna-                       North  Interna-
                                                 Domestic      Sea     China   tional   Total   Domestic      Sea    tional    Total
Proved developed and
     undeveloped reserves -
         Balance December 31, 1994                   77         75       26       13      191       568        199      82      849
              Revisions of previous estimates         2          1        4        1        8        (6)        --       3       (3)
              Purchases of reserves in place          1         --       --       --        1        45         --      --       45
              Sales of reserves in place             (5)        --       --       --       (5)      (31)        --      (1)     (32)
              Extensions, discoveries and
                  other additions                     1         --       --       --        1        25         --       1       26
              Production                            (10)       (14)      --       (2)     (26)      (82)        (8)    (16)    (106)
                                                    ---        ---       --       --      ---      ----        ---     ---     ----

         Balance December 31, 1995(1)                66         62       30       12      170       519        191      69      779
              Revisions of previous estimates        12         (1)      --       (1)      10        (1)       (10)     (1)     (12)
              Purchases of reserves in place         --         --       --       --       --         1         --      --        1
              Sales of reserves in place            (10)        --       --       (1)     (11)      (28)        --     (18)     (46)
              Reserves merged into
                  equity affiliate                  (16)        --       --       (9)     (25)     (122)        --     (41)    (163)
              Extensions, discoveries and
                  other additions                     3         39       --        7       49        27          2      39       68
              Production                            (11)       (11)      (2)      (1)     (25)      (84)       (11)     (9)    (104)
                                                    ---        ---       --       --      ---      ----        ---     ---     ----

         Balance December 31, 1996(1)                44         89       28        7      168       312        172      39      523
              Revisions of previous estimates         5          1       --        1        7        (1)        29       3       31
              Sales of reserves in place             --         (1)      --       --       (1)      (27)        --      --      (27)
              Extensions, discoveries and
                  other additions                     7         --       --        4       11        37         --       4       41
              Production                             (9)        (8)      (3)      (1)     (21)      (56)       (12)     --      (68)
                                                    ---        ---       --       --      ---      ----        ---     ---     ----
         Balance December 31, 1997                   47         81       25       11      164       265        189      46      500
                                                    ===        ===       ==       ==      ===      ====        ===     ===     ====

         Proportional interest in
              equity affiliate's reserves
                  December 31, 1996                  22         --       --        3       25       172         --      13      185
                  December 31, 1997                  22         --       --        3       25       175         --      15      190
Proved developed reserves -
         December 31, 1995(1)                        45         50       --       12      107       329        156      65      550
         December 31, 1996(1)                        26         45       20       --       91       183        161      --      344
         December 31, 1997                           28         33       25       11       97       166        147      --      313
         Proportional interest in
              equity affiliate's reserves
                  December 31, 1996                  20         --       --        3       23       164         --      13      177
                  December 31, 1997                  20         --       --        2       22       142         --      14      156
(1)Includes 1 million  barrels of oil and 3 billion  cubic feet of natural
        gas held for sale at December  31, 1996,  and 12 million  barrels of oil
        and 57 billion  cubic feet of natural gas held for sale at December  31,
        1995 (see Note 11).

     The  following  presents  the  company's  barrel of oil  equivalent  proved
developed and undeveloped  reserves based on approximate  relative heating value
(6 MCF equals 1 barrel).
North                          Other
     (Millions of equivalent barrels)        Domestic        Sea         China         International      Total
December 31, 1995(1)                       152           94           30              24              300
     December 31, 1996(1)                        96          118           28              14              256
     December 31, 1997                           91          112           25              19              247

     Proportional interest in
         equity affiliate's reserves
              December 31, 1996                  51           --           --               5               56
              December 31, 1997                  52           --           --               5               57
(1)Includes 2 million  barrels of oil equivalent and 21 million barrels of
        oil equivalent held for sale at December 31, 1996 and 1995, respectively
        (see Note 11).

29.      Costs Incurred in Crude Oil and Natural Gas Activities

     Total  expenditures,  both  capitalized  and  expensed,  for  crude oil and
natural gas property acquisition, exploration and development activities for the
three years ended December 31, 1997, are reflected in the following table:
Property
                                                             Acquisition         Exploration         Development
     (Millions of dollars)                                    Costs(1)            Costs(2)            Costs(3)
1997 -
         Proprietary costs -
              Domestic                                           $ 29               $ 31               $  45
              North Sea                                            --                 15                  86
              China                                                --                 26                   8
              Other international                                   2                 13                  13
                                                                 ----              -----               -----
                  Total                                          $ 31               $ 85               $ 152
                                                                 ====              =====               =====

         Proportional interest in equity affiliate's costs -
              Domestic                                           $  6               $  6               $  25
              Other international                                  --                 --                   2
                                                                 ----               ----               -----
                  Total                                          $  6               $  6               $  27
                                                                 ====               ====               =====

     1996 -
         Proprietary costs -
              Domestic                                           $  6              $  53               $  99
              North Sea                                            --                 49                  21
              China                                                 1                  6                  25
              Other international                                  --                  9                  10
                                                                 ----              -----               -----
                  Total                                          $  7               $117                $155
                                                                 ====               ====                ====

     1995 -
              Proprietary costs -
              Domestic                                            $84              $  58                $128
              North Sea                                             7                 28                  23
              China                                                 1                  2                  82
              Other international                                   1                 11                  10
                                                                 ----              -----               -----
                  Total                                           $93              $  99                $243
                                                                  ===              =====                ====
(1)Includes $29 million applicable to purchases of reserves in place in
        1995.

      (2)Exploration  costs include delay rentals,  exploratory  dry holes,  dry
        hole and bottom hole  contributions,  geological and geophysical  costs,
        costs  of  carrying  and  retaining   properties,   etc.,   and  capital
        expenditures,  such  as  costs  of  drilling  and  equipping  successful
        exploratory wells, etc.

      (3)Development  costs  include  costs  incurred to obtain access to proved
        reserves  (surveying,  clearing ground,  building roads, etc.), to drill
        and  equip  development  wells and to  acquire,  construct  and  install
        production  facilities and improved recovery systems.  Development costs
        also include costs of developmental dry holes.

30.      Supplementary Mineral Ore Reserve and Price Data (Unaudited)

     The following table presents selected  statistics  related to the company's
mineral operations.  Mineral reserves presented in the following table represent
those  estimated  quantities  of proved and probable ore that,  under  presently
anticipated  conditions,  may be  profitably  recovered  and  processed  for the
extraction of their mineral  content.  Future  production of these  resources is
dependent  on  many  factors,   including  market  conditions  and  governmental
regulations.
(Thousands of tons)                                1997         1996          1995         1994         1993
-------------------                                ---------------------------------------------------------
Proved and probable (demonstrated)
     reserves, December 31 -
         Coal(1)                                   506,000      810,400      833,700      864,200      887,900
         Heavy minerals                            6,500(2)       5,500        5,700        6,000        8,000
Production -
         Coal                                       32,100       31,300       31,100       25,600       23,300
         Heavy minerals                                234          149          238          268          263
Average market price (per ton) -
         Coal                                        $8.93       $10.48       $10.12       $10.73       $13.78
         Heavy minerals                             127.20       142.60       104.40        85.43        69.47
(1)The company withdrew from the coal business in 1998.  See Management's 
        Discussion and Analysis and Note 11.

      (2)Represents  177 million tons of sand  containing 3.7% heavy minerals in
        Western Australia. The percentages of valuable heavy minerals within the
        heavy-mineral   concentrate  are  4.5%  rutile,  61.3%  ilmenite,   3.3%
        leucoxene and 11.1% zircon.

31.      Quarterly Financial Information (Unaudited)

     A summary of quarterly  consolidated results for 1997 and 1996 is presented
below. Refer to Management's  Discussion and Analysis for information about 1997
and 1996 special items.
Diluted Earnings per
                                                               Income (Loss)         Net                Common Share       
                                               Operating      From Continuing      Income        Continuing           Net
                                    Sales       Profit          Operations         (Loss)        Operations         Income
1997 Quarter Ended -
     March 31                     $  384         $ 83              $ 58             $ 70           $1.21           $1.45
     June 30                         335           54                37               42             .76             .87
     September 30                    324           57                31               37             .65             .77
     December 31                     345           62                35               45             .74             .95
                                  ------         ----              ----             ----           -----           -----
         Total                    $1,388         $256              $161             $194           $3.36           $4.04
                                  ======         ====              ====             ====           =====           =====

1996 Quarter Ended -
     March 31                     $  365         $ 65              $ 35             $ 48           $ .69           $ .94
     June 30                         379           62                37               51             .73            1.01
     September 30                    389           67                46               62             .94            1.27
     December 31                     433           95                46               59             .94            1.21
                                  ------         ----              ----             ----           ------          -----
         Total                    $1,566         $289              $164             $220           $3.30           $4.43
                                  ======         ====              ====             ====           ======          =====
The company's  common stock is listed for trading on the New York Stock
Exchange and was held by approximately 11,300 stockholders of record at year-end
1997.  The ranges of sales  prices and  dividends  declared  during the last two
years are as follows:

                                      Market Prices
                         --------------------------------------- 
                                                                     Dividends
                                 1997               1996             per Share 
                         ------------------  ------------------   --------------
                         High       Low       High         Low     1997     1996
                         -------------------------------------------------------

Quarter Ended -
     March 31                75     61 7/8    65 3/4      59 3/8   $.45     $.41
     June 30             67 1/4     55 1/2    67 3/8      56 5/8    .45      .41
     September 30      69 15/16   59 13/16    63 3/8      55 3/4    .45      .41
     December 31         71 1/2     60 1/8    74 1/8      60 5/8    .45      .41

Five-Year Financial Summary
(Millions of dollars, except per-share amounts)       1997         1996         1995         1994         1993
----------------------------------------------        --------------------------------------------------------
Summary of Net Income (Loss)
Sales                                               $1,388       $1,566       $1,401       $1,272       $1,118
                                                    ------       ------       ------       ------       ------
Operating costs and expenses                         1,199        1,397        1,480        1,187        1,020
Interest and debt expense                               47           52           60           59           46
                                                    ------       ------       ------       ------       ------
         Total costs and expenses                    1,246        1,449        1,540        1,246        1,066
                                                    ------       ------       ------       ------       ------
                                                       142          117         (139)          26           52
Other income                                            90          132           29           27           17
Provision (benefit) for income taxes                    71           85          (52)          18           33
                                                    ------       ------       ------       ------       ------
Income (loss) from continuing operations
     before extraordinary charge and cumulative
     effect of accounting changes                      161          164          (58)          35           36
Income from discontinued operations                     33           56           27           55           41
                                                    ------       ------       ------       ------       ------
Net income (loss)                                   $  194       $  220       $  (31)      $   90       $   77
                                                    ======       ======       ======       ======       ======

Common Stock Information, per Share
Diluted earnings (loss) per common share -
     Continuing operations                          $3.36        $3.30        $(1.12)     $.67         $.74
     Discontinued operations                          .68         1.13           .52         1.07          .83
         Total                                      $4.04        $4.43      $(.60)          $1.74        $1.57
Dividends declared                                   1.80         1.64          1.55         1.52         1.52
Stockholders' equity                                30.09        28.10         27.52        29.82        29.24
Market high for the year                            75.00        74.13         64.00        51.00        56.00
Market low for the year                             55.50        55.75         44.00        40.00        41.75
Market price at year-end                           $63.31       $72.00        $63.50       $46.25       $45.25
Shares outstanding at year-end (thousands)         47,686       48,294        51,069       51,694       51,655

Balance Sheet Information
Working capital                                       $166         $320         $189          $52         $102
Property, plant and equipment - net                  1,998        1,948        2,210        2,489        2,446
Total assets                                         3,096        3,124        3,213        3,696        3,506
Long-term debt                                         552          626          632          673          590
Total debt                                             579          663          735          993          859
Stockholders' equity                                 1,440        1,367        1,416        1,543        1,512

Cash Flow Information
Net cash provided by operating activities              569          645          369          356          427
Cash capital expenditures                              341          392          484          410          449
Dividends paid                                          85           83           79           78           73
Purchase of treasury stock                             $60         $195          $45          $--          $--

Ratios and Percentage
Current ratio                                          1.3          1.7          1.3          1.1          1.1
Average price/earnings ratio                          16.2         14.7           NM         26.1         31.1
Total debt to total capitalization                      29%          33%          34%          39%          36%

Employees
Total wages and benefits                              $285         $289         $314         $319         $319
Number of employees at year-end                      3,746        3,851        3,976        5,524        5,812
Six-Year Operating Summary
1997          1996         1995         1994         1993         1992
                                        ----------------------------------------------------------------------
Exploration and Production
    Net proprietary production of
      crude oil and condensate -
       (thousands of barrels per day)
              Domestic                  24.2          30.6         28.9         25.5         27.8         25.5
              North Sea                 23.4          30.9         36.7         34.3         16.7         16.0
              China                      8.8           3.7           --           --           --           --
              Other international         .5           3.4          4.8          7.5          8.7          9.0
                                      ------        ------       ------       ------       ------       ------
                  Total                 56.9          68.6         70.4         67.3         53.2         50.5

Average price of crude oil sold
    (per barrel) -
              Domestic                $18.53        $19.36       $15.69       $14.64       $15.76       $18.17
              North Sea                18.77         19.08        16.31        15.15        15.90        18.71
              China                    17.71         19.53           --           --           --           --
              Other international      18.59         17.69        15.21        13.79        14.80        16.83
                  Average             $18.51        $19.16       $15.99       $14.81       $15.64       $18.11
Proprietary natural gas sales
    (MMCF per day)                       184           281          291          271          286          296
Average price of natural gas
    sold (per MCF)                     $2.56         $2.12        $1.52        $1.76        $1.92        $1.56

Net exploratory wells drilled -
         Productive                     2.65          4.91         3.71         9.61         2.22         2.59
         Dry                            4.42          3.52         9.16         8.47        10.09         5.53
                                      ------        ------       ------       ------       ------       ------
                  Total                 7.07          8.43        12.87        18.08        12.31         8.12

Net development wells drilled -
         Productive                     9.78         21.33        40.86        22.27        43.90        27.26
         Dry                              --          1.04         2.95         4.63         2.33         3.05
                                      ------        ------       ------       ------       ------       ------
                  Total                 9.78         22.37        43.81        26.90        46.23        30.31

Undeveloped net acreage (thousands) -
         Domestic                        319           265          472          499          523          620
         North Sea                       391           428          358          363          243          184
         China                         2,184           925          341          282           --           --
         Other international          10,124           927        1,424        1,463        2,087          401
                                      ------        ------       ------       ------       ------       ------
                  Total               13,018         2,545        2,595        2,607        2,853        1,205

Developed net acreage (thousands) -
         Domestic                        155           209          537          542          539          549
         North Sea                        24            33           22           21           21           18
         China                            19            19           19           19           19           --
         Other international             104           104          159          165          180          187
                                      ------        ------       ------       ------       ------       ------
                  Total                  302           365          737          747          759          754

Estimated proved reserves
    (millions of equivalent barrels)     247           256          300          332          317          302

Chemicals
Industrial and specialty chemical
    sales (thousands of tons)            488           446          445          381          331          314
Item 7.       Financial Statements, Pro Forma Financial Information and Exhibits

              (c)        Exhibits

              23.0       Consent of Independent Public Accountant

              27.0       Financial Data Schedule

                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned hereunto duly authorized.

                                                KERR-MCGEE CORPORATION

                                           By: (Deborah A. Kitchens)
                                               ---------------------            
                                                Deborah A. Kitchens
                                                Vice President and Controller

Dated: November 13, 1998
       -----------------
EXHIBIT INDEX

     Exhibit No.    Description
     -----------    -----------

         23.0       Consent of Independent Public Accountant

         27.0       Financial Data Schedule