SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2003

Commission file number 1-5467

VALHI, INC.
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(Exact name of Registrant as specified in its charter)

Delaware                                            87-0110150     
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(State or other jurisdiction of                              (IRS Employer
incorporation or organization)                            Identification No.)

5430 LBJ Freeway, Suite 1700, Dallas, Texas                    75240-2697     
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(Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code:          (972) 233-1700   
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Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange on
Title of each class                            which registered
-------------------                        ------------------------
Common stock                            New York Stock Exchange
($.01 par value per share)                     Pacific Stock Exchange

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

None.

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

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

Indicate  by check mark  whether  the  Registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes X No

The  aggregate  market  value of the 9.8 million  shares of voting stock held by
nonaffiliates  of Valhi,  Inc. as of June 30, 2003 (the last business day of the
Registrant's  most  recently-completed  second fiscal quarter)  approximated $95
million.

As of February 27, 2004,  119,465,078  shares of the  Registrant's  common stock
were outstanding.

Documents incorporated by reference

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

[INSIDE FRONT COVER]

A chart  showing,  as of December 31, 2003, (i) Valhi's 63% ownership of NL
Industries,  Inc., (ii) Valhi's 32% ownership of Kronos  Worldwide,  Inc., (iii)
Valhi's 69% ownership of CompX International Inc., (iv) Valhi's 90% ownership of
Waste Control  Specialists  LLC, (v) Valhi's 100% ownership of Tremont LLC, (vi)
NL's 51%  ownership of Kronos  Worldwide,  (vii)  Tremont's 21% ownership of NL,
(viii) Tremont's 10% ownership of Kronos Worldwide, (ix) Tremont's 40% ownership
of Titanium Metals Corporation ("TIMET") and (x) Valhi's 1% ownership of TIMET.

PART I

ITEM 1.   BUSINESS

As more fully  described on the chart on the  opposite  page,  Valhi,  Inc.
(NYSE:  VHI), has operations  through  majority-owned  subsidiaries or less than
majority-owned affiliates in the chemicals, component products, waste management
and titanium metals  industries.  Information  regarding the Company's  business
segments  and the  companies  conducting  such  businesses  is set forth  below.
Business and geographic  segment financial  information is included in Note 2 to
the  Company's   Consolidated   Financial   Statements,   which  information  is
incorporated herein by reference. The Company is based in Dallas, Texas.

Chemicals                           Kronos   is   the   world's    fifth-largest
Kronos Worldwide, Inc.            producer,   and   Europe's    second-largest
producer,   of  titanium   dioxide  pigments
("TiO2"),   which  are  used  for  imparting
whiteness,  brightness and opacity to a wide
range   of   products    including   paints,
plastics,  paper, fibers,  foods,  ceramics,
cosmetics   and   other    "quality-of-life"
products.  Kronos had an estimated 12% share
of  worldwide  TiO2  sales  volumes in 2003.
Kronos has production  facilities throughout
Europe and North America.

Component Products                  CompX is a leading manufacturer of precision
CompX International Inc.          ball bearing slides,  security  products and
ergonomic  computer  support systems used in
office      furniture,      computer-related
applications   and  a   variety   of   other
industries.  CompX has production facilities
in North America, Europe and Asia.

Waste Management                    Waste Control  Specialists owns and operates
Waste Control Specialists LLC     a facility in West Texas for the processing,
treatment,    storage   and    disposal   of
hazardous,   toxic  and  certain   types  of
low-level  radioactive wastes. Waste Control
Specialists is seeking additional regulatory
authorizations   to  expand  its  treatment,
storage  and   disposal   capabilities   for
low-level   and   mixed-level    radioactive
wastes.

Titanium Metals                     Titanium Metals Corporation ("TIMET") is one
Titanium Metals Corporation       of the world's leading producers of titanium
sponge, melted products (ingot and slab) and
mill  products.  TIMET had an estimated  18%
share of  worldwide  industry  shipments  of
titanium mill products in 2003. TIMET is the
only   producer   with   major    production
facilities in both the U.S. and Europe,  the
world's   principal   markets  for  titanium
consumption.

Valhi, a Delaware  corporation,  is the successor of the 1987 merger of LLC
Corporation and another  entity.  As of February 27, 2004,  Contran  Corporation
holds,   directly  or  through   subsidiaries,   approximately  90%  of  Valhi's
outstanding  common stock.  Substantially  all of Contran's  outstanding  voting
stock is held by trusts  established  for the  benefit of certain  children  and
grandchildren  of Harold C. Simmons,  of which Mr.  Simmons is the sole trustee.
Mr.  Simmons,  the Chairman of the Board of Contran and Valhi,  may be deemed to
control such companies. NL (NYSE: NL), Kronos (NYSE: KRO), CompX (NYSE: CIX) and
TIMET (NYSE:  TIE) each currently file periodic  reports with the Securities and
Exchange  Commission  ("SEC").  The  information set forth below with respect to
such companies has been derived from such reports.

As  provided  by the  safe  harbor  provisions  of the  Private  Securities
Litigation  Reform Act of 1995, the Company cautions that the statements in this
Annual  Report on Form 10-K relating to matters that are not  historical  facts,
including,  but not limited to,  statements  found in this Item 1 -  "Business,"
Item 3 - "Legal Proceedings," Item 7 - "Management's  Discussion and Analysis of
Financial  Condition and Results of Operations" and Item 7A - "Quantitative  and
Qualitative Disclosures About Market Risk," are forward-looking  statements that
represent  management's  beliefs and  assumptions  based on currently  available
information.  Forward-looking  statements  can be identified by the use of words
such  as  "believes,"   "intends,"  "may,"  "should,"  "could,"   "anticipates,"
"expected" or comparable terminology, or by discussions of strategies or trends.
Although  the  Company  believes  that  the   expectations   reflected  in  such
forward-looking  statements are  reasonable,  it cannot give any assurances that
these  expectations  will prove to be correct.  Such  statements by their nature
involve  substantial risks and  uncertainties  that could  significantly  impact
expected  results,  and actual future results could differ materially from those
described  in such  forward-looking  statements.  While  it is not  possible  to
identify   all   factors,   the  Company   continues  to  face  many  risks  and
uncertainties.  Among the  factors  that could  cause  future  results to differ
materially from those described herein are the risks and uncertainties discussed
in this Annual  Report and those  described  from time to time in the  Company's
other filings with the SEC including, but not limited to, the following:

o    Future supply and demand for the Company's products,
o    The extent of the  dependence  of certain of the  Company's  businesses  on
certain market sectors (such as the dependence of TIMET's  titanium  metals
business on the aerospace industry),
o    The  cyclicality  of certain of the Company's  businesses  (such as Kronos'
TiO2 operations and TIMET's titanium metals operations),
o    The  impact of certain  long-term  contracts  on  certain of the  Company's
businesses (such as the impact of TIMET's long-term  contracts with certain
of its customers and such customers'  performance thereunder and the impact
of TIMET's  long-term  contracts with certain of its vendors on its ability
to reduce or increase supply or achieve lower costs),
o    Customer  inventory  levels (such as the extent to which Kronos'  customers
may,  from  time to  time,  accelerate  purchases  of TiO2  in  advance  of
anticipated  price  increases  or defer  purchases  of TiO2 in  advance  of
anticipated price decreases,  or the relationship  between inventory levels
of TIMET's customers and such customers' current inventory requirements and
the impact of such relationship on their purchases from TIMET),
o    Changes in raw material and other operating costs (such as energy costs),
o    The possibility of labor disruptions,
o    General global  economic and political  conditions  (such as changes in the
level of gross  domestic  product in  various  regions of the world and the
impact of such changes on demand for, among other things, TiO2),
o    Competitive products and substitute products,
o    Customer and competitor strategies,
o    The impact of pricing and production decisions,
o    Competitive technology positions,
o    The introduction of trade barriers,
o    Fluctuations  in currency  exchange  rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro, the Norwegian kroner and
the Canadian dollar),
o    Operating  interruptions  (including,  but not limited to, labor  disputes,
leaks,   fires,   explosions,   unscheduled   or  unplanned   downtime  and
transportation interruptions),
o    The ability to implement  headcount  reductions in certain  operations in a
cost  effective  manner  within the  constraints  of non-U.S.  governmental
regulations, and the timing and amount of any cost savings realized,
o    The ability of the Company to renew or refinance credit facilities,
o    The ultimate  outcome of income tax audits,  tax settlement  initiatives or
other tax matters,
o    Uncertainties  associated  with new  product  development  (such as TIMET's
ability to develop new end-uses for its titanium products),
o    Environmental  matters  (such as those  requiring  emission  and  discharge
standards for existing and new facilities),
o    Government  laws and  regulations  and possible  changes  therein  (such as
changes in government regulations which might impose various obligations on
present and former  manufacturers  of lead  pigment and  lead-based  paint,
including NL, with respect to asserted health concerns  associated with the
use of such products),
o    The ultimate  resolution of pending  litigation  (such as NL's lead pigment
litigation and litigation surrounding  environmental matters of NL, Tremont
and TIMET), and
o    Possible future litigation.

Should one or more of these risks  materialize (or the consequences of such
a development  worsen),  or should the underlying  assumptions  prove incorrect,
actual results could differ  materially from those  forecasted or expected.  The
Company   disclaims  any  intention  or  obligation  to  update  or  revise  any
forward-looking statement whether as a result of changes in information,  future
events or otherwise.

CHEMICALS - KRONOS WORLDWIDE, INC.

General.  Kronos  is an  international  producer  and  marketer  of TiO2 to
customers in over 100 countries from facilities  located  throughout  Europe and
North  America.  Kronos is the  world's  fifth-largest  TiO2  producer,  with an
estimated  12% share of  worldwide  TiO2 sales  volumes  in 2003.  Approximately
one-half of Kronos' 2003 sales volumes were  attributable  to markets in Europe,
where Kronos is the second-largest  producer of TiO2 with an estimated 18% share
of  European  TiO2 sales  volumes.  Kronos has an  estimated  15% share of North
American TiO2 sales volumes.

Pricing within the global TiO2 industry over the long term is cyclical, and
changes in industry economic  conditions,  especially in Western  industrialized
nations,  can  significantly  impact Kronos'  earnings and operating cash flows.
Kronos' average TiO2 selling prices were generally decreasing during all of 2001
and the first quarter of 2002,  were generally flat during the second quarter of
2002,  were  generally  increasing  during  the last  half of 2002 and the first
quarter of 2003,  were generally flat during the second quarter of 2003 and were
generally decreasing during the third and fourth quarters of 2003. Industry-wide
demand for TiO2 is estimated to have been flat, or declined slightly, throughout
2003 as customers reduced their inventory levels in advance of declining selling
prices. Kronos expects demand in 2004 will increase moderately over 2003 levels.

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

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

Per capita Ti02  consumption  in the United  States and Western  Europe far
exceeds  consumption  in other areas of the world and these regions are expected
to continue to be the largest  consumers of TiO2.  Significant  regions for TiO2
consumption  could emerge in Eastern Europe or the Far East (including China) as
the  economies  in these  countries  develop to the point  that  quality-of-life
products,  including TiO2, are in greater  demand.  Kronos believes that, due to
its strong presence in Western  Europe,  it is well positioned to participate in
potential growth in consumption of Ti02 in Eastern Europe.

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

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

Kronos is one of the  world's  leading  producers  and  marketers  of TiO2.
Kronos and its distributors and agents sell and provide  technical  services for
its  products to over 4,000  customers  with the majority of sales in Europe and
North America.  Kronos  distributes its TiO2 by rail, truck and ocean carrier in
either  dry or slurry  form.  Kronos  and its  predecessors  have  produced  and
marketed TiO2 in North America and Europe for over 80 years. As a result, Kronos
believes that it has  developed  considerable  expertise  and  efficiency in the
manufacture,  sale,  shipment  and  service  of its  products  in  domestic  and
international  markets. By volume,  approximately  one-half of Kronos' 2003 TiO2
sales were to Europe,  with about 40% to North America and the balance to export
markets.

Kronos  is also  engaged  in the  mining  and sale of  ilmenite  ore (a raw
material used directly as a feedstock in some sulfate pigment production process
described below),  pursuant to a governmental  concession with an unlimited term
that allows Kronos to operate an ilmenite mine in Norway. The ore body, owned by
the Norwegian  government,  has estimated ilmenite reserves that are expected to
last  at  least  20  years.   Ilmenite   sales  to   third-parties   represented
approximately  5% of chemicals sales in each of 2001,  2002 and 2003.  Kronos is
also engaged in the manufacture and sale of iron-based water treatment chemicals
(derived  co-products  of  the  pigment  production  processes).  Kronos'  water
treatment chemicals are used as treatment and conditioning agents for industrial
effluents and municipal wastewater, and in the manufacture of iron pigments.

Manufacturing  process,  properties and raw materials.  Kronos manufactures
TiO2 using both the chloride process and the sulfate process.  Approximately 72%
of Kronos' current  production  capacity is based on the chloride  process.  The
chloride  process is a continuous  process in which  chlorine is used to extract
rutile Ti02. In general,  the chloride  process is also less  intensive than the
sulfate process in terms of capital investment,  labor and energy.  Because much
of the chlorine is recycled and feedstock  bearing a higher titanium  content is
used, the chloride  process  produces less waste than the sulfate  process.  The
sulfate  process is a batch chemical  process that uses sulfuric acid to extract
TiO2.  Sulfate  technology  normally  produces either anatase or rutile pigment.
Once an  intermediate  TiO2 pigment has been  produced by either the chloride or
sulfate  process,  it  is  finished  into  products  with  specific  performance
characteristics   for  particular  end-use   applications   through  proprietary
processes  involving  various chemical surface  treatments and intensive milling
and micronizing.  Due to environmental factors and customer considerations,  the
proportion of TiO2 industry sales represented by  chloride-process  pigments has
increased    relative   to   sulfate-process    pigments,    and   industry-wide
chloride-process  production facilities in 2003 represented approximately 62% of
industry capacity.

During 2003, Kronos operated four TiO2 facilities in Europe (one in each of
Leverkusen, Germany, Nordenham, Germany, Langerbrugge,  Belgium and Fredrikstad,
Norway). In North America,  Kronos has a Ti02 facility in Varennes,  Quebec and,
through a manufacturing  joint venture discussed below, a one-half interest in a
Ti02 plant in Lake Charles,  Louisiana.  Kronos also owns a Ti02 slurry facility
in Louisiana and leases various corporate and administrative offices in the U.S.
and  various  sales  offices in the U.S.  and Europe.  All of Kronos'  principal
production  facilities  are owned,  except for the land under the Leverkusen and
Fredrikstad facilities. Kronos also operates an ilmenite mine in Norway pursuant
to a governmental concession with an unlimited term.

Kronos'  principal  German operating  subsidiary  leases the land under its
Leverkusen  Ti02 production  facility  pursuant to a lease expiring in 2050. The
Leverkusen  facility,  representing about one-third of Kronos' current aggregate
TiO2 production capacity,  is located within an extensive  manufacturing complex
owned by Bayer AG. Rent for the Leverkusen facility is periodically  established
by agreement with Bayer AG for periods of at least two years at a time.  Under a
separate supplies and services  agreement  expiring in 2011, Bayer provides some
raw  materials,   auxiliary  and  operating  materials  and  utilities  services
necessary  to operate the  Leverkusen  facility.  The lease and the supplies and
services  agreement  have  certain  restrictions  regarding  Kronos'  ability to
transfer ownership or use of the Leverkusen facility.

Kronos  produced a record  476,000 metric tons of TiO2 in 2003, up from the
previous  record of 442,000  metric  tons in 2002,  and higher  than the 412,000
metric tons produced in 2001.  The lower TiO2  production in 2001 as compared to
2002 and 2003 was due in part to the effects of the fire discussed in Note 12 to
the  Consolidated  Financial  Statements.  Kronos' average  production  capacity
utilization rate in 2003 was at near full capacity,  compared to 96% in 2002 and
91% in 2001.  Capacity  utilization rates in 2002 and 2003 were higher than 2001
due in part to continued debottlenecking activities. Kronos believes its current
annual  attainable  production  capacity is  approximately  480,000 metric tons,
including  the  production  capacity  relating to its  one-half  interest in the
Louisiana plant.  Kronos expects to be able to increase its production  capacity
(primarily at its chloride-process  facilities) to approximately  490,000 metric
tons during 2005 with only moderate capital expenditures.

The primary raw materials used in the TiO2 chloride  production process are
chlorine, coke and titanium-containing  feedstock derived from sand ilmenite and
natural rutile ore.  Chlorine and coke are available from a number of suppliers.
Titanium-containing  feedstock  suitable  for  use in the  chloride  process  is
available from a limited, but increasing,  number of suppliers around the world,
principally  in Australia,  South Africa,  Canada,  India and the United States.
Kronos  purchased  approximately  390,000  metric tons of chloride  feedstock in
2003, of which the vast majority was slag.  Kronos  purchased  slag in 2003 from
two  subsidiaries of Rio Tinto plc UK (Richards Bay Iron and Titanium Limited of
South  Africa,  and Q.I.T.  Fer et Titane Inc.  of Canada,  or  "Q.I.T.")  under
long-term   supply   contracts  that  expire  at  the  end  of  2007  and  2006,
respectively.  Natural rutile ore is purchased  primarily from Iluka  Resources,
Limited (Australia) under a long-term supply contract that expires at the end of
2005.  Kronos  does not expect to  encounter  difficulties  obtaining  long-term
extensions  to  existing  supply  contracts  prior  to  the  expiration  of  the
contracts.  Raw materials purchased under these contracts and extensions thereof
are  expected to meet  Kronos'  chloride  feedstock  requirements  over the next
several years.

The primary raw materials used in the TiO2 sulfate  production  process are
sulfuric acid and titanium-containing  feedstock derived primarily from rock and
beach sand  ilmenite.  Sulfuric  acid is available  from a number of  suppliers.
Titanium-containing  feedstock  suitable  for  use in  the  sulfate  process  is
available from a limited number of suppliers  around the world.  Currently,  the
principal  active sources are located in Norway,  Canada,  Australia,  India and
South   Africa.   As  one  of  the  few   vertically-integrated   producers   of
sulfate-process  pigments,  Kronos operates a Norwegian rock ilmenite mine which
provided  all of Kronos'  feedstock  for its  European  sulfate-process  pigment
plants in 2003. Kronos produced approximately 830,000 metric tons of ilmenite in
2003, of which approximately 300,000 metric tons were used internally by Kronos,
with the  remainder  sold to third  parties.  For its  Canadian  sulfate-process
plant,  Kronos also purchases  sulfate grade slag  (approximately  25,000 metric
tons in 2003),  primarily  from Q.I.T.  under a long-term  supply  contract that
expires at the end of 2006.

Kronos believes the availability of titanium-containing  feedstock for both
the  chloride and sulfate  processes  is adequate  for the next  several  years.
Kronos  does not expect to  experience  any  interruptions  of its raw  material
supplies  because of its  long-term  supply  contracts.  However,  political and
economic  instability in certain  countries from which Kronos  purchases its raw
material  supplies could  adversely  affect the  availability of such feedstock.
Should  Kronos'  vendors not be able to meet their  contractual  obligations  or
should Kronos be otherwise unable to obtain necessary raw materials,  Kronos may
incur  higher costs for raw  materials  or may be required to reduce  production
levels,  which  may have a  material  adverse  effect  on  Kronos'  consolidated
financial position, results of operations or liquidity.

TiO2  manufacturing  joint  venture.  Subsidiaries  of Kronos and  Huntsman
International  Holdings LLC ("HICI") each own a 50%-interest  in a manufacturing
joint venture. The joint venture owns and operates a chloride-process TiO2 plant
in Lake  Charles,  Louisiana.  Production  from the plant is shared  equally  by
Kronos and HICI pursuant to separate offtake agreements. The manufacturing joint
venture  operates on a break-even  basis,  and accordingly  Kronos' cost for its
share of the TiO2 produced is equal to its share of the joint venture's costs. A
supervisory  committee,  composed of four members,  two of whom are appointed by
each partner,  directs the business and affairs of the joint venture,  including
production  and output  decisions.  Two  general  managers,  one  appointed  and
compensated  by each partner,  manage the operations of the joint venture acting
under the direction of the supervisory committee.

Competition.  The TiO2  industry  is highly  competitive.  Kronos  competes
primarily on the basis of price,  product quality and technical service, and the
availability of high  performance  pigment grades.  Although certain TiO2 grades
are  considered   specialty  pigments,   the  majority  of  Kronos'  grades  and
substantially all of Kronos'  production are considered  commodity pigments with
price  generally being the most  significant  competitive  factor.  During 2003,
Kronos had an estimated 12% share of worldwide  TiO2 sales  volumes,  and Kronos
believes that it is the leading seller of TiO2 in several  countries,  including
Germany and Canada.

Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont"),
Millennium  Chemicals,  Inc., HICI,  Kerr-McGee  Corporation and Ishihara Sangyo
Kaisha, Ltd. These five largest competitors have estimated  individual worldwide
shares of TiO2  production  capacity  ranging  from 5% to 24%,  and an estimated
aggregate  70% share of  worldwide  TiO2  production  volumes.  DuPont has about
one-half of total U.S. TiO2 production  capacity and is Kronos'  principal North
American competitor.

Worldwide capacity additions in the TiO2 market resulting from construction
of greenfield plants require  significant  capital  expenditures and substantial
lead time (typically three to five years in Kronos'  experience).  No greenfield
plants are currently under  construction.  Kronos expects  industry  capacity to
increase as Kronos and its competitors  debottleneck existing facilities.  Based
on the factors described above,  Kronos expects that the average annual increase
in industry capacity from announced  debottlenecking  projects will be less than
the average  annual  demand growth for TiO2 during the next three to five years.
However,  no assurance  can be given that future  increases in the TiO2 industry
production  capacity and future average annual demand growth rates for TiO2 will
conform to Kronos'  expectations.  If actual  developments  differ from  Kronos'
expectations,  Kronos and the TiO2 industry's  performances could be unfavorably
affected.

Research and  development.  Kronos'  annual  expenditures  for research and
development and certain technical  support programs have averaged  approximately
$6 million during the past three years. TiO2 research and development activities
are  conducted  principally  at  Kronos'  Leverkusen,   Germany  facility.  Such
activities  are  directed  primarily  towards  improving  both the  chloride and
sulfate  production  processes,  improving  product  quality  and  strengthening
Kronos' competitive position by developing new pigment applications.

Patents and trademarks.  Patents held for products and production processes
are believed to be important to Kronos and to the continuing business activities
of  Kronos.  Kronos  continually  seeks  patent  protection  for  its  technical
developments, principally in the United States, Canada and Europe, and from time
to time enters into licensing  arrangements  with third  parties.  Kronos' major
trademarks, including Kronos, are protected by registration in the United States
and elsewhere with respect to those products it manufactures and sells.

Customer  base and annual  seasonality.  Kronos  believes  that neither its
aggregate  sales  nor  those  of  any  of  its  principal   product  groups  are
concentrated in or materially  dependent upon any single customer or small group
of customers.  Kronos' ten largest  customers  accounted for about one-fourth of
chemicals sales during 2003. Neither Kronos' business as a whole nor that of any
of its principal  product groups is seasonal to any significant  extent.  Due in
part to the increase in paint production in the spring to meet spring and summer
painting season demand, TiO2 sales are generally higher in the first half of the
year than in the second half of the year.

Employees.  As of December 31, 2003,  Kronos employed  approximately  2,450
persons (excluding employees of the Louisiana joint venture),  with 50 employees
in the United States and 2,400 at non-U.S. sites. Hourly employees in production
facilities  worldwide,  including the TiO2 joint venture,  are  represented by a
variety of labor unions,  with labor agreements having various expiration dates.
Kronos believes its labor relations are good.

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

Kronos' U.S. manufacturing operations are governed by federal environmental
and worker  health and safety laws and  regulations,  principally  the  Resource
Conservation and Recovery Act ("RCRA"),  the Occupational  Safety and Health Act
("OSHA"),  the Clean Air Act, the Clean Water Act, the Safe Drinking  Water Act,
the Toxic Substances Control Act ("TSCA"),  and the Comprehensive  Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization  Act ("CERCLA"),  as well as the state counterparts of these
statutes.  Kronos  believes that the Louisiana  Ti02 plant owned and operated by
the joint  venture  and a  Louisiana  slurry  facility  owned by  Kronos  are in
substantial compliance with applicable  requirements of these laws or compliance
orders issued  thereunder.  Kronos has no other U.S. plants.  From time to time,
Kronos' facilities may be subject to environmental  regulatory enforcement under
such statutes.  Resolution of such matters typically  involves the establishment
of compliance  programs.  Occasionally,  resolution may result in the payment of
penalties,  but to date  such  penalties  have  not  involved  amounts  having a
material adverse effect on Kronos' consolidated  financial position,  results of
operations or liquidity.

Kronos'  production  facilities  operate  in  an  environmental  regulatory
framework  in  which  governmental   authorities  typically  are  granted  broad
discretionary  powers which allow them to issue operating  permits  required for
the plants to  operate.  Kronos  believes  all of its plants are in  substantial
compliance  with  applicable   environmental  laws  regarding  establishment  of
procedures for reduction and eventual  elimination of pollution  caused by waste
from the TiO2 industry.

While the laws  regulating  operations of  industrial  facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union ("EU").  Germany and Belgium,  each members of the EU, follow the
initiatives of the EU;  Norway,  although not a member,  generally  patterns its
environmental  regulatory  actions after the EU. Kronos believes it has obtained
all  required  permits  and is in  substantial  compliance  with  applicable  EU
requirements,  including  an  EU  directive.  Neither  Kronos  nor  any  of  its
subsidiaries have been notified of any environmental  claim in the United States
or any foreign  jurisdiction by the U.S. EPA or any applicable foreign authority
or any state, provincial or local authority.

At Kronos' sulfate plant facilities other than in Norway and Canada, Kronos
recycles spent acid either through contracts with third parties or using its own
facilities.  Kronos has a contract  with a third party to treat  certain  German
sulfate-process effluents.  Either party may terminate the contract after giving
four  years  notice  with  regard  to  the   Nordenham   plant.   Under  certain
circumstances,  Kronos may terminate the contract after giving six months notice
with respect to treatment of effluents  from the  Leverkusen  plant.  At Kronos'
Norwegian plant,  Kronos ships its spent acid to a third party location where it
is treated and disposed of. Kronos' Canadian sulfate plant neutralizes its spent
acid, byproduct gypsum is sold to a local wallboard manufacturer and other solid
wastes are disposed of in a landfill.

Kronos'  capital   expenditures   related  to  its  ongoing   environmental
protection and improvement  programs were  approximately $5 million in 2003, and
are currently expected to approximate $5 million in 2004.

COMPONENT PRODUCTS - COMPX INTERNATIONAL INC.

General.  CompX is a leading manufacturer of precision ball bearing slides,
security  products  (cabinet locks and other locking  mechanisms)  and ergonomic
computer support systems used office  furniture,  computer-related  applications
and a variety of other industries. CompX's products are principally designed for
use in medium- to  high-end  product  applications,  where  design,  quality and
durability  are critical to CompX's  customers.  CompX believes that it is among
the world's  largest  producers  of  precision  ball  bearing  slides,  security
products  and  ergonomic  computer  support  systems . In 2003,  precision  ball
bearing  slides,  security  products  and  ergonomic  computer  support  systems
accounted  for  approximately  45%, 37% and 14% of sales,  respectively,  with a
variety of other products accounting for the remainder.

Products,  product  design and  development.  Precision ball bearing slides
manufactured to stringent  industry  standards are used in such  applications as
office  furniture,  computer-related  equipment,  file  cabinets,  desk drawers,
automated teller machines,  tool storage cabinets and imaging  equipment.  These
products include CompX's patented  Integrated Slide Lock in which a file cabinet
manufacturer  can reduce the possibility of multiple drawers being opened at the
same  time,  the  adjustable  patented  Ball  Lock  which  reduces  the  risk of
heavily-filled  drawers, such as auto mechanic tool boxes, from opening while in
movement,  and the  Butterfly  Take Apart  System,  which is  designed to easily
disengage drawers from cabinets.

Security products, or locking mechanisms,  are used in applications such as
vending and gaming machines,  ignition systems, motorcycle storage compartments,
parking meters and electrical  circuit panels.  These include CompX's KeSet high
security system,  which has the ability to change the keying on a single lock 64
times  without   removing  the  lock  from  its  enclosure  and  its  potential,
high-security TuBar locking system.

Ergonomic computer support systems include  articulating  computer keyboard
support  arms  (designed  to attach to desks in the  workplace  and home  office
environments  to  alleviate  possible  strains  and stress and  maximize  usable
workspace),  CPU storage  devices  which  minimize  adverse  effects of dust and
moisture and a number of complimentary  accessories,  including  ergonomic wrist
rest aids,  mouse pad supports and computer monitor support arms. These products
include CompX's Leverlock keyboard arm, which is designed to make the adjustment
of an ergonomic keyboard arm easier.

CompX's  precision  ball  bearing  slides and  ergonomic  computer  support
systems are sold under the CompX Waterloo, Waterloo Furniture Components, Thomas
Regout and Dynaslide brand names,  and its security  products are sold under the
CompX Security  Products,  National  Cabinet Lock, Fort Lock,  Timberline  Lock,
Chicago Lock, Stock Locks,  KeSet and TuBar brand names. CompX believes that its
brand names are well recognized in the industry.

CompX also  manufactuers,  markets  and/or  distributes  a complete line of
window  furnishings  hardware in European markets in addition to other furniture
products.

Sales,  marketing  and  distribution.  CompX sells  components  to original
equipment  manufacturers  ("OEMs") and to distributors through a dedicated sales
force. The majority of CompX's sales are to OEMs,  while the balance  represents
standardized  products sold through  distribution  channels.  Sales to large OEM
customers  are made  through the efforts of  factory-based  sales and  marketing
professionals  and  engineers  working in concert  with  field  salespeople  and
independent manufacturers'  representatives.  Manufacturers' representatives are
selected  based on special  skills in  certain  markets  or  relationships  with
current or potential customers.

A significant portion of CompX's sales are made through distributors. CompX
has  a  significant  market  share  of  cabinet  lock  sales  to  the  locksmith
distribution  channel.  CompX  supports  its  distributor  sales  with a line of
standardized  products used by the largest  segments of the  marketplace.  These
products are packaged and  merchandised  for easy  availability  and handling by
distributors  and the  end  users.  Based  on  CompX's  successful  STOCK  LOCKS
inventory program,  similar programs have been implemented for distributor sales
of ergonomic  computer support systems and to some extent precision ball bearing
slides.  CompX also operates a small  tractor/trailer  fleet associated with its
Canadian  facilities  to provide an  industry-unique  service  response to major
customers.

CompX does not believe it is  dependent  upon one or a few  customers,  the
loss of which would have a material  adverse effect on its operations.  In 2003,
the ten largest  customers  accounted for about 38% of component  products sales
(2002  - 30%;  2001 - 36%).  In  each  of the  past  three  years,  no  customer
individually represented over 10% of sales.

Manufacturing  and  operations.  At December 31, 2003,  CompX operated five
manufacturing  facilities  in North  America (two in Illinois and one in each of
South  Carolina,  Michigan and Canada),  one facility in The Netherlands and two
facilities in Taiwan.  Precision ball bearing  slides or ergonomic  products are
manufactured in the facilities located in Canada, The Netherlands,  Michigan and
Taiwan and security products are manufactured in the facilities located in South
Carolina and Illinois.  All of such facilities are owned by CompX except for one
of the  facilities  in Taiwan and the  facility  in The  Netherlands,  which are
leased. See Note 12 to the Consolidated Financial Statements.  CompX also leases
a distribution  center in California  and a warehouse in Taiwan.  CompX believes
that all its facilities are well maintained and  satisfactory for their intended
purposes.

Raw  materials.  Coiled  steel  is  the  major  raw  material  used  in the
manufacture  of precision  ball bearing  slides and ergonomic  computer  support
systems.  Plastic  resins for  injection  molded  plastics  are also an integral
material for ergonomic computer support systems. Purchased components, including
zinc  castings,  are the  principal  raw materials  used in the  manufacture  of
security products.  These raw materials are purchased from several suppliers and
are readily available from numerous sources.

CompX  occasionally  enters  into raw  material  purchase  arrangements  to
mitigate the short-term impact of future increases in raw material costs.  While
these  arrangements  do not commit CompX to a minimum volume of purchases,  they
generally  provide for stated unit prices  based upon  achievement  of specified
volume  purchase  levels.  This allows CompX to stabilize raw material  purchase
prices,  provided the specified  minimum  monthly  purchase  quantities are met.
Materials  purchased  outside of these  arrangements  are  sometimes  subject to
unanticipated and sudden price increases,  such as rapidly increasing  worldwide
steel  prices in 2002 and 2003.  Due to the  competitive  nature of the  markets
served by CompX's  products,  it is often difficult to recover such increases in
raw material  costs through  increased  product  selling  prices.  Consequently,
overall operating margins can be affected by such raw material cost pressures.

Competition.  The office furniture and security products markets are highly
competitive.  CompX competes primarily on the basis of product design, including
ergonomic and aesthetic factors, product quality and durability,  price, on-time
delivery,  service  and  technical  support.  CompX  focuses  its efforts on the
middle- and high-end  segments of the market,  where  product  design,  quality,
durability and service are placed at a premium.

CompX competes in the precision ball bearing slide market  primarily on the
basis of product quality and price with two large  manufacturers and a number of
smaller  domestic  and foreign  manufacturers.  CompX  competes in the  security
products  market  with a  variety  of  relatively  small  domestic  and  foreign
competitors.  CompX  competes in the ergonomic  computer  support  system market
primarily  on the basis of product  quality,  features  and price with one major
producer,  and primarily on the basis of price with a number of smaller domestic
and foreign  manufacturers.  Although  CompX  believes  that it has been able to
compete   successfully  in  its  markets  to  date,   price   competition   from
foreign-sourced  products has intensified in the current economic market.  There
can be no assurance that CompX will be able to continue to successfully  compete
in all of its existing markets in the future.

Patents and  trademarks.  CompX  holds a number of patents  relating to its
component  products,  certain of which are  believed by CompX to be important to
its  continuing  business  activity,  and owns a number of trademarks  and brand
names,  including  CompX,  CompX Security  Products,  CompX  Waterloo,  National
Cabinet Lock,  KeSet, Fort Lock,  Timberline Lock,  Chicago Lock, ACE II, TuBar,
Thomas Regout, STOCK LOCKS, ShipFast,  Waterloo Furniture Components Limited and
Dynaslide.  CompX believes these trademarks are well recognized in the component
products industry.

Regulatory and  environmental  matters.  CompX's  operations are subject to
federal,  state,  local and foreign  laws and  regulations  relating to the use,
storage, handling, generation,  transportation,  treatment, emission, discharge,
disposal  and  remediation  of, and  exposure to,  hazardous  and  non-hazardous
substances,  materials  and  wastes.  CompX's  operations  are also  subject  to
federal, state, local and foreign laws and regulations relating to worker health
and safety.  CompX believes that it is in substantial  compliance  with all such
laws and regulations. The costs of complying with such laws and regulations have
not significantly  impacted CompX to date, and CompX has no significant  planned
costs or expenses relating to such matters. There can be no assurance,  however,
that compliance with future laws and regulations will not require CompX to incur
significant  additional  expenditures,  or that such additional  costs would not
have a material  adverse  effect on CompX's  consolidated  financial  condition,
results of operations or liquidity.

Employees.  As of December 31, 2003,  CompX  employed  approximately  1,700
persons,  including  655  in  the  United  States,  570  in  Canada,  300 in the
Netherlands and 175 in Taiwan.  Approximately 77% of CompX's employees in Canada
are covered by a collective  bargaining agreement which provides for annual wage
increases  from 1% to 2.5% over the term of the  contract  expiring  in  January
2006. Wage increases for these Canadian employees have historically been in line
with overall inflation. CompX believes its labor relations are satisfactory.

WASTE MANAGEMENT - WASTE CONTROL SPECIALISTS LLC

General.   Waste  Control  Specialists  LLC,  formed  in  1995,   completed
construction  in early 1997 of the initial  phase of its  facility in West Texas
for the  processing,  treatment,  storage and disposal of certain  hazardous and
toxic  wastes,  and the first of such wastes were received for disposal in 1997.
Subsequently,   Waste   Control   Specialists   has  expanded   its   permitting
authorizations to include the processing, treatment and storage of low-level and
mixed-level  radioactive  wastes and the disposal of certain  types of low-level
radioactive  wastes. To date, Valhi has contributed $75 million to Waste Control
Specialists in return for its 90% membership equity interest, which cash capital
contributions  were used primarily to fund construction of the facility and fund
Waste Control Specialists' operating losses. The other owner contributed certain
assets,  primarily  land and operating  permits for the facility site, and Waste
Control Specialists also assumed certain indebtedness of the other owner.

Facility, operations, services and customers. Waste Control Specialists has
been issued permits by the Texas Commission on Environmental  Quality  ("TCEQ"),
formerly  the  Texas  Natural  Resource  Conservation  Commission,  and the U.S.
Environmental  Protection  Agency  ("EPA") to accept  hazardous and toxic wastes
governed by RCRA and TSCA. The ten-year RCRA and TSCA permits  initially  expire
in November  2004, but are subject to renewal by the TCEQ assuming Waste Control
Specialists  remains  in  compliance  with the  provisions  of the  permits.  In
February 2004, Waste Control Specialists submitted an application for renewal of
these  permits.  While  there can be no  assurance,  Waste  Control  Specialists
believes it will be able to obtain extensions to continue operating the facility
for the foreseeable future.

In November 1997,  the Texas  Department of Health ("TDH") issued a license
to Waste Control Specialists for the treatment and storage, but not disposal, of
low-level and mixed-level  radioactive  wastes.  The current  provisions of this
license  generally  enable Waste Control  Specialists  to accept such wastes for
treatment  and storage from U.S.  commercial  and federal  facility  generators,
including the  Department  of Energy  ("DOE") and other  governmental  agencies.
Waste Control  Specialists  accepted the first shipments of such wastes in 1998.
Waste Control Specialists has also been issued a permit by the TCEQ to establish
a research,  development and demonstration facility in which third parties could
use the  facility  to develop  and  demonstrate  new  technologies  in the waste
management   industry,   including   possibly  those  involving   low-level  and
mixed-level  radioactive  wastes.  Waste Control  Specialists  has also obtained
additional authority that allows Waste Control Specialists to dispose of certain
categories of low-level  radioactive  materials,  including  naturally-occurring
radioactive material ("NORM") and exempt-level  materials (radioactive materials
that do not exceed certain specified  radioactive  concentrations  and which are
exempt from  licensing).  Although  there are other  categories of low-level and
mixed-level  radioactive  wastes which  continue to be  ineligible  for disposal
under the  increased  authority,  Waste  Control  Specialists  intends to pursue
additional  regulatory  authorizations  to expand  its  storage,  treatment  and
disposal  capabilities for low-level and mixed-level  radioactive wastes.  There
can be no assurance that any such additional  permits or authorizations  will be
obtained.

The facility is located on a  1,338-acre  site in West Texas owned by Waste
Control Specialists.  The 1,338 acres are permitted for 11.3 million cubic yards
of  airspace  landfill  capacity  for the  disposal  of RCRA  and  TSCA  wastes.
Following the initial phase of the construction,  Waste Control  Specialists had
approximately  400,000  cubic  yards  of  airspace  landfill  capacity  in which
customers' wastes can be disposed.  Waste Control Specialists constructed during
2001 an additional  100,000  cubic yards of airspace  landfill  capacity.  Waste
Control   Specialists  owns  approximately   14,000  additional  acres  of  land
surrounding  the  permitted  site,  a small  portion  of which is located in New
Mexico.  This presently  undeveloped  additional acreage is available for future
expansion assuming  appropriate  permits could be obtained.  The 1,338-acre site
has, in Waste Control Specialists' opinion, superior geological  characteristics
which make it an  environmentally-desirable  location.  The site is located in a
relatively  remote and arid  section of West  Texas.  The ground is  composed of
triassic red bed clay for which the  possibility of leakage into any underground
water  table is  considered  highly  remote.  In  addition,  based on  extensive
drilling by the oil and gas industry in the area, Waste Control Specialists does
not believe there are any underground  aquifers or other usable sources of water
below the site.

While the West Texas  facility  operates as a final  repository  for wastes
that cannot be further  reclaimed and recycled,  it also serves as a staging and
processing location for material that requires other forms of treatment prior to
final  disposal as  mandated by the U.S.  EPA or other  regulatory  bodies.  The
facility, as constructed, provides for waste treatment/stabilization,  warehouse
storage,   treatment  facilities  for  hazardous,   toxic  and  mixed  low-level
radioactive  wastes,  drum to bulk,  and  bulk to drum  materials  handling  and
repackaging capabilities.  Waste Control Specialists' policy is to conduct these
operations in compliance with its current permits.  Treatment operations involve
processing  wastes  through one or more  thermal,  chemical  or other  treatment
methods,  depending upon the particular  waste being disposed and regulatory and
customer  requirements.  Thermal treatment uses a thermal destruction technology
as the primary  mechanism  for waste  destruction.  Physical  treatment  methods
include  distillation,  evaporation and  separation,  all of which result in the
separation or removal of solid materials from liquids.  Chemical  treatment uses
chemical  oxidation  and  reduction,  chemical  precipitation  of heavy  metals,
hydrolysis and neutralization of acid and alkaline wastes, and basically results
in the  transformation  of  wastes  into  inert  materials  through  one or more
chemical  processes.  Certain of such treatment processes may involve technology
which Waste Control  Specialists may acquire,  license or subcontract from third
parties.

Once treated and  stabilized,  wastes are either (i) placed in the landfill
disposal site,  (ii) stored onsite in drums or other  specialized  containers or
(iii)  shipped  to  third-party   facilities  for  further  treatment  or  final
disposition.  Only wastes which meet certain specified  regulatory  requirements
can be disposed of by placing them in the  landfill,  which is  fully-lined  and
includes a leachate collection system.

Waste Control Specialists takes delivery of wastes collected from customers
and  transported  on behalf of customers,  via rail or highway,  by  independent
contractors  to  the  West  Texas  site.  Such   transportation  is  subject  to
regulations  governing the transportation of hazardous wastes issued by the U.S.
Department of Transportation.

In  the  U.S.,  the  major  federal  statutes  governing  management,   and
responsibility  for clean-up,  of hazardous and toxic wastes include RCRA,  TSCA
and CERCLA.  Waste Control  Specialists'  business is heavily dependent upon the
extent to which  regulations  promulgated  under these or other similar statutes
and their enforcement require wastes to be managed and disposed of at facilities
of the type constructed by Waste Control Specialists.

Waste  Control  Specialists'  target  customers are  industrial  companies,
including  chemical,  aerospace  and  electronics  businesses  and  governmental
agencies,   including  the  DOE,  which  generate  hazardous,   mixed  low-level
radioactive  and other  wastes.  A majority of the  customers are expected to be
located in the southwest United States,  although  customers  outside a 500-mile
radius of the site can be handled  via rail  lines.  Waste  Control  Specialists
employs  its own  salespeople  as well as  third-party  brokers  to  market  its
services to potential customers.

Competition.  The  hazardous  waste  industry  (other  than  low-level  and
mixed-level  radioactive waste) currently has excess industry capacity caused by
a number of factors, including a relative decline in the number of environmental
remediation  projects  generating  hazardous  wastes and  efforts on the part of
generators  to  reduce  the  volume  of waste  and/or  manage it onsite at their
facilities.  These  factors  have led to  reduced  demand  and  increased  price
pressure for non-radioactive  hazardous waste management  services.  While Waste
Control  Specialists  believes its broad range of permits for the  treatment and
storage of low-level and mixed-level  radioactive waste streams provides certain
competitive  advantages,  a key element of Waste Control Specialists'  long-term
strategy to provide "one-stop shopping" for hazardous, low-level and mixed-level
radioactive wastes includes obtaining additional  regulatory  authorizations for
the disposal of a broad range of low-level and mixed-level radioactive wastes.

Competition within the hazardous waste industry is diverse.  Competition is
based primarily on pricing and customer  service.  Price competition is expected
to  be  intense  with  respect  to  RCRA-  and  TSCA-related  wastes.  Principal
competitors are Envirocare of Utah,  American Ecology  Corporation and Perma-Fix
Environmental  Services,  Inc. These  competitors are well  established and have
significantly  greater resources than Waste Control Specialists,  which could be
important  competitive factors.  However,  Waste Control Specialists believes it
may have certain competitive advantages, including its environmentally-desirable
location,  broad  level  of local  community  support,  a public  transportation
network leading to the facility and capability for future site expansion.

Employees.  At  December  31,  2003,  Waste  Control  Specialists  employed
approximately 80 persons.

Regulatory and environmental  matters.  While the waste management industry
has benefited from increased  governmental  regulation,  the industry itself has
become subject to extensive and evolving regulation by federal,  state and local
authorities.  The regulatory process requires businesses in the waste management
industry  to obtain and  retain  numerous  operating  permits  covering  various
aspects  of their  operations,  any of which  could be  subject  to  revocation,
modification  or denial.  Regulations  also allow  public  participation  in the
permitting  process.  Individuals  as well as companies  may oppose the grant of
permits. In addition, governmental policies and the exercise of broad discretion
by regulators are by their nature  subject to change.  It is possible that Waste
Control  Specialists'  ability to obtain  any  desired  applicable  permits on a
timely basis, and to retain those permits,  could in the future be impaired. The
loss of any individual  permit could have a significant  impact on Waste Control
Specialists' financial condition, results of operations or liquidity, especially
because Waste Control  Specialists owns and operates only one disposal site. For
example,  adverse decisions by governmental  authorities on permit  applications
submitted  by Waste  Control  Specialists  could  result in the  abandonment  of
projects,  premature  closing of the facility or operating  restrictions.  Waste
Control  Specialists'  RCRA and TSCA permits and its license from the TDH expire
in 2004, although such permits and licenses can be renewed subject to compliance
with the  requirements  of the  application  process and approval by the TCEQ or
TDH, as applicable.  In February 2004,  Waste Control  Specialists  submitted an
application for renewal of these permits.

Prior to June 2003, the state law in Texas  prohibited the applicable Texas
regulatory  agency from  issuing a license for the  disposal of a broad range of
low-level and mixed-level  radioactive waste to a private enterprise operating a
disposal facility in Texas. In June 2003, a new Texas state law was enacted that
allows the  regulatory  agency to issue a low-level  radioactive  waste disposal
license to a private entity,  such as Waste Control  Specialists.  Waste Control
Specialists  currently  expects  to apply for such a disposal  license  with the
applicable  regulatory agency by the application deadline of August 6, 2004. The
length of time that the  regulatory  agency will take to review and act upon the
license  application is uncertain,  although Waste Control  Specialists does not
currently  expect the  agency  would  issue any final  decision  on the  license
application   before  2007.  There  can  be  no  assurance  that  Waste  Control
Specialists will be successful in obtaining any such license.

Federal,  state and local authorities have, from time to time,  proposed or
adopted other types of laws and regulations with respect to the waste management
industry,  including laws and regulations  restricting or banning the interstate
or intrastate shipment of certain wastes,  imposing higher taxes on out-of-state
waste shipments compared to in-state shipments, reclassifying certain categories
of hazardous  wastes as  non-hazardous  and  regulating  disposal  facilities as
public  utilities.  Certain  states have  issued  regulations  which  attempt to
prevent waste generated within that particular state from being sent to disposal
sites  outside  that  state.  The U.S.  Congress  has  also,  from time to time,
considered legislation which would enable or facilitate such bans, restrictions,
taxes  and  regulations.  Due to the  complex  nature  of the  waste  management
industry  regulation,  implementation of existing or future laws and regulations
by  different  levels of  government  could be  inconsistent  and  difficult  to
foresee.  Waste  Control  Specialists  will  attempt to monitor  and  anticipate
regulatory,  political and legal  developments which affect the waste management
industry,  but there can be no assurance that Waste Control  Specialists will be
able to do so. Nor can Waste  Control  Specialists  predict  the extent to which
legislation or regulations that may be enacted, or any failure of legislation or
regulations to be enacted, may affect its operations in the future.

The demand for certain  hazardous waste services expected to be provided by
Waste  Control  Specialists  is dependent in large part upon the  existence  and
enforcement  of  federal,  state and local  environmental  laws and  regulations
governing  the  discharge of hazardous  wastes into the  environment.  The waste
management  industry  could be  adversely  affected  to the extent  such laws or
regulations are amended or repealed or their enforcement is lessened.

Because of the high degree of public  awareness  of  environmental  issues,
companies in the waste management business may be, in the normal course of their
business,  subject to  judicial  and  administrative  proceedings.  Governmental
agencies  may seek to impose  fines or revoke,  deny  renewal  of, or modify any
applicable  operating  permits or  licenses.  In addition,  private  parties and
special  interest groups could bring actions  against Waste Control  Specialists
alleging, among other things, violation of operating permits.

TITANIUM METALS - TITANIUM METALS CORPORATION

General.  TIMET is one of the world's leading producers of titanium sponge,
melted products  (ingot and slab) and mill products.  TIMET is the only producer
with major titanium production  facilities in both the United States and Europe,
the world's  principal  markets for titanium.  TIMET  estimates  that in 2003 it
accounted for approximately 18% of worldwide industry shipments of mill products
and approximately 8% of worldwide sponge production.

Titanium was first manufactured for commercial use in the 1950s. Titanium's
unique combination of corrosion resistance, elevated-temperature performance and
high  strength-to-weight  ratio  makes  it  particularly  desirable  for  use in
commercial  and  military  aerospace  applications  where  these  qualities  are
essential  design  requirements for certain critical parts such as wing supports
and jet  engine  components.  While  aerospace  applications  have  historically
accounted  for a substantial  portion of the  worldwide  demand for titanium and
represented  approximately  42% of aggregate mill product shipments in 2003, the
number of non-aerospace end-use markets for titanium has expanded substantially.
Established  industrial uses for titanium  include chemical and industrial power
plants, desalination plants and pollution control equipment.

Industry  conditions.  The  titanium  industry  historically  has derived a
substantial  portion of its  business  from the  aerospace  industry.  Aerospace
demand for titanium  products,  which includes both jet engine  components (e.g.
blades, discs, rings and engine cases) and air frame components (e.g. bulkheads,
tail  sections,  landing gear,  wing supports and  fasteners) can be broken down
into  commercial and military  sectors.  The commercial  aerospace  sector has a
significant influence on titanium companies, particularly mill product producers
such as TIMET.

In 2003, TIMET estimates the commercial aerospace sector accounted for mill
product shipments of approximately  15,700 metric tons, a 7% decrease from 2002,
and represented  approximately 78% of aerospace  industry mill product shipments
and 33% of aggregate  mill  product  shipments.  Mill  product  shipments to the
military  aerospace sector in 2003 were  approximately  4,400 metric tons, a 15%
increase from 2002, and represented approximately 22% of aerospace industry mill
product shipments and 9% of aggregate mill product shipments. Military aerospace
sector  shipments  are largely  driven by government  defense  spending in North
America and Europe. As discussed further below, new aircraft programs  generally
are in  development  for  several  years,  followed  by  multi-year  procurement
contracts.  TIMET's  business is more  dependent  on  aerospace  demand than the
overall titanium industry, as approximately 68% of TIMET's mill product shipment
volume in 2003 was to the aerospace  industry (57% commercial  aerospace and 11%
military aerospace).

The cyclical nature of the aerospace industry has been the principal driver
of the historical  fluctuations in the  performance of most titanium  companies.
Over the past 20 years, the titanium industry had cyclical peaks in mill product
shipments  in 1989,  1997 and 2001 and  cyclical  lows in 1983,  1991 and  1999.
Demand for titanium reached its highest level in 1997 when industry mill product
shipments reached  approximately  60,000 metric tons. However,  since that peak,
industry mill product shipments have fluctuated significantly,  primarily due to
a continued change in demand for titanium from the commercial  aerospace sector.
In 2002,  industry shipments  approximated 50,000 metric tons, and in 2003 TIMET
estimates  industry shipments  approximated  48,000 metric tons. TIMET currently
expects total  industry  mill product  shipments in 2004 will increase from 2003
levels to at least 51,000 metric tons.

The Airline Monitor, a leading aerospace publication,  traditionally issues
forecasts for commercial aircraft deliveries each January and July. According to
The Airline Monitor,  large commercial  aircraft deliveries for the 1996 to 2003
period peaked in 1999 with 889  aircraft,  including 254 wide body aircraft that
use  substantially  more  titanium  than their narrow body  counterparts.  Large
commercial  aircraft deliveries totaled 579 (including 154 wide bodies) in 2003.
The Airline Monitor's most recently issued forecast (January 2004) calls for 575
deliveries in 2004, 540 deliveries in 2005 and 510 deliveries in 2006.  Relative
to 2003, these forecasted delivery rates represent anticipated declines of about
1% in 2004,  7% in 2005 and 12% in 2006.  From 2007  through  2011,  The Airline
Monitor calls for a continued  increase each year in large  commercial  aircraft
deliveries,  with forecasted  deliveries of 620 aircraft in 2008, exceeding 2003
levels.  Deliveries of titanium  generally precede aircraft  deliveries by about
one year, although this varies considerably by titanium product. This correlates
to TIMET's cycle, which historically precedes the cycle of the aircraft industry
and related deliveries.

Although the  commercial  airline  industry  continues to face  significant
challenges, recent economic data show signs of an improving business environment
in that  sector.  According to The Airline  Monitor,  the  worldwide  commercial
airline  industry  reported an estimated  operating loss of  approximately  $3.5
billion in 2003,  compared to a $7.3 billion  loss in 2002 and an $11.7  billion
loss in 2001. The Airline Monitor is currently  forecasting  operating income of
approximately  $6.3  billion  for the  industry  in 2004.  Additionally,  global
airline  passenger traffic returned to pre-September 11, 2001 levels in November
2003.  Although these appear to be positive signs, TIMET currently believes that
industry mill product  shipments  into the commercial  aerospace  sector will be
somewhat flat in 2004 and show a modest upturn in 2005.

Military  aerospace  programs were the first to utilize  titanium's  unique
properties  on a large  scale,  beginning  in the 1950s.  Titanium  shipments to
military  aerospace  markets  reached  a peak in the  1980s  before  falling  to
historical lows in the early 1990s after the end of the Cold War.  However,  the
importance of military  markets to the titanium  industry is expected to rise in
coming  years as defense  spending  budgets  increase in  reaction to  terrorist
activities  and  global   conflicts.   TIMET  estimates  that  overall  titanium
consumption  will  increase  in this  market  sector  in 2004  and  beyond,  but
consumption by military applications will offset only a relatively small part of
the decrease seen in the commercial aerospace sector.

Several of today's active U.S.  military aircraft  programs,  including the
C-17,  F/A-18,  F-16 and F-15  began  during  the Cold War and are  forecast  to
continue production for the foreseeable future. In addition to these established
programs,  new  programs in the United  States offer  growth  opportunities  for
increased  titanium  consumption.  The F/A-22  Raptor is  currently  in low-rate
initial  production,  and U.S. Air Force  officials  have expressed a need for a
minimum of 339 airplanes, but cost overruns and development delays may result in
reduced   procurement   over  the  life  of  the  program.   In  October   2001,
Lockheed-Martin Corporation was awarded what could eventually become the largest
military  contract ever for the F-35 Joint Strike  Fighter  ("JSF").  The JSF is
expected to enter  low-rate  initial  production  in late 2006,  and although no
specific  order and delivery  patterns  have been  established,  procurement  is
expected  to extend over the next 30 to 40 years and include as many as 3,000 to
4,000 planes.  European  military  programs also have active aerospace  programs
offering the possibility for increased titanium  consumption.  Production levels
for the Saab Gripen,  Eurofighter  Typhoon,  Dassault Rafale and Dassault Mirage
2000 are all forecasted to increase over the next decade.

Since titanium's  initial  applications in the aerospace sector, the number
of  end-use  markets  for  titanium  has  significantly  expanded.   Established
industrial uses for titanium include  chemical plants,  industrial power plants,
desalination plants and pollution control equipment.  Titanium continues to gain
acceptance in many emerging market applications,  including automotive, military
armor, energy and architecture.  Although titanium is generally higher cost than
other competing metals, in many cases customers find the physical  properties of
titanium to be attractive from the standpoint of weight, performance, longevity,
design  alternatives,  life cycle  value and other  factors.  Although  emerging
market demand  presently  represents  only about 5% of the total industry demand
for titanium mill products today,  TIMET believes emerging market demand, in the
aggregate,  could grow at double-digit  rates over the next several years. TIMET
is actively pursuing these markets.

Although  difficult to predict,  the automotive  market  continues to be an
attractive  emerging  segment due to its  potential  for  sustainable  long-term
growth.  For this reason,  in 2002,  TIMET  established  a new  division,  TIMET
Automotive,  focused on the development of the automobile,  truck and motorcycle
markets. The division is tasked with developing and marketing proprietary alloys
and processes  specifically  suited for automotive  applications  and supporting
supply chain  activities for automotive  manufacturers  to most cost effectively
engineer  titanium  components.  Titanium  is now used in several  consumer  car
applications,   including  the  Corvette  Z06,  Toyota  Alteeza,  Infiniti  Q45,
Volkswagen  Lupo  FSI,  Honda  S2000  and  Mercedes  S  Class  and  in  numerous
motorcycles.

At the present  time,  titanium  is  primarily  used for  exhaust  systems,
suspension springs and engine valves in consumer  vehicles.  In exhaust systems,
titanium provides for significant weight savings, while its corrosion resistance
provides   life-of-vehicle   durability.   In  suspension  spring  applications,
titanium's low modulus of elasticity allows the spring's height to be reduced by
20% to 40% compared to a steel spring,  which, when combined with the titanium's
low density,  permits 30% to 60% weight  savings  over steel  spring  suspension
systems.  The  lower  spring  height  provides  vehicle  designers  new  styling
alternatives and improved performance opportunities. Titanium suspension springs
and exhaust applications are also attractive compared to alternative lightweight
technologies  because the titanium  component can often be formed and fabricated
on the same tooling used for the steel component it is typically replacing. This
is especially  attractive  for the rapidly  growing niche vehicle market sectors
that often seek the  performance  attributes that titanium  provides,  but where
tooling costs prohibit alternative light-weighting or other improved performance
strategies.

Titanium  is  also  making  inroads  into  other  automotive  applications,
including turbo charger wheels, brake parts and connecting rods. Titanium engine
components  provide  mass-reduction   benefits  that  directly  improve  vehicle
performance  and  fuel  economy.  In  certain   applications,   titanium  engine
components can provide a cost-effective  alternative to engine balance shafts to
address  noise,   vibration  and  harshness   while   simultaneously   improving
performance.

Utilization  of titanium  on  military  ground  combat  vehicles  for armor
applique  and  integrated  armor  or  structural  components  continues  to gain
acceptance within the military market segment. Titanium armor components provide
the necessary  ballistic  performance while achieving a mission critical vehicle
performance objective of reduced weight. In order to counteract increased threat
levels,  titanium is being utilized on vehicle  upgrade  programs in addition to
new  builds.  Based on active  programs,  as well as  programs  currently  under
evaluation,  TIMET believes there will be additional usage of titanium on ground
combat  vehicles  that will  provide  continued  growth in the  military  market
segment.

The oil and gas market  utilizes  titanium  for  down-hole  logging  tools,
critical riser  components,  fire water systems and  saltwater-cooling  systems.
Additionally,  as offshore  development of new oil and gas fields moves into the
ultra  deep-water  depths,  market  demand for  titanium's  light  weight,  high
strength and corrosion  resistance  properties is creating new opportunities for
the  material.  TIMET has a dedicated  group that is focused on  developing  the
expansion   of  titanium   use  in  this  market  and  in  other   non-aerospace
applications.

The decision to select  titanium  components  for consumer  car,  truck and
motorcycle  components  remains  highly cost  sensitive,  however TIMET believes
titanium's  acceptance  in  consumer  vehicles  will  expand  as the  automotive
industry continues to better understand the benefits titanium offers.

Products  and  operations.   TIMET  is  a  vertically  integrated  titanium
manufacturer  whose  products  include (i)  titanium  sponge,  the basic form of
titanium metal used in processed titanium products,  (ii) melted products (ingot
and slab), the result of melting sponge and titanium scrap, either alone or with
various other alloying elements,  (iii) mill products that are forged and rolled
from ingot or slab,  including  long  products  (billet and bar),  flat products
(plate,  sheet and strip) and pipe and (iv)  fabrications  that are cut, formed,
welded and  assembled  from  titanium  mill  products  (spools,  pipe  fittings,
manifolds, vessels, etc.).

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

Titanium  ingot and slab are solid  shapes  (cylindrical  and  rectangular,
respectively)  that weigh up to 8 metric tons in the case of ingots and up to 16
metric  tons in the case of slabs.  Each  ingot  and slab is  formed by  melting
titanium  sponge,  scrap or both,  usually with various other alloying  elements
such as vanadium, aluminum,  molybdenum, tin and zirconium.  Titanium scrap is a
by-product  of the  forging,  rolling,  milling and  machining  operations,  and
significant  quantities  of scrap are  generated in the  production  process for
finished  titanium  products.  The melting process for ingot and slab is closely
controlled and monitored  utilizing computer control systems to maintain product
quality and  consistency  and to meet  customer  specifications.  In most cases,
TIMET uses its ingot and slab as the starting  material  for further  processing
into mill products. However, it also sells ingot and slab to third parties.

Titanium mill products result from the forging,  rolling,  drawing, welding
and/or  extrusion of titanium  ingot or slab into  products of various sizes and
grades.  These mill products include titanium  billet,  bar, rod, plate,  sheet,
strip and pipe.  Fabrications  result  from the  cutting,  forming,  welding and
assembling of titanium mill products into various products such as spools,  pipe
fittings,  manifolds and vessels. TIMET sends certain products either to TIMET's
service  centers or to outside  vendors  for  further  processing  before  being
shipped to customers.  TIMET's  customers  either process  TIMET's  products for
their ultimate end-use or for sale to third parties.

During  the   production   process  and   following   the   completion   of
manufacturing,  TIMET performs extensive testing on its products. The inspection
process is critical to ensuring  that  TIMET's  products  meet the high  quality
requirements of customers, particularly in aerospace component production. TIMET
certifies its products meet customer  specification  at the time of shipment for
substantially all customer orders.

TIMET is reliant on several outside  processors to perform certain rolling,
finishing  and other  processing  steps in the U.S.,  and  certain  melting  and
forging steps in France.  In the U.S., one of these outside  processors is owned
by a competitor,  and another is operated by a customer.  These  processors  are
currently the primary source for these  services.  Other  processors used in the
U.S. are not competitors or customers.  In France, the processor is also a joint
venture partner of TIMET's majority-owned French subsidiary.  During 2003, TIMET
made  significant  strides  toward  reducing  the  reliance on  competitor-owned
sources for these services,  so that any  interruption in these functions should
not have a material adverse effect on TIMET's  business,  results of operations,
financial position and liquidity.

Raw  materials.  The  principal  raw  materials  used in the  production of
titanium ingot,  slab and mill products are titanium sponge,  titanium scrap and
alloying  elements.  During 2003,  approximately  36% of TIMET's melted and mill
product raw  material  requirements  were  fulfilled  with  internally  produced
sponge,  28% with purchased sponge, 30% with titanium scrap and 6% with alloying
elements.

The primary raw materials  used in the  production  of titanium  sponge are
titanium-containing  rutile ore, chlorine,  magnesium and petroleum coke. Rutile
ore is currently  available from a limited number of suppliers around the world,
principally  located in  Australia,  South  Africa and Sri Lanka.  A majority of
TIMET's supply of rutile ore is currently  purchased from Australian  suppliers.
TIMET  believes  the  availability  of  rutile  ore  will  be  adequate  for the
foreseeable  future  and does not  anticipate  any  interruptions  of its rutile
supplies, although political or economic instability in the countries from which
TIMET  purchases  its rutile could  materially  adversely  affect  availability.
However, there can be no assurance that TIMET will not experience interruptions.

Chlorine is currently  obtained from a single  supplier near TIMET's Nevada
sponge plant in Nevada.  While TIMET does not presently  anticipate any chlorine
supply  problems,  there can be no  assurances  the chlorine  supply will not be
interrupted.  In the  event of  supply  disruption,  TIMET  has  taken  steps to
mitigate this risk, including  establishing the feasibility of certain equipment
modifications  to  enable  it to  utilize  material  from  alternative  chlorine
suppliers or to purchase and utilize an  intermediate  product  which will allow
TIMET to eliminate  the purchase of chlorine if needed.  Magnesium and petroleum
coke are also generally available from a number of suppliers.

While TIMET was one of five major worldwide producers of titanium sponge in
2003,  it  cannot  supply  all of its needs for all  grades of  titanium  sponge
internally  and is  dependent,  therefore,  on third  parties for a  substantial
portion of its sponge  requirements.  Titanium mill and melted products  require
varying grades of sponge and/or scrap depending on the customers' specifications
and expected end use.  TIMET is the only active major U.S.  producer of titanium
sponge.  Presently,  TIMET and certain companies in Japan are the only producers
of  premium  quality  sponge  that  currently  have  complete  approval  for all
significant  demanding  aerospace  applications.  During 2003,  two other sponge
producers  received  additional  qualification  of their  products  for  certain
critical aerospace  applications.  This qualification process of competitors for
other aerospace applications is likely to continue for several more years.

Historically,  TIMET has purchased sponge  predominantly  from producers in
Japan and Kazakhstan.  Since 2000, TIMET has also purchased sponge from the U.S.
Defense  Logistics  Agency ("DLA")  stockpile.  In September 2002, TIMET entered
into an agreement with a sponge supplier  effective from January 1, 2002 through
December  31,  2007.  This  agreement  replaced  and  superceded  a  prior  1997
agreement.  The new  agreement  requires  minimum  annual  purchases by TIMET of
approximately   $10  million.   TIMET  has  no  other  long-term  sponge  supply
agreements. In 2004, TIMET expects to continue to purchase sponge from a variety
of sources.

TIMET utilizes a combination of internally produced,  customer returned and
externally  produced titanium scrap at all of its melting locations.  Such scrap
consists  of alloyed  and  commercially  pure  solids and  turnings.  Internally
produced  scrap is  generated  in  TIMET's  factories  during  the  melting  and
processing of mill  products.  Customer  returned  scrap is generally  part of a
supply  agreement with a customer,  which  provides a "closed loop"  arrangement
resulting in supply and cost stability.  Externally  produced scrap is purchased
from a wide range of sources,  including customers,  collectors,  processors and
brokers.  In 2004, TIMET anticipates that  approximately  half the scrap it will
utilize  will be  purchased  from  external  suppliers.  TIMET also sells scrap,
usually in a form of grade it cannot recycle.

Market  forces can  significantly  impact the supply or cost of  externally
produced  scrap.  During  cycles in the titanium  business,  the amount of scrap
generated  in the supply  chain  varies.  During the middle of the cycle,  scrap
generation and consumption are in relative equilibrium,  minimizing  disruptions
in supply or  significant  changes in market  prices for  scrap.  Increasing  or
decreasing  cycles  tend to cause  significant  changes in the  market  price of
scrap. Early in the titanium cycle, when the demand for titanium melted and mill
products begins to increase,  TIMET's  requirements (and those of other titanium
manufacturers)  precede the increase in scrap generation by downstream customers
and the supply chain,  placing upward pressure on the market price of scrap. The
opposite  situation  occurs when demand for  titanium  melted and mill  products
begins to decline,  placing downward pressure on the market price of scrap. As a
net purchaser of scrap,  TIMET is susceptible to price increases  during periods
of increasing demand, although this phenomena normally results in higher selling
prices for melted and mill products, which tend to offset the increased material
costs.

All of TIMET's major  competitors  utilize scrap as a raw material in their
melt operations. In addition to use by titanium manufacturers, titanium scrap is
used in steel-making  operations during production of interstitial-free  steels,
stainless steels and  high-strength-low-alloy  steels.  Current demand for these
steel products,  especially from China, have produced a significant  increase in
demand for titanium scrap at a time where titanium scrap generation rates are at
low levels because of the lower  commercial  aircraft build rates.  These events
are expected to cause a relative  shortage of titanium scrap in 2004,  resulting
in tight supply and higher market prices,  costs, which will directly impact the
approximate 50% of scrap TIMET purchases from external sources.  TIMET's ability
to recover these  material  costs via higher  selling prices to its customers is
uncertain.

Various alloying elements used in the production of titanium ingot are also
available from a number of suppliers.

Properties.  TIMET  currently  has  manufacturing  facilities in the United
States in Nevada, Ohio, Pennsylvania and California, and also has two facilities
in the United  Kingdom and one  facility in France.  TIMET sponge is produced at
the Nevada  facility  while  ingot,  slab and mill  products are produced at the
other facilities.  The facilities in Nevada,  Ohio and Pennsylvania,  and one of
the facilities in the United  Kingdom,  are owned,  and all of the remainder are
leased.

In addition to its U.S. sponge capacity discussed below,  TIMET's worldwide
melting  capacity  presently   aggregates   approximately   45,000  metric  tons
(estimated  29% of world  capacity),  and its mill product  capacity  aggregates
approximately   20,000   metric  tons   (estimated   16%  of  world   capacity).
Approximately  35% of TIMET's  worldwide  melting  capacity  is  represented  by
electron beam cold hearth melting furnaces,  63% by vacuum arc remelting ("VAR")
furnaces and 2% by a vacuum induction melting furnace.

TIMET has operated its major  production  facilities  at varying  levels of
practical  capacity during the past three years. In 2003, the plants operated at
approximately 56% of practical  capacity,  as compared to 55% in 2002 and 75% in
2001. In 2004,  TIMET's plants are expected to operate at  approximately  60% to
65% of practical capacity.  However, practical capacity and utilization measures
can vary significantly based upon the mix of products produced.

TIMET's sponge facility is expected to operate at approximately  92% of its
annual   practical   capacity  of  8,600  metric  tons  during  2004,   up  from
approximately  73% in 2003. VDP sponge is used principally as a raw material for
TIMET's melting  facilities in the U.S. and Europe.  Approximately  1,200 metric
tons of VDP production  from TIMET's Nevada  facility were used in Europe during
2003,  which  represented  approximately  32% of the sponge  consumed in TIMET's
European operations. TIMET expects the consumption of VDP sponge in its European
operations to be approximately 35% to 40% of their sponge  requirements in 2004.
The raw materials processing facilities in Pennsylvania  primarily process scrap
used as melting  feedstock,  either in  combination  with sponge or  separately.
Sponge for  melting  requirements  in the U.S.  that is not  supplied by TIMET's
Nevada plant is purchased  principally  from the DLA and  suppliers in Japan and
Kazakhstan.

TIMET's U.S. melting  facilities in Nevada and  Pennsylvania  produce ingot
and slab,  which are  either  sold to third  parties  or used as  feedstock  for
TIMET's mill  products  operations.  These  melting  facilities  are expected to
operate at approximately 70% of aggregate annual practical  capacity in 2004, up
from 58% in 2003.

Titanium mill products are produced by TIMET in the U.S. at its forging and
rolling  facility in Ohio, which receives ingot or slab principally from TIMET's
U.S. melting  facilities.  TIMET's U.S. forging and rolling facility is expected
to operate at approximately  58% of annual  practical  capacity in 2004, up from
53% in 2003.  Capacity  utilization across TIMET's individual mill product lines
varies.

One of TIMET's  facilities in the United  Kingdom  produces VAR ingots used
primarily as feedstock  for its forging  operations  at the same  facility.  The
forging operations process the ingot principally into billet product for sale to
customers or into an  intermediate  product for further  processing  into bar or
plate at its  other  facility  in the  United  Kingdom.  U.K.  melting  and mill
products production in 2004 is expected to operate at approximately 69% and 51%,
respectively   of  annual   practical   capacity,   compared  to  51%  and  47%,
respectively, in 2003.

Sponge for  melting  requirements  in both the U.K.  and France that is not
supplied by TIMET's Nevada facility is purchased  principally  from suppliers in
Japan and Kazakhstan.

Distribution,  market and customer base.  TIMET sells its products  through
its own sales force based in the U.S. and Europe and through  independent agents
and  distributors  worldwide.  TIMET's  marketing and  distribution  system also
includes  eight  TIMET-owned  service  centers  (five in the U.S.  and  three in
Europe),  which sell  TIMET's  products  on a  just-in-time  basis.  The service
centers  primarily sell value-added and customized mill products  including bar,
flat-rolled  sheet and strip.  TIMET  believes  its  service  centers  provide a
competitive advantage because of their ability to foster customer relationships,
customize products to suit specific customer requirements and respond quickly to
customer needs.

TIMET has  long-term  agreements  with certain major  aerospace  customers,
including, among others, The Boeing Company,  Rolls-Royce plc and its German and
U.S.  affiliates,  United Technologies  Corporation (Pratt & Whitney and related
companies) and Wyman-Gordon Company, a unit of Precision Castparts  Corporation.
These agreements expire in 2007 through 2008, subject to certain conditions. The
agreements  generally  provide for (i) minimum  market shares of the  customers'
titanium  requirements  or firm  annual  volume  commitments  and (ii)  fixed or
formula-determined  prices.  (although  some  contain  elements  based on market
pricing).   Generally,  the  agreements  require  TIMET's  service  and  product
performance to meet  specified  criteria and contain a number of other terms and
conditions customary in transactions of these types.

In  certain  events of  nonperformance  by  TIMET,  the  agreements  may be
terminated  early.  Although it is possible  that some  portion of the  business
would continue on a non-agreement  basis,  the termination of one or more of the
agreements  could result in a material and adverse  effect on TIMET's  business,
consolidated  results  of  operations,  financial  position  or  liquidity.  The
agreements  were  designed to limit  selling  price  volatility to the customer,
while providing  TIMET with a committed base of volume  throughout the aerospace
business cycles. To varying degrees,  the agreements  effectively obligate TIMET
to bear all or part of the risks of  increases  in raw material and other costs,
but also allow TIMET to benefit from decreases in such costs.

During  the  third  quarter  of 2003,  TIMET  and  Wyman-Gordon  agreed  to
terminate the 1998 purchase and sale agreement  associated with the formation of
the titanium castings joint venture  previously owned by the two parties.  TIMET
agreed  to  pay  Wyman-Gordon  a  total  of  $6.8  million  in  three  quarterly
installments in connection with this termination, which included the termination
of certain  favorable  purchase terms.  TIMET recorded a one-time charge for the
entire  $6.8  million  as a  reduction  to sales in the third  quarter  of 2003.
Concurrently, TIMET entered into new long-term purchase and sale agreements with
Wyman-Gordon that expire in 2008.

In April 2001,  TIMET reached a settlement of the litigation  between TIMET
and Boeing related to their long-term  agreement entered into in 1997.  Pursuant
to the  settlement,  TIMET  received a cash  payment of $82 million from Boeing.
Under the terms of the new Boeing agreement,  as amended,  in years 2002 through
2007,  Boeing is required to advance to TIMET $28.5 million  annually less $3.80
per pound of titanium  product  purchased  by Boeing  subcontractors  during the
preceding  year.  Effectively,  TIMET  collects  $3.80 less from Boeing than the
agreement  selling  price for each pound of titanium  product  sold  directly to
Boeing and reduces the related  customer advance recorded by TIMET. For titanium
products  sold to  Boeing  subcontractors,  TIMET  collects  the full  agreement
selling  price,  but gives  Boeing  credit by reducing  the next  year's  annual
advance by $3.80 per pound of titanium  product  sold to Boeing  subcontractors.
The Boeing customer advance is also reduced as take-or-pay  benefits are earned.
Under a separate  agreement,  TIMET must  establish  and hold  buffer  stock for
Boeing at TIMET's facilities, for which Boeing will pay TIMET as such product is
produced.

TIMET also has an agreement  with  VALTIMET SAS, a  manufacturer  of welded
stainless steel and titanium tubing that is principally sold into the industrial
markets. TIMET owns 44% of VALTIMET. This agreement was entered into in 1997 and
expires in 2007. Under this agreement, VALTIMET has agreed to purchase a certain
percentage of its titanium requirements from TIMET at formula-determined selling
prices, subject to certain conditions.  Certain provisions of this contract have
been  renegotiated  in the past and may be  renegotiated  in the  future to meet
changing business conditions.

Approximately 55% of TIMET's 2003 sales was generated by sales to customers
within  North  America,  as  compared  to about  53% and 51% in 2002  and  2001,
respectively.  Approximately 38% of TIMET's 2003 sales was generated by sales to
European customers, as compared to about 40% in 2002 and 39% in 2001.

About 68% of TIMET's sales was generated by sales to the aerospace industry
in  2003,  as  compared  to 67% in 2002  and 70% in 2001.  Sales  under  TIMET's
long-term  agreements accounted for over 41% of its sales in 2003. TIMET expects
that a majority of its 2004 sales will be to the aerospace industry.

The  primary  market for  titanium  products  in the  commercial  aerospace
industry  consists  of  two  major  manufacturers  of  large  (over  100  seats)
commercial  airframes - Boeing  Commercial  Airplanes Group of the United States
and Airbus  Integrated  Company  (80% owned by European  Aeronautic  Defense and
Space  Company  and 20% owned by BAE  Systems)  of Europe.  In  addition  to the
airframe manufacturers, the following four manufacturers of large civil aircraft
engines are also  significant  titanium users:  Rolls-Royce,  Pratt & Whitney (a
unit of United Technologies Corporation),  General Electric Aircraft Engines and
Societe  Nationale  d<180>Etude et de  Construction  de Moteurs  d<180>Aviation.
TIMET's  sales  are made  both  directly  to these  major  manufacturers  and to
companies  (including forgers such as Wyman-Gordon) that use TIMET's titanium to
produce parts and other  materials for such  manufacturers.  If any of the major
aerospace  manufacturers were to significantly reduce aircraft and/or jet engine
build rates from those  currently  expected,  there could be a material  adverse
effect, both directly and indirectly, on TIMET.

As of December 31, 2003,  the  estimated  firm order backlog for Boeing and
Airbus,  as reported by The Airline  Monitor,  was 2,555  planes,  versus  2,649
planes at the end of 2002 and 2,919  planes  at the end of 2001.  The  estimated
firm order  backlog for wide body planes at year-end  2003 was 701 (27% of total
backlog)  compared to 709 (27% of total backlog) at the end of 2002 and 801 (27%
of total backlog) at the end of 2001. The backlogs for Boeing and Airbus reflect
orders for aircraft to be delivered over several years.  Changes in the economic
environment  and the financial  condition of airlines can result in rescheduling
or  cancellation  of  contractual  orders.  Accordingly,  aircraft  manufacturer
backlogs  are  not  necessarily  a  reliable  indicator  of  near-term  business
activity,  but may be indicative of potential business levels over a longer-term
horizon.

Wide body planes  (e.g.,  Boeing 747, 767 and 777 and Airbus A330 and A340)
tend to use a higher  percentage  of  titanium in their  airframes,  engines and
parts than narrow body planes  (e.g.,  Boeing 737 and 757 and Airbus A318,  A319
and  A320),  and  newer  models  of planes  tend to use a higher  percentage  of
titanium  than  older  models.  Additionally,  Boeing  generally  uses a  higher
percentage  of  titanium  in its  airframes  than  Airbus.  For  example,  TIMET
estimates that  approximately  58 metric tons, 43 metric tons and 18 metric tons
of titanium are purchased for the  manufacture  of each Boeing 777, 747 and 737,
respectively,  including  both the airframes and engines.  TIMET  estimates that
approximately  24 metric tons, 17 metric tons and 12 metric tons of titanium are
purchased for the manufacture of each Airbus A340, A330 and A320,  respectively,
including both the airframes and engines.

At year-end 2003, a total of 129 firm orders had been placed for the Airbus
A380  superjumbo  jet,  a program  officially  launched  in  December  2000 with
anticipated  first  deliveries in 2006.  TIMET estimates that  approximately  77
metric tons of titanium will be purchased for each A380  manufactured,  the most
of any commercial  aircraft.  Additionally,  Boeing  currently  plans a mid-2004
production  launch for its newly announced model,  the 7E7 Dreamliner.  Although
this  airplane  will  contain more  composite  materials  than a typical  Boeing
airplane,  initial  estimates are that  approximately 49 metric tons of titanium
(for the airframe) will be purchased for each 7E7 airframe manufactured.  Engine
estimates are not yet available for the 7E7.

Outside of aerospace markets, TIMET manufactures a wide range of industrial
products,  including  sheet,  plate,  tube,  bar,  billet,  pipe and skelp,  for
customers  in the  chemical  process,  oil and gas,  consumer,  sporting  goods,
automotive, power generation and armor/armament industries. Approximately 19% of
TIMET's sales in 2003,  and 18% in 2002 and 2001,  were  generated by sales into
industrial and emerging markets,  including sales to VALTIMET for the production
of condenser tubing. For the oil and gas industry,  TIMET provides seamless pipe
for  downhole  casing,  risers,  tapered  stress  joints and other  offshore oil
production equipment,  including fabrication of sub-sea manifolds.  In armor and
armament,  TIMET sells  plate  products  for  fabrication  into door  hatches on
fighting vehicles, as well as tank/turret protection.

In addition to mill and melted products, which are sold into the aerospace,
industrial  and emerging  markets,  TIMET sells certain  other  products such as
titanium sponge that are not suitable for internal use,  titanium  tetrachloride
and fabricated titanium  assemblies.  Sales of these other products  represented
13% of TIMET's sales in 2003, 15% in 2002 and 12% in 2001.

TIMET's  backlog of  unfilled  orders  was  approximately  $180  million at
December  31,  2003,  compared  to $165  million at  December  31, 2002 and $225
million at December 31, 2001.  Substantially the entire 2003 year-end backlog is
scheduled for shipment during 2004.  TIMET's order backlog may not be a reliable
indicator of future business activity.

TIMET has explored and will continue to explore  strategic  arrangements in
the areas of product development,  production and distribution.  TIMET also will
continue to work with existing and  potential  customers to identify and develop
new or improved  applications  for  titanium  that take  advantage of its unique
qualities.

Competition.  The  titanium  metals  industry  is highly  competitive  on a
worldwide basis.  Producers of melted and mill products are located primarily in
the United States, Japan, France,  Germany,  Italy, Russia, China and the United
Kingdom.  There are  currently  five major,  and  several  minor,  producers  of
titanium  sponge in the world.  TIMET is  currently  the only active  major U.S.
sponge producer.

TIMET's   principal   competitors   in  aerospace   markets  are  Allegheny
Technologies  Incorporated and RTI International Metals, Inc., both based in the
United  States,  and  Verkhnaya  Salda  Metallurgical   Production  Organization
("VSMPO"),  based in  Russia.  These  companies,  along  with  certain  Japanese
producers  and  certain  other  companies,  are also  principal  competitors  in
industrial and emerging markets. TIMET competes primarily on the basis of price,
quality of products,  technical support and the availability of products to meet
customers' delivery schedules.

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

Generally,  imports of titanium products into the U.S. are subject to a 15%
"normal trade  relations"  tariff.  For tariff purposes,  titanium  products are
broadly  classified as either wrought (bar, sheet,  strip,  plate and tubing) or
unwrought (sponge, ingot and slab).

The U.S. maintains a trade program referred to as the generalized system of
preferences,  or "GSP program," designed to promote the economies of a number of
lesser-developed  countries (referred to as beneficiary developing countries) by
eliminating  duties on a specific  list of products  imported  from any of these
beneficiary  developing  countries.  Of the  key  titanium  producing  countries
outside the U.S.,  Russia and Kazakhstan  are currently  regarded as beneficiary
developing countries under the GSP program.

For most periods since 1993,  imports of titanium wrought products from any
beneficiary  developing  country  (notably  Russia,  as a  producer  of  wrought
products) were exempted from U.S. import duties under the GSP program.  In 2002,
TIMET filed a petition seeking the removal of duty-free  treatment under the GSP
program for imports of titanium  wrought  products  into the U.S.  from  Russia.
Action on the TIMET petition has been deferred,  meaning duty-free  treatment on
imports of titanium wrought products into the U.S. from Russia will continue for
the time being.

In 2002,  Kazakhstan  filed a petition  with the  Office of the U.S.  Trade
Representative  seeking GSP status on imports of titanium  sponge into the U.S.,
which,  if granted,  would have eliminated the 15% tariff  currently  imposed on
titanium sponge imported into the U.S. from any beneficiary  developing  country
(notably Russia and  Kazakhstan,  as producers of titanium  sponge).  On July 1,
2003, Kazakhstan's petition was denied.

TIMET has successfully  resisted,  and will continue to resist,  efforts to
eliminate  duties on  sponge  and  unwrought  titanium  products,  and TIMET has
pursued  and will  continue  to pursue the  removal  of GSP status for  titanium
wrought products, although no assurances can be made that TIMET will continue to
be  successful  in these  activities.  Further  reductions  in, or the  complete
elimination  of, any or all of these  tariffs,  including  expansion  of the GSP
program to  unwrought  titanium  products,  could lead to  increased  imports of
foreign  sponge,  ingot and mill  products  into the U.S. and an increase in the
amount of such products on the market  generally,  which could adversely  affect
pricing for titanium sponge,  ingot and mill products and thus TIMET's business,
consolidated results of operations, financial position or liquidity.

Research and development.  TIMET's research and development  activities are
directed toward  expanding the use of titanium and titanium alloys in all market
sectors.  Key  research  activities  include  the  development  of  new  alloys,
applications   development  in  the  automotive   division  and  development  of
technology  required  to enhance  the  performance  of TIMET's  products  in the
traditional  industrial and aerospace markets and other emerging markets.  TIMET
conducts the majority of its research and  development  activities at its Nevada
facility,  with additional activities at its facility in England. TIMET incurred
research and development costs of $2.6 million in 2001, $3.3 million in 2002 and
$2.8 million in 2003.

In April 2003,  TIMET was selected by the United  States  Defense  Advanced
Research  Projects Agency  ("DARPA") to lead a program aimed at  commercializing
the "FFC  Cambridge  Process." The FFC Cambridge  Process,  developed by certain
professors at the University of Cambridge,  represents a potential  breakthrough
technology in the process of extracting  titanium  from  titanium-bearing  ores.
This  program  will  receive up to  approximately  $12.3  million in  government
funding  over the next five years.  As part of the  program,  TIMET is leading a
team of scientists from major defense  contractors,  including  General Electric
Aircraft Engines,  United Defense Limited Partners and Pratt & Whitney,  as well
as the University of California at Berkeley and the University of Cambridge. The
funding is  allocated  among all of the program  partners  (including  TIMET) to
cover program costs. Additionally, TIMET contributes unreimbursed personnel time
to assist in the research. In connection with the program,  TIMET has negotiated
a non-exclusive development and production license for the FFC Cambridge Process
technology from British  Titanium plc. TIMET is conducting the development  work
at its Nevada facility.  While much work must be done and success is by no means
a certainty,  TIMET considers this a significant opportunity to possibly achieve
a meaningful reduction in the cost of producing titanium metal.

Patents and trademarks. TIMET holds U.S. and non-U.S. patents applicable to
certain of its titanium alloys and manufacturing  technology.  TIMET continually
seeks patent  protection with respect to its technical base and has occasionally
entered into  cross-licensing  arrangements  with third parties.  TIMET believes
that the trademarks  TIMET and TIMETAL,  which are protected by  registration in
the U.S. and other  countries,  are  important to its business.  Further,  TIMET
feels its proprietary TIMETAL Exhaust Grade, patented TIMETAL 62S connecting rod
alloy,  patented  TIMETAL LCB spring alloy and patented  TIMETAL  Ti-1100 engine
valve alloy give it competitive  advantages in the automotive  market.  However,
most of the titanium  alloys and  manufacturing  technology used by TIMET do not
benefit from patent or other intellectual property protection.

Employees. At December 31, 2003, TIMET employed approximately 2,050 persons
(1,265 in the U.S. and 785 in Europe),  compared to 1,950  persons at the end of
2002 and 2,410 at the end of 2001. The cyclical nature of the aerospace industry
and  its  impact  on  TIMET's  business  is  the  principal  reason  that  TIMET
periodically implements cost reduction restructurings, reorganizations and other
changes that impact  TIMET's  employment  levels.  The 19% decrease in employees
from 2001 to 2002 was  principally  in response to changes in market  demand for
TIMET's products and met TIMET's targeted reductions  announced during the third
quarter of 2002.  The increase  during 2003  reflects the increase in demand for
titanium  products  during the second half of 2003,  somewhat  offset by TIMET's
continued efforts to operate at more efficient  levels.  TIMET currently expects
employment  to slightly  increase  throughout  2004 as  production  continues to
increase.

TIMET's  production,  maintenance,  clerical and technical workers in Ohio,
and its production and  maintenance  workers in Nevada,  are  represented by the
United Steelworkers of America under contracts expiring in June 2005 and October
2004,  respectively.  Employees at TIMET's other U.S. facilities are not covered
by  collective  bargaining  agreements.  Approximately  60% of the  salaried and
hourly  employees at TIMET's  European  facilities  are  represented  by various
European labor unions.  New labor  agreements were recently reached with TIMET's
U.K. employees through 2005 and TIMET's French employees through 2005.

While TIMET currently  considers its employee relations to be satisfactory,
it is  possible  that  there  could be  future  work  stoppages  or other  labor
disruptions  that  could  materially  and  adversely  affect  TIMET's  business,
consolidated financial position, results of operations or liquidity.

Regulatory and environmental  matters.  TIMET's  operations are governed by
various federal,  state, local and foreign  environmental and worker safety laws
and regulations. In the U.S., such laws include the OSHA, the Clean Air Act, the
Clean Water Act and the RCRA. TIMET uses and manufactures substantial quantities
of substances  that are considered  hazardous or toxic under  environmental  and
worker safety and health laws and  regulations.  TIMET has used and manufacturer
such substances  throughout the history of its operations.  As a result, risk of
environmental,  health  and safety  issues is  inherent  in TIMET's  operations.
TIMET's operations pose a continuing risk of accidental  releases of, and worker
exposure to, hazardous or toxic substances. There is also a risk that government
environmental requirements, or enforcement thereof, may become more stringent in
the future. There can be no assurances that some, or all, of the risks discussed
under this  heading  will not result in  liabilities  that would be  material to
TIMET's  business,  consolidated  financial  position,  results of operations or
liquidity.

TIMET's  operations  in Europe are similarly  subject to various  countries
laws and regulations  respecting  environmental and worker safety matters.  Such
laws have not had, and are not  presently  expected to have, a material  adverse
effect  on  TIMET's  business,   consolidated  financial  position,  results  of
operations or liquidity.

TIMET  believes  that its  operations  are in  compliance  in all  material
respects with  applicable  requirements of  environmental  and worker health and
safety laws. TIMET's policy is to continually  strive to improve  environmental,
health  and  safety  performance.  From time to time,  TIMET may be  subject  to
health, safety or environmental  regulatory  enforcement under various statutes,
resolution of which typically involves the establishment of compliance programs.
Occasionally,  resolution  of  these  matters  may  result  in  the  payment  of
penalties.

TIMET  incurred  capital  expenditures   related  to  health,   safety  and
environmental  compliance and improvement  matters of approximately $2.4 million
in 2001,  $1.4 million in 2002 and $1.9 million in 2003.  TIMET's capital budget
provides for approximately  $2.9 million of such expenditures in 2004.  However,
the imposition of more strict  standards or  requirements  under  environmental,
health or safety laws and regulations  could result in expenditures in excess of
amounts estimated to be required for such matters.

OTHER

NL Industries,  Inc. In addition to its 51% ownership of Kronos at December
31, 2003, NL also holds certain marketable securities and other investments.  In
addition, NL owns 100% of EWI Re. Inc., an insurance brokerage company. See Note
17 to the Consolidated Financial Statements.

Tremont LLC.  Tremont is primarily a holding  company which owns 21% of NL,
40% of TIMET and 10% of Kronos at December 31, 2003.  In addition,  Tremont owns
indirect ownership interests in Basic Management,  Inc. ("BMI"),  which provides
utility services to, and owns property (the "BMI Complex")  adjacent to, TIMET's
facility in Nevada, and The Landwell Company L.P. ("Landwell"), which is engaged
in efforts to develop  certain land  holdings  for  commercial,  industrial  and
residential purposes surrounding the BMI Complex.

Foreign  operations.  Through its subsidiaries and affiliates,  the Company
has  substantial  operations  and assets  located  outside  the  United  States,
principally chemicals operations in Germany, Belgium and Norway, titanium metals
operations in the United  Kingdom and France,  chemicals and component  products
operations in Canada and component  products  operations in the  Netherlands and
Taiwan. See Note 2 to the Consolidated  Financial Statements.  Approximately 71%
of Kronos' 2003 aggregate TiO2 sales were to non-U.S. customers, including 9% to
customers  in areas other than Europe and Canada.  Approximately  39% of CompX's
2003 sales were to non-U.S.  customers located principally in Canada and Europe.
About 45% of TIMET's 2003 sales are to non-U.S. customers,  primarily in Europe.
Foreign  operations are subject to, among other things,  currency  exchange rate
fluctuations and the Company's  results of operations have in the past been both
favorably and unfavorably  affected by fluctuations in currency  exchange rates.
See Item 7 -  "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations" and Item 7A - "Quantitative  and Qualitative  Disclosures
About Market Risk."

CompX's  Canadian  component  products  subsidiary  has, from time to time,
entered into currency  forward  contracts to mitigate  exchange rate fluctuation
risk for a portion of its receivables  denominated in currencies  other than the
Canadian dollar  (principally  the U.S.  dollar) or for similar risks associated
with  future  sales.  See  Note  21 to the  Consolidated  Financial  Statements.
Otherwise,  the  Company  does  not  generally  engage  in  currency  derivative
transactions.

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

Regulatory and environmental matters.  Regulatory and environmental matters
are discussed in the respective business sections contained elsewhere herein and
in Item 3 - "Legal  Proceedings." In addition,  the information included in Note
18  to  the  Consolidated   Financial   Statements  under  the  captions  "Legal
proceedings  --  lead  pigment  litigation"  and -  "Environmental  matters  and
litigation" is incorporated herein by reference.

Acquisition and restructuring  activities.  The Company routinely  compares
its liquidity requirements and alternative uses of capital against the estimated
future  cash  flows to be  received  from its  subsidiaries  and  unconsolidated
affiliates,  and the estimated  sales value of those units.  As a result of this
process,  the  Company  has in the  past  and may in the  future  seek to  raise
additional   capital,   refinance  or   restructure   indebtedness,   repurchase
indebtedness in the market or otherwise,  modify its dividend  policy,  consider
the sale of interests in subsidiaries,  business units, marketable securities or
other assets,  or take a combination  of such steps or other steps,  to increase
liquidity,  reduce indebtedness and fund future activities. Such activities have
in the past and may in the future involve related companies.  From time to time,
the Company and related  entities also evaluate the  restructuring  of ownership
interests among its subsidiaries  and related  companies and expects to continue
this activity in the future.

The Company and other  entities  that may be deemed to be  controlled by or
affiliated  with Mr.  Harold  C.  Simmons  routinely  evaluate  acquisitions  of
interests in, or combinations  with,  companies,  including  related  companies,
perceived by management to be undervalued in the  marketplace.  These  companies
may or may  not be  engaged  in  businesses  related  to the  Company's  current
businesses.  In a number of  instances,  the  Company has  actively  managed the
businesses acquired with a focus on maximizing return-on-investment through cost
reductions,  capital expenditures,  improved operating  efficiencies,  selective
marketing to address market niches,  disposition of marginal operations,  use of
leverage  and  redeployment  of  capital  to more  productive  assets.  In other
instances,  the Company has disposed of the acquired interest in a company prior
to gaining  control.  The Company  intends to consider  such  activities  in the
future and may, in connection with such activities,  consider issuing additional
equity securities and increasing the indebtedness of Valhi, its subsidiaries and
related companies.

Website and availability of Company reports filed with the SEC. Valhi files
reports,  proxy and information  statements and other  information with the SEC.
The  Company  does not  maintain a website on the  internet.  The  Company  will
provide to anyone  without  charge copies of this Annual Report on Form 10-K for
the year ended December 31, 2003,  copies of the Company's  Quarterly Reports on
Form  10-Q for 2003 and 2004 and any  Current  Reports  on Form 8-K for 2003 and
2004,  and any amendments  thereto,  as soon as they are filed with the SEC upon
written  request  to the  Company.  Such  requests  should  be  directed  to the
attention of the Corporate  Secretary at the Company's address on the cover page
of this Form 10-K.

The general  public may read and copy any  materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street,  NW, Washington,
DC 20549,  and may obtain  information on the operation of the Public  Reference
Room by calling the SEC at  1-800-SEC-0330.  The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains  reports,
proxy and information  statements and other  information  regarding issuers that
file electronically with the SEC, including the Company.

ITEM 2.  PROPERTIES

Valhi has  approximately  34,000 square feet of leased office space for its
principal  executive offices in a building located at 5430 LBJ Freeway,  Dallas,
Texas,  75240-2697.  The  principal  properties  used in the  operations  of the
Company,   including  certain  risks  and  uncertainties  related  thereto,  are
described  in the  applicable  business  sections  of Item 1 -  "Business."  The
Company  believes that its  facilities  are generally  adequate and suitable for
their respective uses.

ITEM 3.  LEGAL PROCEEDINGS

The  Company is  involved  in various  legal  proceedings.  In  addition to
information that is included below,  certain information called for by this Item
is  included  in  Note  18  to  the  Consolidated  Financial  Statements,  which
information is incorporated herein by reference.

NL lead pigment litigation.

NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint.  Since 1987, NL, other former  manufacturers of lead
pigments for use in paint (together,  the "former pigment  manufacturers"),  and
lead-based paint, and the Lead Industries Association ("LIA") have been named as
defendants in various legal  proceedings  seeking  damages for personal  injury,
property damage and  governmental  expenditures  allegedly  caused by the use of
lead-based  paints.  Certain of these actions have been filed by or on behalf of
states,  large  U.S.  cities or their  public  housing  authorities  and  school
districts,  and  certain  others  have been  asserted  as class  actions.  These
lawsuits seek recovery under a variety of theories, including public and private
nuisance, negligent product design, negligent failure to warn, strict liability,
breach  of  warranty,   conspiracy/concert   of  action,  aiding  and  abetting,
enterprise  liability,  market  share  liability,  intentional  tort,  fraud and
misrepresentation,  violations of state consumer protection  statutes,  supplier
negligence and similar claims.

The plaintiffs in these actions  generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns  associated
with the use of  lead-based  paints,  including  damages  for  personal  injury,
contribution  and/or  indemnification  for medical expenses,  medical monitoring
expenses  and costs for  educational  programs.  Several  former cases have been
dismissed or  withdrawn.  Most of the remaining  cases are in various  pre-trial
stages.  Some are on appeal  following  dismissal or summary judgment rulings in
favor of the defendants. In addition,  various other cases are pending (in which
NL is not a  defendant)  seeking  recovery for injury  allegedly  caused by lead
pigment and lead-based paint. Although NL is not a defendant in these cases, the
outcome  of these  cases may have an  impact on  additional  cases  being  filed
against NL.

NL believes  these actions are without  merit,  intends to continue to deny
all  allegations  of wrongdoing  and liability and to defend against all actions
vigorously.  NL has  neither  lost nor settled  any of these  cases.  NL has not
accrued  any  amounts  for  the  pending  lead  pigment  and  lead-based   paint
litigation.  Liability that may result,  if any, cannot reasonably be estimated.
There can be no assurance that NL will not incur future  liability in respect of
the pending litigation in view of the inherent  uncertainties  involved in court
and jury rulings.

In 1989 and 1990,  the  Housing  Authority  of New Orleans  ("HANO")  filed
third-party  complaints  for  indemnity  and/or  contribution  against NL, other
former  manufacturers  of lead pigment  (together  with NL, the "former  pigment
manufacturers")  and the LIA in 14 actions  commenced by residents of HANO units
seeking  compensatory and punitive damages for injuries allegedly caused by lead
pigment.  All but two of the actions  (Hall v. HANO,  et al., No.  89-3552,  and
Allen v.  HANO,  et al.,  No.  89-427,  Civil  District  Court for the Parish of
Orleans,  State of Louisiana) have been dismissed.  The two remaining cases have
been inactive since 1992.

In June 1989,  a complaint  was filed in the Supreme  Court of the State of
New York, County of New York,  against the former pigment  manufacturers and the
LIA.  Plaintiffs  sought  damages in excess of $50  million for  monitoring  and
abating alleged lead paint hazards in public and private residential  buildings,
diagnosing  and  treating  children  allegedly  exposed  to lead  paint  in city
buildings,  the costs of educating  city residents to the hazards of lead paint,
and liability in personal  injury actions  against the New York City and the New
York City Housing  Authority  based on alleged lead  poisoning of city residents
(The City of New York, the New York City Housing Authority and the New York City
Health and Hospitals  Corp. v. Lead  Industries  Association,  Inc., et al., No.
89-4617).  As a result of pre-trial motions, the New York City Housing Authority
is the only remaining  plaintiff in the case and is pursuing  damage claims only
with respect to two housing projects.  Discovery is proceeding,  but no activity
has occurred since September 2001.

In August 1992, NL was served with an amended complaint in Jackson,  et al.
v. The Glidden Co., et al., Court of Common Pleas,  Cuyahoga County,  Cleveland,
Ohio (Case No. 236835).  Plaintiffs seek  compensatory  and punitive damages for
personal  injury  caused  by the  ingestion  of  lead,  and an  order  directing
defendants  to  abate  lead-based  paint in  buildings.  Plaintiffs  purport  to
represent a class of similarly  situated  persons  throughout the State of Ohio.
The trial court has denied plaintiffs' motion for class certification. Discovery
and  pre-trial  proceedings  are  continuing  with  the  individual  plaintiffs.
Defendants have filed a motion for summary judgment on all claims. The court has
not yet ruled on the motion.

In December 1998, NL was served with a complaint on behalf of four children
and their guardians in Sabater,  et al. v. Lead Industries  Association,  et al.
(Supreme Court of the State of New York,  County of Bronx,  Index No. 25533/98).
Plaintiffs  purport to represent a class of all  children and mothers  similarly
situated in New York State.  The complaint  seeks damages from the LIA and other
former pigment manufacturers for establishment of property abatement and medical
monitoring funds and compensatory damages for alleged injuries to plaintiffs. In
February 2004, the court denied plaintiffs' motion for class certification.  The
time for plaintiffs to appeal has not yet begun to run.

In  September  1999,  an  amended  complaint  was  filed in  Thomas v. Lead
Industries Association,  et al. (Circuit Court, Milwaukee,  Wisconsin,  Case No.
99-CV-6411)  adding as defendants  the former  pigment  manufacturers  to a suit
originally filed against  plaintiff's  landlords.  Plaintiff,  a minor,  alleges
injuries  purportedly  caused by lead on the  surfaces  of  premises in homes in
which he resided.  Plaintiff seeks compensatory and punitive damages, and NL has
denied liability.  In January 2003, the trial court granted  defendants'  motion
for summary judgment,  dismissing all counts of the complaint. In June 2003, the
plaintiff appealed.

In October 1999, NL was served with a complaint in State of Rhode Island v.
Lead  Industries  Association,  et al.  (Superior  Court  of Rhode  Island,  No.
99-5226).  The State seeks  compensatory  and  punitive  damages for medical and
educational  expenses,  and public and private building  abatement expenses that
the  State  alleges  were  caused by lead  paint,  and for  funding  of a public
education campaign and health screening  programs.  Plaintiff seeks judgments of
joint and several  liability  against the former pigment  manufacturers  and the
LIA.  Trial began in phase I of this case before a Rhode Island state court jury
in  September  2002 on the  question of whether  lead  pigment in paint on Rhode
Island  buildings is a public  nuisance.  On October 29,  2002,  the trial judge
declared a  mistrial  in the case when the jury was unable to reach a verdict on
the question,  with the jury reportedly deadlocked 4-2 in the defendants' favor.
Other  claims made by the  Attorney  General,  including  violation of the Rhode
Island Unfair Trade Practices and Consumer  Protection  Act,  strict  liability,
negligence,  negligent  and  fraudulent  misrepresentation,   civil  conspiracy,
indemnity,  and unjust enrichment remain pending and were not the subject of the
2002 trial. In March 2003, the court denied motions by plaintiffs and defendants
for judgment  notwithstanding the verdict. In January 2004,  plaintiff requested
the  court to  dismiss  its  claims  for  state-owned  buildings,  claiming  all
remaining  claims did not require a jury and asking the court to reconsider  the
trial  schedule.  In February  2004, the court  dismissed the strict  liability,
negligence, negligent misrepresentation and fraud claims with prejudice, and the
time for  plaintiffs to appeal this dismissal has not yet begun to run. In March
2004, the court ruled that the defendants have a constitutional right to a trial
by jury under the Rhode Island Constitution,  a decision of which the plaintiffs
have announced their  intention to appeal.  The court also set April 2005 as the
date for the retrial of all phases of this case.

In October  1999,  NL was served with a complaint in Smith,  et al. v. Lead
Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case
No.  24-C-99-004490).  Plaintiffs,  seven minors from four  families,  each seek
compensatory  damages of $5 million  and  punitive  damages of $10  million  for
alleged  injuries due to  lead-based  paint.  Plaintiffs  allege that the former
pigment  manufacturers and other companies  alleged to have  manufactured  paint
and/or  gasoline  additives,  the  LIA  and  the  National  Paint  and  Coatings
Association are jointly and severally liable.  NL has denied liability,  and all
defendants filed motions to dismiss various of the claims. In February 2002, the
trial court dismissed all claims except those relating to product  liability for
lead paint and the Maryland Consumer Protection Act. In November 2002, the trial
court  granted  summary  judgment  against  the  children  from the first of the
plaintiff  families,  and plaintiffs  have appealed.  The appellate court held a
hearing on the appeal in November 2003, however no decision has yet been issued.
Pre-trial proceedings and discovery against the other plaintiffs are continuing.
The court has set trial dates in 2004 for these  plaintiffs,  however the trials
are stayed pending the appeal.

In February  2000,  NL was served with a complaint  in City of St. Louis v.
Lead  Industries  Association,  et al.  (Missouri  Circuit  Court 22nd  Judicial
Circuit,  St.  Louis City,  Cause No.  002-245,  Division  1).  Plaintiff  seeks
compensatory  and  punitive  damages for its  expenses  discovering  and abating
lead-based  paint,  detecting  lead  poisoning  and  providing  medical care and
educational  programs for City  residents,  and the costs of educating  children
suffering injuries due to lead exposure.  Plaintiff seeks judgments of joint and
several  liability  against  the former  pigment  manufacturers  and the LIA. In
November 2002, defendants' motion to dismiss was denied. In May 2003, plaintiffs
filed an amended complaint  alleging only a nuisance claim.  Defendants  renewed
motion to dismiss and motion for summary  judgment  are  pending.  Discovery  is
proceeding.

In April 2000,  NL was served with a complaint  in County of Santa Clara v.
Atlantic Richfield  Company,  et al. (Superior Court of the State of California,
County of Santa Clara,  Case No.  CV788657)  brought  against the former pigment
manufacturers,  the LIA and  certain  paint  manufacturers.  The County of Santa
Clara seeks to represent a class of California governmental entities (other than
the  state and its  agencies)  to  recover  compensatory  damages  for funds the
plaintiffs  have  expended or will in the future  expend for medical  treatment,
educational expenses,  abatement or other costs due to exposure to, or potential
exposure to, lead paint,  disgorgement of profit,  and punitive  damages.  Santa
Cruz,  Solano,  Alameda,  San Francisco,  and Kern  counties,  the cities of San
Francisco and Oakland,  the Oakland and San Francisco  unified school  districts
and housing  authorities  and the Oakland  Redevelopment  Agency have joined the
case as  plaintiffs.  In February  2003,  defendants  filed a motion for summary
judgment.  In July  2003,  the court  granted  defendants'  motion  for  summary
judgment on all remaining claims. Plaintiffs have appealed.

In June 2000, two complaints were filed in Texas state court, Spring Branch
Independent  School District v. Lead Industries  Association,  et al.  (District
Court of Harris County,  Texas, No. 2000-31175),  and Houston Independent School
District  v.  Lead  Industries  Association,  et al.  (District  Court of Harris
County,  Texas,  No.  2000-33725).  The  school  districts  seek past and future
damages and  exemplary  damages for costs they have  allegedly  incurred or will
occur due to the presence of lead-based paint in their buildings from the former
pigment  manufacturers  and the LIA. NL has denied all liability.  In June 2002,
the court  granted NL's motion for summary  judgment in the Spring  Branch case,
and  plaintiffs  have  filed an  appeal of the grant of  summary  judgment.  The
Houston  case has been  stayed  pending  appellate  review of the trial  court's
dismissal of the Spring Branch case or certain other events.

In June 2000, a complaint was filed in Illinois state court,  Lewis, et al.
v. Lead Industries Association,  et al. (Circuit Court of Cook County, Illinois,
County Department,  Chancery Division,  Case No. 00CH09800).  Plaintiffs seek to
represent two classes,  one of all minors between the ages of six months and six
years who  resided in housing in  Illinois  built  before  1978,  and one of all
individuals  between the ages of six and twenty years who lived between the ages
of six months and six years in Illinois  housing built before 1978 and had blood
lead levels of 10  micrograms/deciliter  or more.  The  complaint  seeks damages
jointly  and  severally  from the former  pigment  manufacturers  and the LIA to
establish a medical  screening fund for the first class to determine  blood lead
levels,  a medical  monitoring  fund for the second class to detect the onset of
latent diseases,  and a fund for a public education campaign. In March 2002, the
court dismissed all claims.  Plaintiffs appealed, and in June 2003 the appellate
court  affirmed  the  dismissal  of five of the six  counts of  plaintiffs,  but
reversed the dismissal of the conspiracy count.

In February  2001,  NL was served with a complaint in Baker,  et al. v. The
Sherwin-Williams   Company,   et  al.   (Circuit  Court  of  Jefferson   County,
Mississippi, Civil Action No. 2000-587, and formerly known as Borden, et al. vs.
The  Sherwin-Williams  Company,  et al.). The complaint  seeks joint and several
liability for  compensatory and punitive damages from more than 40 manufacturers
and retailers of lead pigment and/or paint,  including NL, on behalf of 18 adult
residents  of  Mississippi  who were  allegedly  exposed  to lead  during  their
employment in construction and repair activities.  One plaintiff has dropped his
claims and the court has ordered  that the claims of nine of the  plaintiffs  be
transferred to Holmes County, Mississippi state court. The defendants petitioned
the  Mississippi  Supreme Court to reverse the trial  court's  transfer of these
plaintiffs  to  Holmes  County  and  have   requested  that  the  plaintiffs  be
transferred  to their  appropriate  venues.  The  Mississippi  Supreme Court has
stayed all  activities in Holmes County,  pending its decision.  With respect to
the eight plaintiffs remaining in Jefferson Country,  pre-trial  proceedings are
continuing, and the court has set a trial date of October 2004.

In May 2001,  NL was served with a  complaint  in City of  Milwaukee  v. NL
Industries,  Inc. and Mautz Paint  (Circuit  Court,  Civil  Division,  Milwaukee
County,  Wisconsin,  Case No.  01CV003066).  Plaintiff  seeks  compensatory  and
equitable relief for lead hazards in Milwaukee homes, restitution for amounts it
has spent to abate lead and punitive  damages.  NL has denied all liability.  In
July 2003,  defendants'  motion for  summary  judgment  was granted by the trial
court, and plaintiff has appealed.

In May 2001, NL was served with a complaint in Harris County, Texas v. Lead
Industries  Association,  et al.  (District Court of Harris County,  Texas,  No.
2001-21413).  The complaint  seeks actual and punitive  damages and asserts that
the former pigment  manufacturers  and the LIA are jointly and severally  liable
for past and future  damages due to the  presence of lead paint in  county-owned
buildings.  NL has  denied  all  liability.  The case has  been  stayed  pending
appellate review of the trial court's dismissal of the Spring Branch Independent
School District case discussed above or certain other events.

In January and February 2002, NL was served with complaints by 25 different
New Jersey  municipalities  and counties which have been  consolidated as In re:
Lead Paint Litigation (Superior Court of New Jersey, Middlesex County, Case Code
702).  Each  complaint  seeks  abatement  of lead paint from all housing and all
public buildings in each jurisdiction and punitive damages jointly and severally
from the former pigment  manufacturers  and the LIA. In November 2002, the court
entered an order dismissing this case with prejudice. Plaintiffs have appealed.

In January  2002,  NL was served  with a complaint  in Jackson,  et al., v.
Phillips  Building  Supply of Laurel,  et al.  (Circuit  Court of Jones  County,
Mississippi,  Dkt.  Co.  2002-10-CV1).  The  complaint  seeks  joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for  compensatory  and  punitive  damages  on behalf  of four  adults  for
injuries alleged to have been caused by the use of lead paint.  After removal to
federal  court,  in February  2003 the case was remanded to state court.  NL has
denied all allegations of liability and pre-trial proceedings are continuing. In
August  2003,  the  court  set a trial  date of June  2004.  In  February  2004,
plaintiffs  agreed  to  dismiss  one  plaintiff   voluntarily  upon  defendants'
agreement to extend the statute of limitations  period for that plaintiff for 12
months.

In February  2002,  NL was served with a complaint  in Liberty  Independent
School  District  v. Lead  Industries  Association,  et al.  (District  Court of
Liberty County,  Texas, No. 63,332).  The school district seeks compensatory and
punitive damages jointly and severally from the former pigment manufacturers and
the LIA for property  damage to its buildings.  The complaint was amended to add
Liberty County, the City of Liberty,  and the Dayton Independent School District
as plaintiffs and drop the LIA as a defendant.  NL has denied all allegations of
liability.  The case has been  stayed  pending  appellate  review  of the  trial
court's  dismissal  of  the  Spring  Branch  Independent  School  District  case
discussed above or certain other events.

In May 2002,  NL was served with a  complaint  in  Brownsville  Independent
School  District  v. Lead  Industries  Association,  et al.  (District  Court of
Cameron County,  Texas,  No.  2002-052081 B), seeking  compensatory and punitive
damages  jointly and  severally  from NL,  other  former  manufacturers  of lead
pigment  and the LIA for  property  damage.  NL has  denied all  allegations  of
liability.  The case has been  stayed  pending  appellate  review  of the  trial
court's dismissal of the appeal in the Spring Branch Independent School District
case discussed above or certain other events.

In  September  2002,  NL was served with a complaint  in City of Chicago v.
American  Cyanamid,  et  al.  (Circuit  Court  of  Cook  County,  Illinois,  No.
02CH16212),  seeking  damages to abate lead  paint in a  single-count  complaint
alleging public nuisance against NL and seven other former manufacturers of lead
pigment. In October 2003, the trial court granted defendants' motion to dismiss,
and plaintiffs have appealed.

In  October  2002,  NL was  served  with  a  complaint  in  Walters  v.  NL
Industries,  et al. (Kings County Supreme Court, New York, No.  28087/2002),  in
which an adult seeks  compensatory  and punitive  damages from NL and five other
former  manufacturers of lead pigment for childhood exposures to lead paint. The
complaint alleges negligence and strict product  liability,  and seeks joint and
several liability with claims of civil conspiracy, concert of action, enterprise
liability,  and market share or alternative liability.  In March 2003, the court
granted  defandants'  motion to dismiss the product  defect  allegations  in the
negligence and strict liability counts. Discovery is proceeding.

In April 2003, NL was served with a complaint in Russell v. NL  Industries,
Inc., et al.  (Circuit Court of LeFlore  County,  Mississippi,  Civil Action No.
No.2002-0235-CICI).  The  plaintiffs,  six  painters,  have sued NL,  four paint
companies,  and  a  local  retailer,  alleging  strict  liability,   negligence,
fraudulent   concealment,   misrepresentation,   and  conspiracy,   and  seeking
compensatory  and punitive damages for alleged injuries caused by lead paint. NL
has denied all  liability.  Defendants  removed  this case to federal  court and
plaintiffs have dropped their motion to remand. Discovery is proceedings.

In April 2003,  NL was served with a complaint  in Jones v. NL  Industries,
Inc., et al.  (Circuit Court of LeFlore  County,  Mississippi,  Civil Action No.
2002-0241-CICI). The plaintiffs, fourteen children from five families, have sued
NL  and  one  landlord   alleging  strict  liability,   negligence,   fraudulent
concealment and  misrepresentation,  and seek  compensatory and punitive damages
for alleged  injuries  caused by lead  paint.  Defendants  removed  this case to
federal court, and plaintiffs have moved to remand the case back to state court.
Discovery is  proceeding.  In November  2003,  NL was served with a complaint in
Lauren  Brown v. NL  Industries,  Inc.,  et al.  (Circuit  Court of Cook County,
Illinois,  County Department,  Law Division, Case No. 03L 012425). The complaint
seeks damages  against NL and two local property owners on behalf of a minor for
injuries  alleged to be due to exposure to lead paint  contained  in the minor's
residence. NL has denied all allegations of liability. Discovery is proceeding.

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

Environmental matters and litigation.

General. The Company's  operations are governed by various federal,  state,
local and foreign environmental laws and regulations. The Company's policy is to
comply  with  environmental  laws and  regulations  at all of its  plants and to
continually  strive to improve  environmental  performance in  association  with
applicable industry initiatives. The Company believes that its operations are in
substantial compliance with applicable  requirements of environmental laws. From
time to time, the Company may be subject to environmental regulatory enforcement
under various statutes, resolution of which typically involves the establishment
of compliance programs.

The  Company  records  liabilities  related  to  environmental  remediation
obligations  when  estimated  future  expenditures  are probable and  reasonably
estimable.  Such accruals are adjusted as further  information becomes available
or  circumstances  change.  Estimated  future  expenditures  are  generally  not
discounted to their present value.  Recoveries of  remediation  costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At December 31, 2003, no receivables  for recoveries have been  recognized.  The
Company  believes it has provided  adequate  accruals for  reasonably  estimable
costs for environmental liabilities.

Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing  interpretations  of governmental
regulations,  the number of  potentially  responsible  parties  ("PRPs") and the
PRPs' ability or willingness to fund such  allocation of costs,  their financial
capabilities  and the  allocation  of costs  among  PRPs,  the  multiplicity  of
possible  solutions,  and the years of  investigatory,  remedial and  monitoring
activity  required.  Such costs include,  among other things,  expenditures  for
remedial  investigations,  monitoring,  managing,  studies,  certain legal fees,
clean-up,  removal  and  remediation.  The  extent  of CERCLA  liability  cannot
accurately be determined until the Remedial  Investigation and Feasibility Study
is complete,  the U.S.  EPA issues a record of decision and costs are  allocated
among PRPs. The extent of liability under  analogous state cleanup  statutes and
for common law  equivalents are subject to similar  uncertainties.  In addition,
the imposition of more stringent  standards or requirements under  environmental
laws or  regulations,  new  developments or changes with respect to site cleanup
costs or allocation of such costs among PRPs,  the results of future testing and
analysis  undertaken with respect to certain sites or a  determination  that the
Company is potentially  responsible  for the release of hazardous  substances at
other  sites,  could  result in  expenditures  in excess  of  amounts  currently
estimated by the Company to be required  for such  matters.  In  addition,  with
respect to other PRPs and the fact that the Company may be jointly and severally
liable  for the total  remediation  cost at certain  sites,  the  Company  could
ultimately  be liable for amounts in excess of its  accruals due to, among other
things,  reallocation of costs among PRPs or the insolvency of one of more PRPs.
No assurance can be given that actual costs will not exceed  accrued  amounts or
the upper end of the range for sites for which  estimates have been made, and no
assurance  can be given that costs will not be incurred with respect to sites as
to which no estimate presently can be made.  Further,  there can be no assurance
that additional environmental matters will not arise in the future.

The exact time frame over which the Company makes  payments with respect to
its accrued  environmental  costs is unknown and is dependent upon,  among other
things,  the timing of the actual  remediation  process which in part depends on
factors  outside the control of the  Company.  At each balance  sheet date,  the
Company makes an estimate of the amount of its accrued  environmental costs that
will be paid out over the subsequent 12 months,  and the Company classifies such
amount as a current liability.  The remainder of the accrued environmental costs
is classified as a noncurrent liability.

NL. Some of NL's current and former facilities,  including several divested
secondary  lead smelters and former mining  locations,  are the subject of civil
litigation,  administrative  proceedings or investigations arising under federal
and state  environmental  laws.  Additionally,  in connection with past disposal
practices,  NL has been named as a  defendant,  PRP,  or both,  pursuant  to the
Comprehensive Environmental Response, Compensation and Liability Act, as amended
by the Superfund Amendments and Reauthorization Act ("CERCLA"), or similar state
laws in approximately 70 governmental and private actions  associated with waste
disposal sites,  mining locations and facilities  currently or previously owned,
operated or used by NL, its subsidiaries or their predecessors, certain of which
are on the U.S. EPA's Superfund National Priorities List or similar state lists.
These  proceedings  seek cleanup costs,  damages for personal injury or property
damage  and/or  damages  for  injury  to  natural  resources.  Certain  of these
proceedings involve claims for substantial  amounts.  Although NL may be jointly
and severally  liable for such costs,  in most cases, it is only one of a number
of PRPs who may also be jointly and severally liable. In addition, NL is a party
to a number of lawsuits filed in various jurisdictions  alleging CERCLA or other
environmental claims.

On a quarterly  basis, NL evaluates the potential range of its liability at
sites where it has been named as a PRP or defendant,  including  sites for which
EMS has  contractually  assumed NL's  obligation.  At December 31, 2003,  NL had
accrued $77  million  for those  environmental  matters  which NL  believes  are
reasonably  estimable.  NL believes it is not  possible to estimate the range of
costs for certain sites. The upper end of the range of reasonably possible costs
to NL for  sites for which NL  believes  it is  possible  to  estimate  costs is
approximately  $110 million.  NL's estimates of such  liabilities  have not been
discounted  to  present  value,  and  other  than  certain   previously-reported
settlements  with respect to certain of NL's former insurance  carriers,  NL has
not recognized any insurance  recoveries.  More detailed descriptions of certain
legal proceedings relating to environmental matters are set forth below.

At December  31,  2003,  there are  approximately  20 sites for which NL is
unable  to  estimate  a  range  of  costs.   For  these  sites,   generally  the
investigation is in the early stages,  and it is either unknown as to whether or
not NL actually had any association with the site, or if NL had association with
the site, the nature of its responsibility, if any, for the contamination at the
site and the  extent of  contamination.  The  timing on when  information  would
become  available  to NL to allow NL to  estimate a range of loss is unknown and
dependent on events  outside the control of NL, such as when the party  alleging
liability provides information to NL.

In July 1991, the United States filed an action in the U.S.  District Court
for the Southern  District of Illinois  against NL and others  (United States of
America v. NL  Industries,  Inc.,  et al., Civ. No. 91-CV 00578) with respect to
the Granite  City,  Illinois  lead smelter  formerly  owned by NL. The complaint
sought   injunctive   relief  to  compel  the   defendants  to  comply  with  an
administrative order issued pursuant to CERCLA, and fines and treble damages for
the alleged  failure to comply with the order.  NL and the other parties did not
implement  the order,  believing  that the remedy  selected by the U.S.  EPA was
unlawful.  The  complaint  also sought  recovery of past costs and a declaration
that the defendants  are liable for future costs.  Although the action was filed
against  NL and ten other  defendants,  there  are 330 other  PRPs who have been
notified by the U.S. EPA. Some of those  notified were also  respondents  to the
administrative  order.  NL and the U.S. EPA have  entered into a  court-approved
consent decree settling NL's liability at the site for $31.5 million,  including
$1 million in  penalties.  Pursuant  to the  decree,  in June 2003 NL paid $30.8
million to the United States, and NL will pay up to an additional  $700,000 upon
completion of an EPA audit of certain response costs.

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

In 2000, NL reached an agreement  with the other PRPs at the Baxter Springs
subsite in Cherokee  County,  Kansas,  to resolve NL's liability.  NL and others
formerly mined lead and zinc in the Baxter Springs subsite. Under the agreement,
NL agreed to pay a portion  of the  cleanup  costs  associated  with the  Baxter
Springs  subsite.  The U.S. EPA has  estimated  the total  cleanup  costs in the
Baxter Springs subsite to be $5.4 million. The cleanup has been completed within
previously-disclosed estimates.

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

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

In January  2003, NL received a general  notice of liability  from the U.S.
EPA  regarding  the site of a formerly  owned  primary  lead  smelting  facility
located in  Collinsville,  Illinois.  The U.S.  EPA  alleges  the site  contains
elevated  levels of lead.  NL and the U.S.  EPA are  negotiating  the terms of a
proposed administrative order to remove lead in soils at residential properties.

In June 2003,  NL was served  with a  complaint  in Cole,  et al. v. ASARCO
Incorporated et al. (U.S.  District Court for the Northern District of Oklahoma,
Case No. 03C V327 EA (J)).  The complaint is a purported  class action on behalf
of two classes of persons  living in the  Picher/Cardin,  Oklahoma,  area: (1) a
medical  monitoring  class of persons who have lived in the area since 1994; and
(2) a property owner class of  residential,  commercial and government  property
owners.  Plaintiffs are nine individuals and, in their official capacities,  the
Mayor of Picher and the Chairman of the Picher/Cardin  School Board.  Plaintiffs
allege  causes of action in trespass and nuisance and seek a medical  monitoring
program, a relocation  program,  property damages,  and punitive damages. NL has
answered the complaint and denied all of plaintiffs' allegations.

In July 2003, NL was served with complaints in Crawford,  et al. v. ASARCO,
Incorporated,  et al. (Case No. CJ-03-304); Barr, et al. v. ASARCO Incorporated,
et al. (Case No. CJ-03-305); Brewer, et al. v. ASARCO Incorporated, et al. (Case
No.  CJ-03-306);  Kloer,  et al.  v.  ASARCO,  Incorporated,  et al.  (Case  No.
CJ-03-307);  Rhoten, et al. v. ASARCO Incorporated,  et al. (Case No. CJ-03-308)
and Nowlin, et. Al v. ASARCO Incorporated,  et. al (Case No. J-2003-342) (all in
the District Court in and for Ottawa County, State of Oklahoma). These six cases
assert personal injuries due to exposure to lead from mining waste on behalf of,
respectively,  two,  four,  two,  three,  four and two children.  Each complaint
alleges  causes  of  action  in  negligence,  strict  liability,  nuisance,  and
attractive nuisance;  and each seeks $20 million in compensatory and $20 million
in punitive  damages.  NL has answered each  complaint and has denied all of the
plaintiffs' allegations.

In December  2003,  NL was served with a complaint  in The Quapaw  Tribe of
Oklahoma et al. v. ASARCO  Incorporated  et al. (United States  District  Court,
Northern District of Oklahoma,  Case No.  03-CII-846H(J).  The complaint alleges
public nuisance, private nuisance, trespass, unjust enrichment, strict liability
and deceit by false  representation  against NL and six other  mining  companies
with respect to former  operations in the Tar Creek mining district in Oklahoma.
The  complaint  seeks class  action  status for former and current  owners,  and
possessors of real property located within the Quapaw  Reservation.  Among other
things, the complaint seeks actual and punitive damages from the defendants.  NL
has moved to dismiss the complaint and intends to deny all material allegations.
The plaintiff  has also  notified NL that it intends to file a separate  lawsuit
seeking  natural  resource  damages and  injunctive  relief  under the  Resource
Conservation Recovery Act and CERCLA.

In February 2004, NL was served in Evans v. ASARCO (United States  District
Court, Northern District of Oklahoma, Case No. 04-CV-94EA(M)), a purported class
action  on behalf  of two  classes  of  persons  living  in the town of  Quapaw,
Oklahoma:  (1) a medical  monitoring class of persons who have lived in the area
since  1994,  and (2) a property  owner  class of  residential,  commercial  and
government  property owners.  Plaintiffs are four individuals,  the mayor of the
town of Quapaw, Oklahoma, and the School Board of Quapaw,  Oklahoma.  Plaintiffs
allege  causes of action in nuisance and seek a medical  monitoring  program,  a
relocation program, property damages, and punitive damages.

See also Item 1 -  "Business - Chemicals  -  Regulatory  and  environmental
matters."

Tremont.  In  July  2000  Tremont,  entered  into  a  voluntary  settlement
agreement  with the Arkansas  Department  of  Environmental  Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will  undertake  certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County,  Arkansas.  Tremont  currently  believes that it has accrued
adequate  amounts  ($2.4  million at  December  31,  2003) to cover its share of
probable  and  reasonably   estimable   environmental   obligations   for  these
activities.  Tremont  currently  expects that the nature and extent of any final
remediation  measures  that might be imposed  with  respect to this site will be
known by 2006. Currently,  no reasonable estimate can be made of the cost of any
such final remediation  measure,  and accordingly Tremont has accrued no amounts
at December 31, 2003 for any such cost.  The amount accrued at December 31, 2003
represents Tremont's best estimate of the costs to be incurred through 2006 with
respect to the interim remediation measures.

Tremont   records   liabilities   related  to   environmental   remediation
obligations  when  estimated  future  expenditures  are probable and  reasonably
estimable.  Such accruals are adjusted as further  information becomes available
or circumstances  change.  Estimated  future  expenditures are not discounted to
their  present  value.  It is not  possible to  estimate  the range of costs for
certain sites, including the Hot Springs County,  Arkansas site discussed above.
The imposition of more stringent  standards or requirements under  environmental
laws or  regulations,  the results of future testing and analysis  undertaken by
Tremont at its former facilities, or a determination that Tremont is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated to be required for such
matters.  No assurance  can be given that actual  costs will not exceed  accrued
amounts or that costs will not be incurred  with respect to sites as to which no
problem is currently known or where no estimate can presently be made.  Further,
there can be no assurance that additional  environmental  matters will not arise
in the future.  Environmental exposures are difficult to assess and estimate for
numerous  reasons  including the  complexity  and differing  interpretations  of
governmental regulations; the number of PRPs and the PRPs ability or willingness
to fund such allocation of costs, their financial  capabilities,  the allocation
of costs among PRPs; the  multiplicity of possible  solutions;  and the years of
investigatory,  remedial and monitoring  activity required.  It is possible that
future  developments  could  adversely  affect  Tremont's  business,  results of
operations,  financial  condition or liquidity.  There can be no assurances that
some,  or all,  of these  risks  would not result in  liabilities  that would be
material to Tremont's  business,  results of operations,  financial  position or
liquidity.

TIMET.  TIMET has agreed to convey to BMI, at no cost,  certain lands owned
by TIMET adjacent to its plant site in Nevada (the "TIMET Pond  Property")  upon
payment by BMI of the cost to design,  purchase,  and install the technology and
equipment  necessary  to  allow  TIMET  to stop  discharging  liquid  and  solid
effluents and co-products onto the TIMET Pond Property (BMI will pay 100% of the
first $15.9  million cost for this  project,  and TIMET has agreed to contribute
50% of the cost in excess of $15.9 million,  up to a maximum payment by TIMET of
$2 million).  TIMET  presently  expects that the total cost of this project will
not exceed $15.9 million.  TIMET and BMI are continuing  discussions  about this
project and also continuing  investigation with respect to certain environmental
issues associated with the TIMET Pond Property,  including possible  groundwater
issues.

Under  certain  circumstances  (not  presently  in  effect),  TIMET  may be
required to restore some portion of the TIMET Pond  Property to the condition it
was in prior to  TIMET's  use of the  property,  before  returning  title of the
affected  property to BMI.  TIMET  currently  believes any liability it may have
under this  obligation  is  remote.  TIMET is  continuing  to  investigate  this
potential  liability,  and is presently  unable to estimate the magnitude of any
such potential liability.

TIMET is continuing  assessment  work with respect to its own plant site in
Nevada.  During 2000, a preliminary  study was completed of certain  groundwater
remediation issues at TIMET's Nevada operations and other TIMET sites within the
BMI Complex.  TIMET accrued $3.3 million in 2000 based on the undiscounted  cost
estimates  set forth in the study.  During  2002,  TIMET  updated this study and
accrued an additional  $300,000 based on revised cost estimates.  These expenses
are expected to be paid over a period of up to thirty years.

At December 31, 2003, TIMET had accrued an aggregate of approximately  $4.2
million for these environmental matters discussed above.

Other.  In  addition  to  amounts  accrued  by NL,  Tremont  and  TIMET for
environmental  matters, at December 31, 2003, the Company also had approximately
$6.8 million  accrued for the estimated cost to complete  environmental  cleanup
matters at certain of its other former facilities.

Insurance coverage claims.

NL has settled insurance  coverage claims concerning  environmental  claims
with  certain  of the  defendants  in  the  environmental  coverage  litigation,
including NL's principal former  carriers.  A portion of the proceeds from these
settlements  were placed into special purpose trusts,  as discussed  below.  See
Note 12 to the Consolidated Financial Statements. NL also continues to negotiate
with the remaining  insurance  carriers  with respect to possible  settlement of
claims  that are being  asserted  in the New  Jersey  environmental  litigation,
although  there can be no assurance  that  settlement  agreements can be reached
with  these  other  carriers.   No  further  material  settlements  relating  to
litigation concerning environmental remediation coverage are expected.

At December 31, 2003,  NL had $24 million in  restricted  cash,  restricted
cash  equivalents  and restricted  marketable  debt  securities  held by special
purpose trusts,  the assets of which can only be used to pay for certain of NL's
future  environmental  remediation and other  environmental  expenditures.  Such
restricted  balances  declined  by  approximately  $35  million  during 2003 due
primarily to a $30.8 million payment made by NL related to the final  settlement
of NL's previously-reported Granite City, Illinois lead smelter site.

The issue of whether  insurance  coverage for defense costs or indemnity or
both will be found to exist for lead pigment  litigation  depends upon a variety
of factors,  and there can be no assurance that such insurance  coverage will be
available.  NL has not  considered any potential  insurance  recoveries for lead
pigment  defense  costs  or  environmental  litigation  in  determining  related
accruals.

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

No matters were  submitted to a vote of Valhi  security  holders during the
quarter ended December 31, 2003.

PART II

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

Valhi's common stock is listed and traded on the New York and Pacific Stock
Exchanges (symbol: VHI). As of February 29, 2004, there were approximately 8,000
holders of record of Valhi common stock. The following table sets forth the high
and low closing per share sales  prices for Valhi  common  stock for the periods
indicated,  according to Bloomberg,  and dividends paid during such periods.  On
February 27, 2004 the closing price of Valhi common stock  according to the NYSE
Composite Tape was $13.14.

Dividends
High             Low              paid

Year ended December 31, 2002

First Quarter                                                     $13.30           $10.80             $.06
Second Quarter                                                     15.63            10.61              .06
Third Quarter                                                      19.18             9.82              .06
Fourth Quarter                                                     10.75             8.30              .06

Year ended December 31, 2003

First Quarter                                                     $11.22           $ 7.50             $.06
Second Quarter                                                     11.50             9.11              .06
Third Quarter                                                      12.38             9.60              .06
Fourth Quarter                                                     15.69            11.71              .06

Valhi's regular quarterly dividend is currently $.06 per share. Declaration
and payment of future  dividends and the amount  thereof will be dependent  upon
the Company's results of operations,  financial condition, cash requirements for
its businesses,  contractual  requirements  and  restrictions  and other factors
deemed relevant by the Board of Directors.

ITEM 6.  SELECTED FINANCIAL DATA

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

Years ended December 31,
1999          2000          2001           2002          2003
----          ----          ----           ----          ----
(In millions, except per share data)

STATEMENTS OF OPERATIONS DATA:
Net sales:

Chemicals                                  $  908.4       $  922.3      $  835.1      $  875.2       $1,008.2
Component products                            225.9          253.3         211.4         196.1          207.5
Waste management (1)                           10.9           16.3          13.0           8.4            4.1
--------       --------      --------      --------       --------

$1,145.2       $1,191.9      $1,059.5      $1,079.7       $1,219.8
========       ========      ========      ========       ========

Operating income:
Chemicals                                  $  126.2       $  187.4      $  143.5      $   84.4       $  122.3
Component products                             40.2           37.5          13.1           4.5            3.6
Waste management (1)                           (1.8)          (7.2)        (14.4)         (7.0)         (11.5)
--------       --------      --------      --------       --------

$  164.6       $  217.7      $  142.2      $   81.9       $  114.4
========       ========      ========      ========       ========

Equity in earnings (losses):
TIMET (2)                                  $   -          $   (9.0)     $   (9.2)     $  (32.9)      $    1.9
Waste Control Specialists (1)                  (8.5)          -             -             -              -
Tremont Corporation (3)                       (48.7)          -             -             -              -

Income from continuing
operations (4)                              $   47.4       $   76.6      $   93.2      $    1.2       $   38.9
Discontinued operations                           2.0           -             -             -              -   
Cumulative effect of change in
accounting principle                            -              -             -             -                .6
--------       --------      --------     ---------       --------

Net income                               $   49.4       $   76.6      $   93.2      $    1.2       $   39.5
========       ========      ========      ========       ========

DILUTED EARNINGS PER SHARE DATA:
Income from continuing
operations                                  $    .41       $    .66      $    .80      $    .01       $    .32

Net income                                   $    .43       $    .66      $    .80      $    .01       $    .33

Cash dividends                               $    .20       $    .21      $    .24      $    .24       $    .24

Weighted average common shares
Outstanding                                    116.2          116.3         116.1         115.8          119.9

BALANCE SHEET DATA (at year end):
Total assets                                 $2,235.2       $2,256.8      $2,150.7      $2,074.8       $2,211.0
Long-term debt                                  609.3          595.4         497.2         605.7          632.5
Stockholders' equity                            589.4          628.2         622.3         614.8          659.7

(1)  Consolidated effective June 30, 1999.
(2)  Commenced  reporting  equity in  earnings  effective  January 1, 2000.  
(3)  Consolidated effective December 31, 1999.
(4)  Income from continuing  operations in 1999 include (i) $90 million non-cash
income tax benefit ($52 million net of minority interest)  recognized by NL
and (ii) a non-cash  impairment  charge of $50 million  ($32 million net of
income taxes) for an other than temporary decline in the value of TIMET. In
addition,  the  Company's  results of  operations  in each of 1999 and 2000
include  the impact of  goodwill  amortization  of $13.1  million and $13.3
million, respectively, net of income tax benefit and minority interest. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of unusual items  occurring  during 2001, 2002
and 2003.

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

RESULTS OF OPERATIONS

Summary

The  Company  reported  income  before   cumulative  effect  of  change  in
accounting  principle  of $38.9  million,  or $.32 per  diluted  share,  in 2003
compared to net income of $1.2 million,  or $.01 per diluted share,  in 2002 and
$93.2 million, or $.80 per diluted share, in 2001.

The Company  believes the  analysis  presented  in the  following  table is
useful in understanding the comparability of its results of operations for 2001,
2002  and  2003.  Each of these  items  are more  fully  discussed  below in the
applicable  sections of this "Management's  Discussion and Analysis of Financial
Condition  and  Results  of  Operations  - Results  of  Operations"  and/or  the
Consolidated Financial Statements.

Diluted earnings per share -
years ended December 31,
2001          2002         2003
----          ----         ----

Legal settlement gains, net (1)                                              $ .16          $ .02       $ -

Equity in earnings of TIMET:
Boeing settlement (2)                                                        .06            -           -
Impairment provision and deferred income
tax asset valuation allowance adjustment (3)                               (.12)          (.05)        -
Impairment provision - TIMET (4)                                              -            (.07)        -

Securities transactions, net (5)                                               .26            .04         -

NL and Kronos tax adjustments:
Deferred income tax asset valuation allowance(6)                             .11            -           -
Belgian tax law change (7)                                                    -             .02         -
German income tax benefit (8)                                                 -             -           .17

Gain on disposal of fixed assets(9)                                             -             -           .05

Insurance gain (10)                                                            .06            -           -

Foreign currency transaction gain (11)                                          -             .04         -

Goodwill amortization(12)                                                     (.14)           -           -

Other, net                                                                     .41            .01         .10
-----          -----       -----

$ .80          $ .01       $ .32
=====          =====       =====

(1)  Settlements  NL reached  with  certain of its  principal  former  insurance
carriers in each of 2001,  2002 and 2003,  and Waste  Control  Specialists'
settlement of certain  litigation to which it was a party in 2001. See Note
12 to the Consolidated Financial Statements.
(2)  TIMET's settlement with Boeing.
(3)  TIMET's  provisions  for  other  than  temporary  declines  in value of the
convertible  preferred  securities of Special  Metals  Corporation  held by
TIMET.
(4)  Tremont's provision for an other than temporary decline in the value of its
investment in TIMET. See Note 7 to the Consolidated Financial Statements.
(5)  Net gains  resulting  primarily  from  disposition of shares of Halliburton
Company common stock held by the Company,  including dispositions resulting
from  LYONs  exchanges.  See Notes 5 and 12 to the  Consolidated  Financial
Statements.
(6)  NL's income tax benefit related principally to a change in estimate of NL's
ability  to  utilize  certain  German  tax  attributes.  See Note 15 to the
Consolidated Financial Statements.
(7)  Change in Kronos' net  deferred  income tax  liability  due to reduction in
Belgian   corporate   statutory  income  tax  rate.  See  Note  15  to  the
Consolidated Financial Statements.
(8)  Kronos' income tax benefit  resulting from a favorable German court ruling.
See Note 15 to the Consolidated Financial Statements.
(9)  Primarily  NL's gain on the disposal of certain  real  property not used in
NL's TiO2 operations. See Note 12 to the Consolidated Financial Statements.
(10) NL's  insurance  recoveries  for property  damage related to the Leverkusen
fire. See Note 12 to the Consolidated Financial Statements.
(11) Kronos' foreign currency  transaction gain related to the extinguishment of
certain  NL  intercompany  indebtedness.  See  Note 12 to the  Consolidated
Financial Statements.
(12) Beginning in 2002 the Company no longer recognizes periodic amortization of
goodwill in its results of  operations.  The  Company  would have  reported
higher net income in 2001 of $15.7  million  if the  goodwill  amortization
included in the Company's  reported net income had not been recognized.  Of
such $15.7  million in 2001,  approximately  $14.5 million and $2.4 million
relates to amortization of goodwill attributable to the Company's chemicals
and component products operating segment, approximately $100,000 relates to
incremental income taxes and approximately $1.1 million relates to minority
interest See Note 19 to the Consolidated Financial Statements.

As more  fully  described  below,  and  including  the  effect of the items
summarized  in the  table  above,  the  Company's  diluted  earnings  per  share
decreased from $.80 per share in 2001 to $.01 per share in 2002 due primarily to
the net effects of (i) lower  operating  income in the  Company's  chemicals and
component products segments,  (ii) a lower operating loss in the Company's waste
management segment and (iii) higher environmental remediation and legal expenses
of NL.  Including  the effect of the items  summarized  in the table above,  the
Company's  diluted  earnings per share  increased from $.01 per share in 2002 to
$.32 per share in 2003 due primarily to the net effects of (i) higher  operating
income in the Company's  chemical  segment,  (ii) a higher operating loss in the
Company's waste management  segment and (iii) higher  environmental  remediation
expenses of NL.

The  Company  currently  believes  its net  income  in 2004  will be  lower
compared to 2003 due primarily to lower expected chemicals operating income.

Critical accounting policies and estimates

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

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

o    The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and
other factors.  The Company takes into  consideration the current financial
condition  of its  customers,  the age of the  outstanding  balance and the
current economic  environment when assessing the adequacy of the allowance.
If the financial  condition of the Company's customers were to deteriorate,
resulting in an impairment of their  ability to make  payments,  additional
allowances  may be  required.  During 2001,  2002 and 2003,  the net amount
written off against the allowance for doubtful  accounts as a percentage of
the balance of the allowance  for doubtful  accounts as of the beginning of
the year ranged from 7% to 18%.

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

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

At December 31, 2003, the carrying value (which equals their fair value) of
all of the Company's marketable  securities exceeded the cost basis of each
of such  investments.  With  respect  to the  Company's  investment  in The
Amalgamated  Sugar Company LLC, which represents  approximately  93% of the
aggregate carrying value of all of the Company's  marketable  securities at
December  31,  2003,  the $170 million  carrying  value of such  investment
exceeded  its $34 million  cost basis by about 400%.  At December 31, 2003,
the $52.51 per share quoted  market price of the  Company's  investment  in
TIMET (the only one of the  Company's  equity  method  investees  for which
quoted  market  prices are  available)  exceeded its per share net carrying
value by about 235%.

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

Under  applicable  GAAP (SFAS No. 144,  Accounting  for the  Impairment  or
Disposal of Long-Lived Assets),  property and equipment is not assessed for
impairment unless certain impairment  indicators,  as defined, are present.
During 2003,  impairment  indicators  were present only with respect to the
property and equipment  associated with (i) the Company's waste  management
operating  segment,  which  represented  approximately  3% of the Company's
consolidated  net property and equipment as of December 31, 2003,  and (ii)
CompX's  European  operations,  which  represented  approximately 1% of the
Company's  consolidated net property and equipment as of December 31, 2003.
Waste  Control  Specialists'  completed  an  impairment  review  of its net
property and equipment and related net assets as of December 31, 2003,  and
CompX completed an impairment  review of the net property and equipment and
related net assets associated with its European  operations as of September
30,  2003.  Such  analyses  indicated  no  impairments  were present as the
estimated  future  undiscounted  cash flows associated with such operations
exceeded the carrying  value of such  operation's  net assets.  Significant
judgment is required  in  estimating  such  undiscounted  cash flows.  Such
estimated  cash  flows  are  inherently  uncertain,  and  there  can  be no
assurance that the future cash flows reflected in these projections will be
achieved.

Under applicable GAAP (SFAS No. 142, Goodwill and other Intangible Assets),
goodwill is required to be reviewed  for  impairment  at least on an annual
basis.  Goodwill will also be reviewed for impairment at other times during
each year when impairment indicators, as defined, are present. As discussed
in  Note 19 to the  Consolidated  Financial  Statements,  the  Company  has
assigned its goodwill to four  reporting  units (as that term is defined in
SFAS No. 142). Goodwill attributable to the chemicals operating segment was
assigned  to  the  reporting  unit  consisting  of  NL in  total.  Goodwill
attributable to the components  products  operating segment was assigned to
three  reporting  units within that  operating  segment,  one consisting of
CompX's security  products  operations,  one consisting of CompX's European
operations and one consisting of CompX's Canadian and Taiwanese operations.
No goodwill  impairments  were deemed to exist as a result of the Company's
annual impairment review completed during the third quarter of 2003, as the
estimated  fair value of each such reporting unit exceeded the net carrying
value of the  respective  reporting  unit (NL reporting  unit - 42%,  CompX
security  products  reporting  unit  -  110%,  CompX  European   operations
reporting unit - 14% and CompX Canadian and Taiwanese  operations reporting
unit - 133%).  The estimated fair values of the three CompX reporting units
are determined based on discounted cash flow projections, and the estimated
fair value of the NL reporting  unit is based upon the quoted  market price
for NL's common stock,  as  appropriately  adjusted for a control  premium.
Significant  judgment is required in estimating the  discounted  cash flows
for the CompX  reporting  units.  Such  estimated cash flows are inherently
uncertain, and there can be no assurance that CompX will achieve the future
cash flows reflected in its  projections.  In addition to its internal cash
flow  projections,   CompX  used  a  third-party  valuation  specialist  in
reviewing the net assets of its European operations, including goodwill and
net property and equipment, for impairment.

o    The  Company   maintains   various   defined   benefit  pension  plans  and
postretirement   benefits  other  than  pensions   ("OPEB").   The  amounts
recognized as defined benefit  pension and OPEB expenses,  and the reported
amounts of prepaid and accrued  pension  costs and accrued OPEB costs,  are
actuarially  determined based on several  assumptions,  including  discount
rates,  expected  rates of returns on plan assets and expected  health care
trend rates.  Variances from these actuarially assumed rates will result in
increases or decreases,  as applicable,  in the recognized pension and OPEB
obligations,  pension and OPEB  expenses  and funding  requirements.  These
assumptions are more fully described below under  "--Assumptions on defined
benefit pension plans and OPEB plans."

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

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

Operating  income for each of the Company's  three  operating  segments are
impacted by certain of these significant judgments and estimates,  as summarized
below:

o    Chemicals - allowance  for  doubtful  accounts,  reserves  for  obsolete or
unmarketable inventories,  impairment of equity method investees,  goodwill
and other  long-lived  assets,  defined  benefit pension and OPEB plans and
loss accruals.
o    Component products - allowance for doubtful accounts, reserves for obsolete
or  unmarketable  inventories,  impairment  of  long-lived  assets and loss
accruals.
o    Waste  management  -  allowance  for  doubtful   accounts,   impairment  of
long-lived assets and loss accruals.

In addition,  general  corporate and other items are impacted by the significant
judgments  and estimates for  impairment  of  marketable  securities  and equity
method  investees,  defined benefit pension and OPEB plans,  deferred income tax
asset valuation allowances and loss accruals.

Chemicals - Kronos

Relative changes in Kronos' TiO2 sales and operating income during the past
three  years  are  primarily  due to (i)  relative  changes  in TiO2  sales  and
production volumes,  (ii) relative changes in TiO2 average selling prices, (iii)
relative  changes  in  foreign  currency  exchange  rates  and (iv)  ceasing  to
periodically amortize goodwill beginning in 2002. The relatively lower levels of
sales and  production  volumes in 2001 as  compared  to 2002 and 2003 are due in
part  to the  effects  of a fire at one of  Kronos'  production  facilities,  as
discussed below.

Selling  prices  for  TiO2,  Kronos'  principal  product,   were  generally
decreasing during all of 2001 and the first quarter of 2002, were generally flat
during the second  quarter of 2002,  were generally  increasing  during the last
half of 2002 and the first  quarter  of 2003,  were  generally  flat  during the
second quarter of 2003 and were generally decreasing during the third and fourth
quarters of 2003.

Chemicals   operating   income,  as  presented  below,  is  stated  net  of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL and Kronos.  Such  adjustments  result in
additional  depreciation  and  amortization  expense beyond  amounts  separately
reported  by  Kronos.   Such  additional  non-cash  expenses  reduced  chemicals
operating  income,  as reported by Valhi,  by $25.7  million,  $12.2 million and
$15.0  million in 2001,  2002 and 2003,  respectively,  as  compared  to amounts
separately reported by Kronos. During 2001, about $14.5 million of such purchase
accounting adjustment  amortization relates to goodwill. As discussed above, the
decline in the aggregate amount of purchase accounting  adjustment  amortization
from 2001 to 2002 is  primarily  due to ceasing  the  periodic  amortization  of
goodwill  beginning in 2002.  Other changes in the aggregate  amount of purchase
accounting adjustment  amortization during the past three years is due primarily
to relative changes in foreign currency exchange rates.

Years ended December 31,                       % Change
-----------------------------                  --------------
2001           2002            2003          2001-02        2002-03
----           ----            ----          -------        -------
(In $ millions, except selling
price data)

Net sales                                 $835.1          $875.2           $1,008.2           + 5%         +15%
Operating income                           143.5            84.4              122.3          - 41%         +45%

Operating income margin                      17%             10%                12%

TiO2 data:
Sales volumes*                             402             455                462          + 13%          +2%
Production volumes*                        412             442                476           + 7%          +8%
Production rate as
percent of capacity                       91%             96%             Full
Average selling prices
index (1983=100)                       $  156          $  142           $    146           - 9%          +3%

Percent change in Ti02 average selling prices:
Using actual foreign currency exchange rates                                              - 7%         +13%
Impact of changes in foreign exchange rates                                               - 2%         -10%
----          --- 

In billing currencies                                                                   - 9%         + 3%
====          === 

* Thousands of metric tons

Kronos' sales and operating income increased $133.0 million (15%) and $37.9
million  (45%),  respectively,  in 2003 compared to 2002 due primarily to higher
average  TiO2  selling  prices and higher  TiO2  sales and  production  volumes.
Excluding the effect of fluctuations in the value of the U.S. dollar relative to
other currencies,  Kronos' average TiO2 selling prices in billing  currencies in
2003 were 3% higher than 2002,  with the  greatest  improvement  in European and
export markets.  When translated from billing  currencies to U.S.  dollars using
actual foreign currency exchange rates prevailing during the respective periods,
Kronos' average TiO2 selling prices in 2003 increased 13% compared to 2002.

Kronos' sales are  denominated  in various  currencies,  including the U.S.
dollar,  the euro, other major European  currencies and the Canadian dollar. The
disclosure of the  percentage  change in Kronos'  average TiO2 selling prices in
billing  currencies  (which excludes the effects of fluctuations in the value of
the U.S.  dollar  relative  to other  currencies)  is  considered  a  "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos'  average TiO2 selling  prices  using actual  foreign  currency
exchange rates prevailing  during the respective  periods is considered the most
directly  comparable  financial  measure presented in accordance with accounting
principles  generally  accepted in the United  States ("GAAP  measure").  Kronos
discloses  percentage  changes in its average TiO2 prices in billing  currencies
because Kronos believes such disclosure provides useful information to investors
to allow them to analyze such  changes  without the impact of changes in foreign
currency exchange rates,  thereby facilitating  period-to-period  comparisons of
the relative  changes in average  selling prices in the actual  various  billing
currencies.  Generally,  when the U.S.  dollar  either  strengthens  or  weakens
against other  currencies,  the percentage  change in average  selling prices in
billing currencies will be higher or lower,  respectively,  than such percentage
changes would be using actual  exchange rates  prevailing  during the respective
periods.  The difference  between the 13% change in Kronos' average TiO2 selling
prices during 2003 as compared to 2002 using actual  foreign  currency  exchange
rates  prevailing  during the  respective  period (the GAAP  measure) and the 3%
percentage  change in Kronos' average TiO2 selling prices in billing  currencies
(the  non-GAAP  measure)  during such periods is due to the effect of changes in
foreign  currency  exchange rates.  The above table presents in a tabular format
(i) the  percentage  change in Kronos'  average TiO2 selling prices using actual
foreign currency  exchange rates prevailing  during the respective  periods (the
GAAP measure), (ii) the percentage change in Kronos' average TiO2 selling prices
in billing currencies (the non-GAAP measure) and (iii) the percentage change due
to changes in foreign  currency  exchange rates (or the reconciling item between
the non-GAAP measure and the GAAP measure).

Kronos'  record TiO2 sales  volumes in 2003  increased 2% from the previous
record  volumes of 2002,  with  higher  volumes in European  and North  American
markets  more than  offsetting  lower  volumes  in export  markets.  By  volume,
approximately  one-half of NL's 2003 TiO2 sales  volumes  were  attributable  to
markets in Europe,  with 40%  attributable  to North  America and the balance to
export markets.  Kronos' TiO2 production  volumes in 2003, also a new record for
Kronos,  were 8% higher than 2002, with operating rates at near full capacity in
both years.

Chemicals  sales  increased $40.1 million (5%) in 2002 compared to 2001 due
primarily  to higher TiO2 sales  volumes,  offset by lower  average TiO2 selling
prices. Kronos' TiO2 sales volumes in 2002 were a new record for Kronos and were
13% higher  compared to 2001  primarily  due to higher  volumes in European  and
North American markets. The lower TiO2 sales volumes in 2001 were due in part to
the  effects  of the  previously-reported  fire at Kronos'  Leverkusen,  Germany
facility in March 2001.

Chemicals  operating income declined in 2002 compared to 2001 as the effect
of lower average Ti02 selling  prices more than offset the effect of higher Ti02
sales and production volumes.  Excluding the effect of fluctuations in the value
of the U.S.  dollar relative to other  currencies,  Kronos' average TiO2 selling
prices in 2002 were 9% lower than 2001,  with prices lower in all major regions.
Including the effect of fluctuations in the value of the U.S. dollar relative to
other currencies, Kronos' average TiO2 selling prices (in billing currencies) in
2002 decreased 7% compared to 2001.

Kronos'  TiO2  production  volumes in 2002 were a new record for Kronos and
were 7% higher than 2001. NL's operating rates in 2001 were lower as compared to
2002 primarily due to lost production resulting from the Leverkusen fire.

Chemicals  operating  income in 2001  includes  $27.3  million of  business
interruption  insurance proceeds as payment for losses (unallocated period costs
and lost margin)  caused by the  Leverkusen  fire. The effects of the lower TiO2
sales and  production  volumes were offset in part by the business  interruption
insurance  proceeds.  Of such $27.3 million of business  interruption  insurance
proceeds,  $20.1  million was recorded as a reduction of cost of sales to offset
unallocated  period costs that resulted from lost production,  and the remaining
$7.2  million,  representing  recovery  of lost  margin,  was  recorded in other
income.  The business  interruption  insurance  proceeds  distorts the chemicals
operating income margin percentage in 2001 as there are no sales associated with
the $7.2 million of lost margin operating profit recognized.  See Note 12 to the
Consolidated Financial Statements.

Kronos also  recognized  insurance  recoveries of $29.1 million in 2001 for
property  damage and related  cleanup and other  extra  expenses  related to the
fire,  resulting  in an  insurance  gain  of  $16.2  million,  as the  insurance
recoveries exceeded the carrying value of the property destroyed and the cleanup
and other extra  expenses  incurred.  Such  insurance  gain is not reported as a
component of  chemicals  operating  income but is included in general  corporate
items. Kronos does not expect to recognize any additional  insurance  recoveries
related to the Leverkusen fire.

Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. Kronos expects its TiO2 production capacity
will  increase by about 10,000 metric tons  (primarily  at its  chloride-process
facilities),  with  moderate  capital  expenditures,  to increase its  aggregate
production capacity to about 490,000 metric tons by 2005.

Kronos has  substantial  operations and assets  located  outside the United
States (primarily in Germany,  Belgium, Norway and Canada). A significant amount
of Kronos' sales  generated  from its non-U.S.  operations  are  denominated  in
currencies  other  than the U.S.  dollar,  principally  the  euro,  other  major
European  currencies  and the  Canadian  dollar.  A  portion  of  Kronos'  sales
generated  from its non-U.S.  operations  are  denominated  in the U.S.  dollar.
Certain raw materials,  primarily titanium-containing  feedstocks, are purchased
in U.S.  dollars,  while  labor  and  other  production  costs  are  denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos'  foreign  sales and operating  results are subject to currency  exchange
rate fluctuations  which may favorably or adversely impact reported earnings and
may affect the comparability of  period-to-period  operating  results.  Overall,
fluctuations  in the  value of the U.S.  dollar  relative  to other  currencies,
primarily the euro,  increased TiO2 sales in 2003 by a net $93 million  compared
to 2002, and increased TiO2 sales in 2002 by a net $21 million compared to 2001.
Fluctuations  in the  value  of the U.S.  dollar  relative  to other  currencies
similarly  impacted  Kronos' foreign  currency-denominated  operating  expenses.
Kronos'  operating  costs  that are not  denominated  in the U.S.  dollar,  when
translated into U.S.  dollars,  were higher in 2003 compared to the same periods
of 2002. Overall, currency exchange rate fluctuations resulted in a net decrease
in Kronos'  operating  income in 2003 of approximately $6 million as compared to
2002. Overall,  the net impact of currency exchange rate fluctuations on Kronos'
operating income comparisons was not significant in 2002 as compared to 2001.

Kronos expects its TiO2  production  volumes in 2004 will  approximate  its
2003 production volumes, and sales volumes are expected to be slightly higher in
2004 as compared to 2003.  Kronos' average TiO2 selling  prices,  which declined
during the second half of 2003,  are expected to continue to decline  during the
first  quarter of 2004.  Kronos is hopeful that its average TiO2 selling  prices
will cease to  decline  sometime  during  the first half of 2004,  and will rise
thereafter.  Nevertheless,  Kronos expects its average TiO2 selling  prices,  in
billing currencies,  will be lower in 2004 as compared to 2003. Overall,  Kronos
expects it chemicals  operating income in 2004 will be lower than 2003.  Kronos'
expectations  as to the future  prospects  of Kronos and the TiO2  industry  are
based upon a number of factors beyond NL's control,  including  worldwide growth
of  gross  domestic  product,  competition  in the  marketplace,  unexpected  or
earlier-than-expected  capacity additions and technological  advances. If actual
developments  differ from Kronos'  expectations,  Kronos'  results of operations
could be unfavorably affected.

Component products - CompX

Years ended December 31,                       % Change
----------------------------                 ------------
2001             2002            2003         2001-02       2002-03
----             ----            ----         -------       -------
(In millions)

Net sales                                      $211.4           $196.1          $207.5           - 7%           +6%
Operating income                                 13.1              4.5             3.6           -66%          -21%

Operating income margin                            6%               2%              2%

Component  products  sales  were  higher  in 2003 as  compared  to 2002 due
primarily to the favorable effect of fluctuations in foreign  currency  exchange
rates.  Fluctuations  in  the  value  of  the  U.S.  dollar  relative  to  other
currencies,  as discussed below,  increased net sales by $8.9 million in 2003 as
compared  to 2002.  In addition  to the  favorable  impact of changes in foreign
currency exchange rates,  component products sales increased in 2003 as compared
to 2002 due to the net effects of higher  sales  volumes of  security  products,
lower  sales  volumes  of  ergonomic  products,  higher  sales  volumes of slide
products in North American  markets and lower sales volumes of slide products in
the European market.

During 2003,  sales of slide and security  products  increased  10% and 4%,
respectively,  as compared to 2002, while sales of ergonomic  products decreased
6%. The  percentage  changes in both slide and  ergonomic  products  include the
impact  resulting  from changes in foreign  currency  exchange  rates.  Sales of
security products are generally denominated in U.S. dollars.

Despite  the  increase  in sales in 2003,  operating  income  declined  due
primarily to unfavorable effects of changes in product mix, increases in certain
raw  material  costs  (primarily   steel)  and  expenses   associated  with  the
consolidation of CompX's two Canadian  facilities into one facility,  as well as
the  unfavorable  effect of  fluctuations  in foreign  currency  exchange  rates
discussed  below.  Expenses of $900,000  associated with CompX's  Canadian plant
consolidation,  which  commenced  in the first  quarter of 2003,  were  incurred
substantially all in the first half of the year.  Benefits  associated with this
consolidation  began to be realized in the fourth quarter of 2003.  Fluctuations
in the value of the U.S.  dollar  relative  to other  currencies,  as  discussed
below,  decreased  operating income by $3.8 million in 2003 as compared to 2002.
In addition,  component  products  operating  income in the 2003 includes a $3.3
million  restructuring  charge  associated  with the  implimentation  of certain
headcount reductions in CompX's Netherlands operations, while component products
operating  income in 2002 includes  charges  aggregating $3.5 million related to
the  re-tooling of one of CompX's  manufacturing  facilities  and provisions for
changes in  estimate  with  respect to  obsolete  and  slow-moving  inventories,
overhead absorption rates and other items.

Component products sales and operating income decreased in 2002 compared to
2001 due to continued  weak demand for CompX's  component  products  sold to the
office furniture market resulting from the continued weak economic conditions in
the  manufacturing  sectors  in North  America  and  Europe.  Sales of slide and
ergonomic products decreased 8% and 18%, respectively, in 2002 compared to 2001,
and sales of security products decreased 1%. Component products operating income
comparisons  were  impacted  by (i)  charges  aggregating  $5.7  million in 2001
related to the consolidation and  rationalization of certain of CompX's European
and North American operations  (including  headcount  reductions) and provisions
for  obsolete  and  slow-moving  inventories  and other  items and (ii)  charges
aggregating  $3.5 million in 2002 discussed  above.  The cost savings  resulting
from this retooling  began to be reflected in CompX's  operating  results in the
first  quarter  of 2003.  Operating  income  comparisons  were  also  negatively
impacted by increases in certain raw material costs, primarily steel, as well as
a decline in volume  levels,  unfavorable  changes in the sales mix and  general
competitive  pricing  pressures.  Operating  income  comparisons  were favorably
impacted  by  ceasing to  periodically  amortize  goodwill,  which  amounted  to
approximately  $2.4  million  in 2001  (none in 2002),  as well as the impact of
certain cost reductions that were  implemented.  See Note 19 to the Consolidated
Financial Statements.

CompX has  substantial  operations  and assets  located  outside the United
States in Canada,  the  Netherlands  and  Taiwan.  A portion  of  CompX's  sales
generated from its non-U.S.  operations are denominated in currencies other than
the U.S. dollar,  principally the Canadian  dollar,  the euro and the New Taiwan
dollar.  In addition,  a portion of CompX's  sales  generated  from its non-U.S.
operations are  denominated in the U.S.  dollar.  Most raw materials,  labor and
other production costs for such non-U.S. operations are denominated primarily in
local  currencies.  Consequently,  the translated  U.S. dollar values of CompX's
foreign  sales and  operating  results  are subject to  currency  exchange  rate
fluctuations which may favorably or unfavorably impact reported earnings and may
affect  comparability  of  period-to-period   operating  results.  During  2003,
currency  exchange  rate  fluctuations  of the  Canadian  dollar  and  the  euro
positively  impacted component products sales comparisons with 2002 (principally
with respect to slide products),  but currency exchange rate fluctuations of the
Canadian  dollar  negatively   impacted   component  products  operating  income
comparisons  for the same period.  During 2002, the effects of  fluctuations  in
foreign currency  exchange rates did not materially  impact  component  products
sales or operating income as compared to 2001.

CompX  expects  that weak  market  conditions  will  continue in the office
furniture  market,  the primary  end-market for CompX's  products,  during 2004.
While  the  Business  and  Institutional  Furniture  Manufacturer's  Association
("BIFMA")  International  has  predicted a 6% growth in furniture  shipments for
2004,  the total  volume of  shipments  is  expected to be 33% below the highest
annual volume set in 2000. If the prediction is correct, 2004 would be the first
year of office  furniture  industry  growth  since  2000.  However,  competitive
pricing  pressures  are  expected  to  continue  to be a  challenge  as  foreign
manufacturing,  particularly  in China,  gain market share.  CompX expects steel
prices to  continue  to rise in 2004 as much as 20% to 30%,  or more.  CompX has
initiated  price increases on certain of its products and will continue to focus
on cost improvement  initiatives,  utilizing lean  manufacturing  techniques and
prudent balance sheet  management in order to minimize the impact of lower sales
to  the  office  furniture   industry  and  to  develop   value-added   customer
relationships with additional focus on sales of CompX'x higher-margin  ergonomic
computer support systems to improve operating  results.  CompX currently expects
to realize  annual cost  savings of $3.5  million to $4 million as the result of
the headcount reduction  implemented during 2003 in its Netherlands  operations.
However,  CompX continues with its ongoing strategic analysis of the operations,
and additional actions could be taken in the future that could result in charges
for asset  impairment,  including  goodwill,  and other costs in future periods.
These actions,  along with other activities to eliminate  excess  capacity,  are
designed to position CompX to more  effectively  concentrate on both new product
and new customer opportunities to improve its profitability.

Waste management - Waste Control Specialists

Years ended December 31,
2001            2002            2003
----            ----            ----
(In millions)

Net sales                                                                 $ 13.0         $ 8.4          $  4.1
Operating loss                                                              (14.4)        (7.0)          (11.5)

Waste management sales decreased,  and the operating loss increased, in the
2003 compared to 2002 due to continued weak demand for waste management services
as well as costs  incurred in 2003 related to certain  licensing and  permitting
activities. Waste Control Specialists' continued emphasis on cost control helped
to mitigate the effect of lower sales. Waste Control  Specialists also continues
to explore  opportunities  to obtain  certain  types of new  business  that,  if
obtained,  could increase its sales, and decrease its operating loss, in 2004 as
compared to 2003.

Waste  management sales decreased in 2002 compared to 2001 due primarily to
the  effect of weak  demand  for Waste  Control  Specialists'  waste  management
services.  Waste management's  operating losses declined during 2002 compared to
2001 as the effect of certain cost controls implemented in 2002 more than offset
the effects of the decline in sales.

Waste  Control  Specialists  currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic  wastes,  and to treat
and store a broad range of low-level and  mixed-level  radioactive  wastes.  The
waste  management  industry  currently is experiencing a relative decline in the
number of environmental  remediation  projects  generating  wastes. In addition,
efforts on the part of  generators  to reduce the volume of waste and/or  manage
wastes  onsite at their  facilities  also has  resulted in weak demand for Waste
Control  Specialists'  waste  management  services.  These  factors  have led to
reduced  demand and  increased  downward  price  pressure  for waste  management
services.   While  Waste  Control  Specialists   believes  its  broad  range  of
authorizations  for the  treatment  and  storage of  low-level  and  mixed-level
radioactive waste streams provides certain competitive advantages, a key element
of Waste Control Specialists'  long-term strategy to provide "one-stop shopping"
for hazardous,  low-level and mixed-level  radioactive wastes includes obtaining
additional   regulatory   authorizations  for  the  disposal  of  low-level  and
mixed-level radioactive wastes.

Prior  to  June  2003,   the  state  law  in  Texas  (where  Waste  Control
Specialists'  disposal  facility is located)  prohibited  the  applicable  Texas
regulatory  agency from  issuing a license for the  disposal of a broad range of
low-level and mixed-level  radioactive waste to a private enterprise operating a
disposal facility in Texas. In June 2003, a new Texas state law was enacted that
allows the  regulatory  agency to issue a low-level  radioactive  waste disposal
license to a private entity,  such as Waste Control  Specialists.  Waste Control
Specialists  currently  expects  to apply for such a disposal  license  with the
applicable  regulatory agency by the application deadline of August 6, 2004. The
length of time that the  regulatory  agency will take to review and act upon the
license  application is uncertain,  although Waste Control  Specialists does not
currently  expect the  agency  would  issue any final  decision  on the  license
application   before  2007.  There  can  be  no  assurance  that  Waste  Control
Specialists will be successful in obtaining any such license.

Waste Control  Specialists  is continuing its efforts to increase its sales
volumes from waste  streams that conform to  authorizations  it currently has in
place.  Waste Control  Specialists is also continuing to identify  certain waste
streams,  and attempting to obtain  modifications to its current  permits,  that
would allow for treatment,  storage and disposal of additional  types of wastes.
The ability of Waste Control  Specialists to achieve  increased sales volumes of
these waste  streams,  together with  improved  operating  efficiencies  through
further cost  reductions  and  increased  capacity  utilization,  are  important
factors in Waste Control  Specialists'  ability to achieve  improved cash flows.
The Company  currently  believes Waste Control  Specialists can become a viable,
profitable  operation,  even if Waste Control  Specialists  is  unsuccessful  in
obtaining  a  license  for  the  disposal  of a broad  range  of  low-level  and
mixed-level  radioactive wastes.  However,  there can be no assurance that Waste
Control  Specialists' efforts will prove successful in improving its cash flows.
Valhi has in the past, and may in the future,  consider  strategic  alternatives
with respect to Waste Control  Specialists.  There can be no assurance  that the
Company would not report a loss with respect to any such strategic transaction.

TIMET

Years ended December 31,
2001            2002            2003
----            ----            ----
(In millions)

TIMET historical:

Net sales                                                              $486.9          $366.5          $385.3
======          ======          ======

Operating income (loss):
Boeing settlement, net                                               $ 62.7          $  -            $  -
Fixed asset impairment                                                (10.8)            -               -
Tungsten accrual                                                       (3.3)             .2             1.7
Boeing take-or-pay income                                               -              23.4            23.1
LIFO income (expense)                                                  (5.0)           (9.3)           11.4
Contract termination charge                                             -               -              (6.8)
Goodwill amortization                                                  (4.6)            -               -
Other, net                                                             25.5           (35.1)          (24.0)
------          ------          ------ 
64.5           (20.8)            5.4
Impairment of convertible
preferred securities                                                   (61.5)          (27.5)            -
Other general corporate, net                                              5.9            (2.5)            (.3)
Interest expense                                                        (18.3)          (17.1)          (16.4)
------          ------          ------ 
(9.4)          (67.9)          (11.3)

Income tax benefit (expense)                                            (31.1)            2.0            (1.2)
Minority interest                                                        (1.3)           (1.3)            (.4)
------          ------          ------ 

Loss before cumulative effect of
change in accounting principle                                      $(41.8)         $(67.2)         $(12.9)
======          ======          ====== 

Equity in earnings (losses) of TIMET                                     $ (9.2)         $(32.9)         $  1.9
======          ======          ======

Tremont accounts for its interest in TIMET by the equity method.  Tremont's
equity in earnings of TIMET  differs  from the amounts that would be expected by
applying Tremont's ownership percentage to TIMET's separately-reported  earnings
because of the effect of amortization of purchase accounting adjustments made by
Tremont in conjunction  with Tremont's  acquisitions  of its interests in TIMET.
Amortization of such basis differences  generally increases earnings (or reduces
losses)  attributable  to TIMET as reported by the Company,  and aggregated $6.9
million in 2001, $8.7 million in 2002 and $7.0 million in  2003(exclusive of the
2002  provision  for  an  other  than  temporary  impairment  of  the  Company's
investment in TIMET discussed below).

In February 2003, TIMET completed a reverse stock split of its common stock
at a ratio of one share of  post-split  common  stock for each  outstanding  ten
shares of pre-split  common stock.  The per share  disclosures  related to TIMET
discussed  herein have been  adjusted to give effect to the reverse stock split.
Implementing  such  reverse  split  had no  financial  statement  impact  to the
Company,  and the  Company's  ownership  interest  in TIMET did not  change as a
result thereof.

Tremont  periodically  evaluates  the net carrying  value of its  long-term
assets,  including its  investment in TIMET,  to determine if there has been any
decline in value below its amortized cost basis that is other than temporary and
would,  therefore,  require  a  write-down  which  would be  accounted  for as a
realized loss. At September 30, 2002,  after  considering what it believes to be
all relevant factors,  including,  among other things,  TIMET's then-recent NYSE
stock prices, and TIMET's operating results, financial position, estimated asset
values and prospects,  Tremont recorded a $15.7 million impairment provision for
an other  than  temporary  decline  in value of its  investment  in TIMET.  Such
impairment  provision is reported as part of the  Company's  equity in losses of
TIMET in 2002.  At  December  31,  2003,  Tremont's  net  carrying  value of its
investment in TIMET was $15.69 per share compared to a NYSE market price at that
date of $52.51 per share.  In determining  the amount of the impairment  charge,
Tremont  considered,  among other  things,  then- recent  ranges of TIMET's NYSE
market price and current estimates of TIMET's future operating losses that would
further reduce Tremont's carrying value of its investment in TIMET as it records
additional  equity in losses of TIMET.  Tremont  will  continue  to monitor  and
evaluate the value of its investment in TIMET.  While the  accounting  rules may
require an  investment  in a security  accounted  for by the equity method to be
written down if the market value of that security declines, they do not permit a
writeup if the market value subsequently recovers.

TIMET reported higher sales in 2003 as compared to 2002, and TIMET improved
from a $20.8 million  operating loss in 2002 to operating income of $5.4 million
in 2003.  TIMET's net sales  increased  in 2003 due in part to a 97% increase in
sales volumes of melted products (ingot and slab) , changes in product mix and a
weakening of the U.S.  dollar as compared to the British pound  sterling and the
euro.  These factors were partially  offset by a 16% decrease in average selling
prices for melted products. The improvement in melted product sales volumes, and
the decrease in melted  products  selling  prices,  are due  principally  to new
customer relationships and a change in product mix. TIMET's results in 2003 also
include a (i) $6.8 million charge related to the termination of TIMET's purchase
and sales agreement with Wyman-Gordon  Company and (ii) a $1.7 million reduction
in its accrual for the tungsten matter  discussed in Note 18 to the Consolidated
Financial Statements.

TIMET reported a reduction in its LIFO inventory reserve at the end of 2003
as compared to the end of 2002, favorably impacting TIMET's operating results in
2003 by $11.4  million.  This  compared with an increase in TIMET's LIFO reserve
during 2002, which negatively impacted TIMET's operating results in 2002 by $9.3
million.  TIMET's operating results in 2003 were also favorably  impacted by the
effects of TIMET's continued cost reduction efforts and raw material mix.

TIMET reported lower sales and worse operating  results in 2002 compared to
2001.  TIMET's mill and melted  products sales volumes in 2002 decreased 27% and
46%,  respectively,  compared to 2001.  TIMET's  average selling prices for mill
products  in 2002 were 5% higher  compared  to 2001.  TIMET's  operating  income
comparisons  were favorably  impacted by TIMET ceasing to periodically  amortize
goodwill   recognized  on  its   separate-company   books,   which  amounted  to
approximately $4.6 million in 2001 (none in 2002).  TIMET's results in 2002 were
negatively  impacted by an increase in TIMET's provision for excess  inventories
and severance costs related to TIMET's  program to reduce its global  employment
levels.  TIMET's operating income  comparisons were also negatively  impacted in
2002 by changes in customer and product mix and lower  operating  rates in 2002,
with average  capacity  utilization  declining  from 75% to 55%.  Comparison  of
TIMET's  operating  results in 2001 and 2002 were also  impacted by TIMET's 2001
legal  settlement  with  Boeing,  its  impairment  charges  related  to  certain
equipment in 2001, its accruals for the tungsten matter  discussed in Note 18 to
the Consolidated  Financial  Statements and the effect of the Boeing take-or-pay
income in 2002.

Under TIMET's  previously-reported amended long-term agreement with Boeing,
Boeing  advanced TIMET $28.5 million for each of 2002, 2003 and 2004, and Boeing
is  required to continue to advance  TIMET $28.5  million  annually  during 2005
through 2007.  The agreement is structured as a take-or-pay  agreement such that
Boeing,  beginning in calendar year 2002, will forfeit a  proportionate  part of
the $28.5 million annual advance,  or effectively  $3.80 per pound, in the event
that its orders for  delivery for such  calendar  year are less than 7.5 million
pounds.  TIMET can only be required,  however, to deliver up to 3 million pounds
per quarter.  Based on TIMET's actual  deliveries to Boeing of approximately 1.3
million pounds during 2002 and 1.4 million pounds during 2003,  TIMET recognized
income  of $23.4  million  in 2002 and  $23.1  million  in 2003  related  to the
take-or-pay   provisions  of  the  contract.   These  earnings  related  to  the
take-or-pay  provisions distort TIMET's operating income percentages as there is
no corresponding amount reported in TIMET's sales.

TIMET's  results in 2001 and 2002 also includes the $61.5 million and $27.5
million,  respectively,  provisions for an other than  temporary  impairments of
TIMET's  investment in the  convertible  preferred  securities of Special Metals
Corporation ("SMC"). In addition,  TIMET's effective income tax rate in 2002 and
2003 varies from the 35% U.S.  federal  statutory  income tax rate because TIMET
has concluded it is not currently appropriate to recognize an income tax benefit
related to its U.S. and U.K. losses under the "more-likely-than-not" recognition
criteria.

The Company's  equity in losses of TIMET in 2002 includes (i) an impairment
provision of $15.7  million ($8.0  million,  or $.07 per diluted  share,  net of
income tax benefit and  minority  interest)  related to an other than  temporary
decline in value of the  Company's  investment in TIMET and (ii) a $10.6 million
charge ($5.4 million,  or $.05 per diluted share,  net of income tax benefit and
minority  interest)  related to TIMET's  impairment  for an other than temporary
decline in value of the SMC securities  held by TIMET.  The Company's  equity in
losses of TIMET in 2001 includes (i) a $15.7 million gain ($7.6 million, or $.06
per diluted share, net of income taxes and minority interest) related to TIMET's
settlement gain with Boeing and (ii) a $28.4 million charge ($14.5  million,  or
$.12 per diluted share, net of income tax benefit and minority interest) related
to TIMET's 2001  impairment  provision  for an other than  temporary  decline in
value of the SMC securities held by TIMET.

See  Note  18 to the  Consolidated  Financial  Statements  for  information
concerning (i) certain workers'  compensation bonds issued on behalf of a former
subsidiary of TIMET and (ii) certain  reserves  recognized by TIMET related to a
defective product produced by TIMET.

The cyclical nature of the aerospace industry has been the principal driver
of the historical  fluctuations in the  performance of most titanium  companies.
Over the past 20 years, the titanium industry had cyclical peaks in mill product
shipments  in 1989,  1997 and 2001 and  cyclical  lows in 1983,  1991 and  1999.
Demand for titanium reached its highest level in 1997 when industry mill product
shipments reached  approximately  60,000 metric tons. However,  since that peak,
industry mill product shipments have fluctuated significantly,  primarily due to
a continued change in demand for titanium from the commercial  aerospace sector.
In 2002,  industry shipments  approximated 50,000 metric tons, and in 2003 TIMET
estimates  industry shipments  approximated  48,000 metric tons. TIMET currently
expects total  industry  mill product  shipments in 2004 will increase from 2003
levels to at least 51,000 metric tons.

Although the  commercial  airline  industry  continues to face  significant
challenges,  recent economic data have sign of an improving business environment
in that  sector.  According to The Airline  Monitor,  the  worldwide  commercial
airline  industry  reported an estimated  operating loss of  approximately  $3.5
billion in 2003,  compared to a $7.3 billion  loss in 2002 and an $11.7  billion
loss in 2001. The Airline Monitor is currently  forecasting  operating income of
approximately $6.3 billion for the industry in 2004. Furthermore, global airline
passenger traffic returned to pre-September 11, 2001 levels in November of 2003.
Although  these  appear to be positive  signs,  TIMET  currently  believes  that
industry mill product  shipments  into the commercial  aerospace  sector will be
somewhat flat in 2004 and show a modest upturn in 2005.

The Airline Monitor  traditionally issues forecasts for commercial aircraft
deliveries  each  January  and July.  According  to The Airline  Monitor,  large
commercial  aircraft deliveries totaled 579 (including 154 wide bodies) in 2003.
The Airline Monitor's most recently issued forecast (January 2004) calls for 575
deliveries in 2004, 540 deliveries in 2005 and 510 deliveries in 2006.  Relative
to 2003, these forecasted delivery rates represent anticipated declines of about
1% in 2004,  7% in 2005 and 12% in 2006.  From 2007  through  2011,  The Airline
Monitor calls for a continued  increase each year in large  commercial  aircraft
deliveries  with forecasted  deliveries of 620 aircraft in 2008,  exceeding 2003
levels.  Deliveries of titanium  generally precede aircraft  deliveries by about
one year, although this varies considerably by titanium product. This correlates
to TIMET's cycle, which historically precedes the cycle of the aircraft industry
and related deliveries.

Although the current business environment continues to make it difficult to
predict future  performance,  TIMET  currently  expects sales revenue in 2004 to
increase to between  $425  million and $445  million,  reflecting  the  combined
effects of increases in sales volumes and market share and relative  weakness of
the U.S.  dollar  as  compared  to the  British  pound  sterling  and the  euro,
partially offset by customer and product mix. Mill product sales volumes,  which
were 8,875 metric tons in 2003,  are expected to increase to between  10,300 and
10,500  metric tons in 2004.  Melted  product  sales  volumes,  which were 4,725
metric tons in 2003,  is expected to decrease to between  4,800 and 5,000 metric
tons in 2004.  TIMET currently  expects between 55% and 60% of its 2004 mill and
melted  product  sales  volumes  will be derived from the  commercial  aerospace
sector  (which  would be a slight  decrease  from 2003),  with the balance  from
military  aerospace,  industrial and emerging markets.  The expected increase in
sales volumes in 2004 are principally driven by an anticipated increase in sales
volume to industrial and emerging markets.

Additionally,  TIMET's  backlog of unfilled orders was  approximately  $180
million at December 31, 2003,  compared to $165 million at December 31, 2002 and
$225  million at December  31,  2001.  Substantially  the entire  2003  year-end
backlog is scheduled for shipment during 2004.  TIMET's order backlog may not be
a reliable indicator of future business activity.

Raw material costs represent the largest  portion of TIMET's  manufacturing
cost structure.  TIMET has recently been experiencing higher raw material prices
due to a  tightening  in raw  material  availability,  especially  in the  scrap
markets. TIMET also expects an increase in energy costs in 2004.

TIMET expects to manufacture a significant  portion of its titanium  sponge
requirements in 2004. The unit cost of titanium  sponge  manufactured at TIMET's
Nevada  facility  is expected to decrease  relative to 2003,  due  primarily  to
higher sponge plant  operating  rates as the plant moves to full capacity by the
third quarter of 2004.  TIMET expects the aggregate cost of purchased sponge and
scrap to increase during 2004.

TIMET  currently  expects   production   volumes  will  increase  in  2004,
increasing  overall  capacity  utilization  to  between  60% and 65% in 2004 (as
compared to 56% in 2003).  However,  practical capacity utilization measures can
vary  significantly  based on product mix. TIMET continues to identify areas for
potential cost savings, in addition to the savings realized in 2003, and expects
gross margin in 2004 to range from 6% to 8% of net sales.

TIMET  currently  anticipates  that it will receive  orders from Boeing for
about 1.5 million pounds of product during 2004. At this projected  order level,
TIMET expects to recognize  about $25 million of operating  income in 2004 under
the Boeing LTA's take-or-pay provisions.

Overall,  TIMET currently  expects it will report operating income for 2004
of between  $14  million and $24  million,  including  the $23 million of Boeing
take-or-pay  income and income of $1.9 million in the first quarter 2004 related
to a change  in the  vacation  policy  for its U.S.  salaried  employees.  TIMET
currently  expects  its net  earnings  in 2004 will  range from a net loss of $3
million  to net  income  of $7  million,  including  the $23  million  of Boeing
take-or-pay  income and the $1.9  million  benefit  related to the change in the
vacation policy.

During  2002,  TIMET  adopted SFAS No. 142,  Goodwill and other  intangible
assets.  Under the transition  provisions of SFAS No. 142, TIMET determined that
the entire  carrying value of its  recognized  goodwill at December 31, 2001 was
impaired,  and during 2002 TIMET  recognized a $44.3 million net charge recorded
as a cumulative  effect of a change in  accounting  principle to writeoff all of
its recognized  goodwill.  However,  Tremont had already  written off all of its
pro-rata share of TIMET's recognized goodwill as part of a 1999 provision for an
other  than  temporary  impairment  of its  investment  in TIMET  at that  time.
Accordingly,  TIMET's adoption of SFAS No. 142 had no financial statement impact
to the Company during 2002.

General corporate and other items

General corporate interest and dividend income.  General corporate interest
and dividend income  decreased $2.0 million in 2003 as compared to 2002 due to a
lower  average  level of  invested  funds  and  lower  average  yields.  General
corporate  interest and dividend income  decreased $3.7 million in 2002 compared
to 2001 due to a lower average level of invested funds and lower average yields.
The Company received $23.7 million of distributions  from The Amalgamated  Sugar
Company  LLC in 2003  compared  to $23.6  million in each of 2002 and 2001.  See
Notes  5 and 12 to the  Consolidated  Financial  Statements.  Aggregate  general
corporate  interest and dividend income is currently expected to be lower during
2004  compared to 2003 due  primarily to a lower amount of funds  available  for
investment.

Legal settlement  gains. The $823,000 of net legal settlement gains in 2003
and the $5.2  million  of net  legal  settlement  gains in 2002  relate  to NL's
settlements with certain former insurance carriers.  The $31.9 million net legal
settlement  gains  in 2001  relate  principally  to (i)  settlement  of  certain
litigation to which Waste Control  Specialists  was a party ($20.1  million) and
(ii) NL's additional  settlements with certain former insurance  carriers ($11.4
million). NL's legal settlement gains in 2001, 2002 and 2003, as well as similar
legal  settlement  gains in 2000,  resolved  court  proceedings  in which NL had
sought  reimbursement  from the carriers for legal  defense  costs and indemnity
coverage for certain of its environmental remediation  expenditures.  No further
material settlements relating to litigation concerning environmental remediation
coverages are expected. See Note 12 to the Consolidated Financial Statements.

Securities  transactions.  Securities  transaction  gains  in  2003  relate
principally  to a first  quarter  gain of  $316,000  related to NL's  receipt of
shares of Valhi common stock in exchange for shares of Tremont common stock held
directly or indirectly by NL (such gain being  attributable  to NL  stockholders
other  than  the  Company).  See  Notes 3 and 12 to the  Consolidated  Financial
Statements.

Securities  transaction  gains in 2002 are  comprised of (i) a $3.0 million
unrealized gain related to the reclassification of 621,000 shares of Halliburton
Company common stock from  available-for-sale  to trading  securities and (ii) a
$3.4  million  gain  related to changes in the market  value of the  Halliburton
common stock classified as trading securities.

Securities transactions gains in 2001 include a $33.1 million realized gain
from  exchanges  of LYONs and  related  to the  disposition  of a portion of the
shares of Halliburton  common stock held by the Company when certain  holders of
the Company's  LYONs debt  obligations  exercised  their right to exchange their
LYONs for such Halliburton shares.  Securities transactions in 2001 also include
(i) a $14.2 million gain related to the  reclassification  of certain  shares of
Halliburton common stock from available-for-sale to trading securities,  (ii) an
$11.6  million  unrealized  loss  related  to  changes  in  market  value of the
Halliburton  shares  classified  as trading  securities,  (iii)  Valhi's sale of
390,000 Halliburton shares in market transactions for an aggregate realized gain
of $13.7  million  and (iv) a $2.3  million  charge for an other than  temporary
impairment of certain marketable securities held by the Company.

Insurance  gain. The insurance gain in 2001 relates to proceeds NL received
related to property damage  insurance  coverages for the fire at its Leverkusen,
Germany  facility,  as the proceeds  received exceeded the carrying value of the
property  destroyed  and cleanup and other  extra  costs  incurred.  NL does not
expect to receive any additional  insurance  proceeds  related to the Leverkusen
fire. See Note 12 to the Consolidated Financial Statements.

Other general  corporate income items. The gain on disposal of property and
equipment in 2003 relates  primarily to the sale of certain real  property of NL
not associated  with NL's TiO2  operations.  NL has certain other real property,
including some subject to environmental remediation,  which could be sold in the
future for a profit. The $6.3 million foreign currency  transaction gain in 2002
relates to the  extinguishment of certain  intercompany  indebtedness of NL. The
gain on disposal  of fixed  assets in 2002  relates to the sale of certain  real
estate held by Tremont.  The gain on  sale/leaseback  in 2001 relates to CompX's
manufacturing  facility  in The  Netherlands.  See  Note 12 to the  Consolidated
Financial Statements.

General corporate  expenses.  Net general  corporate  expenses in 2003 were
$19.5 million higher than 2002 due primarily to higher environmental remediation
expenses of NL (principally  related to one formerly-owned  site of NL for which
the remediation  process is expected to occur over the next several years). Such
environmental  expenses  are  included  in selling,  general and  administrative
expenses.  In  addition,  NL's $20 million of proceeds  from the disposal of its
specialty  chemicals  business unit in January 1998 related to its agreement not
to compete in the rheological products business was recognized as a component of
general corporate income (expense) ratably over the five-year non-compete period
ended in January 2003 ($4 million recognized in 2002 and $333,000  recognized in
2003).  See  Note  12 to the  Consolidated  Financial  Statements.  Net  general
corporate  expenses in  calendar  2004 are  currently  expected to be lower than
calendar 2003 due to lower expected  environmental  remediation  expenses of NL.
However,  obligations for environmental remediation obligations are difficult to
assess and  estimate,  and no assurance  can be given that actual costs will not
exceed accrued  amounts or that costs will not be incurred with respect to sites
for which no estimate of liability  can  presently  be made.  See Note 18 to the
Consolidated Financial Statements.

Net general  corporate  expenses in 2002 were $10.4 million  higher than in
2001,  as higher legal and stock  compensation-related  expenses of NL were only
partially  offset  by the  effect  of  lower  compensation-related  expenses  of
Tremont.

Interest  expense.  Interest  expense  declined  $1.7  million  in  2003 as
compared to 2002 due  primarily  to the net effects of lower  average  levels of
indebtedness  of Valhi parent,  higher average levels of  indebtedness of Kronos
and lower average interest rates on Kronos indebtedness.

Assuming interest rates and foreign currency exchange rates do not increase
significantly  from  current  levels,  interest  expense in 2004 is  expected to
approximate interest expense in 2003.

Interest  expense  declined  $2.1  million  in 2002  compared  to 2001  due
primarily to lower average levels of outstanding  indebtedness  as well as lower
average U.S.  variable  interest rates.  Interest  expense in 2002 includes $2.0
million related to the loss on early  extinguishment of certain  indebtedness of
NL. See Note 10 to the Consolidated Financial Statements.

At  December  31,  2003,   approximately   $607  million  of   consolidated
indebtedness,  principally  KII's  publicly-traded  debt and Valhi's  loans from
Snake River Sugar Company, bears interest at fixed interest rates averaging 9.1%
(2002 - $552 million with a weighted  average interest rate of 9.1%; 2001 - $476
million  with a weighted  average  fixed  interest  rate of  10.3%).  Fixed-rate
outstanding  indebtedness  at December 31, 2001  consisted  primarily of Valhi's
9.25%  LYONs and NL's  11.75%  Senior  Secured  Notes,  both of which were fully
retired by December 31,  2002,  as well as Valhi's  loans from Snake River.  The
weighted  average  interest  rate on $31 million of  outstanding  variable  rate
borrowings  at  December  31,  2003 was  3.1%  (2002 - 4.4%;  2001 - 4.5%).  The
weighted average  interest rate on outstanding  variable rate debt declined from
December 31, 2002 to December 31, 2003 due primarily to lower  average  interest
rates on U.S.  borrowings,  as well as lower outstanding  borrowings under KII's
European  revolver  at December  31, 2003 as compared to December  31, 2002 (for
which the average interest rate is generally higher than U.S.  borrowings).  The
weighted average interest rate on outstanding  variable rate borrowings declined
slightly  from  December  31, 2001 to  December  31, 2002 as the effect of lower
average interest rates on U.S.  borrowings more than offset the effect of higher
average  interest  rates  on  NL's  non-U.S.  borrowings.  See  Note  10 to  the
Consolidated Financial Statements.

KII has a certain amount of  indebtedness  denominated in currencies  other
than the U.S. dollar and, accordingly,  Kronos' interest expense is also subject
to currency fluctuations. See Item 7A, "Quantitative and Qualitative Disclosures
About Market Risk." Periodic cash interest payments were not required on Valhi's
9.25% deferred  coupon LYONs (which were fully retired by December 31, 2002). As
a result, cash interest expense payments in the past had been lower than accrual
basis interest expense.

Provision  for income  taxes.  The  principal  reasons  for the  difference
between the Company's  effective income tax rates and the U.S. federal statutory
income  tax  rates  are  explained  in  Note  15 to the  Consolidated  Financial
Statements.  Income tax rates vary by jurisdiction  (country and/or state),  and
relative  changes in the  geographic mix of the Company's  pre-tax  earnings can
result in fluctuations in the effective income tax rate.

As discussed in Note 19 to the Consolidated Financial Statements, effective
January 1, 2002,  the  Company no longer  recognizes  periodic  amortization  of
goodwill.  Under GAAP,  generally there is no income tax benefit  recognized for
financial reporting purposes attributable to goodwill amortization. Accordingly,
ceasing  to  periodically  amortize  goodwill  beginning  in 2002  impacted  the
Company's  overall  effective  income tax rate in 2002 and 2003 as  compared  to
2001.

During  2003,  NL and  Kronos  reduced  their  deferred  income  tax  asset
valuation allowance by an aggregate of approximately $7.2 million,  primarily as
a result of  utilization  of certain income tax attributes for which the benefit
had not  previously  been  recognized.  In addition,  Kronos  recognized a $38.0
million  income tax  benefit  related  to the net  refund of certain  prior year
German income taxes.

During  2002,  NL and  Kronos  reduced  their  deferred  income  tax  asset
valuation allowance by an aggregate of approximately $3.4 million,  primarily as
a result of  utilization  of certain income tax attributes for which the benefit
had not previously been recognized.  During 2002, Tremont increased its deferred
income tax asset valuation  allowance (at the Valhi consolidated level) by a net
$3.8 million  primarily  because Tremont concluded certain tax attributes do not
currently meet the  "more-likely-than-not"  recognition criteria.  The provision
for  income  taxes in 2002 also  includes  a $2.7  million  deferred  income tax
benefit related to certain changes in the Belgian tax law.

During  2001,  NL and  Kronos  reduced  their  deferred  income  tax  asset
valuation allowance by an aggregate of $24.7 million.  Of such reduction,  $23.2
million  related to a change in estimate of Kronos'  ability to utilize  certain
German income tax attributes  following the completion of a restructuring of its
German operations, the benefit of which had not previously been recognized under
the  "more-likely-than-not"  recognition  criteria.  In  addition,  Kronos  also
utilized  certain tax attributes  during 2001 for which the benefit had also not
previously been recognized.

During 2001,  Tremont  increased  its deferred  income tax asset  valuation
allowance (at the Valhi consolidated  level) by a net $3.8 million due primarily
because Tremont  concluded  certain tax attributes,  including its net operating
loss  carryforwards  generated  prior  to  January  1,  2001 no  longer  met the
"more-likely-than-not"   recognition   criteria.   Such   net   operating   loss
carryforwards  can only be used to offset future taxable income of Tremont,  and
may not be used to offset future  taxable income of other members of the Contran
Tax Group.

At December 31,  2003,  Kronos had the  equivalent  of  approximately  $438
million of income tax loss  carryforwards  in Germany with no  expiration  date.
However,  Kronos has provided a deferred  income tax asset  valuation  allowance
against  substantially  all of  these  tax  loss  carryforwards  because  Kronos
currently  believes  they do not  meet  the  "more-likely-than-not"  recognition
criteria. Kronos periodically evaluates the  "more-likely-than-not"  recognition
criteria with respect to such tax loss carryforwards, and it is possible that in
the future  Kronos  may  conclude  such  carryforwards  do meet the  recognition
criteria,  at which time Kronos would  reverse all or a portion of such deferred
tax valuation allowance.

In  January  2004,  the  German  federal  government  enacted  new  tax law
amendments  that limit the annual  utilization of income tax loss  carryforwards
effective January 1, 2004. The new law may  significantly  affect Kronos' future
income tax expense and cash tax payments.

Minority interest.  See Note 13 to the Consolidated  Financial  Statements.
Minority   interest   in  NL's   subsidiaries   relates   principally   to  NL's
majority-owned  environmental management subsidiary, NL Environmental Management
Services,  Inc.  ("EMS").  EMS was  established  in  1998,  at  which  time  EMS
contractually assumed certain of NL's environmental  liabilities.  EMS' earnings
are based, in part, upon its ability to favorably  resolve these  liabilities on
an aggregate  basis. The shareholders of EMS, other than NL, actively manage the
environmental  liabilities  and  share in 39% of EMS'  cumulative  earnings.  NL
continues to consolidate EMS and provides accruals for the reasonably  estimable
costs for the settlement of EMS' environmental liabilities, as discussed below.

As previously  reported,  Waste Control Specialists was formed by Valhi and
another entity in 1995. Waste Control Specialists assumed certain liabilities of
the other owner and such  liabilities  exceeded the carrying value of the assets
contributed  by the other  owner.  Since its  inception in 1995,  Waste  Control
Specialists  has  reported  aggregate  net  losses.  Consequently,  all of Waste
Control Specialists aggregate,  inception-to-date net losses have accrued to the
Company for financial reporting  purposes,  and all of Waste Control Specialists
future net income or net losses  will also  accrue to the  Company  until  Waste
Control  Specialists  reports  positive equity  attributable to the other owner.
Accordingly,  no minority  interest in Waste Control  Specialists' net assets or
net earnings  (losses) is reported  during 2001, 2002 or 2003, or as of December
31, 2002 and 2003.

Following  completion of the merger  transactions  in which Tremont  became
wholly owned by Valhi in February 2003,  the Company no longer reports  minority
interest in Tremont's net assets or earnings.  The Company commenced recognizing
minority  interest in Kronos' net assets and earnings in December 2003 following
NL's  distribution  of a portion  of the  shares of Kronos  common  stock to its
shareholders. See Note 3 to the Consolidated Financial Statements.

Related party transactions.  The Company is a party to certain transactions
with related parties. See Note 17 to the Consolidated Financial Statements.

Accounting  principles  newly adopted in 2002 and 2003.  See Note 19 to the
Consolidated Financial Statements.

Accounting  principles  not yet  adopted.  See Note 20 to the  Consolidated
Financial Statements.

Assumptions on defined benefit pension plans and OPEB plans.

Defined  benefit  pension  plans.  The Company  maintains  various  defined
benefit  pension  plans  in the  U.S.,  Europe  and  Canada.  See Note 16 to the
Consolidated  Financial Statements.  At December 31, 2003,  approximately 92% of
the  projected  benefit  obligations  related to defined  benefit  pension plans
relates to Kronos and NL plans and 8% relates to benefits owed to certain former
U.S.  employees  of Medite  Corporation,  a former  business  unit of Valhi (the
"Medite plan").

The Company  accounts for its defined  benefit pension plans using SFAS No.
87,  Employer's  Accounting  for Pensions.  Under SFAS No. 87,  defined  benefit
pension plan expense and prepaid and accrued  pension costs are each  recognized
based on certain actuarial  assumptions,  principally the assumed discount rate,
the assumed  long-term rate of return on plan assets and the assumed increase in
future compensation levels. The Company recognized  consolidated defined benefit
pension  plan  expense of $4.4  million in 2001,  $6.8  million in 2002 and $9.6
million in 2003. The amount of funding  requirements  for these defined  benefit
pension plans is generally  based upon applicable  regulation  (such as ERISA in
the U.S.), and will generally differ from pension expense  recognized under SFAS
No. 87 for financial reporting purposes.  Contributions made by Kronos and NL to
all of their plans  aggregated  $7.6  million in 2001,  $9.6 million in 2002 and
$14.1 million in 2003.  Contributions with respect to the Medite plan during the
past three years were not significant.

The discount rates the Company  utilizes for  determining  defined  benefit
pension  expense  and the  related  pension  obligations  are  based on  current
interest  rates  earned on  long-term  bonds that receive one of the two highest
ratings given by recognized rating agencies in the applicable  country where the
defined  benefit  pension  benefits  are being paid.  In  addition,  the Company
receives advice about appropriate discount rates from the Company's  third-party
actuaries,  who may in some cases utilize their own market indices. The discount
rates are adjusted as of each valuation date  (September 30th for the Kronos and
NL plans and December 31st for the Medite plan) to reflect then-current interest
rates on such  long-term  bonds.  Such discount  rates are used to determine the
actuarial  present value of the pension  obligations as of December 31st of that
year, and such discount rates are also used to determine the interest  component
of defined benefit pension expense for the following year.

At  December  31,  2003,   approximately   92%  of  the  projected  benefit
obligations  for all of the Company's  defined  benefit pension plans related to
plans sponsored by NL and Kronos, and substantially all of the remainder related
to the Medite  plan.  Of the amount  attributable  to plans  sponsored by NL and
Kronos, approximately 15%, 54%, 11% and 15% related to Kronos plans in the U.S.,
Germany,  Canada and Norway,  respectively.  The Company uses several  different
discount rate  assumptions  in  determining  its  consolidated  defined  benefit
pension  plan  obligations  and expense  because the Company  maintains  defined
benefit pension plans in several different countries in North America and Europe
and the interest rate environment differs from country to country.

The Company  used the  following  discount  rates for its  defined  benefit
pension plans:

Discount rates used for:
------------------------------------------------------------------------------------------------
Obligations at                   Obligations at                   Obligations at
December 31, 2001 and expense     December 31, 2002 and expense       December 31, 2003 and
in 2002                           in 2003                     expense in 2004
-------------------------------  --------------------------------  -----------------------------

Kronos and NL plans:

U.S.                                  7.3%                          6.5%                              5.9%
Germany                               5.8%                          5.5%                              5.3%
Canada                                7.3%                          7.0%                              6.3%
Norway                                6.0%                          6.0%                              5.5%
Medite plan                             7.0%                          6.5%                              6.0%

The  assumed  long-rate  return on plan  assets  represents  the  estimated
average  rate of earnings  expected to be earned on the funds  invested or to be
invested in the plans' assets provided to fund the benefit payments  inherent in
the projected benefit  obligations.  Unlike the discount rate, which is adjusted
each year based on changes in current  long-term  interest  rates,  the  assumed
long-term rate of return on plan assets will not  necessarily  change based upon
the actual, short-term performance of the plan assets in any given year. Defined
benefit  pension  expense each year is based upon the assumed  long-term rate of
return on plan assets for each plan and the actual fair value of the plan assets
as of the beginning of the year. Differences between the expected return on plan
assets for a given year and the actual  return are deferred and  amortized  over
future periods based either upon the expected average  remaining service life of
the active  plan  participants  (for plans for which  benefits  are still  being
earned by active  employees)  or the average  remaining  life  expectancy of the
inactive  participants  (for plans for which benefits are not still being earned
by active employees).

At December 31, 2003,  approximately  91% of the plan assets for all of the
Company's  defined  benefit  pension plans related to plans  sponsored by NL and
Kronos, and the remainder related to the Medite plan. Of the amount attributable
to plans sponsored by NL and Kronos, approximately 18%, 48%, 10% and 18% related
to plan  assets for  Kronos'  plans in the U.S.,  Germany,  Canada  and  Norway,
respectively.  The Company uses several  different  long-term rates of return on
plan asset  assumptions in determining its consolidated  defined benefit pension
plan expense  because the Company  maintains  defined  benefit  pension plans in
several  different  countries  in North  America and Europe,  the plan assets in
different  countries  are  invested in a different  mix of  investments  and the
long-term  rates of return for  different  investments  differs  from country to
country.

In  determining  the  expected  long-term  rate of  return  on  plan  asset
assumptions,  the Company  considers  the long-term  asset mix (e.g.  equity vs.
fixed  income) for the assets for each of its plans and the  expected  long-term
rates of return for such asset  components.  In addition,  the Company  receives
advice  about   appropriate   long-term  rates  of  return  from  the  Company's
third-party actuaries. Such assumed asset mixes are summarized below:

o    During 2003,  the NL plan assets in the U.S.  were invested in the Combined
Master Retirement Trust ("CMRT"), a collective investment trust established
by Valhi to permit the collective investment by certain master trusts which
fund certain  employee  benefits plans  sponsored by Contran and certain of
its affiliates.  Harold Simmons is the sole trustee of the CMRT. The CMRT's
long-term  investment  objective is to provide a rate of return exceeding a
composite of broad market equity and fixed income  indices  (including  the
S&P 500 and certain Russell indices) utilizing both third-party  investment
managers as well as investments directed by Mr. Simmons. During the 16-year
history of the CMRT,  through  December 31, 2003 the average annual rate of
return has been  approximately  12.4%. Prior to 2003, NL's U.S. plan assets
were invested with a combination of equity and fixed income managers.
o    In  Germany,  the  composition  of Kronos'  plan assets is  established  to
satisfy the requirements of the German insurance commissioner.  The current
plan asset  allocation at December 31, 2003 was 25% to equity  managers and
75% to fixed income managers.
o    In Canada,  Kronos'  currently has a plan asset target allocation of 65% to
equity  managers  and  35% to  fixed  income  managers,  with  an  expected
long-term rate of return for such investments to average  approximately 125
basis points above the applicable equity or fixed income index. The current
plan asset  allocation at December 31, 2003 was 57% to equity  managers and
43% to fixed income managers.
o    In Norway,  Kronos'  currently has a plan asset target allocation of 14% to
equity  managers  and  86% to  fixed  income  managers,  with  an  expected
long-term rate of return for such  investments of  approximately 8% and 6%,
respectively.  The current plan asset  allocation  at December 31, 2003 was
15% to equity managers and 85% to fixed income managers.
o    In the U.S., the Medite plan assets are also invested in the CMRT.

The Company regularly reviews its actual asset allocation for each of its plans,
and will periodically  rebalance the investments in each plan to more accurately
reflect the targeted allocation when considered appropriate.

The assumed  long-term  rates of return on plan assets used for purposes of
determining net period pension cost for 2001, 2002 and 2003 were as follows:

2001                  2002                   2003
--------              --------               ------

Kronos and NL plans:

U.S.                                                    8.5%                  8.5%                  10.0%
Germany                                                 7.3%                  6.8%                   6.5%
Canada                                                  7.8%                  7.0%                   7.0%
Norway                                                  7.0%                  7.0%                   6.0%
Medite plan                                              10.0%                 10.0%                  10.0%

The Company currently expects to utilize the same long-term rates of return
on plan asset assumptions in 2004 as it used in 2003 for purposes of determining
the 2004 defined benefit pension plan expense.

To the extent that a plan's particular  pension benefit formula  calculates
the pension benefit in whole or in part based upon future  compensation  levels,
the projected benefit  obligations and the pension expense will be based in part
upon expected increases in future compensation  levels. For all of the Company's
plans for which the benefit  formula is so  calculated,  the  Company  generally
bases the assumed  expected  increase in future  compensation  levels based upon
average long-term inflation rates for the applicable country.

In addition to the actuarial  assumptions  discussed above,  because Kronos
maintains  defined  benefit  pension  plans  outside  the  U.S.,  the  amount of
recognized defined benefit pension expense and the amount of prepaid and accrued
pension costs will vary based upon relative changes in foreign currency exchange
rates.

Based on the  actuarial  assumptions  described  above and Kronos' and NL's
current  expectations  for what actual average foreign  currency  exchange rates
will be during  2004,  Kronos  and NL expect  their  aggregate  defined  benefit
pension expense will approximate $13 million in 2004. In comparison,  Kronos and
NL  expect  to be  required  to  make  approximately  $9  million  of  aggregate
contributions  to such plans during 2004. The expected amount of defined benefit
pension  expense  and  contributions  for  2004  for  the  Medite  plan  is  not
significant.

As noted above,  defined benefit pension expense and the amounts recognized
as prepaid and accrued  pension costs are based upon the  actuarial  assumptions
discussed above. The Company believes all of the actuarial  assumptions used are
reasonable and  appropriate.  If Kronos and NL had lowered the assumed  discount
rates by 25 basis points for all of their plans as of December  31, 2003,  their
aggregate  projected  benefit  obligations would have increased by approximately
$13 million at that date, and their  aggregate  defined  benefit pension expense
would  be  expected  to  increase  by  approximately  $2  million  during  2004.
Similarly,  if Kronos and NL lowered  the assumed  long-term  rates of return on
plan assets by 25 basis points for all of their  plans,  their  defined  benefit
pension expense would be expected to increase by  approximately  $700,000 during
2004.  Similar  assumed  changes with respect to the discount  rate and expected
long-term  rate of  return  on plan  assets  for the  Medite  plan  would not be
significant.

OPEB plans.  Certain  subsidiaries of the Company currently provide certain
health care and life insurance benefits for eligible retired employees. See Note
16 to the Consolidated Financial Statements. At December 31, 2003, approximately
65% of the Company's  aggregate accrued OPEB costs relate to NL and Kronos,  and
substantially all of the remainder relates to Tremont. Kronos provides such OPEB
benefits to retirees in Canada, and NL and Tremont provide such OPEB benefits to
retirees  in the U.S.  The Company  accounts  for such OPEB costs under SFAS No.
106, Employers Accounting for Postretirement Benefits other than Pensions. Under
SFAS No. 106, OPEB expense and accrued OPEB costs are based on certain actuarial
assumptions,  principally  the assumed  discount  rate and the  assumed  rate of
increases in future health care costs. The Company recognized  consolidated OPEB
expense of $254,000 in 2001,  $555,000 in 2002 and $935,000 in 2003.  Similar to
defined  benefit  pension  benefits,  the amount of funding will differ from the
expense recognized for financial  reporting  purposes,  and contributions to the
plans to cover benefit payments aggregated $1.8 million in 2001, $5.3 million in
2002 and $5.2 million in 2003.

The  assumed  discount  rates the Company  utilizes  for  determining  OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company  utilizes for its U.S. and Canadian  defined  benefit
pension plans.

In estimating  the health care cost trend rate,  the Company  considers its
actual health care cost experience,  future benefit structures,  industry trends
and advice from its third-party actuaries.  During each of the past three years,
the  Company has assumed  that the  relative  increase in health care costs will
generally  trend downward over the next several years,  reflecting,  among other
things,   assumed  increases  in  efficiency  in  the  health  care  system  and
industry-wide cost containment  initiatives.  For example, at December 31, 2003,
the  expected  rate of  increase in future  health care costs  ranges from 8% to
10.4% in 2004, declining to rates of between 4% and 5.5% in 2010 and thereafter.

Based  on the  actuarial  assumptions  described  above  and  NL's  current
expectation  for what actual  average  foreign  currency  exchange rates will be
during 2004, the Company expects its consolidated  OPEB expense will approximate
$1.5 million in 2004. In comparison,  the Company expects to be required to make
approximately $5.4 million of contributions to such plans during 2004.

As noted  above,  OPEB  expense and the amount  recognized  as accrued OPEB
costs are based upon the  actuarial  assumptions  discussed  above.  The Company
believes all of the actuarial  assumptions  used are reasonable and appropriate.
If the Company had lowered the assumed discount rates by 25 basis points for all
of its OPEB plans as of December 31, 2003,  the  Company's  aggregate  projected
benefit  obligations would have increased by approximately  $1.1 million at that
date,  and the Company's OPEB expense would be expected to increase by less than
$100,000  during 2004.  Similarly,  if the assumed future health care cost trend
rate had been  increased by 100 basis  points,  the Company's  accumulated  OPEB
obligations  would have increased by approximately  $2.8 million at December 31,
2003, and OPEB expense would have increased by $250,000 in 2004.

Foreign operations

Kronos. Kronos has substantial operations located outside the United States
(principally  Europe and  Canada) for which the  functional  currency is not the
U.S. dollar. As a result,  the reported amount of Kronos' assets and liabilities
related to its non-U.S. operations, and therefore the Company's consolidated net
assets,  will fluctuate  based upon changes in currency  exchange  rates.  As of
January 1, 2001,  the  functional  currency of NL's German,  Belgian,  Dutch and
French operations had been converted to the euro from their respective  national
currencies.  At December 31, 2003, Kronos had substantial net assets denominated
in the euro, Canadian dollar, Norwegian kroner and British pound sterling.

CompX.  CompX has  substantial  operations and assets  located  outside the
United States,  principally slide and/or ergonomic product operations in Canada,
the  Netherlands and Taiwan.  As of January 1, 2001, the functional  currency of
CompX's Thomas Regout  operations in The  Netherlands  had been converted to the
euro from its national currency (Dutch guilders).

TIMET. TIMET also has substantial  operations and assets located in Europe,
principally in the United Kingdom,  France and Italy. The United Kingdom has not
adopted the euro. Approximately 64% of TIMET's European sales are denominated in
currencies  other than the U.S.  dollar,  principally  the British pound and the
euro.  Certain  purchases  of raw  materials  for TIMET's  European  operations,
principally  titanium sponge and alloys,  are denominated in U.S.  dollars while
labor and other production costs are primarily  denominated in local currencies.
The U.S.  dollar value of TIMET's  foreign sales and operating costs are subject
to currency exchange rate fluctuations that can impact reported earnings.

LIQUIDITY AND CAPITAL RESOURCES

Summary

The Company's  primary  source of liquidity on an ongoing basis is its cash
flows from  operating  activities,  which is generally  used to (i) fund capital
expenditures,  (ii) repay short-term indebtedness incurred primarily for working
capital  purposes  and (iii)  provide  for the payment of  dividends  (including
dividends paid to Valhi by its subsidiaries). In addition, from time-to-time the
Company  will  incur  indebtedness,  generally  to (i) fund  short-term  working
capital needs, (ii) refinance existing  indebtedness,  (iii) make investments in
marketable and other securities  (including the acquisition of securities issued
by  subsidiaries  and  affiliates  of the  Company) or (iii) fund major  capital
expenditures  or the  acquisition of other assets outside the ordinary course of
business.  Also,  the Company  will from  time-to-time  sell assets  outside the
ordinary  course of business,  the proceeds of which are  generally  used to (i)
repay  existing  indebtedness   (including  indebtedness  which  may  have  been
collateralized  by the assets sold),  (ii) make  investments  in marketable  and
other  securities,  (iii) fund major capital  expenditures or the acquisition of
other assets outside the ordinary course of business or (iv) pay dividends.

At December 31, 2003,  the Company's  third-party  indebtedness  aggregated
$638  million,  of which 99% has a  maturity  date on or after  January 1, 2005.
Accordingly,  the Company does not currently expect that a significant amount of
its cash flows from operating  activities  generated in 2004 will be required to
be used to repay indebtedness.

Consolidated cash flows

Operating  activities.  Trends  in cash  flows  from  operating  activities
(excluding the impact of significant asset  dispositions and relative changes in
assets  and  liabilities)  are  generally  similar  to trends  in the  Company's
earnings. However, certain items included in the determination of net income are
non-cash,  and therefore  such items have no impact on cash flows from operating
activities.  Non-cash items included in the  determination of net income include
depreciation  and  amortization  expense,   non-cash  interest  expense,   asset
impairment  charges and  unrealized  securities  transactions  gains and losses.
Non-cash  interest  expense relates  principally to Valhi and NL and consists of
amortization of original issue discount on certain indebtedness and amortization
of deferred  financing  costs.  In addition,  substantially  all of the proceeds
resulting from NL's legal  settlements in 2001 are shown as restricted cash, and
therefore  such   settlements  had  no  impact  on  cash  flows  from  operating
activities.

Certain other items included in the determination of net income may have an
impact on cash flows from operating activities,  but the impact of such items on
cash  flows from  operating  activities  will  differ  from their  impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates,  and equity in losses
of affiliates does not  necessarily  result in current cash outlays paid to such
affiliates.  The amount of periodic  defined  benefit  pension  plan expense and
periodic  OPEB  expense  depends  upon a number of  factors,  including  certain
actuarial assumptions,  and changes in such actuarial assumptions will result in
a change in the  reported  expense.  In  addition,  the amount of such  periodic
expense  generally  differs from the  outflows of cash  required to be currently
paid  for  such  benefits.  Also,  proceeds  from  the  disposal  of  marketable
securities  classified as trading securities are reported as a component of cash
flows from operating  activities,  and such proceeds will generally  differ from
the amount of the related gain or loss on disposal.

Certain  other items  included in the  determination  of net income have no
impact on cash flows from  operating  activities,  but such items do impact cash
flows  from  investing  activities  (although  their  impact on such cash  flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of  available-for-sale  marketable  securities  and long-lived
assets are included in the  determination  of net income,  although the proceeds
from  any  such  disposal  are  shown  as  part  of cash  flows  from  investing
activities.  Similarly,  NL's  insurance  gain in 2001  related to the  property
destroyed by fire at its Leverkusen facility is included in the determination of
net income,  but the proceeds  received from the insurance  company for property
damage reimbursements are also shown as cash flows from investing activities.

Changes in product pricing,  production volumes and customer demand,  among
other things, could significantly affect the liquidity of the Company.  Relative
changes  in  assets  and  liabilities   generally  result  from  the  timing  of
production,  sales, purchases and income tax payments. Such relative changes can
significantly  impact the comparability of cash flow from operations from period
to period, as the income statement impact of such items may occur in a different
period from when the  underlying  cash  transaction  occurs.  For  example,  raw
materials may be purchased in one period, but the payment for such raw materials
may  occur  in a  subsequent  period.  Similarly,  inventory  may be sold in one
period,  but the cash  collection  of the  receivable  may occur in a subsequent
period.

Cash flows from operating  activities increased from $106.8 million in 2002
to $108.5 million in 2003.  This $1.7 million  increase was due primarily to the
net effect of (i) higher net income of $38.2 million,  (ii) higher  depreciation
expense of $11.2  million,  (iii) lower proceeds from the disposal of marketable
securities (trading) of $18.1 million, (iv) higher gains on disposal of property
and equipment of $9.9 million,  (v) higher minority interest in earnings of $7.0
million,  (vi) lower distributions from NL's TiO2 manufacturing joint venture of
$7.1 million,  (vii) lower equity in losses of TIMET of $34.9 million,  (viii) a
higher  amount of net cash used to fund  changes in the  Company's  inventories,
receivables,  payables,  accruals and accounts with affiliates of $31.7 million,
(ix) lower cash paid for income taxes of $19.0  million and (x) a higher  amount
of net cash  provided to fund relative  changes in other assets and  liabilities
(primarily  noncurrent accruals) of $31.0 million.  Relative changes in accounts
receivable  are  affected by,  among other  things,  the timing of sales and the
collection  of  the  resulting  receivable.  Relative  changes  in  inventories,
accounts  payable and accrued  liabilities  are affected by, among other things,
the timing of raw material  purchases and the payment for such purchases and the
relative  difference  between  production  volumes and sales  volumes.  Relative
changes in accrued  environmental costs are affected by, among other things, the
period in which recognition of the  environmental  accrual is recognized and the
period in which the remediation expenditure is actually made.

Cash flows from operating  activities decreased from $158.6 million in 2001
to $106.8 million in 2002. This $51.8 million  decrease was due primarily to the
net effect of (i) lower net  income of $92.0  million,  (ii) lower  depreciation
expense  (primarily due to ceasing to periodically  amortize  goodwill) of $12.7
million, (iii) lower legal settlement gains of $10.3 million and lower insurance
gains of $16.2 million,  (iv) lower net securities  transactions  gains of $40.6
million,  (v)  higher  proceeds  from  the  disposal  of  marketable  securities
(trading)  of $18.1  million,  (vi) lower  deferred  income tax expense of $17.4
million,  (vii) lower  minority  interest in earnings of $22.4  million,  (viii)
lower  distributions from NL's TiO2 manufacturing joint venture of $3.4 million,
(ix) higher  equity in losses of TIMET of $23.7  million and (x) a higher amount
of net cash used to fund  changes  in the  Company's  inventories,  receivables,
payables,  accruals and  accounts  with  affiliates  of $6.0  million.  Relative
changes in accounts  receivable are affected by, among other things,  the timing
of sales and the  collection of the resulting  receivable.  Relative  changes in
inventories,  accounts  payable and accrued  liabilities  are affected by, among
other  things,  the timing of raw  material  purchases  and the payment for such
purchases  and the  relative  difference  between  production  volume  and sales
volume.  Relative changes in accrued  environmental costs are affected by, among
other things,  the period in which recognition of the  environmental  accrual is
recognized and the period in which the remediation expenditure is actually made.

Valhi does not have complete  access to the cash flows of its  subsidiaries
and  affiliates,  in  part  due  to  limitations  contained  in  certain  credit
agreements as well as the fact that such  subsidiaries  and  affiliates  are not
100% owned by Valhi. A detail of Valhi's  consolidated cash flows from operating
activities is presented in the table below. Eliminations consist of intercompany
dividends (most of which are paid to Valhi Parent).

Years ended December 31,
2001            2002            2003
----            ----            ----
(In millions)

Cash provided (used) by operating activities:

NL/Kronos                                                              $130.5          $  98.3         $ 90.5
CompX                                                                    27.7             16.9           24.4
Waste Control Specialists                                                12.1             (5.7)          (6.6)
Tremont                                                                   3.6             24.6            7.2
Valhi Parent                                                             42.0            113.3           30.6
Other                                                                     5.3              4.0           (2.7)
Eliminations                                                            (62.6)          (144.6)         (34.9)
------          -------         ------ 

$158.6          $ 106.8         $108.5
======          =======         ======

Investing  activities.  Capital  expenditures  are  disclosed  by  business
segment in Note 2 to the Consolidated Financial Statements.

At December 31, 2003,  the estimated cost to complete  capital  projects in
process  approximated  $11 million,  of which $9.6 million  relates to NL's Ti02
facilities and the remainder  relates to CompX's  facilities.  Aggregate capital
expenditures  for 2004 are expected to approximate  $63 million ($38 million for
NL,  $13  million  for CompX and $12  million  for Waste  Control  Specialists).
Capital  expenditures  in  2004  are  expected  to be  financed  primarily  from
operations or existing cash resources and credit facilities.

During 2003,  (i) Valhi  purchased  shares of Kronos common stock in market
transactions  in December  2003 for $6.4  million,  (ii) the  Company  purchased
additional shares of TIMET common stock for $976,000,  and the Company purchased
a  nominal  number of shares of  convertible  preferred  securities  issued by a
wholly-owned  subsidiary of TIMET for $238,000 and (iii) NL collected $4 million
of its  loan to one of the  Contran  family  trusts  described  in Note 1 to the
Consolidated   Financial   Statements.   In  addition,   the  Company  generated
approximately  $13.5 million from the sale of property and equipment,  including
the real property of NL discussed above.

During 2002,  (i) NL purchased  $21.3 million of its common stock in market
transactions,  (ii) NL purchased the EWI insurance brokerage services operations
for $9 million and (iii) one of the Contran family trusts described in Note 1 to
the Consolidated  Financial  Statements  repaid $2 million of its loan from EMS.
See Notes 3 and 17 to the Consolidated Financial Statements.

During 2001, NL and CompX each purchased shares of their respective  common
stocks  in  market  transactions  for an  aggregate  of $15.5  million  and $2.6
million,  respectively,  and Valhi  purchased  shares of Tremont common stock in
market transactions for an aggregate of $198,000. In addition,  (i) EMS loaned a
net $20 million to one of the Contran  family trusts  discussed in Note 1 to the
Consolidated  Financial Statements,  (ii) NL received $23.4 million of insurance
recoveries for property damage and clean-up costs associated with the Leverkusen
fire,  (iii) Valhi sold  390,000  shares of  Halliburton  common stock in market
transactions for aggregate proceeds of $16.8 million and (iv) CompX received $10
million of proceeds from the sale/leaseback of its manufacturing facility in The
Netherlands.

Financing  activities.  During  2003,  (i) Valhi  borrowed a net $5 million
under its  revolving  bank credit  facility and repaid a net $3.8 million of its
short-term  demand loans from Contran,  (ii) CompX repaid a net $5 million under
its  revolving  bank credit  facility and (iii) Kronos  borrowed an aggregate of
euro 15 million  ($16 million when  borrowed) of  borrowings  under its European
revolving  bank credit  facility and repaid  kroner 80 million ($11 million) and
euro 30 million ($34 million) under such facility. In addition,  Valhi paid cash
dividends  of $.06 per share per quarter,  or an aggregate of $29.8  million for
2003.  Distributions to minority interest in 2003 are primarily  comprised of NL
cash dividends paid to NL shareholders other than Valhi and Tremont.  Other cash
flows from financing  activities  relate  primarily to proceeds from the sale of
Valhi and NL common stock upon exercise of stock options.

During 2002,  (i) Valhi repaid a net $35 million under its  revolving  bank
credit  facility and repaid a net $13.4 million of its  short-term  demand loans
from Contran,  (ii) CompX repaid a net $18 million of its revolving  bank credit
facility,  (iii)  NL  repaid  all  of  its  existing  short-term  notes  payable
denominated  in euros and  Norwegian  kroner ($53  million  when  repaid)  using
primarily  proceeds from borrowings ($39 million) under KII's new revolving bank
credit  facility,  (iv) NL redeemed $194 million  principal amount of its Senior
Secured Notes,  primarily using the proceeds from the new euro 285 million ($280
million when issued)  borrowing of KII and (v) NL repaid an aggregate of euro 14
million  ($14  million when repaid) of  borrowings  under KII's  revolving  bank
credit  facility.  In addition,  Valhi  redeemed  the  remaining  $43.1  million
principal  amount at  maturity  of its LYONs  debt  obligations  ($27.4  million
accreted  value)  for  cash.  Valhi  paid cash  dividends  of $.06 per share per
quarter,  or an aggregate of $27.9 million for 2002.  Distributions  to minority
interest in 2002 are  attributable to NL ($24.8  million),  CompX ($2.4 million)
and  Tremont  ($647,000).  Other  cash flows from  financing  activities  relate
primarily to proceeds  from the sale of Valhi and NL common stock upon  exercise
of stock options.

During 2001, (i) Valhi borrowed a net $4.0 million under its revolving bank
credit facility and borrowed a net $16.6 million under  short-term  demand loans
from Contran,  (ii) CompX  borrowed a net $10 million  under its revolving  bank
credit  facility and (iii) NL repaid euro 24 million ($21.4 million when repaid)
of its  short-term  non-U.S.  notes  payable.  In addition,  (i) a  wholly-owned
subsidiary of Valhi purchased Waste Control Specialists' bank term loan from the
lender at par value,  (ii) $142.6 million  principal  amount at maturity  ($79.9
million  accreted value) of Valhi's LYONs debt  obligations  were retired either
through  exchanges or  redemptions  and (iii) EMS entered  into a $13.4  million
reducing revolving  intercompany  credit facility with Tremont,  the proceeds of
which were used to repay  Tremont's loan from Contran.  In addition,  Valhi paid
cash  dividends of $.06 per share per quarter,  or an aggregate of $27.8 million
for 2001.  Distributions  to minority  interest in 2001 are  attributable  to NL
($7.5 million),  CompX ($2.4 million) and Tremont  ($647,000).  Other cash flows
from financing  activities  relate  primarily to proceeds from the sale of Valhi
and NL common stock upon exercise of stock options.

At December  31,  2003,  unused  credit  available  under  existing  credit
facilities  approximated  $239.3  million,  which was comprised of $21.5 million
available  to CompX  under its new  revolving  credit  facility,  $99.9  million
available to Kronos under non-U.S. credit facilities, $39.0 million available to
Kronos under its U.S. credit facility and $78.9 million available to Valhi under
its  revolving  bank credit  facility.  In  addition,  in January  2004  Kronos'
Canadian  subsidiary  entered  into a new  Cdn.  $30  million  revolving  credit
facility,  of which no amounts were borrowed when the facility was entered into.
See Note 10 to the Consolidated Financial Statements.

Provisions  contained in certain of the Company's  credit  agreements could
result in the  acceleration of the applicable  indebtedness  prior to its stated
maturity  for reasons  other than  defaults  from failing to comply with typical
financial covenants.  For example, certain credit agreements allow the lender to
accelerate  the  maturity  of the  indebtedness  upon a change  of  control  (as
defined) of the borrower.  The terms of Valhi's  revolving bank credit  facility
could require Valhi to either reduce outstanding borrowings or pledge additional
collateral in the event the fair value of the existing pledged  collateral falls
below specified levels.  In addition,  certain credit agreements could result in
the  acceleration  of all or a portion of the  indebtedness  following a sale of
assets outside the ordinary course of business.  See Note 10 to the Consolidated
Financial  Statements.  Other than operating  leases discussed in Note 18 to the
Consolidated Financial Statements,  neither Valhi nor any of its subsidiaries or
affiliates are parties to any off-balance sheet financing arrangements.

Chemicals - Kronos

At December 31, 2003,  Kronos had cash and cash equivalents of $57 million,
including  restricted balances of $1 million,  and Kronos had approximately $139
million available for borrowing under its U.S. and non-U.S.  credit  facilities.
In addition,  in January 2004,  Kronos' Canadian  subsidiary  entered into a new
revolving credit facility. See Note 10 to the Consolidated Financial Statements.

At December 31 2003,  Kronos'  outstanding  debt was  comprised of (i) $356
million related to KII's Senior Secured Notes and (ii) approximately $600,000 of
other  indebtedness.  In  addition,  Kronos had a $200  million  long-term  note
payable to NL, as  discussed  below.  Kronos' $200 million note payable to NL at
December 31, 2003, which is eliminated in the Company's  consolidated  financial
statements.  At  December  31,  2003,  Kronos had  complied  with all  financial
covenants governing its debt agreements. Based upon Kronos' expectations for the
TiO2  industry and  anticipated  demands on Kronos' cash  resources as discussed
herein,  Kronos  expects  to have  sufficient  liquidity  to meet its  near-term
obligations including operations, capital expenditures, debt service and current
dividends  policy.  To the extent that actual  developments  differ from Kronos'
expectations, Kronos' liquidity could be adversely affected.

Pricing  within the TiO2  industry  is  cyclical,  and  changes in industry
economic  conditions  significantly  impact Kronos'  earnings and operating cash
flows.  Cash flow from  operations is considered the primary source of liquidity
for Kronos.  Changes in TiO2  pricing,  production  volume and customer  demand,
among other things, could significantly affect the liquidity of Kronos.

Kronos' capital  expenditures during the past three years aggregated $121.5
million,  including  $15.4 million  ($5.4  million in 2003) for Kronos'  ongoing
environmental  protection and compliance  programs and $25.4 million  (mostly in
2001) related to reconstruction of the Leverkusen  facility destroyed by fire in
March  2001.  Kronos'  estimated  2004  capital  expenditures  are $38  million,
including $5 million in the area of environmental protection and compliance. The
capital expenditures of the TiO2 manufacturing joint venture are not included in
Kronos' capital expenditures.

See Note 15 to the Consolidated Financial Statements for certain income tax
examinations  currently  underway with respect to certain of Kronos'  income tax
returns in  various  U.S.  and  non-U.S.  jurisdictions,  and see Note 18 to the
Consolidated  Financial Statements with respect to certain legal proceedings and
environmental matters with respect to Kronos.

At December 31, 2003,  Kronos had recorded net deferred tax  liabilities of
$114 million. Kronos operates in numerous tax jurisdictions, in certain of which
it has temporary  differences that net to deferred tax assets (before  valuation
allowance).  Kronos has  provided a deferred tax  valuation  allowance of $162.7
million  at  December  31,  2003,  principally  related  to  Germany,  partially
offsetting  deferred tax assets which Kronos  believes do not currently meet the
"more-likely-than-not"  recognition criteria.  Kronos periodically evaluates the
"more-likely-than-not"  recognition  criteria  with  respect  to such  tax  loss
carryforwards,  and it is possible  that in the future  Kronos may conclude such
carryforwards  do meet the  recognition  criteria,  at which time  Kronos  would
reverse all or a portion of such deferred tax valuation allowance.

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

As discussed in "Results of Operations - Chemicals," Kronos has substantial
operations  located outside the United States for which the functional  currency
is not the U.S. dollar. As a result,  the reported amounts of Kronos' assets and
liabilities  related to its non-U.S.  operations,  and therefore Kronos' and the
Company's consolidated net assets, will fluctuate based upon changes in currency
exchange rates.

NL Industries

At December 31, 2003, NL (exclusive of Kronos) had cash,  cash  equivalents
and marketable debt securities of $40 million,  including restricted balances of
$28 million.  NL also has a $200 million  long-term note  receivable from Kronos
due in  2010,  which  is  eliminated  in the  Company's  consolidated  financial
statements.

See Note 15 to the Consolidated Financial Statements for certain income tax
examinations  currently  underway  with  respect to  certain of NL's  income tax
returns,  and see Note 18 to the Consolidated  Financial Statements with respect
to certain legal proceedings and environmental matters with respect to NL.

At December  31, 2003,  NL had $24 million in cash,  cash  equivalents  and
marketable debt  securities held by special purpose trusts,  the assets of which
can only be used to pay for certain of NL's future environmental remediation and
other  environmental  expenditures.  See  Notes  1 and  12 to  the  Consolidated
Financial Statements.

In  addition  to  those  legal  proceedings  described  in  Note  18 to the
Consolidated  Financial  Statements,   various  legislation  and  administrative
regulations  have,  from time to time,  been  proposed  that seek to (i)  impose
various  obligations  on present and former  manufacturers  of lead  pigment and
lead-based  paint with respect to asserted health  concerns  associated with the
use of such products and (ii)  effectively  overturn court decisions in which NL
and other pigment manufacturers have been successful.  Examples of such proposed
legislation  include bills which would permit civil liability for damages on the
basis of market  share,  rather  than  requiring  plaintiffs  to prove  that the
defendant's  product  caused the alleged  damage,  and bills which would  revive
actions  barred  by  the  statute  of  limitations.   While  no  legislation  or
regulations  have been  enacted  to date that are  expected  to have a  material
adverse effect on NL's consolidated financial position, results of operations or
liquidity,  imposition of market share liability or other legislation could have
such an effect.

In December 2003, NL completed the distribution of  approximately  48.8% of
Kronos' outstanding common stock to its shareholders under which NL shareholders
received  one share of  Kronos'  common  stock for every two shares of NL common
stock  held.  Approximately  23.9  million  shares of Kronos  common  stock were
distributed.  Immediately  prior to the  distribution of shares of Kronos common
stock,  Kronos  distributed a $200 million  promissory note payable by Kronos to
NL. See Note 3 to the Consolidated Financial Statements.

At December 31, 2003,  NL  (exclusive  of Kronos) had recorded net deferred
tax  liabilities  of $70  million.  NL has  provided  a deferred  tax  valuation
allowance of $31.1 million at December 31, 2003,  partially  offsetting deferred
tax assets which NL believes do not  currently  meet the  "more-likely-than-not"
recognition  criteria.  NL  periodically  evaluates  the  "more-likely-than-not"
recognition  criteria  with  respect  to such  deferred  tax  assets,  and it is
possible that in the future NL may conclude such deferred tax assets do meet the
recognition  criteria,  at which time NL would  reverse all or a portion of such
deferred tax valuation allowance.

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

Component products - CompX International

CompX's capital  expenditures  during the past three years aggregated $34.9
million.  Such  capital  expenditures  included  manufacturing   equipment  that
emphasizes improved production efficiency and increased production capacity.

CompX  believes that its cash on hand,  together with cash  generated  from
operations and borrowing  availability under its new bank credit facility,  will
be  sufficient  to meet CompX's  liquidity  needs for working  capital,  capital
expenditures and debt service  requirements for the foreseeable  future.  To the
extent that CompX's actual operating results or developments differ from CompX's
expectations, CompX's liquidity could be adversely affected. CompX suspended its
regular quarterly dividend of $.125 per share in the second quarter of 2003.

CompX periodically evaluates its liquidity  requirements,  alternative uses
of  capital,  capital  needs and  available  resources  in view of,  among other
things,  its capital  expenditure  requirements,  dividend  policy and estimated
future operating cash flows. As a result of this process,  CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness,   issue  additional   securities,   modify  its  dividend  policy,
repurchase  shares of its common  stock or take a  combination  of such steps or
other steps to manage its liquidity and capital resources.  In the normal course
of business,  CompX may review  opportunities  for  acquisitions,  divestitures,
joint  ventures  or  other  business  combinations  in  the  component  products
industry.  In the event of any such  transaction,  CompX may consider  using its
then-available  cash,  issuing  additional  equity  securities or increasing the
indebtedness of CompX or its subsidiaries.

Waste management - Waste Control Specialists

Waste Control Specialists capital  expenditures during the past three years
aggregated $4.7 million.  Such capital  expenditures  were funded primarily from
certain debt financing provided to Waste Control Specialists by Valhi.

At December 31, 2003,  Waste Control  Specialists'  indebtedness  consisted
principally of $30.9 million of borrowings owed to a wholly-owned  subsidiary of
Valhi, all of which matures in March 2005 (2002 - $23.2 million). The additional
borrowings during 2003 were used by Waste Control Specialists  primarily to fund
its operating loss and its capital expenditures. Such indebtedness is eliminated
in the Company's  consolidated  financial statements.  Waste Control Specialists
will likely borrow  additional  amounts  during 2004 under its revolving  credit
facility with such Valhi subsidiary.

TIMET

At December  31, 2003,  TIMET had $142  million of  borrowing  availability
under its various U.S. and European credit  agreements.  TIMET presently expects
to generate $25 million to $35 million in cash flow from operations during 2004,
driven in part by the continued  deferral of  distributions  on the  convertible
preferred  securities,  as discussed  below.  TIMET received the 2004 advance of
$27.9 million from Boeing in January 2004.

TIMET has a U.S.  asset-based  revolving credit agreement that provides for
borrowings  up to the lesser of $105 million or a  formula-determined  borrowing
base  derived from the value of TIMET's  accounts  receivable,  inventories  and
equipment. This facility requires TIMET's U.S. daily cash receipts to be used to
reduce  outstanding  borrowings,  which may then be  reborrowed,  subject to the
terms of the agreement.  Borrowings are  collateralized  by substantially all of
TIMET's U.S. assets. The credit agreement  prohibits the payment of dividends on
the  convertible  preferred  securities  issued by a wholly-owned  subsidiary of
TIMET if excess  availability,  as  defined,  is less than $25  million,  limits
additional  indebtedness,  prohibits the payment of dividends on TIMET's  common
stock if excess availability is less than $40 million,  requires compliance with
certain  financial  covenants and contains other covenants  customary in lending
transactions of this type.  Excess  availability is defined as unused  borrowing
availability less certain contractual  commitments such as letters of credit. As
of December 31, 2003, excess availability was approximately $82 million.

TIMET's U.S.  credit  agreement  allows the lender to modify the  borrowing
base formulas at its  discretion,  subject to certain  conditions.  During 2002,
TIMET's  lender  elected  to  exercise  such  discretion  and  modified  TIMET's
borrowing  base  formulas,  which  reduced the amount  that TIMET  could  borrow
against its inventories and equipment by approximately $7 million.  In the event
the lender  exercises  such  discretion  in the future,  such event could have a
material adverse impact on TIMET's liquidity.

TIMET's United Kingdom subsidiary also has a credit agreement that provides
for  borrowings  limited  to the  lesser of pound  sterling  22.5  million  or a
formula-determined borrowing base derived from the value of accounts receivable,
inventories  and  equipment.   As  of  December  31,  2003,   unused   borrowing
availability was approximately $40 million.

TIMET also has  overdraft  and other  credit  facilities  at certain of its
other European  subsidiaries.  These facilities accrue interest at various rates
and are payable on demand. Unused borrowing availability as of December 31, 2003
under these facilities was approximately $20 million.

TIMET's capital  expenditures  during the past three years aggregated $36.4
million.  TIMET's capital  expenditures during 2004 are currently expected to be
about $16 million.

See Note 18 to the  Consolidated  Financial  Statements  for certain  legal
proceedings,  environmental  matters  and other  contingencies  associated  with
TIMET.  While  TIMET  currently  believes  that the  outcome  of these  matters,
individually  and in the aggregate,  will not have a material  adverse effect on
TIMET's consolidated financial position,  liquidity or overall trends in results
of operations,  all such matters are subject to inherent uncertainties.  Were an
unfavorable  outcome to occur in any given period,  it is possible that it could
have a material adverse impact on TIMET's  consolidated results of operations or
cash flows in a particular period.

At  December  31,  2003,  a  wholly-owned  subsidiary  of TIMET had  issued
4,024,820 shares  outstanding of its 6.625%  convertible  preferred  securities,
representing  an aggregate  $201.2 million  liquidation  amount,  that mature in
2026.  Each  security  is  convertible  into shares of TIMET  common  stock at a
conversion rate of .1339 shares of TIMET common stock per convertible  preferred
security.  Such  convertible  preferred  securities  do  not  require  principal
amortization,  and TIMET has the right to defer distributions on the convertible
preferred securities for one or more quarters of up to 20 consecutive  quarters,
provided that such deferral  period may not extend past the 2026 maturity  date.
TIMET is prohibited  from,  among other things,  paying dividends or reacquiring
its capital  stock while  distributions  are being  deferred on the  convertible
preferred  securities.  In October 2002,  TIMET elected to exercise its right to
defer future distributions on its convertible  preferred securities for a period
of up to 20 consecutive  quarters.  Distributions will continue to accrue at the
coupon rate on the liquidation  amount and unpaid  distributions.  This deferral
was effective  starting with TIMET's December 1, 2002 scheduled  payment.  TIMET
will consider  resuming payment of  distributions  on the convertible  preferred
securities once the outlook for TIMET's business improves substantially.

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

Tremont LLC

See Note 18 to the  Consolidated  Financial  Statements  for certain  legal
proceedings and environmental matters with respect to Tremont.

In October  2002,  Tremont  entered  into a $15  million  revolving  credit
facility with NL,  collateralized  by 10.2 million shares of NL common stock and
5.1 million  shares of Kronos  common stock owned by Tremont.  The new facility,
which matures in December 2004, is eliminated in Valhi's consolidated  financial
statements.  At December 31, 2003, no amounts were  outstanding  under Tremont's
loan facility  with NL and $15 million was  available to Tremont for  additional
borrowings.

General corporate - Valhi

Because Valhi's operations are conducted primarily through its subsidiaries
and  affiliates,  Valhi's  long-term  ability to meet its parent  company  level
corporate  obligations is dependent in large measure on the receipt of dividends
or other  distributions from its subsidiaries and affiliates.  In February 2004,
Kronos announced it would pay its first regular  quarterly cash dividend of $.25
per share.  At that rate,  and based on the 20.5  million  shares of Kronos held
directly or indirectly by Valhi at December 31, 2003 (including 5.1 million held
by Tremont LLC, a  wholly-owned  subsidiary of Valhi),  Valhi would  directly or
indirectly receive aggregate annual dividends from Kronos of $20.5 million.  NL,
which paid regular quarterly cash dividends of $.20 per share in 2003, announced
in February  2004 that it would pay its first  quarter  2004  regular  quarterly
dividend of $.20 per share in the form of shares of Kronos common  stock.  CompX
suspended its regular quarterly dividend in the second quarter of 2003, TIMET is
currently  prohibited  from  paying  dividends  on its  common  stock due to its
election to defer  payment of interest on its  convertible  securities,  and the
Company  does not  currently  expect to  receive  any  distributions  from Waste
Control Specialists during 2004.

Various credit  agreements to which certain  subsidiaries or affiliates are
parties contain customary  limitations on the payment of dividends,  typically a
percentage of net income or cash flow;  however,  such  restrictions in the past
have not  significantly  impacted  Valhi's ability to service its parent company
level obligations. Valhi has not guaranteed any indebtedness of its subsidiaries
or affiliates.  To the extent that one or more of Valhi's  subsidiaries  were to
become  unable  to  maintain  its  current  level of  dividends,  either  due to
restrictions  contained in the  applicable  subsidiary's  credit  agreements  or
otherwise,  Valhi parent company's liquidity could become adversely impacted. In
such an event,  Valhi might  consider  reducing or  eliminating  its dividend or
selling interests in subsidiaries or other assets.

At December 31, 2003,  Valhi had $5.4 million of parent level cash and cash
equivalents,  had  $5  million  outstanding  under  its  revolving  bank  credit
agreement and had $7.3 million of short-term demand loans payable to Contran. In
addition,  Valhi had  $78.9  million  of  borrowing  availability  under its $85
million revolving bank credit facility.

The terms of The Amalgamated  Sugar Company LLC Company  Agreement  provide
for annual "base level" of cash dividend distributions (sometimes referred to as
distributable  cash) by the LLC of $26.7  million,  from  which the  Company  is
entitled to a 95% preferential share.  Distributions from the LLC are dependent,
in  part,  upon  the  operations  of  the  LLC.  The  Company  records  dividend
distributions  from the LLC as income  upon  receipt,  which  occurs in the same
month  in  which  they  are  declared  by the  LLC.  To  the  extent  the  LLC's
distributable  cash is below this base level in any given  year,  the Company is
entitled  to an  additional  95%  preferential  share of any  future  annual LLC
distributable  cash  in  excess  of the  base  level  until  such  shortfall  is
recovered.  Based on the LLC's current  projections  for 2004,  Valhi  currently
expects that  distributions  received from the LLC in 2004 will  approximate its
debt service  requirements  under its $250 million  loans from Snake River Sugar
Company.

Certain covenants  contained in Snake River's third-party senior debt allow
Snake River to pay periodic installments of debt service payments (principal and
interest)  under  Valhi's $80  million  loan to Snake River prior to its current
scheduled  maturity  in 2007,  and such loan is  subordinated  to Snake  River's
third-party  senior debt. At December 31, 2003, the accrued and unpaid  interest
on the  $80  million  loan  to  Snake  River  aggregated  $33.1  million  and is
classified  as a  noncurrent  asset.  The  Company  currently  believes  it will
ultimately  realize  both the $80 million  principal  amount and the accrued and
unpaid  interest,  whether through cash generated from the future  operations of
Snake River and the LLC or otherwise  (including any  liquidation of Snake River
or the LLC).  Following  the  currently  scheduled  complete  repayment of Snake
River's  third-party  senior debt in April 2007,  Valhi believes it will receive
significant  debt service  payments on its loan to Snake River as the cash flows
that Snake River  previously  would have been using to fund debt  service on its
third-party senior debt ($10.9 million in 2004) would then become available, and
would be  required,  to be used to fund debt  service  payments on its loan from
Valhi.  Prior to the repayment of the third-party senior debt, Snake River might
also make debt  service  payments  to Valhi,  if  permitted  by the terms of the
senior debt.

The Company  may, at its  option,  require the LLC to redeem the  Company's
interest in the LLC  beginning in 2010,  and the LLC has the right to redeem the
Company's  interest  in the LLC  beginning  in  2027.  The  redemption  price is
generally $250 million plus the amount of certain undistributed income allocable
to the  Company.  In the  event  the  Company  requires  the LLC to  redeem  the
Company's  interest  in the LLC,  Snake  River has the right to  accelerate  the
maturity of and call Valhi's $250 million loans from Snake River.  Redemption of
the Company's  interest in the LLC would result in the Company  reporting income
related to the disposition of its LLC interest for both financial  reporting and
income tax purposes.  However, because of Snake River's ability to call its $250
million loans to Valhi upon redemption of the Company's interest in the LLC, the
net cash proceeds  (after  repayment of the debt) generated by redemption of the
Company's  interest  in the LLC could be less than the  income  taxes that would
become payable as a result of the disposition.

The Company routinely  compares its liquidity  requirements and alternative
uses of capital against the estimated  future cash flows to be received from its
subsidiaries,  and the estimated sales value of those units. As a result of this
process,  the  Company  has in the  past  and may in the  future  seek to  raise
additional   capital,   refinance  or   restructure   indebtedness,   repurchase
indebtedness in the market or otherwise,  modify its dividend policies, consider
the sale of interests in subsidiaries,  affiliates,  business units,  marketable
securities or other assets,  or take a combination of such steps or other steps,
to increase  liquidity,  reduce  indebtedness and fund future  activities.  Such
activities have in the past and may in the future involve related companies.

The  Company  and  related  entities  routinely  evaluate  acquisitions  of
interests in, or combinations  with,  companies,  including  related  companies,
perceived by management to be undervalued in the  marketplace.  These  companies
may or may  not be  engaged  in  businesses  related  to the  Company's  current
businesses.  The Company intends to consider such acquisition  activities in the
future and, in connection with this activity,  may consider  issuing  additional
equity   securities  and  increasing  the  indebtedness  of  the  Company,   its
subsidiaries and related  companies.  From time to time, the Company and related
entities  also evaluate the  restructuring  of ownership  interests  among their
respective subsidiaries and related companies.

Non-GAAP financial measures

In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain  non-GAAP   information  which  the  Company  believes  provides  useful
information to investors:

o    The Company  discloses  percentage  changes in Kronos' average TiO2 selling
prices in  billing  currencies,  which  excludes  the  effects  of  foreign
currency  translation.  The Company believes  disclosure of such percentage
changes  allows  investors to analyze  such  changes  without the impact of
changes  in  foreign   currency   exchange  rates,   thereby   facilitating
period-to-period  comparisons  of the relative  changes in average  selling
prices in the actual various billing currencies.  Generally,  when the U.S.
dollar  either  strengthens  or  weakens  against  other  currencies,   the
percentage  change in average selling prices in billing  currencies will be
higher or lower, respectively,  than such percentage changes would be using
actual exchange rates prevailing during the respective periods.

Summary of debt and other contractual commitments

As  more  fully  described  in  the  notes  to the  Consolidated  Financial
Statements,  the Company is a party to various debt,  lease and other agreements
which  contractually  and  unconditionally  commit the  Company  to pay  certain
amounts  in the  future.  See  Notes  10 and  18 to the  Consolidated  Financial
Statements.  The Company's  obligations related to the long-term supply contract
for the purchase of  chloride-process  TiO2 feedstock is more fully described in
Note 18 to the Consolidated Financial Statements. The following table summarizes
such contractual  commitments of the Company and its  consolidated  subsidiaries
that are  unconditional  both in terms of timing and amount by the type and date
of payment.

Unconditional payment due date
2009 and
Contractual commitment                2004        2005/2006       2007/2008           after         Total
----------------------                ----        ---------       ---------          -------        -----
(In millions)

Third-party indebtedness                      $  5.4           $ 26.4            $ -           $606.1       $  637.9

Demand loan from Contran                         7.3               -               -               -             7.3

Operating leases                                 4.1              4.8             1.7            19.9           30.5

Kronos' long-term supply
contract for the
purchase of chloride-
process TiO2 feedstock                        146.1            265.8           135.0              -           546.9

Fixed asset acquisitions                        10.2               -              2.5              -            12.7

Purchase obligations and other
11.4              .3                              5.8           17.5
-----            -----             ---            ----        -------

$184.5           $297.3          $139.2          $631.8       $1,252.8
======           ======          ======          ======       ========

The  timing  and  amount  shown for the  Company's  commitments  related to
indebtedness,  operating leases, fixed asset acquisitions,  purchase obligations
and other are based upon the  contractual  payment  amount  and the  contractual
payment date for such commitments. The timing and amount shown for the Company's
commitments  related to the  long-term  supply  contracts for feedstock is based
upon the  Company's  current  estimate of the quantity of material  that will be
purchased in each time period shown,  and the contractual  payment that would be
due based upon such estimated purchased quantity.  The actual amount of material
purchased, and therefore the actual amount that would be payable by the Company,
may vary from such estimated amounts.

In  addition,  the  Company is a party to  certain  other  agreements  that
conditionally  commit the Company to pay certain  amounts in the future.  Due to
the  provisions  of such  agreements,  it is possible that the Company might not
ever be required to pay any amounts under these agreements.  Agreements to which
the Company is a party that fall into this  category,  more fully  described  in
Notes 5, 8 and 18 to the Consolidated Financial Statements, are described below.
The Company has not included any amounts for these  conditional  commitments  in
the above table because the Company  currently  believes it is not probable that
the Company will be required to pay any amounts pursuant to these agreements.  o
The Company's  requirement to escrow funds in amounts up to the next three years
of debt service of Snake River's  third-party  term debt to  collateralize  such
debt in order to exercise its conditional  right to temporarily  take control of
The  Amalgamated  Sugar  Company LLC; o The Company's  requirement  to pledge $5
million  of cash or  marketable  securities  as  collateral  for  Snake  River's
third-party debt in order to permit Snake River to continue to make debt service
payments on its $80 million loan from Valhi;  and o Waste  Control  Specialists'
requirement  to  pay  certain  amounts  based  upon  specified   percentages  of
qualifying revenues.

The above table does not reflect any amounts that the Company  might pay to
fund its defined  benefit pension plans and OPEB plans, as the timing and amount
of any such future  fundings are unknown and  dependent  on, among other things,
the future  performance of defined  benefit  pension plan assets,  interest rate
assumptions  and actual  future  retiree  medical  costs.  Such defined  benefit
pension plans and OPEB plans are discussed above in greater detail.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General.  The  Company is exposed  to market  risk from  changes in foreign
currency exchange rates, interest rates and equity security prices. In the past,
the Company has periodically  entered into interest rate swaps or other types of
contracts  in order to manage a portion of its interest  rate market  risk.  The
Company has also periodically  entered into currency forward contracts to either
manage a nominal  portion of foreign  exchange rate market risk  associated with
receivables  denominated  in a  currency  other  than  the  holder's  functional
currency or similar risk  associated  with future  sales,  or to hedge  specific
foreign currency  commitments.  Otherwise,  the Company does not generally enter
into  forward or option  contracts  to manage  such market  risks,  nor does the
Company enter into any such contract or other type of derivative  instrument for
trading or speculative  purposes.  Other than the contracts discussed below, the
Company was not a party to any forward or derivative  option contract related to
foreign exchange rates, interest rates or equity security prices at December 31,
2002 and 2003. See Notes 1 and 21 to the Consolidated Financial Statements for a
discussion of the  assumptions  used to estimate the fair value of the financial
instruments to which the Company is a party at December 31, 2002 and 2003.

Interest  rates.  The  Company is exposed  to market  risk from  changes in
interest rates,  primarily related to indebtedness and certain  interest-bearing
notes receivable.

At December  31,  2003,  the  Company's  aggregate  indebtedness  was split
between 95% of fixed-rate instruments and 5% of variable-rate borrowings (2002 -
91% of fixed-rate  instruments  and 9% of variable rate  borrowings).  The large
percentage of fixed-rate debt instruments  minimizes  earnings  volatility which
would  result from  changes in interest  rates.  The  following  table  presents
principal  amounts  and  weighted  average  interest  rates  for  the  Company's
aggregate  outstanding  indebtedness at December 31, 2003. At December 31, 2002,
all outstanding  fixed-rate  indebtedness was denominated in U.S. dollars or the
euro, and the  outstanding  variable rate  borrowings  were  denominated in U.S.
dollars,  the euro or the  Norwegian  kroner.  Information  shown below for such
foreign  currency  denominated  indebtedness  is  presented  in its U.S.  dollar
equivalent at December 31, 2003 using  exchange  rates of 1.25 U.S.  dollars per
euro.

Amount
-------------------------
Carrying            Fair           Interest          Maturity
Indebtedness*                        value            value             rate              date
------------                       ---------        ---------         --------          ------
(In millions)

Fixed-rate indebtedness:
Euro-denominated KII

Senior Secured Notes                              $356.1          $356.1              8.9%               2009
Valhi loans from Snake River                        250.0           250.0              9.4%               2027
Other                                                  .2              .2              7.0%              various
------          ------              ---
606.3           606.3              9.1%
------          ------              ---

Variable-rate indebtedness:
Valhi bank revolver                                   5.0             5.0              2.6%               2004
CompX bank revolver                                  26.0            26.0              3.2%               2006
------          ------              ---
31.0            31.0              3.1%
------          ------              ---

$637.3          $637.3              8.8%
======          ======              ===

*  Denominated in U.S. dollars, except as otherwise indicated.

At December 31, 2002,  fixed rate  indebtedness  aggregated  $549.7 million
(fair value - $552.7  million)  with a  weighted-average  interest rate of 9.1%;
variable  rate  indebtedness  at  such  date  aggregated  $58.1  million,  which
approximates  fair value,  with a  weighted-average  interest rate of 4.4%. Such
fixed rate  indebtedness  was  denominated in the euro (54% of the total) or the
U.S.  dollars (46%).  Such variable rate  indebtedness  was  denominated in U.S.
dollars (53% of the total), the euro (27%) or the Norwegian kroner (20%).

The  Company  has an $80  million  loan to Snake  River  Sugar  Company  at
December 31, 2002 and 2003. Such loan bears interest at a fixed interest rate of
6.49% at such dates,  the estimated  fair value of such loan  aggregated  $108.7
million and $111.5  million at December  31,  2002 and 2003,  respectively.  The
potential  decrease in the fair value of such loan resulting from a hypothetical
100 basis point increase in market  interest rates would be  approximately  $6.7
million at December 31, 2003 (2002 - $6.5 million).

Foreign  currency  exchange  rates.  The  Company is exposed to market risk
arising  from  changes  in  foreign  currency  exchange  rates  as a  result  of
manufacturing  and  selling  its  products  worldwide.  Earnings  are  primarily
affected by  fluctuations  in the value of the U.S. dollar relative to the euro,
the Canadian dollar, the Norwegian kroner and the British pound sterling.

As described  above,  at December 31, 2003, NL had the equivalent of $356.1
million of outstanding  euro-denominated  indebtedness  (2002- the equivalent of
$312.5 million of  euro-denominated  indebtedness and $11.5 million of Norwegian
kroner-denominated  indebtedness).  The  potential  increase in the U.S.  dollar
equivalent of the principal amount outstanding resulting from a hypothetical 10%
adverse  change in  exchange  rates at such date  would be  approximately  $35.6
million at December 31, 2003 (2002 - $32.4 million).

Certain  of  CompX's  sales  generated  by  its  Canadian   operations  are
denominated in U.S.  dollars.  To manage a portion of the foreign  exchange rate
market risk  associated  with such  receivables  or similar  exchange  rate risk
associated  with future  sales,  at December  31, 2003 CompX had entered  into a
series of short-term  forward exchange  contracts maturing through February 2004
to exchange an aggregate of $4.2  million for an  equivalent  amount of Canadian
dollars at an exchange rates of Cdn. $1.30 to Cdn. $1.33 per U.S. dollar (2002 -
contracts to exchange an aggregate of $2.5 million for an  equivalent  amount of
Canadian  dollars  maturing  through January 2003).  The estimated fair value of
such forward exchange contracts at December 31, 2002 and 2003 is not material.

At December  31,  2003,  the Company  also had  entered  into a  short-term
currency forward  contract  maturing on January 2, 2004 to exchange an aggregate
of euro 40 million into U.S. dollars at an exchange rate of U.S. $1.25 per euro.
Such contract was entered into in  conjunction  with the January 2004 payment of
an intercompany  dividend from one of the Company's  European  subsidiaries.  At
December  31,  2003,  the  actual  exchange  rate was U.S.  $1.25 per euro.  The
estimated fair value of such foreign  currency forward contract was not material
at December 31, 2003.

Marketable  equity  and debt  security  prices.  The  Company is exposed to
market  risk due to changes  in prices of the  marketable  securities  which are
owned.  The fair value of such debt and equity  securities  at December 31, 2002
and 2003 was $189.3  million and $183.0  million,  respectively.  The  potential
change in the aggregate fair value of these  investments,  assuming a 10% change
in prices,  would be $18.9  million at December  31,  2002 and $18.3  million at
December 31, 2003.

Other. The Company believes there may be a certain amount of incompleteness
in the sensitivity  analyses  presented  above.  For example,  the  hypothetical
effect of changes in interest rates discussed above ignores the potential effect
on other  variables  which affect the Company's  results of operations  and cash
flows,  such as demand for the  Company's  products,  sales  volumes and selling
prices and operating  expenses.  Contrary to the above  assumptions,  changes in
interest rates rarely result in simultaneous  comparable  shifts along the yield
curve. Also, certain of the Company's marketable securities are exchangeable for
certain of the Company's debt  instruments,  and a decrease in the fair value of
such securities would likely be mitigated by a decrease in the fair value of the
related  indebtedness.   Accordingly,   the  amounts  presented  above  are  not
necessarily  an accurate  reflection of the  potential  losses the Company would
incur assuming the hypothetical changes in market prices were actually to occur.

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

The Company maintains a system of disclosure  controls and procedures.  The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the  Securities  Exchange  Act of 1934,  as amended  (the  "Act"),  is
recorded, processed,  summarized and reported, within the time periods specified
in the SEC's  rules and  forms.  Disclosure  controls  and  procedures  include,
without limitation,  controls and procedures designed to ensure that information
required to be  disclosed by the Company in the reports that it files or submits
to the SEC  under  the Act is  accumulated  and  communicated  to the  Company's
management,   including  its  principal  executive  officer  and  its  principal
financial officer,  or persons  performing similar functions,  as appropriate to
allow timely decisions to be made regarding required disclosure.  Each of Steven
L. Watson,  the Company's Chief  Executive  Officer,  and Bobby D. O'Brien,  the
Company's Vice President,  Chief Financial Officer and Treasurer, have evaluated
the Company's  disclosure controls and procedures as of December 31, 2003. Based
upon  their  evaluation,  these  executive  officers  have  concluded  that  the
Company's  disclosure  controls and  procedures  are effective as of the date of
such evaluation.

The Company also  maintains a system of internal  controls  over  financial
reporting.  The term "internal control over financial  reporting," as defined by
regulations  of the SEC, means a process  designed by, or under the  supervision
of, the  Company's  principal  executive and principal  financial  officers,  or
persons  performing  similar  functions,  and effected by the Company's board of
directors,  management  and other  personnel,  to provide  reasonable  assurance
regarding  the  reliability  of  financial  reporting  and  the  preparation  of
financial statements for external purposes in accordance with GAAP, and includes
those policies and procedures that:

o    Pertain to the maintenance of records that in reasonable  detail accurately
and fairly reflect the  transactions  and dispositions of the assets of the
Company,
o    Provide reasonable assurance that transactions are recorded as necessary to
permit  preparation  of financial  statements in accordance  with GAAP, and
that  receipts  and  expenditures  of the  Company  are being  made only in
accordance with  authorizations of management and directors of the Company,
and
o    Provide reasonable  assurance  regarding  prevention or timely detection of
unauthorized  acquisition,  use or disposition of the Company's assets that
could  have a  material  effect  on the  Company's  consolidated  financial
statements.

There has been no change to the  Company's  system  of  internal  controls  over
financial  reporting  during  the  quarter  ended  December  31,  2003  that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required by this Item is incorporated by reference to the
Valhi  Proxy  Statement.   See  also  Note  17  to  the  Consolidated  Financial
Statements.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) and (d) Financial Statements and Schedules

The Registrant

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

50%-or-less owned persons

The consolidated  financial  statements of TIMET (41%-owned at December 31,
2003) are filed as Exhibit 99.1 of this Annual Report pursuant to Rule 3-09
of  Regulation  S-X.  The  Registrant  is not required to provide any other
consolidated financial statements pursuant to Rule 3-09 of Regulation S-X.

(b) Reports on Form 8-K

Reports on Form 8-K filed for the quarter ended December 31, 2003:

October 29,  2003 - Reported  Items 7 and 9.  November  10, 2003 - Reported
Items 9 and 12.

(c) Exhibits

Included as exhibits are the items listed in the Exhibit Index. The Company
has retained a signed  original of any of the these  exhibits  that contain
signatures,  and the Company will provide such exhibit to the Commission or
its staff upon  request.  Valhi will  furnish a copy of any of the exhibits
listed  below upon  request  and  payment of $4.00 per exhibit to cover the
costs to Valhi of furnishing the exhibits. Valhi will also furnish, without
charge,  a copy of its Code of Business  Conduct and Ethics,  as adopted by
the board of directors on February 26, 2004,  upon  request.  Such requests
should be directed  to the  attention  of Valhi's  Corporate  Secretary  at
Valhi's corporate offices located at 5430 LBJ Freeway,  Suite 1700, Dallas,
Texas  75240.  Pursuant  to Item  601(b)(4)(iii)  of  Regulation  S-K,  any
instrument  defining  the rights of holders of  long-term  debt  issues and
other  agreements  related  to  indebtedness  which  do not  exceed  10% of
consolidated  total assets as of December 31, 2003 will be furnished to the
Commission upon request.

Item No.                         Exhibit Item

2.1   Agreement and Plan of Merger dated as of November 4, 2002 by and among
the Registrant,  Valhi Acquisition Corp. and Tremont  Corporation,  as
amended by  Amendment  No. 1 thereto -  incorporated  by  reference to
Appendix A to the Proxy Statement/Prospectus included in Part I of the
Registration  Statement on Form S-4 (File No. 333-101244) filed by the
Registrant.

Item No.                         Exhibit Item

2.2   Agreement and Plan of Merger dated as of November 4, 2002 by and among
the Registrant,  Tremont Group,  Inc. and Valhi Acquisition Corp. II -
incorporated  by  reference  to  Exhibit  10.3  to  the   Registrant's
Quarterly  Report on Form 10-Q (File No. 1-5467) for the quarter ended
September 30, 2002.

3.1   Restated Articles of Incorporation of the Registrant - incorporated by
reference  to  Appendix  A to the  definitive  Prospectus/Joint  Proxy
Statement of The Amalgamated  Sugar Company and LLC Corporation  (File
No. 1-5467) dated February 10, 1987.

3.2   By-Laws of the  Registrant as amended -  incorporated  by reference to
Exhibit 3.1 of the  Registrant's  Quarterly  Report on Form 10-Q (File
No. 1-5467) for the quarter ended June 30, 2002.

4.1   Indenture dated June 28, 2002 between Kronos  International,  Inc. and
The Bank of New York,  as Trustee,  governing  Kronos  International's
8.875% Senior  Secured Notes due 2009 -  incorporated  by reference to
Exhibit 4.1 to NL  Industries,  Inc.'s  Quarterly  Report on Form 10-Q
(File No. 1-640) for the quarter ended June 30, 2002.

9.1   Shareholders'  Agreement dated February 15, 1996 among TIMET, Tremont,
IMI plc,  IMI Kynoch Ltd. and IMI  Americas,  Inc. -  incorporated  by
reference to Exhibit 2.2 to Tremont's Current Report on Form 8-K (File
No. 1-10126) dated March 1, 1996.

9.2   Amendment to the  Shareholders'  Agreement  dated March 29, 1996 among
TIMET,  Tremont,  IMI plc,  IMI Kynosh Ltd. and IMI  Americas,  Inc. -
incorporated by reference to Exhibit 10.30 to Tremont's  Annual Report
on Form 10-K (File No. 1-10126) for the year ended December 31, 1995.

10.1   Intercorporate  Services  Agreement between the Registrant and Contran
Corporation effective as of January 1, 2003.

10.2   Intercorporate  Services Agreement between Contran  Corporation and NL
effective as of January 1, 2003 - incorporated by reference to Exhibit
10.1 to NL's  Quarterly  Report on Form 10-Q (File No.  1-640) for the
quarter ended June 30, 2003.

10.3   Intercorporate  Services  Agreement  between  Contran  Corporation and
TIMET  effective as of January 1, 2003 - incorporated  by reference to
Exhibit  10.1 to  TIMET's  Quarterly  Report  on Form  10-Q  (File No.
0-28538) for the quarter ended June 30, 2003.

10.4   Intercompany  Services Agreement between Contran Corporation and CompX
effective  January 1, 2003 - incorporated by reference to Exhibit 10.1
to CompX's  Quarterly  Report on Form 10-Q (File No.  1-13905) for the
quarter ended June 30, 2003.

10.5   Form of Intercorporate  Services Agreement between Contran Corporation
and Kronos Worldwide,  Inc. - incorporated by reference to Exhibit No.
10.2 to the Kronos Worldwide,  Inc. Registration  Statement on Form 10
(File No. 001-31763).

10.6   Revolving  Loan Note dated May 4, 2001 with Harold C.  Simmons  Family
Trust No. 2 and EMS  Financial,  Inc. -  incorporated  by reference to
Exhibit 10.1 to NL's  Quarterly  Report on Form 10-Q (File No.  1-640)
for the quarter ended September 30, 2001.

Item No.                         Exhibit Item

10.7   Security  Agreement dated May 4, 2001 by and between Harold C. Simmons
Family Trust No. 2 and EMS Financial, Inc. - incorporated by reference
to Exhibit 10.2 to NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 2001.

10.8   Purchase Agreement dated January 4, 2002 by and among Kronos,  Inc. as
the  Purchaser,  and  Big  Bend  Holdings  LLC and  Contran  Insurance
Holdings,  Inc., as Sellers regarding the sale and purchase of EWI RE,
Inc. and EWI RE, Ltd. - incorporated by reference to Exhibit No. 10.40
to NL's Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 2001.

10.9*  Valhi,  Inc.  1987 Stock Option - Stock  Appreciation  Rights Plan, as
amended  -   incorporated   by   reference  to  Exhibit  10.4  to  the
Registrant's Annual Report on Form 10-K (File No. 1-5467) for the year
ended December 31, 1994.

10.10*  Valhi, Inc. 1997 Long-Term  Incentive Plan - incorporated by reference
to Exhibit 10.12 to the Registrant's  Annual Report on Form 10-K (File
No. 1-5467) for the year ended December 31, 1996.

10.11*  CompX  International Inc. 1997 Long-Term Incentive Plan - incorporated
by reference to Exhibit 10.2 to CompX's Registration Statement on Form
S-1 (File No. 333-42643).

10.12*  Form of Deferred  Compensation  Agreement  between the  Registrant and
certain executive officers - incorporated by reference to Exhibit 10.1
to the  Registrant's  Quarterly  Report on Form 10-Q (File No. 1-5467)
for the quarter ended March 31, 1999.

10.13   Agreement  Regarding  Shared Insurance dated as of October 30, 2003 by
and between CompX  International Inc., Contran  Corporation,  Keystone
Consolidated Industries,  Inc., Kronos Worldwide, Inc., NL Industries,
Inc.,  Titanium Metals  Corporation and Valhi,  Inc. - incorporated by
reference to Exhibit 10.32 to Kronos' Annual Report on Form 10-K (File
No. 1-31763) for the year ended December 31, 2003.

10.14   Formation Agreement of The Amalgamated Sugar Company LLC dated January
3, 1997 (to be effective  December 31, 1996) between Snake River Sugar
Company and The Amalgamated  Sugar Company - incorporated by reference
to Exhibit 10.19 to the Registrant's  Annual Report on Form 10-K (File
No. 1-5467) for the year ended December 31, 1996.

10.15   Master Agreement Regarding Amendments to The Amalgamated Sugar Company
Documents  dated  October  19, 2000 -  incorporated  by  reference  to
Exhibit 10.1 to the  Registrant's  Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended September 30, 2000.

10.16   Company  Agreement of The Amalgamated  Sugar Company LLC dated January
3,  1997  (to be  effective  December  31,  1996)  -  incorporated  by
reference to Exhibit 10.20 to the  Registrant's  Annual Report on Form
10-K (File No. 1-5467) for the year ended December 31, 1996.

10.17   First  Amendment  to the Company  Agreement of The  Amalgamated  Sugar
Company LLC dated May 14, 1997 - incorporated  by reference to Exhibit
10.1 to the  Registrant's  Quarterly  Report  on Form  10-Q  (File No.
1-5467) for the quarter ended June 30, 1997.

Item No.                         Exhibit Item

10.18   Second  Amendment to the Company  Agreement of The  Amalgamated  Sugar
Company LLC dated  November  30, 1998 -  incorporated  by reference to
Exhibit 10.24 to the Registrant's Annual Report on Form 10-K (File No.
1-5467) for the year ended December 31, 1998.

10.19   Third  Amendment  to the Company  Agreement of The  Amalgamated  Sugar
Company LLC dated  October 19, 2000 -  incorporated  by  reference  to
Exhibit 10.2 to the  Registrant's  Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended September 30, 2000.

10.20   Subordinated  Promissory Note in the principal amount of $37.5 million
between  Valhi,  Inc. and Snake River Sugar  Company,  and the related
Pledge  Agreement,  both  dated  January  3,  1997 -  incorporated  by
reference to Exhibit 10.21 to the  Registrant's  Annual Report on Form
10-K (File No. 1-5467) for the year ended December 31, 1996.

10.21   Limited  Recourse  Promissory  Note in the principal  amount of $212.5
million  between Valhi,  Inc. and Snake River Sugar  Company,  and the
related Limited Recourse Pledge Agreement,  both dated January 3, 1997
-  incorporated  by  reference  to Exhibit  10.22 to the  Registrant's
Annual  Report  on Form  10-K  (File No.  1-5467)  for the year  ended
December 31, 1996.

10.22   Subordinated  Loan  Agreement  between  Snake River Sugar  Company and
Valhi,  Inc.,  as  amended  and  restated  effective  May  14,  1997 -
incorporated  by  reference  to  Exhibit  10.9  to  the   Registrant's
Quarterly  Report on Form 10-Q (File No. 1-5467) for the quarter ended
June 30, 1997.

10.23   Second  Amendment to the  Subordinated  Loan  Agreement  between Snake
River  Sugar  Company  and  Valhi,  Inc.  dated  November  30,  1998 -
incorporated by reference to Exhibit 10.28 to the Registrant's  Annual
Report on Form 10-K (File No.  1-5467) for the year ended December 31,
1998.

10.24   Third Amendment to the Subordinated Loan Agreement between Snake River
Sugar Company and Valhi, Inc. dated October 19, 2000 - incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended September 30, 2000.

10.25   Fourth  Amendment to the  Subordinated  Loan  Agreement  between Snake
River  Sugar  Company  and  Valhi,   Inc.   dated  March  31,  2003  -
incorporated  by  reference  to Exhibit No.  10.1 to the  Registrant's
Quarterly  Report on Form 10-Q (file No. 1-5467) for the quarter ended
March 31, 2003.

10.26   Contingent  Subordinate  Pledge  Agreement  between  Snake River Sugar
Company  and Valhi,  Inc.,  as  acknowledged  by First  Security  Bank
National  Association  as Collateral  Agent,  dated October 19, 2000 -
incorporated  by  reference  to  Exhibit  10.4  to  the   Registrant's
Quarterly  Report on Form 10-Q (File No. 1-5467) for the quarter ended
September 30, 2000.

10.27   Contingent  Subordinate  Security  Agreement between Snake River Sugar
Company  and Valhi,  Inc.,  as  acknowledged  by First  Security  Bank
National  Association  as Collateral  Agent,  dated October 19, 2000 -
incorporated  by  reference  to  Exhibit  10.5  to  the   Registrant's
Quarterly  Report on Form 10-Q (File No. 1-5467) for the quarter ended
September 30, 2000.

Item No.                         Exhibit Item

10.28   Contingent  Subordinate  Collateral Agency and Paying Agency Agreement
among Valhi,  Inc.,  Snake River Sugar Company and First Security Bank
National   Association  dated  October  19,  2000  -  incorporated  by
reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended September 30, 2000.

10.29   Deposit Trust Agreement  related to the Amalgamated  Collateral  Trust
among ASC Holdings,  Inc. and  Wilmington  Trust Company dated May 14,
1997 - incorporated  by reference to Exhibit 10.2 to the  Registrant's
Quarterly  Report on Form 10-Q (File No. 1-5467) for the quarter ended
June 30, 1997.

10.30   Pledge  Agreement  between the Amalgamated  Collateral Trust and Snake
River Sugar Company dated May 14, 1997 - incorporated  by reference to
Exhibit 10.3 to the  Registrant's  Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended June 30, 1997.

10.31   Guarantee by the Amalgamated  Collateral Trust in favor of Snake River
Sugar  Company  dated May 14,  1997 -  incorporated  by  reference  to
Exhibit 10.4 to the  Registrant's  Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended June 30, 1997.

10.32   Amended and Restated Pledge Agreement  between ASC Holdings,  Inc. and
Snake  River  Sugar  Company  dated  May 14,  1997 -  incorporated  by
reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended June 30, 1997.

10.33   Collateral  Deposit Agreement among Snake River Sugar Company,  Valhi,
Inc. and First Security Bank, National  Association dated May 14, 1997
-  incorporated  by  reference  to  Exhibit  10.6 to the  Registrant's
Quarterly  Report on Form 10-Q (File No. 1-5467) for the quarter ended
June 30, 1997.

10.34   Voting  Rights  and   Forbearance   Agreement  among  the  Amalgamated
Collateral Trust, ASC Holdings, Inc. and First Security Bank, National
Association  dated May 14, 1997 - incorporated by reference to Exhibit
10.7 to the  Registrant's  Quarterly  Report  on Form  10-Q  (File No.
1-5467) for the quarter ended June 30, 1997.

10.35   First Amendment to the Voting Rights and  Forbearance  Agreement among
the  Amalgamated  Collateral  Trust,  ASC  Holdings,  Inc.  and  First
Security   Bank  National   Association   dated  October  19,  2000  -
incorporated  by  reference  to  Exhibit  10.9  to  the   Registrant's
Quarterly  Report on Form 10-Q (File No. 1-5467) for the quarter ended
September 30, 2000.

10.36   Voting Rights and Collateral Deposit Agreement among Snake River Sugar
Company,  Valhi, Inc., and First Security Bank,  National  Association
dated May 14, 1997 - incorporated  by reference to Exhibit 10.8 to the
Registrant's  Quarterly  Report on Form 10-Q (File No. 1-5467) for the
quarter ended June 30, 1997.

10.37   Subordination  Agreement  between  Valhi,  Inc.  and Snake River Sugar
Company  dated May 14, 1997 -  incorporated  by  reference  to Exhibit
10.10 to the  Registrant's  Quarterly  Report on Form  10-Q  (File No.
1-5467) for the quarter ended June 30, 1997.

Item No.                         Exhibit Item

10.38   First Amendment to the Subordination Agreement between Valhi, Inc. and
Snake River Sugar  Company dated  October 19, 2000 -  incorporated  by
reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended September 30, 2000.

10.39   Form of Option Agreement among Snake River Sugar Company,  Valhi, Inc.
and the holders of Snake River Sugar  Company's 10.9% Senior Notes Due
2009 dated May 14, 1997 -  incorporated  by reference to Exhibit 10.11
to the  Registrant's  Quarterly  Report on Form 10-Q (File No. 1-5467)
for the quarter ended June 30, 1997.

10.40   First Amendment to Option  Agreements among Snake River Sugar Company,
Valhi Inc.,  and the holders of Snake  River's  10.9% Senior Notes Due
2009 dated  October 19, 2000 -  incorporated  by  reference to Exhibit
10.8 to the  Registrant's  Quarterly  Report  on Form  10-Q  (File No.
1-5467) for the quarter ended September 30, 2000.

10.41   Deposit Agreement dated June 28, 2002 among NL Industries, Inc. and JP
Morgan Chase Bank, as trustee -  incorporated  by reference to Exhibit
4.9 to NL Industries,  Inc.'s  Quarterly Report on Form 10-Q (File No.
1-640) for the quarter ended June 30, 2002.

10.42   Satisfaction  and  Discharge of  Indenture,  Release,  Assignment  and
Transfer  dated June 28, 2002 made by JP Morgan Chase Bank pursuant to
the Indenture for NL  Industries,  Inc.'s 11 3/4% Senior Secured Notes
due 2003 - incorporated by reference to Exhibit 4.10 to NL Industries,
Inc.'s  Quarterly Report on Form 10-Q (File No. 1-640) for the quarter
ended June 30, 2002.

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

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

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

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

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

Item No.                         Exhibit Item

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

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

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

10.51   Amendment  dated  August 11,  2003 to the  Contract  on  Supplies  and
Services  among  Bayer AG,  Kronos  Titan-GmbH  & Co.  OHG and  Kronos
International  (English  translation  of German  language  document) -
incorporated   by  reference  to  Exhibit  No.  10.32  to  the  Kronos
Worldwide,   Inc.   Registration   Statement  on  Form  10  (File  No.
001-31763).

10.52   Lease Agreement,  dated January 1, 1996,  between Holford Estates Ltd.
and IMI Titanium Ltd. related to the building known as Titanium Number
2 Plant at Witton,  England -  incorporated  by  reference  to Exhibit
10.23 to Tremont's  Annual Report on Form 10-K (File No.  1-10126) for
the year ended December 31, 1995.

10.53** Richards Bay Slag Sales Agreement  dated May 1, 1995 between  Richards
Bay Iron and Titanium (Proprietary) Limited and Kronos Worldwide, Inc.
(f/k/a Kronos,  Inc.) - incorporated  by reference to Exhibit 10.17 to
NL's  Annual  Report on Form 10-K (File No.  1-640) for the year ended
December 31, 1995.

10.54** Amendment  to  Richards  Bay Slag Sales  Agreement  dated May 1, 1999,
between  Richards  Bay Iron and  Titanium  (Proprietary)  Limited  and
Kronos  Worldwide,  Inc.  (f/k/a/  Kronos,  Inc.)  -  incorporated  by
reference to Exhibit 10.4 to NL's Annual Report on Form 10-K (File No.
1-640) for the year ended December 31, 1999.

10.55** Amendment  to  Richards  Bay Slag Sales  Agreement  dated June 1, 2001
between  Richards  Bay Iron and  Titanium  (Proprietary)  Limited  and
Kronos  Worldwide,  Inc.  (f/k/a/  Kronos,  Inc.)  -  incorporated  by
reference to Exhibit No. 10.5 to NL's Annual Report on Form 10-K (File
No. 1-640) for the year ended December 31, 2001.

10.56** Amendment to Richards Bay Slag Sales Agreement dated December 20, 2002
between  Richards  Bay Iron and  Titanium  (Proprietary)  Limited  and
Kronos  Worldwide,  Inc.  (f/k/a/  Kronos,  Inc.)  -  incorporated  by
reference to Exhibit No. 10.7 to NL's Annual Report on Form 10-K (File
No. 1-640) for the year ended December 31, 2002.

10.57** Amendment to Richards Bay Slag Sales  Agreement dated October 31, 2003
between  Richards  Bay Iron and  Titanium  (Proprietary)  Limited  and
Kronos  Worldwide,   Inc.  (f/k/a  Kronos,  Inc.)  -  incorporated  by
reference to Exhibit No. 10.17 to Kronos'  Annual  Report on Form 10-K
(File No. 1-31763) for the year ended December 31, 2003.

Item No.                         Exhibit Item

10.58   Agreement  between  Sachtleben  Chemie  GmbH  and  Kronos  Titan  GmbH
effective  as of December  30, 1988 -  Incorporated  by  reference  to
Exhibit No. 10.1 to Kronos  International  Inc.'s  Quarterly Report on
Form 10-Q (File No.  333-100047)  for the quarter ended  September 30,
2002.

10.59   Supplementary  Agreement  dated  as of May 3,  1996  to the  Agreement
effective as of December 30, 1986 between  Sachtleben  Chemie GmbH and
Kronos Titan GmbH -  incorporated  by reference to Exhibit No. 10.2 to
Kronos  International  Inc.'s  Quarterly Report on Form 10-Q (File No.
333-100047) for the quarter ended September 30, 2002.

10.60   Second  Supplementary  Agreement  dated as of  January  8, 2002 to the
Agreement  effective as of December 30, 1986 between Sachtleben Chemie
GmbH and Kronos Titan GmbH - incorporated  by reference to Exhibit No.
10.3 to  Kronos  International  Inc.'s  Quarterly  Report on Form 10-Q
(File No. 333-100047) for the quarter ended September 30, 2002.

10.61   Purchase and Sale Agreement (for titanium products) between The Boeing
Company, acting through its division, Boeing Commercial Airplanes, and
Titanium Metals  Corporation (as amended and restated  effective April
19, 2001) - incorporated  by reference to Exhibit No. 10.2 to Titanium
Metals Corporation's  Quarterly Report on Form 10-Q (File No. 0-28538)
for the quarter ended June 30, 2002.

10.62   Purchase  and Sale  Agreement  between  Rolls  Royce plc and  Titanium
Metals Corporation dated December 22, 1998 - incorporated by reference
to Exhibit No. 10.3 to Titanium Metals Corporation's  Quarterly Report
on Form 10-Q (File No. 0-28538) for the quarter ended June 30, 2002.

10.63   First Amendment to Purchase and Sale Agreement between Rolls-Royce plc
and TIMET - incorporated  by reference to Exhibit No. 10.17 to TIMET's
Annual  Report on Form  10-K  (File No.  0-28538)  for the year  ended
December 31, 2003.

10.64   Second  Amendment to Purchase and Sale Agreement  between  Rolls-Royce
plc and TIMET -  incorporated  by  reference  to Exhibit No.  10.18 to
TIMET's  Annual  Report on Form 10-K (File No.  0-28538)  for the year
ended December 31, 2003.

10.65   Termination Agreement by and between Wyman-Gordon Company and Titanium
Metals  Corporation  effective as of September 28, 2003 - incorporated
by reference to Exhibit No. 10.1 to TIMET's  Quarterly  Report on Form
10-Q (File No. 0-28538) for the quarter ended September 30, 2003.

10.66   Insurance Sharing Agreement, effective January 1, 1990, by and between
NL,  Tall Pines  Insurance  Company,  Ltd.  and Baroid  Corporation  -
incorporated  by reference to Exhibit  10.20 to NL's Annual  Report on
Form 10-K (File No. 1-640) for the year ended December 31, 1991.

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

Item No.                         Exhibit Item

10.68   Administrative   Settlement  for  Interim  Remedial   Measures,   Site
Investigation  and  Feasibility  Study dated July 7, 2000  between the
Arkansas  Department  of  Environmental  Quality,  Halliburton  Energy
Services,  Inc., M I, LLC and TRE Management Company - incorporated by
reference to Exhibit 10.1 to Tremont Corporation's Quarterly Report on
Form 10-Q (File No. 1-10126) for the quarter ended June 30, 2002.

10.69   Settlement  Agreement  and  Release  of Claims  dated  April 19,  2001
between   Titanium  Metals   Corporation  and  the  Boeing  Company  -
incorporated by reference to Exhibit 10.1 to TIMET's  Quarterly Report
on Form 10-Q (File No. 0-28538) for the quarter ended March 31, 2001.

21.1    Subsidiaries of the Registrant.

23.1    Consent  of   PricewaterhouseCoopers   LLP  with  respect  to  Valhi's
consolidated financial statements

23.2    Consent  of   PricewaterhouseCoopers   LLP  with  respect  to  TIMET's
consolidated financial statements

31.1    Certification

31.2    Certification

32.1    Certification

99.1    Consolidated  financial  statements of Titanium  Metals  Corporation -
incorporated  by reference to TIMET's Annual Report on Form 10-K (File
No. 0-28538) for the year ended December 31, 2003.

*    Management contract, compensatory plan or agreement.
**   Portions  of the  exhibit  have been  omitted  pursuant  to a  request  for
confidential treatment.

SIGNATURES

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

VALHI, INC.
(Registrant)

By: /s/ Steven L. Watson          
----------------------------------
Steven L. Watson, March 10, 2004
(President and Chief Executive Officer)

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

/s/ Harold C. Simmons                        /s/ Steven L. Watson               
---------------------------------------     ------------------------------------
Harold C. Simmons, March 10, 2004           Steven L. Watson, March 10, 2004
(Chairman of the Board)                     (President, Chief Executive Officer
and Director)

/s/ Thomas E. Barry                           /s/ Glenn R. Simmons              
---------------------------------------     ------------------------------------
Thomas E. Barry, March 10, 2004             Glenn R. Simmons, March 10, 2004
(Director)                                  (Vice Chairman of the Board)

/s/ Norman S. Edelcup                        /s/ Bobby D. O'Brien               
--------------------------------------      ------------------------------------
Norman S. Edelcup, March 10, 2004           Bobby D. O'Brien, March 10, 2004
(Director)                                  (Vice President, Chief Financial 
Officer and Treasurer, Principal 
Financial Officer)

/s/ W. Hayden McIlroy                       /s/ Gregory M. Swalwell             
--------------------------------------      ------------------------------------
W. Hayden McIlroy, March 10, 2004           Gregory M. Swalwell, March 10, 2004
(Director)                                  (Vice President and Controller,
Principal Accounting Officer)

/s/ J. Walter Tucker, Jr.             
--------------------------------------
J. Walter Tucker, Jr. March 10, 2004
(Director)

Annual Report on Form 10-K

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

Index of Financial Statements and Schedules

Financial Statements                                                Page

Report of Independent Auditors                                    F-2

Consolidated Balance Sheets - December 31, 2002 and 2003          F-3

Consolidated Statements of Income -
Years ended December 31, 2001, 2002 and 2003                     F-5

Consolidated Statements of Comprehensive Income -
Years ended December 31, 2001, 2002 and 2003                     F-7

Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2001, 2002 and 2003                     F-8

Consolidated Statements of Cash Flows -
Years ended December 31, 2001, 2002 and 2003                     F-9

Notes to Consolidated Financial Statements                        F-12

Financial Statement Schedules

Schedule I - Condensed Financial Information of Registrant        S-2

Schedule II - Valuation and Qualifying Accounts                   S-10

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

REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors of Valhi, Inc.:

In our  opinion,  the  accompanying  consolidated  balance  sheets  and the
related consolidated statements of income,  comprehensive income,  stockholders'
equity and cash flows present fairly,  in all material  respects,  the financial
position of Valhi,  Inc. and  Subsidiaries as of December 31, 2002 and 2003, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003, in conformity with accounting  principles
generally accepted in the United States of America.  These financial  statements
are the  responsibility of the Company's  management;  our  responsibility is to
express  an  opinion  on these  financial  statements  based on our  audits.  We
conducted our audits of these  financial  statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates made by management,  and evaluating the overall financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

As  discussed  in Note 19 to the  consolidated  financial  statements,  the
Company adopted Statement of Financial  Accounting Standards ("SFAS") No. 142 on
January 1, 2002, and the Company adopted SFAS No. 143 on January 1, 2003.

PricewaterhouseCoopers LLP

Dallas, Texas
March 8, 2004

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2003

(In thousands, except per share data)

ASSETS
2002               2003
----               ----

Current assets:

Cash and cash equivalents                                                         $   94,679          $  103,394
Restricted cash equivalents                                                           52,489              19,348
Marketable securities                                                                  9,717               6,147
Accounts and other receivables                                                       170,623             189,091
Refundable income taxes                                                                3,161              37,712
Receivable from affiliates                                                             3,947                 317
Inventories                                                                          239,533             293,113
Prepaid expenses                                                                      15,867              10,635
Deferred income taxes                                                                 14,114              14,435
----------          ----------

Total current assets                                                             604,130             674,192
----------          ----------

Other assets:
Marketable securities                                                                179,582             176,941
Investment in affiliates                                                             155,549             161,818
Receivable from affiliate                                                             18,000              14,000
Loans and other receivables                                                          111,255             116,566
Prepaid pension costs                                                                 17,572                   -
Unrecognized net pension obligations                                                   5,561              13,747
Goodwill                                                                             364,994             377,591
Other intangible assets                                                                4,413               3,805
Deferred income taxes                                                                  1,934               7,033
Other assets                                                                          31,120              27,177
----------          ----------

Total other assets                                                               889,980             898,678
----------          ----------

Property and equipment:
Land                                                                                  31,725              35,557
Buildings                                                                            180,311             217,744
Equipment                                                                            677,268             805,081
Mining properties                                                                     35,440              34,330
Construction in progress                                                              12,605              11,297
----------          ----------
937,349           1,104,009
Less accumulated depreciation                                                        356,678             465,851
----------          ----------

Net property and equipment                                                       580,671             638,158
----------          ----------

$2,074,781          $2,211,028
==========          ==========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31, 2002 and 2003

(In thousands, except per share data)

LIABILITIES AND STOCKHOLDERS' EQUITY
2002               2003
----               ----

Current liabilities:

Current maturities of long-term debt                                             $    4,127          $    5,392
Accounts payable                                                                    108,970             118,781
Accrued liabilities                                                                 149,466             130,091
Payable to affiliates                                                                20,122              21,454
Income taxes                                                                          8,344              13,105
Deferred income taxes                                                                 3,627               3,941
----------          ----------

Total current liabilities                                                       294,656             292,764
----------          ----------

Noncurrent liabilities:
Long-term debt                                                                      605,740             632,533
Accrued pension costs                                                                54,930              90,517
Accrued OPEB costs                                                                   45,474              37,410
Accrued environmental costs                                                          43,670              61,725
Deferred income taxes                                                               255,735             301,648
Other                                                                                38,974              34,908
----------          ----------

Total noncurrent liabilities                                                  1,044,523           1,158,741
----------          ----------

Minority interest                                                                     120,846              99,789
----------          ----------

Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued                                                                  -               -    
Common stock, $.01 par value; 150,000 shares
authorized; 126,161 and 134,027 shares issued                                        1,262               1,340
Additional paid-in capital                                                           47,657              99,048
Retained earnings                                                                   629,773             639,463
Accumulated other comprehensive income:
Marketable securities                                                              84,264              85,124
Currency translation                                                              (35,590)             (3,573)
Pension liabilities                                                               (36,961)            (59,154)
Treasury stock, at cost - 10,570 and 13,841 shares                                  (75,649)           (102,514)
----------          ---------- 

Total stockholders' equity                                                      614,756             659,734
----------          ----------

$2,074,781          $2,211,028
==========          ==========

Commitments and contingencies (Notes 5, 8, 10, 15, 17 and 18)

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2001, 2002 and 2003

(In thousands, except per share data)

2001                2002              2003
----                ----              ----

Revenues and other income:

Net sales                                                        $1,059,470         $1,079,716          $1,219,762
Other, net                                                          154,000             60,288              39,934
----------         ----------          ----------

1,213,470          1,140,004           1,259,696
----------         ----------          ----------

Cost and expenses:
Cost of sales                                                       774,979            857,435             935,624
Selling, general and administrative                                 195,166            191,352             229,747
Interest                                                             62,285             60,157              58,526
----------         ----------          ----------

1,032,430          1,108,944           1,223,897
----------         ----------          ----------

181,040             31,060              35,799
Equity in earnings of:
Titanium Metals Corporation ("TIMET")                                (9,161)           (32,873)              1,910
Other                                                                   580                566                 771
----------         ----------          ----------

Income (loss) before taxes                                        172,459             (1,247)             38,480

Provision for income taxes (benefit)                                   53,179             (6,126)            (11,086)

Minority interest in after-tax earnings                                26,082              3,642              10,666
----------         ----------          ----------

Income before cumulative effect on
change in accounting principle                                    93,198              1,237              38,900

Cumulative effect of change in accounting
principle                                                               -                  -                    586
----------         ----------          ----------

Net income                                                     $   93,198         $    1,237          $   39,486
==========         ==========          ==========

Pro forma income before cumulative effect
of change in accounting principle*                                $   93,399         $    1,289          $   38,900
==========         ==========          ==========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)

Years ended December 31, 2001, 2002 and 2003

(In thousands, except per share data)

2001                2002              2003
----                ----              ----

Basic earnings per share:
Before cumulative effect of change in

accounting principle                                         $    .81            $    .01            $    .32
Cumulative effect of change in
accounting principle                                             -                   -                    .01
--------            --------            --------

Net income                                                  $    .81            $    .01            $    .33
========            ========            ========

Diluted earnings per share:
Before cumulative effect of change in
accounting principle                                         $    .80            $    .01            $    .32
Cumulative effect of change in
accounting principle                                             -                   -                    .01
--------            --------            --------

Net income                                                  $    .80            $    .01            $    .33
========            ========            ========

Pro forma income before cumulative effect of change in accounting principle per
share:*
Basic                                                         $    .81            $    .01            $    .32
Diluted                                                            .80                 .01            $    .32

Cash dividends per share                                        $    .24            $    .24            $    .24

Shares used in the calculation of per share amounts:
Basic earnings per share                                       115,193             115,419             119,696
Diluted impact of stock options                                    920                 416                 213
--------            --------            --------

Diluted earnings per share                                     116,113             115,835             119,909
========            ========            ========

*Assumes SFAS No. 143 had been adopted as of January 1, 2001.  See Note 19.

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2001, 2002 and 2003

(In thousands)

2001           2002            2003
----           ----            ----

Net income                                                                    $ 93,198        $  1,237       $ 39,486
--------        --------       --------

Other comprehensive income (loss), net of tax: Marketable securities adjustment:
Unrealized net gains (losses) arising during
the year                                                                   (7,673)          1,779            860
Reclassification for realized net gains
included in net income                                                    (38,253)         (4,169)          -
--------        --------       -----
(45,926)         (2,390)           860

Currency translation adjustment                                              (18,593)         43,814         32,017

Pension liabilities adjustment                                                (7,404)        (25,040)       (22,193)
--------        --------       -------- 

Total other comprehensive income (loss), net                               (71,923)         16,384         10,684
--------        --------       --------

Comprehensive income                                                    $ 21,275        $ 17,621       $ 50,170
========        ========       ========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years ended December 31, 2001, 2002 and 2003

(In thousands)

Accumulated other comprehensive income       
Additional                ------------------------------------                 Total    
Common   paid-in      Retained    Marketable    Currency     Pension    Treasury   stockholders'
stock   capital      earnings    securities   translation liabilities    stock        equity
-------  -------      --------    ----------   ----------- -----------  ---------    --------

Balance at December 31, 2000 ...   $1,257   $ 44,345    $ 591,030    $ 132,580    $(60,811)   $ (4,517)   $ (75,649)   $ 628,235

Net income .....................     --         --         93,198         --          --          --           --         93,198
Cash dividends .................     --         --        (27,820)        --          --          --           --        (27,820)
Other comprehensive income
(loss), net ...................     --         --           --        (45,926)    (18,593)     (7,404)        --        (71,923)
Other, net .....................        1        637         --           --          --          --           --            638
------   --------    ---------    ---------    --------    --------    ---------    ---------

Balance at December 31, 2001 ...    1,258     44,982      656,408       86,654     (79,404)    (11,921)     (75,649)     622,328

Net income .....................     --         --          1,237         --          --          --           --          1,237
Cash dividends .................     --         --        (27,872)        --          --          --           --        (27,872)
Other comprehensive income
(loss), net ...................     --         --           --         (2,390)     43,814     (25,040)        --         16,384
Other, net .....................        4      2,675         --           --          --          --           --          2,679
------   --------    ---------    ---------    --------    --------    ---------    ---------

Balance at December 31, 2002 ...    1,262     47,657      629,773       84,264     (35,590)    (36,961)     (75,649)     614,756

Net income .....................     --         --         39,486         --          --          --           --         39,486
Cash dividends .................     --         --        (29,796)        --          --          --           --        (29,796)
Other comprehensive income
(loss), net ...................     --         --           --            860      32,017     (22,193)        --         10,684
Merger transactions - Valhi
shares issued to acquire
Tremont shares attributable to:
Tremont minority interest ....       48     50,926         --           --          --          --           --         50,974
NL's holdings on Tremont .....       30     19,219         --           --          --          --        (19,249)        --   
Adjust treasury stock for Valhi
shares held by NL .............     --         --           --           --          --          --         (7,616)      (7,616)
Income taxes related to
Kronos distribution ...........     --      (19,019)        --           --          --          --           --        (19,019)
Other, net .....................     --          265         --           --          --          --           --            265
------   --------    ---------    ---------    --------    --------    ---------    ---------

Balance at December 31, 2003 ...   $1,340   $ 99,048    $ 639,463    $  85,124    $ (3,573)   $(59,154)   $(102,514)   $ 659,734
======   ========    =========    =========    ========    ========    =========    =========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2001, 2002 and 2003

(In thousands)

2001           2002            2003
----           ----            ----

Cash flows from operating activities:

Net income                                                                $ 93,198       $  1,237       $ 39,486
Depreciation and amortization                                               74,493         61,776         72,969
Legal settlements, net                                                     (10,307)             -           -   
Securities transaction gains, net                                          (47,009)        (6,413)          (487)
Proceeds from disposal of marketable
securities (trading)                                                            -         18,136             50
Loss (gain) on disposal of property and
equipment                                                                  (1,375)           261         (9,845)
Insurance gain                                                             (16,190)             -              -
Noncash:
Interest expense                                                           5,601          3,911          2,366
Defined benefit pension expense                                           (3,651)        (2,324)        (5,478)
Other postretirement benefit expense                                        (385)        (4,692)        (4,078)
Deferred income taxes                                                        7,718         (9,652)        29,549
Minority interest                                                           26,082          3,642         10,666
Equity in:
TIMET                                                                      9,161         32,873         (1,910)
Other                                                                       (580)          (566)          (771)
Cumulative effect of change in accounting
principle                                                                       -              -           (586)
Distributions from:
Manufacturing joint venture                                               11,313          7,950            875
Other                                                                      1,300            361          1,205
Other, net                                                                     898         (2,228)        (1,195)
Change in assets and liabilities:
Accounts and other receivables                                             8,464          2,395          3,795
Inventories                                                              (28,623)        45,301        (20,938)
Accounts payable and accrued liabilities                                  30,065        (35,615)        (8,948)
Income taxes                                                               3,439           (475)       (26,646)
Accounts with affiliates                                                   4,025         (4,199)         2,293
Other noncurrent assets                                                   (1,750)         4,149         (1,812)
Other noncurrent liabilities                                              (4,129)        (5,187)        21,115
Other, net                                                                (3,109)        (3,818)         6,871
--------       --------       --------

Net cash provided by operating activities                              158,649        106,829        108,546
--------       --------       --------

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 2001, 2002 and 2003

(In thousands)

2001              2002              2003
----              ----              ----

Cash flows from investing activities:

Capital expenditures                                                 $(70,821)         $ (45,995)       $ (45,331)
Purchases of:
Kronos common stock                                                       -               -              (6,428)
TIMET common stock                                                        -               (534)            (976)
TIMET debt securities                                                     -                  -             (238)
NL common stock                                                     (15,502)           (21,254)            -   
Business unit                                                             -             (9,149)            -   
Tremont common stock                                                   (198)                 -             -   
CompX common stock                                                   (2,650)                 -             -   
Proceeds from disposal of:
Property and equipment                                               11,032              2,957           13,472
Marketable securities (available-for-sale)                           16,802                  -             -   
Change in restricted cash equivalents, net                              8,022              2,539             (248)
Loans to affiliates
Loans                                                               (20,000)                 -             -   
Collections                                                               -              2,000            4,000
Property damaged by fire:
Insurance proceeds                                                   23,361                  -                -
Other, net                                                           (3,205)                 -                -
Other, net                                                               (635)             2,294            1,984
--------          ---------        ---------

Net cash used by investing activities                               (53,794)           (67,142)         (33,765)
---------          ---------        --------- 

Cash flows from financing activities:
Indebtedness:
Borrowings                                                           51,356            364,068           27,106
Principal payments                                                 (102,014)          (390,761)         (59,782)
Deferred financing costs paid                                             -            (10,706)            (426)
Loans from affiliates:
Loans                                                                81,905             13,421           16,354
Repayments                                                          (78,731)           (26,825)         (20,193)
Valhi dividends paid                                                  (27,820)           (27,872)         (29,796)
Distributions to minority interest                                    (10,496)           (27,846)          (6,509)
Other, net                                                              1,347              3,254            2,002
---------          ---------        ---------

Net cash used by financing activities                               (84,453)          (103,267)         (71,244)
---------          ---------        --------- 

Net increase (decrease)                                               $  20,402          $ (63,580)        $  3,537
=========          =========         ========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 2001, 2002 and 2003

(In thousands)

2001             2002              2003
----             ----              ----

Cash and cash equivalents - net change from:
Operating, investing and financing

activities                                                        $ 20,402          $(63,580)        $  3,537
Currency translation                                                 (1,006)            3,650            5,178
Business unit acquired                                                 -                  196             -
--------          --------         -----
19,396           (59,734)           8,715

Balance at beginning of year                                        135,017           154,413           94,679
--------          --------         --------

Balance at end of year                                             $154,413          $ 94,679         $103,394
========          ========         ========

Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized                               $ 57,775          $ 61,016         $ 53,990
Income taxes, net                                                    36,556            14,734           (4,237)

Business unit acquired - net assets consolidated:
Cash and cash equivalents                                           $   -          $    196         $   -   
Restricted cash equivalents                                             -             2,685                -
Goodwill and other intangible assets                                    -             9,007                -
Other non-cash assets                                                   -             1,259                -
Liabilities                                                          -               (3,998)            -
--------          --------         -----

Cash paid                                                        $   -             $  9,149         $   -
========          ========         =====

VALHI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -       Summary of significant accounting policies:

Organization  and  basis of  presentation.  Valhi,  Inc.  (NYSE:  VHI) is a
subsidiary of Contran Corporation.  At December 31, 2003, Contran held, directly
or through subsidiaries,  approximately 90% of Valhi's outstanding common stock.
Substantially  all of  Contran's  outstanding  voting  stock  is held by  trusts
established for the benefit of certain  children and  grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee.  Mr. Simmons, the Chairman of the
Board of Valhi and  Contran,  may be deemed to control such  companies.  Certain
prior  year  amounts  have been  reclassified  to conform  to the  current  year
presentation.

Management's   estimates.   The  preparation  of  financial  statements  in
conformity with accounting principles generally accepted in the United States of
America  ("GAAP")  requires  management to make estimates and  assumptions  that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent assets and liabilities at the date of the financial  statements,  and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.

Principles of consolidation.  The consolidated financial statements include
the accounts of Valhi and its  majority-owned  subsidiaries  (collectively,  the
"Company").   All  material   intercompany   accounts  and  balances  have  been
eliminated.

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

Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed.  Shipping terms of products  shipped in both the Company's  chemicals
and components  products segments are generally FOB shipping point,  although in
some instances shipping terms are FOB destination point (for which sales are not
recognized  until the product is received by the customer).  Amounts  charged to
customers for shipping and handling are included in net sales.  Sales are stated
net of price, early payment and distributor discounts and volume rebates.

Inventories and cost of sales.  Inventories are stated at the lower of cost
or market, net of allowance for obsolete and slow-moving inventories.  Inventory
costs are  generally  based on average cost or the first-in,  first-out  method.
Cost of sales includes costs for  materials,  packing and finishing,  utilities,
salary and benefits, maintenance and depreciation.

Selling, general and administrative expenses;  shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales,  distribution,  shipping and handling,  research and development,  legal,
environmental  remediation  and  administrative  functions  such as  accounting,
treasury and finance,  and includes costs for salaries and benefits,  travel and
entertainment,   promotional  materials  and  professional  fees.  Shipping  and
handling costs of the Company's chemicals segment were approximately $49 million
in 2001,  $51 million in 2002 and $63  million in 2003.  Shipping  and  handling
costs of the Company's  component products and waste management segments are not
material.  Advertising  costs,  expensed as incurred,  were  approximately  $2.0
million in each of 2001, 2002 and 2003. Research and development costs, expensed
as incurred, were approximately $7 million in each of 2001, 2002 and 2003.

Cash and cash equivalents.  Cash equivalents include bank time deposits and
government  and  commercial  notes and bills with  original  maturities of three
months or less.

Restricted cash equivalents and marketable debt securities. Restricted cash
equivalents  and  debt  securities,   invested  primarily  in  U.S.   government
securities  and money  market funds that invest in U.S.  government  securities,
include  amounts  restricted  pursuant  to  outstanding  letters of credit  ($10
million and $5 million at  December  31,  2002 and 2003,  respectively),  and at
December 31, 2003 also includes $24 million held by special purpose trusts (2002
- $59 million) formed by NL Industries,  the assets of which can only be used to
pay for certain of NL's future environmental remediation and other environmental
expenditures.  Such  restricted  amounts are  generally  classified  as either a
current or noncurrent asset depending on the  classification of the liability to
which  the  restricted  amount  relates.   Additionally,   the  restricted  debt
securities  are generally  classified  as either a current or  noncurrent  asset
depending upon the maturity date of each such debt security.  See Notes 5, 8 and
12.

Marketable securities; securities transactions.  Marketable debt and equity
securities  are  carried at fair value  based upon  quoted  market  prices or as
otherwise  disclosed.  Unrealized  and  realized  gains and  losses  on  trading
securities are recognized in income  currently.  Unrealized  gains and losses on
available-for-sale securities are accumulated in stockholders' equity as part of
accumulated other comprehensive income, net of related deferred income taxes and
minority  interest.  Realized  gains  and  losses  are based  upon the  specific
identification of the securities sold.

Accounts  receivable.  The  Company  provides  an  allowance  for  doubtful
accounts  for  known  and  estimated  potential  losses  arising  from  sales to
customers based on a periodic review of these accounts.

Investment  in  affiliates  and joint  ventures.  Investments  in more than
20%-owned but less than majority-owned companies are accounted for by the equity
method.  See Note 7.  Differences  between the cost of each  investment  and the
Company's pro rata share of the entity's separately-reported net assets, if any,
are  allocated  among the  assets  and  liabilities  of the  entity  based  upon
estimated  relative  fair values.  Such  differences  approximate  a $46 million
credit at December 31, 2003, related principally to the Company's  investment in
TIMET and are charged or credited to income as the entities depreciate, amortize
or dispose of the related net assets.

Goodwill  and  other  intangible  assets;  amortization  expense.  Goodwill
represents the excess of cost over fair value of individual net assets  acquired
in business combinations  accounted for by the purchase method. Through December
31, 2001, goodwill was amortized by the straight-line  method over not more than
40 years. Upon adoption of SFAS No. 142,  Goodwill and Other Intangible  Assets,
effective  January  1,  2002,   goodwill  was  no  longer  subject  to  periodic
amortization.  Other  intangible  assets  have been,  and  continues  to be upon
adoption  of  SFAS  No.  142  effective  January  1,  2002,   amortized  by  the
straight-line  method over their estimated lives.  Goodwill and other intangible
assets are stated net of accumulated amortization. See Notes 9 and 19.

Through  December  31,  2001,  when  events  or  changes  in  circumstances
indicated that goodwill or other  intangible  assets may have been impaired,  an
evaluation was performed to determine if an impairment  existed.  Such events or
circumstances  included,  among other  things,  (i) a  prolonged  period of time
during which the Company's net carrying value of its investment in  subsidiaries
whose common  stocks are  publicly-traded  was greater than quoted market prices
for such stocks and (ii)  significant  current and prior  periods or current and
projected periods with operating losses related to the applicable business unit.
All relevant  factors  were  considered  in  determining  whether an  impairment
existed. If an impairment was determined to exist, goodwill and, if appropriate,
the underlying long-lived assets associated with the goodwill, were written down
to reflect the estimated  future  discounted cash flows expected to be generated
by the underlying  business.  Effective  January 1, 2002, the Company  commenced
assessing  impairment of goodwill and other intangible assets in accordance with
SFAS No. 142. See Note 19.

Property and equipment;  depreciation  expense.  Property and equipment are
stated at cost. The Company has a governmental concession with an unlimited term
to operate an ilmenite mine in Norway.  Mining  properties  consist of buildings
and equipment used in the Company's  Norwegian ilmenite mining  operations.  The
Company  does  not  own  the  ilmenite   reserves   associated  with  the  mine.
Depreciation  of  property  and  equipment  for  financial   reporting  purposes
(including  mining  properties)  is computed  principally  by the  straight-line
method over the  estimated  useful  lives of ten to 40 years for  buildings  and
three to 20 years for equipment.  Accelerated  depreciation methods are used for
income tax  purposes,  as permitted.  Upon sale or  retirement of an asset,  the
related cost and accumulated  depreciation are removed from the accounts and any
gain or loss is recognized in income currently.

Expenditures  for  maintenance,  repairs and minor  renewals are  expensed;
expenditures  for major  improvements  are  capitalized.  The  Company  performs
certain planned major  maintenance  activities  during the year,  primarily with
respect to the chemicals  segment.  Repair and maintenance costs estimated to be
incurred in  connection  with such  planned  major  maintenance  activities  are
accrued in advance and are included in cost of goods sold. At December 31, 2003,
accrued repair and maintenance costs, included in other current liabilities, was
$6 million (2002 - $4 million).

Interest costs related to major long-term capital projects and renewals are
capitalized as a component of  construction  costs.  Interest costs  capitalized
related to the Company's  consolidated business segments were not significant in
2001, 2002 or 2003.

When  events or  changes  in  circumstances  indicate  that  assets  may be
impaired,  an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances  include, among other things, (i) significant
current  and prior  periods or current  and  projected  periods  with  operating
losses,  (ii) a significant  decrease in the market value of an asset or (iii) a
significant  change  in the  extent  or  manner  in which an asset is used.  All
relevant  factors  are  considered.  The test for  impairment  is  performed  by
comparing the estimated  future  undiscounted  cash flows (exclusive of interest
expense)  associated  with  the  asset  to the  asset's  net  carrying  value to
determine  if a  write-down  to market  value or  discounted  cash flow value is
required.  Through  December 31, 2001, if the asset being tested for  impairment
was acquired in a business combination accounted for by the purchase method, any
goodwill which arose out of that business combination was also considered in the
impairment test if the goodwill  related  specifically to the acquired asset and
not to other  aspects of the acquired  business,  such as the  customer  base or
product  lines.  Effective  January 1, 2002,  the  Company  commenced  assessing
impairment  of  goodwill  in  accordance  with  SFAS No.  142,  and the  Company
commenced assessing  impairment of other long-lived assets (such as property and
equipment and mining properties) in accordance with SFAS No. 144. See Note 19.

Long-term  debt.  Amortization  of deferred  financing  costs,  included in
interest  expense,  is  computed  by the  interest  method  over the term of the
applicable issue.

Derivatives  and hedging  activities.  Derivatives are recognized as either
assets or  liabilities  and measured at fair value in  accordance  with SFAS No.
133, Accounting for Derivative  Instruments and Hedging Activities,  as amended.
The  accounting  for  changes  in fair  value of  derivatives  depends  upon the
intended use of the  derivative,  and such changes are recognized  either in net
income  or  other   comprehensive   income.   As  permitted  by  the  transition
requirements  of SFAS No. 133, the Company has  exempted  from the scope of SFAS
No. 133 all host contracts  containing embedded derivatives which were issued or
acquired prior to January 1, 1999. See Note 21.

Income  taxes.  Valhi  and  its  qualifying  subsidiaries  are  members  of
Contran's  consolidated United States federal income tax group (the "Contran Tax
Group"). The policy for intercompany allocation of federal income taxes provides
that  subsidiaries  included in the Contran Tax Group  compute the provision for
income taxes on a separate company basis. Generally,  subsidiaries make payments
to or receive  payments  from  Contran in the amounts they would have paid to or
received  from the  Internal  Revenue  Service had they not been  members of the
Contran Tax Group.  The separate  company  provisions  and payments are computed
using the tax elections made by Contran.

NL and Kronos are  members of the  Contran  Tax Group.  CompX is a separate
U.S.  taxpayer and is not a member of the Contran Tax Group.  Tremont LLC, Waste
Control  Specialists  LLC and The  Amalgamated  Sugar Company LLC are treated as
partnerships for income tax purposes.

Deferred  income tax assets and liabilities are recognized for the expected
future tax  consequences  of  temporary  differences  between the income tax and
financial  reporting  carrying  amounts  of assets  and  liabilities,  including
investments in the Company's  subsidiaries and affiliates who are not members of
the Contran Tax Group and undistributed  earnings of foreign  subsidiaries which
are not deemed to be permanently  reinvested.  Earnings of foreign  subsidiaries
deemed permanently reinvested aggregated $347 million at December 31, 2003 (2002
- $306 million).  The Company periodically  evaluates its deferred tax assets in
the various  taxing  jurisdictions  in which it operates and adjusts any related
valuation  allowance  based on the  estimate of the amount of such  deferred tax
assets  which  the  Company  believes  does not meet the  "more-likely-than-not"
recognition criteria.

Environmental remediation costs. The Company records liabilities related to
environmental  remediation  obligations when estimated  future  expenditures are
probable  and  reasonably  estimable.  Such  accruals  are  adjusted  as further
information  becomes  available  or  circumstances   change.   Estimated  future
expenditures are generally not discounted to their present value.  Recoveries of
remediation  costs from other  parties,  if any, are  recognized  as assets when
their receipt is deemed probable.  At December 31, 2002 and 2003, no receivables
for recoveries have been recognized.

Closure and post closure  costs.  Through  December  31, 2002,  the Company
provided for the estimated  closure and  post-closure  monitoring  costs for its
waste  disposal  site over the  operating  life of the  facility as airspace was
consumed.  Effective  January  1,  2003,  the  Company  adopted  SFAS  No.  143,
Accounting for Asset Retirement  Obligations,  and commenced accounting for such
costs in  accordance  with  SFAS No.  143.  See  Note 19.  Refundable  insurance
deposits  (see  Note 8)  collateralize  certain  of the  Company's  closure  and
post-closure  obligations  and will be refunded to the Company  when the related
policy  terminates or expires if the insurance  company  suffers no losses under
the policy.

Earnings per share.  Basic earnings per share of common stock is based upon
the weighted  average number of common shares actually  outstanding  during each
period.  Diluted  earnings  per share of common  stock  includes  the  impact of
outstanding  dilutive stock options.  The weighted average number of outstanding
stock  options  excluded  from the  calculation  of diluted  earnings  per share
because  their  impact  would have been  antidilutive  aggregated  approximately
297,000 in 2001, 184,000 in 2002 and 410,000 in 2003.

Stock options. The Company accounts for stock-based  employee  compensation
in  accordance  with  Accounting  Principles  Board  Opinion  ("APBO")  No.  25,
Accounting for Stock Issued to Employees, and its various interpretations. Under
APBO No.  25, no  compensation  cost is  generally  recognized  for fixed  stock
options in which the exercise price is greater than or equal to the market price
on the grant  date.  During  the  fourth  quarter  of 2002,  following  the cash
settlement  of certain  stock  options  held by  employees  of NL, NL  commenced
accounting for its remaining stock options using the variable  accounting method
because NL could not overcome the  presumption  that it would not similarly cash
settle its remaining stock options.  Under the variable  accounting  method, the
intrinsic  value of all  unexercised  stock  options  (including  those  with an
exercise  price at least  equal to the  market  price on the date of grant)  are
accrued as an expense  over their  vesting  period,  with  subsequent  increases
(decreases)  in the market price of the  underlying  common  stock  resulting in
additional  compensation  expense  (income).  Compensation cost related to stock
options   recognized  by  the  Company  in  accordance  with  APBO  No.  25  was
approximately  $2.1  million in 2001,  $3.3  million in 2002 and $1.9 million in
2003.

The following  table presents what the Company's  consolidated  net income,
and related per share amounts,  would have been in 2001,  2002 and 2003 if Valhi
and its  subsidiaries  and  affiliates  had each  elected to  account  for their
respective  stock-based  employee  compensation  related  to  stock  options  in
accordance  with the fair  value-based  recognition  provisions of SFAS No. 123,
Accounting for Stock-Based  Compensation,  for all awards granted  subsequent to
January 1, 1995.

Years ended December 31,
2001            2002            2003
----            ----            ----
(In millions, except
per share amounts)

Net income as reported                                                      $93.2          $ 1.2           $39.5

Adjustments, net of applicable income tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25                                                .8            1.7              .9
Stock-based employee compensation expense
determined under SFAS No. 123                                             (3.9)          (2.6)           (1.4)
-----          -----           ----- 

Pro forma net income                                                        $90.1          $  .3           $39.0
=====          =====           =====

Basic earnings per share:
As reported                                                               $ .81          $ .01           $ .32
Pro forma                                                                   .78            -               .32

Diluted earnings per share:
As reported                                                               $ .80          $ .01           $ .32
Pro forma                                                                   .77            -               .32

Employee  benefit  plans.  Accounting  and funding  policies for retirement
plans are described in Note 16.

Note 2 - Business and geographic segments:

% owned by Valhi at
Business segment                 Entity                    December 31, 2003 

Chemicals             Kronos Worldwide, Inc.                      93%
Component products    CompX International Inc.                    69%
Waste management      Waste Control Specialists LLC               90%
Titanium metals       TIMET                                       41%

The Company's  ownership of Kronos includes 32% held directly by Valhi, 51%
held directly by NL Industries,  Inc., a majority-owned subsidiary of Valhi, and
10% owned by Tremont LLC, a wholly-owned  subsidiary of Valhi. Valhi owns 63% of
NL directly,  and Tremont LLC owns an additional 21%. The Company's ownership of
TIMET includes 40% owned directly by Tremont LLC and 1% owned directly by Valhi.
See Note 3.

The  Company  is  organized  based  upon its  operating  subsidiaries.  The
Company's  operating  segments  are defined as  components  of our  consolidated
operations  about which  separate  financial  information  is available  that is
regularly  evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing  performance.  The Company's chief operating
decision maker is Mr. Harold C. Simmons.  Each  operating  segment is separately
managed,  and each  operating  segment  represents  a  strategic  business  unit
offering different products.

The Company's  reportable operating segments are comprised of the chemicals
business conducted by Kronos, the component products business conducted by CompX
and the waste management business conducted by Waste Control Specialists.

Kronos  manufactures and sells titanium dioxide pigments ("TiO2").  TiO2 is
used to impart whiteness,  brightness and opacity to a wide variety of products,
including paints,  plastics,  paper, fibers and ceramics.  Kronos has production
facilities  located  throughout  North  America and  Europe.  Kronos also owns a
one-half interest in a TiO2 production  facility located in Louisiana.  See Note
7.

CompX produces and sells component  products  (ergonomic  computer  support
systems,  precision  ball  bearing  slides  and  security  products)  for office
furniture,  computer related  applications and a variety of other  applications.
CompX has production facilities in North America, Europe and Asia.

Waste  Control  Specialists  operates  a  facility  in West  Texas  for the
processing,  treatment and storage of  hazardous,  toxic and low-level and mixed
radioactive  wastes,  and for the  disposal of  hazardous  and toxic and certain
types of low-level and mixed radioactive  wastes.  Waste Control  Specialists is
seeking  additional  regulatory  authorizations  to  expand  its  treatment  and
disposal capabilities for low-level and mixed radioactive wastes.

TIMET is a  vertically  integrated  producer  of  titanium  sponge,  melted
products (ingot and slab) and a variety of titanium mill products for aerospace,
industrial and other applications with production facilities located in the U.S.
and Europe.

The  Company  evaluates  segment  performance  based on  segment  operating
income,  which is defined as income  before  income taxes and interest  expense,
exclusive of certain non-recurring items (such as gains or losses on disposition
of business units and other  long-lived  assets  outside the ordinary  course of
business and certain legal settlements) and certain general corporate income and
expense items (including  securities  transactions gains and losses and interest
and  dividend  income)  which  are not  attributable  to the  operations  of the
reportable  operating  segments.  The  accounting  policies  of  the  reportable
operating  segments are the same as those described in Note 1. Segment operating
profit  includes the effect of  amortization of any goodwill (prior to 2002) and
other intangible assets attributable to the segment.

Interest income included in the calculation of segment  operating income is
not material in 2001, 2002 or 2003.  Capital  expenditures  include additions to
property and equipment but exclude  amounts paid for business  units acquired in
business  combinations  accounted  for by  the  purchase  method.  See  Note  3.
Depreciation  and  amortization  related to each  reportable  operating  segment
includes  amortization  of any  goodwill  (prior to 2002)  and other  intangible
assets attributable to the segment.  Amortization of deferred financing costs is
included  in  interest  expense.  There are no  intersegment  sales or any other
significant intersegment transactions.

Segment assets are comprised of all assets  attributable to each reportable
operating segment, including goodwill and other intangible assets. The Company's
investment in the TiO2  manufacturing  joint venture (see Note 7) is included in
the chemicals business segment assets.  Corporate assets are not attributable to
any  operating  segment and consist  principally  of cash and cash  equivalents,
restricted cash equivalents,  marketable  securities and loans to third parties.
At December 31,  2003,  approximately  17% of  corporate  assets were held by NL
(2002 - 30%), with substantially all of the remainder held by Valhi.

For  geographic  information,  net  sales  are  attributed  to the place of
manufacture    (point-of-origin)    and   the    location   of   the    customer
(point-of-destination);  property and equipment are attributed to their physical
location. At December 31, 2003, the net assets of non-U.S. subsidiaries included
in consolidated net assets approximated $570 million (2002 - $511 million).

Years ended December 31,
2001             2002             2003
----             ----             ----
(In millions)
Net sales:

Chemicals                                                         $  835.1         $  875.2         $1,008.2
Component products                                                   211.4            196.1            207.5
Waste management                                                      13.0              8.4              4.1
--------         --------         --------

Total net sales                                                 $1,059.5         $1,079.7          1,219.8
========         ========         ========

Operating income:
Chemicals                                                         $  143.5         $   84.4         $  122.3
Component products                                                    13.1              4.5              3.6
Waste management                                                     (14.4)            (7.0)           (11.5)
--------         --------         -------- 

Total operating income                                             142.2             81.9            114.4

General corporate items:
Interest and dividend income                                          38.0             34.3             32.3
Gain on disposal of fixed assets                                     -                  1.6             10.3
Legal settlement gains, net                                           31.9              5.2               .8
Securities transaction gains, net                                     47.0              6.4               .5
Insurance gain                                                        16.2            -
Foreign currency transaction gain                                    -                  6.3            -
Gain on sale/leaseback                                                 2.2            -                -
General expenses, net                                                (34.1)           (44.5)           (64.0)
Interest expense                                                       (62.3)           (60.2)           (58.5)
--------         --------         -------- 
181.1             31.0             35.8
Equity in:
TIMET                                                                 (9.2)           (32.9)             1.9
Other                                                                   .6               .6               .8
--------         --------         --------

Income (loss) before income taxes                               $  172.5         $   (1.3)        $   38.5
========         ========         ========

Net sales - point of origin:
United States                                                     $  380.1         $  387.0         $  409.0
Germany                                                              398.5            404.3            510.1
Belgium                                                              126.8            123.8            150.7
Norway                                                               102.8            111.8            131.5
Netherlands                                                           33.32            31.2             35.3
Other Europe                                                          82.3             89.6            110.4
Canada                                                               231.4            229.2            249.6
Taiwan                                                                11.7             14.7             13.4
Eliminations                                                        (307.4)          (311.9)          (390.2)
--------         --------         -------- 

$1,059.5         $1,079.7         $1,219.8
========         ========         ========

Net sales - point of destination:
United States                                                     $  401.8         $  406.5         $  427.7
Europe                                                               462.4            489.9            605.0
Canada                                                                82.5             83.0             85.5
Asia and other                                                       112.8            100.3            101.6
--------         --------         --------

$1,059.5         $1,079.7         $1,219.8
========         ========         ========

Years ended December 31,
2001             2002              2003
----             ----              ----
(In millions)
Depreciation and amortization:

Chemicals                                                        $  54.6           $  44.3          $  54.5
Component products                                                  14.9              13.0             14.8
Waste management                                                     3.8               3.0              2.7
Corporate                                                            1.2               1.5              1.0
-------           -------          -------

$  74.5           $  61.8          $  73.0
=======           =======          =======

Capital expenditures:
Chemicals                                                        $  53.7           $  32.6          $  35.2
Component products                                                  13.2              12.7              8.9
Waste management                                                     3.1                .6              1.1
Corporate                                                             .8                .1               .1
-------           -------          -------

$  70.8           $  46.0          $  45.3
=======           =======          =======

December 31,
2001             2002              2003
----             ----              ----
(In millions)
Total assets:
Operating segments:

Chemicals                                                      $1,296.5          $1,346.5         $1,542.2
Component products                                                224.2             202.1            209.4
Waste management                                                   31.1              28.5             24.5
Investment in:
TIMET common stock                                                 60.3              12.9             20.4
TIMET debt securities                                              -                 -                  .3
Other joint ventures                                               12.4              12.6             12.2
Corporate and eliminations                                          526.2             472.2            402.0
--------          --------         --------

$2,150.7          $2,074.8         $2,211.0
========          ========         ========

Net property and equipment:
United States                                                    $   84.0          $   78.2         $   73.0
Germany                                                             243.1             275.9            319.7
Canada                                                               83.0              82.1             91.7
Norway                                                               55.2              68.1             67.4
Belgium                                                              52.6              60.5             71.1
Netherlands                                                           7.3              10.0              9.6
Taiwan                                                                5.5               5.9              5.7
--------          --------         --------

$  530.7          $  580.7         $  638.2
========          ========         ========

Note 3 -  Business combinations and related transactions:

General.  NL (NYSE:  NL), Kronos (NYSE:  KRO), CompX (NYSE:  CIX) and TIMET
(NYSE:  TIE) each file periodic  reports with the SEC pursuant to the Securities
Exchange Act of 1934, as amended.

Effective  July 1,  2001,  the  Company  adopted  SFAS  No.  141,  Business
Combinations,  for all business combinations initiated on or after July 1, 2001,
and all purchase business combinations (including step acquisitions). Under SFAS
No. 141, all business combinations are accounted for by the purchase method, and
the pooling-of-interests  method became prohibited.  The Company did not qualify
to use the  pooling-of-interests  method of accounting for business combinations
prior to July 1, 2001.

NL  Industries,  Inc.  At the  beginning  of 2001,  Valhi  held 60% of NL's
outstanding  common stock, and Tremont held an additional 20% of NL. During 2001
and 2002,  NL  purchased  shares of its own common  stock in market and  private
transactions for an aggregate of $36.8 million,  thereby  increasing Valhi's and
Tremont's ownership of NL to 63% and 21% at December 31, 2003, respectively. See
Note 17. The Company  accounted for such  increases in its interest in NL by the
purchase method (step acquisitions).

In January 2002, NL purchased the insurance brokerage  operations conducted
by EWI Re, Inc.  and EWI Re, Ltd.  for an aggregate  cash  purchase  price of $9
million. See Note 17.

Kronos  Worldwide,  Inc. Prior to December 2003,  Kronos was a wholly-owned
subsidiary  of  NL.  In  December  2003,  NL  completed  the   distribution   of
approximately 48.8% of Kronos' common stock to NL shareholders  (including Valhi
and Tremont LLC) in the form of a pro-rata dividend. Shareholders of NL received
one share of Kronos  common stock for every two shares of NL held.  Subsequently
in December 2003,  Valhi purchased  additional  shares of Kronos common stock by
market transactions for an aggregate of $6.4 million.  The Company accounted for
such  increases  in  its  interest  in  Kronos  by  the  purchase  method  (step
acquisition).

Valhi,  Tremont and NL are members of the Contran Tax Group.  NL is a party
to a tax sharing  agreement with Valhi  pursuant to which NL generally  computes
its  provision  for  income  taxes  on a  separate-company  basis,  and NL makes
payments to or receives  payments  from Valhi in amounts that it would have paid
to or received from the U.S.  Internal  Revenue Service had NL not been a member
of the Contran Tax Group.  Prior to NL's completion of the distribution of 48.8%
of the outstanding  shares of common stock of Kronos,  Kronos and its qualifying
subsidiaries  were  members  of NL's  tax  group.  Following  completion  of the
distribution,  Kronos and its qualifying  subsidiaries  are no longer members of
NL's tax group, but Kronos and its qualifying  subsidiaries  will remain members
of the Contran Tax Group. NL's  distribution of 48.8% of the outstanding  shares
of common  stock of Kronos is taxable to NL, and NL is required  to  recognize a
taxable gain equal to the difference between the fair market value of the shares
of Kronos  common  stock  distributed  ($17.25  per share,  equal to the closing
market  price  of  Kronos'  common  stock  on  December  8,  2003,  the date the
distribution  was  completed)  and NL's  adjusted tax basis in such stock at the
date of distribution.  With respect to the shares of Kronos distributed to Valhi
and Tremont (20.2 million shares in the aggregate),  effective December 1, 2003,
Valhi and NL amended the terms of their tax sharing  agreement to not require NL
to pay up to Valhi the tax liability  generated  from the  distribution  of such
Kronos shares to Valhi and Tremont, since the tax on that portion of the gain is
deferred  at the Valhi level due to Valhi,  Tremont and NL being  members of the
same tax group. NL was required to recognize a tax liability with respect to the
Kronos shares distributed to NL shareholders  other than Valhi and Tremont,  and
such tax liability was approximately $22.5 million. The Company's pro-rata share
of such tax liability,  based on the Company's ownership of NL, is approximately
$19.0 million and in accordance  with GAAP has been recognized as a reduction of
the Company's additional paid-in capital.  Completion of the distribution had no
other  impact on the  Company's  consolidated  financial  position,  results  of
operations or cash flows.

CompX  International Inc. At the beginning of 2001, the Company held 68% of
CompX's  common stock.  During 2001,  CompX  purchased  shares of its own common
stock  in  market  transactions  for  an  aggregate  of  $2.6  million,  thereby
increasing  the  Company's  ownership  interest of CompX to 69% at December  31,
2003.  The Company  accounted  for such increase in its interest in CompX by the
purchase method (step acquisition).

Tremont Corporation,  Tremont Group, Inc. and Tremont LLC. At the beginning
of 2001, Valhi and NL owned 80% and 20%,  respectively,  of Tremont Group,  Inc.
Tremont  Group was a holding  company  which  owned 80% of Tremont  Corporation.
During 2001, Valhi purchased a nominal number of additional Tremont  Corporation
common  shares for  $198,000.  The Company  accounted  for such  increase in its
interest in Tremont by the purchase method (step acquisition).

In February  2003,  Valhi  completed two  consecutive  merger  transactions
pursuant  to  which   Tremont   Group  and  Tremont  both  became   wholly-owned
subsidiaries  of Valhi.  Under these merger  transactions,  (i) Valhi issued 3.5
million  shares of its common  stock to NL in  exchange  for NL's 20%  ownership
interest in Tremont  Group and (ii) Valhi  issued 3.4 shares of its common stock
(plus cash in lieu of  fractional  shares) to Tremont  stockholders  (other than
Valhi and Tremont Group) in exchange for each share of Tremont common stock held
by such  stockholders,  or an  aggregate  of 4.3 million  shares of Valhi common
stock,  in each case in a tax-free  exchange.  A special  committee of Tremont's
board of directors,  consisting of members unrelated to Valhi who retained their
own independent financial and legal advisors, recommended approval of the second
merger.  Subsequent to these two mergers,  Tremont  Group and Tremont  merged to
form  Tremont  LLC,  also wholly  owned by Valhi.  The number of shares of Valhi
common stock issued to NL in exchange for NL's 20% ownership interest in Tremont
Group was equal to NL's 20%  pro-rata  interest in the shares of Tremont  common
stock held by Tremont  Group,  adjusted for the 3.4 exchange ratio in the second
merger.

For financial reporting purposes,  the Tremont shares previously held by NL
(either directly or indirectly through NL's ownership interest in Tremont Group)
were already considered as part of the Valhi  consolidated  group's ownership of
Tremont to the extent of  Valhi's  ownership  interest  in NL.  Therefore,  that
portion  of such  Tremont  shares  was  not  considered  as held by the  Tremont
minority stockholders.  As a result, the Valhi shares issued to NL in the merger
transactions described above were deemed to have been issued in exchange for the
Tremont  shares held by the Tremont  minority  interest  only to the extent that
Valhi did not have an ownership interest in NL. At December 31, 2003, NL and its
subsidiaries  owned an  aggregate of 4.7 million  shares of Valhi common  stock,
including 3.5 million shares received by NL in the merger transactions described
above and 1.2 million shares previously acquired by NL. As discussed in Note 14,
the amount shown as treasury stock in the Company's  consolidated  balance sheet
for financial reporting purposes includes the Company's proportional interest in
the shares of Valhi common stock held by NL.  Accordingly,  a portion of the 3.5
million  shares of Valhi common  stock  issued to NL in the merger  transactions
were  reported  as  treasury  stock,  and were not deemed to have been issued in
exchange for Tremont shares held by the minority interest,  since they represent
shares  issued to  "acquire"  the portion of the  Tremont  shares  already  held
directly  or  indirectly  by NL  that  were  considered  as  part  of the  Valhi
consolidated group's ownership of Tremont.

The  following  table  presents the number of Valhi common shares that were
issued pursuant to the merger transactions described above.

Equivalent
Tremont             Valhi
shares         shares(1)

Valhi shares issued to NL in exchange for NL's ownership interest in Tremont
Group:

Valhi shares issued to NL(2)                                                                            3,495,200

Less shares deemed Valhi has issued to itself based
on Valhi's ownership interest in NL                                                                   (2,957,288)
----------

537,912
----------
Valhi shares issued to the Tremont stockholders:
Total number of Tremont shares outstanding                                            6,424,858

Less Tremont shares held by Tremont Group and Valhi(3)                               (5,146,421)
----------

1,278,437         4,346,686
==========

Less fractional shares converted into cash                                                                   (1,758)

Less shares deemed Valhi has issued to itself based on
Valhi's ownership interest in NL(4)                                                                        (23,494)
---------

4,321,434
---------
Net Valhi shares issued to acquire the Tremont
minority interest                                                                                     4,859,346
=========

(1)  Based on the 3.4 exchange ratio.
(2)  Represents 5,141,421 shares of Tremont held by Tremont Group, multiplied by
NL's 20% ownership interest in Tremont Group, adjusted for the 3.4 exchange
ratio in the merger.
(3)  The Tremont  shares held by Tremont  Group and Valhi were  cancelled in the
merger transactions.
(4)  Represents  shares of Tremont held  directly by NL,  multiplied  by Valhi's
ownership interest in NL and adjusted for the 3.4 exchange ratio.

For financial reporting purposes,  the merger transactions  described above
were accounted for by the purchase  method (step  acquisition  of Tremont).  The
shares of Valhi common stock issued to the Tremont minority interest were valued
at $10.49 per share,  representing  the  average of Valhi's  closing  NYSE stock
price for the period  beginning  two trading  days prior to the November 5, 2002
public announcement of the signing of the definitive merger agreement and ending
two trading days following such public announcement.  The shares of Valhi common
stock  issued  to  acquire  the  Tremont  shares  held by NL that  were  already
considered  as part of the Valhi's  consolidated  groups  ownership  of Tremont,
which were reported as treasury  stock,  were valued at carryover  cost basis of
approximately  $19.2 million.  The following presents the purchase price for the
step  acquisition  of Tremont.  The value assigned to the shares of Valhi common
stock issued is $10.49 per share, as discussed above.

Valhi
shares               Assigned
issued                 value
----------            --------
(In millions)

Net Valhi shares issued                                                         4,859,346                 $51.0
=========

Plus cash fees and expenses                                                                                 0.9
-----

Total purchase price                                                                                  $51.9
=====

The purchase price has been allocated based upon a preliminary  estimate of
the fair value of the net assets acquired as follows:

Amount
(In millions)

Book value of historical minority interest in Tremont's net

assets acquired                                                                                             $28.7

Remaining purchase price allocation:
Increase property and equipment to fair value                                                                4.0
Reduce Tremont's accrued OPEB costs to accumulated benefit
obligations                                                                                                 4.4
Adjust deferred income taxes                                                                                 8.9
Goodwill                                                                                                     5.9
-----

Purchase price                                                                                           $51.9
=====

The  adjustments  to increase the carrying  value of property and equipment
and mining  properties relate to such assets of NL, and gives recognition to the
effect that Valhi's  acquisition of the minority  interest in Tremont results in
an increase in Valhi's effective  ownership of NL due to Tremont's  ownership of
NL. The  reduction  in  Tremont's  accrued  OPEB costs to an amount equal to the
accumulated benefit obligations eliminates the unrecognized prior service credit
and the  unrecognized  actuarial  gains. The adjustment to deferred income taxes
includes  (i) the deferred  income tax effect of the  estimated  purchase  price
allocated to property and  equipment  and accrued OPEB costs and (ii) the effect
of  adjusting  the  deferred  income  taxes   separately-recognized  by  Tremont
(principally an elimination of a deferred  income tax asset valuation  allowance
separately-recognized  by Tremont which Valhi does not believe is required to be
recognized  at the  Valhi  level  under the  "more-likely-than-not"  recognition
criteria).

Assuming the merger  transactions had been completed as of January 1, 2002,
the Company would have reported a net loss of $3.5 million,  or $.03 per diluted
share,  in 2002.  Such pro forma effect on the Company's  reported net income in
2003 was not material.

As noted  above,  the  Company's  proportional  interest in shares of Valhi
common  stock  held  by NL are  reported  as  treasury  stock  in the  Company's
consolidated  balance sheet.  As a result of the merger  transactions  discussed
above, the acquisition of minority interest in Tremont  effectively  resulted in
an  increase in the  Company's  overall  ownership  of NL due to  Tremont's  21%
ownership interest in NL.  Accordingly,  as a result of the merger  transactions
noted above, the Company also recognized a $7.6 million increase in its treasury
stock  attributable  to the shares of Valhi common stock held by NL. At December
31, 2003,  the amount  reported as treasury  stock,  at cost,  in the  Company's
consolidated  balance sheet includes an aggregate of $37.9 million  attributable
to the 4.7  million  shares  of Valhi  common  stock  held by NL (or 85% of NL's
aggregate original cost basis in such shares of $44.8 million).

TIMET.  At the beginning of 2001,  the Company  owned 39% of TIMET.  During
2002 and 2003, the Company purchased  additional shares of TIMET common stock in
market  transactions for an aggregate of $1.5 million,  increasing the Company's
ownership of TIMET to 41% as of December 31, 2003. During 2003, the Company also
purchased   certain   convertible  debt  securities  issued  by  a  wholly-owned
subsidiary of TIMET. See Note 7.

Waste Control  Specialists  LLC. In 1995,  Valhi acquired a 50% interest in
newly-formed  Waste Control  Specialists  LLC. Valhi  contributed $25 million to
Waste  Control  Specialists  at  various  dates  through  early 1997 for its 50%
interest. Valhi contributed an additional aggregate $50 million to Waste Control
Specialists'  equity during 1997 through 2000, thereby increasing its membership
interest  from 50% to 90%. A  substantial  portion of such equity  contributions
were used by Waste Control Specialists to reduce the then-outstanding balance of
its revolving  intercompany  borrowings from the Company.  At formation in 1995,
the other owner of Waste Control Specialists,  KNB Holdings,  Ltd.,  contributed
certain assets,  primarily land and certain  operating  permits for the facility
site, and Waste Control  Specialists  also assumed  certain  indebtedness of the
other owner.

Valhi is entitled to a 20%  cumulative  preferential  return on its initial
$25 million  investment,  after which earnings are generally split in accordance
with ownership  interests.  The  liabilities of the other owner assumed by Waste
Control   Specialists  in  1995  exceeded  the  carrying  value  of  the  assets
contributed by the other owner.  Accordingly,  all of Waste Control Specialists'
cumulative  net  losses  to date  have  accrued  to the  Company  for  financial
reporting  purposes,  and all of Waste Control  Specialists future net income or
net losses  will also  accrue to the Company  until  Waste  Control  Specialists
reports positive equity attributable to the other owner. See Note 13.

Note 4 - Accounts and other receivables:

December 31,
2002             2003
----             ----
(In thousands)

Accounts receivable                                                                    $174,644         $191,714
Notes receivable                                                                          2,221            2,026
Accrued interest                                                                            114                -
Allowance for doubtful accounts                                                          (6,356)          (4,649)
--------         -------- 

$170,623         $189,091

Note 5 - Marketable securities:

December 31,
2002            2003
----            ----
(In thousands)

Current assets:

Restricted debt securities                                                            $  9,670        $  6,147
Halliburton Company common stock (trading)                                                  47            -
--------        -----

$  9,717        $  6,147
========        ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC                                                     $170,000        $170,000
Restricted debt securities                                                               9,232           6,870
Other common stocks                                                                        350              71
--------        --------

$179,582        $176,941

Amalgamated.  Prior to 2001, the Company transferred control of the refined
sugar operations previously conducted by the Company's wholly-owned  subsidiary,
The  Amalgamated  Sugar  Company,  to  Snake  River  Sugar  Company,  an  Oregon
agricultural  cooperative  formed by certain  sugarbeet growers in Amalgamated's
areas  of  operations.  Pursuant  to the  transaction,  Amalgamated  contributed
substantially  all of its net assets to the  Amalgamated  Sugar  Company  LLC, a
limited liability company  controlled by Snake River, on a tax-deferred basis in
exchange for a non-voting  ownership  interest in the LLC. The cost basis of the
net assets  transferred by Amalgamated to the LLC was approximately $34 million.
As part of such transaction, Snake River made certain loans to Valhi aggregating
$250 million.  Such loans from Snake River are  collateralized  by the Company's
interest in the LLC. Snake River's  sources of funds for its loans to Valhi,  as
well as for the $14 million it contributed to the LLC for its voting interest in
the LLC,  included  cash capital  contributions  by the grower  members of Snake
River and $180  million  in debt  financing  provided  by Valhi,  of which  $100
million was repaid  prior to 2001 when Snake River  obtained an equal  amount of
third-party term loan financing.  After such repayments,  $80 million  principal
amount of Valhi's loans to Snake River remain outstanding. See Notes 8 and 10.

The Company and Snake  River share in  distributions  from the LLC up to an
aggregate of $26.7 million per year (the "base" level),  with a preferential 95%
share going to the Company. To the extent the LLC's distributions are below this
base level in any given  year,  the Company is  entitled  to an  additional  95%
preferential  share of any future annual LLC distributions in excess of the base
level until such shortfall is recovered.  Under certain conditions,  the Company
is entitled to receive  additional cash  distributions  from the LLC,  including
amounts discussed in Note 8. The Company may, at its option,  require the LLC to
redeem the Company's  interest in the LLC beginning in 2010, and the LLC has the
right to  redeem  the  Company's  interest  in the LLC  beginning  in 2027.  The
redemption   price  is  generally  $250  million  plus  the  amount  of  certain
undistributed income allocable to the Company. In the event the Company requires
the LLC to redeem the Company's  interest in the LLC,  Snake River has the right
to  accelerate  the maturity of and call  Valhi's $250 million  loans from Snake
River.

The LLC Company Agreement contains certain  restrictive  covenants intended
to protect the Company's interest in the LLC,  including  limitations on capital
expenditures  and additional  indebtedness  of the LLC. The Company also has the
ability  to  temporarily  take  control  of the LLC in the event  the  Company's
cumulative  distributions  from  the  LLC  fall  below  specified  levels.  As a
condition to  exercising  temporary  control,  the Company  would be required to
escrow  funds in  amounts up to the next  three  years of debt  service of Snake
River's  third-party  term loan (an  aggregate of $30.1  million at December 31,
2003) unless the Company and Snake River's third-party lender otherwise mutually
agree.  Through December 31, 2003, the Company's  cumulative  distributions from
the LLC had not fallen below the specified levels.

Beginning  in 2000,  Snake River  agreed that the annual  amount of (i) the
distributions paid by the LLC to the Company plus (ii) the debt service payments
paid by Snake River to the  Company on the $80 million  loan will at least equal
the  annual  amount of  interest  payments  owed by Valhi to Snake  River on the
Company's  $250 million in loans from Snake  River.  In the event that such cash
flows  to the  Company  are less  than  the  required  minimum  amount,  certain
agreements  among the  Company,  Snake  River and the LLC made in 2000 and 2003,
including a reduction in the amount of  cumulative  distributions  which must be
paid by the LLC to the Company in order to prevent  the Company  from having the
ability to temporarily take control of the LLC, would retroactively  become null
and void.  Through  December 31, 2003,  Snake River and the LLC  maintained  the
minimum required levels of cash flows to the Company.

The  Company  reports  the  cash  distributions  received  from  the LLC as
dividend  income.  See Note 12.  The  amount  of such  future  distributions  is
dependent  upon,  among  other  things,  the  future  performance  of the  LLC's
operations. Because the Company receives preferential distributions from the LLC
and has the right to  require  the LLC to redeem its  interest  in the LLC for a
fixed and determinable  amount  beginning at a fixed and determinable  date, the
Company  accounts  for  its  investment  in  the  LLC  as an  available-for-sale
marketable security carried at estimated fair value. In estimating fair value of
the Company's  interest in the LLC, the Company  considers,  among other things,
the  outstanding  balance  of  the  Company's  loans  to  Snake  River  and  the
outstanding balance of the Company's loans from Snake River.

Other.  At December  31,  2002,  Valhi held  approximately  2,500 shares of
Halliburton  common stock (aggregate cost of $20,000) with a quoted market price
of $18.71 per share, or an aggregate market value of $47,000.  During 2003, such
Halliburton  shares were sold in market  transactions for aggregate  proceeds of
approximately  $50,000.  The aggregate cost of the debt  securities,  restricted
pursuant  to the  terms  of one of NL's  environmental  special  purpose  trusts
discussed in Note 1, approximates  their net carrying value at December 31, 2002
and 2003. The aggregate cost of other noncurrent  available-for-sale  securities
is nominal at December 31, 2002 and 2003. See Note 12.

Note 6 -       Inventories:

December 31,
2002             2003
----             ----
(In thousands)

Raw materials:

Chemicals                                                                            $ 54,077         $ 61,960
Component products                                                                      6,573            6,170
--------         --------
60,650           68,130
--------         --------

In process products:
Chemicals                                                                              15,936           19,854
Component products                                                                     12,602           10,852
--------         --------
28,538           30,706
--------         --------

Finished products:
Chemicals                                                                             109,978          148,047
Component products                                                                     12,296            9,166
--------         --------
122,274          157,213
--------         --------

Supplies (primarily chemicals)                                                           28,071           37,064
--------         --------

$239,533         $293,113

Note 7 -       Investment in affiliates:

December 31,   
2002            2003
----            ----
(In thousands)

TIMET:

Common stock                                                                          $ 12,920        $ 20,357
Debt securities                                                                           -                265
--------        --------
12,920          20,622

Ti02 manufacturing joint venture                                                         130,009         129,010
Other joint ventures                                                                      12,620          12,186
--------        --------

$155,549        $161,818

TiO2  manufacturing   joint  venture.  A  Kronos  TiO2  subsidiary  (Kronos
Louisiana,  Inc.,  or "KLA") and another  Ti02  producer  are equal  owners of a
manufacturing  joint venture  (Louisiana  Pigment Company,  L.P., or "LPC") that
owns and operates a TiO2 plant in Louisiana. KLA and the other Ti02 producer are
each required to purchase  one-half of the TiO2 produced by LPC. LPC operates on
a break-even  basis,  and consequently the Company reports no equity in earnings
of LPC.  Each  owner's  acquisition  transfer  price  for its  share of the TiO2
produced  is equal to its  share of the  joint  venture's  production  costs and
interest  expense,  if any.  Distributions  from LPC, which generally  relate to
excess  cash  generated  by  LPC  from  its  non-cash   production   costs,  and
contributions  to LPC,  which  generally  relate to cash required by LPC when it
builds  working  capital,  are  reported as part of cash  generated by operating
activities  in  the  Company's  Consolidated  Statements  of  Cash  Flows.  Such
distributions  are  reported  net of any  contributions  made to LPC  during the
periods.  Net  distributions  of $11.3 million in 2001, $8.0 million in 2002 and
$900,000 in 2003 are stated net of  contributions of $6.2 million in 2001, $14.2
million in 2002 and $13.1 million in 2003.

LPC's net sales  aggregated  $187.4  million,  $186.3  million  and  $202.9
million in 2001,  2002 and 2003,  respectively,  of which $93.4  million,  $92.4
million and $101.3 million,  respectively,  represented  sales to Kronos and the
remainder  represented  sales to LPC's other owner.  Substantially  all of LPC's
operating costs during the past three years represented costs of sales.

At December 31, 2003,  LPC reported  total assets and  partners'  equity of
$284.0  million  and $260.8  million,  respectively  (2002 - $292.5  million and
$262.8 million, respectively). Approximately 80% of LPC's assets at December 31,
2002 and 2003 are  comprised of property and  equipment.  LPC's  liabilities  at
December 31, 2002 and 2003 are current.  LPC has no indebtedness at December 31,
2002 and 2003.

TIMET.  At December 31, 2003,  the Company held 1.3 million shares of TIMET
with a quoted market price of $52.51 per share, or an aggregate  market value of
$68 million (2002 - 1.3 million  shares with a quoted market price of $19.10 per
share,  or an aggregate  market value of $24 million).  In February 2003,  TIMET
effected  a  reverse  split  of its  common  stock  at a ratio  of one  share of
post-split  common stock for each  outstanding  ten shares of  pre-split  common
stock. The share and per share  disclosures  related to TIMET common stock as of
December 31, 2002 have been adjusted to give effect to such reverse split.  Such
reverse stock split had no financial  statement  impact to the Company,  and the
Company's  ownership interest in TIMET did not change as a result of the reverse
split.

At December 31, 2003,  TIMET  reported  total assets of $567.4  million and
stockholders'  equity  of  $157.6  million  (2002 - $570.1  million  and  $159.4
million,  respectively).  TIMET's  total  assets at December  31,  2003  include
current assets of $276.0  million,  property and equipment of $239.2 million and
intangible  assets of $6.3 million (2002 - $262.7  million,  $254.7  million and
$8.4  million,  respectively).  TIMET's total  liabilities  at December 31, 2003
include current liabilities of $78.5 million,  long-term debt and capital leases
of $9.8 million,  accrued OPEB and pension costs  aggregating  $77.2 million and
debt payable to TIMET Capital  Trust I (the  subsidiary of TIMET that issued the
convertible preferred securities) of $207.5 million (2002 - $92.6 million, $16.0
million,  $74.5 million and $207.5 million,  respectively).  During 2003,  TIMET
reported  net sales of $385.3  million,  operating  income of $5.4 million and a
loss before cumulative effect of change in accounting principle of $12.9 million
(2002 - net sales of $366.5  million,  an operating  loss of $20.8 million and a
loss  before  cumulative  effect  of  change in  accounting  principle  of $67.2
million;  2001 - net sales of $486.9 million,  operating income of $64.5 million
and a net loss of $41.8 million).

The  Company's  equity in losses of TIMET in 2002  includes a $15.7 million
impairment  provision  for an  other  than  temporary  decline  in the  value of
Tremont's  investment  in TIMET.  In  determining  the amount of the  impairment
charge,  Tremont considered,  among other things,  then-recent ranges of TIMET's
NYSE market price and estimates of TIMET's  future  operating  losses that would
further reduce Tremont's carrying value of its investment in TIMET as it records
additional equity in losses of TIMET.

During 2003, the Company  purchased  14,700 of TIMET's  6.625%  convertible
preferred  securities (with an aggregate  liquidation amount of $735,000) for an
aggregate cost of $238,000,  including expenses. The securities were issued by a
wholly-owned  subsidiary  of TIMET,  and have  been  guaranteed  by TIMET.  Such
securities  represent  less  than  1% of the  aggregate  4  million  convertible
preferred  securities that are  outstanding.  Each share of TIMET's  convertible
preferred  securities is convertible  into .1339 shares of TIMET's common stock.
TIMET  has the  right to defer  payments  of  distributions  on the  convertible
preferred securities for up to 20 consecutive quarters,  although  distributions
continue  to  accrue  at the  coupon  rate  during  the  deferral  period on the
liquidation  amount  and  any  unpaid  distributions.  In  October  2002,  TIMET
exercised such deferral rights starting with the quarterly  distribution payable
in December 2002. The convertible  preferred  securities  mature in 2026, and do
not require any amortization  prior to maturity.  TIMET may currently redeem the
convertible  preferred  securities,  at its option,  for 102.65% of  liquidation
amount,  declining  to 100% in December  2006 and  thereafter.  The  convertible
preferred  securities  are  accounted  for  as   available-for-sale   marketable
securities  carried at estimated  fair value.  At December 31, 2003,  the quoted
market price of the convertible  preferred  securities was $33.00 per share, the
amortized cost basis of the convertible preferred securities  approximated their
carrying  amount,  and Contran  held an  additional  1.6 million  shares of such
convertible preferred securities.

Other. At December 31, 2002 and 2003,  other joint ventures,  held by TRECO
LLC, are comprised of (i) a 32% interest in Basic Management, Inc., which, among
other things,  provides  utility  services in the  industrial  park where one of
TIMET's  plants is located,  and (ii) a 12%  interest in The  Landwell  Company,
which is  actively  engaged in efforts to develop  certain  real  estate.  Basic
Management owns an additional 50% interest in Landwell.

At December 31, 2003, the combined  balance sheets of Basic  Management and
Landwell  reflected total assets and partners' equity of $88.0 million and $49.3
million,  respectively  (2002 - $96.8 million and $53.0 million,  respectively).
The combined  total assets at December 31, 2003 include  current assets of $24.1
million,  property and equipment of $16.1 million, prepaid costs and expenses of
$18.5 million, land and development costs of $19.7 million,  long-term notes and
other  receivables of $5.2 million and investment in undeveloped  land and water
rights of $4.2 million (2002 - $30.1  million,  $16.7  million,  $19.5  million,
$18.3  million,  $9.2 million and $2.5 million,  respectively).  Combined  total
liabilities at December 31, 2003 include  current  liabilities of $16.4 million,
long-term debt of $15.9 million and deferred  income taxes of $5.7 million (2002
- $23.6 million, $12.6 million and $6.6 million, respectively).

During 2003, Basic Management and Landwell  reported  combined  revenues of
$14.9 million, income before income taxes of $280,000 and net income of $529,000
(2002 - $18.3 million, $4.1 million and $3.3 million, respectively; 2001 - $19.3
million, $575,000 and $761,000,  respectively).  Landwell is treated for federal
income tax purposes as a partnership,  and accordingly  the combined  results of
operations  of Basic  Management  and Landwell  includes a provision  for income
taxes on Landwell's  earnings  only to the extent that such  earnings  accrue to
Basic Management.

The Company has certain  transactions with certain of these affiliates,  as
more fully described in Note 17.

Note 8 - Other noncurrent assets:

December 31,
2002             2003
----             ----
(In thousands)
Loans and other receivables:
Snake River Sugar Company:

Principal                                                                          $ 80,000         $ 80,000
Interest                                                                             27,910           33,102
Other                                                                                   5,566            5,490
--------         --------
113,476          118,592
Less current portion                                                                    2,221            2,026
--------         --------

Noncurrent portion                                                                   $111,255         $116,566
========         ========

Other assets:
Deferred financing costs                                                             $ 10,588         $ 10,569
Refundable insurance deposits                                                           1,864            1,972
Waste disposal site operating permits                                                   1,754              982
Restricted cash equivalents                                                             2,158              488
Other                                                                                  14,756           13,166
--------         --------

$ 31,120         $ 27,177
========         ========

Valhi's loan to Snake River is  subordinate  to Snake  River's  third-party
senior term loan and bears  interest at a fixed rate of 6.49%,  with all amounts
due no later than 2010.  Covenants contained in Snake River's third-party senior
term  loan  allow  Snake  River,  under  certain  conditions,  to  pay  periodic
installments  for debt  service on the $80 million loan prior to its maturity in
2007.  The Company does not  currently  expect to receive any  significant  debt
service  payments from Snake River during 2004, and  accordingly all accrued and
unpaid  interest has been  classified  as a noncurrent  asset as of December 31,
2003. Under certain  conditions,  Valhi will be required to pledge $5 million in
cash  equivalents  or  marketable  securities  to  collateralize  Snake  River's
third-party senior term loan as a condition to permit continued repayment of the
$80 million loan. No such cash  equivalents  or marketable  securities  have yet
been  required  to be pledged at December  31,  2003,  and the Company  does not
currently expect it will be required to pledge any such amount during 2004.

In April 2000, the Company  amended its loan to Snake River to, among other
things, reduce the interest rate from 12.99% to 6.49%. The reduction of interest
income  resulting from such interest rate reduction will be recouped and paid to
the Company via additional future LLC  distributions  from The Amalgamated Sugar
Company LLC upon achievement of specified levels of future LLC profitability. If
Snake River and the LLC do not maintain minimum specified levels of cash flow to
the Company,  the interest  rate on the loan to Snake River would revert back to
12.99%  retroactive to April 1, 2000. Through December 31, 2003, Snake River and
the LLC maintained the minimum required levels of cash flows to the Company. See
Note 5. Snake  River has granted to Valhi a lien on  substantially  all of Snake
River's  assets to  collateralize  the $80  million  loan,  such  lien  becoming
effective  generally upon the repayment of Snake River's third-party senior term
loan with a current scheduled maturity date of April 2007.

Note 9 - Goodwill and other intangible assets:

Goodwill.  Changes in the carrying amount of goodwill during the past three
years is presented in the table below. Substantially all of the goodwill related
to the chemicals operating segment was generated from the Company's various step
acquisitions of its interest in NL Industries. Substantially all of the goodwill
related to the component  products  operating segment was generated  principally
from CompX's acquisitions of certain business units completed prior to 2001.

Operating segment
-----------------------------
Component
Chemicals          products            Total
(In millions)

Balance at December 31, 2000                                          $314.0           $45.4             $359.4

Goodwill acquired during the year                                        7.7              -                 7.7
Periodic amortization                                                   (14.5)          (2.4)             (16.9)
Changes in foreign exchange rates                                         -             (1.1)              (1.1)
---           -----             ------

Balance at December 31, 2001                                           307.2            41.9              349.1
Goodwill acquired during the year                                       14.1              -                14.1
Changes in foreign exchange rates                                         -              1.8                1.8
---           -----             ------

Balance at December 31, 2002                                           321.3            43.7              365.0
Goodwill acquired during the year                                       10.0             -                 10.0
Changes in foreign exchange rates                                         -              2.6                2.6
---           -----             ------

Balance at December 31, 2003                                          $331.3           $46.3             $377.6
======           =====             ======

Upon adoption of SFAS No. 142 effective  January 1, 2002 (see Note 19), the
goodwill  related  to  the  chemicals  operating  segment  was  assigned  to the
reporting  unit (as that term is defined in SFAS No.  142)  consisting  of NL in
total, and the goodwill related to the components  product operating segment was
assigned to three reporting units within that operating segment,  one consisting
of CompX's  security  products  operations,  one consisting of CompX's  European
operations and one consisting of CompX's Canadian and Taiwanese operations.

Other intangible assets.

December 31,   
2002           2003   
-----         ------  
(In millions)

Patents:

Cost                                                                                   $3.4          $3.4
Less accumulated amortization                                                           1.2           1.5
----          ----

Net                                                                                   2.2           1.9
----          ----

Customer list:
Cost                                                                                    2.6           2.6
Less accumulated amortization                                                            .4            .7
----          ----

Net                                                                                   2.2           1.9
----          ----

$4.4          $3.8
====          ====

The patents intangible asset relates to the estimated fair value of certain
patents acquired in connection with the acquisition of certain business units by
CompX, and the customer list intangible asset relates to NL's acquisition of EWI
discussed in Note 3. The patents intangible asset was, and continues to be after
adoption  of  SFAS  No.  142  effective  January  1,  2002,   amortized  by  the
straight-line  method  over the  lives of the  patents  (approximately  10 years
remaining at December 31, 2003),  with no assumed  residual  value at the end of
the life of the patents.  The customer list intangible asset is amortized by the
straight-line method over the estimated seven-year life of such intangible asset
(approximately 5 years remaining at December 31, 2003), with no assumed residual
value at the end of the life of the intangible  asset.  Amortization  expense of
intangible  assets was  approximately  $229,000  in 2001,  $612,000  in 2002 and
$605,000 in 2003, and amortization  expense of intangible  assets is expected to
be approximately $620,000 in each of calendar 2004 through 2008.

Note 10 - Long-term debt:

December 31,
2002              2003
----              ----
(In thousands)

Valhi:

Snake River Sugar Company                                                             $250,000         $250,000
Bank credit facility                                                                      -               5,000
--------         --------

250,000          255,000
--------         --------

Subsidiaries:
Kronos Worldwide:
Senior Secured Notes                                                                 296,942          356,136
European bank credit facility                                                         27,077                -
CompX bank credit facility                                                              31,000           26,000
Valcor Senior Notes                                                                      2,431                -
Other                                                                                    2,417              789
--------         --------

359,867          382,925
--------         --------

609,867          637,925

Less current maturities                                                                    4,127            5,392
--------         --------

$605,740         $632,533

Valhi.  Valhi's $250  million in loans from Snake River Sugar  Company bear
interest at a weighted  average fixed interest rate of 9.4%, are  collateralized
by the Company's  interest in The  Amalgamated  Sugar Company LLC and are due in
January  2027.  Currently,  these loans are  nonrecourse  to Valhi.  Up to $37.5
million  principal  amount of such loans will  become  recourse  to Valhi to the
extent  that the  balance  of Valhi's  loan to Snake  River  (including  accrued
interest) becomes less than $37.5 million. Under certain conditions, Snake River
has the ability to accelerate the maturity of these loans. See Notes 5 and 8.

At  December  31,  2003,  Valhi has an $85  million  revolving  bank credit
facility which matures in October 2004,  generally  bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings),  and is
collateralized  by 30 million shares of NL common stock and 15 million shares of
Kronos common stock held by Valhi. The agreement limits dividends and additional
indebtedness  of Valhi  and  contains  other  provisions  customary  in  lending
transactions  of this type.  In the event of a change of  control  of Valhi,  as
defined,  the lenders  would have the right to  accelerate  the  maturity of the
facility. The maximum amount which may be borrowed under the facility is limited
to one-third of the aggregate market value of the shares of NL and Kronos common
stock pledged as collateral.  Based on NL's and Kronos' December 31, 2003 quoted
market price of $11.70 and $22.20 per share, respectively,  the shares of NL and
Kronos  common stock  pledged  under the facility  provide more than  sufficient
collateral  coverage  to  allow  for  borrowings  up to the full  amount  of the
facility.  At  December  31,  2003,  Valhi  would  only have  become  limited to
borrowing  less than the full $85 million  amount of the  facility,  or would be
required to pledge additional  collateral if the full amount of the facility had
been  borrowed,  if the  aggregate  market  value of the shares of NL and Kronos
pledged  was $428  million  lower.  At  December  31,  2003,  letters  of credit
aggregating  $1.1 million had been issued,  and $78.9  million was available for
borrowing.

Kronos and its subsidiaries.  In June 2002, Kronos  International  ("KII"),
which  conducts  Kronos'  TiO2  operations  in Europe,  issued  euro 285 million
principal  amount ($280 million when issued) of its 8.875% Senior  Secured Notes
due 2009. The KII Senior Secured Notes are  collateralized by a pledge of 65% of
the common stock or other  ownership  interests  of certain of KII's  first-tier
operating  subsidiaries.  The KII Senior Secured Notes are issued pursuant to an
indenture  which contains a number of covenants and  restrictions  which,  among
other things,  restricts the ability of KII and its  subsidiaries to incur debt,
incur liens, pay dividends or merge or consolidate with, or sell or transfer all
or substantially all of their assets to, another entity.  The KII Senior Secured
Notes  are  redeemable,  at KII's  option,  on or  after  December  30,  2005 at
redemption  prices ranging from 104.437% of the principal  amount,  declining to
100% on or after December 30, 2008. In addition, on or before June 30, 2005, KII
may redeem up to 35% of its Senior  Secured  Notes  with the net  proceeds  of a
qualified  public equity  offering at 108.875% of the principal  amount.  In the
event of a change of control of KII, as  defined,  KII would be required to make
an offer to purchase its Senior  Secured Notes at 101% of the principal  amount.
KII would also be required  to make an offer to purchase a specified  portion of
its  Senior  Secured  Notes at par value in the event  KII  generates  a certain
amount of net proceeds  from the sale of assets  outside the ordinary  course of
business,  and such net proceeds are not otherwise  used for specified  purposes
within a specified time period. At December 31, 2002 and 2003, the quoted market
price of the KII Senior Notes was euro 1,010 and euro 1,000,  respectively,  per
euro 1,000 principal amount.

Also in June 2002,  KII's operating  subsidiaries  in Germany,  Belgium and
Norway entered into a euro 80 million  secured  revolving  bank credit  facility
that matures in June 2005.  Borrowings may be  denominated  in euros,  Norwegian
kroner or U.S.  dollars,  and bear interest at the applicable  interbank  market
rate plus 1.75%.  The  facility  also  provides  for the  issuance of letters of
credit up to euro 5 million.  The KII bank credit facility is  collateralized by
the accounts receivable and inventories of the borrowers,  plus a limited pledge
of all of the other assets of the Belgian borrower. The KII bank credit facility
contains certain restrictive covenants which, among other things,  restricts the
ability of the borrowers to incur debt,  incur liens,  pay dividends or merge or
consolidate  with, or sell or transfer all or substantially  all of their assets
to, another  entity.  At December 31, 2003, no amounts were  outstanding and the
equivalent  of $97.5  million was  available  for  additional  borrowing  by the
subsidiaries.  In January and  February  2004,  the  equivalent  of a net of $50
million was borrowed under the facility.

In September 2002, certain of Kronos' U.S.  subsidiaries entered into a $50
million  revolving  credit facility (nil  outstanding at December 31, 2003) that
matures in  September  2005.  The  facility is  collateralized  by the  accounts
receivable,  inventories  and certain fixed assets of the borrowers.  Borrowings
under  this   facility   are   limited  to  the  lesser  of  $45  million  or  a
formula-determined  amount based upon the accounts receivable and inventories of
the borrowers.  Borrowings bear interest at either the prime rate or rates based
upon the eurodollar rate. The facility  contains certain  restrictive  covenants
which,  among other  things,  restricts  the abilities of the borrowers to incur
debt, incur liens, pay dividends in certain circumstances,  sell assets or enter
into  mergers.  At December 31, 2003,  $39 million was  available  for borrowing
under the facility.

Under the  cross-default  provisions of the KII Senior Secured  Notes,  the
Notes may be accelerated  prior to their stated  maturity if KII or any of KII's
subsidiaries  default under any other  indebtedness in excess of $20 million due
to a failure to pay such other  indebtedness  at its due date (including any due
date that arises  prior to the stated  maturity  as a result of a default  under
such other indebtedness).  Under the cross-default  provisions of KII's European
revolving credit facility, any outstanding borrowings under such facility may be
accelerated prior to their stated maturity if the borrowers or KII default under
any other  indebtedness in excess of euro 5 million due to a failure to pay such
other  indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other indebtedness).  In
the event the cross-default provisions of either the Senior Secured Notes or the
European revolving credit facility become  applicable,  and such indebtedness is
accelerated,  KII would be  required to repay such  indebtedness  prior to their
stated maturity.

In January 2004,  Kronos' Canadian  subsidiary  entered into a new Cdn. $30
million  revolving credit facility that matures in January 2009. The facility is
collateralized  by the accounts  receivable  and  inventories  of the  borrower.
Borrowings  under this facility are limited to the lesser of Cdn. $26 million or
a  formula-determined  amount based upon the accounts receivable and inventories
of the  borrower.  Borrowings  bear  interest  at rates  based  upon  either the
Canadian prime rate, the U.S. prime rate or LIBOR. The facility contains certain
restrictive  covenants which,  among other things,  restricts the ability of the
borrower to incur debt,  incur liens,  pay  dividends in certain  circumstances,
sell assets or enter into mergers.

In 2002, NL redeemed $194 million principal amount of the NL Senior Secured
Notes at par value,  using available cash on hand ($25 million) and a portion of
the  net  proceeds  from  the  issuance  of the KII  Senior  Secured  Notes.  In
accordance  with the terms of the  indenture  governing  the NL  Senior  Secured
Notes,  on June 28, 2002,  NL  irrevocably  placed on deposit with the NL Senior
Secured Note trustee funds in an amount sufficient to pay in full the redemption
price plus all accrued and unpaid  interest due on the July 28, 2002  redemption
date for the $169 million of NL Senior Notes redeemed using a portion of the net
proceeds from the issuance of the KII Senior Notes.  Immediately thereafter,  NL
was released  from its  obligations  under such  indenture,  the  indenture  was
discharged  and all  collateral was released to NL. Because NL had been released
as the primary  obligor under the  indenture as of June 30, 2002,  the NL Senior
Secured Notes were  eliminated from the balance sheet as of that date along with
the funds  placed on  deposit  with the  trustee  to  effect  the July 28,  2002
redemption.  NL  recognized  a loss  on the  early  extinguishment  of  debt  of
approximately $2 million in the second quarter of 2002,  consisting primarily of
the interest on the NL Senior  Secured  Notes for the period from July 1 to July
28, 2002. Such loss is recognized as a component of interest expense.

CompX. At December 31, 2003,  CompX has a $47.5 million  secured  revolving
bank credit facility  maturing in January 2006 with interest at rates based upon
the prime rate or LIBOR (3.2% at December 2003). The facility is  collateralized
by substantially  all of CompX's U.S.  tangible assets as well as a pledge of at
least 65% of the ownership interests in CompX's first-tier foreign subsidiaries.
The facility  contains certain  covenants and restrictions  customary in lending
transactions  of this type which,  among other things,  restricts the ability of
CompX and its subsidiaries to incur debt, incur liens, pay dividends or merge or
consolidate  with,  or transfer all or  substantially  all of their  assets,  to
another entity.  In the event of a change of control of CompX,  as defined,  the
lenders would have the right to accelerate  the maturity of the facility.  CompX
would also be required under certain conditions to use the net proceeds from the
sale of assets  outside the  ordinary  course of business to reduce  outstanding
borrowings  under the facility,  and such a  transaction  would also result in a
permanent  reduction of the size of the  facility.  At December 31, 2003,  $21.5
million was available to CompX for additional  borrowing  under the terms of the
facility.

Other  indebtedness.  At December  31,  2002,  the quoted  market  price of
Valcor's  unsecured 9 5/8% Senior Notes due November  2003 was $1,003 per $1,000
principal amount.  Such Valcor Notes were redeemed by Valcor in February 2003 at
par value.

Aggregate maturities of long-term debt at December 31, 2003:

Years ending December 31,                                                                           Amount
(In thousands)

2004                                                                                               $  5,392
2005                                                                                                    190
2006                                                                                                 26,183
2007                                                                                                     25
2008                                                                                                    -  
2009 and thereafter                                                                                 606,135
--------

$637,925

Restrictions.  Certain of the credit facilities described above require the
respective   borrower  to  maintain  minimum  levels  of  equity,   require  the
maintenance  of  certain  financial  ratios,   limit  dividends  and  additional
indebtedness and contain other provisions and restrictive covenants customary in
lending  transactions  of this type. At December 31, 2003,  the  restricted  net
assets of consolidated subsidiaries approximated $104 million.

At December 31, 2003,  amounts available for the payment of Valhi dividends
pursuant to the terms of Valhi's revolving bank credit facility  aggregated $.06
per Valhi share outstanding per quarter, plus an additional $20 million.

Note 11 - Accrued liabilities:

December 31,
2002              2003
----              ----
(In thousands)
Current:

Employee benefits                                                                     $ 43,534          $ 48,827
Environmental costs                                                                     57,496            24,956
Deferred income                                                                          6,018             4,699
Interest                                                                                   317               383
Other                                                                                   42,101            51,226
--------          --------

$149,466          $130,091
========          ========

Noncurrent:
Insurance claims and expenses                                                         $ 16,416          $ 13,303
Employee benefits                                                                       10,409             9,705
Deferred income                                                                          1,875             1,634
Asset retirement obligations                                                             1,665             1,670
Other                                                                                    8,609             8,596
--------          --------

$ 38,974          $ 34,908
========          ========

The asset retirement obligations are discussed in Note 19.

Note 12 - Other income, net:

Years ended December 31,
2001             2002            2003
----             ----            ----
(In thousands)

Securities earnings:

Dividends and interest                                                $ 38,003          $ 34,344       $ 32,334
Securities transactions, net                                            47,009             6,413            487
--------          --------       --------
85,012            40,757         32,821
Legal settlement gains, net                                               31,871             5,225            823
Insurance gain                                                            16,190              -                 -
Business interruption insurance                                            7,222              -                 -
Currency transactions, net                                                 1,824             4,859         (8,409)
Noncompete agreement income                                                4,000             4,000            333
Disposal of property and equipment, net                                    1,375              (261)         9,845
Pension curtailment/settlement gains                                         116               677              -
Other, net                                                                 6,390             5,031          4,521
--------          --------       --------

$154,000          $ 60,288       $ 39,934
========          ========       ========

Dividends  and  interest  income  in 2001,  2002 and  2003  includes  $23.6
million,   $23.6   million  and  $23.7   million,   respectively,   of  dividend
distributions  received  from The  Amalgamated  Sugar  Company  LLC. See Note 5.
Noncompete  agreement  income  related to NL's  agreement  not to compete in the
specialty  chemicals  industry  and was  recognized  in income  ratably over the
five-year  noncompete period that ended in January 2003. The pension curtailment
and settlement gains are discussed in Note 16.

Net  securities  transactions  gains  in 2002 are  comprised  of (i) a $3.0
million  unrealized  gain related to the  reclassification  of 621,000 shares of
Halliburton common stock from  available-for-sale to trading securities and (ii)
a $3.4 million  gain  relates to changes in the market value of the  Halliburton
common stock classified as trading securities. Net securities transactions gains
in 2001 are comprised of (i) a $33.1 million  realized gain related to exchanges
of LYONs (a debt  instrument  previously  issued  by  Valhi)  and the  resulting
disposition  of a portion of the shares of  Halliburton  common  stock for which
such LYONs were exchangeable,  (ii) a $13.7 million realized gain related to the
sale of 390,000 shares of Halliburton common stock in market transactions, (iii)
a $14.2  million  unrealized  gain  related to the  reclassification  of 515,000
Halliburton shares from available-for-sale to trading securities,  (iv) an $11.6
million  unrealized  loss related to changes in market value of the  Halliburton
shares classified as trading securities and (v) a $2.3 million impairment charge
for an other than temporary  decline in value of certain  marketable  securities
held by the Company. See Notes 5 and 10.

In 2001,  2002 and 2003,  NL  recognized  $11.7  million,  $5.2 million and
$823,000,  respectively,  of net gains from legal  settlements,  of which  $11.4
million in 2001, and all in 2002 and 2003,  relates to settlements  with certain
of its former insurance carriers.  These settlements  resolved court proceedings
in  which  NL  sought   reimbursement   from  the  carriers  for  legal  defense
expenditures and indemnity coverage for certain of its environmental remediation
expenditures.  Proceeds from substantially all of the 2001 settlements, plus the
proceeds from similar  settlements in 2000, were  transferred by the carriers to
special purpose trusts formed by NL to pay for certain of its future remediation
and other environmental expenditures.  At December 31, 2002 and 2003, restricted
cash equivalents and debt securities include an aggregate of $59 million and $24
million, respectively, held by such special purpose trusts.

In 2001, Waste Control Specialists recognized a $20.1 million net gain from
a legal settlement related to certain previously-reported  litigation.  Pursuant
to the settlement,  Waste Control  Specialists,  among other things,  received a
cash payment of approximately $20.1 million, net of attorney fees.

In March 2001, NL suffered a fire at its Leverkusen, Germany TiO2 facility.
Production at the facility's chloride-process plant returned to full capacity on
April 8, 2001. The facility's  sulfate-process  plant became  approximately  50%
operational  in September  2001,  and became fully  operational  in late October
2001. The damages to property and the business interruption losses caused by the
fire were covered by insurance,  but the effect on the financial  results of the
Company on a  quarter-to-quarter  basis was impacted by the timing and amount of
insurance recoveries.  Chemicals operating income in 2001 includes $27.3 million
of business  interruption  insurance  recoveries losses caused by the Leverkusen
fire. Of such business  interruption proceeds amount, $20.1 million was recorded
as a reduction of cost of sales to offset unallocated period costs that resulted
from lost  production and the remaining $7.2 million,  representing  recovery of
lost  margin,  was  recorded  as  other  income.  NL also  recognized  insurance
recoveries of $29.1 million in 2001 for property  damage and related cleanup and
other extra  costs,  resulting  in an  insurance  gain of $16.2  million as such
recoveries exceeded the carrying value of the property destroyed and the cleanup
and other extra expenses incurred.

Net gains from  disposal of property  and  equipment in 2001 include a $2.2
million gain related to the sale/leaseback of CompX's manufacturing  facility in
the Netherlands.  Pursuant to the  sale/leaseback,  CompX sold the manufacturing
facility  with a net  carrying  value of $8.2  million  for $10.0  million  cash
consideration  in  December  2001,  and  CompX  simultaneously  entered  into  a
leaseback of the facility with a nominal  monthly  rental for  approximately  30
months.  CompX has the  option  to  extend  the  leaseback  period  for up to an
additional  two years with  monthly  rentals of $40,000 to  $100,000.  CompX may
terminate  the  leaseback at any time without  penalty.  In addition to the cash
received up front,  CompX  included an estimate of the fair market  value of the
monthly rental during the  nominal-rental  leaseback  period as part of the sale
proceeds.  A portion of the gain from the sale of the facility after transaction
costs,  equal to the present  value of the  monthly  rentals  over the  expected
leaseback  period  (including the fair market value of the monthly rental during
the nominal-rental  leaseback period),  has been deferred and is being amortized
into income over the expected leaseback period.  CompX recognizes rental expense
over the leaseback period, including amortization of the prepaid rent consisting
of  the  estimated   fair  market  value  of  the  monthly   rental  during  the
nominal-rental leaseback period.

Net gains from the disposal of property and equipment in 2002 includes $1.6
million  related to the sale of certain  real estate held by Tremont.  Net gains
from the  disposal of property  and  equipment in 2003  includes  $10.3  million
related primarily to the sale of certain real property of NL not associated with
Kronos' TiO2 operations.  Net currency  transaction  gains in 2002 includes $6.3
million related to the  extinguishment of certain  intercompany  indebtedness of
NL.

Note 13 - Minority interest:

December 31,
2002            2003
----            ----
(In thousands)
Minority interest in net assets:

NL Industries                                                                         $ 40,880         $31,262
Kronos Worldwide                                                                             -          11,076
CompX International                                                                     44,539          48,424
Tremont Corporation                                                                     26,911               -
Other subsidiaries of NL                                                                 8,516           9,027
--------         -------

$120,846         $99,789

Years ended December 31,
2001            2002           2003
----            ----           ----
(In thousands)
Minority interest in net earnings (losses):

NL Industries                                                             $23,061        $ 6,331        $ 9,794
Kronos Worldwide                                                                -              -            246
Tremont Corporation                                                          (175)        (4,151)          (217)
CompX International                                                         2,236            198            400
Other subsidiaries of NL                                                      960          1,264            443
-------        -------        -------

$26,082        $ 3,642        $10,666
=======        =======        =======

Tremont  Corporation.  Subsequent to February 2003, following completion of
the  mergers of Valhi and  Tremont  discussed  in Note 3, the  Company no longer
reports minority interest in Tremont's net assets or net earnings (losses).

Waste Control  Specialists.  Waste Control  Specialists was formed by Valhi
and  another  entity in 1995.  See Note 3.  Waste  Control  Specialists  assumed
certain  liabilities  of the  other  owner  and such  liabilities  exceeded  the
carrying value of the assets contributed by the other owner.  Consequently,  all
of Waste Control Specialists aggregate inception-to-date net losses have accrued
to the  Company  for  financial  reporting  purposes,  and all of Waste  Control
Specialists  future  net income or net losses  will also  accrue to the  Company
until Waste Control  Specialists  reports  positive  equity  attributable to the
other owner. Accordingly, no minority interest in Waste Control Specialists' net
assets or net losses is reported at December 31, 2003.

Kronos Worldwide.  The Company commenced  recognizing  minority interest in
Kronos' net assets and net earnings following NL's December 2003 distribution of
a portion of the shares of Kronos common stock to its shareholders. See Note 3.

Other  subsidiaries of NL. Minority interest in NL's  subsidiaries  relates
principally  to NL's  majority-owned  environmental  management  subsidiary,  NL
Environmental Management Services, Inc. ("EMS"). EMS was established in 1998, at
which time EMS contractually assumed certain of NL's environmental  liabilities.
EMS' earnings are based,  in part,  upon its ability to favorably  resolve these
liabilities  on an aggregate  basis.  The  shareholders  of EMS,  other than NL,
actively  manage  the  environmental  liabilities  and  share  in  39%  of  EMS'
cumulative  earnings.  NL continues to consolidate EMS and provides accruals for
the  reasonably  estimable  costs  for  the  settlement  of  EMS'  environmental
liabilities, as discussed in Note 18.

Note 14 - Stockholders' equity:

Shares of common stock
Issued         Treasury        Outstanding
(In thousands)

Balance at December 31, 2000                                           125,730          (10,570)       115,160

Issued                                                                      81             -                81
-------          -------        -------

Balance at December 31, 2001                                           125,811          (10,570)       115,241

Issued                                                                     350             -               350
-------          -------        -------

Balance at December 31, 2002                                           126,161          (10,570)       115,591

Issued:
Tremont merger                                                         7,840           (2,981)         4,859
Other                                                                     26             -                26
Other                                                                     -                (290)          (290)
-------          -------        -------

Balance at December 31, 2003                                           134,027          (13,841)       120,186
=======          =======        =======

The  shares of Valhi  issued in 2003  pursuant  to the  Tremont  merger are
discussed in Note 3. Other shares of Valhi common stock issued during 2001, 2002
and 2003 consist of (i) shares  issued upon  exercise of stock  options and (ii)
stock awards issued to members of Valhi's board of directors.

For  financial  reporting  purposes,  at December 31, 2003  treasury  stock
includes the Company's proportional interest in 4.7 million Valhi shares held by
NL. However,  under Delaware  Corporation Law, 100% of a parent company's shares
held by a  majority-owned  subsidiary of the parent is considered to be treasury
stock.  As a result,  Valhi common shares  outstanding  for financial  reporting
purposes differ from those outstanding for legal purposes.

Valhi options.  Valhi has an incentive  stock option plan that provides for
the  discretionary  grant of,  among other  things,  qualified  incentive  stock
options,  nonqualified stock options,  restricted common stock, stock awards and
stock  appreciation  rights. Up to five million shares of Valhi common stock may
be issued  pursuant to this plan.  Options are generally  granted at a price not
less than fair market value on the date of grant,  generally vest ratably over a
five-year  period  beginning one year from the date of grant and expire 10 years
from the date of grant. Restricted stock, when granted, is generally forfeitable
unless  certain  periods of  employment  are completed and held in escrow in the
name of the grantee until the restriction period expires.  No stock appreciation
rights have been granted.

Outstanding  options at December 31, 2003 represent less than 1% of Valhi's
outstanding shares at that date and expire at various dates through 2013, with a
weighted-average  remaining term of 4.2 years. At December 31, 2003,  options to
purchase  951,000 Valhi shares were  exercisable at prices ranging from $5.48 to
$12.45 per share,  or an aggregate  amount  payable upon exercise of $8 million.
All of such exercisable options are exercisable at various dates through 2012 at
prices  lower than the  Company's  December  31, 2003 market price of $14.96 per
share. At December 31, 2003,  options to purchase 90,000 shares are scheduled to
become  exercisable  in  2004,  and an  aggregate  of 4.1  million  shares  were
available for future grants.

The following  table sets forth changes in  outstanding  options during the
past three years under all Valhi option plans in effect during such periods.

Amount
Exercise           payable
price per            upon
Shares            share            exercise
(In thousands, except
per share amounts)

Outstanding at December 31, 2000                                      2,682            $4.96-$12.06       $20,561

Granted                                                                   8                   10.50            84
Exercised                                                               (76)            4.96- 12.00          (591)
Canceled                                                               (230)            5.36- 12.00        (1,410)
------            ------------       -------

Outstanding at December 31, 2001                                      2,384             4.96- 12.06       $18,644

Granted                                                                   8                   12.45           100
Exercised                                                              (346)            4.96- 12.00        (2,564)
Canceled                                                               (865)                   6.38        (5,517)
------                   -----       -------

Outstanding at December 31, 2002                                      1,181             4.96- 12.45        10,663

Granted                                                                   8                   10.05            80
Exercised                                                               (20)            9.50- 12.00          (210)
Canceled                                                                (76)            4.96-  6.56          (417)
------            ------------       -------

Outstanding at December 31, 2003                                      1,093            $5.48-$12.45       $10,116
======            ============       =======

Stock option plans of subsidiaries and affiliates. NL, CompX and TIMET each
maintain  plans  which  provide  for the  grant of  options  to  purchase  their
respective common stocks. Provisions of these plans vary by company. Outstanding
options to purchase common stock of NL, CompX and TIMET at December 31, 2003 are
summarized below.

Amount
Exercise           payable
price per            upon
Shares            share            exercise
(In thousands, except
per share amounts)

NL Industries                                                       1,140     $  .06-$13.34               $10,512
CompX                                                                 619      10.00- 20.00               $10,684
TIMET                                                                 110      16.60-353.10               $19,715

Other. The pro forma  information  included in Note 1, required by SFAS No.
123,  "Accounting  for  Stock-Based  Compensation,"  as amended,  is based on an
estimation  of the fair value of options  issued  subsequent  to January 1, 1995
using the  Black-Scholes  stock option valuation model. The aggregate fair value
of the nominal number of Valhi options  granted  during 2001,  2002 and 2003 was
not  material.  The  Black-Scholes  model was not  developed  for use in valuing
employee stock  options,  but was developed for use in estimating the fair value
of traded options that have no vesting  restrictions and are fully transferable.
In  addition,   it  requires  the  use  of  subjective   assumptions   including
expectations of future  dividends and stock price  volatility.  Such assumptions
are only used for making the  required  fair  value  estimate  and should not be
considered as indicators of future dividend policy or stock price  appreciation.
Because  changes in the subjective  assumptions  can materially  affect the fair
value  estimate,   and  because  employee  stock  options  have  characteristics
significantly   different  from  those  of  traded  options,   the  use  of  the
Black-Scholes  option-pricing  model may not provide a reliable  estimate of the
fair value of employee  stock  options.  The pro forma  impact on net income and
basic earnings per share  disclosed in Note 1 is not  necessarily  indicative of
future effects on net income or earnings per share.

Note 15 - Income taxes:

Years ended December 31,
2001             2002           2003
----             ----           ----
(In millions)
Components of pre-tax income:
United States:

Contran Tax Group                                                     $ 31.5           $(60.2)         $(34.8)
CompX tax group                                                         (1.0)            (1.9)            6.3
------           ------          ------
30.5            (62.1)          (28.5)
Non-U.S. subsidiaries                                                    142.0             60.8            67.0
------           ------          ------

$172.5           $ (1.3)         $ 38.5
======           ======          ======

Expected tax expense (benefit), at U.S.
federal statutory income tax rate of 35%                                 $ 60.4           $  (.4)         $ 13.5
Non-U.S. tax rates                                                          (5.0)            (7.3)           (1.5)
Incremental U.S. tax and rate differences
on equity in earnings of non-tax group
companies                                                                   8.0             (1.5)            2.6
Change in NL's and Tremont's deferred income
tax valuation allowance, net                                              (20.9)              .4            (7.2)
Refund of prior year German income taxes                                     -                -             (38.0)
Change in Belgian income tax law                                             -               (2.7)            -
U.S. state income taxes, net                                                 2.5             (1.8)            (.6)
No tax benefit for goodwill amortization                                     5.8              -               -
NL tax contingency reserve adjustment, net                                   1.0              2.9            14.7
Nondeductible expenses                                                        .8              3.4             3.7
Nontaxable income                                                           (3.4)             (.1)            -
Other, net                                                                   4.0              1.0             1.7
------           ------          ------

$ 53.2           $ (6.1)         $(11.1)
======           ======          ====== 

Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state                                                $ 11.2           $ (9.3)         $ (6.6)
Non-U.S.                                                                34.3             12.8           (34.0)
------           ------          ------ 
45.5              3.5           (40.6)
------           ------          ------ 
Deferred income taxes (benefit):
U.S. federal and state                                                  21.0             (9.7)             .6
Non-U.S.                                                               (13.3)              .1            28.9
------           ------          ------
7.7             (9.6)           29.5
------           ------          ------

$ 53.2           $ (6.1)         $(11.1)
======           ======          ====== 

Comprehensive provision for income taxes (benefit) allocable to:
Income before cumulative effect of change
in accounting principle                                                $ 53.2           $ (6.1)         $(11.1)
Cumulative effect of change in
accounting principle                                                      -                -                .3
Additional paid-in-capital                                                 -                -              22.5
Other comprehensive income:
Marketable securities                                                  (24.7)            (1.6)            2.1
Currency translation                                                    (2.3)             3.9             4.7
Pension liabilities                                                     (3.9)           (16.4)          (11.5)
------           ------          ------ 

$ 22.3           $(20.2)         $  7.0
======           ======          ======

The  components  of the net deferred tax liability at December 31, 2002 and
2003, and changes in the deferred income tax valuation allowance during the past
three years,  are summarized in the following  tables.  At December 31, 2002 and
2003,  substantially  all of the deferred  tax  valuation  allowance  relates to
Kronos and NL tax jurisdictions, principally Germany.

December 31,
2002                         2003
-------------------------    ------------------------
Assets      Liabilities      Assets      Liabilities
(In millions)
Tax effect of temporary differences related to:

Inventories                                               $   4.4       $  (4.0)      $    .9         $  (3.3)
Marketable securities                                        -            (65.5)         -              (71.5)
Property and equipment                                       43.5        (101.6)         46.3          (108.4)
Accrued OPEB costs                                           17.8           -            15.1            -
Accrued environmental liabilities and
other deductible differences                                73.9           -            72.9            -
Other taxable differences                                    -           (185.3)         -             (205.0)
Investments in subsidiaries and
affiliates not members of the
Contran Tax Group                                           30.2         (29.7)         27.2           (31.2)
Tax loss and tax credit carryforwards                       168.5          -            166.7            -
Valuation allowance                                          (195.5)         -           (193.8)           -
-------       -------       -------         ----
Adjusted gross deferred tax assets
(liabilities)                                             142.8        (386.1)        135.3          (419.4)
Netting of items by tax jurisdiction                         (126.8)        126.8        (113.9)          113.9
-------       -------       -------         -------
16.0        (259.3)         21.4          (305.5)
Less net current deferred tax asset
(liability)                                                   14.1          (3.6)         14.4            (3.9)
-------       -------       -------         ------- 

Net noncurrent deferred tax asset
(liability)                                            $   1.9       $(255.7)      $   7.0         $(301.6)
=======       =======      ========         ======= 

Years ended December 31,
2001           2002             2003
----           ----             ----
(In millions)

Increase (decrease) in valuation allowance:
Increase in certain deductible temporary
differences which the Company believes do
not meet the "more-likely-than-not"

recognition criteria                                                   $  3.8        $ 3.8            $   -
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria                             (24.7)        (3.4)             (7.2)
Foreign currency translation                                              (7.5)        21.6              28.2
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies                                                      (3.7)        10.1             (11.8)
Valhi/Tremont merger                                                       -             -              (10.8)
Other, net                                                                  .4           .1               (.1)
------        -----            ------ 

$(31.7)       $32.2            $ (1.7)
======        =====            ====== 

A reduction  in the Belgian  income tax rate from 40% to 34% was enacted in
December  2002 and became  effective  in January  2003.  This  reduction  in the
Belgian  income tax rate  resulted in a $2.7 million  decrease in the  Company's
income tax expense in 2002 because the Company had  previously  recognized a net
deferred income tax liability with respect to Belgium temporary differences.

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

In the first quarter of 2003, KII was notified by the German Federal Fiscal
Court that it had ruled in KII's  favor  concerning  a claim for refund  suit in
which KII sought  refunds of prior taxes paid during the  periods  1990  through
1997. KII and KII's German  operating  subsidiary  were required to file amended
tax returns with the German tax  authorities to receive  refunds for such years,
and all of such amended  returns were filed  during 2003.  Such amended  returns
reflected  an  aggregate  refund of taxes and related  interest to KII's  German
operating  subsidiary of euro 103.2 million ($123.0  million),  and an aggregate
additional  liability of taxes and related  interest to KII of euro 91.9 million
($109.6  million).  Assessments  and refunds  will be  processed  by year as the
respective  returns  are  reviewed  by the  tax  authorities.  Certain  interest
components  may also be refunded  separately.  The German tax  authorities  have
reviewed and accepted the amended  return with respect to the 1990 tax year.  In
February  2004 KII's  German  operating  subsidiary  received  euro 16.8 million
($19.2  million).  KII  believes  it will  receive  the net refunds of taxes and
related interest for the remaining years during 2004. In addition to the refunds
for the 1990 to 1997 periods, the court ruling also resulted in a refund of 1999
income taxes and interest, and KII received euro 21.5 million ($24.6 million) in
2003. KII has recognized the aggregate euro 32.8 million ($38.0 million) benefit
of such net refunds in its 2003 results of operations.

Certain of the Company's  U.S. and non-U.S.  tax returns are being examined
and tax authorities have or may propose tax deficiencies,  including  non-income
related items and interest. For example:

o    NL's and NL's majority-owned subsidiary,  EMS, 1998 U.S. federal income tax
returns are being examined by the U.S. tax authorities, and NL and EMS have
granted  extensions of the statute of  limitations  for  assessments of tax
with respect to their 1998 and 1999 income tax returns until  September 30,
2004. Based upon the course of the examination, NL anticipates that the IRS
will propose a substantial tax deficiency, including interest, related to a
restructuring transaction.  In an effort to avoid protracted litigation and
minimize the hazards of such litigation,  NL applied to take part in an IRS
settlement   initiative   applicable   to   transactions   similar  to  the
restructuring transaction,  and in April 2003 NL received notification from
the IRS that NL had been accepted into such  settlement  initiative.  Under
the  initiative,  afinal  settlement  with the IRS is to be reached through
expedited  negotiations and, if necessary,  through a specified arbitration
procedure.  NL anticipates that settlement of this matter will likely occur
in 2004,  resulting  in payments  of federal  and state taxes and  interest
ranging from $33 million to $45 million. Additional payments in later years
may be  required  as  part  of the  settlement.  NL has  provided  adequate
accruals to cover the currently expected range of settlement outcomes.

o    Kronos has received a preliminary  tax assessment  related to 1993 from the
Belgian tax  authorities  proposing  tax  deficiencies,  including  related
interest,  of  approximately  euro 6 million ($8  million at  December  31,
2003).  NL has filed a protest to this  assessments,  and  believes  that a
significant  portion of the  assessment is without  merit.  The Belgian tax
authorities  have filed a lien on the fixed assets of Kronos'  Belgian TiO2
operations  in  connection  with this  assessment.  In April  2003,  Kronos
received a notification from the Belgian tax authorities of their intent to
assess a tax  deficiency  related  to 1999  that,  including  interest,  is
expected to be approximately euro 13 million ($16 million). Kronos believes
the proposed  assessment is  substantially  without  merit,  and Kronos has
filed a written  response.  In December 2003,  the Belgian tax  authorities
agreed to a  settlement  of certain tax  assessments  for the years 1991 to
1997 of euro 5 million  ($6.3  million),  including  interest,  a  separate
assessment from the assessments discussed above.

o    The  Norwegian  tax  authorities  have  notified  Kronos of their intent to
assess tax  deficiencies  of  approximately  kroner 12 million ($2 million)
relating  to the years  1998  through  2000.  Kronos has  objected  to this
proposed assessment.

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

At December  31,  2003,  (i) Kronos had the  equivalent  of $438 million of
German income tax loss  carryforwards  with no expiration date, (ii) Tremont had
$6 million of U.S. net  operating  loss  carryforwards  expiring in 2018 through
2020,  and (iii) CompX had the  equivalent of $6 million of net  operating  loss
carryforwards  in The Netherlands with no expiration date and $8 million of U.S.
net operating loss carryforwards  expiring in 2007 through 2018. At December 31,
2003, the U.S. tax attribute carryforwards of Tremont may only be used to offset
future taxable income of the respective  company and are not available to offset
future  taxable  income of other members of the Contran Tax Group,  and the U.S.
net  operating  loss  carryforwards  of CompX may only be used to offset  future
taxable  income of a subsidiary of CompX  acquired prior to 2001 and are limited
in utilization to approximately $400,000 per year.

Note 16 - Employee benefit plans:

Defined  benefit  plans.  The Company  maintains  various  U.S. and foreign
defined benefit  pension plans.  Variances from  actuarially  assumed rates will
result in increases or decreases in  accumulated  pension  obligations,  pension
expense and funding  requirements  in future  periods.  The funded status of the
Company's  defined  benefit  pension  plans and, the  components of net periodic
defined  benefit  pension  cost are  presented  in the tables  below.  Effective
January 1, 2001,  CompX ceased  providing  future defined pension benefits under
its plan in The  Netherlands,  resulting  in a  curtailment  gain of $116,000 in
2001.  Certain  obligations  related to the terminated  plan were not been fully
settled until 2002 and were reflected in accrued  defined  benefit pension costs
at December 31, 2001. Upon settling the remaining obligations,  CompX recognized
a $677,000  settlement  gain in 2002.  See Note 12. At December  31,  2003,  the
Company  currently  expects to contribute the equivalent of  approximately  $9.2
million to all of its defined benefit pension plans during 2004.

Years ended December 31,
2002              2003
----              ----
(In thousands)
Change in projected benefit obligations ("PBO"):

Benefit obligations at beginning of the year                                        $290,329        $ 331,452
Service cost                                                                           4,538            5,347
Interest cost                                                                         18,387           20,063
Participant contributions                                                              1,057            1,357
Plan amendments                                                                            -            3,200
Actuarial losses                                                                         133           28,583
Change in foreign currency exchange rates                                             37,013           43,514
Benefits paid                                                                        (20,005)         (23,999)
--------        --------- 

Benefit obligations at end of the year                                          $331,452        $ 409,517
========        =========

Change in plan assets:
Fair value of plan assets at beginning of the year                                  $230,345        $ 244,655
Actual return on plan assets                                                          (4,376)            (327)
Employer contributions                                                                 9,558           14,838
Participant contributions                                                              1,057            1,357
Change in foreign currency exchange rates                                             28,076           27,249
Benefits paid                                                                        (20,005)         (23,999)
--------        --------- 

Fair value of plan assets at end of year                                        $244,655        $ 263,773
========        =========

Funded status at end of the year:
Plan assets less than PBO                                                           $(86,797)       $(145,744)
Unrecognized actuarial losses                                                         82,830          143,786
Unrecognized prior service cost                                                        4,881            8,566
Unrecognized net transition obligations                                                5,011            5,079
--------        ---------

$  5,925        $  11,687
========        =========

Amounts recognized in the balance sheet:
Prepaid pension costs                                                               $ 17,572           $    -
Unrecognized net pension obligations                                                   5,561           13,747
Accrued pension costs:
Current                                                                             (7,027)          (8,374)
Noncurrent                                                                         (54,930)         (90,517)
Accumulated other comprehensive income                                                44,749           96,831
--------        ---------

$  5,925        $  11,687
========        =========

Years ended December 31,
2001             2002              2003
----             ----              ----
(In thousands)

Net periodic pension cost:

Service cost benefits                                                   $  3,974        $  4,538          $  5,347
Interest cost on PBO                                                      17,428          18,387            20,063
Expected return on plan assets                                           (18,386)        (18,135)          (19,294)
Amortization of prior service cost                                           201             307               354
Amortization of net transition obligations                                   509             515               733
Recognized actuarial losses                                                  703           1,223             2,423
--------        --------          --------

$  4,429        $  6,835          $  9,626
========        ========          ========

The  weighted-average  rate  assumptions  used in determining the actuarial
present  value of  benefit  obligations  as of  December  31,  2002 and 2003 are
presented in the table below. Such weighted-average  rates were determined using
the projected benefit obligations at each date.

December 31,
Rate                                                                     2002                 2003
----                                                                     ----                 ----

Discount rate                                                                        6.0%                 5.5%
Increase in future compensation levels                                               2.7%                 2.9%

The weighted-average  rate assumptions used in determining the net periodic
pension  cost for 2001,  2002 and 2003 are  presented  in the table  below.  The
weighted-average  discount  rate and the  weighted-average  increase  in  future
compensation  levels were determined using the projected benefit  obligations at
the beginning of each year, and the  weighted-average  long-term  return on plan
assets was  determined  using the fair value of plan assets at the  beginning of
each year.

Years ended December 31,
Rate                                      2001                2002                2003
----                                      ----                ----                ----

Discount rate                                                              6.6%                6.3%                6.0% 
Increase in future compensation levels                                     3.1%                2.9%                2.7% 
Long-term return on plan assets                                            8.0%                7.7%                7.4% 

At December 31, 2003, the accumulated  benefit  obligations for all defined
benefit pension plans was approximately  $364 million (2002 - $302 million).  At
December 31, 2003, the projected  benefit  obligations  for all defined  benefit
pension  plans was  comprised  of $86  million  related  to U.S.  plans and $324
million  related  to  non-U.S.  plans  (2002 - $80  million  and  $251  million,
respectively).  At December  31,  2002 and 2003,  all of the  projected  benefit
obligations  attributable  to  non-U.S.  plans  relates to plans  maintained  by
Kronos.  At  December  31,  2003,  approximately  63% of the  projected  benefit
obligations attributable to U.S. plans relates to plans maintained by NL and 37%
relates to a plan  maintained  by a disposed  business unit of Valhi (2002 - 64%
and 36%, respectively).  Kronos and NL use a September 30th measurement date for
their defined  benefit  pension  plans,  and all other plans use a December 31st
measurement date.

At December 31, 2003, the fair value of plan assets for all defined benefit
pension  plans was  comprised  of $67  million  related  to U.S.  plans and $197
million  related  to  non-U.S.  plans  (2002 - $61  million  and  $184  million,
respectively).   At  December  31,  2002  and  2003,  all  of  the  plan  assets
attributable  to  non-U.S.  plans  relates to plans  maintained  by  Kronos.  At
December 31, 2003,  approximately  66% of the plan assets  attributable  to U.S.
plans relates to plans maintained by NL and 34% relates to plans maintained by a
disposed business unit of Valhi (2002 - 71% and 29%, respectively).

At December  31,  2003,  the  projected  benefit  obligations,  accumulated
benefit  obligations  and fair  value of plan  assets  for all  defined  benefit
pension plans for which the  accumulated  benefit  obligation  exceeded the fair
value  of plan  assets  were  $410  million,  $364  million  and  $264  million,
respectively (2002 - $281 million, $258 million and $197 million, respectively).
At December 31, 2002 and 2003, approximately 71% and 79%, respectively,  of such
unfunded amount relates to non-U.S.  plans maintained by Kronos, and most of the
remainder relates to certain U.S. plans maintained by NL.

At December 31, 2003,  substantially all of the assets attributable to U.S.
plans  were  invested  in the  Combined  Master  Retirement  Trust  ("CMRT"),  a
collective  investment  trust  established  by Valhi to  permit  the  collective
investment by certain master trusts which fund certain  employee  benefits plans
sponsored by Contran and certain of its  affiliates.  At December 31, 2002,  $18
million of the assets  attributable to U.S. plans were invested in the CMRT, and
approximately 39% and 61% of the remaining $43 million of assets attributable to
U.S. plans were allocated to equity and fixed income managers, respectively.

At  December  31,  2003,  the asset mix of the CMRT was 63% in U.S.  equity
securities,  24% in U.S. fixed income  securities,  7% in  international  equity
securities  and 6% in cash and other  investments  (2002 - 64%,  26%, 8% and 2%,
respectively).

The CMRT's  long-term  investment  objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indicies) utilizing both third-party  investment
managers as well as investments  directed by Mr. Harold Simmons.  Mr. Simmons is
the  trustee  of the CMRT.  The  trustee  of the  CMRT,  along  with the  CMRT's
investment committee,  actively manage the investments of the CMRT. Such parties
have in the past,  and may in the future,  periodically  change the asset mix of
the CMRT based upon,  among other things,  advice they receive from  third-party
advisors and their  expectations as to what asset mix will generate the greatest
overall return.

For the year ended December 31, 2003, the assumed  long-term rate of return
for plan assets invested in the CMRT was 10%. In determining the appropriateness
of such  long-rate of return  assumption,  the Company  considered,  among other
things,  the historical  rates of return for the CMRT, the current and projected
asset mix of the CMRT and the  investment  objectives  of the  CMRT's  managers.
During  the  16-year  history  of the CMRT from its  inception  in 1987  through
December  31,  2003,  the average  annual rate of return has been  approximately
12.4%.

Defined   contribution   plans.  The  Company   maintains  various  defined
contribution pension plans with Company contributions based on matching or other
formulas.   Defined   contribution   plan  expense   related  to  the  Company's
consolidated  business segments  approximated $2.3 million in 2001, $2.3 million
in 2002 and $2.5 million in 2003.

Postretirement benefits other than pensions. Certain subsidiaries currently
provide  certain  health care and life insurance  benefits for eligible  retired
employees.  Based on communications with a certain insurance provider of certain
retiree  benefits  of NL, and  consultations  with NL's  actuaries,  NL has been
released from certain life insurance retiree benefit  obligations as of December
31, 2002 through the use of an equal amount of plan assets.

The components of the periodic OPEB cost and accumulated  OPEB  obligations
are presented in the tables below. Variances from actuarially-assumed rates will
result in additional increases or decreases in accumulated OPEB obligations, net
periodic OPEB cost and funding  requirements in future periods.  At December 31,
2003, the expected rate of increase in future health care costs ranges from 8.0%
to  10.4%  in  2004,  declining  to  rates  of  between  4% to 5.5% in 2010  and
thereafter  (2002 - 9% to 11.4% in 2003,  declining to 4.25% to 5.5% in 2010 and
thereafter). If the health care cost trend rate was increased (decreased) by one
percentage  point for each year,  OPEB expense would have  increased by $245,000
(decreased by $248,000) in 2003, and the actuarial  present value of accumulated
OPEB  obligations  at December  31, 2003 would have  increased  by $2.8  million
(decreased by $2.6 million). At December 31, 2003, the Company currently expects
to contribute approximately $5.2 million to all of its OPEB plans during 2004.

Years ended December 31,
2002             2003
----             ----
(In thousands)

Change in accumulated OPEB obligations:

Obligations at beginning of the year                                                $ 50,688        $ 48,866
Service cost                                                                             103             152
Interest cost                                                                          3,030           2,820
Actuarial losses (gains)                                                               6,714          (1,278)
Release of benefit obligations                                                        (5,778)              -
Change in foreign currency exchange rates                                                 32             772
Benefits paid                                                                         (5,923)         (5,155)
--------        -------- 

Obligations at end of the year                                                      $ 48,866        $ 46,177
========        ========

Change in plan assets:
Fair value of plan assets at beginning of the year                                  $  6,400        $   -   
Actual return on plan assets                                                             (27)              -
Employer contributions                                                                 5,328           5,155
Release of benefit obligations                                                        (5,778)              -
Benefits paid                                                                         (5,923)         (5,155)
--------        -------- 

Fair value of plan assets at end of the year                                        $   -           $   -
========        =====

Funded status at end of the year:
Plan assets less than benefit obligations                                           $(48,866)       $(46,177)
Unrecognized net actuarial losses                                                      4,284           4,364
Unrecognized prior service credit                                                     (7,034)         (1,633)
--------        -------- 

$(51,616)       $(43,446)

Accrued OPEB costs recognized in the balance sheet:
Current                                                                             $ (6,142)       $ (6,036)
Noncurrent                                                                           (45,474)        (37,410)
--------        -------- 

$(51,616)       $(43,446)

Years ended December 31,
2001            2002           2003
----            ----           ----
(In thousands)

Net periodic OPEB cost (credit):

Service cost                                                          $    94        $   103         $   152
Interest cost                                                           3,572          3,030           2,820
Expected return on plan assets                                           (773)            (3)              -
Amortization of prior service credit                                   (2,516)        (2,516)         (2,075)
Recognized actuarial gains                                               (123)           (59)             38
-------        -------         -------

$   254        $   555         $   935
=======        =======         =======

The  weighted  average  discount  rate used in  determining  the  actuarial
present  value of benefit  obligations  as of December 31, 2003 was 5.9% (2002 -
6.4%).  Such weighted  average rate was determined  using the projected  benefit
obligations  as of such  dates.  The  impact  of  assumed  increases  in  future
compensation  levels does not have a material  effect on the  actuarial  present
value of the benefit  obligations as  substantially  all of such benefits relate
solely to eligible retirees, for which compensation is not applicable.

The weighted  average  discount rate used in  determining  the net periodic
OPEB cost for 2003 was 6.4% (2002 - 7.0%;  2001 - 7.3%).  Such weighted  average
rate was determined using the projected benefit  obligations as of the beginning
of each year. The impact of assumed increases in future compensation levels does
not have a material effect on the net periodic OPEB cost as substantially all of
such benefits relate solely to eligible retirees,  for which compensation is not
applicable.  The impact of assumed  rate of return on plan  assets also does not
have a  material  effect on the net  periodic  OPEB  cost as there  were no plan
assets as of December 31, 2002 or 2003.

As of December 31, 2002 and 2003, the accumulated  benefit  obligations for
all OPEB plans was equal to the projected benefit  obligations.  At December 31,
2003,  the  projected  benefit  obligations  for all OPEB plans was comprised of
$40.6 million related to U.S. plans and $5.5 million  related to non-U.S.  plans
(2002 - $45.6 million and $3.3 million,  respectively). At December 31, 2002 and
2003, all of the projected benefit  obligations  attributable to non-U.S.  plans
relates to plans maintained by Kronos.  At December 31, 2003,  approximately 69%
of the projected benefit obligations attributable to U.S. plans relates to plans
maintained by NL and 31% relates to a plan maintained by Tremont (2002 - 65% and
35%,  respectively).  Kronos and NL use a September  30th  measurement  date for
their OPEB plans, and Tremont uses a December 31st measurement date.

In  December  2003,  the  Medicare   Prescription  Drug,   Improvement  and
Modernization  Act of 2003 (the "Medicare  2003 Act") was enacted.  The Medicare
2003 Act introduced a prescription drug benefit under Medicare (Medicare Part D)
as well as a federal  subsidy to sponsors of retiree  health care benefit  plans
that provide a benefit that is at least  equivalent to Medicare Part D. Detailed
regulations  necessary to implement  the Medicare 2003 Act have not been issued,
including  those that would  specify  the  manner in which plan  sponsors  could
demonstrate their eligibility to receive the subsidy.  Certain accounting issues
raised by the  Medicare  2003 Act,  including  how to  account  for the  federal
subsidy,  are  not  explicitly  addressed  by  current  existing   authoritative
guidance.  In accordance  with FASB Staff  Position No.  106-1,  the Company has
elected  to defer  accounting  for the  effects of the  Medicare  2003 Act until
authoritative  guidance  on how to  account  for the  federal  subsidy  has been
issued.   Consequently,   the  Company's  accumulated   postretirement   benefit
obligation  and net periodic  postretirement  benefit  cost, as reflected in the
accompanying consolidated financial statements, do not reflect any effect of the
Medicare 2003 Act.  Specific  authoritative  guidance on the  accounting for the
federal subsidy is pending,  and that guidance,  when issued,  could require the
Company to change previously  reported financial  information,  depending on the
transition provisions of such guidance.

Note 17 - Related party transactions:

The Company may be deemed to be controlled  by Harold C. Simmons.  See Note
1.  Corporations  that may be deemed to be controlled by or affiliated  with Mr.
Simmons sometimes engage in (a) intercorporate  transactions such as guarantees,
management and expense  sharing  arrangements,  shared fee  arrangements,  joint
ventures,  partnerships,  loans, options, advances of funds on open account, and
sales,  leases and  exchanges  of assets,  including  securities  issued by both
related  and  unrelated  parties,  and (b)  common  investment  and  acquisition
strategies,   business   combinations,    reorganizations,    recapitalizations,
securities  repurchases,  and  purchases and sales (and other  acquisitions  and
dispositions)  of  subsidiaries,   divisions  or  other  business  units,  which
transactions  have involved both related and unrelated parties and have included
transactions  which  resulted  in the  acquisition  by one  related  party  of a
publicly-held  minority equity  interest in another  related party.  The Company
continuously considers,  reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business,  tax and other  objectives then relevant,  it is possible that the
Company might be a party to one or more such transactions in the future.

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

Receivables  from and payables to  affiliates  are  summarized in the table
below.

December 31,
2002           2003
----           ----
(In thousands)

Current receivables from affiliates:

Income taxes receivable from Contran                                                   $ 3,481         $  -   
TIMET                                                                                       84              50
Other                                                                                      382             267
-------         -------

$ 3,947         $   317
=======         =======

Noncurrent receivable from affiliate -
loan to Contran family trust                                                           $18,000         $14,000
=======         =======

Current payables to affiliates:
Contran:
Demand loan                                                                          $11,171         $ 7,332
Income taxes                                                                               -           3,759
Trade items                                                                            1,292           1,790
Louisiana Pigment Company                                                                7,614           8,560
TIMET                                                                                       32               -
Other                                                                                       13              13
-------         -------

$20,122         $21,454

From time to time,  loans and  advances  are made  between  the Company and
various related parties,  including Contran,  pursuant to term and demand notes.
These  loans and  advances  are entered  into  principally  for cash  management
purposes.  When the  Company  loans  funds to  related  parties,  the  lender is
generally able to earn a higher rate of return on the loan than the lender would
earn if the funds were  invested  in other  instruments.  While  certain of such
loans  may be of a  lesser  credit  quality  than  cash  equivalent  instruments
otherwise  available to the Company,  the Company believes that it has evaluated
the credit risks involved,  and that those risks are reasonable and reflected in
the  terms of the  applicable  loans.  When the  Company  borrows  from  related
parties, the borrower is generally able to pay a lower rate of interest than the
borrower would pay if it borrowed from other parties.

In 2001,  EMS, NL's  majority-owned  environmental  management  subsidiary,
entered  into a $25 million  revolving  credit  facility  with one of the family
trusts  discussed in Note 1 ($14 million  outstanding at December 31, 2003). The
loan  bears  interest  at prime,  is due on demand  with 60 days  notice  and is
collateralized  by certain shares of Contran's  Class A common stock and Class E
cumulative  preferred  stock held by the trust.  The value of the  collateral is
dependent,  in  part,  on the  value  of the  Company  as  Contran's  beneficial
ownership  interest in the Company is one of Contran's more substantial  assets.
The terms of this loan were approved by special committees of both NL's and EMS'
respective board of directors composed of independent directors. At December 31,
2003,  $11 million is available for borrowing by the family trust,  and the loan
has been classified as a noncurrent  asset because EMS does not presently intend
to demand repayment within the next 12 months.

During 2001,  2002 and 2003,  Valhi borrowed  varying  amounts from Contran
pursuant to the terms of a demand note. Such unsecured  borrowings bear interest
at a rate of prime less .5%.

Interest  income on all loans to  related  parties  was  $869,000  in 2001,
$964,000  in 2002 and  $723,000  in 2003.  Interest  expense  on all loans  from
related parties was $1.4 million in 2001, $922,000 in 2002 and $154,000 in 2003.

Payables to Louisiana  Pigment  Company are  primarily  for the purchase of
TiO2  (see Note 7).  Purchases  in the  ordinary  course  of  business  from the
unconsolidated TiO2 manufacturing joint venture are disclosed in Note 7.

Under the terms of  various  intercorporate  services  agreements  ("ISAs")
entered into between the Company and various related parties, including Contran,
employees  of  one  company  will  provide  certain  management,  tax  planning,
financial and administrative  services to the other company on a fee basis. Such
charges are based upon  estimates  of the time  devoted by the  employees of the
provider of the services to the affairs of the recipient,  and the  compensation
and other expenses associated with such persons.  Because of the large number of
companies  affiliated with Contran,  the Company  believes it benefits from cost
savings  and  economies  of  scale  gained  by not  having  certain  management,
financial and  administrative  staffs  duplicated at each entity,  thus allowing
certain  individuals  to provide  services  to  multiple  companies  but only be
compensated by one entity. These ISA agreements are reviewed and approved by the
applicable  independent  directors  of the  companies  that are  parties  to the
agreements.

The net ISA fees charged by Contran to the Company,  including NL,  Kronos,
Tremont,  TIMET, CompX and Waste Control Specialists,  aggregated  approximately
$8.5 million in 2001, $9.6 million in 2002 and $10.0 million in 2003.  TIMET has
an ISA with  Tremont  whereby  TIMET  provided  certain  services to Tremont for
approximately  $400,000 in each of 2001 and 2002 and $180,000 in 2003. NL had an
ISA with TIMET whereby NL provided certain  services to TIMET for  approximately
$300,000  in  each  of  2001  and  2002  and  $14,000  in  2003.  Certain  other
subsidiaries  of the Company are also parties to similar ISAs among  themselves,
and  expenses  associated  with  these  agreements  are  eliminated  in  Valhi's
consolidated financial statements.

Tall Pines Insurance  Company,  Valmont  Insurance Company and EWI RE, Inc.
provide for or broker certain insurance  policies for Contran and certain of its
subsidiaries and affiliates,  including the Company.  Tall Pines and Valmont are
wholly-owned  subsidiaries of Valhi, and EWI is a wholly-owned subsidiary of NL.
Prior to  January  2002,  an entity  controlled  by one of  Harold  C.  Simmons'
daughters  owned a majority of EWI, and Contran  owned the  remainder of EWI. In
January 2002, NL purchased  EWI from its previous  owners for an aggregate  cash
purchase  price of  approximately  $9  million.  See Note 3.  The  purchase  was
approved by a special committee of NL's board of directors  consisting of two of
its independent directors,  and the purchase price was negotiated by the special
committee based upon its  consideration of relevant  factors,  including but not
limited to due diligence  performed by independent  consultants and an appraisal
of  EWI  conducted  by an  independent  third  party  selected  by  the  special
committee. Consistent with insurance industry practices, Tall Pines, Valmont and
EWI receive commissions from the insurance and reinsurance  underwriters for the
policies  that  they  provide  or  broker.   The  Company   expects  that  these
relationships with Tall Pines, Valmont and EWI will continue in 2004.

Contran and  certain of its  subsidiaries  and  affiliates,  including  the
Company, purchase certain of their insurance policies as a group, with the costs
of  the  jointly-owned   policies  being  apportioned  among  the  participating
companies.  With  respect to  certain  of such  policies,  it is  possible  that
unusually  large losses  incurred by one or more insureds  during a given policy
period could leave the other  participating  companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates,  including the Company, have entered
into a loss sharing  agreement under which any uninsured loss is shared by those
entities  who have  submitted  claims  under the  relevant  policy.  The Company
believes  the  benefits in the form of reduced  premiums  and  broader  coverage
associated  with  the  group  coverage  for  such  policies  justifies  the risk
associated with the potential of any uninsured loss.

Basic  Management,  Inc.,  among other things,  provides  utility  services
(primarily water  distribution,  maintenance of a common electrical facility and
sewage  disposal   monitoring)  to  TIMET  and  other  manufacturers  within  an
industrial  complex located in Nevada. The other owners of BMI are generally the
other  manufacturers  located within the complex.  Power  transmission and sewer
services are provided on a cost reimbursement  basis,  similar to a cooperative,
while water  delivery is currently  provided at the same rates as are charged by
BMI to an unrelated third party.  Amounts paid by TIMET to BMI for these utility
services  were $1.6  million in each of 2001 and 2002 and $1.7  million in 2003.
TIMET also paid BMI an electrical  facilities  usage fee of $1.3 million in each
of 2001,  2002 and 2003.  The $1.3 million  annual fee  continues  through 2004,
declines to $600,000 in 2005 and $500,000  annually for 2006 through  2009,  and
then terminates completely in January 2010.

During 2001,  Tremont  paid BMI $600,000  pursuant to an agreement in which
Tremont  and other  owners of BMI  agreed  to cover  the costs of  certain  land
improvements made by BMI to the land owned by Tremont and other BMI owners.  The
cost of the land  improvement  was  divided  among the  companies  based on each
company's proportional share in the improved acreage.

During 2002, NL purchased  approximately  52,200 shares of its common stock
from certain of its  officers  and  directors,  in part in  connection  with the
exercise of certain  options to purchase NL common  stock held by such  officers
and directors,  at a net cost to NL (after  considering  the proceeds to NL from
the exercise of such options) of approximately  $500,000.  All of such shares of
NL common stock purchased had been held by the respective owner for at least six
months, and all of such purchases were valued at market prices on the respective
date of purchase. See Notes 3 and 10.

COAM Company is a partnership which has sponsored research  agreements with
the  University of Texas  Southwestern  Medical  Center at Dallas to develop and
commercially market a safe and effective treatment for arthritis (the "Arthritis
Research  Agreement")  and  to  develop  and  commercially  market  patents  and
technology  resulting  from a cancer  research  program  (the  "Cancer  Research
Agreement").  At December 31, 2003, COAM partners are Contran, Valhi and another
Contran  subsidiary.  Harold C.  Simmons is the manager of COAM.  The  Arthritis
Research Agreement, as amended,  provides for payments by COAM of up to $400,000
during 2004 and the Cancer Research Agreement, as amended, provides for funds of
up to $8.1 million over the next seven years. Funding  requirements  pursuant to
the Arthritis and Cancer  Research  Agreements are without  recourse to the COAM
partners  and the  partnership  agreement  provides  that no  partner  shall  be
required to make capital  contributions.  Capital  contributions are expensed as
paid.  The  Company's  contributions  to COAM were nil in each of the past three
years,  and the  Company  does not  currently  expect it will  make any  capital
contributions to COAM in 2004.

Amalgamated  Research,  Inc.,  a  wholly-owned  subsidiary  of the Company,
conducts  certain  research and  development  activities  within and outside the
sweetener industry for The Amalgamated Sugar Company LLC and others. Amalgamated
Research has also granted to The Amalgamated  Sugar Company LLC a non-exclusive,
perpetual  royalty-free  license  to use all  currently  existing  or  hereafter
developed  technology  which is applicable to sugar  operations and provides for
certain royalties to The Amalgamated Sugar Company from future sales or licenses
of the subsidiary's technology. Research and development services charged to The
Amalgamated  Sugar  Company  LLC were  $828,000  in 2001,  $849,000  in 2002 and
$865,000  in 2003.  The  Amalgamated  Sugar  Company LLC also  provides  certain
administrative  services  to  Amalgamated  Research.  The cost of such  services
provided by the LLC,  based upon  estimates  of the time devoted by employees of
the LLC to the affairs of Amalgamated  Research,  and the  compensation  of such
persons, is netted against the agreed-upon research and development services fee
paid by the LLC to Amalgamated Research.

Note 18 - Commitments and contingencies:

Lead pigment litigation - NL.

NL's former operations included the manufacture of lead pigments for use in
paid and lead-based  paint.  Since 1987, NL, other former  manufacturers of lead
pigments  for  use in  paint  and  lead-based  paint,  and the  Lead  Industries
Association  ("LIA") have been named as defendants in various legal  proceedings
seeking  damages  for  personal   injury,   property  damage  and   governmental
expenditure   allegedly  caused  by  the  use  of  lead-based  paints  (the  LIA
discontinued  its business  operations  in 2002).  Certain of these actions have
been filed by or on behalf of states,  large U.S. cities or their public housing
authorities and school districts, and certain others have been asserted as class
actions.  These  lawsuits seek recovery  under a variety of theories,  including
public and private  nuisance,  negligent  product design,  negligent  failure to
warn, strict liability, breach of warranty, conspiracy/concert of action, aiding
and abetting  enterprise  liability,  market share liability,  intentional tort,
fraud and  misrepresentation,  violations of state consumer protection statutes,
supplier negligence and similar claims.

The plaintiffs in these actions  generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns  associated
with the use of  lead-based  paints,  including  damages  for  personal  injury,
contribution  and/or  indemnification  for medical expenses,  medical monitoring
expenses  and costs for  educational  programs.  Several  former cases have been
dismissed or  withdrawn.  Most of the remaining  cases are in various  pre-trial
stages.  Some are on appeal  following  dismissal or summary judgment rulings in
favor of the defendants. In addition,  various other cases are pending (in which
NL is not a  defendant)  seeking  recovery for injury  allegedly  caused by lead
pigment and lead-based paint. Although NL is not a defendant in these cases, the
outcome  of these  cases may have an  impact on  additional  cases  being  filed
against NL.

NL believes  these actions are without  merit,  intends to continue to deny
all  allegations  of wrongdoing  and liability and to defend against all actions
vigorously.  NL has  neither  lost nor settled  any of these  cases.  NL has not
accrued  any  amounts  for  the  pending  lead  pigment  and  lead-based   paint
litigation.  Liability that may result,  if any, cannot reasonably be estimated.
There can be no assurance that NL will not incur future  liability in respect of
this pending litigation in view of the inherent  uncertainties involved in court
and jury rulings.

Environmental matters and litigation.

General. The Company's  operations are governed by various federal,  state,
local and foreign  environmental laws and regulations.  Certain of the Company's
businesses  are and have been  engaged in the  handling,  manufacture  or use of
substances  or compounds  that may be considered  toxic or hazardous  within the
meaning of applicable  environmental  laws. As with other  companies  engaged in
similar  businesses,  certain  past and current  operations  and products of the
Company have the potential to cause  environmental or other damage.  The Company
has implemented and continues to implement  various  policies and programs in an
effort  to  minimize  these  risks.  The  Company's  policy  is to  comply  with
environmental  laws and  regulations  at all of its  plants  and to  continually
strive to improve  environmental  performance  in  association  with  applicable
industry   initiatives.   The  Company  believes  that  its  operations  are  in
substantial compliance with applicable  requirements of environmental laws. From
time to time, the Company may be subject to environmental regulatory enforcement
under various statutes, resolution of which typically involves the establishment
of  compliance  programs.  It is  possible  that  future  developments,  such as
stricter requirements of environmental laws and enforcement policies thereunder,
could  adversely  affect  the  Company's  production,  handling,  use,  storage,
transportation, sale or disposal of such substances.

The  Company's  production   facilities  operate  within  an  environmental
regulatory  framework in which  governmental  authorities  typically are granted
broad  discretionary  powers which allow them to issue  operating  permits under
which the plants must  operate.  The Company  believes  all of its plants are in
substantial  compliance with applicable  environmental laws. With respect to the
Company's  plants,  neither the Company  nor any of its  subsidiaries  have been
notified  of  any  environmental  claim  in the  United  States  or any  foreign
jurisdiction by the U.S. EPA or any applicable  foreign  authority or any state,
provincial or local authority.

Some of the  Company's  current and former  facilities,  including  several
divested secondary lead smelters and former mining locations, are the subject of
civil litigation,  administrative  proceedings or  investigations  arising under
federal and state  environmental  laws.  Additionally,  in connection  with past
disposal  practices,  the  Company  has  been  named as a  defendant,  potential
responsible party ("PRP") or both,  pursuant to the Comprehensive  Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and   Reauthorization   Act   ("CERCLA")  and  similar  state  laws  in  various
governmental  and private actions  associated with waste disposal sites,  mining
locations, and facilities currently or previously owned, operated or used by the
Company or its subsidiaries, or their predecessors,  certain of which are on the
U.S.  Environmental  Protection  Agency's Superfund National  Priorities List or
similar state lists. These proceedings seek cleanup costs,  damages for personal
injury or  property  damage  and/or  damages  for injury to  natural  resources.
Certain of these proceedings  involve claims for substantial  amounts.  Although
the Company may be jointly and severally liable for such costs, in most cases it
is only one of a number of PRPs who may also be jointly and severally liable.

Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing  interpretations  of governmental
regulations,  the number of PRPs and the PRPs'  ability or  willingness  to fund
such  allocation of costs,  their financial  capabilities  and the allocation of
costs among PRPs,  the  solvency of other  PRPs,  the  multiplicity  of possible
solutions,  and the years of  investigatory,  remedial and  monitoring  activity
required.   In  addition,   the  imposition  of  more  stringent   standards  or
requirements  under  environmental  laws or  regulations,  new  developments  or
changes  with respect to site cleanup  costs or  allocation  of such costs among
PRPs,  the results of future  testing and  analysis  undertaken  with respect to
certain sites or a determination that the Company is potentially responsible for
the release of hazardous substances at other sites, could result in expenditures
in excess of amounts currently  estimated by the Company to be required for such
matters.  In addition,  with respect to other PRPs and the fact that the Company
may be jointly and severally  liable for the total  remediation  cost at certain
sites,  the  Company  could  ultimately  be liable for  amounts in excess of its
accruals due to,  among other  things,  reallocation  of costs among PRPs or the
insolvency of one of more PRPs. No assurance can be given that actual costs will
not  exceed  accrued  amounts  or the upper end of the range for sites for which
estimates  have been made,  and no assurance can be given that costs will not be
incurred  with respect to sites as to which no estimate  presently  can be made.
Further,  there can be no assurance that additional  environmental  matters will
not arise in the future.

The  Company  records  liabilities  related  to  environmental  remediation
obligations  when  estimated  future  expenditures  are probable and  reasonably
estimable.  Such accruals are adjusted as further  information becomes available
or  circumstances  change.  Estimated  future  expenditures  are  generally  not
discounted to their present value.  Recoveries of  remediation  costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At  December  31,  2002 and  2003,  no  receivables  for  recoveries  have  been
recognized.

The exact time frame over which the Company makes  payments with respect to
its accrued  environmental  costs is unknown and is dependent upon,  among other
things,  the timing of the actual  remediation  process which in part depends on
factors  outside the control of the  Company.  At each balance  sheet date,  the
Company makes an estimate of the amount of its accrued  environmental costs that
will be paid out over the subsequent 12 months,  and the Company classifies such
amount as a current liability.  The remainder of the accrued environmental costs
is classified as a noncurrent liability.

A summary of the  activity in the  Company's  accrued  environmental  costs
during the past two years is presented in the table below.

Years ended December 31,
2002             2003
----             ----
(In thousands)

Balance at the beginning of the year                                                  $110,640        $101,166
Additions charged to expense                                                            12,777          29,524
Payments                                                                               (22,251)        (44,009)
--------        -------- 

Balance at the end of the year                                                        $101,166        $ 86,681
========        ========

Amounts recognized in the balance sheet:
Current liability                                                                   $ 57,496        $ 24,956
Noncurrent liability                                                                  43,670          61,725
--------        --------

$101,166        $ 86,681
========        ========

NL. Some of NL's current and former facilities,  including several divested
secondary  lead smelters and former mining  locations,  are the subject of civil
litigation,  administrative  proceedings or investigations arising under federal
and state  environmental  laws.  Additionally,  in connection with past disposal
practices,  NL has been named as a  defendant,  PRP,  or both,  pursuant  to the
CERCLA,  or similar  state laws in  approximately  70  governmental  and private
actions  associated with waste disposal sites,  mining  locations and facilities
currently or  previously  owned,  operated or used by NL, its  subsidiaries  and
their  predecessors,  certain of which are on the U.S. EPA's Superfund  National
Priorities List or similar state lists.  These  proceedings  seek cleanup costs,
damages for  personal  injury or property  damage  and/or  damages for injury to
natural resources.  Certain of these proceedings  involve claims for substantial
amounts. Although NL may be jointly and severally liable for such costs, in most
cases,  it is only one of a number of PRPs who may also be jointly and severally
liable.  In  addition,  NL is a party to a number of  lawsuits  filed in various
jurisdictions alleging CERCLA or other environmental claims.

On a quarterly  basis, NL evaluates the potential range of its liability at
sites where it has been named as a PRP or defendant,  including  sites for which
EMS has  contractually  assumed  NL's  obligation.  See Note 12. At December 31,
2003,  NL had  accrued  $77 million  for those  environmental  matters  which NL
believes are  reasonably  estimable.  NL believes it is not possible to estimate
the range of costs for certain  sites.  The upper end of the range of reasonably
possible  costs to NL for sites for which NL believes it is possible to estimate
costs is approximately $110 million. NL's estimates of such liabilities have not
been  discounted to present  value,  and other than certain  previously-reported
settlements  with respect to certain of NL's former insurance  carriers,  NL has
not recognized any insurance recoveries.

At December  31,  2003,  there are  approximately  20 sites for which NL is
unable  to  estimate  a  range  of  costs.   For  these  sites,   generally  the
investigation is in the early stages,  and it is either unknown as to whether or
not NL actually had any association with the site, or if NL had association with
the site, the nature of its responsibility, if any, for the contamination at the
site and the  extent of  contamination.  The  timing on when  information  would
become  available  to NL to allow NL to  estimate a range of loss is unknown and
dependent on events  outside the control of NL, such as when the party  alleging
liability provides information to NL.

At December 31, 2003,  NL had $24 million in  restricted  cash,  restricted
cash  equivalents  and restricted  marketable  debt  securities  held by special
purpose trusts,  the assets of which can only be used to pay for certain of NL's
future  environmental  remediation and other  environmental  expenditures.  Such
restricted  balances  declined  by  approximately  $35  million  during 2003 due
primarily to a $30.8 million payment made by NL related to the final  settlement
of one of NL's  sites.  Use of such  restricted  balances  does not  affect  the
Company's consolidated statements of cash flows.

Tremont.  In  July  2000  Tremont,  entered  into  a  voluntary  settlement
agreement  with the Arkansas  Department  of  Environmental  Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will  undertake  certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County,  Arkansas.  Tremont  currently  believes that it has accrued
adequate  amounts  ($2.4  million at  December  31,  2003) to cover its share of
probable and reasonably estimable environmental  obligations.  Tremont currently
expects that the nature and extent of any final remediation  measures that might
be  imposed  with  respect  to this  site will be known by 2006.  Currently,  no
reasonable  estimate  can be made  of the  cost of any  such  final  remediation
measure, and accordingly Tremont has accrued no amounts at December 31, 2003 for
any such cost. The amount accrued at December 31, 2003 represents Tremont's best
estimate of the costs to be incurred  through  2006 with  respect to the interim
remediation measures.

TIMET. At December 31, 2003, TIMET had accrued  approximately  $4.2 million
for environmental  cleanup matters,  principally  related to TIMET's facility in
Nevada.

Other. The Company has also accrued  approximately $6.8 million at December
31, 2003 in respect of other environmental cleanup matters. Such accrual is near
the upper end of the range of the  Company's  estimate  of  reasonably  possible
costs for such matters.

Other litigation.

NL has been  named as a  defendant  in  various  lawsuits  in a variety  of
jurisdictions,  alleging personal injuries as a result of occupational  exposure
to  asbestos,  silica  and/or  mixed  dust in  connection  with  formerly  owned
operations.  Approximately 435 of these cases involving a total of approximately
32,000  plaintiffs  and  their  spouses  remain  pending.  Of these  plaintiffs,
approximately  21,500  are  represented  by eight  cases  pending  in Texas  and
Mississippi  state  courts.  NL has not accrued any amounts for this  litigation
because liability that may result to NL, if any, cannot be reasonably estimated.
In addition,  from time to time, NL has received notices  regarding  asbestos or
silica  claims  purporting  to be brought  against  former  subsidiaries  of NL,
including   notices  provided  to  insurers  with  which  NL  has  entered  into
settlements  extinguishing  certain insurance policies.  These insurers may seek
indemnification from NL.

In late July 2002,  shortly after the  announcement of Valhi's  proposal to
merge with Tremont, four separate complaints were filed in the Court of Chancery
of the State of Delaware,  New Castle County, against Tremont, Valhi and members
of Tremont's board of directors  (Crandon Capital Partners,  et al. v. J. Landis
Martin,  et al.,  Andrew Neyman v. J. Landis Martin,  et al.,  Herman M. Weisman
Revocable  Trust v. J. Landis  Martin,  et al. and Alice  Middleton v. J. Landis
Martin,  et al.). The complaints,  purported class actions,  generally  alleged,
among other things,  that the terms of the proposed  merger of Valhi and Tremont
were unfair and that defendants  violated their fiduciary duties. At the request
of the parties,  the court ordered that these actions be consolidated  under the
caption In re Tremont  Corporation  Shareholders  Litigation.  In June 2003, the
court  dismissed the case as moot, but the court retained  jurisdiction  of this
action for the purpose of determining the  plaintiffs'  application for an award
of counsel  fees and  reimbursement  of expenses.  In August  2003,  plaintiffs'
counsel filed an  application  for fees and expenses in the aggregate  amount of
$300,000.  Defendants intend to vigorously  contest any award of counsel fees or
reimbursement of expenses.

In November 2002, a former  employee of Waste Control  Specialists  filed a
complaint in U.S. District Court,  Eastern District of Tennessee,  against Waste
Control  Specialists  (Sandy  Lewis  vs.  Waste  Control  Specialists,  LLC  No.
3:02-CV-665) alleging violations,  among others, of the Equal Pay Act, Title VII
of the Civil Rights Act and Fair Labor Standards Act in her  classification  and
termination  of  employment  at Waste  Control  Specialists'  former  Oak Ridge,
Tennessee office. This matter was settled in November 2003 and the case has been
dismissed.

In June 2003,  Valhi was served with a complaint  in Ken Bigham,  et al. v.
Valhi, Inc. et al. (No.  GN302008,  126th Judicial  District,  District Court of
Travis County,  Texas).  Plaintiffs allege,  among other things, that defendants
breached duties of loyalty owed to plaintiffs  with respect to their  investment
in Waste Control  Specialists  and that  defendants  committed  acts not in good
faith.   Plaintiffs   seek,   among  other  things,   unspecified   damages  and
reimbursement  of  expenses.  Waste  Control  Specialists  was not  named in the
complaint.  In  February  2004,  Waste  Control  Specialists  filed  a  Plea  in
Intervention  to intervene in this case, as the claims brought by the plaintiffs
regarding  mismanagement  of Waste  Control  Specialists,  if they exist at all,
properly  belong to Waste  Control  Specialists.  Waste Control  Specialists  is
seeking a permanent  injunction  to enforce  the terms of a July 1999  agreement
entered  into by Waste  Control  Specialists  with Mr.  Bigham that  contained a
covenant not to sue. Waste Control  Specialists filed for declaratory  judgment,
and intends to contest the action  vigorously.  Valhi believes,  and understands
that each of the other  defendants  believes,  that the  allegations are without
merit,  and Valhi intends,  and  understands  that each of the other  defendants
intend, to contest the action vigorously.

Kronos'  Belgian  subsidiary  and various of its Belgian  employees are the
subject of civil and criminal  proceedings relating to an accident that resulted
in two fatalities at NL's Belgian facility in 2000. At a hearing held in January
2004, the government  requested the court to impose fines on Kronos'  subsidiary
and certain of its  employees in an amount equal to  approximately  euro 370,000
($460,000).  Kronos'  subsidiary has undertaken the defense of and liability for
any fines and costs incurred by its employees arising out of these  proceedings.
The court's decision is anticipated in April 2004.

In  addition  to the  litigation  described  above,  the  Company  and  its
affiliates  are also  involved  in  various  other  environmental,  contractual,
product  liability,  patent (or  intellectual  property),  employment  and other
claims and disputes incidental to its present and former businesses. The Company
currently believes that the disposition of all claims and disputes, individually
or in  the  aggregate,  should  not  have  a  material  adverse  effect  on  its
consolidated financial position, results of operations or liquidity.

Other matters

Concentrations  of credit risk.  Sales of TiO2 accounted for  substantially
all of NL's sales  during the past three years.  TiO2 is  generally  sold to the
paint,   plastics  and  paper   industries,   which  are  generally   considered
"quality-of-life"  markets  whose demand for TiO2 is  influenced by the relative
economic  well-being  of the various  geographic  regions.  TiO2 is sold to over
4,000 customers and the ten largest customers  accounted for about one-fourth of
chemicals sales. In each of the past three years, approximately one-half of NL's
TiO2 sales volume were to Europe with about 40% attributable to North America.

Component products are sold primarily to original  equipment  manufacturers
in North America and Europe.  In 2003, the ten largest  customers  accounted for
approximately 38% of component products sales (2002 - 30%; 2001 - 36%).

The majority of TIMET's sales are to customers in the  aerospace  industry,
including  airframe  and engine  manufacturers.  TIMET's ten  largest  customers
accounted for about 50% of its sales in 2001, 40% in 2002 and 30% in 2003.

At December 31, 2003,  consolidated  cash, cash  equivalents and restricted
cash includes $38 million invested in U.S. Treasury  securities  purchased under
short-term  agreements to resell (2002 - $80 million),  of which $17 million are
held in trust for the Company by a single U.S. bank (2002 - $24 million).

Capital  expenditures.  At December 31, 2003 the estimated cost to complete
capital projects in process  approximated  $10.2 million,  of which $9.6 million
relates to NL's TiO2 facilities and the remainder relates to CompX.

Royalties.  Royalty  expense,  which relates  principally  to the volume of
certain products  manufactured in Canada and sold in the United States under the
terms  of  a  third-party   patent  license  agreement  that  expired  in  2003,
approximated $675,000 in 2001, $700,000 in 2002 and $450,000 in 2003.

Long-term  contracts.  NL has long-term  supply  contracts that provide for
NL's chloride-process  TiO2 feedstock  requirements through 2007. The agreements
require NL to purchase  certain  minimum  quantities  of feedstock  with average
minimum annual purchase commitments aggregating approximately $165 million.

TIMET has a long-term supply agreement with Boeing pursuant to which Boeing
advanced  TIMET  $28.5  million for each of 2002,  2003 and 2004,  and Boeing is
required to advance  TIMET $28.5 million  annually  from 2005 through 2007.  The
agreement is structured as a take-or-pay  agreement such that Boeing,  beginning
in calendar year 2002,  will forfeit a  proportionate  part of the $28.5 million
annual  advance,  or effectively  $3.80 per pound,  in the event that its annual
orders or those of Boeing's  subcontractors  for delivery for such calendar year
are less than 7.5  million  pounds.  TIMET  can only be  required,  however,  to
deliver up to 3 million pounds per quarter.  Under a separate  agreement,  TIMET
must establish and hold buffer stock for Boeing at TIMET's facilities, for which
Boeing pays TIMET as such stock is produced.

In  addition to its  agreement  with  Boeing,  TIMET has  long-term  supply
agreements  with  certain  other major  aerospace  customers,  including,  among
others, Rolls-Royce plc and its German and U.S. affiliates,  United Technologies
Corporation (Pratt & Whitney and related companies) and Wyman-Gordon  Company (a
unit of  Precision  Castparts  Corporation).  These  agreements  expire  in 2007
through 2008, subject to certain  conditions.  The agreements  generally provide
for (i) minimum market shares of the customers'  titanium  requirements  or firm
annual volume commitments and (ii) fixed or formula-determined  prices.  Certain
of these  agreements  also contain  market  pricing  provisions  that may, under
certain  circumstances,  become  applicable.  Generally,  the agreements require
TIMET's  service and product  performance to meet specified  criteria,  and also
contain a number of other terms and  conditions  customary  in  transactions  of
these types. In certain events of nonperformance by TIMET, the agreements may be
terminated early.

TIMET also has a long-term  agreement  with  VALTIMET,  a  manufacturer  of
welded stainless steel and titanium tubing  principally for industrial  markets.
TIMET owns 44% of VALTIMET at December 31, 2003.  The agreement was entered into
in 1997 and  expires  in 2007.  Under  the  agreement,  VALTIMET  has  agreed to
purchase a certain percentage of its titanium  requirements from TIMET.  Selling
prices are formula determined, subject to certain conditions. Certain provisions
of this  contract have been amended in the past and may be amended in the future
to meet changing business conditions.

In 2002, TIMET entered into a long-term agreement,  effective through 2007,
for the purchase of titanium  sponge.  This agreement  replaced and superceded a
previous agreement. The new agreement requires annual minimum purchases by TIMET
of  approximately  $10  million.  TIMET  has no other  long-term  sponge  supply
agreements.

Waste Control Specialists has agreed to pay an independent  consultant fees
for performing  certain  services  based on specified  percentages of certain of
Waste  Control  Specialists'  revenues  through  2009.  Expense  related to this
agreement was not significant during the past three years.

Operating leases.  Kronos' principal German operating subsidiary leases the
land under its Leverkusen TiO2 production  facility pursuant to a lease expiring
in 2050.  The  Leverkusen  facility,  with  approximately  one-third  of Kronos'
current TiO2  production  capacity,  is located  within the  lessor's  extensive
manufacturing   complex.  Rent  for  the  Leverkusen  facility  is  periodically
established  by agreement with the lessor for periods of at least two years at a
time.  Under a separate  supplies and services  agreement  expiring in 2011, the
lessor  provides  some raw  materials,  auxiliary  and  operating  materials and
utilities services necessary to operate the Leverkusen facility.  Both the lease
and the supplies and services  agreements  restrict  Kronos' ability to transfer
ownership or use of the Leverkusen facility.

The  Company  also  leases  various  other  manufacturing   facilities  and
equipment.  Some of the leases  contain  purchase  and/or  various  term renewal
options at fair market and fair rental values,  respectively.  In most cases the
Company  expects  that,  in the normal  course of business,  such leases will be
renewed or replaced  by other  leases.  Rent  expense  related to the  Company's
consolidated business segments approximated $12 million in each of 2001 and 2002
and $13 million in 2003. At December 31, 2003,  future  minimum  payments  under
noncancellable operating leases having an initial or remaining term of more than
one year were as follows:

Years ending December 31,                                                                            Amount
(In thousands)

2004                                                                                                $ 4,106
2005                                                                                                  2,903
2006                                                                                                  1,885
2007                                                                                                  1,488
2008                                                                                                    194
2009 and thereafter                                                                                  19,881
-------

$30,457

Approximately  $19.4 million of the $30.5 million  aggregate future minimum
rental  commitments  at December  31, 2003 relates to NL's  Leverkusen  facility
lease discussed above. The minimum commitment amounts for such lease included in
the table above for each year through the 2050 expiration of the lease are based
upon the current annual rental rate as of December 31, 2003.

Other.   TIMET  is  the  primary  obligor  on  two  $1.5  million  workers'
compensation  bonds issued on behalf of a former  subsidiary  that TIMET sold in
1989.  The bonds were provided as part of the  conditions  imposed on the former
subsidiary in order to self-insure its workers'  compensation  obligations.  The
former  subsidiary filed for Chapter 11 bankruptcy  protection in July 2001, and
discontinued payment on the underlying workers'  compensation claims in November
2001.  During 2002,  TIMET  received  notices that the issuers of the bonds were
required to make  payments on one of the bonds with  respect to certain of these
claims and were requesting  reimbursement  from TIMET.  Based upon  then-current
loss  projections,  TIMET accrued $1.6 million for this matter in 2002.  Through
December 31, 2003, TIMET has reimbursed the issuer approximately  $800,000 under
this bond, and $800,000 remains accrued for future payments.  During 2003, TIMET
received  notice that certain  claimants had  submitted  claims under the second
bond. Accordingly, TIMET accrued $450,000 for this bond in 2003, and payments on
this second bond were less than $100,000  through  December 31, 2003.  TIMET may
revise its  estimated  liability  under these bonds in the future as  additional
facts become known or claims develop.

As of  December  31,  2003,  TIMET had  $100,000  accrued  for  pending and
potential future claims associated with certain standard grade titanium produced
by TIMET,  which was  subsequently  found to contain  tungsten  inclusions  as a
result of tungsten  contaminated silicon purchased from a third-party  supplier.
Pending claims have been  investigated,  and in 2004 the final pending claim was
resolved and paid. Based upon an analysis of information  pertaining to asserted
and  unasserted  claims,  during the third  quarter of 2003  TIMET  revised  its
estimate  of  probable  loss and  reduced  its  accrual  for  pending and future
customer claims,  resulting in a $1.7 million reduction in TIMET's cost of sales
during the quarter. TIMET has paid $1.1 million in claims related to this matter
through  December 31, 2003. There is no assurance that all potential claims have
been  submitted to TIMET.  TIMET has filed suit seeking full  recovery  from its
silicon supplier for any liability TIMET might incur, although no assurances can
be given that TIMET will  ultimately  be able to recover  all or any  portion of
such amounts.  In April 2003,  TIMET received notice that this silicon  supplier
had filed a voluntary petition for  reorganization  under Chapter 11 of the U.S.
Bankruptcy Code. TIMET's motion for relief from the automatic stay in bankruptcy
was granted in the fourth quarter of 2003. TIMET has not recorded any recoveries
related to this matter as of December 31, 2003.

Note 19  - Accounting principles newly adopted in 2002 and 2003:

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

Goodwill.  The Company adopted SFAS No. 142,  Goodwill and Other Intangible
Assets,  effective  January 1, 2002.  Under SFAS No.  142,  goodwill,  including
goodwill arising from the difference between the cost of an investment accounted
for by the equity method and the amount of the  underlying  equity in net assets
of  such  equity  method  investee  ("equity  method  goodwill"),  is no  longer
amortized on a periodic basis.  Goodwill (other than equity method  goodwill) is
subject to an impairment  test to be performed at least on an annual basis,  and
impairment  reviews  may  result  in  future  periodic  write-downs  charged  to
earnings. Equity method goodwill is not tested for impairment in accordance with
SFAS No. 142;  rather,  the overall carrying amount of an equity method investee
will continue to be reviewed for  impairment in accordance  with existing  GAAP.
There  is  currently  no  equity  method  goodwill  associated  with  any of the
Company's equity method investees.  Under the transition  provisions of SFAS No.
142,  all  goodwill  existing  as of June 30,  2001  ceased  to be  periodically
amortized as of January 1, 2002, and all goodwill arising in a purchase business
combination (including step acquisitions) completed on or after July 1, 2001 was
not periodically amortized from the date of such combination.

As  discussed  in Note 9, the Company  has  assigned  its  goodwill to four
reporting units (as that term is defined in SFAS No. 142). Goodwill attributable
to the chemicals operating segment was assigned to the reporting unit consisting
of NL in  total.  Goodwill  attributable  to the  component  products  operating
segment was assigned to three reporting units within that operating segment, one
consisting of CompX's security  products  operations,  one consisting of CompX's
European  operations  and one  consisting  of  CompX's  Candaian  and  Taiwanese
operations.  Under SFAS No. 142, such goodwill will be deemed to not be impaired
if the  estimated  fair  value of the  applicable  reporting  unit  exceeds  the
respective net carrying value of such  reporting  unit,  including the allocated
goodwill.  If the fair value of the reporting unit is less than carrying  value,
then a goodwill impairment loss would be recognized equal to the excess, if any,
of the net carrying  value of the reporting  unit goodwill over its implied fair
value (up to a maximum  impairment equal to the carrying value of the goodwill).
The implied fair value of reporting  unit goodwill  would be the amount equal to
the excess of the  estimated  fair value of the  reporting  unit over the amount
that  would be  allocated  to the  tangible  and  intangible  net  assets of the
reporting unit (including  unrecognized  intangible assets) as if such reporting
unit had been  acquired  in a purchase  business  combination  accounted  for in
accordance with GAAP as of the date of the impairment testing.

In  determining  the  estimated  fair value of the NL reporting  unit,  the
Company will consider  quoted  market prices for NL's common stock,  as adjusted
for an appropriate control premium.  The Company will also use other appropriate
valuation techniques,  such as discounted cash flows, to estimate the fair value
of the three CompX reporting units.

The  Company  completed  its  initial,   transitional  goodwill  impairment
analysis under SFAS No. 142 as of January 1, 2002,  and no goodwill  impairments
were deemed to exist as of such date. In  accordance  with the  requirements  of
SFAS No. 142, the Company will review the goodwill of its four  reporting  units
for impairment during the third quarter of each year starting in 2002.  Goodwill
will also be reviewed for impairment at other times during each year when events
or changes in  circumstances  indicate that an impairment  might be present.  No
goodwill  impairments  were deemed to exist as a result of the Company's  annual
impairment reviews completed during 2002 and 2003.

The following  table presents what the Company's  consolidated  net income,
and  related per share  amounts,  would have been if the  goodwill  amortization
included  in the  Company's  reported  consolidated  net  income  had  not  been
recognized.

Years ended December 31,
2001            2002           2003
----            ----           ----
(In millions,
except per share data)

Net income as reported                                                $ 93.2         $ 1.2           $39.5
Adjustments:
Goodwill amortization                                                 16.9           -               -
Equity method goodwill amortization                                   -              -               -
Incremental income taxes                                               (.1)          -               -
Minority interest in goodwill amortization                            (1.1)          -               -
------         -----           ---

Adjusted net income                                                $108.9         $ 1.2           $39.5
======         =====           =====

Basic net income per share as reported                                $  .81         $ .01           $ .32
Adjustments:
Goodwill amortization                                                  .15           -               -
Equity method goodwill amortization                                   -              -               -
Incremental income taxes                                              -              -               -
Minority interest in goodwill amortization                            (.01)          -               -
------         -----           ---

Adjustment basic net income per share                              $  .95         $ .01           $ .32
======         =====           =====

Diluted net income per share as reported                              $  .80         $ .01           $ .32
Adjustments:
Goodwill amortization                                                  .15           -               -
Equity method goodwill amortization                                   -              -               -
Incremental income taxes                                              -              -               -
Minority interest in goodwill amortization                            (.01)          -               -
------         -----           ---

Adjusted diluted net income per share                              $  .94         $ .01           $ .32
======         =====           =====

Debt  extinguishment  gains and losses.  The Company  adopted  SFAS No. 145
effective April 1, 2002. SFAS No. 145, among other things,  eliminated the prior
requirement that all gains and losses from the early extinguishment of debt were
to be classified as an extraordinary  item. Upon adoption of SFAS No. 145, gains
and  losses  from the  early  extinguishment  of debt are now  classified  as an
extraordinary  item  only if they meet the  "unusual  and  infrequent"  criteria
contained in Accounting  Principles  Board Opinion ("APBO") No. 30. In addition,
upon   adoption  of  SFAS  No.  145,   all  gains  and  losses  from  the  early
extinguishment  of debt that had previously been classified as an  extraordinary
item are to be  reassessed  to determine if they would have met the "unusual and
infrequent"  criteria  of APBO No. 30; any such gain or loss that would not have
met the APBO No. 30 criteria is to be retroactively reclassified and reported as
a component of income before  extraordinary item. The Company concluded that all
of its  previously-recognized  gains and losses from the early extinguishment of
debt that  occurred on or after  January 1, 1998 would not have met the APBO No.
30 criteria for  classification  as an extraordinary  item, and accordingly such
previously-reported  gains and losses from the early extinguishment of debt were
retroactively  reclassified and are now reported as a component of income before
extraordinary item.

Guarantees.  The Company has complied with the disclosure  requirements  of
FIN No. 45, Guarantor's  Accounting and Disclosure  Requirements for Guarantees,
Including  Indirect  Guarantees of  Indebtedness  of Others,  as of December 31,
2002. As required by the transition  provisions of FIN No. 45, beginning in 2003
the Company will apply the  recognition  and initial  measurement  provisions of
this FIN on a  prospective  basis for any  guarantees  issued or modified  after
December 31, 2002.  The Company is not a party to any such guarantee at December
31, 2003.

Asset  retirement  obligations;  closure and post  closure  costs.  Through
December  31, 2002,  the Company  provided  for the  estimated  closure and post
closure  monitoring costs of its waste disposal facility over the operating life
of the facility as airspace was consumed. Such costs were estimated based on the
technical  requirements of applicable  state or federal  regulations,  whichever
were  stricter,  and  included  such  items as final  cap and cover on the site,
methane gas and leachate management and groundwater  monitoring.  Cost estimates
were based on  management's  judgment and experience and  information  available
from  regulatory  agencies  as to costs of  remediation.  These  estimates  were
sometimes a range of possible  outcomes.  In such case, the Company provided for
the amount within the range which  constituted  its best estimate.  If no amount
within the range  appeared to be a better  estimate than any other  amount,  the
Company provided for at least the minimum amount within the range.

Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for
Asset Retirement Obligations.  Under SFAS No. 143, the fair value of a liability
for an asset  retirement  obligation  covered under the scope of SFAS No. 143 is
recognized in the period in which the liability is incurred,  with an offsetting
increase in the carrying amount of the related  long-lived asset. Over time, the
liability  is  accreted  to its  future  value,  and  the  capitalized  cost  is
depreciated  over the useful life of the related asset.  Future revisions in the
estimated fair value of the asset retirement  obligation,  due to changes in the
amount and/or timing of the expected  future cash flows to settle the retirement
obligation,   are   accounted  for   prospectively   as  an  adjustment  to  the
previously-recognized  asset  retirement cost. Upon settlement of the liability,
an entity will either settle the obligation  for its recorded  amount or incur a
gain or loss upon settlement. The Company's closure and post closure obligations
related to its waste disposal facility are covered by the scope of SFAS No. 143.
The Company also has certain other obligations  covered by the scope of SFAS No.
143.

Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company  recognized (i) an asset retirement cost capitalized
as an  increase  to the  carrying  value of its  property  and  equipment,  (ii)
accumulated  depreciation on such capitalized cost and (iii) a liability for the
asset retirement  obligation.  Amounts resulting from the initial application of
SFAS No. 143 were measured using information, assumptions and interest rates all
as of January 1, 2003. The amount  recognized as the asset  retirement  cost was
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement  obligation,  and accumulated  depreciation on
the asset  retirement cost, was recognized for the time period from the date the
asset  retirement  cost  and  liability  would  have  been  recognized  had  the
provisions  of SFAS  No.  143 been in  effect  at the  date  the  liability  was
incurred,  through January 1, 2003. The difference,  if any, between the amounts
to be recognized as described above and any associated amounts recognized in the
Company's  balance sheet as of December 31, 2002 was  recognized as a cumulative
effect of a change in  accounting  principles  as of the date of  adoption.  The
effect  of  adopting  SFAS  No.  143 as of  January  1,  2003  was a net gain of
approximately  $600,000  as  summarized  in the  table  below.  Such  change  in
accounting  relates  principally  to  accounting  for closure  and  post-closure
obligations at the Company's waste management operations.

Amount
(In millions)

Increase in carrying value of net property and equipment:

Cost                                                                                                  $  .8
Accumulated depreciation                                                                                (.2)
Investment in TIMET                                                                                       (.1)
Decrease in carrying value of previously-accrued closure and
post-closure activities                                                                                  1.7
Asset retirement obligations recognized                                                                  (1.3)
Deferred income taxes                                                                                     (.3)
-----

Net impact                                                                                            $  .6
=====

The increase in the asset retirement obligations from January 1, 2003 ($1.3
million) to December 31, 2003 ($1.7 million) is due to accretion expense,  which
is reported as a component of cost of goods sold in the  accompanying  statement
of income.  If the Company had adopted  SFAS No. 143 as of January 1, 2001,  the
asset retirement obligations would have been $1.1 million at December 31, 2001.

The types of  estimated  costs  used in  determining  the  Company's  asset
retirement  obligations  under  SFAS  No.  143 are the same  types of costs  the
Company  used to  estimate  its closure and post  closure  obligations  prior to
adoption  of SFAS No.  143.  Estimates  of the  ultimate  cost to be incurred to
settle the Company's  closure and post closure  obligations  require a number of
assumptions,  are inherently  difficult to develop and the ultimate  outcome may
differ from current estimates. As additional information becomes available, cost
estimates  will be adjusted as  necessary.  It is possible  that  technological,
regulatory or enforcement developments,  the results of studies or other factors
could necessitate the recording of additional liabilities.

Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146,  Accounting for Costs Associated with Exit or Disposal  Activities,  on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities,  as defined, that are
covered by the scope of SFAS No. 146 will be recognized  and measured  initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include  termination  benefits  provided to
employees,  costs to consolidate facilities or relocate employees,  and costs to
terminate contracts (other than a capital lease).  Under prior GAAP, a liability
for such an exit cost is recognized  at the date an exit plan is adopted,  which
may or may not be the date at which the liability has been incurred.  The effect
of adopting  SFAS No. 146 as of January 1, 2003 was not  material as the Company
was not involved in any exit or disposal  activities covered by the scope of the
new standard as of such date.

Note 20 - Accounting principles not yet adopted:

The Company is required to comply with the  consolidation  requirements  of
FASB  Interpretation   ("FIN")  No.  46R,  Consolidation  of  Variable  Interest
Entities,  an interpretation  of ARB No. 51, as amended,  at March 31, 2004. The
Company is still studying this  newly-issued  interpretation.  While the Company
currently  does not believe it has any  involvement  with any variable  interest
entity (as that term is defined in FIN No. 46R)  covered by the scope of FIN No.
46R, the  interpretation  is complex,  and  therefore the impact of adopting the
consolidation  requirements  of FIN  No.  46R  has  not  yet  been  definitively
determined.

Note 21 - Financial instruments:

December 31,
2002                  2003
-------------------    ------------
Carrying      Fair      Carrying     Fair
amount      value       amount      value
(In millions)

Cash, cash equivalents and restricted cash

equivalents                                                           $149.3      $149.3      $123.2      $  123.2

Marketable securities:
Current                                                              $  9.7      $  9.7      $  6.1      $    6.1
Noncurrent                                                            179.6       179.6       176.9         176.9

Loan to Snake River Sugar Company                                      $ 80.0      $108.7      $ 80.0      $  111.5

Notes payable and long-term debt (excluding capitalized leases): Publicly-traded
fixed rate debt:
KII Senior Notes                                                   $296.9      $299.9      $356.1      $  356.1
Valcor Senior Secured Notes                                           2.4         2.4         -             -
Snake River Sugar Company loans                                       250.0       250.0       250.0         250.0
Other fixed-rate debt                                                    .4          .4          .1            .1
Variable rate debt                                                     58.1        58.1        31.0          31.0

Minority interest in:
NL common stock                                                      $ 40.9      $124.8      $ 31.3      $   87.0
Kronos common stock                                                     -           -          11.1          75.8
CompX common stock                                                     44.5        39.7        48.4          30.4
Tremont common stock                                                   26.9        37.8         -            -

Valhi common stockholders' equity                                      $614.8      $958.4      $659.7      $1,798.0

The fair value of the Company's  publicly-traded  marketable securities and
debt, minority interest in NL Industries,  Kronos, CompX and Tremont and Valhi's
common  stockholders'  equity are all based upon  quoted  market  prices at each
balance  sheet  date.  The  fair  value  of  the  Company's  investment  in  The
Amalgamated Sugar Company LLC is based upon the $250 million redemption price of
such investment,  less the $80 million outstanding balance of the Company's loan
to Snake River Sugar Company. The fair value of the Company's fixed-rate loan to
Snake  River Sugar  Company is based upon  relative  changes in market  interest
rates since the interest rates were fixed. The fair value of Valhi's  fixed-rate
nonrecourse  loans from Snake River Sugar Company is based upon the $250 million
redemption  price of Valhi's  investment in the  Amalgamated  Sugar Company LLC,
which investment  collateralizes such nonrecourse loans. Fair values of variable
interest  rate debt and other  fixed-rate  debt are deemed to  approximate  book
value. See Notes 5 and 10.

Certain of the Company's  sales  generated by its non-U.S.  operations  are
denominated in U.S.  dollars.  The Company  periodically  uses currency  forward
contracts  to  manage a very  nominal  portion  of  foreign  exchange  rate risk
associated  with  receivables  denominated in a currency other than the holder's
functional  currency or similar exchange rate risk associated with future sales.
The Company  has not entered  into these  contracts  for trading or  speculative
purposes in the past, nor does the Company  currently  anticipate  entering into
such  contracts  for trading or  speculative  purposes  in the  future.  At each
balance  sheet  date,  any  such   outstanding   currency  forward  contract  is
marked-to-market  with any resulting gain or loss recognized in income currently
as part of net currency  transactions.  To manage such  exchange  rate risk,  at
December 31, 2003, the Company held contracts  maturing through February 2004 to
exchange an aggregate of U.S. $4.2 million for an equivalent  amount of Canadian
dollars at an exchange rates of Cdn. $1.30 to Cdn. $1.33 per U.S. dollar (2002 -
contracts  maturing  through  January 2003 to exchange an aggregate of U.S. $2.5
million for an equivalent amount of Canadian dollars at an exchange rate of Cdn.
$1.57 per U.S. dollar).  At December 31, 2002 and 2003, the actual exchange rate
was Cdn. $1.57 and Cdn. $1.31 per U.S. dollar, respectively.  The estimated fair
values of such foreign currency forward  contracts at December 31, 2002 and 2003
is insignificant.

At December  31,  2003,  the Company  also had  entered  into a  short-term
currency forward  contract  maturing on January 2, 2004 to exchange an aggregate
of euro 40 million into U.S. dollars at an exchange rate of U.S. $1.25 per euro.
Such contract was entered into in  conjunction  with the January 2004 payment of
an intercompany  dividend from one of the Company's  European  subsidiaries.  At
December  31,  2003,  the  actual  exchange  rate was U.S.  $1.25 per euro.  The
estimated fair value of such foreign  currency forward contract was not material
at December 31, 2003.

The  Company  periodically  uses  interest  rate  swaps and other  types of
contracts  to manage  interest  rate risk with  respect to  financial  assets or
liabilities.  The Company has not entered  into these  contracts  for trading or
speculative  purposes  in the past,  nor does the Company  currently  anticipate
entering into such contracts for trading or speculative  purposes in the future.
The Company was not a party to any such contract during 2001, 2002 or 2003.

Note 22 - Quarterly results of operations (unaudited):

Quarter ended
-------------------------------------------------------
March 31         June 30        Sept. 30        Dec. 31
--------         -------        --------        -------
(In millions, except per share data)

Year ended December 31, 2002

Net sales                                             $253.7          $279.1         $284.1          $262.8
Operating income                                        19.4            21.8           25.3            15.4

Net income (loss)                                 $ (3.7)         $  6.4         $ (7.1)         $  5.6

Net income (loss) per basic
common share                                         $ (.03)         $  .05         $ (.06)         $  .05

Year ended December 31, 2003
Net sales                                             $305.4          $317.4         $296.0          $301.0
Operating income                                        30.0            29.0           28.2            27.2

Net income                                        $  2.2          $ 17.8         $  8.8          $ 10.7

Net income per basic
common share                                         $  .02          $  .15         $  .07          $  .09

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

During the fourth  quarter of 2002,  the Company  recognized a $2.7 million
income tax benefit  related to the reduction in the Belgian income tax rate. See
Note 15.

REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULES

To the Stockholders and Board of Directors of Valhi, Inc.:

Our audits of the  consolidated  financial  statements  referred  to in our
report dated March 8, 2004,  appearing on page F-2 of the 2003 Annual  Report on
Form 10-K of Valhi,  Inc.,  also  included an audit of the  financial  statement
schedules  listed in the index on page F-1 of this Form  10-K.  In our  opinion,
these financial  statement  schedules present fairly, in all material  respects,
the  information  set forth  therein when read in  conjunction  with the related
consolidated financial statements.

PricewaterhouseCoopers LLP

Dallas, Texas
March 10, 2004

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Condensed Balance Sheets

December 31, 2002 and 2003

(In thousands)

2002              2003
----              ----

Current assets:

Cash and cash equivalents                                                             $  5,115       $    5,443
Restricted cash equivalents                                                                400              320
Marketable securities                                                                       47            -    
Accounts and notes receivable                                                            4,593            4,816
Receivables from subsidiaries and affiliates:
Income taxes, net                                                                      3,978            5,953
Other                                                                                    154            1,953
Deferred income taxes                                                                      260              219
Other                                                                                      359              238
--------       ----------

Total current assets                                                                14,906           18,942
--------       ----------

Other assets:
Marketable securities                                                                  170,173          170,033
Restricted cash equivalents                                                                502              488
Investment in and advances to subsidiaries and
affiliates                                                                            664,501          724,231
Other receivable from subsidiary                                                           908            2,258
Loans and notes receivable                                                             110,228          115,535
Other assets                                                                             1,303              202
Property and equipment, net                                                              2,448            2,160
--------       ----------

Total other assets                                                                 950,063        1,014,907
--------       ----------

$964,969       $1,033,849

Current liabilities:
Current maturities of long-term debt                                                     $   -       $    5,000
Payables to subsidiaries and affiliates:
Demand loan from Tremont LLC and subsidiaries                                              -           16,293
Demand loan from Contran Corporation                                                  11,171            7,332
Other                                                                                    386               10
Accounts payable and accrued liabilities                                                 2,152            7,372
Income taxes                                                                             1,301              381
--------       ----------

Total current liabilities                                                           15,010           36,388
--------       ----------

Noncurrent liabilities:
Long-term debt                                                                         250,000          250,000
Deferred income taxes                                                                   74,126           76,450
Other                                                                                   11,077           11,277
--------       ----------

Total noncurrent liabilities                                                       335,203          337,727
--------       ----------

Stockholders' equity                                                                     614,756          659,734
--------       ----------

$964,969       $1,033,849

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Condensed Statements of Income

Years ended December 31, 2001, 2002 and 2003

(In thousands)

2001            2002             2003
----            ----             ----

Revenues and other income:

Interest and dividend income                                          $ 30,601        $ 30,424          $30,432
Securities transaction gains, net                                       48,142           6,413                3
Other, net                                                               2,997           3,184            3,419
--------        --------          -------

81,740          40,021           33,854
--------        --------          -------

Costs and expenses:
General and administrative                                               9,862          10,283            8,385
Interest                                                                31,295          28,216           24,613
--------        --------          -------

41,157          38,499           32,998
--------        --------          -------

40,583           1,522              856

Equity in earnings of subsidiaries and
affiliates                                                               70,190          (4,717)          32,956
--------        --------          -------

Income (loss) before income taxes                                      110,773          (3,195)          33,812

Provision for income taxes (benefit)                                      17,575          (4,432)          (5,088)
--------        --------          ------- 

Income before cumulative effect of change
in accounting principle                                                93,198           1,237           38,900

Cumulative effect of change in accounting
principle                                                                  -               -                 586
-------         -------          -------

Net income                                                            $ 93,198        $  1,237          $39,486
========        ========          =======

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Condensed Statements of Cash Flows

Years ended December 31, 2001, 2002 and 2003

(In thousands)

2001             2002              2003
----             ----              ----

Cash flows from operating activities:

Net income                                                         $ 93,198          $  1,237         $ 39,486
Securities transactions, net                                        (48,142)           (6,413)              (3)
Proceeds from disposal of marketable
securities (trading)                                                  -               18,136               50
Noncash interest expense                                              5,089             2,143             -   
Deferred income taxes                                                 8,546             5,981            2,038
Equity in earnings of subsidiaries:
Before cumulative effect of change
in accounting principle                                          (70,190)            4,717          (32,956)
Cumulative effect of change in
accounting principle                                                   -                 -             (586)
Dividends from subsidiaries and
affiliates                                                          55,696           105,786           25,405
Other, net                                                              327               591              (37)
Net change in assets and liabilities                                 (2,528)          (18,908)          (2,838)
--------          --------         -------- 

Net cash provided by operating
activities                                                      41,996           113,270           30,559
--------          --------         --------

Cash flows from investing activities:
Purchase of:
Kronos common stock                                                     -                 -           (6,428)
TIMET common stock                                                      -                 -             (840)
TIMET debt securities                                                   -                 -             (238)
Tremont common stock                                                 (198)             -                   -
Subsidiary debt from lender                                        (5,273)             -                   -
Proceeds from disposal of marketable
securities (available-for-sale)                                     16,802              -                   -
Loans to subsidiaries and affiliates:
Loans                                                             (11,505)           (7,303)          (9,689)
Collections                                                         2,746               184            1,000
Change in restricted cash
equivalents, net                                                      -                 (902)              94
Other, net                                                             (176)              (83)            (919)
--------          --------         -------- 

Net cash provided (used) by
investing activities                                             2,396            (8,104)         (17,020)
--------          --------         -------- 

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Condensed Statements of Cash Flows (Continued)

Years ended December 31, 2001, 2002 and 2003

(In thousands)

2001               2002             2003
----               ----             ----

Cash flows from financing activities:
Indebtedness:

Borrowings                                                        $ 35,000          $  27,300          $ 10,000
Principal payments                                                 (67,662)           (92,572)           (5,000)
Loans from affiliates:
Loans                                                               81,905             13,718            34,583
Repayments                                                         (66,310)           (26,825)          (23,262)
Dividends                                                            (27,820)           (27,872)          (29,796)
Other, net                                                               632              2,680               264
--------          ---------          --------

Net cash used by financing activities                            (44,255)          (103,571)          (13,211)
--------          ---------          -------- 

Cash and cash equivalents:
Net increase                                                             137              1,595               328
Balance at beginning of year                                           3,383              3,520             5,115
--------          ---------          --------

Balance at end of year                                              $  3,520          $   5,115          $  5,443
========          =========          ========

Supplemental disclosures - cash paid (received) for:
Interest                                                            $ 26,785          $  26,153          $ 24,613
Income taxes, net                                                      2,320              2,456            (4,231)

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Notes to Condensed Financial Information

Note 1 - Basis of presentation:

The  accompanying  financial  statements  of Valhi,  Inc.  reflect  Valhi's
investment in (i) the common stocks (or  equivalent  thereof) of NL  Industries,
Inc.,  Kronos  Worldwide,   Inc.,  Tremont  LLC,  Valcor,  Inc.,  Waste  Control
Specialists LLC and Titanium Metals  Corporation  ("TIMET") on the equity method
and (ii)  the debt  securities  of  TIMET  as an  available-for-sale  marketable
security.  The Consolidated Financial Statements of Valhi, Inc. and Subsidiaries
are incorporated herein by reference.

Note 2 - Marketable securities:

December 31,
2002           2003
----           ----
(In thousands)

Current assets - Halliburton Company common stock

(trading)                                                                               $     47      $   -
========      ========

Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC                                                      $170,000      $170,000
Other securities                                                                            173            33
--------      --------

$170,173      $170,033

Note 3 - Investment in and advances to subsidiaries and affiliates:

December 31,
2002            2003
----            ----
(In thousands)

Investment in:

NL Industries (NYSE: NL)                                                               $436,311       $217,516
Kronos Worldwide, Inc. (NYSE: KRO)                                                            -        191,662
Tremont LLC                                                                             147,386        231,054
Valcor and subsidiaries                                                                  59,454         65,677
Waste Control Specialists LLC                                                            (1,842)       (13,815)
TIMET (NYSE: TIE) common stock                                                                -          1,013
TIMET debt securities                                                                      -               265
--------       --------
641,309        693,372

Noncurrent loan to Waste Control Specialists LLC                                           23,192         30,859
--------       --------

$664,501       $724,231

Noncurrent  receivable  from  subsidiary  at  December  31,  2002  and 2003
consists of accrued interest due from Waste Control Specialists LLC.

Prior to December  2003,  Kronos was a  wholly-owned  subsidiary  of NL. In
December 2003, NL completed the distribution of  approximately  48.8% of Kronos'
common stock to NL shareholders (including Valhi and Tremont LLC) in the form of
a pro-rata  dividend.  Shareholders  of NL received  one share of Kronos  common
stock for every two shares of NL held.  Valhi's equity in earnings of Kronos for
2003 relates to Kronos' earnings subsequent to the December 2003 distribution.

At December  31,  2002,  Valhi and NL owned 80% and 20%,  respectively,  of
Tremont  Group,  Inc.  Tremont  Group was a holding  company  that  owned 80% of
Tremont  Corporation.  In  February  2003,  Valhi  completed  a series of merger
transactions  pursuant to which,  among other things,  both Tremont  Group,  and
Tremont became wholly-owned  subsidiaries of Valhi and Tremont Group and Tremont
subsequently  merged to form Tremont LLC. Tremont LLC is a holding company whose
principal  assets at December 31, 2003 are (i) a 40%  interest in TIMET,  (ii) a
21% interest in NL and (iii) a 10% interest in Kronos.  Valhi owns an additional
63% of NL's common stock and an additional 1% of TIMET's common stock directly.

Valcor's principal asset is a 66% interest in CompX International,  Inc. at
December 31, 2003 (NYSE:  CIX).  Valhi owns an additional 3% of CompX  directly,
and Valhi's direct  investment in CompX is considered  part of its investment in
Valcor.

Years ended December 31,
2001            2002            2003
----            ----            ----
(In thousands)

Equity in earnings of subsidiaries and
affiliates before cumulative effect of
change in accounting principle

NL Industries                                                              $57,183       $ 15,198        $ 32,781
Kronos Worldwide                                                                 -              -             804
Tremont LLC                                                                  3,961        (11,965)         11,617
Valcor                                                                       4,214            256             629
Waste Control Specialists LLC                                                4,832         (8,206)        (12,923)
TIMET                                                                         -              -                 48
-------       --------        --------

$70,190       $ (4,717)       $ 32,956
=======       ========        ========

Dividends from subsidiaries

Declared:
NL Industries                                                           $24,108        $ 99,447        $ 24,108
Kronos Worldwide                                                              -               -            -   
Tremont LLC                                                               1,152           1,152               -
Valcor                                                                    6,437           5,187           1,297
Waste Control Specialists LLC                                            17,637            -               -
-------        --------        -----

49,334         105,786          25,405

Net change in dividends receivable                                          6,362            -               -
-------        --------        -----

Cash dividends received                                               $55,696        $105,786        $ 25,405
=======        ========        ========

Note 4 - Loans and notes receivable:

December 31,
2002           2003
----           ----
(In thousands)

Snake River Sugar Company:

Principal                                                                              $ 80,000        $ 80,000
Interest                                                                                 27,910          33,102
Other                                                                                       2,318           2,433
--------        --------

$110,228        $115,535

Note 5 - Long-term debt:

December 31,
2002           2003
----           ----
(In thousands)

Snake River Sugar Company                                                                $250,000        $250,000
Bank credit facility                                                                         -              5,000
--------        --------
250,000         255,000

Less current maturities                                                                      -              5,000
--------        --------

$250,000        $250,000

Valhi's $250 million in loans from Snake River bear  interest at a weighted
average  fixed  interest  rate of  9.4%,  are  collateralized  by the  Company's
interest  in The  Amalgamated  Sugar  Company  LLC and are due in January  2027.
Currently,  these loans are  nonrecourse  to Valhi.  Up to $37.5 million of such
loans will  become  recourse  to Valhi to the extent that the balance of Valhi's
loan to Snake  River  (including  accrued  interest)  becomes  less  than  $37.5
million.  See Note 4. Under certain  conditions,  Snake River has the ability to
accelerate the maturity of these loans.

At  December  31,  2003,  Valhi has an $85  million  revolving  bank credit
facility which matures in October 2004,  generally  bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings),  and is
collateralized  by 30 million shares of NL common stock and 15 million shares of
Kronos common stock held by Valhi. The agreement limits dividends and additional
indebtedness  of Valhi  and  contains  other  provisions  customary  in  lending
transactions  of this type.  In the event of a change of  control  of Valhi,  as
defined,  the lenders  would have the right to  accelerate  the  maturity of the
facility. The maximum amount which may be borrowed under the facility is limited
to one-third of the aggregate market value of the shares of NL and Kronos common
stock pledged as collateral.  Based on NL's and Kronos' December 31, 2003 quoted
market price of $11.70 and $22.20 per share, respectively,  the shares of NL and
Kronos  common stock  pledged  under the facility  provide more than  sufficient
collateral  coverage  to  allow  for  borrowings  up to the full  amount  of the
facility.  At December  31, 2003,  Valhi would have become  limited to borrowing
less than the full $85 million  amount of the facility,  or would be required to
pledge  additional  collateral  if the  full  amount  of the  facility  had been
borrowed,  if the aggregate  market value of the shares of NL and Kronos pledged
was $428 million lower. At December 31, 2003, letters of credit aggregating $1.1
million had been issued, and $78.9 million was available for borrowing.

Note 6 -       Income taxes:

Years ended December 31,
2001            2002            2003
----            ----            ----
(In thousands)

Components of income tax expense (benefit):

Currently payable (refundable)                                          $ 9,029         $(10,413)       $(7,126)
Deferred income taxes                                                     8,546            5,981          2,038
-------         --------        -------

$17,575         $ (4,432)       $(5,088)
=======         ========        ======= 

Cash paid (received) for income taxes, net:
Paid to (received from) subsidiaries, net                               $  (439)        $  2,455        $(5,768)
Paid to Contran                                                           2,607                -          1,490
Paid to tax authorities, net                                                152                1             47
-------         --------        -------

$ 2,320         $  2,456        $(4,231)
=======         ========        ======= 

Waste Control  Specialists  LLC and The  Amalgamated  Sugar Company LLC are
treated as partnerships for federal income tax purposes.  Valhi Parent Company's
provision  for  income  taxes  (benefit)  includes  a  tax  provision  (benefit)
attributable   to  Valhi's   equity  in  earnings   (losses)  of  Waste  Control
Specialists.

Deferred tax
asset (liability)
December 31,
2002            2003
----            ----
(In thousands)

Components of the net deferred tax asset (liability) - tax effect of temporary
differences related to:

Marketable securities                                                                 $(65,082)      $ (68,109)
Investment in Waste Control Specialists LLC                                              2,014           1,373
Reduction of deferred income tax assets of
subsidiaries that are members of the Contran Tax
Group - separate company U.S. net operating loss
carryforwards and other tax attributes that do not
exist at the Valhi level                                                              (19,534)         (6,808)
Tax attributes of Valhi:
Net operating loss carryforwards                                                      11,507            -   
AMT credit carryforwards                                                                 381             381
Accrued liabilities and other deductible differences                                     5,187           4,532
Other taxable differences                                                               (8,339)         (7,600)
--------        -------- 

$(73,866)       $(76,231)

Current deferred tax asset                                                                $    260        $    219
Noncurrent deferred tax liability                                                          (74,126)        (76,450)
--------        -------- 

$(73,866)       $(76,231)

VALHI, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(In thousands)

Additions
Balance at  charged to                               Balance
beginning   costs and      Net     Currency          at end
Description             of year    expenses   deductions translation  Other of year
--------------------------------- ---------   --------   ---------- -----------  ----- -------

Year ended December 31, 2001:

Allowance for doubtful accounts   $ 5,908   $  1,588    $(1,080  )   $ (90)   $--     $ 6,326
=======   ========    =======      =====    =====   =======

Amortization of intangibles:
Goodwill ....................   $60,891   $ 16,963    $  --        $ (75)   $--     $77,779
Other .......................       785        229       --           (4)    --       1,010
-------   --------    -------      -----    -----   -------

$61,676   $ 17,192    $  --        $ (79)   $--     $78,789
=======   ========    =======      =====    =====   =======

Year ended December 31, 2002:
Allowance for doubtful accounts   $ 6,326   $    692    $(1,014)   $ 352    $--     $ 6,356
=======   ========    =======    =====    =====   =======

Amortization of intangibles:
Goodwill ....................   $77,779   $   --      $  --      $ 332    $--     $78,111
Other .......................     1,010        612       --         (1)    --       1,621
-------   --------    -------    -----    -----   -------

$78,789   $    612    $  --      $ 331    $--     $79,732
=======   ========    =======    =====    =====   =======

Year ended December 31, 2003:
Allowance for doubtful accounts   $ 6,356   $ (1,768)   $  (425)   $ 486    $--     $ 4,649
=======   ========    =======    =====    =====   =======

Amortization of intangibles:
Goodwill ....................   $78,111   $   --      $  --      $ 407    $--     $78,518
Other .......................     1,621        605       --         19     --       2,245
-------   --------    -------    -----    -----   -------

$79,732   $    605    $  --      $ 426    $--     $80,763
=======   ========    =======    =====    =====   =======

Note - Certain  information  has been omitted from this  Schedule  because it is
disclosed in the notes to the Consolidated Financial Statements.

INTERCORPORATE SERVICES AGREEMENT

This INTERCORPORATE  SERVICES AGREEMENT (the "Agreement"),  effective as of
January 1, 2003,  amends and  supersedes  that certain  Intercorporate  Services
Agreement effective as of January 1, 2002 by and between CONTRAN CORPORATION,  a
Delaware  corporation  ("Contran"),  and VALHI,  INC.,  a  Delaware  corporation
("Recipient").

Recitals

A. Without  direct  compensation  from  Recipient,  employees and agents of
Contran and affiliates of Contran perform (i) management,  legal,  financial and
administrative  functions  for  Recipient  and (ii) pilot  services and aircraft
management  functions  with  respect  to  certain  aircraft  owned or  leased by
Recipient.

B. Recipient does not separately  maintain the full internal  capability to
perform all necessary  management,  financial and administrative  functions that
Recipient requires.

C. The cost of maintaining the additional  personnel by Recipient necessary
to perform the functions provided for by this Agreement would exceed the fee set
forth in Section 3 of this  Agreement,  and the terms of this  Agreement  are no
less favorable to Recipient than could  otherwise be obtained from a third party
for comparable services.

D. Recipient desires to continue  receiving the services presently provided
by Contran  and  affiliates  of Contran  and  Contran is willing to  continue to
provide such services under the terms of this Agreement.

Agreement

For  and in  consideration  of the  mutual  premises,  representations  and
covenants herein contained, the parties hereto mutually agree as follows:

Section 1.  Services to be Provided.  Contran  agrees to make  available to
Recipient,  upon request, the following services (the "Services") to be rendered
by the internal staff of Contran and affiliates of Contran:

(a) Consultation and assistance in the development and  implementation
of Recipient's corporate business strategies, plans and objectives;

(b) Consultation and assistance in management and conduct of corporate
affairs and corporate governance  consistent with the charter and bylaws of
Recipient;

(c)  Consultation  and assistance in maintenance of financial  records
and  controls,  including  preparation  and  review of  periodic  financial
statements and reports to be filed with public and regulatory  entities and
those  required to be prepared for  financial  institutions  or pursuant to
indentures and credit agreements;

(d)  Consultation  and assistance in cash  management and in arranging
financing necessary to implement the business plans of Recipient;

(e) Consultation and assistance in tax management and  administration,
including,  without limitation,  preparation and filing of tax returns, tax
reporting, examinations by government authorities and tax planning;

(f) Consultation and assistance with respect to employee benefit plans
and incentive compensation arrangements;

(g) Pilot services and aircraft  management  functions with respect to
aircraft owned or leased by Recipient;

(h) Certain  administration  and  management  services with respect to
Recipient's  insurance  and  risk  management  needs,  including,   without
limitations, administration of Recipient's:

(i) property and casualty insurance program,

(ii) claims management program,

(iii) property loss control program, and

(i) Such other  services as may be requested by Recipient from time to
time.

This  Agreement  does not apply to, and the Services  provided for herein do not
include,  any  services  that Harold C.  Simmons,  Glenn R. Simmons or Steven L.
Watson may provide to Recipient in their roles as members of  Recipient's  board
of directors or any other activity related to such board of directors.

Section 2. Miscellaneous  Services.  It is the intent of the parties hereto
that Contran provide only the Services requested by Recipient in connection with
routine  functions  related to the ongoing  operations of Recipient and not with
respect to special projects,  including corporate investments,  acquisitions and
divestitures.  The parties  hereto  contemplate  that the  Services  rendered in
connection with the conduct of Recipient's  business will be on a scale compared
to that existing on the effective date of this Agreement,  adjusted for internal
corporate  growth or contraction,  but not for major  corporate  acquisitions or
divestitures,  and  that  adjustments  may be  required  to the  terms  of  this
Agreement in the event of such major  corporate  acquisitions,  divestitures  or
special  projects.  Recipient will continue to bear all other costs required for
outside  services  including,  but not  limited  to,  the  outside  services  of
attorneys, auditors, trustees, consultants,  transfer agents and registrars, and
it is expressly understood that Contran assumes no liability for any expenses or
services  other than those  stated in Section 1. In  addition to the fee paid to
Contran by  Recipient  for the  Services  provided  pursuant to this  Agreement,
Recipient  will pay to Contran  the amount of  out-of-pocket  costs  incurred by
Contran in rendering such Services.

Section 3. Fee for Services.  Recipient agrees to pay to Contran $1,064,750
quarterly on the first business day of each quarter, commencing as of January 1,
2003, pursuant to this Agreement.

Section 4. Original  Term.  Subject to the  provisions of Section 5 hereof,
the original  term of this  Agreement  shall be from January 1, 2003 to December
31, 2003.

Section  5.   Extensions.   This   Agreement   shall  be   extended   on  a
quarter-to-quarter  basis  after the  expiration  of its  original  term  unless
written  notification  is given by  Contran  or  Recipient  thirty  (30) days in
advance of the first day of each  successive  quarter or unless it is superseded
by a subsequent written agreement of the parties hereto.

Section 6.  Limitation of Liability.  In providing its Services  hereunder,
Contran  shall  have a duty  to act,  and to  cause  its  agents  to  act,  in a
reasonably  prudent  manner,  but  neither  Contran nor any  officer,  director,
employee or agent of Contran or its affiliates  shall be liable to Recipient for
any error of judgment or mistake of law or for any loss incurred by Recipient in
connection  with the  matter  to which  this  Agreement  relates,  except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Contran.

Section  7.  Indemnification  of  Contran  by  Recipient.  Recipient  shall
indemnify  and hold  harmless  Contran,  its  affiliates  and  their  respective
officers,  directors  and  employees  from  and  against  any  and  all  losses,
liabilities,  claims, damages, costs and expenses (including attorneys' fees and
other  expenses of  litigation)  to which  Contran or any such person may become
subject  arising  out of the  Services  provided  by  Contran  to the  Recipient
hereunder, provided that such indemnity shall not protect any person against any
liability to which such person  would  otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on the part of such person.

Section 8. Confidentiality. Except as otherwise required by applicable law,
each of the parties agrees that it will maintain in confidence all  confidential
information  regarding  the  other  party  supplied  to it in the  course of the
performance of this Agreement.

Section 9.  Further  Assurances.  Each of the parties  will make,  execute,
acknowledge and deliver such other instruments and documents,  and take all such
other actions,  as the other party may reasonably  request and as may reasonably
be required in order to effectuate  the purposes of this  Agreement and to carry
out the terms hereof.

Section 10. Notices.  All communications  hereunder shall be in writing and
shall be addressed,  if intended for Contran,  to Three Lincoln Centre, 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240,  Attention:  Chairman of the Board, or
such other  address as it shall have  furnished to Recipient in writing,  and if
intended for Recipient,  to Three Lincoln Centre, 5430 LBJ Freeway,  Suite 1700,
Dallas, Texas 75240, Attention: President or such other address as it shall have
furnished to Contran in writing.

Section 11. Amendment and Modification. Neither this Agreement nor any term
hereof may be changed, waived,  discharged or terminated other than by agreement
in writing signed by the parties hereto.

Section 12. Successor and Assigns. This Agreement shall be binding upon and
inure to the benefit of Contran and  Recipient and their  respective  successors
and  assigns,  except  that  neither  party may  assign  its  rights  under this
Agreement without the prior written consent of the other party.

Section  13.  Governing  Law.  This  Agreement  shall be  governed  by, and
construed and interpreted in accordance with, the laws of the state of Texas.

IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed and delivered as of the date first above written.

CONTRAN CORPORATION

By: /s/Steven L. Watson
----------------------------------------------
Steven L. Watson, President

VALHI, INC.

By: /s/Bobby D. O'Brien
----------------------------------------------
Bobby D. O'Brien, Vice President

EXHIBIT 21.1     SUBSIDIARIES OF THE REGISTRANT

% of Voting
Securities
Jurisdiction of                    Held at 
Incorporation or                 December 31, 
Name of Corporation                                                  Organization                     2003 (1)
-----------------------------------                                ----------------                  ----------

Amcorp, Inc.                                                           Delaware                           100%
ASC Holdings, Inc.                                                Utah                               100
Amalgamated Research, Inc.                                        Idaho                              100

Andrews County Holdings, Inc.                                          Delaware                           100
Waste Control Specialists LLC                                     Delaware                            90
Greenhill Technologies LLC                                      Delaware                            50
Tecsafe LLC                                                     Delaware                           100

NL Industries, Inc. (2)                                                New Jersey                          63
Kronos Worldwide, Inc. (3)                                         Delaware                            51

Tremont LLC (2)(3)                                                     Delaware                           100
TRECO L.L.C.                                                      Nevada                             100
Basic Management, Inc.                                          Nevada                              32
The Landwell Company LP                                       Delaware                            50
The Landwell Company LP                                         Delaware                            12
TRE Holding Corporation                                           Delaware                           100
TRE Management Company                                          Delaware                           100
Tremont Colorado Corporation                                      Delaware                           100
Tall Pines Insurance Company                                      Vermont                            100
Titanium Metals Corporation (5)                                   Delaware                            40

Valcor, Inc.                                                           Delaware                           100
Medite Corporation                                                Delaware                           100
CompX International Inc. (4)                                      Delaware                            66

Other wholly-owned
Valmont Insurance Company                                         Vermont                            100
Impex Realty Holding, Inc.                                        Delaware                           100

(1)  Held by the Registrant or the indicated subsidiary of the Registrant.

(2)  Subsidiaries  of NL are  incorporated  by reference to Exhibit 21.1 of NL's
Annual  Report on Form 10-K for the year ended  December 31, 2003 (File No.
1-640). Tremont LLC owns an additional 21% of NL directly.

(3)  Subsidiaries  of Kronos are  incorporated  by  reference to Exhibit 21.1 of
Kronos'  Annual  Report on Form 10-K for the year ended  December  31, 2003
(File No.  333-100047).  The  Registrant  owns an additional  32% of Kronos
directly, and Tremont LLC owns an additional 10% of Kronos directly.

(4)  Subsidiaries  of CompX are  incorporated  by  reference  to Exhibit 21.1 of
CompX's  Annual  Report on Form 10-K for the year ended  December  31, 2003
(File No. 1-13905). The Registrant owns an additional 3% of CompX directly.

(5)  Subsidiaries of Titanium Metals  Corporation  ("TIMET") are incorporated by
reference  to Exhibit  21.1 of TIMET's  Annual  Report on Form 10-K for the
year ended December 31, 2003 (File No.  0-28538).  The  Registrant  owns an
additional 1% of TIMET directly.

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the  incorporation  by reference in Valhi,  Inc.'s (i)
Registration  Statement  on Form S-8  (Nos.  33-53633,  33-48146,  33-41507  and
33-21758) and related  Prospectus  pertaining to the Valhi,  Inc. 1987 Incentive
Stock Option - Stock Appreciation Rights Plan and (ii) Registration Statement on
Form S-8 (No.  333-48391) and related  Prospectus  pertaining to the Valhi, Inc.
1997  Long-Term  Incentive  Plan, of our reports dated March 8, 2004 relating to
the financial statements and financial statement schedules of Valhi, Inc., which
appear in this Annual Report on Form 10-K.

PricewaterhouseCoopers LLP

Dallas, Texas
March 10, 2004

Exhibit 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the  incorporation  by reference in Valhi,  Inc.'s (i)
Registration  Statement  on Form S-8  (Nos.  33-53633,  33-48146,  33-41507  and
33-21758) and related  Prospectus  pertaining to the Valhi,  Inc. 1987 Incentive
Stock Option - Stock Appreciation Rights Plan and (ii) Registration Statement on
Form S-8 (No.  333-48391) and related  Prospectus  pertaining to the Valhi, Inc.
1997 Long-Term  Incentive  Plan, of our report dated March 2, 2004,  relating to
the financial  statements of Titanium Metals Corporation,  which is incorporated
by reference in this Annual Report on Form 10-K of Valhi, Inc.

PricewaterhouseCoopers LLP

Denver, Colorado
March 10, 2004

Exhibit 31.1

I, Steven L. Watson,  the President and Chief Executive Officer of Valhi,  Inc.,
certify that:

1)   I have reviewed this annual report on Form 10-K of Valhi, Inc.;

2)   Based on my knowledge, this report does not contain any untrue statement of
a material  fact or omit to state a  material  fact  necessary  to make the
statements made, in light of the circumstances  under which such statements
were made,  not  misleading  with  respect  to the  period  covered by this
report;

3)   Based on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in  this  report,  fairly  present  in all  material
respects the financial  condition,  results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;

4)   The  registrant's  other  certifying  officer  and  I are  responsible  for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules  13a-15(e) and  15d-15(e))  for the registrant and we
have:

a)   Designed  such  disclosure  controls  and  procedures,  or caused such
disclosure   controls  and   procedures  to  be  designed   under  our
supervision,  to ensure  that  material  information  relating  to the
registrant,  including its consolidated subsidiaries, is made known to
us by others within those entities,  particularly during the period in
which this report is being prepared;

b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
and procedures and presented in this report our conclusions  about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and

c)   Disclosed  in this  report  any  change in the  registrant's  internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's  fourth fiscal quarter in
the case of an annual  report)  that has  materially  affected,  or is
reasonably  likely to materially  affect,  the  registrant's  internal
control over financial reporting; and

5)   The registrant's  other certifying  officer and I have disclosed,  based on
our most recent evaluation of internal control over financial reporting, to
the registrant's  auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):

a)   All significant  deficiencies and material weaknesses in the design or
operation  of internal  control  over  financial  reporting  which are
reasonably  likely to  adversely  affect the  registrant's  ability to
record, process, summarize and report financial information; and

b)   Any fraud, whether or not material,  that involves management or other
employees who have a  significant  role in the  registrant's  internal
control over financial reporting.

Date: March 10, 2004

/s/ Steven L. Watson
-------------------------------------
Steven L. Watson
President and Chief Executive Officer

Exhibit 31.2

I, Bobby D. O'Brien,  the Vice President,  Chief Financial Officer and Treasurer
of Valhi, Inc., certify that:

1)   I have reviewed this annual report on Form 10-K of Valhi, Inc.;

2)   Based on my knowledge, this report does not contain any untrue statement of
a material  fact or omit to state a  material  fact  necessary  to make the
statements made, in light of the circumstances  under which such statements
were made,  not  misleading  with  respect  to the  period  covered by this
report;

3)   Based on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in  this  report,  fairly  present  in all  material
respects the financial  condition,  results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;

4)   The  registrant's  other  certifying  officer  and  I are  responsible  for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules  13a-15(e) and  15d-15(e))  for the registrant and we
have:

a)   Designed  such  disclosure  controls  and  procedures,  or caused such
disclosure   controls  and   procedures  to  be  designed   under  our
supervision,  to ensure  that  material  information  relating  to the
registrant,  including its consolidated subsidiaries, is made known to
us by others within those entities,  particularly during the period in
which this report is being prepared;

b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
and procedures and presented in this report our conclusions  about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and

c)   Disclosed  in this  report  any  change in the  registrant's  internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's  fourth fiscal quarter in
the case of an annual  report)  that has  materially  affected,  or is
reasonably  likely to materially  affect,  the  registrant's  internal
control over financial reporting; and

5)   The registrant's  other certifying  officer and I have disclosed,  based on
our most recent evaluation of internal control over financial reporting, to
the registrant's  auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):

a)   All significant  deficiencies and material weaknesses in the design or
operation  of internal  control  over  financial  reporting  which are
reasonably  likely to  adversely  affect the  registrant's  ability to
record, process, summarize and report financial information; and

b)   Any fraud, whether or not material,  that involves management or other
employees who have a  significant  role in the  registrant's  internal
control over financial reporting.

Date: March 10, 2004

/s/ Bobby D. O'Brien
---------------------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer and Treasurer`

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Valhi, Inc. (the "Company") on Form 10-K
for the year ended  December 31, 2003 as filed with the  Securities and Exchange
Commission on the date hereof (the  "Report"),  we, Steven L. Watson,  President
and  Chief  Executive  Officer  of the  Company,  and  Bobby  D.  O'Brien,  Vice
President,  Chief  Financial  Officer and  Treasurer  of the  Company,  certify,
pursuant to 18 U.S.C.  Section 1350,  as adopted  pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

(1) The Report fully  complies  with the  requirements  of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2)  The  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and result of  operations of the
Company.

/s/  Steven L. Watson                       /s/  Bobby D. O'Brien
-------------------------------------       ---------------------
Steven L. Watson                            Bobby D. O'Brien
President and Chief Executive Officer       Vice President, Chief Financial 
March 10, 2004                              Officer and Treasurer
March 10, 2004

Note: The certification  the registrant  furnishes in this exhibit is not deemed
"filed" for purposes of Section 18 of the  Securities  Exchange Act of 1934,  as
amended,  or otherwise subject to the liabilities of that Section.  Registration
Statements or other documents filed with the Securities and Exchange  Commission
shall not incorporate this exhibit by reference,  except as otherwise  expressly
stated in such filing.