SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
ACT OF 1934 - For the fiscal year ended December 31, 2005

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 ($.01 par value per share)              New York Stock Exchange

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

None.

Indicate by check mark:

If the Registrant is a well-known  seasoned issuer,  as defined in Rule 405
of the Securities Act. Yes No X

If the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes No X

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 (or for such  shorter  period that the  Registrant  was
required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. Yes X No 

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. Yes X No

Whether the Registrant is a large  accelerated  filer, an accelerated filer
or a  non-accelerated  filer (as  defined in Rule 12b-2 of the Act).  Large
accelerated filer Accelerated filer X non-accelerated filer .

Whether the  Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes No X .

The aggregate market value of the 9.4 million shares of voting common stock held
by  nonaffiliates  of Valhi,  Inc. as of June 30, 2005 (the last business day of
the Registrant's  most  recently-completed  second fiscal quarter)  approximated
$164.5 million.

As of February 28, 2006,  115,919,578  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, 2005, (i) Valhi's 83% ownership of NL
Industries,  Inc., 57% ownership of Kronos  Worldwide,  Inc.,  100% ownership of
Waste Control Specialists LLC, 100% ownership of Tremont LLC and 4% ownership of
Titanium  Metals  Corporation  ("TIMET"),  (ii)  NL's 36%  ownership  of  Kronos
Worldwide and 70% ownership of CompX  International  Inc.,  (iii)  Tremont's 35%
ownership of TIMET and (x) TIMET's 18% ownership of CompX.

PART I

ITEM 1.   BUSINESS

As more  fully  described  on the  condensed  organizational  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 a leading global producer
Kronos Worldwide, Inc.                      and    marketer   of    value-added
titanium dioxide pigments ("TiO2"),
which   are  used   for   imparting
whiteness,  brightness  and opacity
to  a  diverse  range  of  customer
applications  and end-use  markets,
including coatings, plastics, paper
and other  industrial  and consumer
"quality-of-life"  products. Kronos
has production facilities in Europe
and  North  America.  Sales of TiO2
represent   about  90%  of  Kronos'
total sales in 2005,  with sales of
other     products     that     are
complementary   to   Kronos'   TiO2
business comprising the remainder.

Component Products                           CompX is a leading  manufacturer of
CompX International Inc.                    precision   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  and
Asia.

Waste Management                             Waste Control  Specialists owns and
Waste Control Specialists LLC               operates a  facility  in West Texas
for  the   processing,   treatment,
storage and disposal of  hazardous,
toxic   and   certain    types   of
low-level   and   mixed   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 low-level radioactive wastes.

Titanium Metals                              Titanium     Metals     Corporation
Titanium Metals Corporation                 ("TIMET")   is  a  leading   global
producer of titanium sponge, melted
products  (ingot and slab) and mill
products   for    commercial    and
military aerospace,  industrial and
other   markets,    including   new
applications  for  titanium  in the
automotive   and   other   emerging
markets. TIMET is the only producer
with  major   titanium   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.  Contran Corporation holds,  directly or through
subsidiaries,   approximately   92%  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, or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons.  Consequently, Mr. Simmons 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 1A - "Risk Factors," 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 actual 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 commercial 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    Possible  disruption  of  business or  increases  in the cost of doing
business resulting from terrorist activities or global conflicts,
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, natural disasters, fires, explosions,  unscheduled or
unplanned downtime and transportation interruptions),
o    The timing and amounts of insurance recoveries,
o    The ability of the Company to renew or refinance credit facilities,
o    Uncertainties associated with new product development (such as TIMET's
ability to develop new end-uses for its titanium products),
o    The ultimate outcome of income tax audits, tax settlement  initiatives
or other tax matters,
o    The ultimate ability to utilize income tax attributes,  the benefit of
which has been recognized under the "more-likely-than-not" recognition
criteria (such as Kronos'  ability to utilize its German net operating
loss carryforwards),
o    Environmental   matters  (such  as  those  requiring  compliance  with
emission and discharge  standards for existing and new facilities,  or
new developments regarding environmental  remediation at sites related
to former operation of the Company),
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 and Tremont), 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  currently  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 a leading  global  producer and marketer of value-added
TiO2, inorganic chemical products used for imparting  whiteness,  brightness and
opacity  to a  diverse  range of  customer  applications  and  end-use  markets,
including coatings,  plastics, paper, fibers, food, ceramics and cosmetics. TiO2
is considered a "quality-of-life" product with demand affected by gross domestic
product in various  regions of the world.  TiO2, the largest  commercially  used
whitening pigment by volume, derives its value from its whitening properties and
opacifying ability (commonly referred to as hiding power). As a result of TiO2's
high  refractive  index rating,  it can provide more hiding power than any other
commercially  produced white pigment. In addition,  TiO2 demonstrates  excellent
resistance  to  chemical  attack,  good  thermal  stability  and  resistance  to
ultraviolet  degradation.  TiO2 is supplied to  customers  in either a powder or
slurry form.

Approximately  one-half of Kronos' 2005 TiO2 sales  volumes were to Europe,
with  about 38% to North  America  and the  balance  to export  markets.  Kronos
believes it is the second-largest  producer of TiO2 in Europe, with an estimated
20% share of European  TiO2 sales  volumes in 2005.  Kronos has an estimated 15%
share of North American TiO2 sales volumes.

Per capita  consumption of Ti02 in the United States and Western Europe far
exceeds  that in other  areas of the world and these  regions  are  expected  to
continue  to be the  largest  consumers  of TiO2.  Significant  markets for TiO2
consumption  could  emerge in  Eastern  Europe,  the Far East or  China,  as the
economies in these regions continue to develop to the point that quality-of-life
products, including TiO2, experience greater demand.

Products and operations.  TiO2 is produced in two crystalline forms: rutile
and  anatase.  Both the  chloride and sulfate  production  processes  (discussed
below)  produce  rutile  TiO2.  Chloride  process  rutile is  preferred  for the
majority of customer applications. From a technical standpoint, chloride process
rutile has a bluer  undertone and higher  durability than sulfate process rutile
TiO2.  Although many end-use  applications can use either form of TiO2, chloride
process rutile TiO2 is the preferred form for use in coatings and plastics,  the
two largest end-use  markets.  Anatase TiO2,  which is produced only through the
sulfate  production  process,  represents  a much smaller  percentage  of annual
global TiO2  production  and is preferred for use in selected  paper,  ceramics,
rubber tires, man-made fibers, food and cosmetics.

Kronos  believes  that  there  are  no  effective   substitutes  for  TiO2.
Extenders, such as kaolin clays, calcium carbonate and polymeric opacifiers, are
used in a number of end-use  markets as white  pigments,  however the opacity in
these products is not able to duplicate the performance characteristics of TiO2,
and Kronos believes these products are unlikely to replace TiO2.

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

Kronos and its distributors and agents sell and provide technical  services
for its products to over 4,000 customers in over 100 countries with the majority
of sales in Europe and North  America.  TiO2 is distributed by rail and truck in
either  dry or slurry  form.  Kronos  and its  predecessors  have  produced  and
marketed  TiO2 in North  America and Europe for over 80 years.  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.

Sales of TiO2  represented  about 90% of Kronos' total sales in 2005. Sales
of other products,  complementary to Kronos' TiO2 business, are comprised of the
following:

o    Kronos  owns  an  ilmenite  mine  in  Norway  operated  pursuant  to a
governmental  concession  with an  unlimited  term.  Ilmenite is a raw
material  used  directly as a feedstock by some  sulfate-process  TiO2
plants,  including all of Kronos' European sulfate-process plants. The
mine has  estimated  reserves  that are  expected  to last at least 50
years. Ilmenite sales to third-parties represented approximately 5% of
chemicals sales in 2005.
o    Kronos  manufactures  and  sells  iron-based   chemicals,   which  are
by-products and processed  by-products of the TiO2 pigment  production
process.  These  co-product  chemicals  are marketed  through  Kronos'
Ecochem division, and are used primarily as treatment and conditioning
agents for industrial effluents and municipal wastewater as well as in
the manufacture of iron pigments,  cement and  agricultural  products.
Sales of iron based products were about 4% of chemical sales in 2005.
o    Kronos  manufactures  and sells  certain  titanium  chemical  products
(titanium  oxychloride  and titanyl  sulfate),  which are  side-stream
products from the production of TiO2. Titanium  oxychloride is used in
specialty  applications  in the  formulation of pearlescent  pigments,
production  of  electroceramic  capacitors  for cell  phones and other
electronic  devices.  Titanyl  sulfate  products are used primarily in
pearlescent  pigments.  Sales  of  these  products  were  about  1% of
chemical sales in 2005.

Manufacturing  process,  properties and raw materials.  Kronos manufactures
TiO2 using both the chloride process and the sulfate process.  Approximately 73%
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. The chloride process typically has lower  manufacturing  costs than
the sulfate  process due to higher yield and  production of less waste and lower
energy  requirements  and labor costs.  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 can
produce 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 micronizing (milling). Due to environmental factors and
customer  considerations,  the proportion of TiO2 industry sales  represented by
chloride-process  pigments has increased relative to  sulfate-process  pigments,
and, in 2005, industry-wide  chloride-process  production facilities represented
approximately 64% of industry capacity.

During 2005, Kronos operated four TiO2 facilities in Europe (one in each of
Leverkusen, Germany, Nordenham, Germany, Langerbrugge,  Belgium and Fredrikstad,
Norway). In North America,  Kronos operates a Ti02 facility in Varennes,  Quebec
and,  through a  manufacturing  joint venture  discussed  below,  has a one-half
interest in a Ti02 plant in Lake Charles,  Louisiana. TiO2 is produced using the
chloride  process at the  Leverkusen,  Langerbrugge,  Varennes  and Lake Charles
facilities and is produced using the sulfate  process in Nordenham,  Leverkusen,
Fredrikstad  and  Varennes.  Kronos  owns an  ilmenite  mine in Norway  operated
pursuant to a governmental  concession  with an unlimited  term, and 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.  Kronos'  co-products are produced at its Norwegian,  Belgian and German
facilities,  and its titanium chemicals are produced at its Belgian and Canadian
facilities.

All of Kronos' principal  production  facilities are owned,  except for the
land under the Leverkusen and Fredrikstad  facilities.  The Fredrikstad plant is
located on public land and is leased  until  2013,  with an option to extend the
lease for an  additional 50 years.  Kronos leases the land under its  Leverkusen
Ti02  production  facility  pursuant to a lease expiring in 2050. The Leverkusen
facility,  which is owned by Kronos  and which  represents  about  one-third  of
Kronos'  current  TiO2  production  capacity,  is  located  within an  extensive
manufacturing  complex  owned by Bayer AG.  Rent for such land lease  associated
with 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,
including chlorine,  auxiliary and operating  materials,  utilities and services
necessary to operate the Leverkusen facility.

Kronos  believes the  transportation  access to its  facilities,  which are
generally  maintained  by the  applicable  local  government,  are  adequate for
Kronos' purposes.

Kronos  produced a new company  record 492,000 metric tons of TiO2 in 2005,
compared to the prior records of 484,000  metric tons in 2004 and 476,000 metric
tons in 2003. Such production  amounts include Kronos' one-half  interest in the
joint-venture owned Louisiana plant discussed below.  Kronos' average production
capacity  utilization rates in all three years were near full capacity.  Kronos'
production  capacity has increased by approximately  30% over the past ten years
due to debottlenecking programs, with only moderate capital expenditures. Kronos
believes its annual  attainable  production  capacity for 2006 is  approximately
510,000  metric tons,  with some slight  additional  capacity  available in 2007
through its continued debottlenecking efforts.

The primary raw materials used in the TiO2 chloride  production process are
titanium-containing   feedstock,  chlorine  and  coke.  Chlorine  and  coke  are
available from a number of suppliers. Titanium-containing feedstock suitable for
use in the chloride process is available from a limited, but increasing,  number
of suppliers around the world,  principally in Australia,  South Africa, Canada,
India and the United States. Kronos purchased  approximately 430,000 metric tons
of chloride  feedstock  in 2005,  of which the vast  majority  was slag.  Kronos
purchased chloride process grade slag in 2005 from a subsidiary of Rio Tinto plc
UK - Richards  Bay Iron and  Titanium  Limited of South Africa under a long-term
supply contract that expires at the end of 2007. Natural rutile ore is purchased
primarily from Iluka  Resources,  Limited  (Australia)  under a long-term supply
contract  that  expires at the end of 2009.  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 process
feedstock requirements over the next several years.

The primary raw materials used in the TiO2 sulfate  production  process are
titanium-containing  feedstock,  derived  primarily  from  rock and  beach  sand
ilmenite,  and  sulfuric  acid.  Sulfuric  acid is  available  from a number  of
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  owns and  operates a rock  ilmenite  mine in
Norway which provided all of Kronos' feedstock for its European  sulfate-process
pigment plants in 2005.  Kronos  produced  approximately  816,000 metric tons of
ilmenite  in  2005,  of  which  approximately  317,000  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
29,000 metric tons in 2005), primarily from Q.I.T. Fer et Titane Inc. of Canada,
a subsidiary of Rio Tinto plc UK, under a long-term supply contract that expires
at the end of 2009. Raw materials purchased under these contracts and extensions
thereof are expected to meet Kronos' sulfate process feedstock requirements over
the next several years.

Kronos' raw material  contracts  contain  fixed  quantities  that Kronos is
required to purchase,  although these  contracts allow for an upward or downward
adjustment in the quantity  purchased.  The quantities  under these contracts do
not require Kronos to purchase  feedstock in excess of amounts that Kronos would
reasonably  consume in any given year.  The pricing  under these  agreements  is
generally negotiated annually.

The number of sources of, and  availability  of,  certain raw  materials is
specific to the particular  geographic region in which a facility is located. As
noted  above,  Kronos  purchases   titanium-bearing  ore  from  three  different
suppliers in different  countries under multiple-year  contracts.  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.

The following table summarizes our raw materials procured or mined in 2005.

Quantities of Raw Materials
Production Process/Raw Material                                     Procured or Mined
-------------------------------                                ---------------------------
(In thousands of metric tons)

Chloride process plants -

purchased slag or natural rutile ore                                               433

Sulfate process plants:
Raw ilmenite ore mined internally                                                  317
Purchased slag                                                                      29

TiO2  manufacturing  joint  venture.  Subsidiaries  of Kronos and  Huntsman
Holdings LLC 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 Huntsman
pursuant to separate offtake agreements.

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

Kronos is required to purchase  one-half of the Ti02  produced by the joint
venture. Because Kronos does not control the joint venture, the joint venture is
not  consolidated  in Kronos'  financial  statements.  Kronos  accounts  for its
interest in the joint  venture by the equity  method.  The  manufacturing  joint
venture operates on a break-even  basis, and accordingly  Kronos does not report
any equity in earnings of the joint venture.  With the exception of raw material
costs and packaging costs for the pigment grades  produced,  Kronos and Huntsman
share all costs and capital  expenditures of the joint venture equally.  Kronos'
share of the net costs of the joint  venture is reported as cost of sales as the
related  TiO2  acquired  from  the  joint  venture  is  sold.  See Note 7 to the
Consolidated Financial Statements.

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.  Kronos believes
that it is the leading seller of TiO2 in several  countries,  including Germany,
with an estimated 12% share of worldwide  Ti02 sales  volumes in 2005.  Overall,
Kronos is the world's fifth-largest producer of Ti02.

Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont"),
Millennium Chemicals,  Inc., Huntsman, Tronox Incorporated,  and Ishihara Sangyo
Kaisha, Ltd. These five largest competitors have estimated  individual shares of
TiO2 production  capacity ranging from 4% to 24%, and an estimated aggregate 70%
share of worldwide TiO2 production  volumes.  DuPont has about one-half of total
North American 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).  Kronos is not
aware of any greenfield plant under construction in the United States, Europe or
any other part of the world.  However,  a competitor has announced its intention
to build a greenfield  facility in China, but it is not clear when  construction
will begin and it is not likely that any product would be available  until 2010,
at the  earliest.  During 2004,  certain  competitors  either idled or shut down
facilities.  However, Kronos does expect that industry capacity will increase as
Kronos and its competitors  continue to debottleneck their 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'   expenditures   for  research  and
development,   process   technology  and  quality   assurance   activities  were
approximately  $7  million  in 2003,  $8 million in 2004 and $9 million in 2005.
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.

Kronos continually seeks to improve the quality of its grades, and has been
successful at developing  new grades for existing and new  applications  to meet
the needs of customers  and  increase  product  life cycle.  Since 1999,  13 new
grades  have  been  added for  plastics,  coatings,  fiber  and  paper  laminate
applications.

Patents and trademarks.  Patents held for products and production processes
are important to Kronos and its  continuing  business  activities.  Kronos 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' existing patents generally have a term
of 20 years from the date of filing,  and have remaining  terms ranging from one
to 20 years. Kronos seeks to protect its intellectual property rights, including
its patent rights,  and from time to time Kronos is engaged in disputes relating
to the protection and use of intellectual property relating to its products.

Kronos' major trademarks,  including Kronos,  are protected by registration
in  the  United  States  and  elsewhere   with  respect  to  those  products  it
manufactures and sells.  Kronos also relies on unpatented  proprietary  know-now
and continuing  technological  innovation and other trade secrets to develop and
maintain its  competitive  position.  Kronos'  proprietary  chloride  production
process is an important part of Kronos'  technology,  and Kronos' business could
be harmed if Kronos should fail to maintain confidentiality of its trade secrets
used in this technology.

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 approximately 26% of
its sales during 2005.  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, 2005,  Kronos employed  approximately  2,415
persons (excluding employees of the Louisiana joint venture),  with 50 employees
in the United States, 420 employees in Canada and 1,945 employees in Europe.

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. In Europe,  Kronos' union employees
are covered by master collective bargaining agreements in the chemicals industry
that are renewed annually.  In Canada,  Kronos' union employees are covered by a
collective  bargaining  agreement that expires in June 2007. Kronos believes its
labor relations are good.

Regulatory and environmental  matters.  Kronos'  operations are governed by
various  environmental laws and regulations.  Certain of Kronos' operations are,
or 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 and regulations.  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,,
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 by the joint
venture and a Louisiana Ti02 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.

While the laws  regulating  operations of  industrial  facilities in Europe
vary from country to country,  a common regulatory  framework is provided by the
European Union ("EU").  Germany and Belgium are members of the EU and follow its
initiatives.  Norway,  although not a member of the EU,  generally  patterns its
environmental  regulations  after the EU.  Kronos  believes it has  obtained all
required   permits  and  is  in  substantial   compliance   with  applicable  EU
requirements.

At Kronos'  sulfate  plant  facilities  in Germany,  Kronos  recycles  weak
sulfuric  acid  either  through  contracts  with third  parties or using its own
facilities.  At Kronos' Norwegian plant,  Kronos ships its spent acid to a third
party location where it is treated and disposed.  Kronos' Canadian sulfate plant
neutralizes  its spent acid and sells its gypsum  byproduct to a local wallboard
manufacturer.  Kronos  has a  contract  with a  third  party  to  treat  certain
sulfate-process  effluents at its German sulfate process plants.  With regard to
the German plants, either party may terminate the contract after giving three or
four years advance notice, depending on the contract.

From time to time,  Kronos'  facilities  may be  subject  to  environmental
regulatory  enforcement  under U.S.  and foreign  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  believes  that all of its  plants  are in  substantial  compliance  with
applicable environmental laws.

Kronos'  capital   expenditures   related  to  its  ongoing   environmental
compliance,  protection and improvement  programs in 2005 were  approximately $4
million, and are currently expected to approximate $6 million in 2006.

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 in 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 2005, precision ball bearing
slides,  security products and ergonomic  computer support systems accounted for
approximately 42%, 43% and 15%,respectively,  of sales related to its continuing
operations.

In January 2005,  CompX  completed the disposition of all of the net assets
of its Thomas Regout  operations  conducted in the Netherlands.  Thomas Regout's
results of operations are classified as discontinued operations in the Company's
Consolidated   Financial  Statements.   In  August  2005,  CompX  completed  the
acquisition of a components  products business for aggregate cash  consideration
of $7.3 million,  net of cash acquired.  See Notes 3 and 22 to the  Consolidated
Financial Statements.

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,  tool storage cabinets,  imaging
equipment, file cabinets, desk drawers, automated teller machines, refrigerators
and other applications. 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 and the  Self-Closing  Slide,  which is
designed  to assist  in  closing a drawer  and is used in  applications  such as
bottom mount freezers.

Security  products  are used in  various  applications  including  ignition
systems,  office  furniture,   vending  and  gaming  machines,  parking  meters,
electrical circuit panels, storage compartments, security devices for laptop and
desktop  computers as well as mechanical and  electronic  locks for the toolbox,
medical and other  industries.  Some of these products may 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 patented high
security TuBar locking system. CompX believes that it is a North American market
leader  in  the  manufacture  and  sale  of  cabinet  locks  and  other  locking
mechanisms.

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 flat screen  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.  In addition,  CompX offers
its  engineering  and design  capabilities  for the design  and  manufacture  of
products on a proprietary basis for key customers.

CompX's  precision ball bearing  slides are sold under the CompX  Precision
Slides, CompX Waterloo, Waterloo Furniture Components, CompX DurISLide and CompX
Dynaslide  brand  names.  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.  Ergonomic products are sold under the CompX
ErgonomX brand name.  CompX believes that its brand names are well recognized in
the industry.

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 for those Canadian manufactured products.

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 2005,
the ten largest  customers  accounted for about 43% of component  products sales
(2004 - 43%; 2003 - 44%). In 2004 and 2005,  one customer  accounted for 11% and
10%, respectively,  of CompX's sales. No single customer accounted for more than
10% of CompX's sales in 2003.

Manufacturing  and  operations.  At December 31, 2005,  CompX  operated six
manufacturing  facilities in North America related to its continuing  operations
(two in Illinois  and one in each of South  Carolina,  Michigan,  Wisconsin  and
Canada)  and two  facilities  in  Taiwan.  Precision  ball  bearing  slides  are
manufactured in the facilities located in Canada,  Michigan and Taiwan. Security
products  are  manufactured  in the  facilities  located in South  Carolina  and
Illinois. Ergonomic products are manufactured in the facility located in Canada.
Other component  products are manufactured at the Wisconsin facility acquired in
2005. All of such facilities are owned by CompX except for one of the facilities
in  Taiwan,  which is  leased.  CompX  also  leases  a  distribution  center  in
California.  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 and zinc,
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.  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 or raw
material surcharges.  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 a number of smaller  domestic  manufacturers,  and primarily on the
basis of price with a number of foreign  manufacturers.  Although CompX believes
that it has been able to compete  successfully  in its  markets  to date,  price
competition from  foreign-sourced  products continues to intensify and 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 to be important to CompX and
its continuing  business  activity.  CompX's patents generally have a term of 20
years,  and have  remaining  terms ranging from less than 3 years to 18 years at
December 31, 2005.  CompX's major  trademarks and brand names,  including CompX,
CompX Precision Slides, CompX Security Products, CompX Waterloo, CompX ErgonomX,
National Cabinet Lock, KeSet, Fort Lock,  Timberline Lock, Chicago Lock, ACE II,
TuBar, STOCK LOCKS,  ShipFast,  Waterloo  Furniture  Components  Limited,  CompX
DurISLide,  and CompX  Dynaslide,  are protected by  registration  in the United
States and elsewhere with respect to the products CompX  manufactures and sells.
CompX  believes such  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 maintaining  compliance  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, 2005,  CompX  employed  approximately  1,230
persons,  including 750 in the United  States,  330 in Canada and 150 in Taiwan.
Approximately  70% of CompX's  employees  in Canada are  represented  by a labor
union covered by a collective  bargaining  agreement  which  provides for annual
wage increases  from 1% to 2.5% over the term of the contract.  A new collective
bargaining agreement was ratified in December 2005 that expires in January 2009.
Wage increases for these Canadian employees  historically have also been in line
with overall  inflation  indices.  CompX  believes that 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 low-level  radioactive  wastes and the disposal of certain types of exempt
low-level radioactive wastes.

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,  which  initially
expired in November  2004,  were  administratively  extended  while the agencies
complete their review for renewal.  The final renewal will be for a new ten-year
period and are subject to  additional  renewals by the agencies  assuming  Waste
Control Specialists remains in compliance with the provisions of the permits.

In November 1997, the Texas Department of State Health Services  ("TDSHS"),
formerly  the Texas  Department  of Health,  issued a license  to Waste  Control
Specialists  for the treatment and storage,  but not disposal,  of low-level and
mixed  low-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  low-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 low-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 low-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 5.4 million cubic yards
of airspace  landfill  capacity for the disposal of RCRA and TSCA wastes.  Waste
Control   Specialists  owns  approximately   13,500  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 in part on extensive
drilling by the oil and gas  industry in the area and its own test wells,  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
20,000    square    foot     treatment     facility     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.  Treatment  operations involve
processing  wastes  through  one or more  chemical or other  treatment  methods,
depending upon the  particular  waste being disposed and regulatory and customer
requirements. Chemical treatment uses chemical oxidation and reduction, chemical
precipitation  of  heavy  metals,  hydrolysis  and  neutralization  of acid  and
alkaline  wastes,  and  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 Waste Control
Specialists'  landfill  disposal  site,  (ii)  stored  onsite  in drums or other
specialized  containers or (iii)  shipped to  third-party  facilities  for 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.

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.  Waste  Control  Specialists  employs  its  own
salespeople to market its services to potential customers.

Competition.  The hazardous  waste industry (other than low-level and mixed
low-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
low-level   radioactive   wastes  includes   obtaining   additional   regulatory
authorizations  for the  disposal  of a  broad  range  of  low-level  and  mixed
low-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  Energy  Solutions,   LLC,  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
rail  transportation  network  leading to the facility and capability for future
site expansion.

Employees.  At  December  31,  2005,  Waste  Control  Specialists  employed
approximately 120 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 TDSHS,  as
amended,  are  expected to expire in 2015,  and such permits and licenses can be
renewed subject to compliance with the  requirements of the application  process
and approval by the TCEQ or TDSHS, as applicable.

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  low-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 Texas  Commission on  Environmental  Quality ("TCEQ") to
issue a low-level  radioactive waste disposal license to a private entity,  such
as Waste Control  Specialists.  Waste Control Specialists has applied for such a
disposal  license  with the TCEQ,  and Waste  Control  Specialists  was the only
entity to submit an application for such a disposal license. The application was
declared   administratively   complete  by  the  TCEQ  in  February   2005.  The
regulatorially required merit review has been completed,  and the TCEQ began its
technical review of the application in May 2005. The length of time that it will
take to complete the review and act upon the license  application  is uncertain,
although  Waste Control  Specialists  does not currently  expect the agency will
issue any final decision on the license  application before late 2007. There can
be no assurance that Waste Control  Specialists  will be successful in obtaining
any such license.

In June 2004, Waste Control  Specialists applied to the TDSHS for a license
to dispose of byproduct  11.e(2) waste material.  Waste Control  Specialists can
currently  treat and store  byproduct  material,  but may not dispose of it. The
length  of time  that  TDSHS  will  take to  review  and act  upon  the  license
application is uncertain,  but Waste Control  Specialists  currently expects the
TDSHS will issue a final  decision on the license  application  sometime  during
2006.  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, a violation of operating permits.

TITANIUM METALS - TITANIUM METALS CORPORATION

General.  TIMET is a leading  global  producer 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 consumption. TIMET estimates that in 2005
it accounted for approximately 18% of worldwide  industry  shipments of titanium
mill products and  approximately  8% of worldwide  titanium  sponge  production.
Demand for  titanium is also  increasing  in emerging  markets with such diverse
uses as offshore oil and gas production  installations,  automotive,  geothermal
facilities and architectural applications.

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,  the
number of non-aerospace end-use markets for titanium has expanded substantially.
Today, numerous industrial uses for titanium include chemical plants, industrial
power plants,  desalination  plants and pollution  control  equipment.  TIMET is
currently the only major producer of titanium sponge, a key raw material, in the
United States.

Industry  conditions.  The  titanium  industry  historically  has derived a
substantial  portion of its business  from the  aerospace  industry.  Demand for
titanium  products within the commercial  aerospace  sector is derived from both
jet engine components (e.g., blades, discs, rings and engine cases) and airframe
components  (e.g.,  bulkheads,  tail sections,  landing gear,  wing supports and
fasteners).  The  commercial  aerospace  sector has a  significant  influence on
titanium companies, particularly mill product producers such as TIMET.

The following table illustrates TIMET's estimates of titanium industry mill
product shipments during 2004 and 2005:

Year ended December 31,
--------------------------    
2004                  2005             % change
----                  ----             --------
(metric tons)
Mill product shipments to:

Commercial aerospace sector                                    20,900              24,000              +15%
Military sector                                                 4,700               6,200              +32%
Industrial sector                                              32,300              35,600              +10%
Emerging markets sector                                         2,300               2,700              +17%
-------             -------

Aggregate mill product shipments
to all sectors                                                  60,200              68,500              +14%
=======             =======

TIMET's  business is more dependent on commercial  aerospace demand than is
the overall  titanium  industry,  as  approximately  59% of TIMET's mill product
shipment  volume in 2005 was to the commercial  aerospace  sector,  whereas,  as
indicated  by  the  above  table,  approximately  35% of  the  overall  titanium
industry's shipment volume in 2005 was to the commercial aerospace sector.

The  cyclical  nature of the  commercial  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,  1999 and 2003.  Prior to 2004,  demand for  titanium  reached  its
highest level in 1997 when industry mill product shipments reached approximately
60,700 metric tons.  However,  since 1997,  industry mill product shipments have
fluctuated  significantly,  primarily  due to a  continued  change in demand for
titanium from the commercial  aerospace  sector.  TIMET  estimates that industry
shipments  approximated  60,200  metric  tons in 2004 and 68,500  metric tons in
2005.  TIMET  currently  expects  total  industry  mill product  shipments  will
increase by only 5% to 10% in 2006 as compared to 2005,  due to tightness of raw
material supply.

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 2005
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 650 (including 152 wide bodies) in 2005.
The following  table  summarizes  The Airline  Monitor's  most  recently  issued
forecast (January 2006) for large commercial  aircraft  deliveries over the next
five years:

% increase (decrease)
Forecasted deliveries                     over previous year
-----------------------------             ---------------------
Year                   Total             Wide bodies          Total            Wide bodies
----                   -----             -----------          -----            -----------

2006                     840                 193                29%                 27%
2007                     920                 217                 9%                 12%
2008                     985                 259                 7%                 19%
2009                   1,030                 294                 5%                 13%
2010                   1,030                 314                 -                   7%

The  latest  forecast  from The  Airline  Monitor  reflects  a  significant
increase  from  earlier  forecasts,  in large  part due to record  levels of new
orders placed for Boeing and Airbus models during 2005. Total order bookings for
Boeing and Airbus in 2005  aggregated  2,109 planes.  Expectations  are that new
orders in 2006 will be  significantly  lower  than  2005.  However,  the  strong
bookings in 2005 have  increased the order backlog for both Boeing and Airbus in
support of this increased forecast.

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  persistently  high oil  prices  have had an
adverse impact on the commercial  airline industry,  global  commercial  airline
traffic  increased in 2005 compared to 2004.  TIMET estimates that industry mill
product shipments into the commercial  aerospace sector will increase 15% to 20%
as compared to 2005.

Wide body  planes  tend to use a higher  percentage  of  titanium  in their
airframes,  engines and parts than narrow body  planes.  Newer  models of planes
tend to use a higher  percentage of titanium than older models.  Newer wide body
models such as the Airbus A380  superjumbo jet and the Boeing 787 Dreamliner are
expected to use an even greater  quantity of titanium  than  previous  wide body
models.

Titanium   shipments  into  the  military  sector  are  largely  driven  by
government  defense  spending in North  America and Europe.  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. In recent years,  titanium has become an accepted
use in ground combat vehicles as well as in Naval  applications.  The importance
of military markets to the titanium  industry is expected to continue to rise in
coming  years as defense  spending  budgets  increase in  reaction to  terrorist
activities and global conflicts.

Several of today's  active  U.S.  military  programs,  including  the C-17,
F/A-18,  F-16 and F-15 are expected to continue in production through the end of
the  current  decade.   However,  a  recent  Quadrennial  Defense  Review  (QDR)
recommends  that the U.S.  Air Force stop  procurement  of the C-17 with the 180
planes it now has on order,  but this  recommendation  still must go through the
federal budget process.  Without  further orders,  the C-17 production line will
close in 2008.

In addition to these  established U.S.  programs,  new U.S.  programs offer
growth opportunities for increased titanium  consumption.  The F/A-22 Raptor was
given full-rate  production approval in April 2005. According to The Teal Group,
a leading independent  aerospace  publication,  the U.S. Air Force would like to
purchase 381  aircraft,  but the  Department of Defense is now planning for only
179. However,  additional F/A-22 Raptors may be manufactured for sale to foreign
nations.

In October 2001,  Lockheed-Martin  Corporation was awarded the contract for
construction  of the F-35 Joint Strike Fighter  ("JSF").  The JSF is expected to
enter  low-rate  initial  production  in late 2006,  with  delivery of the first
production  aircraft in 2009.  Although no specific  delivery patterns have been
established,  procurement is expected to extend over the next 30 to 40 years and
to include as many as 3,000 to 4,000 planes, including sales to foreign nations.
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 remain steady through the end of the decade.

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
sector.  In armor  and  armament,  TIMET  sells  plate and  sheet  products  for
fabrication into applique plate for protection  application of the entire ground
combat vehicle as well as the primary vehicle structure.

Since titanium's  initial  applications,  the number of end-use markets for
titanium has significantly  expanded.  Established  industrial uses for titanium
include chemical plants, power plants, desalination plants and pollution control
equipment.  Rapid growth of the Chinese and other  Southeast Asian economies has
brought unprecedented demand for  titanium-intensive  industrial  equipment.  In
November 2005,  TIMET entered into a joint venture with XI'AN  BAOTIMET  VALINOX
TUBES CO.  LTD. to produce  welded  titanium  tubing in the Peoples  Republic of
China.   BAOTIMET's  production  facilities  will  be  located  in,  China,  and
production is expected to begin in early 2007.

Titanium continues to gain acceptance in many emerging market applications,
including automotive, energy (including oil and gas) 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.  TIMET  continues  to explore  opportunities  in these
emerging  market  applications  through  marketing  initiatives,   research  and
development  and  proprietary  alloys  designed to provide  more cost  effective
alternatives for these markets.

Although TIMET estimates that emerging market demand  presently  represents
only about 4% of the 2005 total  industry  demand for  titanium  mill  products,
TIMET  believes  emerging  market  demand,  in  the  aggregate,  could  grow  at
double-digit  rates over the next  several  years.  TIMET  continues to actively
pursue  these  markets  and was  able to grow its mill  product  shipments  into
emerging markets by more than 50% during 2005 as compared to 2004.  Beginning in
2005,  TIMET no longer includes armor and armament  related sales as part of its
emerging  markets sector,  as titanium usage has become widely accepted for such
applications.

The automotive market continues to be an attractive  emerging market due to
its potential for sustainable  long-term growth.  TIMET Automotive is focused on
developing and marketing  proprietary alloys and processes  specifically  suited
for  automotive  applications.  Titanium  is now used in  several  consumer  car
applications as well as in numerous  motorcycles.  At the present time, titanium
is  primarily  used for exhaust  systems,  suspension  springs,  engine  valves,
connecting rods and  turbocharger  compressor  wheels in consumer and commercial
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.  Titanium  engine  components  provide
mass-reduction  benefits  that directly  improve  vehicle  performance  and fuel
economy.  The application of titanium to turbocharger  compressor wheels is part
of a solution to meet U.S. and European Union government-regulated diesel engine
emissions   requirements.   TIMET  proprietary  alloys  provide  cost  effective
optimized  performance  for the various  target  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.

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 group  dedicated to  developing  the expansion of
titanium use in this market and in other non-aerospace applications.

Products  and  operations.   TIMET  is  a  vertically  integrated  titanium
manufacturer  whose  products  include (i)  titanium  sponge,  the basic form of
titanium  metal  used  in  titanium  products,   (ii)  melted  products  (ingot,
electrodes and slab),  the result of melting sponge and titanium  scrap,  either
alone or with various  other  alloys,  (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  (spools,
pipefittings,  manifolds,  vessels,  etc.)  that are  cut,  formed,  welded  and
assembled from titanium mill products.

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 is a cylindrical  solid shape that, in TIMET's case,  weighs
up to 8 metric tons. Titanium slab is a rectangular solid shape that, in TIMET's
case,  weighs  up to 16 metric  tons.  Each  ingot or slab is formed by  melting
titanium  sponge,  scrap or both,  usually  with  various  other  alloys such as
vanadium, aluminum, molybdenum, tin and zirconium. 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,  electrodes  and  slab as the  starting
material for further processing into mill products. However, it also sells ingot
and slab to  third  parties.  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 and
components.

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 its customers,  particularly in aerospace component  production.
TIMET  certifies  that its products meet customer  specification  at the time of
shipment for substantially all customer orders.

TIMET currently is reliant on several  outside  processors (one of which is
owned  by  a  competitor)  to  perform  certain  rolling,  finishing  and  other
processing  steps in the U.S., and certain  melting and forging steps in France.
In France,  the processor is also a joint venture  partner in TIMET's  70%-owned
subsidiary.  During the past several years,  TIMET has 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  or
liquidity.

Distribution. 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  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, sheet,  plate,  tubing 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.

Raw  materials.  The  principal  raw  materials  used in the  production of
titanium ingot,  slab and mill products are titanium sponge,  titanium scrap and
alloys.  During 2005,  TIMET's raw material usage requirements in the production
of its melted and mill  products were  provided by  internally  produced  sponge
(29%), purchased sponge (25%), titanium scrap (40%) and other alloys (6%).

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.  TIMET purchases
the  majority of its supply of rutile ore from  Australia.  TIMET  believes  the
availability of rutile ore will be adequate for the foreseeable  future and does
not anticipate any interruptions of its rutile supplies.  However,  there can be
no assurance that TIMET will not experience interruptions.

Chlorine is currently  obtained from a single  supplier near TIMET's 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 generally available from a number of suppliers.

During 2005, TIMET was the only major U.S.  producer of titanium sponge and
one of only six major  worldwide  producers  (the  others are located in Russia,
Kazakhstan, the Ukraine and two in Japan).  Additionally,  there are two smaller
sponge producers located in China. However, TIMET 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
melted and mill products require varying grades of sponge and/or scrap depending
on the  customers'  specifications  and expected end use.  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. Over the past few years, sponge producers in Russia and Kazakhstan
have  progressed in their efforts to obtain approval for the use of their sponge
into all  aerospace  applications.  This  qualification  process  is  likely  to
continue  for  several  more years.  Historically,  TIMET has  purchased  sponge
predominantly  from  producers in Kazakhstan and Japan.  In 2002,  TIMET entered
into a sponge supply  agreement,  effective through 2007, which requires minimum
annual  purchases  by  TIMET.   TIMET  has  no  other  long-term  sponge  supply
agreements.  Since 2000,  TIMET has also purchased  sponge from the U.S. Defense
Logistics  Agency ("DLA")  stockpile;  however,  the DLA stockpile  became fully
depleted  during  2005.  TIMET  expects to continue  to  purchase  sponge from a
variety of sources during 2006.

TIMET  utilizes  titanium  scrap at its  melting  locations  that is either
generated  internally,  purchased  from certain of its  customers  under various
buyback  arrangements  or purchased  externally  on the open market.  Such scrap
consists  of alloyed  and  commercially  pure  solids and  turnings.  Internally
produced  scrap is generated in TIMET's  factories  during both melting and mill
product  processing.   Scrap  obtained  through  customer  buyback  arrangements
provides  a "closed  loop"  arrangement  resulting  in  greater  supply and cost
stability.  Externally  purchased  scrap  comes  from a wide  range of  sources,
including customers, collectors,  processors and brokers. TIMET anticipates that
30% to 35% of the  scrap it will  utilize  during  2006 will be  purchased  from
external  suppliers,  as  compared  to 35%  to  40%  for  2005,  due to  TIMET's
successful  efforts  to  increase  its  closed  loop  arrangements.  TIMET  also
occasionally  sells  scrap,  usually  in a form or grade it cannot  economically
recycle.

Market  forces can  significantly  impact the supply or cost of  externally
produced scrap.  The amount of scrap generated in the supply chain varies during
the titanium business cycles.  During the middle of the cycle,  scrap generation
and consumption are in relative equilibrium, minimizing disruptions in supply or
significant changes in available supply and market prices for scrap.  Increasing
or decreasing  cycles tend to cause  significant  changes in both the supply and
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, resulting in greater availability or supply
and 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. This phenomenon normally results in higher selling prices for melted and
mill products, which tends 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.  Recent strong demand for
these steel products, especially from China, has produced a significant increase
in demand for titanium scrap at a time when titanium scrap  generation rates are
at low levels, partly due to lower commercial aircraft build rates over the past
few years.  These events created a  significantly  tightened  supply of titanium
scrap  during 2004 and 2005,  and TIMET  expects  this trend to continue  during
2006. For TIMET,  this will translate to lower  availability and higher cost for
externally purchased scrap in the near-term.

In 2005,  TIMET was somewhat limited in its ability to raise prices for the
portion of its business that is subject to long-term pricing agreements. TIMET's
ability to offset these  increased  material  costs with higher  selling  prices
should  improve in 2006,  as many of TIMET's  long-term  agreements  have either
expired or have been renegotiated for 2006 with price adjustments that take into
account raw material cost fluctuations.  Additionally,  the expected increase in
commercial  aircraft  build rates over the next  several  years,  as  previously
discussed,  could have the effect of lessening  the shortage of titanium  scrap.
Further,  several titanium  producers,  including TIMET, have recently announced
plans to expand their respective sponge producing  capabilities.  Although these
expansions  should help reduce the current imbalance of global supply and demand
for raw  materials,  TIMET does not believe the raw  material  shortage  will be
fully relieved at any time in the near future and therefore  expects  relatively
high prices for raw materials to continue for at least the near term.

Various  alloys  used in the  production  of  titanium  products  are  also
available from a number of suppliers.  However,  the recent high level of global
demand for steel  products has also  resulted in a  significant  increase in the
costs for several  alloys,  such as vanadium and  molybdenum.  The cost of these
alloys during 2005 was significantly higher than at any point during the past 10
years.  Vanadium and molybdenum  costs peaked in the spring of 2005 and finished
the year well below those levels.  Although availability is not expected to be a
concern  and  TIMET  has  negotiated  certain  price  and cost  protection  with
suppliers and  customers,  there is no assurance  that such alloy costs will not
continue to fluctuate significantly in the near future.

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's sponge is produced at
the Nevada  facility while ingot,  slab and mill products are produced at all of
the 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   44,650  metric  tons
(estimated  22% of world  capacity),  and its mill product  capacity  aggregates
approximately  22,600 metric tons (estimated 18% of world capacity).  Of TIMET's
worldwide  melting  capacity,  35% 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.  Overall in 2005,  the plants
operated at approximately 80% of practical capacity,  as compared to 73% in 2004
and  56%  in  2003.  In  2006,   TIMET's  plants  are  expected  to  operate  at
approximately  88%  of  practical  capacity.  However,  practical  capacity  and
utilization  measures  can vary  significantly  based  upon the mix of  products
produced.

TIMET's  VDP sponge  facility  is  expected  to operate at its full  annual
practical  capacity of 8,600 metric tons during 2006,  which is comparable  with
2005.  VDP sponge is used  principally  as a raw  material  for TIMET's  melting
facilities  in the U.S. and Europe.  The raw  materials  processing  facility in
Morgantown,  Pennsylvania  primarily  processes scrap used as melting feedstock,
either in combination  with sponge or separately.  In May 2005,  TIMET announced
plans to expand its existing titanium sponge facility in Nevada. This expansion,
which TIMET  currently  expects to complete by the first  quarter of 2007,  will
provide  the  capacity  to produce an  additional  4,000  metric  tons of sponge
annually, an increase of approximately 42% over current Nevada sponge production
capacity levels. TIMET currently estimates the capital cost for the project will
approximate $38 million.

TIMET's U.S.  melting  facilities in Nevada,  Pennsylvania  and  California
produce  ingot and slab,  which are either used as  feedstock  for TIMET's  mill
products  operations  or sold to third  parties.  These melting  facilities  are
expected  to  operate  at  approximately  82%,  92% and  55%,  respectively,  of
aggregate  annual  practical  capacity in 2006,  compared  to 70%,  91% and 59%,
respectively, in 2005.

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  82% of annual  practical  capacity in 2006, up from
68% in 2005.  Capacity  utilization  will vary  depending on mix across  TIMET's
individual mill product lines.

One of TIMET's  facilities  in the United  Kingdom  produces VAR ingot used
primarily as feedstock at the same facility.  The forging operations process the
ingot into  billet  product  for sale to third  parties or into an  intermediate
product for further  processing  into bar or plate at its other  facility in the
United Kingdom.  TIMET's United Kingdom melting and mill products  production in
2006 is  expected  to operate at  approximately  91% and 85%,  respectively,  of
annual practical capacity, compared to 73% and 69%, respectively, in 2005.

The capacity of TIMET's facility in France is to a certain extent dependent
upon the level of activity in the other owner of such  business,  which may from
time to time provide TIMET with capacity in excess of that which the other owner
is  contractually  required to provide.  During 2005, TIMET utilized 119% of the
maximum annual capacity the other owner was contractually required to provide in
2005, and TIMET expects this amount to approximate 102% for 2006.

Customer  agreements.  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 ("UTC,"
Pratt & Whitney and related  companies),  Societe  Nationale  d<180>Etude  et de
Construction de Moteurs d'Aviation  ("Snecma"),  Wyman-Gordon Company, a unit of
Precision  Castparts  Corporation  ("PCC") and VALTIMET  SAS.  These  agreements
expire  at  various  times  from 2007  through  2012,  are  subject  to  certain
conditions,  and  generally  provide  for  (i)  minimum  market  shares  of  the
customers'  titanium  requirements  or  firm  annual  volume  commitments,  (ii)
formula-determined  prices  (although  some  contain  elements  based on  market
pricing)  and (iii) price  adjustments  for certain raw material and energy cost
fluctuations.  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. Certain provisions of these
agreements  have been  amended  in the past and may be  amended in the future to
meet changing  business  conditions.  During 2005,  49% of TIMET's sales were to
customers under long-term agreements.

In  certain  events  of  nonperformance  by  TIMET  or  the  customer,  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  effect on TIMET's  business,
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.

During 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 paid Wyman-Gordon a total of
$6.8 million,  which  included the  termination  of certain  favorable  purchase
terms.  Concurrently,  TIMET  entered  into  new  long-term  purchase  and  sale
agreements with Wyman-Gordon that expires in 2008.

Prior to July 1, 2005,  under the terms of the previous  agreement  between
TIMET and Boeing,  in 2002  through  2007,  Boeing  would have been  required to
advance  TIMET $28.5 million  annually less $3.80 per pound of titanium  product
purchased  by  Boeing  subcontractors  under the  Boeing  agreement  during  the
preceding  year.  Effectively,  TIMET  collected $3.80 less from Boeing than the
agreement  selling  price for each pound of titanium  product  sold  directly to
Boeing and reduced the related  customer advance recorded by TIMET. For titanium
products  sold to Boeing  subcontractors,  TIMET  collected  the full  agreement
selling price, but gave Boeing credit by reducing the next year's annual advance
by $3.80 per  pound.  The  Boeing  customer  advance  was also  reduced as TIMET
recognized  income under the  take-or-pay  provisions of the agreement.  Under a
separate agreement, TIMET must establish and hold buffer inventory for Boeing at
TIMET's  facilities,  for which  Boeing will be  invoiced by TIMET at  long-term
agreement pricing when such material is processed into a mill product by TIMET.

Effective July 1, 2005, TIMET entered into a new agreement with Boeing. The
new agreement expires on December 31, 2010 and provides for, among other things,
(i)  mutual  annual  purchase  and  supply  commitments  by both  parties,  (ii)
continuation of the existing  buffer  inventory  program  currently in place for
Boeing and (iii) certain improved product pricing, including certain adjustments
for raw material cost  fluctuations.  Beginning in 2006,  the new agreement also
replaces the  take-or-pay  provisions of the previous  agreement  with an annual
makeup  payment early in the following  year in the event Boeing  purchases less
than its annual volume commitment in any year.

TIMET's  agreement with VALTIMET,  a manufacturer of welded stainless steel
and titanium tubing that is principally  sold into the industrial  markets,  was
entered into in 1997 and expires in 2007.  VALTIMET is a 44%-owned  affiliate of
TIMET. Under the agreement,  TIMET has agreed to provide a certain percentage of
VALTIMET's titanium requirements at formula-determined  selling prices,  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.

Markets and customer base. During 2005,  approximately 56% of TIMET's sales
were to customers  located in North America,  with 36% in Europe.  Substantially
all of TIMET's sales and operating  income are derived from operations  based in
the U.S.,  the U.K.,  France and Italy.  TIMET  generates  more than half of its
sales  revenue from sales to the  commercial  aerospace  industry (57% in 2005).
TIMET has long-term agreements with certain major aerospace customers, including
Boeing,  Rolls-Royce,  UTC, Snecma and Wyman-Gordon.  During 2005, approximately
49% of TIMET's  total  sales were  attributable  to such  long-term  agreements.
TIMET's ten  largest  customers  accounted  for 45% of its sales in 2005 (2004 -
48%;  2003- 44%),  including  Rolls-Royce  and suppliers  under the  Rolls-Royce
long-term  agreement  (12% of  TIMET's  sales in 2005).  Such  concentration  of
customers may impact TIMET's overall exposure to credit and other risks,  either
positively or negatively,  in that such  customers may be similarly  affected by
economic or other conditions.

The primary market for titanium products in the commercial aerospace sector
consists  of two  major  manufacturers  of large  (over  100  seats)  commercial
airframes - Boeing Commercial Airplanes Group (a unit of Boeing) and Airbus (80%
owned by  European  Aeronautic  Defence  and Space  Company and 20% owned by BAE
Systems).  In  addition  to  the  airframe  manufacturers,  the  following  four
manufacturers  of large civil  aircraft  engines are also  significant  titanium
users - Rolls-Royce,  General  Electric  Aircraft  Engines,  Pratt & Whitney and
Snecma.  TIMET's  sales are made both directly to these major  manufacturers  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's business,  results of operating
and liquidity.

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.  The
following  table shows the estimated  firm order backlogs for Boeing and Airbus,
as reported by The Airline Monitor in January 2006:

At December 31,
------------------------------------------
2003              2004                2005
----              ----                ----

Firm order backlog - all planes:

Airbus                                                                1,454             1,500            2,177
Boeing                                                                1,101             1,089            1,783
-----             -----            -----

2,555             2,589            3,960
=====             =====            =====

Firm order backlog - wide body planes:
Airbus                                                                  471               466              500
Boeing                                                                  230               287              671
-----             -----            -----

701               753            1,171
=====             =====            =====

Wide body planes as % of total firm
order backlog                                                             27%               29%              30%
=====             =====            =====

Wide body planes (e.g.,  Boeing 747, 777 and 787 and Airbus A330,  A340 and
A380) 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).  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  59 metric tons, 45 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  25 metric tons, 18 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 December  31,  2005,  a total of 159 firm orders had been placed for the
Airbus  A380,  a program  officially  launched  in 2000 with  anticipated  first
deliveries in 2006.  Current estimates are that  approximately 76 metric tons of
titanium  (50 metric tons for the  airframe  and 26 metric tons for the engines)
will be purchased for each A380 manufactured.  Additionally, at year-end 2005, a
total of 291 firm  orders  have  been  placed  for the  Boeing  787,  a  program
officially  launched in April 2004 with  anticipated  first  deliveries in 2008.
Although the 787 will contain more  composite  materials  than a typical  Boeing
airplane,  TIMET  estimates  that  approximately  91 metric tons of titanium (80
metric  tons  for the  airframe  and 11  metric  tons for the  engines)  will be
purchased  for each 787  manufactured.  TIMET  believes  significant  additional
titanium  will be  required in the early  years of 787  manufacturing  until the
program reaches maturity.

During 2005, Airbus officially launched the A350 program,  which is a major
derivative  of the Airbus A330 with first  deliveries  scheduled for 2010. As of
December 31, 2005, firm booked orders received by Airbus for the A350 totaled 87
airplanes.  These A350s will use composite  materials and new engines similar to
the ones used on the Boeing 787 and are expected to require  significantly  more
titanium as compared with earlier Airbus models. TIMET preliminary estimates are
that approximately 51 metric tons (40 metric tons for the airframe and 11 metric
tons for the engines) will be purchased for each A350 manufactured. However, the
final titanium buy weight may change as the A350 is still in the design phase.

Outside of commercial aerospace and military sectors,  TIMET manufactures a
wide range of products  for  customers  in the  chemical  process,  oil and gas,
consumer,   sporting  goods,   automotive  and  power   generation   industries.
Approximately  15% of TIMET's  sales revenue in 2005 was generated by sales into
industrial and emerging markets,  including sales to VALTIMET for the production
of welded tubing. For the oil and gas industry, TIMET provides seamless pipe for
downhole  casing,  risers,  tapered stress joints and other offshore oil and gas
production equipment, along with firewater piping systems.

In addition to melted and mill products, which are sold into the commercial
aerospace,  military,  industrial  and  emerging  markets  sectors,  TIMET sells
certain  other  products  such as  titanium  fabrications,  titanium  scrap  and
titanium tetrachloride. Sales of these other products represented 15% of TIMET's
sales revenue in 2005.

TIMET's  backlog of  unfilled  orders  was  approximately  $870  million at
December  31,  2005,  compared  to $450  million at  December  31, 2004 and $205
million at December 31, 2003. Over 90% of the 2005 year-end backlog is scheduled
for shipment during 2006.  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 will also
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.  In  addition,  producers  of other metal  products,  such as steel and
aluminum,  maintain forging, rolling and finishing facilities that could be used
or  modified  without  substantial  capital  expenditures  to  process  titanium
products.  There are  currently  six major,  and  several  minor,  producers  of
titanium sponge in the world. TIMET is currently the only sponge producer in the
U.S.  Four of the  major  producers  have  announced  plans to  increase  sponge
capacity.  TIMET believes that entry as a new producer of titanium  sponge would
require a significant capital investment and substantial technical expertise.

TIMET's  principal   competitors  in  the  aerospace  titanium  market  are
Allegheny Technologies  Incorporated and RTI International Metals,  Inc.("RTI"),
both based in the United States,  and Verkhnaya Salda  Metallurgical  Production
Organization  ("VSMPO"),  based  in  Russia.  UNITI,  (a joint  venture  between
Allegheny and VSMPO),  RTI and certain Japanese  producers are TIMET's principal
competitors in the 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 is able to
take  advantage of this  situation by purchasing  sponge from such countries for
use in its own operations,  the negative effect of these imports on TIMET can be
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  (billet,  bar,  sheet,  strip,  plate and
tubing) or unwrought (sponge,  ingot and slab). Because a significant portion of
end-use  products made from titanium  products are ultimately  exported,  TIMET,
along with its principal  competitors and many customers,  actively  utilize the
duty-drawback mechanism to recover most of the tariff paid on imports.

From  time-to-time,  the U.S.  government  has granted  preferential  trade
status to certain titanium products imported from particular  countries (notably
wrought titanium products from Russia,  which carried no U.S. import duties from
approximately  1993 until 2004).  It is possible that such  preferential  status
could be granted again in the future.

The Japanese  government  has raised the  elimination or  harmonization  of
tariffs on titanium  products,  including  titanium sponge, for consideration in
multi-lateral  trade  negotiations  through  the World Trade  Organization  (the
so-called  "Doha  Round").  As part of the Doha  Round,  the  United  States has
proposed the staged  elimination of all industrial  tariffs,  including those on
titanium. The Japanese government has specifically asked that titanium in all it
forms be included  in the tariff  elimination  program.  TIMET has urged that no
change be made to these tariffs,  either on wrought or unwrought  products.  The
negotiations  are  currently  scheduled  to  conclude  at the  end of  2006  for
implementation beginning in 2007.

TIMET has successfully  resisted,  and will continue to resist,  efforts to
eliminate  duties  on  sponge  and  unwrought  titanium  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 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,  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,
development  of  technology  required  to  enhance  the  performance  of TIMET's
products in the traditional  industrial and aerospace  markets and  applications
development  for  automotive  and other  emerging  markets.  TIMET  conducts the
majority of its research and development  activities at its Henderson  Technical
Laboratory  in  Henderson,  Nevada,  with  additional  activities at its Witton,
England facility.  TIMET incurred research and development costs of $2.8 million
in 2003, $2.9 million in 2004 and $3.2 million in 2005.

Patents and trademarks. TIMET holds U.S. and non-U.S. patents applicable to
certain of its titanium  alloys and  manufacturing  technology,  which expire at
various times from 2007 through 2013. TIMET  continually seeks patent protection
with  respect  to  its  technical  base  and  has   occasionally   entered  into
cross-licensing  arrangements with third parties.  TIMET believes the trademarks
TIMET and TIMETAL,  which are  protected by  registration  in the U.S. and other
countries, are important to its business.  Additionally,  TIMET has been granted
certain patents and has certain other patent  applications  pending  relating to
various  aspects of its  manufacturing  technology.  However,  the  majority  of
TIMET's  titanium  alloys and  manufacturing  technologies  do not benefit  from
patent or other intellectual property protection.

Employees.  The cyclical nature of the aerospace industry and its impact on
TIMET's  business is the  principal  reason for  significant  changes in TIMET's
employment  levels.  At December 31, 2005,  TIMET employed  approximately  1,475
persons  in the  U.S.  and  900  persons  in  Europe.  TIMET  currently  expects
employment to increase  throughout 2006 as production  continues to increase and
its sponge plant expansion project in Nevada nears completion.

TIMET's production, maintenance, clerical and technical workers in Toronto,
Ohio,  and  its  production  and  maintenance   workers  in  Henderson,   Nevada
(approximately  50% of TIMET's  total U.S.  employees)  are  represented  by the
United Steelworkers of America under contracts expiring in July 2008 and January
2008,  respectively.  Employees at TIMET's other U.S. facilities are not covered
by  collective  bargaining  agreements.  Approximately  85% of the  salaried and
hourly  employees at TIMET's  European  facilities  are  represented  by various
European labor unions. TIMET recently extended its labor agreement with its U.K.
production and maintenance  employees  through 2008, and TIMET's labor agreement
with its French and Italian employees are renewed annually.

TIMET  currently  considers  its  employee  relations  to be  satisfactory.
However, it is possible that there could be future work stoppages or other labor
disruptions that could materially and adversely affect TIMET's business, results
of operations, financial position 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  Occupational,  Safety and
Health Act,  the Clean Air Act,  the Clean Water Act and the CERCLA.  TIMET uses
and  manufactures  substantial  quantities  of  substances  that are  considered
hazardous,  extremely  hazardous or toxic under  environmental and worker safety
and health laws and regulations. TIMET has used and manufactured such substances
throughout  the  history  of its  operations.  Although  TIMET  has  substantial
controls and procedures  designed to reduce  continuing  risk of  environmental,
health and safety issues, TIMET could incur substantial cleanup costs, fines and
civil or criminal  sanctions,  third party property  damage or personal  inujury
claims  as  a  result  of  violations  or   liabilities   under  these  laws  or
non-compliance  with  environmental  permits  required  at  our  facilities.  In
addition,  government environmental  requirements or the enforcement thereof may
become more  stringent in the future.  There can be no assurance  that some,  or
all, of the risks  discussed  under this heading will not result in  liabilities
that would be material to TIMET's  business,  results of  operations,  financial
position 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.  TIMET incurred capital  expenditures  related to
health,  safety and  environmental  compliance and improvement of  approximately
$1.9  million  in 2003,  $5.1  million in 2004 and $25.1  million in 2005.  Such
amounts  include an aggregate  $28.1 million  related to the  construction  of a
wastewater treatment facility at its Henderson, Nevada location. TIMET's capital
budget provides for  approximately  $4.6 million for  environmental,  health and
safety capital expenditures in 2006.

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. 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  currently
estimated to be required for such matters.

OTHER

NL Industries,  Inc. In addition to its 70% ownership of CompX (principally
through  CompX Group) and its 36%  ownership of Kronos at December 31, 2005,  NL
also holds certain marketable securities and other investments.  In addition, NL
owns 100% of EWI Re., Inc., an insurance  brokerage and risk management services
company. See Note 17 to the Consolidated Financial Statements.

Tremont LLC.  Tremont is primarily a holding  company which at December 31,
2005 owns 35% of TIMET.  Tremont also 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.  Tremont also  directly  owns certain land which could be developed for
commercial or industrial purposes.

Foreign operations. Through its subsidiaries and affiliate, the Company has
substantial  operations  and assets  related to  continuing  operations  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 Taiwan.  See Note 2 to the Consolidated  Financial  Statements for
certain geographic financial information  concerning the Company.  Approximately
71% of Kronos'  2005 TiO2  sales were to  non-U.S.  customers,  including  8% to
customers  in areas other than Europe and Canada.  Approximately  20% of CompX's
2005 sales were to non-U.S.  customers located principally in Canada.  About 44%
of TIMET's 2005 sales were 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 and Kronos have,  from time to time,  entered into  currency  forward
contracts  to mitigate  exchange  rate  fluctuation  risk for a portion of their
receivables related to their Canadian operations denominated in currencies other
than the Canadian  dollar  (principally  the U.S.  dollar) or for similar  risks
associated  with future sales.  Kronos and CompX may,  from time to time,  enter
into  currency  forward  contracts to mitigate  exchange rate  fluctuation  risk
associated with specific  transactions,  such as  intercompany  dividends or the
acquisition of a significant  amount of assets.  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  - NL lead  pigment  litigation"  and -  "Environmental  matters and
litigation" is incorporated herein by reference.

Insurance.   The  Company  maintains   insurance  for  its  businesses  and
operations, with customary levels of coverage,  deductibles and limits. See also
Item 3 - "Legal  Proceedings  -  Insurance  coverage  claims" and Note 17 to the
Consolidated Financial Statements.

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 other  available  information.  Valhi files reports,  proxy and
information  statements and other  information  with the SEC. Valhi  maintains a
website on the internet at  www.valhi.net.  Copies of this Annual Report on Form
10-K for the year ended  December 31, 2005,  copies of the  Company's  Quarterly
Reports on Form 10-Q for 2005 and 2006 and any  Current  Reports on Form 8-K for
2005 and 2006, and amendments  thereto,  are or will be available free of charge
at such website as soon as reasonably  practical after they have been filed with
the SEC. Additional  information regarding the Company,  including the Company's
Audit Committee  charter,  the Company's Code of Business Conduct and Ethics and
the  Company's  Corporate  Governance  Guidelines,  can  also be  found  at this
website.  Information  contained  on the  Company's  website is not part of this
Annual Report.  The Company will also provide to anyone without charge copies of
such  documents  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.  The public  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 1A. RISK FACTORS

Listed below are certain risk factors  associated  with the Company and its
businesses.  In addition to the potential effect of these risk factors discussed
below,  any risk factor  which  could  result in reduced  earnings or  operating
losses,  or reduced  liquidity,  could in turn  adversely  affect our ability to
service our liabilities or pay dividends on our common stock or adversely affect
the quoted market prices for our securities.

Our assets consist primarily of investments in our operating  subsidiaries,
and we are dependent upon distributions from our subsidiaries. A majority of our
cash flows are  generated  by our  operating  subsidiaries,  and our  ability to
service Valhi's  liabilities and to pay dividends on our common stock depends to
a large extent upon the cash  dividends or other  distributions  we receive from
our subsidiaries.  Our subsidiaries are separate and distinct legal entities and
they have no obligation,  contingent or otherwise, to pay such cash dividends or
other  distributions  to us. In  addition,  the  payment of  dividends  or other
distributions  from our  subsidiaries  could be  subject to  restrictions  on or
taxation of dividends or repatriation of earnings under applicable law, monetary
transfer restrictions, foreign currency exchange regulations in jurisdictions in
which our subsidiaries  operate and any other restrictions imposed by current or
future  agreements  to which our  subsidiaries  may be a party,  including  debt
instruments.  Events beyond our control,  including  changes in general business
and economic conditions,  could adversely impact the ability of our subsidiaries
to pay dividends or make other  distributions to us. If our  subsidiaries  would
become unable to make sufficient cash dividends or other distributions to Valhi,
our ability to service our  liabilities and to pay dividends on our common stock
could be adversely  affected.  In addition,  a significant portion of our assets
consists of ownership  interests in our subsidiaries and affiliates.  If we were
required to  liquidate  any of such  securities  in order to  generate  funds to
satisfy our liabilities, we may be required to sell such securities at a time or
times at which we would not be able to realize  what we believe to be the actual
value of such assets.

Subject to specified  limitations,  the agreements covering the indebteness
of our subsidiaries permit our subsidiaries to incur additional debt,  including
secured  debt.  At  December  31,  2005,  the  outstanding  indebtedness  of our
subsidiaries  aggregated  $467.4 million,  substantially all of which relates to
KII's Senior Secured Notes. In addition,  as of such date our subsidiaries  have
unused  borrowing   availability  of  approximately  $186.0  million  under  our
subsidiaries'  credit  facilities,  subject to certain  tests.  Any borrowing or
other liabilities or our subsidiaries are structurally senior to any liabilities
of Valhi, and a substantial  portion of our subsidiaries'  assets  collateralize
the  indebtedness of our  subsidiaries.  If any new debt were to be added to our
subsidiaries'  current debt levels,  then the related risks that we and they now
face, as more fully described herein, could intensify.

Demand for, and prices of,  certain of our products are cyclical and we may
experience  prolonged  depressed market  conditions for our products,  which may
result in reduced  earnings or operating  losses.  A significant  portion of our
revenues  is  attributable  to sales of TiO2.  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  our  earnings  and  operating  cash  flows.  This may  result in reduced
earnings or operating losses.

Historically,  the  markets  for  many  of our  products  have  experienced
alternating  periods of tight  supply,  causing  prices  and  profit  margins to
increase,  followed  by periods of  capacity  additions,  and demand  reductions
resulting in oversupply and declining prices and profit margins.  Selling prices
(in billing  currencies)  for TiO2 were generally:  increasing  during the first
quarter of 2003, flat during the second quarter of 2003,  decreasing  during the
last half of 2003 and the first quarter of 2004,  flat during the second quarter
of 2004 and increasing in the last half of 2004 and the first six months of 2005
and decreasing during the second half of 2005.

Our overall average TiO2 selling prices in billing currencies:

o    were 3% higher in 2003 as compared to 2002;

o    were 2% lower in 2004 as compared to 2003; and

o    were 8% higher in 2005 as compared to 2004.

Future  growth in demand for TiO2 may not be  sufficient  to alleviate  any
future  conditions of excess industry  capacity,  and such conditions may not be
sustained or may be further aggravated by anticipated or unanticipated  capacity
additions  or other  events.  The  demand  for TiO2  during a given year is also
subject to annual seasonal fluctuations.  TiO2 sales are generally higher in the
first  half of the year than in the  second  half of the year due in part to the
increase  in paint  production  in the  spring  to meet the  spring  and  summer
painting season demand.

The titanium industry in general, and TIMET specifically,  has historically
derived a  substantial  portion of its business  from the  commercial  aerospace
sector. Consequently, the cyclical nature of the commercial aerospace sector has
been the principal driver of the historical fluctuations in TIMET's performance.
Over the past 25 years, the titanium industry had cyclical peaks in mill product
shipments in 1989, 1997 and 2001 and cyclical lows in 1983, 1991, 1999 and 2002.
Prior to 2004,  demand for  titanium  reached  its highest  level in 1997,  when
industry  mill  product  shipments  reached  approximately  60,700  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 but also due to geopolitical instability and the
economic impact of terrorist  threats and attacks.  Sales of TIMET's products to
the  commercial  aerospace  sector  accounted  for about 57% of its total  sales
revenue in each of the last three years.  Events that could adversely affect the
commercial  aerospace  sector,  such as future terrorist  attacks,  world health
crises or reduced  orders from  commercial  airlines  resulting  from  continued
operating losses at the airlines,  could significantly  decrease TIMET's results
of operations,  and TIMET's business and financial condition could significantly
decline.

As a global  business,  we are exposed to local business risks in different
countries,  which could  result in  operating  losses.  Kronos,  CompX and TIMET
conduct some of their businesses in several  jurisdictions outside of the United
States  and  are  subject  to  risks  normally   associated  with  international
operations,  which include trade barriers,  tariffs, exchange controls, national
and regional labor strikes,  social and political risks, general economic risks,
seizures, nationalizations, compliance with a variety of foreign laws, including
tax laws, and the difficulty in enforcing agreements and collecting  receivables
through foreign legal systems.  For example,  we have  substantial net operating
loss  carryforwards in Germany,  and any change in German tax law that adversely
impacts our ability to fully utilize such  carryforwards  could adversely affect
us.

We may incur losses from fluctuations in currency  exchange rates.  Kronos,
CompX and TIMET operate their  businesses in several  different  countries,  and
sell their products worldwide. Therefore, we are exposed to risks related to the
prices that we receive for our products and the need to convert  currencies that
we may receive for some of our products into the currencies required to pay some
of our debt, or into  currencies in which we may purchase  certain raw materials
or pay for  certain  services,  all of  which  could  result  in  future  losses
depending on fluctuations in foreign currency exchange rates.

We sell several of our products in mature and highly competitive industries
and face price pressures in the markets in which we operate, which may result in
reduced earnings or operating losses. The global markets in which Kronos, CompX,
TIMET  and  Waste  Control  Specialists  operate  their  businesses  are  highly
competitive. Competition is based on a number of factors, such as price, product
quality and service.  Some of our  competitors  may be able to drive down prices
for our products because their costs are lower than our costs. In addition, some
of our competitors' financial,  technological and other resources may be greater
than our resources, and such competitors may be better able to withstand changes
in market  conditions.  Our competitors may be able to respond more quickly than
we can to new or emerging  technologies  and  changes in customer  requirements.
Further,  consolidation of our competitors or customers in any of the industries
in which we compete may result in reduced demand for our products.  In addition,
in some of our  businesses  new  competitors  could  emerge by  modifying  their
existing production  facilities so they could manufacture  products that compete
with our products. The occurrence of any of these events could result in reduced
earnings or operating losses.

Higher costs or limited  availability of our raw materials may decrease our
liquidity. The number of sources for, and availability of, certain raw materials
is  specific  to the  particular  geographical  region  in which a  facility  is
located.  For example,  titanium-containing  feedstocks  suitable for use in our
TiO2 and  titanium  metal  facilities  are  available  from a limited  number of
suppliers around the world. While chlorine is generally widely available,  TIMET
obtains its chlorine  requirements  for its Nevada  production  facility  from a
single supplier near such plant. In addition, TIMET cannot supply internally all
of its needs for all grades of titanium sponge and scrap, and TIMET is dependent
on third parties for a substantial portion of its raw material requirements. All
of TIMET's major competitors  utilize sponge and scrap as raw materials in their
melt operations. In addition to use by titanium manufacturers, titanium scrap is
used  in  certain  steel-making  operations.  Current  demand  for  these  steel
products,  especially from China, have produced a significant increase in demand
for titanium  scrap at a time when titanium  scrap  generation  rates are at low
levels  because of the lower  commercial  aircraft  build rates.  Political  and
economic  instability  in the  countries  from  which we  purchase  certain  raw
material  supplies  could  adversely  affect  their  availability.   Should  our
worldwide vendors not be able to meet their contractual  obligations,  should we
be otherwise  unable to obtain  necessary raw materials or should we be required
to pay more for our raw materials and other operating costs, we may incur higher
costs for raw  materials or other  operating  costs or may be required to reduce
production  levels,  either of which may  decrease  our  liquidity  as we may be
unable to offset  such  higher  costs  with  increased  selling  prices  for our
products.

We are subject to many environmental and safety regulations with respect to
our operating  facilities that may result in unanticipated costs or liabilities.
Our facilities are subject to extensive laws, regulations,  rules and ordinances
relating to the protection of the  environment,  including  those  governing the
discharge of pollutants in the air and water and the generation,  management and
disposal of hazardous  substances  and wastes or other  materials.  We may incur
substantial  costs,  including  fines,  damages and criminal  penalties or civil
sanctions,  or experience  interruptions in our operations for actual or alleged
violations or compliance  requirements  arising under  environmental  laws.  Our
operations could result in violations under environmental laws, including spills
or other  releases  of  hazardous  substances  to the  environment.  Some of our
operating facilities are in densely populated urban areas or in industrial areas
adjacent to other operating facilities. In the event of an accidental release or
catastrophic  incident,  we could incur material costs as a result of addressing
such an event and in implementing measures to prevent such incidents.  Given the
nature  of  our  business,  violations  of  environmental  laws  may  result  in
restrictions   imposed  on  our  operating   activities  or  substantial  fines,
penalties, damages or other costs, including as a result of private litigation.

Our  production  facilities  have  been  used  for a  number  of  years  to
manufacture products or conduct mining operations. We may incur additional costs
related  to  compliance  with  environmental  laws  applicable  to our  historic
operations  and  these  facilities.   In  addition,  we  may  incur  significant
expenditures  to comply  with  existing  or  future  environmental  laws.  Costs
relating  to  environmental  matters  will be  subject  to  evolving  regulatory
requirements  and will depend on the timing of  promulgation  and enforcement of
specific  standards that impose  requirements  on our  operations.  Costs beyond
those   currently   anticipated  may  be  required  under  existing  and  future
environmental laws.

We  could  incur  significant  costs  related  to legal  and  environmental
remediation matters. NL formerly manufactured lead pigments for use in paint. NL
and others 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.  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   or  risk   contribution   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 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.  As with all
legal proceedings, the outcome is uncertain. Any liability NL might incur in the
future could be material. See also Item 3 - "Legal proceedings - NL lead pigment
litigation."

Certain  properties  and facilities  used in our former  businesses are the
subject of  litigation,  administrative  proceedings or  investigations  arising
under various environmental laws. These proceedings seek cleanup costs, personal
injury or property damages and/or damages for injury to natural resources.  Some
of these  proceedings  involve  claims for  substantial  amounts.  Environmental
obligations  are difficult to assess and estimate for numerous  reasons,  and we
may incur costs for environmental remediation in the future in excess of amounts
currently  estimated.  Any  liability  we  might  incur in the  future  could be
material.  See also Item 3 - "Legal  Proceedings  -  Environmental  matters  and
litigation".

If our patents are declared  invalid or our trade  secrets  become known to
competitors, our ability to compete may be adversely affected. Protection of our
proprietary  processes  and other  technology  is important  to our  competitive
position.  Consequently,  we rely on judicial  enforcement for protection of our
patents,  and  our  patents  may be  challenged,  invalidated,  circumvented  or
rendered unenforceable.  Furthermore, if any pending patent application filed by
us does not result in an issued patent,  or if patents are issued to us but such
patents do not provide meaningful protection of our intellectual property,  then
the use of any such  intellectual  property by our  competitors  could result in
decreasing our cash flows. Additionally,  our competitors or other third parties
may obtain patents that restrict or preclude our ability to lawfully  produce or
sell our products in a competitive manner, which could have the same effects.

We also rely on certain  unpatented  proprietary  know-how  and  continuing
technological  innovation  and other trade  secrets to develop and  maintain our
competitive position.  Although it is our practice to enter into confidentiality
agreements to protect our intellectual  property,  because these confidentiality
agreements  may  be  breached,   such  agreements  may  not  provide  sufficient
protection for our trade secrets or proprietary  know-how,  or adequate remedies
may not be available in the event of an  unauthorized  use or disclosure of such
trade secrets and know-how.  In addition,  others could obtain knowledge of such
trade secrets through independent development or other access by legal means.

Loss of key  personnel  or our ability to attract and retain new  qualified
personnel  could hurt our businesses and inhibit our ability to operate and grow
successfully.  Our success in the highly competitive markets in which we operate
will continue to depend to a significant  extent on the leadership  teams of our
businesses and other key management personnel.  We generally do not have binding
employment agreements with any of these managers.  This increases the risks that
we may not be able to retain our current management  personnel and we may not be
able to recruit  qualified  individuals to join our management  team,  including
recruiting  qualified  individuals to replace any of our current  personnel that
may leave in the future.

Our relationships with our union employees could  deteriorate.  At December
31,  2005,  we employed  approximately  6,100  persons  worldwide in our various
businesses.  A  significant  number of our  employees  are subject to collective
bargaining  or  similar  arrangements.  We may not be able  to  negotiate  labor
agreements with respect to these  employees on satisfactory  terms or at all. If
our employees were to engage in a strike,  work stoppage or other  slowdown,  we
could  experience a significant  disruption of our  operations or higher ongoing
labor costs.

Adverse changes to or interruptions in TIMET's relationships with its major
aerospace customers could reduce its revenues,  profitability and liquidity.  In
2005,  approximately  54% TIMET's revenues  represented  sales to the commercial
aerospace industry.  Sales under long-term  agreements with certain customers in
the aerospace industry accounted for a significant  portion of TIMET's revenues.
If we would be unable to maintain our relationships with TIMET's major aerospace
customers,  including The Boeing  Company,  Rolls Royce,  Snecma,  UTC and Wyman
Gordon  Company,  under  the  long-term  agreements  that  we  have  with  these
customers, TIMET's sales could decrease substantially, resulting in lower equity
in earnings and net income to us.

TIMET's  failure to  develop  new  markets  would  result in our  continued
dependence on the cyclical  aerospace  industry and our operating results would,
accordingly,  remain  cyclical.  In an effort to reduce  our  dependence  on the
commercial  aerospace market and to increase our participation in other markets,
TIMET has been devoting resources to developing new markets and applications for
its products,  principally  in the  automotive,  oil and gas and other  emerging
markets for titanium.  Developing  these emerging market  applications  involves
substantial  risk and  uncertainties  due to the fact that titanium must compete
with  less  expensive  alternative  materials  in  these  potential  markets  or
applications. We may not be successful in developing new markets or applications
for our  products,  significant  time may be required for such  development  and
uncertainty  exists as to the extent to which we will face  competition  in this
regard.

Reductions  in, or the  complete  elimination  of,  any or all  tariffs  on
imported  titanium  products  into the United  States  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  decrease
pricing for our titanium  products.  In the U.S. titanium 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.

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  (billet,  bar,  sheet,  strip,  plate and
tubing) or unwrought (sponge, ingot and slab).

From  time-to-time,  the U.S.  government  has granted  preferential  trade
status to certain titanium products imported from particular  countries (notably
wrought titanium products from Russia,  which carried no U.S. import duties from
approximately  1993 until 2004).  It is possible that such  preferential  status
could be granted again in the future.

TIMET may not be  successful  in resisting  efforts to eliminate  duties or
tariffs on titanium products.

Our  leverage  may impair our  financial  condition or limit our ability to
operate our  businesses.  We currently have a significant  amount of debt. As of
December 31, 2005, our total  consolidated debt was approximately  $717 million,
substantially  all of which relates to KII's Senior  Secured Notes and our loans
from  Snake  River  Sugar  Company.  Our  level  of debt  could  have  important
consequences to our stockholders and creditors, including:

o    making  it more  difficult  for us to  satisfy  our  obligations  with
respect to our liabilities;

o    increasing our  vulnerability to adverse general economic and industry
conditions;

o    requiring that a portion of our cash flow from  operations be used for
the payment of interest on our debt, therefore reducing our ability to
use our  cash  flow to fund  working  capital,  capital  expenditures,
dividends  on our common  stock,  acquisitions  and general  corporate
requirements;

o    limiting  our ability to obtain  additional  financing  to fund future
working  capital,  capital  expenditures,   acquisitions  and  general
corporate requirements;

o    limiting our  flexibility  in planning for, or reacting to, changes in
our business and the industry in which we operate; and

o    placing  us at a  competitive  disadvantage  relative  to  other  less
leveraged competitors.

In addition to our  indebtedness,  we are party to various  lease and other
agreements  pursuant  to  which we are  committed  to pay  approximately  $316.6
million in 2006.  Our ability to make payments on and refinance our debt, and to
fund planned  capital  expenditures,  depends on our future  ability to generate
cash flow.  To some  extent,  this is subject  to general  economic,  financial,
competitive,  legislative,  regulatory  and other  factors  that are  beyond our
control. In addition, our ability to borrow funds under our subsidiaries' credit
facilities  in the  future  will  in some  instances  depend  in  part on  these
subsidiaries' ability to maintain specified financial ratios and satisfy certain
financial covenants  contained in the applicable credit agreement.  Our business
may not generate cash flows from operating activities sufficient to enable us to
pay our debts when they become due and to fund our other  liquidity  needs. As a
result,  we may need to refinance all or a portion of our debt before  maturity.
We may not be able to refinance any of our debt on favorable  terms,  if at all.
Any  inability to generate  sufficient  cash flows or to  refinance  our debt on
favorable terms could have a material adverse effect on our financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.  PROPERTIES

Valhi leases 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. NL, other former  manufacturers of lead pigments for
use in paint and lead-based paint, and the Lead Industries  Association  ("LIA,"
which discontinued business operations in 2002) 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   or  risk   contribution   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 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.  A number of cases are  inactive  or 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 either the  defendants or the  plaintiffs.  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 in the future.

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 never settled any of these cases, nor have any final adverse
judgments  against NL been  entered.  NL has not accrued any amounts for pending
lead pigment and lead-based paint litigation. Liability that may result, if any,
cannot currently be reasonably  estimated.  However, see the discussion below in
the State of Rhode Island case. See also Note 18 to the  Consolidated  Financial
Statements.  There can be no assurance  that NL will not incur  liability in the
future  in  respect  of  this  pending   litigation  in  view  of  the  inherent
uncertainties  involved in court and jury rulings in pending and possible future
cases.  If any such  future  liability  were to be  incurred,  it  could  have a
material  adverse  effect on the Company's  consolidated  financial  statements,
results of operations and liquidity.

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  denied  plaintiffs'  motion for class  certification.  In 2003,
defendants filed a motion for summary judgment on all claims,  which was granted
in January 2006. In February 2006, plaintiffs filed a notice of appeal.

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.  The plaintiff
appealed  the  dismissal,  and in July 2004 the  appellate  court  affirmed  the
dismissal.  In July 2005,  the Wisconsin  Supreme  Court  affirmed the appellate
court's  dismissal of plaintiff's  civil  conspiracy  and  enterprise  liability
claims and reversed and remanded the appellate  court's dismissal of plaintiff's
risk of contribution claim. The matter is proceeding in the trial court.

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 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
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 the state to appeal this dismissal
has not yet run.  In March  2004,  the court  ruled that the  defendants  have a
constitutional  right to a trial by jury  under the Rhode  Island  Constitution.
Plaintiff  appealed such ruling, and in July 2004 the Rhode Island Supreme Court
dismissed  plaintiff's appeal of, and plaintiff's petition to reverse, the trial
court's ruling. In May 2005, the trial court dismissed the conspiracy claim with
prejudice, and the time for the state to appeal this dismissal has not yet begun
to run. In September  2005, the state  dismissed its Unfair Trade  Practices Act
claim against NL without  prejudice.  Trial commenced on November 1, 2005 on the
state's  remaining  claims of public nuisance,  indemnity and unjust  enrichment
against NL and three other defendants. Following the state's presentation of its
case,  the trial court  dismissed  the state's  claims of  indemnity  and unjust
enrichment. The public nuisance claim was sent to the jury in February 2006, and
the jury found that NL and two other defendants substantially contributed to the
creation  of a public  nuisance as a result of the  collective  presence of lead
pigments in paints and  coatings on  buildings  in Rhode  Island.  The jury also
found that NL and the two other defendants should be ordered to abate the public
nuisance.  Following  the jury  verdict,  the trial court  dismissed the state's
claim for punitive damages. The scope of the abatement remedy will be determined
by the judge. The extent, nature and cost of such remedy is not currently known,
and will be determined only following  additional  proceedings.  Various motions
made at the end of the state's  presentation  of evidence  remain pending before
the trial  court,  including  NL's motion to  dismiss.  NL intends to appeal any
adverse judgment which the trial court may enter against NL.

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. The trial
court,  on defendants'  motions,  dismissed all plaintiffs'  claims.  Plaintiffs
appealed,  and in May 2004 the court of appeals  reinstated  certain claims.  In
September 2004, the court of appeals granted plaintiffs'  petition for review of
such  court's  affirmation  of the  dismissal  of  certain  of  the  plaintiffs'
remaining  claims.  In April 2005, the court of appeals  vacated the decision of
the  intermediate  appellate  court,  stating  that such  court  should not have
accepted  the appeal,  and remanded the case back to the trial court for further
proceedings.  In February 2006,  the trial court issued orders again  dismissing
the Smith's  family's case and severing and staying the cases of the three other
families. Plaintiffs have appealed.

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 were denied by the trial court
in March 2004,  but the trial court  limited  plaintiff's  complaint to monetary
damages from 1990 to 2000, specifically excluding future damages. In March 2005,
the defendants filed a motion for summary  judgment.  In January 2006, the trial
court granted defendants' motion for summary judgment. Plaintiffs have appealed.

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.  In March 2006, the appellate  court affirmed
the dismissal of plaintiffs'  trespass claim,  Unfair  Competition Law claim and
public  nuisance  claim for  government-owned  properties.  The appellate  court
reversed the dismissal of  plaintiffs'  public  nuisance  claim for  residential
housing  properties and plaintiffs'  negligence and strict  liability claims for
government-owned buildings and plaintiffs' fraud claim.

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 May 2004,  defendants filed a
motion for summary judgment on plaintiffs'  conspiracy count,  which was granted
in February  2005.  In February  2006,  the court of appeals  reversed the trial
court's dismissal of the case and remanded the case for further proceedings.  In
March 2006,  the  defendants  filed a petition  with the Illinois  Supreme Court
seeking review of the appellate court's ruling.

In February  2001, NL was served with a complaint in Barker,  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.  In 2003, the court ordered
that the  claims of ten of the  plaintiffs  be  transferred  to  Holmes  County,
Mississippi  state court.  In April 2004,  the parties  jointly  petitioned  the
Mississippi  Supreme Court to transfer these ten plaintiffs to their appropriate
venue,  and in May 2004 the  Mississippi  Supreme Court remanded the case to the
trial court in Holmes  County and  instructed  the court to  transfer  these ten
plaintiffs to their appropriate  venues.  Five of these ten plaintiffs have been
dismissed without prejudice with respect to NL, and five remain against NL. With
respect to the eight plaintiffs in Jefferson  County,  seven of these plaintiffs
have been  dismissed  without  prejudice  with  respect to NL,  and one  remains
against NL.

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.  In November 2004, the appellate  court reversed this ruling and remanded
the case. Defendants filed a petition for review of the appellate court's ruling
in December 2004 with the Wisconsin Supreme Court, but withdrew this petition in
July 2005.  The case is now  proceeding  in the trial  court.  In January  2006,
defendants filed a motion to dismiss plaintiffs' claim.

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.  In August  2005,  the
appellate  court  affirmed the trial court's  dismissal of all counts except for
the state's public nuisance count, which has been reinstated.  In November 2005,
the New Jersey Supreme Court granted defendants'  petition seeking review of the
appellate court's ruling on the public nuisance count.

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 three  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 liability and pre-trial  proceedings are continuing.  In August 2004,
plaintiffs  voluntarily  agreed  to  dismiss  one  plaintiff  and to  sever  the
remaining two plaintiffs. In July 2005, plaintiffs voluntarily agreed to dismiss
another plaintiff without prejudice, leaving one plaintiff remaining. In January
2006, the court set a trial date of April 2007.

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.  Discovery is proceeding.  In September  2005, the court set the
trial date for July 2006. In January 2006, defendants filed a motion for summary
judgment.

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 December  2004,  NL was served with a complaint  in Terry,  et al. v. NL
Industries,  Inc., et al. (United States  District Court,  Southern  District of
Mississippi, Case No. 4:04 CV 269 PB). The plaintiffs, seven children from three
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.  The plaintiffs in the Terry
case are alleged to have resided in the same housing  complex as the  plaintiffs
in the Jones case discussed  above.  NL has denied all  allegations of liability
and has filed a motion to dismiss  plaintiffs'  fraud claim. In August 2005, the
court  denied  NL's  motion  to  strike  plaintiffs'  fraud  claim  for  lack of
particularity, allowing plaintiffs to re-plead this claim.

In  October  2005,  NL was served  with a  complaint  in Evans v.  Atlantic
Richfield  Company,  et. al.  (Circuit  Court,  Milwaukee,  Wisconsin,  Case No.
05-CV-9281).  Plaintiff, a minor, alleges injuries purportedly caused by lead on
the  surfaces  of  premises  in homes  in which  she  resided.  Plaintiff  seeks
compensatory and punitive  damages.  NL has denied all allegations of liability.
In December  2005,  defendants  filed a motion to dismiss the defective  product
damages claims.

In December 2005, NL was served with a complaint in Hurkmans v.  Salczenko,
et. al.  (Circuit  Court,  Marinette  County,  Wisconsin,  Case No.  05-CV-418).
Plaintiff,  a minor, alleges injuries purportedly caused by lead on the surfaces
of the home in which he resided.  Plaintiff seeks compensatory  damages.  NL has
denied all allegations of liability. In February 2006, defendants filed a motion
to dismiss the defective product damages claim.

In January  2006,  NL was served  with a  complaint  in Hess,  et al. v. NL
Industries,  Inc., et al.  (Missouri  Circuit Court 22nd Judicial  Circuit,  St.
Louis City, Cause No.  052-11799).  Plaintiffs are two minor children who allege
injuries  purportedly  caused by lead on the  surfaces of the home in which they
resided.  Plaintiffs seek compensatory and punitive damages.  NL intends to deny
all allegations of liability.

In  addition  to  the  foregoing   litigation,   various   legislation  and
administrative  regulations  have, from time to time, been 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  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 and  regulations.  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 maintain  compliance  with
applicable environmental laws and regulations at all of its plants and to strive
to improve its environmental performance.  From time to time, the Company may be
subject to environmental regulatory enforcement under U.S. and foreign 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  believes  all of its plants are in
substantial compliance with applicable environmental laws.

Certain  properties and facilities used in the Company's former businesses,
including  divested  primary  and  secondary  lead  smelters  and former  mining
locations of NL, 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, potentially responsible party ("PRP") or both, pursuant to
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. EPA's Superfund  National
Priorities List or similar state lists.  These  proceedings  seek cleanup costs,
damages for  personal  injury or property  damage  and/or  damages for injury to
natural resources.  Certain of these proceedings  involve claims for substantial
amounts.  Although  the  Company may be jointly  and  severally  liable for such
costs,  in most cases it is only one of a number of PRPs who may also be jointly
and severally liable.

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  respecting  site cleanup  costs or allocation of such costs among PRPs,
solvency of other 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 or 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. If any such future liability
were to be incurred,  it could have a material  adverse  effect on the Company's
consolidated financial statements, results of operations and liquidity.

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, 2005, no receivables for such 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  that 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.  Certain  properties  and  facilities  used in NL's former  operations,
including  divested  primary  and  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 CERCLA,  and similar state laws in  approximately  60
governmental  and private actions  associated with waste disposal sites,  mining
locations and facilities currently or previously owned,  operated or used by NL,
or its  subsidiaries  or their  predecessors,  certain  of which are on the U.S.
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 18 to the Consolidated
Financial  Statements.  At December 31, 2005,  NL had accrued  $54.9 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  $80.0
million.  NL's estimates of such liabilities have not been discounted to present
value.

At December  31,  2005,  there are  approximately  20 sites for which NL is
currently  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.  On  certain  of these  sites  that had
previously  been  inactive,  NL has  received  general  and  special  notices of
liability  from the EPA alleging  that NL, along with other PRPs,  is liable for
past and  future  costs of  remediating  environmental  contamination  allegedly
caused by former  operations  conducted at such sites.  These  notifications may
assert that NL, along with other PRP's,  is liable for past clean-up  costs that
could be material to NL if liability for such amounts ultimately were determined
against NL.

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 alleged  the site  contained
elevated  levels of lead.  In July 2004,  NL and the U.S.  EPA  entered  into an
administrative  order on  consent to perform a removal  action  with  respect to
residential  properties  located at the site. NL has complied with the order and
has  substantially  completed the clean-up work  associated  with the order.  NL
anticipates  it will  undertake  to perform an  additional  removal  action with
respect to ponds located within the residential area.

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  has  denied  all  of   plaintiffs'
allegations.  In April 2004, plaintiffs filed an amended complaint adding claims
under the CERCLA and the RCRA,  and NL moved to dismiss  those  claims.  In June
2004, the court dismissed  plaintiffs' claims for unjust enrichment and fraud as
well as one of the RCRA claims.  In September  2004,  the court stayed the case,
pending an appeal by the tribe related to sovereign immunity issues. In February
2006,  the court of appeals  affirmed the trial court's  ruling that  plaintiffs
waived their sovereign  immunity to defendants'  counter claim for  contribution
and indemnity.

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.  Four individuals are named as plaintiffs,  together
with, 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.  NL answered the complaint and denied all of  plaintiffs'  allegations.
The trial court  subsequently  stayed all  proceedings  in this case pending the
outcome of a class certification  decision in another case that had been pending
in the same U.S.  District  Court,  a case from which NL has been dismissed with
prejudice.

In January 2006, NL was served in Brown et al. v. NL  Industries,  Inc., et
al. (Circuit Court Wayne County,  Michigan,  Case No. 06-602096 CZ), a purported
class action on behalf of a class of property  owners living in the Krainz Woods
Neighborhood of Wayne County,  Michigan.  Plaintiffs  allege causes of action in
negligence,  nuisance,  trespass and under the Michigan  Natural  Resources  and
Environmental  Protection Act with respect to a lead smelting  facility formerly
operated by NL and another defendant. Plaintiffs seek property damages, personal
injury damages, loss of income and medical expense and medical monitoring costs.
In February  2006, NL filed a petition to remove the case to federal  court.  NL
intends to deny all allegations of liability.

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  ($3.8  million at  December  31,  2005) to cover its share of
probable  and  reasonably   estimable   environmental   obligations   for  these
activities. Tremont has entered into an agreement with another PRP of this site,
Halliburton  Energy  Services,  Inc. that provides for, among other things,  the
interim  sharing of remediation  costs  associated with the site pending a final
allocation  of  costs  and  an  agreed-upon  procedure  through  arbitration  to
determine such final  allocation of costs. On December 9, 2005,  Halliburton and
DII Industries,  LLC,  another PRP of this site, filed suit in the United States
District Court for the Southern District of Texas,  Houston  Division,  Case No.
H-05-4160,  against NL, Tremont and certain of its  subsidiaries,  M-I,  L.L.C.,
Milwhite,  Inc. and Georgia-Pacific  Corporation seeking (i) to recover response
and  remediation  costs incurred at the site, (ii) a declaration of the parties'
liability  for  response and  remediation  costs  incurred at the site,  (iii) a
declaration of the parties'  liability for response and remediation  costs to be
incurred  in the  future  at the  site  and  (iv) a  declaration  regarding  the
obligation  of Tremont to indemnify  Halliburton  and DII for costs and expenses
attributable  to the site.  On December 27, 2005, a subsidiary  of Tremont filed
suit in the United States  District Court for the Western  District of Arkansas,
Hot Springs  Division,  Case No. 05-6089,  against  Georgia-Pacific,  seeking to
recover response costs it has incurred and will incur at the site. Subsequently,
plaintiffs in the Houston litigation verbally agreed to stay that litigation and
enter into with NL, Tremont and its  affiliates an amendment to the  arbitration
agreement  previously  agreed upon for resolving the  allocation of costs at the
site. Tremont has also agreed to stay the Arkansas litigation. Tremont has based
its  accrual  for this site  based upon the  agreed-upon  interim  cost  sharing
allocation.  Tremont  currently  expects that the nature and extent of any final
remediation measures that might be imposed with respect to this site will not be
known until 2008.  Currently,  no reasonable estimate can be made of the cost of
any such final  remediation  measures,  and  accordingly  Tremont has accrued no
amounts at December 31, 2005 for any such cost.  The amount  accrued at December
31, 2005 represents  Tremont's estimate of the costs to be incurred through 2008
with respect to the interim remediation measures.

TIMET. At December 31, 2005, TIMET had accrued  approximately  $3.2 million
for environmental  cleanup matters,  principally  related to TIMET's facility in
Nevada. The upper end of the range of reasonably possible costs related to these
matters is approximately $5.4 million.

Other. The Company has also accrued  approximately $7.0 million at December
31, 2005 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.

Insurance coverage claims.

In October  2005,  NL was served with a  complaint  in  OneBeacon  American
Insurance Company v. NL Industries,  Inc., et. al.(Supreme Court of the State of
New York,  County of New York,  Index No.  603429-05).  The plaintiff,  a former
insurance carrier,  seeks a declaratory  judgment of its obligations to NL under
insurance  policies issued to NL by the plaintiff's  predecessor with respect to
certain lead pigment lawsuits. NL filed a motion to dismiss the New York action.
NL  filed an  action  against  OneBeacon  and  certain  other  former  insurance
companies, captioned NL Industries, Inc. v. OneBeacon America Insurance Company,
et. al. (District Court for Dallas County,  Texas, Case No. 05-11347)  asserting
that OneBeacon has breached its obligations to NL under such insurance  policies
and seeking a declaratory  judgment of OneBeacon's  obligations to NL under such
policies.  Certain of the former  insurance  companies  have filed a petition to
remove the Texas action to federal court.

In February 2006, NL was served with a complaint in Certain Underwriters at
Lloyds,  London v. Millennium Holdings LLC et. al (Supreme Court of the State of
New York,  County of New York,  Index No.  06/60026).  The  plaintiff,  a former
insurance  carrier of NL, seeks a  declaratory  judgment of its  obligations  to
defendants  under  insurance  policies  issued to defendants  by plaintiff  with
respect to certain lead pigment lawsuits.

NL has reached an agreement with a former  insurance  carrier in which such
carrier  would  reimburse  NL for a portion of its past and future lead  pigment
litigation  defense costs,  although the amount that NL will ultimately  recover
from such carrier with respect to such defense  costs  incurred by NL is not yet
determinable. In addition, during 2005, NL recognized $2.2 million of recoveries
from certain  insolvent  former  insurance  carriers  relating to  settlement of
excess  insurance  claims  that  were  paid to NL.  While NL  continues  to seek
additional  insurance  recoveries,  there  can be no  assurance  that NL will be
successful in obtaining reimbursement for either defense costs or indemnity. Any
such additional  insurance  recoveries would be recognized when their receipt is
deemed probable and the amount is determinable.

The issue of whether  insurance  coverage for defense costs or indemnity or
both will be found to exist  for NL's 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  or  environmental   litigation  matters  in  determining  related
accruals.

NL has settled insurance  coverage claims concerning  environmental  claims
with certain of its principal  former  carriers.  A portion of the proceeds from
these  settlements were placed into special purpose trusts,  as discussed below.
No further material settlements  relating to environmental  remediation coverage
are expected.

At December 31, 2004,  NL had $19 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.  Use of
such  restricted  balances does not affect the Company's  consolidated  net cash
flows. All of such $19 million was so used by NL during 2005.

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, 2005.

PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OR EQUITY SECURITIES

Valhi's  common  stock is listed and traded on the New York Stock  Exchange
(symbol:  VHI). As of February 28, 2006, there were approximately  4,100 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 28,
2006 the closing price of Valhi common stock according to Bloomberg was $17.85.

Cash
dividends
High             Low              paid
----             ---           ---------

Year ended December 31, 2004

First Quarter                      $15.71          $11.50             $.06
Second Quarter                      14.10           10.12              .06
Third Quarter                       15.03           11.10              .06
Fourth Quarter                      16.31           14.99              .06

Year ended December 31, 2005

First Quarter                      $21.43          $14.87             $.10
Second Quarter                      22.47           17.00              .10
Third Quarter                       18.26           16.94              .10
Fourth Quarter                      19.14           17.20              .10

Valhi paid regular  quarterly  dividends of $.06 per share during 2004, and
regular  quarterly  dividends  of $.10 per share  during  2005.  In March  2006,
Valhi's  board of directors  declared a first  quarter 2006 dividend of $.10 per
share, to be paid on March 31, 2006 to Valhi  shareholders of record as of March
16, 2006. However,  declaration and payment of future dividends,  and the amount
thereof,  is  discretionary  and is  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.  The  amount  and  timing  of past  dividends  is not
necessarily  indicative  of the amount or timing of any future  dividends  which
might be paid. In this regard,  Valhi's revolving bank credit facility currently
limits the  amount of Valhi's  quarterly  dividends  to $.10 per share,  plus an
additional aggregate amount of $67.9 million at December 31, 2005.

In March 2005, the Company's  board of directors  authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases,  or in privately negotiated  transactions,  which may
include  transactions  with affiliates of Valhi. The stock may be purchased from
time to time as market conditions  permit. The stock repurchase program does not
include  specific  price targets or timetables and may be suspended at any time.
Depending  on  market  conditions,  the  program  could be  terminated  prior to
completion.  The  Company  will  use its  cash on hand to  acquire  the  shares.
Repurchased  shares  will be retired  and  cancelled  or may be added to Valhi's
treasury and used for  employee  benefit  plans,  future  acquisitions  or other
corporate  purposes.   See  Notes  14  and  17  to  the  Consolidated  Financial
Statements.

The following table discloses certain information regarding shares of Valhi
common stock  purchased by Valhi during the fourth  quarter of 2005. All of such
purchases were made under the repurchase  program  discussed  above,  and all of
such purchases were made in open market transactions.

Maximum number of
Average                 Total number of          shares that may yet
Total       price paid                shares purchased          be purchased under
number of     per share,                  as part of a               the publicly-
shares       including                publicly-announced         announced plan at
Period                   purchased    commissions                      plan                  end of period
------                   ---------    -----------               ------------------         -------------------

October  1, 2005 to  October

31, 2005                            123,900         $17.54                     123,900                     1,564,500

November    1,    2005    to
November 30, 2005                    13,600          17.34                      13,600                     1,550,900

December 1, 2005
to December 31,
2005                                63,200          18.07                      63,200                     1,487,700

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,
-----------------------------------------------------------------
2001 (2)      2002 (2)      2003 (2)       2004 (2)        2005
--------      --------      --------       --------        ------
(Restated)    (Restated)    (Restated)     (Restated)
(In millions, except per share data)

STATEMENTS OF OPERATIONS DATA:
Net sales:

Chemicals                                   $  835.1    $  875.2      $1,008.2       $1,128.6       $1,196.7
Component products                             179.6       166.7         173.9          182.6          186.3
Waste management                                13.0         8.4           4.1            8.9            9.8
--------    --------      --------       --------       --------

$1,027.7    $1,050.3      $1,186.2       $1,320.1       $1,392.8
========    ========      ========       ========       ========

Operating income:
Chemicals                                   $  143.5    $   84.4      $  122.3       $  103.5       $  164.9
Component products                              13.3         4.4           9.1           16.2           19.3
Waste management                               (14.4)       (7.0)        (11.5)         (10.2)         (12.1)
--------    --------      --------       --------       --------

$  142.4    $   81.8      $  119.9       $  109.5          172.1
========    ========      ========       ========       ========

Equity in earnings (losses) of
TIMET                                        $  (11.1)   $  (29.0)     $   (2.3)      $   22.7       $   64.9
========    ========      ========       ========       ========

Income (loss) from continuing
operations (1)                               $  102.3    $    5.4      $  (85.4)      $  226.3       $   81.7
Discontinued operations                           (1.1)        (.2)         (2.9)           3.7            (.3)
Cumulative effect of change in
accounting principle                             -           -               .6           -              -
--------    --------      --------       --------       --------

Net income (loss)                         $  101.2    $    5.2      $  (87.7)      $  230.0       $   81.4
========    ========      ========       ========       ========

DILUTED EARNINGS PER SHARE DATA:
Income (loss) from continuing
Operations                                   $    .88    $    .05      $    (.71)     $   1.88       $    .68

Net income (loss)                             $    .87    $    .04      $    (.73)     $   1.91       $    .68

Cash dividends                                $    .24    $    .24      $    .24       $    .24       $    .40

Weighted average common shares
Outstanding                                     116.1       115.8         119.9          120.4          118.5

STATEMENTS OF CASH FLOW DATA:
Cash provided (used) by:
Operating activities                        $  158.6    $  106.8      $  108.5       $  142.1       $  104.3
Investing activities                           (53.8)      (67.1)        (33.8)         (58.1)          20.4
Financing activities                           (84.5)     (103.3)        (71.2)          78.4         (115.8)

BALANCE SHEET DATA (at year end):
Total assets                                  $2,238.8    $2,167.8      $2,307.2       $2,690.5       $2,578.4
Long-term debt                                   497.2       605.7         632.5          769.5          715.8
Stockholders' equity                             692.5       688.5         629.0          874.7          795.6

(1)  The  Company's  results of  operations  in 2001  includes  $15.7 million of
goodwill  amortization,  net of income tax benefit and  minority  interest.
Goodwill  ceased to be  periodically  amortized in 2002. See  "Management's
Discussion  and Analysis of Financial  Condition and Results of Operations"
for a discussion of unusual items occurring during 2003, 2004 and 2005.
(2)  Income (loss) from continuing operations and net income (loss), and related
per share amounts,  for the years ended December 31, 2001,  2002,  2003 and
2004,  and total assets and  stockholders'  equity as of December 31, 2001,
2002,  2003 and 2004,  have  each been  restated  from  amounts  previously
disclosed due to a change in accounting  principle  adopted by TIMET in the
first  quarter  of 2005,  which  change in  accounting  method  is  adopted
retroactively under accounting  principles generally accepted in the United
States  of  America  ("GAAP").  See  Note 1 to the  Consolidated  Financial
Statements.  Income (loss) from continuing  operations and net income,  and
the related per diluted share  amounts,  as presented  above,  differs from
amounts  previously  reported by a $1.2 million reduction ($.01 per diluted
share) in 2001 and by a $2.5 million  increase  ($.02 per diluted share) in
2002. Total assets, as presented above, is greater than amounts  previously
reported by $8.1 million at December 31, 2001, by $12.0 million at December
31, 2002 and by $7.7 million at December 31, 2003. Stockholders' equity, as
presented above, is greater than amounts previously  reported at such dates
by $5.3 million, $7.7 million and $5.0 million, respectively.

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

RESULTS OF OPERATIONS

Summary

The Company reported income from continuing operations of $81.7 million, or
$.68 per diluted share, in 2005 compared to income of $226.3  million,  or $1.88
per  diluted  share,  in 2004 and a loss of $85.4  million,  or $.71 per diluted
share, in 2003. As discussed is Note 1 to the Consolidated Financial Statements,
the Company's consolidated financial statements as of December 31, 2004, and for
the years ended  December  31, 2002 and 2003,  have been  restated  from amounts
previously disclosed due to a change in accounting principle adopted by TIMET in
the first  quarter  of 2005,  which  change  in  accounting  method  is  adopted
retroactively under GAAP.

The Company's  diluted earnings per share declined from 2004 to 2005 as the
favorable effects in 2005 of (i) higher chemicals  operating income, (ii) higher
component products operating income,  (iii) higher securities  transaction gains
and (iv) the Company's  equity in a non-operating  gain from the sale of certain
land and  certain  income tax  benefits  recognized  by TIMET were less than the
favorable effect in 2004 of certain income tax benefits recognized by Kronos and
NL.

The Company's diluted earnings per share increased from 2003 to 2004 as the
favorable  effects in 2004 of (i) higher component  products  operating  income,
(ii) lower  environmental  remediation  and legal  expenses of NL,  (iii) higher
equity in  earnings  of TIMET and (iv)  certain  income tax  benefits  more than
offset the effect of lower chemicals operating income.

Income from  continuing  operations  in 2005  includes  (i) gains from NL's
sales of shares of Kronos common stock of $.05 per diluted share,  most of which
occurred in the first  quarter,  (ii) gains from Kronos'  second quarter sale of
its  passive  interest  in a Norwegian  smelting  operation  of $.03 per diluted
share,  (iii)  income  related to TIMET's  second  quarter  sale of certain real
property  adjacent to its Nevada facility of $.02 per diluted share,  (iv) a net
non-cash  income tax  expense  of $.03 per  diluted  share  (mostly in the third
quarter) related to the aggregate effects of recent developments with respect to
certain income tax audits of Kronos (principally in Germany, Belgium and Canada)
and NL in the U.S., and a change in CompX's  permanent  reinvestment  conclusion
regarding certain of its non-U.S. subsidiaries and (v) income related to certain
non-cash  income tax  benefits  recognized  by TIMET of $.11 per  diluted  share
recognized throughout all of 2005.

Income from  continuing  operations in 2004  includes (i) a second  quarter
income tax benefit related to the reversal of Kronos'  deferred income tax asset
valuation allowance in Germany of $1.91 per diluted share, (ii) a second quarter
income tax  benefit  related to the  reversal of the  deferred  income tax asset
valuation  allowance related to EMS and the adjustment of estimated income taxes
due upon the IRS  settlement  related to EMS of $.34 per  diluted  share,  (iii)
income related to Kronos' contract dispute settlement of $.03 per diluted share,
(iv)  income  related to NL's fourth  quarter  sales of Kronos  common  stock in
market  transactions  of $.01 per  diluted  share,  (v)  income  related  to the
Company's pro-rata share of TIMET's  non-operating gain from TIMET's exchange of
its convertible  preferred debt securities for a new issue of TIMET  convertible
preferred  stock of $.03  per  diluted  share  and (vi)  income  related  to the
Company's  pro-rata share of TIMET's  income tax benefit  resulting from TIMET's
utilization  of a capital loss  carryforward,  the benefit of which had not been
previously recognized by TIMET, of $.01 per diluted share.

Income  from  continuing  operations  in 2003  includes  (i) an income  tax
benefit  relating  to the refund of prior year German  income  taxes of $.17 per
diluted  share and (ii)  gains  from the  disposal  of  property  and  equipment
(principally  related to  certain  real  property  of NL)  aggregating  $.05 per
diluted share.

Each of these items is more fully  discussed  below  and/or in the notes to
the Consolidated Financial Statements.

The Company currently  believes its income from continuing  operations will
be lower in 2006 as compared to 2005 due primarily to lower  expected  chemicals
operating income in 2006.

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 ongoing  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 2003,  2004 and 2005,  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 24%.

o    The Company provides  reserves for estimated  obsolete 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.  Kronos  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,  2005,  the  carrying  value (which  equals their fair
value) of  substantially  all of the Company's  marketable  securities
equaled or 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  92% of the aggregate  carrying
value of all of the  Company's  marketable  securities at December 31,
2005, the $250 million  carrying value of such  investment is the same
as its cost basis.  At December 31, 2005,  the $63.26 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)  was more  than six  times  the  Company's  per  share  net
carrying value of its investment in TIMET.

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 2005,  impairment  indicators  were present only with
respect to the property and  equipment  associated  with the Company's
waste management operating segment, which represented approximately 4%
of  the  Company's  consolidated  net  property  and  equipment  as of
December 31, 2005. Waste Control  Specialists  completed an impairment
review of its net property and  equipment and related net assets as of
December 31, 2005.  Such analysis  indicated no impairment was 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 9 to the  Consolidated  Financial
Statements, at December 31, 2005 the Company has assigned its goodwill
to three  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  Kronos  in  total.  Goodwill
attributable to the component  products operating segment was assigned
to two reporting units within that operating  segment,  one consisting
of CompX's security products  operations and one consisting of CompX's
Michigan,  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 2005, as the estimated
fair value of each such reporting unit exceeded the net carrying value
of the respective reporting unit. The estimated fair values of the two
CompX  reporting  units are determined  based on discounted  cash flow
projections, and the estimated fair value of the Kronos reporting unit
is based upon the quoted  market price for Kronos'  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.

As discussed in Note 22 to the Consolidated  Financial Statement,  the
Company did recognize a $6.5 million goodwill  impairment with respect
to  CompX's  European  operations  in  the  fourth  quarter  of  2004,
following CompX's decision to dispose of those assets. The disposal of
such  operations  was  completed in January  2005,  and  therefore the
Company no longer reports any goodwill attributable to such operations
at December 31, 2005.

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.  For  example,  Kronos
has  substantial  net  operating  loss  carryforwards  in Germany (the
equivalent  of $593  million for German  corporate  purposes  and $104
million for German trade tax purposes at December  31,  2005).  During
2004 the Company concluded that the  more-likely-than-not  recognition
criteria  had  been  met  with  respect  to  the  income  tax  benefit
associated  with Kronos'  German net operating loss  carryforwards  in
Germany.  Prior to the complete utilization of such carryforwards,  it
is  possible  that the Company  might  conclude in the future that the
benefit   of   such   carryforwards   would   no   longer   meet   the
more-likely-than-not  recognition criteria, at which point the Company
would be required  to  recognize  a  valuation  allowance  against the
then-remaining tax benefit associated with the carryforwards.

In  addition,  the  Company  makes  an  evaluation  at the end of each
reporting period as to whether or not some or all of the undistributed
earnings of its foreign  subsidiaries  are permanently  reinvested (as
that term is defined in GAAP). While the Company may have concluded in
the past  that some of such  undistributed  earnings  are  permanently
reinvested,  facts and circumstances can change in the future,  and it
is possible that a change in facts and circumstances, such as a change
in  the  expectation  regarding  the  capital  needs  of  its  foreign
subsidiaries,  could result in a  conclusion  that some or all of such
undistributed earnings are no longer permanently  reinvested.  In such
an event, the Company would be required to recognize a deferred income
tax  liability in an amount equal to the  estimated  incremental  U.S.
income tax and  withholding  tax liability  that would be generated if
all of such previously-considered permanently reinvested undistributed
earnings  were  distributed  to the U.S. In this  regard,  during 2005
CompX  determined  that certain of the  undistributed  earnings of its
non-U.S.   operations  could  no  longer  be  considered   permanently
reinvested,  and in accordance with GAAP CompX recognized an aggregate
$9.0 million provision for deferred income taxes on such undistributed
earnings of its foreign subsidiaries.  See Note 15 to the Consolidated
Financial Statements.

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 and
(iii) relative  changes in foreign currency  exchange rates.  Selling prices (in
billing  currencies)  for  TiO2,  Kronos'  principal  product,  were  generally:
increasing  during the first quarter of 2003,  flat during the second quarter of
2003,  decreasing  during  the last half of 2003 and the first  quarter of 2004,
flat during the second quarter of 2004,  increasing in the last half of 2004 and
the first six months of 2005 and decreasing during the second half of 2005.

Years ended December 31,                       % Change
-----------------------------------------       ----------------------
2003           2004            2005           2003-04       2004-05
----           ----            ----          ---------     --------
(In $ millions, except selling price data)

Net sales                                  $1,008.2         $1,128.6        $1,196.7           +12%           +6%
Operating income                              122.3            103.5           164.9           -15%          +59%

Operating income margin                         12%               9%             14%

TiO2 operating statistics:
Sales volumes*                                462              500             478            +8%           -4%
Production volumes*                           476              484             492            +2%           +2%
Production rate as
percent of capacity                          Full             Full             99%
Average selling prices
index (1990=100)                        $     84         $     82        $     89            -2%           +8%

Percent change in Ti02 average selling prices:
Using actual foreign currency exchange rates                                                +4%           +9%
Impact of changes in foreign exchange rates                                                - 6%          - 1%
---           ---

In billing currencies                                                                    - 2%          + 8%
===           ===

* Thousands of metric tons

Kronos' sales  increased $68.1 million (6%) in 2005 as compared to 2004 due
primarily to the net effects of higher average TiO2 selling  prices,  lower TiO2
sales  volumes and the  favorable  effect of  fluctuations  in foreign  currency
exchange rates, which increased  chemicals sales by approximately $16 million as
further  discussed  below.  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 2005 were 8% higher as compared to 2004.  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 2005 increased 9%.

Kronos' sales increased $120.4 million (12%) in 2004 as compared to 2003 as
the favorable effect of fluctuations in foreign currency  exchange rates,  which
increased  chemicals  sales by  approximately  $60 million as further  discussed
below,  and higher sales  volumes  more than offset the impact of lower  average
TiO2 selling  prices.  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  were 2% lower in 2004 as compared to 2003.  When translated
from billing currencies into U.S. dollars using actual foreign currency exchange
rates  prevailing  during the respective  periods,  Kronos' average TiO2 selling
prices in 2004 increased 4% in 2004 as compared to 2003.

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 GAAP ("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 4% and 9%
increases  in  Kronos'  average  TiO2  selling  prices  during  2004  and  2005,
respectively,  as compared to the  respective  prior year using  actual  foreign
currency  exchange  rates  prevailing  during the  respective  periods (the GAAP
measure),  and the 2%  decrease  and the 8%  increase  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 (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).

Chemicals  operating income in 2004 includes $6.3 million of income related
to the settlement of a contract  dispute with a customer.  The $6.3 million gain
recognized represents the present value of the future payments to be paid by the
customer to Kronos.  The dispute  with the  customer  concerned  the  customer's
alleged past  failure to purchase the required  amount of TiO2 from Kronos under
the terms of Kronos' contract with the customer. See Note 12 to the Consolidated
Financial Statements.

Kronos'  operating income increased $61.4 million (59%) in 2005 as compared
to 2004 as the favorable  effect of the higher  average Ti02 selling  prices and
higher TiO2  production  volumes more than offset the impact of lower TiO2 sales
volumes,  higher raw  material and  maintenance  costs and the $6.3 million gain
recognized in 2004 discussed  above.  TiO2 sales volumes in 2005 decreased 4% as
compared to 2004, with volumes lower in all regions of the world.  Approximately
one-half of Kronos'  2005 TiO2 sales  volumes  were  attributable  to markets in
Europe,  with 38%  attributable  to North  America  and the  balance  to  export
markets.  Kronos  estimates  that  overall  worldwide  demand  for  TiO2 in 2005
declined by  approximately  5% from the  exceptionally  strong  demand levels in
2004. Kronos attributes the decline in overall sales and its own sales to slower
overall  economic  growth in 2005 and  inventory  destocking  by its  customers.
Kronos'  TiO2  production  volumes in 2005  increased  2% as  compared  to 2004,
setting  a  new  TiO2  production  volume  record  for  Kronos  for  the  fourth
consecutive  year.  Kronos'  operating  rates  were near full  capacity  in both
periods.

Kronos'  operating income decreased $18.8 million (15%) in 2004 as compared
to 2003,  as the  effect of lower  average  TiO2  selling  prices and higher raw
material and  maintenance  costs more than offset the impact of higher sales and
production volumes and the income from the contract dispute settlement.  Kronos'
TiO2 sales volumes in 2004  increased 8% compared to 2003, as higher  volumes in
European and export markets more than offset lower volumes in Canada. Demand for
TiO2 remained strong  throughout 2004, and while Kronos believes that the strong
demand was largely  attributable  to the end-use demand of its customers,  it is
possible  that  some  portion  of the  strong  demand  resulted  from  customers
increasing  their  inventory  levels of TiO2 in  advance  of  implementation  of
announced or anticipated price increases.  Kronos' operating income  comparisons
were also favorably impacted by higher production levels,  which increased 2% in
2004 as compared to 2003.  Kronos'  operating  rates were near full  capacity in
both periods.

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  by a net $16  million  in 2005 as
compared to 2004,  and increased  sales by a net $60 million in 2004 as compared
to  2003.  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 2005 and 2004 as compared to
the same periods of the respective prior years. Overall,  currency exchange rate
fluctuations  resulted in a net $6 million increase in Kronos'  operating income
in each of 2004 and 2005 as compared to the respective prior year.

On September  22, 2005,  the  chloride-process  TiO2  facility  operated by
Kronos' 50%-owned joint venture, Louisiana Pigment Company ("LPC"),  temporarily
halted  production  due  to  Hurricane  Rita.  Although  storm  damage  to  core
processing facilities was not extensive, a variety of factors, including loss of
utilities,  limited  access and  availability  of employees  and raw  materials,
prevented the  resumption of partial  operations  until October 9, 2005 and full
operations  until late 2005.  The joint  venture  expects  the  majority  of its
property  damage  and  unabsorbed  fixed  costs  for  periods  in  which  normal
production  levels were not achieved  will be covered by  insurance,  and Kronos
believes   insurance  will  cover  its  lost  profits   (subject  to  applicable
deductibles) resulting from its share of the lost production from LPC. Insurance
proceeds  from the lost profit for product that Kronos was not able to sell as a
result of the loss of  production  from LPC are  expected  to be  recognized  by
Kronos during 2006, although the amount and timing of such insurance  recoveries
is not  presently  determinable.  The effect on Kronos'  financial  results will
depend on the timing and amount of insurance recoveries.

Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove  successful.  Such  debottlenecking  efforts  included,
among other things,  the addition of finishing  capacity in the German  facility
and  equipment  upgrades  and  enhancements  in several  locations  to allow for
reduced downtime for maintenance  activities.  Kronos'  production  capacity has
increased by  approximately  30% over the past ten years due to  debottlenecking
programs,  with only moderate capital  expenditures.  Kronos believes its annual
attainable  production  capacity for 2006 is approximately  510,000 metric tons,
with some slight  additional  capacity  expected to be available in 2007 through
its continued debottlenecking efforts.

Kronos  expects its  operating  income in 2006 will be somewhat  lower than
2005,  as the  favorable  effect of  anticipated  modest  improvements  in sales
volumes and average TiO2  selling  prices are expected to be more than offset by
the effect of higher  production  costs,  particularly  raw  material and energy
costs.  Kronos'  expectations as to the future  prospects of Kronos and the TiO2
industry are based upon a number of factors  beyond Kronos'  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.

Chemicals   operating   income,  as  presented  above,  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 $15.0 million in 2003, $16.2 million
in 2004 and $16.6 million in 2005 as compared to amounts separately  reported by
Kronos.  Changes  in the  aggregate  amount of  purchase  accounting  adjustment
amortization  during the past  three  years are due  primarily  to the effect of
relative changes in foreign currency exchange rates.

Component products - CompX

Years ended December 31,                       % Change
--------------------------------------        ----------------------
2003             2004            2005         2003-04       2004-05
----             ----            -----        -------       --------
(In millions)

Net sales                                      $173.9           $182.6          $186.3            +5%           +2%
Operating income                                  9.1             16.2            19.3           +80%          +18%

Operating income margin                            5%               9%             10%

Component product sales were higher in 2005 as compared to 2004 principally
due to increases in selling prices for certain  products  across all segments to
recover  volatile raw material prices,  sales volume  associated with a business
acquired in 2005 and the net effect of fluctuations in currency  exchange rates,
which increased sales by $1.5 million,  as discussed below,  partially offset by
sales volume  decreases for certain products  resulting from Asian  competition.
During  2005,  sales of  security  products  (including  sales  of the  business
acquired in 2005)  increased  6% as compared to 2004,  while sales of  precision
slide and ergonomic products decreased 1% and 2%,  respectively.  The percentage
changes  in 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.

Component  products  sales were  higher in 2004 as  compared to 2003 due in
part to the favorable effect of fluctuations in foreign currency exchange rates,
which increased  component products sales by $2.5 million in 2004 as compared to
2003,  as  discussed  below.  Component  products  sales  comparisons  were also
impacted by  increases  in product  prices for  precision  slides and  ergonomic
products  which  were  primarily  a pass  through  of raw  material  steel  cost
increases to customers.  During 2004,  sales of slide products  increased 13% as
compared to 2003,  while sales of security  products  decreased less than 1% and
sales of ergonomic products increased 1% during the same period.

Component  products  operating income increased in 2005 as compared to 2004
as the favorable impact of continued reductions in manufacturing, fixed overhead
and other  overhead  costs more than  offset the  negative  impact of changes in
foreign  currency  exchange rates, as discussed  below,  and higher raw material
costs.

Component  products  operating  income  comparisons  in 2004 were favorably
impacted by the effect of certain cost reduction initiatives undertaken in 2003.
Component  products  segment  profit  comparisons  were also impacted by the net
effects of  increases in the cost of steel (the primary raw material for CompX's
products) and continued  reductions in  manufacturing,  fixed overhead and other
overhead costs.

CompX has  substantial  operations  and assets  located  outside the United
States in Canada  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 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 2005,  currency  exchange rate
fluctuations  positively  impacted the Company's sales  comparisons with 2004 as
discussed above, and negatively  impacted  component  products  operating income
comparisons  for the same periods by  approximately  $2.3 million.  During 2004,
currency exchange rate fluctuations positively impacted component products sales
comparisons  with  2003  as  discussed  above,   while  currency  exchange  rate
fluctuations did not significantly  impact component  products  operating income
comparisons for the same periods.

While  demand  has  stabilized  across  most of CompX's  product  segments,
certain  customers are seeking  lower-priced  Asian sources as  alternatives  to
CompX's  products.  CompX believes the impact of this will be mitigated  through
its  ongoing   initiatives   to  expand  both  new   products   and  new  market
opportunities.  Asian-sourced  competitive  pricing  pressures  are  expected to
continue to be a challenge.  CompX's  strategy in responding to the  competitive
pricing  pressure  has  included   reducing   production  cost  through  product
reengineering,  improvement in manufacturing  processes or moving  production to
lower-cost facilities,  including CompX's Asian-based  manufacturing facilities.
CompX has also  emphasized  and  focused on  opportunities  where it can provide
value-added  customer  support  services  that  Asian-based   manufacturers  are
generally  unable to provide.  CompX  believes its  combination  of cost control
initiatives  together with its value-added approach to development and marketing
of products helps to mitigate the impact of competitive pricing pressures.

CompX 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,  particularly  to the  office  furniture
industry,  and to develop value-added customer  relationships with an additional
focus on sales of CompX's  higher-margin  ergonomic computer support systems and
security products to improve operating results. In addition,  CompX continues to
develop  sources  for  lower  cost  components  for  certain  product  lines  to
strengthen  its  ability  to meet  competitive  pricing  when  practical.  These
actions,  along with other activities to eliminate excess capacity, are designed
to position CompX to expand more  effectively on both new product and new market
opportunities to improve CompX's profitability.

Waste management - Waste Control Specialists

Years ended December 31,
----------------------------------------
2003            2004            2005
-------          ------          -------
(In millions)

Net sales                                                               $  4.1           $  8.9         $  9.8
Operating loss                                                           (11.5)           (10.2)         (12.1)

Waste  management  sales  increased  in 2005 as compared  to 2004,  but its
operating loss also  increased,  as higher  operating costs more than offset the
effect of higher utilization of certain waste management services. Waste Control
Specialists  also continues to explore  opportunities to obtain certain types of
new business (including disposal and storage of certain types of waste) that, if
obtained,  could help to further  increase its sales, and decrease its operating
loss, in 2006.

Waste management sales increased,  and its operating loss declined, in 2004
as  compared to 2003 due to higher  utilization  of waste  management  services,
offset in part by higher expenses  associated  with the additional  staffing and
consulting  requirements  related to licensing  efforts to expand  low-level and
mixed radioactive waste storage and disposal capabilities.

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  low-level  radioactive  wastes.
Certain  sectors of the waste  management  industry are  experiencing a relative
improvement  in the  number of  environmental  remediation  projects  generating
wastes. However, efforts on the part of generators to reduce the volume of waste
and/or manage waste onsite at their  facilities  may result in weaker demand for
Waste Control  Specialists'  waste management  services.  Although Waste Control
Specialists  believes demand appears to be improving,  there is continuing 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  low-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  low-level
radioactive wastes includes obtaining additional  regulatory  authorizations for
the disposal of low-level and mixed low-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  low-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 Texas  Commission on  Environmental  Quality ("TCEQ") to
issue a low-level  radioactive waste disposal license to a private entity,  such
as Waste Control  Specialists.  Waste Control Specialists has applied for such a
disposal  license  with the TCEQ,  and Waste  Control  Specialists  was the only
entity to submit an application for such a disposal license. The application was
declared   administratively   complete  by  the  TCEQ  in  February   2005.  The
regulatorially required merit review has been completed,  and the TCEQ began its
technical review of the application in May 2005. The length of time that it will
take to complete the review and act upon the license  application  is uncertain,
although  Waste Control  Specialists  does not currently  expect the agency will
issue any final decision on the license  application before late 2007. There can
be no assurance that Waste Control  Specialists  will be successful in obtaining
any such license.

Waste Control  Specialists  applied to the Texas Department of State Health
Services  ("TDSHS") for a license to dispose of byproduct 11.e(2) waste material
in June 2004. Waste Control  Specialists can currently treat and store byproduct
material,  but may not dispose of it. The length of time that TDSHS will take to
review and act upon the license  application  is  uncertain,  but Waste  Control
Specialists  currently  expects  the TDSHS  will issue a final  decision  on the
license  application  sometime during 2006. 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
low-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,
---------------------------------------
2003            2004            2005
-------         --------         ------
(Restated)       (Restated)
(In millions)

TIMET historical:

Net sales                                                              $385.3          $501.8          $749.8
======          ======          ======

Operating income (loss):
Boeing take-or-pay income                                            $ 23.1          $ 22.1          $ 17.1
Tungsten accrual adjustment                                             1.7            -               -
Contract termination charge                                            (6.8)           -               -
Other, net                                                            (24.0)           21.0           154.0
------          ------          ------
(6.0)           43.1           171.1

Gain on sale of land                                                      -               -              13.9
Gain on exchange of convertible
preferred securities                                                     -              15.5             -
Other general corporate, net                                              (.3)             .7             4.3
Interest expense                                                        (16.4)          (12.5)           (4.0)
------          ------          ------
(22.7)           46.8           185.3

Income tax benefit (expense)                                             (1.2)            2.1           (24.5)
Minority interest                                                         (.4)           (1.2)           (4.9)
Dividends on preferred stock                                              -              (4.4)          (12.2)
------          ------          ------

Income (loss) before cumulative effect
of change in accounting principle
attributable to common stock                                        $(24.3)         $ 43.3          $143.7
======          ======          ======

Equity in earnings (losses) of TIMET                                     $ (2.3)         $ 22.7          $ 64.9
======          ======          ======

The Company  accounts for its interest in TIMET by the equity  method.  The
Company'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 the Company in  conjunction  with the Company'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 such  increases  aggregated  $7.0 million in 2003,
$5.0 million in 2004 and $4.2 million in 2005.

In 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, in 2004 TIMET effected a 5:1 split of its common stock,
in 2005 TIMET effected another 2:1 split of its common stock.  Such stock splits
had no financial  statement impact to the Company,  and the Company's  ownership
interest  in TIMET  did not  change as a result  of such  splits.  The per share
disclosures  related to TIMET discussed herein have been adjusted to give effect
to such splits.

TIMET  reported  higher sales and  operating  income in 2005 as compared to
2004 due in part to higher sales  volumes and average  selling  prices.  TIMET's
average  selling prices for melted  products  (ingot and slab)  increased 48% in
2005 as  compared  to 2004,  while  average  selling  prices  for mill  products
increased  30%.  TIMET's  melted  product  average  selling  prices in 2005 were
positively  affected by current  market  conditions  and changes in customer and
product mix, while mill product average selling prices were positively  affected
by changes in customer and product mix and by the  weakening of the U.S.  dollar
compared to both the British pound sterling and the euro.  TIMET's sales volumes
of mill  products  increased  11% in 2005 as compared to 2004,  while volumes of
melted products were 6% higher as a result of increased demand across all market
segments,  especially commercial aerospace. Large commercial aircraft deliveries
increased from 600 in 2004 to 650 in 2005,  and 2006  deliveries are expected to
be 840 aircraft.  As  previously  discussed,  a  substantial  portion of TIMET's
business is tied to the  commercial  aerospace  industry,  and sales of titanium
generally  precede  aircraft  deliveries by about one year.  Therefore,  TIMET's
sales in 2005 were  significantly  benefited  from the increase in production of
large commercial aircraft scheduled for delivery in 2006.

TIMET's  operating results  comparisons were favorably  impacted in 2005 by
improved plant operating rates, which increased from 73% in 2004 to 80% in 2005,
and higher  gross  margin from the sale of titanium  scrap  (which TIMET can not
economically  recycle)  and  other  non-mill  products.  In  addition,   TIMET's
operating results  comparisons were negatively  impacted by higher costs for raw
materials,  energy and accruals for certain performance-based employee incentive
compensation and a $1.2 million noncash  impairment  charge in the first quarter
of 2005 related to certain abandoned manufacturing equipment of TIMET.

TIMET  reported  higher  sales in 2004 as compared to 2003,  and  operating
income  improved  from a $6.0 million loss in 2003 to $43.1 million of income in
2004,  in part due to the net effects of a 28% increase in sales volumes of mill
products,  a 13% increase in sales volumes of melted  products  (ingot and slab)
and an 11%  increase in melted  product  average  selling  prices.  TIMET's mill
product average selling prices were positively  affected by the weakening of the
U.S.  dollar  compared  to the British  pound  sterling  and the euro,  and were
negatively  impacted by changes in customer  and product  mix.  The  increase in
sales volumes for mill and melted  products is principally the result of greater
market demands and share gains.  As discussed  above,  a substantial  portion of
TIMET's business is derived from the commercial aerospace industry, and sales of
titanium to that market sector generally  precede  aircraft  deliveries by about
one  year.  Therefore,  TIMET's  2004  sales  benefited  significantly  from the
increase in production of large  commercial  aircraft  scheduled for delivery in
2005.

TIMET's  operating  results in 2004 includes income in the first quarter of
$1.9 million related to a change in TIMET's vacation policy.  TIMET's  operating
results  comparisons  were also favorably  impacted by improved plant  operating
rates,  which  increased from 56% in 2003 to 73% in 2004, and TIMET's  continued
cost management  efforts.  TIMET's operating results comparisons were negatively
impacted  by higher  costs for raw  materials  (scrap and  alloys)  and  energy.
TIMET's  operating  results in 2003 include (i) a $6.8 million charge related to
the  termination of TIMET's  purchase and sale agreement with  Wyman-Gordon  and
(ii) a $1.7 million reduction in its accrual for a  previously-reported  product
liability  matter.  TIMET's  operating  results  in 2004  were  also  negatively
affected by higher accruals for employee incentive compensation.

During the second quarter of 2005, TIMET recognized a $13.9 million pre-tax
gain ($2.6 million,  or $.02 per diluted share, net of income taxes and minority
interest  to Valhi)  related to the sale of certain  real  property  adjacent to
TIMET's facility in Nevada. In addition, TIMET periodically reviews its deferred
income tax assets to  determine if future  realization  is more likely than not.
During the first quarter of 2005, due to a change in estimate of TIMET's ability
to utilize  the  benefits of its net  operating  loss  carryforwards,  other tax
attributes and deductible temporary  differences in the U.S. and the U.K., TIMET
determined that its net deferred income tax assets in such jurisdictions now met
the "more-likely-than-not" recognition criteria. Accordingly, TIMET's income tax
benefit in 2005 includes a $50.2 million  benefit  ($13.7  million,  or $.11 per
diluted  share,  net of minority  interest to Valhi)  related to reversal of the
valuation allowances attributable to such deferred income tax assets.

TIMET's  provision  for  income  taxes in 2005  includes  $4.4  million  of
deferred  income taxes  resulting from the  elimination  of its minimum  pension
liability equity adjustment  component of accumulated other comprehensive income
related to its U.S. defined benefit pension plan. In accordance with GAAP, TIMET
did not  recognize  a deferred  income tax  benefit  related to a portion of the
minimum  pension  equity  adjustment  previously  recognized,  as TIMET had also
recognized  a  deferred  income  tax asset  valuation  related  to its U.S.  net
operating loss carryforward and other U.S. net deductible temporary  differences
during a portion of the periods in which the minimum  pension equity  adjustment
had  previously  been  recognized.  In  accordance  with GAAP, a portion of such
valuation  allowance  recognized  ($4.4 million) was recognized  through TIMET's
pension liability component of other  comprehensive  income. As discussed above,
during  2005  TIMET  concluded  recognition  of such  deferred  income tax asset
valuation  allowance was no longer  required,  and in  accordance  with GAAP the
reversal of all of such valuation allowance was recognized through the provision
for income taxes included in the determination of net income, including the $4.4
million  portion of the  valuation  allowance  which was  previously  recognized
through other comprehensive income. As of December 31, 2005, TIMET was no longer
required to recognize a minimum pension  liability related to its U.S. plan, and
TIMET  reversed the minimum  pension  liability  previously  recognized in other
comprehensive  income.  After the  reversal of such minimum  pension  liability,
which in accordance  with GAAP was  recognized on a net-of-tax  basis,  the $4.4
million amount remained in accumulated other comprehensive income related to the
U.S. minimum pension liability,  which in accordance with GAAP is required to be
recognized  in the  provision  for income  taxes  during the period in which the
minimum pension liability is no longer required to be recognized.

In August 2004,  TIMET  completed an exchange offer in which  approximately
3.9 million shares of the  outstanding  convertible  preferred  debt  securities
issued by TIMET  Capital  Trust I (a  wholly-owned  subsidiary  of  TIMET)  were
exchanged  for an aggregate of 3.9 million  shares of a  newly-created  Series A
Preferred Stock of TIMET at the exchange rate of one share of Series A Preferred
Stock for each convertible preferred debt security.  TIMET recognized a non-cash
pre-tax  gain of $15.5  million  related to such  exchange.  The exchange of the
convertible  preferred debt  securities for a new issue of TIMET preferred stock
resulted in TIMET reporting lower interest expense subsequent to the August 2004
exchange,  although the effect on TIMET's income attributable to common stock of
lower interest expense will be substantially offset by dividends accruing on the
preferred stock.

Effective July 1, 2005,  TIMET entered into a new long-term  agreement with
Boeing for the purchase and sale of titanium products. The new agreement expires
on December 31, 2010 and provides  for,  among other  things,  (i) mutual annual
purchase  and supply  commitments  by both  parties,  (ii)  continuation  of the
existing  buffer  inventory  program  currently  in place for  Boeing  and (iii)
certain improved product pricing, including certain adjustments for raw material
cost  fluctuations.  The new agreement  also  replaces,  beginning in 2006,  the
take-or-pay  provisions of the previous agreement discussed below with an annual
makeup  payment early in the following  year in the event Boeing  purchases less
than its annual  volume  commitment in any year.  Under TIMET's prior  long-term
agreement with Boeing,  Boeing advanced TIMET $28.5 million annually for each of
2003,  2004 and 2005 at the  beginning  of the  year,  and  Boeing  forfeited  a
proportionate  part of the such annual advance,  or effectively $3.80 per pound,
to the extent that its orders for delivery for such calendar year were less than
7.5 million pounds. TIMET was only required, however, to deliver up to 3 million
pounds  per  quarter.   Based  on  TIMET's   actual   deliveries  to  Boeing  of
approximately 1.4 million pounds during 2003, 1.7 million pounds during 2004 and
3.0 million  pounds  during 2005,  TIMET  recognized  income of $23.1 million in
2003, $22.1 million in 2004 and $17.1 million in 2005 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 effective income tax rate in 2003 and 2004 varies from the 35% U.S.
federal  statutory income tax rate primarily  because TIMET concluded it was not
appropriate  to  recognize  an income tax benefit  related to its U.S.  and U.K.
losses  under the  "more-likely-than-not"  recognition  criteria.  In  addition,
TIMET's  provision for income taxes in 2004  includes a $4.2 million  income tax
benefit ($1.1 million,  or $.01 per diluted share,  net of income taxes) related
to the utilization of a capital loss carryforward,  the benefit of which had not
been previously recognized by TIMET.

TIMET continues to see the  availability of certain raw materials  tighten,
and, consequently,  the prices for such raw materials increase.  TIMET currently
expects  that the  shortage  in  certain  raw  materials  is likely to  continue
throughout  2006,  which could limit TIMET's  ability to produce enough titanium
products to fully meet customer demand. In addition, TIMET has certain long-term
customer  agreements  that will somewhat limit its ability to pass on all of its
increased raw material costs.  However,  TIMET expects that the impact of higher
average  selling  prices  for melted  and mill  products  in 2006 will more than
offset such increased raw material costs.

TIMET currently  expects its 2006 net sales revenue will increase by 35% to
50% from 2005,  to between $1.0  billion and $1.1  billion.  Mill product  sales
volumes,  which were  12,660  metric  tons in 2005,  are  expected to range from
14,500 and 15,000 metric tons in 2006, an increase of 15% to 18%. Melted product
sales  volumes,  which were 5,655  metric tons in 2005,  are  expected to remain
relatively  unchanged in 2006. Melted product average selling prices in 2006 are
expected  to  increase  by 75% to 80%,  with mill  product  prices  expected  to
increase by 25% to 30%.

TIMET's cost of sales is affected by a number of factors including customer
and product mix,  material  yields,  plant operating  rates, raw material costs,
labor costs and energy costs.  Raw material costs,  which include sponge,  scrap
and  alloys,  represent  the  largest  portion  of its  cost  structure,  and as
previously  discussed,  continued cost increases are expected during 2006. Scrap
and certain alloy prices have continued their upward rise, and increased  energy
costs also continue to have a negative  impact on gross margin.  TIMET currently
expects  production  volumes to  continue  to  increase  in 2006,  with  overall
capacity  utilization expected to approximate 85% to 90% in 2006 (as compared to
80%  in  2005).  However,  practical  capacity  utilization  measures  can  vary
significantly based on product mix.

Under the terms of TIMET's new long-term agreement with Boeing,  TIMET does
not  currently  expect  Boeing  will  incur a makeup  payment  for 2006 as TIMET
expects Boeing will purchase at least its minimum  specified volumes from TIMET.
TIMET expects its 2006  operating  income will increase 50% to 65% over 2005, to
between $257 million and $282 million.

General corporate and other items

General corporate interest and dividend income.  General corporate interest
and  dividend  income in 2005 was higher as compared to the same periods of 2004
due primarily to a higher level of  distributions  received from The Amalgamated
Sugar  Company LLC  ("LLC").  A  significant  portion of the  Company's  general
corporate  interest and dividend income relates to  distributions  received from
The  Amalgamated  Sugar  Company LLC and interest  income on the  Company's  $80
million loan to Snake River Sugar  Company.  Dividend  income for  distributions
from the LLC aggregated  $23.7 million in 2003,  $23.8 million in 2004 and $45.0
million in 2005,  while  interest  income on the  Company's  loan to Snake River
aggregated  $5.2 million in each of 2003 and 2004 and $3.9 million in 2005.  See
Notes 5, 8 and 12 to the Consolidated Financial Statements. In October 2005, the
Company and Snake River Sugar Company  amended the Company  Agreement of the LLC
pursuant  to which,  among  other  things,  the LLC is  required  to make higher
minimum  levels of  distributions  to its  members  (including  the  Company) as
compared  to levels  required  under the prior  Company  Agreement,  which would
result in the Company receiving annual  distributions  from the LLC in aggregate
amounts  approximately  $25.4 million.  In addition,  assuming certain specified
conditions  are met (which  conditions the Company met during the fourth quarter
of 2005 and which are currently  expected to be met during 2006),  the LLC would
be  required  to  distribute,  in  addition  to the  distributions  noted in the
preceding  sentence,  additional  amounts  that  would  result  in  the  Company
receiving at least an additional $25 million  during the 15-month  period ending
December 31, 2006 (with approximately $19 million received in the fourth quarter
of 2005 and the remaining $6 million  expected to be paid during 2006).  Also in
the fourth  quarter of 2005,  the Company  recognized a $21.6 million  charge to
earnings  related to the accrued  interest on the Company's  loan to Snake River
that was forgiven. See Note 8 to the Consolidated Financial Statements.

General  corporate  interest and dividend  income in 2004 was comparable to
2003.  Aggregate  general  corporate  interest  and  dividend  income in 2006 is
currently  expected  to be lower  than  2005  due  primarily  to lower  expected
distributions from the LLC, as discussed above.

Insurance  recoveries.  NL has reached an agreement with a former insurance
carrier in which such carrier  would  reimburse NL for a portion of its past and
future lead pigment litigation  defense costs,  although the amount that NL will
ultimately recover from such carrier with respect to such defense costs incurred
by NL is not yet  determinable.  In addition,  during 2005, NL  recognized  $2.2
million of recoveries from certain insolvent former insurance  carriers relating
to settlement of excess insurance claims that were paid to NL.

Insurance  recoveries of $823,000 in 2003, $552,000 in 2004 and $804,000 in
2005 relate to NL's settlements  with certain of its former insurance  carriers.
These  settlements,  as well as similar  prior  settlements  NL reached prior to
2003,  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.

While NL continues to seek additional insurance recoveries, there can be no
assurance  that NL will be  successful  in  obtaining  reimbursement  for either
defense  costs or  indemnity.  NL has not  considered  any  potential  insurance
recoveries in determining  related accruals for lead pigment litigation matters.
Any such additional  insurance recoveries would be recognized when their receipt
is deemed probable and the amount is determinable.

Securities  transactions.  Net securities transactions gains in 2005 relate
principally to a $14.7 million  pre-tax gain ($6.6 million,  or $.05 per diluted
share, net of income taxes and minority interest) related to NL's sale of shares
of Kronos common stock in market  transaction and (ii) a $5.4 million gain ($3.1
million,  or $.03 per diluted share, net of income taxes and minority  interest)
related  to  Kronos'  sale  of its  passive  interest  in a  Norwegian  smelting
operation,  which had a nominal carrying value for financial reporting purposes.
See Notes 2 and 8 to the Consolidated Financial Statements.

Net  securities  transactions  gains in 2004  includes a $2.2  million gain
($1.1  million,  or $.01 per diluted  share,  net of income  taxes and  minority
interest)  related  to NL's  sale of shares  of  Kronos  common  stock in market
transactions.  Securities transaction gains in 2003 relate principally to a 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.

Other general  corporate income items. The gain on disposal of fixed assets
in 2003  relates  primarily  to the  sale of  certain  real  property  of NL not
associated  with any operations.  NL has certain other real property,  including
some subject to environmental remediation, which could be sold in the future for
a profit. See Note 12 to the Consolidated Financial Statements.

General corporate  expenses.  Net general  corporate  expenses in 2005 were
$5.2 million higher than 2004, due primarily to higher legal expenses of NL. Net
general  corporate  expenses  in 2004 were  $36.0  million  lower  than 2003 due
primarily  to lower  environmental  remediation  and legal  expenses of NL. Such
environmental   and  legal  expenses  are  included  in  selling,   general  and
administrative expenses.

Net general corporate  expenses in calendar 2006 are currently  expected to
be  higher  as  compared  to  calendar  2005,  in part  due to  higher  expected
litigation and related  expenses of NL. However,  obligations for  environmental
remediation  obligations are difficult to assess and estimate,  and no assurance
can be given that actual  costs for  environmental  remediation  will not exceed
accrued amounts or that costs will not be incurred in the future with respect to
sites for which no estimate of liability can  presently be made.  See Note 18 to
the Consolidated Financial Statements.

Interest  expense.  The Company has a  significant  amount of  indebtedness
denominated in the euro, including KII's  euro-denominated  Senior Secured Notes
(euro 375 million outstanding at December 31, 2005).  Accordingly,  the reported
amount of interest  expense will vary  depending on relative  changes in foreign
currency  exchange  rates.  Interest  expense in 2005 was  higher  than 2004 due
primarily to the interest expense associated with the additional euro 90 million
principal  amount of Senior  Secured Notes issued in November 2004. In addition,
the increase in interest expense was due to relative changes in foreign currency
exchange rates,  which increased the U.S. dollar  equivalent of interest expense
on the euro 285 million principal amount of KII Senior Secured Notes outstanding
during all of both 2004 and 2005 by approximately $1 million.

Interest  expense in 2004 was higher  than 2003 due  primarily  to relative
changes in foreign  currency  exchange  rates,  which  increased the U.S. dollar
equivalent of interest  expense on the euro 285 million  principal amount of KII
Senior  Secured  Notes  outstanding   during  all  of  both  2003  and  2004  by
approximately $3 million.

Assuming interest rates and foreign currency exchange rates do not increase
significantly  from current levels,  interest  expense in 2006 is expected to be
approximate 2005.

At  December  31,  2005,   approximately   $706  million  of   consolidated
indebtedness,  principally  KII's Senior  Secured  Notes and Valhi's  loans from
Snake River Sugar Company, bears interest at fixed interest rates averaging 9.1%
(2004 - $770 million with a weighted  average interest rate of 9.1%; 2003 - $607
million  with a weighted  average  fixed  interest  rate of 9.1%).  The weighted
average interest rate on $11 million of outstanding  variable rate borrowings at
December 31, 2005 was 7.0% (2004 - 3.8%; 2003 - 3.1%).  Relative  changes in the
weighted  average  interest  rate on  outstanding  variable  rate  borrowings at
December 31, 2003,  2004 and 2005 are due primarily to relative  differences  in
the mix of such  borrowings,  with higher  relative  outstanding  borrowings  at
December  31,  2004 as compared  to  December  31,  2003 under the KII  European
revolver, for which the interest rate is generally higher than the interest rate
on any outstanding U.S. variable borrowings.

As noted above, KII has a significant amount of indebtedness denominated in
currencies  other  than  the  U.S.  dollar.  See  Item  7A,   "Quantitative  and
Qualitative Disclosures About Market Risk."

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.

The Company's  income tax expense in 2005 includes the net non-cash effects
of (i) the aggregate  favorable  effects of recent  developments with respect to
certain non-U.S. income tax audits of Kronos, principally in Belgium and Canada,
of $12.5 million  ($10.8  million,  or $.09 per diluted  share,  net of minority
interest),  (ii) the  favorable  effect of recent  developments  with respect to
certain  income  tax  items of NL of $7.4  million  ($6.2  million,  or $.05 per
diluted share,  net of minority  interest),  (iii) the  unfavorable  effect with
respect to the loss of certain  income  tax  attributes  of Kronos in Germany of
$17.5  million  ($15.2  million,  or $.13 per  diluted  share,  net of  minority
interest)  and (iv) the  unfavorable  effect with respect to a change in CompX's
permanent reinvestment conclusion regarding certain of its non-U.S. subsidiaries
of $9.0  million  ($5.1  million,  or $.04 per  diluted  share,  net of minority
interest).

At December 31, 2005,  Kronos had the  equivalent  of $593 million and $104
million of income tax loss  carryforwards  for  German  corporate  and trade tax
purposes,  respectively,  all of which have no  expiration  date.  As more fully
described  in Note  15 to the  Consolidated  Financial  Statements,  Kronos  had
previously  provided a deferred  income tax asset  valuation  allowance  against
substantially all of these tax loss carryforwards and other deductible temporary
differences   in  Germany   because   Kronos  did  not  believe   they  met  the
"more-likely-than-not"  recognition  criteria.  During  the first six  months of
2004,  Kronos  reduced its  deferred  income tax asset  valuation  allowance  by
approximately $8.7 million, primarily as a result of utilization of these German
net operating loss  carryforwards,  the benefit of which had not previously been
recognized.  At June 30, 2004, after considering all available evidence,  Kronos
concluded  that  these  German  tax  loss  carryforwards  and  other  deductible
temporary differences now met the  "more-likely-than-not"  recognition criteria.
Under applicable GAAP related to accounting for income taxes at interim periods,
a change in  estimate  at an  interim  period  resulting  in a  decrease  in the
valuation  allowance is segregated into two  components,  the portion related to
the remaining interim periods of the current year and the portion related to all
future years.  The portion of the valuation  allowance  reversal  related to the
former is recognized over the remaining interim periods of the current year, and
the portion of the  valuation  allowance  related to the latter is recognized at
the time the  change in  estimate  is made.  Accordingly,  as of June 30,  2004,
Kronos reversed  $268.6 million of the valuation  allowance (the portion related
to future years), and Kronos reversed the remaining $3.4 million during the last
six months of 2004. Prior to the complete utilization of such carryforwards,  it
is possible  that the Company  might  conclude in the future that the benefit of
such  carryforwards  would no longer meet the  more-likely-than-not  recognition
criteria,  at which point the Company would be required to recognize a valuation
allowance   against  the   then-remaining   tax  benefit   associated  with  the
carryforwards.

Also during 2004, NL recognized a second  quarter $48.5 million  income tax
benefit  related  to  income  tax  attributes  of  NL  Environmental  Management
Services,  Inc.  ("EMS"),  a subsidiary of NL. This income tax benefit  resulted
from a  settlement  agreement  reached  with the U.S.  IRS  concerning  the IRS'
previously-reported examination of a certain restructuring transaction involving
EMS, and included (i) an $17.4 million tax benefit related to a reduction in the
amount of  additional  income taxes and  interest  which NL estimates it will be
required to pay related to this matter as a result of the  settlement  agreement
and (ii) a $31.1  million  tax  benefit  related to the  reversal  of a deferred
income tax asset  valuation  allowance  related to certain tax attributes of EMS
(including a U.S. net operating  loss  carryforward)  which NL now believes meet
the "more-likely-than-not" recognition criteria.

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 to 60% of  taxable  income  after  the first  euro 1
million of taxable income. The new law will have a significant effect on Kronos'
cash tax  payments  in  Germany  going  forward,  the  extent  of which  will be
dependent upon the level of taxable income earned in Germany.

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.

As  discussed  in  Note 1 to the  Consolidated  Financial  Statements,  the
Company commenced to recognize  deferred income taxes with respect to the excess
of the financial  reporting carrying amount over the income tax basis of Valhi's
investment  in  Kronos  beginning  in  December  2003  following  NL's  pro-data
distribution  of shares of Kronos common stock to NL's  shareholders,  including
Valhi.  The  aggregate  amount of such  deferred  income  taxes  included in the
Company's  provision for income taxes was $104.0 million in 2003,  $83.7 million
in 2004 and $10.4  million in 2005.  In addition,  the  Company's  provision for
income taxes in 2003,  2004 and 2005 includes an aggregate  $22.5 million,  $2.5
million and $664,000, respectively, for the current income tax effect related to
NL's  distribution  of such shares of Kronos  common stock to NL's  shareholders
other than Valhi during such periods.

Minority interest. See Note 13 to the Consolidated Financial Statements.

Discontinued  operations.   See  Note  22  to  the  Consolidated  Financial
Statements.

Accounting  principles  newly adopted in 2003 and 2004.  See Note 19 to the
Consolidated Financial Statements.

Accounting  principles  not yet  adopted.  See Note 20 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.  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.

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, 2005, the projected benefit
obligations  for all defined  benefit plans was comprised of $98 million related
to U.S. plans and $423 million related to non-U.S. plans. Substantially,  all of
such projected  benefit  obligations  attributable to non-U.S.  plans related to
plans maintained by Kronos,  and approximately 49%, 15% and 36% of the projected
benefit  obligations  attributable to U.S. plans related to plans  maintained by
NL, Kronos and Medite  Corporation,  a former  business  unit of Valhi  ("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 $9.6  million in 2003,  $13.5  million in 2004 and $13.1
million in 2005. 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 the Company to
all of its defined benefit pension plans aggregated $14.8 million in 2003, $17.8
million in 2004 and $19.2 million in 2005.

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.

Approximately  65%,  14%, 14% and 4% of the projected  benefit  obligations
attributable  to plans  maintained  by Kronos at December  31,  2005  related to
Kronos plans in Germany, Norway, Canada and the U.S.,  respectively.  The Medite
plan and NL's  plans are all in the U.S.  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, 2003 and expense     December 31, 2004 and expense       December 31, 2005 and
in 2004                           in 2005                     expense in 2006
-------------------------------  --------------------------------  -----------------------------

Kronos and NL plans:

Germany                            5.3%                             5.0%                              4.0%
Norway                             5.5%                             5.0%                              4.5%
Canada                             6.3%                             6.0%                              5.0%
U.S.                               5.9%                             5.8%                              5.5%
Medite plan                          6.0%                             5.7%                              5.5%

The assumed  long-term 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, 2005, the fair value of plan assets for all defined benefit
plans was  comprised  of $112  million  related to U.S.  plans and $226  million
related to  non-U.S.  plans.  All of such plan assets  attributable  to non-U.S.
plans related to plans maintained by Kronos,  and approximately 46%, 16% and 38%
of the plan assets  attributable to U.S. plans related to plans maintained by NL
and Kronos and the Medite plan, respectively. Approximately 51%, 19%, 18% and 7%
of the plan assets  attributable  to plans  maintained by Kronos at December 31,
2005 related to plans in Germany, Norway, Canada and the U.S., respectively. The
Medite  plan and  NL's  plans  are all in the  U.S.  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  2005,  substantially  all of the  Kronos,  NL and Medite  plan
assets in the U.S.  were  invested in The Combined  Master  Retirement
Trust ("CMRT"), a collective  investment trust sponsored by Contran 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 18-year history of the CMRT through  December 31,
2005,  the average  annual rate of return has been  approximately  14%
(including a 36% return during 2005).  At December 31, 2005, the asset
mix of the CMRT was 86% in U.S.  equity  securities,  3% in U.S. fixed
income  securities,  7% in international  equity  securities and 4% in
cash and other investments.
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, 2005 was 23% to equity
managers, 48% to fixed income managers and 29% to real estate.
o    In Norway,  Kronos currently has a plan asset target allocation of 14%
to equity  managers,  64% to fixed income  managers and the  remainder
primarily to cash and liquid investments.  The expected long-term rate
of return for such  investments  is  approximately  8%, 4.5% to 6% and
2.5%, respectively. The plan asset allocation at December 31, 2005 was
16% to equity managers, 62% to fixed income managers and the remainder
primarily to cash and liquid investments.
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, 2005 was 64% to
equity  managers,  32%  to  fixed  income  managers  and  4% to  other
investments.

The Company regularly reviews its actual asset allocation for each of its plans,
and  periodically  rebalances 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 2003, 2004 and 2005 were as follows:

2003                  2004                   2005
----                  ----                   ----
Kronos and NL plans:

Germany                                                 6.5%                 6.0%                   5.5%
Norway                                                  6.0%                 6.0%                   5.5%
Canada                                                  7.0%                 7.0%                   7.0%
U.S.                                                   10.0%                10.0%                  10.0%
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 2006 as it used in 2005 for purposes of determining
the 2006 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.

As  discussed  above,  assumed  discount  rates  and rate of return on plan
assets are  re-evaluated  annually.  A reduction  in the assumed  discount  rate
generally  results in an actuarial loss, as the  actuarially-determined  present
value of  estimated  future  benefit  payments  will  increase.  Conversely,  an
increase in the assumed discount rate generally results in an actuarial gain. In
addition,  an actual return on plan assets for a given year that is greater than
the assumed return on plan assets results in an actuarial gain,  while an actual
return  on plan  assets  that is less  than the  assumed  return  results  in an
actuarial  loss.  Other actual  outcomes that differ from previous  assumptions,
such as  individuals  living longer or shorter than assumed in mortality  tables
which are also used to determine  the  actuarially-determined  present  value of
estimated future benefit payments, changes in such mortality table themselves or
plan amendments,  will also result in actuarial losses or gains. Under GAAP, all
of such actuarial gains and losses are not recognized in earnings currently, but
instead  are  deferred  and  amortized  into income in the future as part of net
periodic defined benefit pension cost. However, any actuarial gains generated in
future periods would reduce the negative  amortization  effect of any cumulative
unrecognized  actuarial  losses,  while any actuarial losses generated in future
periods  would  reduce  the  favorable  amortization  effect  of any  cumulative
unrecognized actuarial gains.

During 2005, all of the Company's defined benefit pension plans generated a
net actuarial loss of $101.4 million.  This actuarial loss,  principally related
to Kronos' defined benefit  pension plans,  resulted  primarily from the general
overall  reduction  in the  assumed  discount  rates as well as the  unfavorable
effect of using updated  mortality tables (which generally  reflect  individuals
living longer than prior mortality  tables used),  partially offset by an actual
return on plan assets in excess of the assumed return.

While  actuarial gains and losses are deferred and amortized into income in
future periods,  as discussed above, GAAP also requires that a minimum amount of
accrued pension cost be recognized in a statement of financial  position for any
plans for which the accumulated  benefit  obligation is less than the fair value
of plan  assets.  To the extent GAAP  accounting  would  otherwise  result in an
accrued pension cost balance for such plans that was less than the excess of the
aggregate  accumulated  benefit  obligation  over the value of the related  plan
assets,  GAAP then requires that such excess be recognized as a component of the
consolidated  accrued pension cost,  with the offset to such additional  accrued
pension  cost  (commonly  referred  to as  an  "additional  minimum  liability")
recognized (i) first as an intangible asset up to specified amounts (referred to
as  "unrecognized  net pension  obligations" in the Company's  balance sheet and
then (ii) second as part of accumulated  other  comprehensive  income (loss). At
December 31, 2005,  and  primarily as a result of the aggregate  $101.4  million
actuarial loss generated during 2005 as discussed above, the aggregate amount of
the additional  minimum liability  required to be recognized by Kronos increased
by  approximately  $87 million at December  31, 2005 as compared to December 31,
2004,  resulting  in the  Company  recognized  aggregate  accrued  pension  cost
(current and  noncurrent)  of $153.5 million at December 31, 2005 as compared to
$86.5 million at December 31, 2004.

Based on the  actuarial  assumptions  described  above and Kronos'  current
expectations  for what actual average  foreign  currency  exchange rates will be
during 2006, the Company  currently  expects  aggregate  defined benefit pension
expense  will  approximate  $19  million in 2006.  In  comparison,  the  Company
currently expects to be required to make  approximately $18 million of aggregate
contributions to such plans during 2006.

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, 2005,  their
aggregate  projected  benefit  obligations would have increased by approximately
$16.5 million at that date, and their aggregate  defined benefit pension expense
would  be  expected  to  increase  by  approximately  $2  million  during  2006.
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
2006.  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, 2005, approximately
35%,  33% and 31% of the  Company's  aggregate  accrued  OPEB  costs  relate  to
Tremont,  NL and Kronos,  respectively.  Kronos  provides  such OPEB benefits to
retirees in the U.S. and 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  $935,000  in 2003,  $2  million  in 2004 and $1.2  million in 2005.
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  $5.2 million in 2003,  $5.7
million in 2004 and $5.0  million in 2005.  Substantially  all of the  Company's
accrued OPEB costs relates to benefits being paid to current  retirees and their
dependents,  and no material amount of OPEB benefits are being earned by current
employees.  As a result,  the amount  recognized  for OPEB expense for financial
reporting  purposes has been,  and is expected to continue to be,  significantly
less than the amount of OPEB benefit payments made each year.  Accordingly,  the
amount of accrued OPEB costs has been,  and is expected to continue to,  decline
gradually.

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. In certain cases, NL has the right to
pass on to  retirees  all or a portion of any  increases  in health  care costs.
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, 2005,  the expected  rate of increase in future health
care costs  ranges from 8.2% to 9.0% in 2006,  declining  to rates of between 4%
and 5.5% in 2010 and thereafter.

Based on the  actuarial  assumptions  described  above and Kronos'  current
expectation  for what actual  average  foreign  currency  exchange rates will be
during 2006, the Company expects its consolidated  OPEB expense will approximate
$1.3 million in 2006. In comparison,  the Company expects to be required to make
approximately $3.9 million of contributions to such plans during 2006.

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, 2005,  the  Company's  aggregate  projected
benefit  obligations would have increased by approximately  $1.2 million at that
date,  and the Company's OPEB expense would be expected to increase by less than
$100,000  during 2006.  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  $2.7 million at December 31,
2005, and OPEB expense would have increased by $221,000 in 2006.

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.  At
December 31, 2005,  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
and Taiwan.

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 58% of TIMET's European sales was denominated in
the British  pound or 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 (iv) 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,  2005,  the  Company's   third-party   indebtedness   was
substantially  comprised  of (i) Valhi's  $250 million of loans from Snake River
Sugar  Company due in 2027,  (ii) KII's  euro-denominated  Senior  Secured Notes
(equivalent of $449 million principal amount  outstanding) due in 2009 and (iii)
Kronos' U.S.  revolving bank credit facility ($11.5 million  outstanding) due in
2008.  Accordingly,  since  none of such  indebtedness  comes  due in 2006,  the
Company does not currently  expect that a  significant  amount of its cash flows
from operating  activities  generated during 2006 will be required to be used to
repay indebtedness during 2006.

Based  upon the  Company's  expectations  for the  industries  in which its
subsidiaries  and  affiliates  operate,  and  the  anticipated  demands  on  the
Company's  cash  resources  as  discussed  herein  (including  debt  refinancing
expectations),  the Company  expects to have  sufficient  liquidity  to meet its
short-term  obligations  (defined as the twelve-month period ending December 31,
2006) and its  long-term  obligations  (defined as the  five-year  period ending
December  31,  2010,  the time  period  for which  the  Company  generally  does
long-term budgeting),  including operations, capital expenditures,  debt service
current  dividend policy and repurchases of its common stock. To the extent that
actual  developments  differ  from the  Company's  expectations,  the  Company's
liquidity could be adversely affected.

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,  deferred
income taxes,  asset impairment charges and unrealized  securities  transactions
gains and losses.  Non-cash  interest expense relates  principally to Kronos and
consists  of  amortization  of  original  issue  discount  or premium on certain
indebtedness and amortization of deferred financing costs.

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.

Changes in product pricing,  production volumes and customer demand,  among
other things,  can 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 flows 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.  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 the environmental  accrual
is recognized  and the period in which the  remediation  expenditure is actually
made.

Cash flows from operating  activities decreased from $142.1 million in 2004
to $104.3  million in 2005.  This $37.8 million net decrease is due primarily to
the net  effects  of (i) lower net  income of $148.6  million,  (ii)  higher net
securities  transaction  gains of $18.1  million,  (iii) a higher  provision for
deferred income taxes of $256.9 million,  (iv) lower minority  interest of $32.7
million, (v) higher equity in earnings of TIMET of $42.2 million, (vi) lower net
cash distributions  from the TiO2  manufacturing  joint venture of $3.8 million,
(vii) higher net cash paid for income taxes of $74.7 million,  due in large part
to $44.7 million of aggregate  income tax refunds received by Kronos in 2004 and
a $21 million payment by NL in 2005 to settle a  previously-reported  income tax
audit,  (viii) $50.5 million  higher use of cash related to relative  changes in
working capital items (principally  accounts receivable,  inventories,  payables
and accruals and accounts with  affiliates) , and (ix) higher net cash generated
from  relative  changes  in other  noncurrent  assets and  liabilities  of $11.7
million.

Cash flows provided from operating activities increased from $108.5 million
in 2003 to $142.1 million in 2004. This $33.6 million increase was due primarily
to the net  effect of (i) higher net  income of $317.7  million,  (ii)  goodwill
impairment in 2004 of $6.5  million,  (iii) lower net gains from the disposal of
property  and  equipment of $10.7  million,  (iv) a larger  deferred  income tax
benefit of $364.0 million,  (v) higher depreciation and amortization  expense of
$5.4 million,  (vi) higher  distributions from Kronos' TiO2 manufacturing  joint
venture of $7.7 million, (vii) a $25.0 million improvement in equity in earnings
(losses) of TIMET,  (viii) higher  minority  interest of $51.5  million,  (ix) a
higher  use of cash  related  to  relative  changes  in  working  capital  items
(principally  accounts  receivable,   inventories,  payables  and  accruals  and
accounts  with  affiliates)  of $2.7  million,  (x)  higher  net cash  used from
relative changes in other noncurrent assets and liabilities of $37.9 million and
(xi) higher cash received for income taxes of $16.3 million.

Relative  changes in working  capital  assets  and  liabilities  can have a
significant effect on cash flows from operating activities. Kronos' average days
sales outstanding ("DSO") decreased from 60 days at December 31, 2004 to 55 days
at December 31,  2005,  due to the timing of  collection.  At December 31, 2005,
Kronos' average number of days in inventory  ("DII")  increased to 102 days from
97 days at December 31, 2004 due to the effects of higher production volumes and
lower sales volumes.  CompX's  average DSO related to its continuing  operations
increased  from 38 days at December 31, 2004 to 40 days at December 31, 2005 due
to timing of collection on the slightly  higher accounts  receivable  balance at
the end of 2005. CompX's average DII related to its continuing operations was 52
days at December  31, 2004 and 59 days at December  31,  2005.  The  increase in
CompX's DII is primarily due to higher raw material prices, primarily steel.

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 and NL Parent and,  prior to
2005, Tremont).

Years ended December 31,
------------------------------------
2003            2004            2005
----            ----            ----
(In millions)

Cash provided (used) by operating activities:

Kronos                                                                 $107.7          $151.0          $ 97.8
NL Parent                                                               (10.2)            8.8           (20.1)
CompX                                                                    24.4            30.2            20.0
Waste Control Specialists                                                (6.6)           (7.4)           (7.7)
Tremont                                                                   7.2             2.0            (5.0)
Valhi Parent                                                             30.6            24.8           101.4
Other                                                                    (2.7)            (.3)            (.7)
Eliminations                                                            (41.9)          (67.0)          (81.4)
------          ------          ------

$108.5          $142.1          $104.3
======          ======          ======

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

At December 31, 2005,  firm purchase  commitments  for capital  projects in
process  approximated  $10.0 million,  of which $7.4 million  relates to Kronos'
Ti02  facilities  and the  remainder  relates to CompX's  facilities.  Aggregate
capital  expenditures  for 2006 are  expected to  approximate  $67 million  ($41
million  for Kronos,  $16  million  for CompX and $10 million for Waste  Control
Specialists). Capital expenditures in 2006 are expected to be financed primarily
from operations or existing cash resources and credit facilities.

During  2005,  (i) Valhi  purchased  shares of TIMET common stock in market
transactions  for $18.0  million,  (ii) NL sold shares of Kronos common stock in
market transactions for $19.2 million, (iii) NL purchased shares of CompX common
stock in market  transactions  for $3.6 million,  (iv) Valhi purchased shares of
Kronos common stock in market transactions for $7.0 million,  (v) CompX received
a net $18.1  million from the sale of its Thomas  Regout  operations  (which had
approximately $4.0 million of cash at the date of disposal), (vi) Valhi received
a net $4.9 million on its short-term  loan to Contran,  (vii) NL collected $10.0
million on its loan to one of the Contran  family trusts  described in Note 1 to
the Consolidated Financial Statements,  (viii) the Company made net purchases of
marketable  securities of $9.8 million,  (ix) Kronos  received $3.5 million from
the sale of its passive interest in a Norwegian smelting  operations,  (x) CompX
acquired a company for an  aggregate  of $7.3  million and (xi) Valhi  collected
$80.0 million  principal  amount of its loan to Snake River Sugar  Company.  See
Notes 2, 8 and 15 to the Consolidated Financial Statements.

During 2004,  (i) Valhi  purchased  shares of Kronos common stock in market
transactions for $17.1 million,  (ii) NL collected $4 million on its loan to one
of the Contran family  trusts,  (iii) Valhi loaned a net $4.9 million to Contran
and (iv) NL sold shares of Kronos  common stock in market  transactions  for net
proceeds of $2.7 million.

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.  In  addition,  the  Company
generated  approximately  $13.5 million from the sale of property and equipment,
including the real property of NL discussed above.

Financing  activities.  During 2005,  Kronos  repaid an  aggregate  euro 10
million  ($12.9  million  when  repaid)  under  its  European  revolving  credit
facility, Kronos borrowed a net $11.5 million under its U.S. credit facility and
entered into additional  capital lease arrangements for certain mining equipment
for the  equivalent of $4.4 million,  and Valhi borrowed and repaid $5.0 million
under its revolving bank credit  facility.  Valhi,  which  increased its regular
quarterly dividend from $.06 per share to $.10 per share in the first quarter of
2005, paid cash dividends in 2005  aggregating  $48.8 million.  Distributions to
minority interest in 2005 are primarily  comprised of Kronos cash dividends paid
to shareholders  other than Valhi and NL, NL cash dividends paid to shareholders
other than Valhi and CompX dividends paid to  shareholders  other than NL. Valhi
purchased  approximately  3.5 million  shares of its common  stock in market and
other transactions for an aggregate of $62.1 million,  and other cash flows from
financing  activities in 2005 relate  primarily to proceeds from the issuance of
NL, CompX and Valhi common stock upon exercises of stock options.

During 2004, (i) Valhi repaid a net $7.3 million of its  short-term  demand
loans from Contran and repaid a net $5 million under its  revolving  bank credit
facility,  (ii) CompX repaid a net $26.0 million under its revolving bank credit
facility,  (iii) KII issued an additional euro 90 million principal amount of it
Senior Secured Notes at 107% of par (equivalent to $130 million when issued) and
(iv)  Kronos  borrowed  an  aggregate  of euro 90  million  ($112  million  when
borrowed) of borrowings under its European  revolving bank credit  facility,  of
which euro 80 million ($100  million)  were  subsequently  repaid.  In addition,
Valhi paid cash  dividends  of $.06 per share per  quarter,  or an  aggregate of
$29.8 million for 2004. Distributions to minority interest in 2004 are primarily
comprised  of Kronos  cash  dividends  paid to  shareholders  other than  Valhi,
Tremont and NL and CompX  dividends  paid to  shareholders  other than NL. Other
cash flows from  financing  activities  relate  primarily  to proceeds  from the
issuance of NL common stock issued upon exercise of stock options.

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) KII  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 issued upon exercise of stock options.

At December  31,  2005,  unused  credit  available  under  existing  credit
facilities  approximated  $287.4 million,  which was comprised of: CompX - $50.0
million under its revolving  credit  facility;  Kronos - $92.3 million under its
European credit facility,  $33.5 million under its U.S. credit  facility,  $12.8
million under its Canadian  credit facility and $.3 million under other non-U.S.
facilities;  and Valhi - $98.5 million under its revolving bank credit facility.
See Note 10 to the Consolidated Financial Statements.

In  March  2006,  Valhi's  board  of  directors  declared  Valhi's  regular
quarterly  dividend  of $.10 per  share,  to be paid on March 31,  2006 to Valhi
shareholders  of record as of March  16,  2006.  However,  the  declaration  and
payment  of future  dividends,  and the amount  thereof,  is  discretionary  and
dependent upon several  factors.  See Item 5 - "Market for  Registrant's  Common
Equity, Related Stockholder Matters and Issuer Purchases of Common Stock."

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.

Off-balance sheet financing  arrangements.  Other than the 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, 2005, Kronos had cash, cash equivalents and marketable debt
securities of $76.0 million,  including restricted balances of $3.9 million, and
Kronos had  approximately  $139 million  available for borrowing under its U.S.,
Canadian and European credit facilities. Based upon Kronos' expectations for the
TiO2 industry,  Kronos expects to have  sufficient  liquidity to meet its future
obligations including operations, capital expenditures, debt service and current
dividend  policy.  To the extent that actual  developments  differ from  Kronos'
expectations, Kronos' liquidity could be adversely affected.

At December  31, 2005,  Kronos'  outstanding  debt was  comprised of $449.3
million related to KII's Senior Secured Notes,  $11.5 million  outstanding under
Kronos' U.S.  revolving credit facility and approximately  $4.5 million of other
indebtedness.

Kronos' capital  expenditures during the past three years aggregated $117.9
million,  including  $15  million  ($4  million  in 2005)  for  Kronos'  ongoing
environmental protection and compliance programs. Kronos' estimated 2006 capital
expenditures are $41 million,  including $6 million in the area of environmental
protection and compliance.

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 with
respect to Kronos.

Kronos  International's  assets  consist  primarily of  investments  in its
operating subsidiaries, and its ability to service its parent level obligations,
including the Senior Secured Notes,  depends in large part upon the distribution
of earnings of its subsidiaries,  whether in the form of dividends,  advances or
payments  on account  of  intercompany  obligation,  or  otherwise.  None of its
subsidiaries   have  guaranteed  the  Senior  Secured  Notes,   although  Kronos
International has pledged 65% of the common stock or other ownership interest of
certain of its first-tier  operating  subsidiaries  as collateral of such Senior
Secured Notes.

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 in the past has sought  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
related  entities.  In the event of any such  transaction,  Kronos may  consider
using available cash,  issuing equity  securities or increasing its indebtedness
to the extent permitted by the agreements governing Kronos' existing debt.

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' consolidated net assets, will fluctuate based upon changes
in currency exchange rates.

NL Industries Parent

At December 31, 2005, NL (exclusive  of CompX) had cash,  cash  equivalents
and marketable debt securities of $59.9 million,  including  restricted balances
of $4.3 million.

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 and Item 3,
"Legal  Proceedings" with respect to certain legal proceedings and environmental
matters with respect to NL.

In  addition  to  those  legal  proceedings  described  in  Note  18 to the
Consolidated   Financial   Statements  and  Item  3,  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, enactment of such legislation could have such an effect.

Prior to December  2003,  Kronos was a  wholly-owned  subsidiary  of NL. In
December  2003,  and  in  conjunction  with a  recapitalization  of  Kronos,  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.  During  2004 and the first  quarter of 2005,  NL paid an
aggregate of five  quarterly  dividends  in the form of shares of Kronos  common
stock,  in which an aggregate  of  approximately  1.5 million  shares of Kronos'
common  stock  (3.0% of  Kronos'  outstanding  shares)  were  distributed  to NL
shareholders  (including  Valhi and Tremont) in the form of pro-rata  dividends.
Valhi and Tremont (which until January 2005 owned part of the Company's interest
in NL) received an aggregate of approximately  1.2 million shares of Kronos with
respect to these  distributions.  In January 2005, Tremont  distributed to Valhi
its ownership  interest in Kronos.  NL's 2003,  2004 and 2005  distributions  of
shares of common  stock of Kronos  are  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  on the  various  dates of
distribution  and  NL's  adjusted  tax  basis  in such  stock  at such  dates of
distribution.  The amount of such tax liability  related to the shares of Kronos
distributed to NL  shareholders  other than Valhi and Tremont was  approximately
$22.5  million in 2003,  $2.5  million in 2004 and  $664,000  in 2005,  and such
amounts are  recognized as a component of the Company's  consolidated  provision
for income taxes in such periods.  Other than the Company's  recognition of such
NL tax  liabilities,  the  completion  of the  December  2003  and 2004 and 2005
quarterly  distributions  of  Kronos  had  no  other  impact  on  the  Company's
consolidated financial position, results of operations or cash flows. See Note 3
to the Consolidated Financial Statements.

The amount of NL's  separate  tax  liability  with respect to the shares of
Kronos distributed to Valhi and Tremont,  while recognized by NL at its separate
company  level,  is not  recognized  in  the  Company's  consolidated  financial
statements  because the separate tax  liability is eliminated at the Valhi level
due to Valhi,  Tremont and NL all being  members of the Contran Tax Group.  With
respect to such shares of Kronos  distributed  to Valhi and  Tremont,  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 separate tax liability  generated  from
the  distribution  of such Kronos  shares to Valhi and Tremont.  On November 30,
2004  Valhi  and NL  agreed to  further  amend  the  terms of their tax  sharing
agreement  to  provide  that NL would  now be  required  to pay up to Valhi  the
separate  tax  liability  generated  from the  distribution  of shares of Kronos
common  stock to Valhi and  Tremont,  including  the tax  related to such shares
distributed  to Valhi and  Tremont in  December  2003 and the tax related to the
shares distributed to Valhi and Tremont during all of 2004. In determining to so
amend the terms of the tax sharing  agreement,  NL and Valhi  considered,  among
other things,  the changed  expectation  for the generation of taxable income at
the NL level resulting from the inclusion of CompX in NL's consolidated  taxable
income  effective in the fourth  quarter of 2004,  as discussed in Note 1 to the
Consolidated Financial Statements. Valhi and NL further agreed that in lieu of a
cash income tax  payment,  such  separate tax  liability  could be paid by NL to
Valhi  in the  form of  shares  of  Kronos  common  stock  held by NL.  Such tax
liability  related to the shares of Kronos  distributed  to Valhi and Tremont in
December 2003 and 2004,  including the tax liability  resulting  from the use of
Kronos  common stock to settle such  liability,  aggregated  approximately  $227
million. Accordingly, in the fourth quarter of 2004 NL transferred approximately
5.5  million  shares of Kronos  common  stock to Valhi in  satisfaction  of such
separate tax  liability  and the tax  liability  generated  from the use of such
Kronos  shares to settle  such tax  liability.  In  agreeing  to settle such tax
liability with such 5.5 million shares of Kronos common stock, the Kronos shares
were valued at an agreed-upon  price of $41 per share.  Kronos'  average closing
market  prices  during the months of November and December  2004 were $41.53 and
$41.77, respectively. NL also considered the fact that the shares of Kronos held
by non-affiliates are very thinly traded, and consequently an average price over
a period of days  mitigates  the effect of the  thinly-traded  nature of Kronos'
common  stock.  The transfer of such 5.5 million  shares of Kronos common stock,
accounted for under GAAP as a transfer of net assets among entities under common
control  at  carryover  basis,  had  no  effect  on the  Company's  consolidated
financial statements, and as noted above such tax liability is not recognized in
the Company's  consolidated financial statements because it is eliminated at the
Valhi level due to Valhi,  Tremont and NL all being members of Valhi's tax group
on a  separate-company  basis and of the Contran Tax Group.  Such tax  liability
related to the  shares of Kronos  distributed  to Valhi in the first  quarter of
2005 aggregated $3.3 million,  and such tax liability was paid by NL to Valhi in
cash.  This  aggregate  $230 million tax liability has not been paid by Valhi to
Contran,  nor  has  Contran  paid  such  tax  liability  to the  applicable  tax
authority.  Such income tax liability  would become payable by Valhi to Contran,
and by  Contran  to the  applicable  tax  authority,  when the  shares of Kronos
transferred  or  distributed  by NL to Valhi and Tremont  are sold or  otherwise
transferred   outside  the  Contran  Tax  Group  or  in  the  event  of  certain
restructuring transactions involving NL and Valhi. However, as discussed in Note
1 to the Consolidated Financial Statements,  the Company does recognize deferred
income taxes with respect to its  investment in Kronos,  and in accordance  with
GAAP the amount of such deferred income taxes  recognized by Valhi ($184 million
at December 31, 2005) is limited to this $230 million tax liability.  See Note 3
to the Consolidated Financial Statements.

Following the second of such 2004  quarterly  dividends of NL, NL no longer
owned a majority of Kronos'  outstanding common stock, and accordingly NL ceased
to  consolidate  Kronos as of July 1, 2004.  However,  the Company  continues to
consolidate  Kronos  since the  Company  continues  to own a majority of Kronos,
either directly or indirectly through NL.

Prior to September 24, 2004, the Company's  ownership of CompX was owned by
Valhi and Valcor (a wholly-owned subsidiary of Valhi). On September 24, 2004, NL
completed  the  acquisition  of the CompX  shares  previously  held by Valhi and
Valcor at a purchase price of $16.25 per share, or an aggregate of approximately
$168.6 million. The purchase price was paid by NL's transfer to Valhi and Valcor
of $168.6  million of NL's $200 million  long-term note  receivable  from Kronos
(which  long-term  note and related  interest  income and interest  expense were
eliminated  in  the   preparation  of  the  Company's   Consolidated   Financial
Statements).   See  Note  3  to  the  Consolidated  Financial  Statements.  NL's
acquisition  was  accounted  for under  GAAP as a transfer  of net assets  among
entities  under  common  control,  and such  transaction  had no  effect  on the
Company's consolidated financial statements. After such acquisition, NL retained
a $31.4  million note  receivable  from  Kronos,  which note  receivable  Kronos
prepaid in November  2004 using funds from KII's  November 2004 issuance of euro
90 million principal amount of KII Senior Secured Notes.

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
component products or other industries,  as well as the acquisition of interests
in, and loans to, related entities.

Component products - CompX International

CompX's capital  expenditures  during the past three years aggregated $24.7
million.  Such  capital  expenditures  included  manufacturing   equipment  that
emphasizes improved production and efficiency.

CompX  received  approximately  $18.1  million  cash (net of  expenses)  in
January 2005 upon the sale of its Thomas Regout  operations in The  Netherlands.
See Note 22 to the Consolidated  Financial  Statements.  CompX believes that its
cash on hand,  together  with  cash  generated  from  operations  and  borrowing
availability under its bank credit facility,  will be sufficient to meet CompX's
liquidity  needs for working  capital,  capital  expenditures,  debt service and
dividends (if declared).  To the extent that CompX's actual operating results or
other developments differ from CompX's expectations,  CompX's liquidity could be
adversely affected. CompX, which had suspended its regular quarterly dividend of
$.125 per share in the second quarter of 2003,  reinstated its regular quarterly
dividend at the $.125 per share rate in the fourth quarter of 2004.

In August 2005,  CompX  completed the  acquisition of a components  product
company for aggregate cash consideration of $7.3 million,  net of cash acquired.
See Note 3 to the Consolidated Financial Statements.

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 cash,
issuing  additional equity securities or increasing the indebtedness of CompX or
its subsidiaries.

Waste management - Waste Control Specialists

At December 31, 2005,  Waste Control  Specialists'  indebtedness  consisted
principally of $4.6 million of borrowings  owed to a wholly-owned  subsidiary of
Valhi (December 31, 2004 intercompany indebtedness - $4.6 million). During 2005,
this subsidiary of Valhi loaned an additional net $21.9 million to Waste Control
Specialists,  which were used by Waste Control Specialists primarily to fund its
operating  loss  and  its  capital  expenditures.  Such  $21.9  million  of  net
additional  borrowings by Waste Control Specialists during 2005 were contributed
to Waste Control  Specialists' equity as of December 31, 2005. Such indebtedness
is eliminated in the Company's Consolidated Financial Statements.  Waste Control
Specialists  will likely borrow  additional  amounts during 2006 from such Valhi
subsidiary under the terms of its revolving credit facility, that as amended has
a maturity  date of March 2007 and  provides  for  borrowings  by Waste  Control
Specialists of up to $19.0 million as of December 31, 2005.

Waste Control Specialists capital expenditures and capitalized permit costs
during the past three years aggregated  $22.2 million.  Such  expenditures  were
funded  primarily  from  certain  debt  financing   provided  to  Waste  Control
Specialists by the wholly-owned subsidiary of Valhi.

TIMET

At December  31, 2005,  TIMET had $124  million of  borrowing  availability
under its various U.S. and European credit agreements.

In May 2005,  TIMET  announced  it plans to expand  its  existing  titanium
sponge  facility in Nevada.  This expansion,  which TIMET  currently  expects to
complete by the first quarter of 2007 and cost an aggregate of $38 million, will
provide  the  capacity  to produce an  additional  4,000  metric  tons of sponge
annually,  an increase of approximately  42% over the current sponge  production
capacity levels at its Nevada facility.  TIMET's capital expenditures during the
past three years  aggregated  $97.2 million ($61.1  million in 2005),  including
$11.8 million spent in 2005 related to such expansion of its sponge  facility in
Nevada and $24 million spent in 2005 related to  completion of the  construction
of a water conservation  facilty in Nevada.  TIMET's capital expenditures during
2006 are currently expected to range from $90 million to $100 million, including
$23 million  related to the expansion of the Nevada  sponge  facility as well as
additional  capacity  improvements  as TIMET  continues to prepare for increased
demand by certain customers under long-term agreements.

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.

In 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,  in 2004 TIMET effected a 5:1 split of its common stock
and in 2005 TIMET  effected  another 2:1 split of its common  stock.  Such stock
splits had no  financial  statement  impact to the  Company,  and the  Company's
ownership  interest in TIMET did not change as a result of such splits.  The per
share  disclosures  related to TIMET discussed herein have been adjusted to give
effect to such splits.

Prior to  August  2004,  a  wholly-owned  subsidiary  of TIMET  had  issued
4,024,820  shares   outstanding  of  its  6.625%   convertible   preferred  debt
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 debt 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
continued  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.  In April  2004,  TIMET  paid all  previously-deferred
distributions with respect to the convertible preferred debt securities and paid
the next scheduled distribution in June 2004.

In August 2004,  TIMET  completed an exchange offer in which  approximately
3.9 million shares of the  outstanding  convertible  preferred  debt  securities
issued by TIMET Capital  Trust I were  exchanged for an aggregate of 3.9 million
shares of a newly-created Series A Preferred Stock of TIMET at the exchange rate
of one share of Series A Preferred  Stock for each  convertible  preferred  debt
security.  Dividends on the Series A shares  accumulate at the rate of 6 3/4% of
their  liquidation  value of $50 per share,  and are convertible  into shares of
TIMET common stock at the rate of one and  two-thirds of a share of TIMET common
stock per Series A share.  The Series A shares are not  mandatorily  redeemable,
but are  redeemable  at the  option of TIMET in certain  circumstances.  Through
December  31,  2005,  an  aggregate  of  approximately  926,000  shares  of such
preferred  stock were  converted  into an  aggregate  of 6.2  million  shares of
TIMET's common stock, and 3.0 million preferred shares remained outstanding.

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.

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.  At Kronos' current
quarterly  cash dividend  rate of $.25 per share,  and based on the 28.1 million
shares of  Kronos  held by Valhi at  December  31,  2005,  Valhi  would  receive
aggregate annual dividends from Kronos of $28.1 million. NL, which paid its 2004
regular  quarterly  dividends  of $.20 per share in the form of shares of Kronos
common stock,  increased its regular quarterly  dividend in the first quarter of
2005 to $.25 per share,  which  also was in the form of shares of Kronos  common
stock.  In the second,  third and fourth  quarters of 2005,  NL paid its regular
quarterly  dividend in the form of cash.  In March 2006,  NL reduced its regular
quarterly  dividend to $.125 per share.  Assuming NL paid its regular  quarterly
dividends  in the  form of cash at such  reduced  rate,  and  based  on the 40.4
million  shares of NL common  stock held by Valhi at December  31,  2005,  Valhi
would receive  aggregate annual dividends from NL of $20.2 million.  The Company
does not  currently  expect to receive  any  distributions  from  Waste  Control
Specialists or TIMET during 2006. CompX  dividends,  which resumed in the fourth
quarter of 2004, are paid to NL. See also the discussion  contained in Item 1A -
"Risk Factors - our assets  consist  primarily of  investments  in our operating
subsidiaries and we are dependent upon distributions from our subsidiaries."

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 generally does not guarantee any indebtedness or other
obligations 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 dividends or selling interests in subsidiaries or other assets.

Waste  Control   Specialists  is  required  to  provide  certain  financial
assurances to Texas government agencies with respect to certain  decommissioning
obligations related to its facility in West Texas. Such financial assurances may
be provided by various means,  including a parent company guarantee assuming the
parent meets specified financial tests. In March 2005, Valhi agreed to guarantee
certain  specified  decommissioning  obligations  of Waste Control  Specialists,
currently  estimated by Waste Control Specialists at approximately $3.5 million.
Such  obligations  would  arise  only upon a closure of the  facility  and Waste
Control  Specialists'  failure to perform such activities.  The Company does not
currently  expect  that it will have to  perform  under such  guarantee  for the
foreseeable future.

In March 2005, the Company's  board of directors  authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases,  or in privately negotiated  transactions,  which may
include  transactions  with affiliates of Valhi. The stock may be purchased from
time to time as market conditions  permit. The stock repurchase program does not
include  specific  price targets or timetables and may be suspended at any time.
Depending  on  market  conditions,  the  program  could be  terminated  prior to
completion.  The  Company  will  use its  cash on hand to  acquire  the  shares.
Repurchased  shares  will be retired  and  cancelled  or may be added to Valhi's
treasury and used for  employee  benefit  plans,  future  acquisitions  or other
corporate  purposes.  On April 1, 2005, the Company purchased 2.0 million shares
of its common  stock,  at a discount  to the  then-current  market  price,  from
Contran for $17.50 per share or an aggregate  purchase  price of $35.0  million.
Such  shares  were  purchased  under  the  stock  repurchase  program.   Valhi's
independent  directors  approved such  purchase.  The Company has also purchased
during the second,  third and fourth  quarters of 2005 an additional 1.5 million
shares of its common stock under the repurchase  program in market  transactions
for an aggregate of $27.1  million.  See Note 14 to the  Consolidated  Financial
Statements.

At December  31,  2005,  Valhi had $119.8  million of parent level cash and
cash equivalents and had no amounts  outstanding under its revolving bank credit
agreement. In addition,  Valhi had $98.5 million of borrowing availability under
its revolving bank credit facility.  See Note 10 to the  Consolidated  Financial
Statements.

As noted above,  in  September  2004 NL completed  the  acquisition  of the
shares of CompX common stock  previously held by Valhi and Valcor.  The purchase
price for  these  shares  was paid by NL's  transfer  to Valhi and  Valcor of an
aggregate  $168.6 million of NL's note receivable from Kronos ($162.5 million to
Valcor and $6.1 million to Valhi). In October 2004, Valcor  distributed to Valhi
its $162.5 million note receivable from Kronos,  and  subsequently in the fourth
quarter of 2004 Kronos  prepaid the $168.5  million  note payable to Valhi using
cash on hand and funds  from KII's  November  2004  issuance  of euro 90 million
principal  amount of its Senior  Secured  Notes.  Valhi used $58  million of the
proceeds  from the  repayment  of its note  receivable  from Kronos to repay the
outstanding  balance under its revolving bank credit facility.  The remainder of
such funds were available for Valhi's general corporate purposes.

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 2006,  Valhi  currently
expects that  distributions  received  from the LLC in 2006 will exceed 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
allowed Snake River in certain  circumstances  to pay periodic  installments  of
debt service payments (principal and interest) under Valhi's $80 million loan to
Snake  River  prior  to its  scheduled  maturity  in  2007,  and  such  loan was
subordinated to Snake River's  third-party senior debt. During the third quarter
of 2005,  Snake River  prepaid such senior  third-party  senior debt,  and Snake
River subsequently made an aggregate of $5.5 million of debt service payments to
Valhi during the quarter. At September 30, 2005, the accrued and unpaid interest
on the  $80  million  loan to  Snake  River  aggregated  $36.7  million  and was
classified  as a  noncurrent  asset.  The Company  believed it would  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 complete repayment of Snake River's third-party senior debt,
Snake River was required,  under the terms of the Company's loan to Snake River,
to use all of its  available  cash  resources to make debt  service  payments to
Valhi (estimated to be approximately $20 million annually),  including the funds
that Snake River  previously  was using to fund debt service on its  third-party
senior debt. In October 2005, when Valhi agreed to forgive  approximately  $21.6
million of accrued and unpaid  interest in return for Snake River  prepaying  an
aggregate of $94.8 million under its loan from Valhi,  Valhi  considered,  among
other  things,  the present  value of the future  repayment of its loan to Snake
River under the present terms, the income tax benefit relating to forgiveness of
the accrued interest and Valhi's various  alternate  reinvestment  opportunities
with respect to such  prepayment and the returns  thereon.  Consequently,  while
Valhi  continued to believe it would  ultimately  fully  collect all amounts due
under  the  terms of its loan to Snake  River,  Valhi  was  willing  to accept a
discount  under  certain  conditions  (principally,  Snake River's $94.8 million
prepayment).  In October 2005,  Snake River completed a new senior loan facility
that generated funds  sufficient to make the $94.8 million  prepayment to Valhi,
and Valhi  accordingly  forgave the remaining  accrued and unpaid interest.  See
Note 3 and 8 to the Consolidated Financial Statements.

The Company  may, at its  option,  require the LLC to redeem the  Company's
interest in the LLC  beginning in 2012,  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,  if any. 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 income tax purposes, although
the Company  would not be expected  to report a gain in earnings  for  financial
reporting  purposes at the time its LLC interest  was redeemed (as  discussed in
Note 3 to the  Consolidated  Financial  Statements).  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 Ti02  feedstock  is more fully  described in Note 18 to the
Consolidated  Financial  Statements  and above in "Business - Chemicals - Kronos
Worldwide,  Inc., -  manufacturing  process,  properties and raw materials." The
following table summarizes such  contractual  commitments of the Company and its
consolidated  subsidiaries  as of  December  31,  2005 by the  type  and date of
payment.

Payment due date
--------------------------------------------------------------------
2011 and
Contractual commitment                 2006        2007/2008       2009/2010           after          Total
----------------------                 ----        ---------       ---------         --------         -----
(In millions)

Third-party indebtedness:

Principal                                      $ 1.6           $ 13.6          $452.2          $250.0           $717.4
Interest                                        63.4            126.2            85.8           376.0            651.4

Operating leases                                   5.4              6.9             3.7            21.1             37.1

Kronos' long-term supply
contract for the purchase
of TiO2 feedstock                               194.6            312.7           173.5              -             680.8

CompX raw material and
other purchase commitments                       16.9               -               -               -              16.9

Fixed asset acquisitions                          10.0               -               -               -              10.0

Income taxes                                      24.7               -               -               -              24.7
------           ------          ------          ------         --------

$316.6           $459.4          $715.2          $647.1         $2,138.3
======           ======          ======          ======         ========

The  timing  and  amount  shown for the  Company's  commitments  related to
indebtedness  (principal  and  interest),   operating  leases  and  fixed  asset
acquisitions  are based upon the contractual  payment amount and the contractual
payment  date for such  commitments.  With  respect  to  indebtedness  involving
revolving credit facilities, the amount shown for indebtedness is based upon the
actual  amount  outstanding  at  December  31,  2005,  and the amount  shown for
interest  for any  outstanding  variable-rate  indebtedness  is  based  upon the
December 31, 2005 interest rate and assumes that such variable-rate indebtedness
remains  outstanding  until the maturity of the  facility.  The amount shown for
income taxes is the consolidated  amount of income taxes payable at December 31,
2005,  which is assumed to be paid during  2006.  A  significant  portion of the
amount shown for  indebtedness  relates to KII's Senior  Secured  Notes  ($449.3
million at December 31, 2005).  Such  indebtedness  is  denominated in euro. See
Item 7A - "Quantative and Qualitative Disclosures About Market Risk" and Note 10
to the Consolidated Financial Statements.

Kronos'  contracts  for  the  purchase  of  TiO2  feedstock  contain  fixed
quantities  that  Kronos is  required  to  purchase,  although  certain of these
contracts allow for an upward or downward  adjustment in the quantity purchased,
generally no more than 10%, based on Kronos' feedstock requirements. The pricing
under these agreements is generally based on a fixed price with price escalation
clauses primarily based on consumer price indices,  as defined in the respective
contracts.  The timing and amount shown for Kronos'  commitments  related to the
long-term  supply  contracts  for TiO2  feedstock is based upon Kronos'  current
estimate of the quantity of material  that will be purchased in each time period
shown,  and the payment  that would be due based upon such  estimated  purchased
quantity  and an  estimate  of the effect of the price  escalation  clause.  The
actual amount of material purchased, and the actual amount that would be payable
by Kronos, may vary from such estimated amounts.

The above  table of  contractual  commitments  does not include any amounts
under  Kronos'  obligation  under the  Louisiana  Pigment  Company,  L.P.  joint
venture,  as the timing and amount of such  purchases  are unknown and dependent
on, among other things,  the amount of TiO2 produced by the joint venture in the
future, and the joint venture's future cost of producing such TiO2. However, the
table of contractual  commitments  does include amounts related to Kronos' share
of the joint  venture's ore  requirements  necessary to produce TiO2 for Kronos.
See Notes 7 and 17 to the  Consolidated  Financial  Statements  and  "Business -
Chemicals - Kronos Worldwide, Inc. - TiO2 manufacturing joint venture."

In addition,  Waste Control  Specialists  is a party to an agreement  which
could require Waste Control  Specialists to pay certain amounts to a third party
based upon  specified  percentages of qualifying  revenues.  The Company has not
included any amounts for this conditional  commitment 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 this  agreement.  See Note 18 to the
Consolidated Financial Statements.

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.  The above
table also does not reflect any  amounts  that the Company  might pay related to
its asset  retirement  obligations,  as the  timing and  amounts of such  future
fundings  are  unknown.  See  Notes  16  and 19 to  the  Consolidated  Financial
Statements.

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,
2004 and 2005. 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, 2004 and 2005.

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,  2005,  the  Company's  aggregate  indebtedness  was split
between 98% of fixed-rate instruments and 2% of variable-rate borrowings (2004 -
98% of fixed-rate  instruments  and 2% 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, 2005. Information shown below
for such  foreign  currency  denominated  indebtedness  is presented in its U.S.
dollar equivalent at December 31, 2005 using exchange rates of 1.18 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                              $449.3          $463.6              8.9%               2009
Valhi loans from Snake River                        250.0           250.0              9.4%               2027
Other                                                 2.0             2.0              7.7%              Various
------          ------
701.3           715.6              9.1%
------          ------

Variable-rate indebtedness -
Kronos U.S. revolver                                 11.5            11.5              7.0%               2008
------          ------

$712.8          $727.1              9.0%
======          ======

* Denominated in U.S. dollars,  except as otherwise indicated.  Excludes capital
lease obligations.

At December 31, 2004,  fixed rate  indebtedness  aggregated  $769.8 million
(fair value - $799.7  million)  with a  weighted-average  interest rate of 9.1%;
variable  rate  indebtedness  at  such  date  aggregated  $13.6  million,  which
approximates  fair value,  with a  weighted-average  interest rate of 3.9%. Such
fixed rate  indebtedness  was  denominated in the euro (68% of the total) or the
U.S. dollars 32%. At December 31, 2004, all outstanding fixed-rate  indebtedness
was denominated in U.S.  dollars or the euro, and the outstanding  variable rate
borrowings were denominated in the euro.

The  Company  had an $80  million  loan to Snake  River  Sugar  Company  at
December 31, 2004.  Such loan bore  interest at a fixed  interest rate of 6.49%,
and the estimated  fair value of such loan at such date was $96.3  million.  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  $5.4
million at December 31, 2004.  Such loan was prepaid  during 2005. See Note 8 to
the Consolidated Financial Statements.

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, 2005,  Kronos had the  equivalent  of
$449.3  million  of  outstanding   euro-denominated   indebtedness   (2004-  the
equivalent of $532.8 million of  euro-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  $44.4  million  at  December  31,  2005  (2004 - $52.4
million).

Certain of the Kronos'  sales  generated  by its  non-U.S.  operations  are
denominated in U.S. dollars. Kronos 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.  Kronos has
not entered  into these  contracts  for trading or  speculative  purposes in the
past,  nor does Kronos  currently  anticipate  entering into such  contracts for
trading  or  speculative  purposes  in the  future.  Derivatives  used to  hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated  financial assets and liabilities  which meet the criteria for hedge
accounting  are  designated  as cash flow hedges.  Consequently,  the  effective
portion of gains and losses is  deferred  as a component  of  accumulated  other
comprehensive  income and is  recognized in earnings at the time the hedged item
affects  earnings.  Contracts that do not meet the criteria for hedge accounting
are  marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. During 2004
and 2005,  Kronos has not used hedge  accounting  for any of its  contracts.  To
manage such exchange  rate risk,  at December 31, 2005,  Kronos held a series of
short-term  currency  forward  contracts,  which mature  through  March 2006, to
exchange an aggregate of U.S. $7.5 million for an equivalent  amount of Canadian
dollars at an exchange rate of Cdn. $1.19 per U.S. dollar. At December 31, 2005,
the actual  exchange rate was Cdn.  $1.16 per U.S.  dollar.  The estimated  fair
value of such foreign  currency  forward  contracts at December 31, 2005 was not
material.  Kronos held no such contracts at December 31, 2004, and held no other
significant derivative contracts at December 31, 2004 or 2005.

Certain of the CompX's  sales  generated  by its  non-U.S.  operations  are
denominated in U.S. dollars.  CompX periodically uses currency forward contracts
to manage a portion of foreign  exchange rate risk associated  with  receivables
denominated in a currency other than the holder's functional currency. CompX has
not entered  into these  contracts  for trading or  speculative  purposes in the
past,  nor does CompX  currently  anticipate  entering  into such  contracts for
trading  or  speculative  purposes  in the  future.  Derivatives  used to  hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated  financial assets and liabilities  which meet the criteria for hedge
accounting  are  designated  as cash flow hedges.  Consequently,  the  effective
portion of gains and losses is  deferred  as a component  of  accumulated  other
comprehensive  income and is  recognized in earnings at the time the hedged item
affects  earnings.  Contracts that do not meet the criteria for hedge accounting
are  marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. At December
31,  2005,  CompX had  entered  into a series  of  short-term  forward  exchange
contracts  maturing  through March 2006 to exchange an aggregate of $6.5 million
for an equivalent  value of Canadian  dollars at an exchange rate of Cdn.  $1.19
per U.S.  dollar.  The actual  exchange rate was Cdn.  $1.17 per U.S.  dollar at
December  31,  2005.  At December  31,  2004 CompX had entered  into a series of
short-term forward exchange contracts maturing through March 2005 to exchange an
aggregate of $7.2  million for an  equivalent  amount of Canadian  dollars at an
exchange rates of Cdn. $1.19 to Cdn. $1.23 per U.S.  dollar.  The estimated fair
value of such  forward  exchange  contracts at December 31, 2004 and 2005 is not
material.

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, 2004
and 2005 was $266.2  million and $270.5  million,  respectively.  The  potential
change in the aggregate fair value of these  investments,  assuming a 10% change
in prices,  would be $26.6  million at December  31,  2004 and $27.1  million at
December 31, 2005.

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

Remediation of Prior Material  Weakness.  A material  weakness is a control
deficiency, or a combination of control deficiencies,  that results in more than
a remote  likelihood  that a  material  misstatement  of the  annual or  interim
financial  statements  will  not be  prevented  or  detected.  The  Company  has
previously  concluded  that as of  December  31,  2004 and March 31, June 30 and
September  30, 2005,  the Company did not maintain  effective  controls over the
accounting for income taxes, including the determination and reporting of income
taxes  payable to  affiliates,  deferred  income  tax  assets  and  liabilities,
deferred  income tax asset  valuation  allowance,  and the  provision for income
taxes. Specifically, the Company did not have adequate personnel with sufficient
knowledge of income tax accounting and reporting.  Additionally, the Company did
not maintain  effective controls over the review and monitoring of the accuracy,
completeness  and  valuation of the  components  of the income tax provision and
related  deferred income taxes as well as the income taxes payable to affiliates
resulting  in errors in (i) the  accounting  for the  income  tax  effect of the
difference  between  book and income tax basis of the  Company's  investment  in
Kronos Worldwide, Inc., a majority-owned subsidiary of the Company, (ii) current
income taxes related to distributions or transfer of Kronos common stock made by
NL  Industries,  Inc.,  a  majority-owned  subsidiary  of the  Company,  to NL's
stockholders and (iii) current and deferred income taxes related to other items,
that were not  prevented or detected.  This control  deficiency  resulted in the
previously-reported   restatements   of  the  Company's   2002,  2003  and  2004
consolidated  financial  statements  and its  2004 and  2005  interim  financial
information.   Additionally,   this  control   deficiency   could  result  in  a
misstatement  of income taxes payable to affiliates,  deferred income tax assets
and  liabilities,  deferred  income  tax  asset  valuation  allowance,  and  the
provision for income taxes that would result in a material  misstatement  to the
Company's annual or interim consolidated  financial statements that would not be
prevented or detected.  Accordingly,  management of the Company  determined that
this control deficiency constituted a material weakness.

To  remediate  this  material  weakness,  in the  fourth  quarter  of  2005
additional  resources have been added with a background in accounting for income
taxes in accordance  with SFAS No. 109 and the related  authoritative  guidance.
Management  has  concluded  that the  addition  of such staff has  ensured  that
accounting  principles  generally  accepted in the United  States of America has
been  appropriately  applied with respect to the calculation and  classification
within  the  consolidated  financial  statements  of income tax  provisions  and
related current and deferred income tax accounts.  Accordingly,  the Company has
concluded that this material weakness no longer exists at December 31, 2005.

Evaluation of Disclosure  Controls and Procedures.  The Company maintains a
system of disclosure controls and procedures.  The term "disclosure controls and
procedures," as defined by Exchange Act Rule 13a-15(e), 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
President and Chief Executive Officer,  and Bobby D. O'Brien, the Company's Vice
President and Chief  Financial  Officer,  has evaluated the design and operating
effectiveness of the Company's disclosure controls and procedures as of December
31, 2005. Based upon their evaluation,  these executive  officers have concluded
that the  Company's  disclosure  controls and  procedures  were  effective as of
December 31, 2005.

Scope of Management's Report on Internal Control Over Financial  Reporting.
The Company also maintains internal control over financial  reporting.  The term
"internal  control over  financial  reporting,"  as defined by Exchange Act Rule
13a-15(f),  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  generally   accepted   accounting
principles, 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.

Section  404 of the  Sarbanes-Oxley  Act of 2002  requires  the  Company to
include a management report on internal control over financial reporting in this
Annual Report on Form 10-K for the year ended  December 31, 2005.  The Company's
independent  registered  public  accounting  firm is also  required to audit the
Company's internal control over financial reporting as of December 31, 2005.

As permitted by the SEC, the Company's  assessment of internal control over
financial  reporting  excludes (i) internal control over financial  reporting of
its equity method  investees and (ii) internal  control over the  preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. However,  our assessment of internal control over financial  reporting with
respect to the Company's  equity method  investees did include our controls over
the  recording  of amounts  related to our  investment  that are recorded in our
consolidated  financial  statements,  including  controls  over the selection of
accounting  methods  for our  investments,  the  recognition  of  equity  method
earnings  and losses  and the  determination,  valuation  and  recording  of our
investment account balances.

Management's  Report on Internal  Control  Over  Financial  Reporting.  The
Company's  management is responsible for establishing  and maintaining  adequate
internal control over financial  reporting,  as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). The Company's evaluation of the effectiveness
of its internal  control over  financial  reporting is based upon the  framework
established in Internal  Control - Integrated  Framework issued by the Committee
of Sponsoring  Organizations of the Treadway Commission (commonly referred to as
the "COSO" framework).  Based on the Company's  evaluation under that framework,
management of the Company has concluded that the Company's internal control over
financial reporting was effective as of December 31, 2005.

PricewaterhouseCoopers  LLP, the independent  registered  public accounting
firm that has audited the Company's Consolidated Financial Statement included in
this Annual  Report on Form 10-K,  has audited  management's  assessment  of the
effectiveness of the Company's  internal control over financial  reporting as of
December  31,  2005,  as stated in their report which is included in this Annual
Report on Form 10-K.

Changes  in  Internal  Control  Over  Financial  Reporting.  Other than the
remediation of the material weakness discussed above, there have been no changes
to the Company's  internal  control over financial  reporting during the quarter
ended December 31, 2005 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.

Certifications.  The  Company's  chief  executive  officer is  required  to
annually  file a  certification  with  the New  York  Stock  Exchange  ("NYSE"),
certifying  the  Company's  compliance  with the  corporate  governance  listing
standards of the NYSE.  During 2005, the Company's chief executive officer filed
such annual certification with the NYSE. The 2005 certification was qualified in
that,  while the Company had publicly  disclosed  in its latest proxy  statement
that the audit  committee  chairman  presided  at  meetings  of its  independent
directors and how its  stockholders  might  communicate  directly with the audit
committee  chairman,  it had not publicly disclosed how other interested parties
could communicate with the presiding  director of the  non-management  directors
and  had  not  established   procedures  as  to  who  presided  at  meetings  of
non-management  directors. The Company remediated this qualification by amending
its corporate  governance  guidelines on November 1, 2005,  disclosing  that the
audit committee  chairman presided at meetings of the  non-management  directors
and how  stockholders and other  interested  parties might  communicate with the
presiding  director.  The Company's chief executive  officer and chief financial
officer are also required to, among other things,  quarterly file certifications
with the SEC  regarding  the quality of the  Company's  public  disclosures,  as
required by Section 302 of the  Sarbanes-Oxley  Act of 2002. The  certifications
for the quarter  ended  December  31, 2005 have been filed as exhibits  31.1 and
31.2 to this Annual Report on Form 10-K.

ITEM 9B. OTHER INFORMATION

Not applicable.

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
AND RELATED STOCKHOLDER MATTERS

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 AND FINANCIAL STATEMENT SCHEDULES

(a) and (c)   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  (39%-owned at
December  31,  2005) are  filed as  Exhibit  99.1 of this  Annual
Report  pursuant  to Rule 3-09 of  Regulation  S-X.  Management's
Report on Internal  Control Over Financial  Reporting of TIMET is
not  included  as part of Exhibit  99.1.  The  Registrant  is not
required to provide any other consolidated  financial  statements
pursuant to Rule 3-09 of Regulation S-X.

(b)     Exhibits

Included as exhibits are the items  listed in the Exhibit  Index.
The  Company  has  retained  a  signed  original  of any of 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, its Audit Committee Charter and its Corporate  Governance
Guidelines,  each as adopted by the Company's board of directors,
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,  2005  will  be
furnished to the Commission upon request.

Item No.                         Exhibit Item

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,  2004  -
incorporated  by reference  to Exhibit  10.1 to the  Registrant's
Quarterly  Report on Form 10-Q for the  quarter  ended  March 31,
2004.

10.2        Intercorporate Services Agreement between Contran Corporation and
NL effective as of January 1, 2004 - incorporated by reference to
Exhibit  10.1 to NL's  Quarterly  Report on Form  10-Q  (File No.
1-640) for the quarter ended March 31, 2004.

10.3        Intercorporate  Services  Agreement between Contran  Corporation,
Tremont  LLC  and  TIMET  effective  as  of  January  1,  2004  -
incorporated  by  reference  to Exhibit  10.14 to TIMET's  Annual
Report  on Form  10-K  (File  No.  0-28538)  for the  year  ended
December 31, 2003.

10.4        Intercorporate Services Agreement between Contran Corporation and
CompX  effective  January 1, 2004 - incorporated  by reference to
Exhibit  10.2 to  CompX's  Annual  Report on Form 10-K  (File No.
1-13905) for the year ended December 31, 2003.

Item No.                         Exhibit Item

10.5         Intercorporate Services Agreement between Contran Corporation and
Kronos Worldwide,  Inc.  effective January 1, 2004 - incorporated
by reference to Exhibit No. 10.1 to Kronos'  Quarterly  Report on
Form 10-Q (File No.  1-31763)  for the  quarter  ended  March 31,
2004.

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.

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*         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.

10.9*         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.

10.10*        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).

10.11*        NL Industries,  Inc. 1998 Long-Term Incentive Plan - incorporated
by  reference  to Appendix A to NL's Proxy  Statement on Schedule
14A (File No. 1-640) for the annual meeting of shareholders  held
on May 9, 1998.

10.12*        Kronos   Worldwide,   Inc.  2003   Long-Term   Incentive  Plan  -
incorporated by reference to Exhibit 10.4 to Kronos' Registration
Statement on Form 10 (File No. 001-31763).

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         Prerepayment  and  Termination  Agreement  dated October 14, 2005
among Valhi, Inc., Snake River Sugar Company and Wells Fargo Bank
Northwest,  N.A. - incorporated  by reference to Exhibit No. 10.1
to the Registrant's Amendment No. 1 to its Current Report on Form
8-K (File No. 1-5467) dated October 18, 2005.

Item No.                         Exhibit Item

10.17        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.

10.18        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.

10.19        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.

10.20        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.

10.21        Amended and Restated Company  Agreement of The Amalgamated  Sugar
Company LLC dated  October 14, 2005 among The  Amalgamated  Sugar
Company  LLC,  Snake  River  Sugar  Company  and The  Amalgamated
Collateral  Trust - incorporated by reference to Exhibit No. 10.7
to the Registrant's Amendment No. 1 to its Current Report on Form
8-K (File No. 1-5467) dated October 18, 2005.

10.22        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.

10.23        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.

10.24        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.

10.25        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.

10.26        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.

Item No.                         Exhibit Item

10.27         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.

10.28         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.

10.29         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.

10.30         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.

10.31         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.

10.32         First Amendment to Deposit Trust Agreement dated October 14, 2005
among  ASC  Holdings,   Inc.  and   Wilmington   Trust   Company-
incorporated by reference to Exhibit No. 10.2 to the Registrant's
Amendment  No. 1 to its  Current  Report  on Form 8-K  (File  No.
1-5467) dated October 18, 2005.

10.33         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.

10.34         Second  Pledge  Amendment  (SPT) dated October 14, 2005 among The
Amalgamated  Collateral  Trust and Snake  River  Sugar  Company -
incorporated by reference to Exhibit No. 10.4 to the Registrant's
Amendment  No. 1 to its  Current  Report  on Form 8-K  (File  No.
1-5467) dated October 18, 2005.

10.35         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.

10.36         Second SPT Guaranty  Amendment  dated  October 14, 2005 among The
Amalgamated  Collateral  Trust and Snake  River  Sugar  Company -
incorporated by reference to Exhibit No. 10.5 to the Registrant's
Amendment  No. 1 to its  Current  Report  on Form 8-K  (File  No.
1-5467) dated October 18, 2005.

Item No.                         Exhibit Item

10.37         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.

10.38         Second Amended and Restated  Pledge  Agreement  dated October 14,
2005 among ASC  Holdings,  Inc.  and Snake River Sugar  Company -
incorporated by reference to Exhibit No. 10.3 to the Registrant's
Amendment  No. 1 to its  Current  Report  on Form 8-K  (File  No.
1-5467) dated October 18, 2005.

10.39         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.

10.40         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.

10.41         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.

10.42         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.

10.43         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.

10.44         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.

10.45         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.

10.46         Option Agreement dated October 14, 2005 among Valhi,  Inc., Snake
River Sugar  Company,  Northwest Farm Credit  Services,  FLCA and
U.S. Bank National  Association  -  incorporated  by reference to
Exhibit  No.  10.6 to the  Registrant's  Amendment  No.  1 to its
Current  Report on Form 8-K (File No.  1-5467)  dated October 18,
2005.

Item No.                         Exhibit Item

10.47         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.

10.48         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.

10.49         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.

10.50         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.

10.51         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.

10.52         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.

10.53         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.

10.54         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.

10.55         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.

10.56         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).

Item No.                         Exhibit Item

10.57          Form of Lease  Agreement,  dated  November 12, 2004,  between The
Prudential Assurance Company Limited and TIMET UK Ltd. related to
the premises known as TIMET Number 2 Plant, The Hub,  Birmingham,
England -  incorporated  by  reference to Exhibit 10.1 to TIMET's
Current Report on Form 8-K (File No. 1 -10126) filed with the SEC
on November 17, 2004.

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

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

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

10.61**        Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited
and 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.

10.62**        Amendment to Richards Bay Slag Sales  Agreement dated October 31,
2003 between Richards Bay Iron and Titanium (Proprietary) Limited
and 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.

10.63          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.

10.64          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.

10.65          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.

10.66          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.

Item No.                               Exhibit Item

10.67          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.

10.68**        First   Amendment   to  Purchase  and  Sale   Agreement   between
Rolls-Royce  plc and TIMET - 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 June 30, 2004.

10.69**        Second   Amendment  to  Purchase  and  Sale   Agreement   between
Rolls-Royce  plc and TIMET - incorporated by reference to Exhibit
No.  10.2 to  TIMET's  Quarterly  Report on Form  10-Q  (File No.
0-28538) for the quarter ended June 30, 2004.

10.70**        General Terms  Agreement  between The Boeing Company and Titanium
Metals  Corporation  -  incorporated  by reference to Exhibit No.
10.2 to TIMET's Amendment No. 1 to its Current Report on Form 8-K
(File No. 0-28538) dated August 2, 2005.

10.71**        Special  Business  Provisions  between  The  Boeing  Company  and
Titanium  Metals  Corporation  -  incorporated  by  reference  to
Exhibit No. 10.3 to TIMET's Amendment No. 1 its Current Report on
Form 8-K (File No. 0-28538) dated August 2, 2005.

10.72          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.

10.73          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.

10.74          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.

10.75          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

Item No.                         Exhibit Item

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, 2005.

*  Management contract, compensatory plan or agreement.

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

***  Filed herewith.

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 24, 2006
(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 24, 2006           Steven L. Watson, March 24, 2006
(Chairman of the Board)                     (President, Chief Executive Officer
and Director)

/s/ Thomas E. Barry                         /s/ Glenn R. Simmons               
-----------------------------------         -----------------------------------
Thomas E. Barry, March 24, 2006             Glenn R. Simmons, March 24, 2006
(Director)                                  (Vice Chairman of the Board)

/s/ Norman S. Edelcup                       /s/ Bobby D. O'Brien               
-----------------------------------         -----------------------------------
Norman S. Edelcup, March 24, 2006           Bobby D. O'Brien, March 24, 2006
(Director)                                  (Vice   President   and  
Chief Financial Officer, 
Principal Financial Officer)

/s/ W. Hayden McIlroy                       /s/ Gregory M. Swalwell            
-----------------------------------         -----------------------------------
W. Hayden McIlroy, March 24, 2006           Gregory M. Swalwell, March 24, 2006
(Director)                                  (Vice President and Controller,
Principal Accounting Officer)

/s/ J. Walter Tucker, Jr.             
-----------------------------------
J. Walter Tucker, Jr. March 24, 2006
(Director)

Annual Report on Form 10-K

Items 8, 15(a) and 15(d)

Index of Financial Statements and Schedules

Financial Statements                                                     Page
----

Report of Independent Registered Public Accounting Firm                 F-2

Consolidated Balance Sheets - December 31, 2004 (Restated);
December 31, 2005                                                     F-4

Consolidated Statements of Operations -
Years ended December 31, 2003 and 2004 (Restated);
Year ended December 31, 2005                                          F-6

Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2003 and 2004 (Restated);
Year ended December 31, 2005                                          F-8

Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2003 and 2004 (Restated);
Year ended December 31, 2005                                          F-9

Consolidated Statements of Cash Flows -
Years ended December 31, 2003 and 2004 (Restated);
Year ended December 31, 2005                                         F-10

Notes to Consolidated Financial Statements                             F-13

Financial Statement Schedules

Schedule I - Condensed Financial Information of Registrant
(Restated)                                                            S-1

Schedule II - Valuation and Qualifying Accounts                        S-10

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have  completed  integrated  audits  of  Valhi,  Inc.'s  2004  and  2005
consolidated  financial  statements  and of its internal  control over financial
reporting  as of  December  31,  2005,  and an audit  of its  2003  consolidated
financial  statements  in accordance  with the  standards of the Public  Company
Accounting Oversight Board (United States).  Our opinions,  based on our audits,
are presented below.

Consolidated financial statements and financial statement schedules

In  our  opinion,  the  consolidated  financial  statements  listed  in the
accompanying  index  present  fairly,  in all material  respects,  the financial
position of Valhi,  Inc. and its subsidiaries at December 31, 2004 and 2005, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2005 in conformity with  accounting  principles
generally accepted in the United States of America. In addition, in our opinion,
the  financial  statement  schedules  listed in the  accompanying  index present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.  These financial
statements  and  financial  statement  schedules are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial  statements and financial  statement schedules based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company  Accounting  Oversight  Board (United  States).  Those  standards
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial statements are free of material misstatement.  An audit of
financial  statements 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 1 to the  consolidated  financial  statements,  the
Company has restated its 2003 and 2004  consolidated  financial  statements as a
result of a change in  accounting  principle  adopted  retroactively  in 2005 by
Titanium Metals Corporation, an equity method investee of the Company.

As  discussed  in Note 19 to the  consolidated  financial  statements,  the
Company adopted Statement of Financial  Accounting  Standards No. 143 on January
1, 2003.

Internal control over financial reporting

Also, in our opinion,  management's  assessment,  included in  Management's
Report on Internal  Control Over Financial  Reporting  appearing  under Item 9A,
that the Company maintained  effective internal control over financial reporting
as of December 31, 2005 based on the criteria  established in Internal Control -
Integrated  Framework  issued by the  Committee of Sponsoring  Organizations  of
Treadway Commission  ("COSO), is fairly stated, in all material respects,  based
on those criteria.  Furthermore,  in our opinion, the Company maintained, in all
material  respects,  effective  internal control over financial  reporting as of
December  31,  2005,  based  on  criteria  established  in  Internal  Control  -
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining  effective internal control over financial reporting and for its
assessment of the  effectiveness of internal  control over financial  reporting.
Our responsibility is to express opinions on management's  assessment and on the
effectiveness of the Company's  internal control over financial  reporting based
on our  audit.  We  conducted  our  audit of  internal  control  over  financial
reporting in  accordance  with the  standards of the Public  Company  Accounting
Oversight  Board  (United  States).  Those  standards  require  that we plan and
perform  the  audit to  obtain  reasonable  assurance  about  whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects.  An  audit of  internal  control  over  financial  reporting  includes
obtaining  an  understanding  of  internal  control  over  financial  reporting,
evaluating  management's  assessment,  testing  and  evaluating  the  design and
operating   effectiveness  of  internal  control,   and  performing  such  other
procedures as we consider  necessary in the  circumstances.  We believe that our
audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (i) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions of the assets of the company,  (ii)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company and (iii)  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 financial statements.

Because  of its  inherent  limitations,  internal  control  over  financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Dallas, Texas
March 24, 2006

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2005

(In thousands, except per share data)

ASSETS
2004               2005
----------          ----------
(Restated)

Current assets:

Cash and cash equivalents                                                        $  267,829          $  274,963
Restricted cash equivalents                                                           9,609               6,007
Marketable securities                                                                 9,446              11,755
Accounts and other receivables                                                      217,931             218,766
Refundable income taxes                                                               3,330               1,489
Receivable from affiliates                                                            5,531                  34
Inventories                                                                         263,414             283,157
Prepaid expenses                                                                     12,342               9,981
Deferred income taxes                                                                 9,705              10,502
---------          ----------

Total current assets                                                            799,137             816,654
---------          ----------

Other assets:
Marketable securities                                                               256,770             258,705
Investment in affiliates                                                            189,726             270,632
Receivable from affiliate                                                            10,000                   -
Loans and other receivables                                                         119,452               2,502
Unrecognized net pension obligations                                                 13,518              11,916
Prepaid pension cost                                                                      -               3,529
Goodwill                                                                            354,051             361,783
Other intangible assets                                                               3,189               3,432
Deferred income taxes                                                               239,521             213,726
Other assets                                                                         52,326              59,137
---------          ----------

Total other assets                                                            1,238,553           1,185,362
---------          ----------

Property and equipment:
Land                                                                                 38,493              37,876
Buildings                                                                           234,152             220,110
Equipment                                                                           894,023             827,690
Mining properties                                                                    20,277              19,969
Construction in progress                                                             21,557              15,771
---------          ----------
1,208,502           1,121,416
Less accumulated depreciation                                                       555,707             545,055
---------          ----------

Net property and equipment                                                      652,795             576,361
---------          ----------

$2,690,485          $2,578,377
==========          ==========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31, 2004 and 2005

(In thousands, except per share data)

LIABILITIES AND STOCKHOLDERS' EQUITY
2004               2005
--------           --------
(Restated)

Current liabilities:

Current maturities of long-term debt                                            $   14,412           $   1,615
Accounts payable                                                                   109,158             105,650
Accrued liabilities                                                                131,119             129,429
Payable to affiliates                                                               11,607              13,754
Income taxes                                                                        21,196              24,680
Deferred income taxes                                                               24,170               4,313
----------           ---------

Total current liabilities                                                      311,662             279,441
----------           ---------

Noncurrent liabilities:
Long-term debt                                                                     769,525             715,820
Accrued pension costs                                                               77,360             140,742
Accrued OPEB costs                                                                  34,988              32,279
Accrued environmental costs                                                         55,450              49,161
Deferred income taxes                                                              386,054             400,964
Other                                                                               41,061              39,328
----------           ---------

Total noncurrent liabilities                                                 1,364,438           1,378,294
----------           ---------

Minority interest                                                                    139,710             125,049
----------           ---------

Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued                                                                 -                   -
Common stock, $.01 par value; 150,000 shares
authorized; 124,195 and 120,748 shares issued                                       1,242               1,207
Additional paid-in capital                                                         110,978             108,810
Retained earnings                                                                  812,484             786,268
Accumulated other comprehensive income:
Marketable securities                                                              5,449               4,194
Currency translation                                                              36,380              11,157
Pension liabilities                                                              (53,916)            (78,101)
Treasury stock, at cost - 3,984 and 3,984 shares                                   (37,942)            (37,942)
----------           ---------

Total stockholders' equity                                                     874,675             795,593
----------           ---------

$2,690,485          $2,578,377
==========          ==========

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

See accompanying notes to consolidated financial statements.

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2003, 2004 and 2005

(In thousands, except per share data)

2003                2004              2005
----                ----              ----
(Restated)          (Restated)

Revenues and other income:

Net sales                                                       $1,186,185           $1,320,128        $1,392,866
Other, net                                                          41,427               44,244            67,989
Equity in earnings of:
Titanium Metals Corporation ("TIMET")                             (2,312)              22,669            64,889
Other                                                                771                2,175             3,563
----------           ----------        ----------

1,226,071            1,389,216         1,529,307
----------           ----------        ----------

Cost and expenses:
Cost of sales                                                      905,658            1,036,950         1,042,838
Selling, general and administrative                                220,753              208,101           219,641
Interest                                                            58,524               62,901            69,190
----------           ----------        ----------

1,184,935            1,307,952         1,331,669
----------           ----------        ----------

Income before taxes                                               41,136               81,264           197,638

Provision for income taxes (benefit)                                 132,406             (193,338)          104,159

Minority interest in after-tax
earnings (losses)                                                    (5,863)              48,343            11,756
----------           ----------        ----------

Income (loss) from continuing
operations                                                     (85,407)             226,259            81,723

Discontinued operations                                               (2,874)               3,732              (272)

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

Net income (loss)                                            $   (87,695)          $  229,991        $   81,451
===========           ==========        ==========

See accompanying notes to consolidated financial statements.

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

Years ended December 31, 2003, 2004 and 2005

(In thousands, except per share data)

2003                2004              2005
----                ----              ----
(Restated)          (Restated)

Basic earnings per share:
Income (loss) from continuing

operations                                                  $   (.71)          $   1.89            $    .69
Discontinued operations                                          (.03)               .03                -
Cumulative effect of change in
accounting principle                                             .01               -                   -
--------           --------            --------

Net income (loss)                                          $   (.73)          $   1.92            $    .69
========           ========            ========

Diluted earnings per share:
Income (loss) from continuing
operations                                                  $   (.71)          $   1.88            $    .68
Discontinued operations                                          (.03)               .03                -
Cumulative effect of change in
accounting principle                                             .01               -                   -
--------           --------            --------

Net income (loss)                                          $   (.73)          $   1.91            $    .68
========           ========            ========

Cash dividends per share                                       $    .24           $    .24            $    .40

Shares used in the calculation of
per share amounts:
Basic earnings per share                                      119,696            120,197             118,155
Diluted impact of stock options                                  -                   243                 364
--------           --------            --------

Diluted earnings per share                                    119,696            120,440             118,519
========           ========            ========

See accompanying notes to consolidated financial statements.

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years ended December 31, 2003, 2004 and 2005

(In thousands)

2003           2004            2005
----           ----            ----
(Restated)     (Restated)

Net income (loss)                                                             $(87,695)      $229,991       $ 81,451
--------       --------       --------

Other comprehensive income (loss), net of tax:
Marketable securities adjustment                                                 860          3,243         (1,255)

Currency translation adjustment                                               31,798         40,172        (25,223)

Pension liabilities adjustment                                               (18,275)         1,870        (24,185)
--------       --------       --------

Total other comprehensive income (loss), net                                14,383         45,285        (50,663)
--------       --------       --------

Comprehensive income (loss)                                             $(73,312)      $275,276       $ 30,788
========       ========       ========

See accompanying notes to consolidated financial statements.

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years ended December 31, 2003, 2004 and 2005

(In thousands)

Additional                     Accumulated other comprehensive income        Total
Common     paid-in   Retained      Marketable   Currency    Pension     Treasury  stockholders'
stock     capital    earnings      securities translation liabilities     stock      equity
-----     -------    --------      ---------- ----------- -----------   --------  ------------
(Restated)                                                    (Restated)
Balance at December 31, 2002:

As previously reported           $1,262   $47,657    $779,240     $1,346    $(35,590)    $(37,511)   $(75,649)      $680,755
Effect of TIMET's change in
accounting principle               -         -         7,778       -           -            -           -             7,778
------   -------    --------     ------    --------     --------    --------       --------

Balance as restated               1,262    47,657     787,018      1,346     (35,590)     (37,511)    (75,649)       688,533

Net loss*                               -         -     (87,695)         -           -            -           -        (87,695)
Cash dividends                          -         -     (29,796)         -           -            -           -        (29,796)
Other comprehensive income
(loss), net                            -         -           -        860      31,798      (18,275)          -         14,383
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)
Other, net                            -         265        -          -           -            -           -               265
------   -------    --------     ------    --------     --------    --------       --------

Balance at December 31, 2003*       1,340   118,067     669,527      2,206      (3,792)     (55,786)   (102,514)       629,048

Net income*                           -        -        229,991       -           -            -           -           229,991
Cash dividends                        -        -        (29,804)      -           -            -           -           (29,804)
Other comprehensive income, net       -        -           -         3,243      40,172        1,870        -            45,285
Retirement of treasury stock          (99)   (7,243)    (57,230)         -        -               -      64,572              -
Other, net                              1       154         -         -           -            -           -               155
------   -------    --------     ------    --------     --------    --------       --------

Balance at December 31, 2004*       1,242   110,978     812,484      5,449      36,380      (53,916)    (37,942)       874,675

Net income                               -         -     81,451           -          -         -              -         81,451
Cash dividends                           -         -    (48,805)          -          -         -              -        (48,805)
Other comprehensive income
(loss), net                          -         -           -       (1,255)    (25,223)     (24,185)       -           (50,663)
Treasury stock:
Acquired                               -         -           -         -           -            -     (62,060)       (62,060)
Retired                              (35)   (3,163    (58,862)      -              -            -      62,060           -   
Other, net                            -          995        -         -           -            -           -               995
------   -------    --------     ------    --------     --------    --------       --------

Balance at December 31, 2005        $1,207  $108,810    $786,268   $ 4,194    $ 11,157     $(78,101)   $(37,942)      $795,593
======  ========    ========   =======    ========     ========    ========       ========

*As restated.

See accompanying notes to consolidated financial statements.

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2003, 2004 and 2005

(In thousands)

2003           2004            2005
----           ----            ----
(Restated)     (Restated)

Cash flows from operating activities:

Net income (loss)                                                      $ (87,695)      $ 229,991      $  81,451
Depreciation and amortization                                             72,969          78,352         74,527
Goodwill impairment                                                            -           6,500              -
Securities transactions, net                                                (487)         (2,113)       (20,259)
Proceeds from disposal of marketable
securities (trading)                                                         50               -              -
Write-off of accrued interest receivable                                       -               -         21,638
Loss (gain) on disposal of property and
equipment                                                                (9,845)            855          1,555
Noncash interest expense                                                   2,366           2,543          3,037
Benefit plan expense less than
cash funding:
Defined benefit pension expense                                         (5,478)         (2,977)        (6,365)
Other postretirement benefit expense                                    (4,078)         (2,839)        (2,963)
Deferred income taxes:
Continuing operations                                                  151,257        (211,831)        42,295
Discontinued operations                                                 (2,590)         (3,508)          (696)
Minority interest:
Continuing operations                                                   (5,863)         48,343         11,756
Discontinued operations                                                 (1,414)         (4,124)          (205)
Equity in:
TIMET                                                                    2,312         (22,669)       (64,889)
Other                                                                     (771)         (2,175)        (3,563)
Cumulative effect of change in accounting
principle                                                                  (586)              -              -
Net distributions from:
Ti02 manufacturing joint venture                                           875           8,600          4,850
Other                                                                    1,205             494            964
Other, net                                                                (1,195)          4,391            347
Change in assets and liabilities:
Accounts and other receivables                                           3,795         (25,148)        (4,052)
Inventories                                                            (20,938)         46,937        (48,858)
Accounts payable and accrued liabilities                                (8,948)        (10,116)         1,407
Income taxes                                                           (26,646)         30,759         16,082
Accounts with affiliates                                                24,077         (10,060)         3,750
Other noncurrent assets                                                 (1,812)           (812)        (4,562)
Other noncurrent liabilities                                            21,115         (17,764)        (2,307)
Other, net                                                               6,871             500           (649)
--------         -------        -------

Net cash provided by operating activities                            108,546         142,129        104,291
--------         -------        -------

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 2003, 2004 and 2005

(In thousands)

2003            2004            2005
----            ----            ----
(Restated)      (Restated)

Cash flows from investing activities:

Capital expenditures                                                    $ (44,659)     $ (48,521)      $ (62,778)
Purchases of:
Kronos common stock                                                      (6,428)       (17,057)         (7,039)
TIMET common stock                                                         (976)             -         (17,972)
CompX common stock                                                            -              -          (3,638)
TIMET debt securities                                                      (238)             -               -
Other subsidiary                                                              -           (575)              -
Business unit                                                              -                 -          (7,342)
Marketable securities                                                         -              -         (29,449)
Capitalized permit costs                                                     (672)        (6,274)         (4,105)
Proceeds from disposal of:
Business unit                                                                 -              -          18,094
Property and equipment                                                   13,472          2,964             553
Kronos common stock                                                           -          2,745          19,176
Marketable securities                                                         -              -          19,690
Interest in Norwegian smelting operation                                      -              -           3,542
Change in restricted cash equivalents, net                                   (248)        10,068          (1,759)
Collection of loan to Snake River Sugar
Company                                                                        -              -          80,000
Cash of disposed business unit                                                  -              -          (4,006)
Loans to affiliates:
Loans                                                                      -           (12,929)        (11,000)
Collections                                                               4,000         12,000          25,929
Other, net                                                                  1,984           (508)          2,474
---------        -------         -------

Net cash provided (used) by investing
activities                                                             (33,765)       (58,087)         20,370
---------        -------         -------

Cash flows from financing activities:
Indebtedness:
Borrowings                                                               27,106        297,439          56,996
Principal payments                                                      (59,782)      (186,274)        (54,210)
Deferred financing costs paid                                              (426)        (2,017)           (114)
Loans from affiliates:
Loans                                                                    16,354         26,117               -
Repayments                                                              (20,193)       (33,449)              -
Valhi dividends paid                                                      (29,796)       (29,804)        (48,805)
Distributions to minority interest                                         (6,509)        (3,577)        (12,007)
Treasury stock acquired                                                         -              -         (62,060)
NL common stock issued                                                      1,738          9,201           2,507
Other, net                                                                    264            802           1,931
---------        -------         -------

Net cash provided (used) by financing
Activities                                                             (71,244)        78,438        (115,762)
---------        -------         -------

Net increase                                                               $  3,537      $ 162,480       $   8,899
========      =========       =========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 2003, 2004 and 2005

(In thousands)

2003             2004              2005
----             ----              ----
(Restated)       (Restated)

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

activities                                                       $  3,537          $162,480         $  8,899
Currency translation                                                 5,178             1,955           (1,765)
--------          --------         --------
8,715           164,435            7,134

Balance at beginning of year                                        94,679           103,394          267,829
--------          --------         --------

Balance at end of year                                            $103,394          $267,829         $274,963
========          ========         ========

Supplemental disclosures:
Cash paid (received) for:
Interest, net of amounts capitalized                            $ 53,990          $ 59,446         $ 64,964
Income taxes, net                                                 (4,237)          (20,583)          54,131

Noncash investing activities:
Note receivable received upon
disposal of business unit                                       $   -            $   -            $  4,179

Inventories received as partial
consideration for disposal of
interest in Norwegian smelting
operation                                                              -             -               1,897

See accompanying notes to consolidated financial statements.

VALHI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -       Restatement and summary of significant accounting policies:

Restatement  of financial  statements.  As previously  reported,  effective
January 1, 2005,  TIMET, an equity method  investee of the Company,  changed its
method of accounting for  approximately 40% of its inventories from the last-in,
first-out   ("LIFO")  method  to  the  specific   identification   cost  method,
representing  all of its  inventories  previously  accounted  for under the LIFO
method.  In accordance  with  accounting  principles  generally  accepted in the
United States of America ("GAAP"),  the Company has  retroactively  restated its
consolidated financial statements to reflect its financial position,  results of
operations and cash flows as if TIMET had accounted for such  inventories  under
the new  method  for all  periods  presented.  As a  result  of this  change  in
accounting principles by TIMET, the Company's consolidated  stockholders' equity
as of December 31, 2002 is  approximately  $7.8 million  higher than  previously
reported,  the Company's  consolidated income from continuing operations and net
income in 2003 are approximately $2.7 million,  or $.02 per diluted share, lower
than previously  reported (comprised of $4.2 million of lower equity in earnings
of TIMET offset by a $1.5 million deferred income tax benefit) and the Company's
consolidated  income  from  continuing  operations  and net  income  in 2004 are
approximately  $2.1 million,  or $.02 per diluted share,  higher than previously
reported (comprised of $3.2 million of higher equity in earnings of TIMET offset
by a $1.1 million deferred income tax provision).

Summary of significant accounting policies.

Organization  and  basis of  presentation.  Valhi,  Inc.  (NYSE:  VHI) is a
subsidiary of Contran Corporation.  At December 31, 2005, Contran held, directly
or through subsidiaries,  approximately 92% 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,  or is held by Mr.  Simmons or
persons or other entities related to Mr. Simmons.  Consequently, Mr. Simmons may
be deemed to control such companies.

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  disclosures  of
contingent assets and liabilities at the date of the financial  statements,  and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results may differ significantly 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.

Increases  in  the  Company's   ownership   interest  of  its  consolidated
subsidiaries,  either through the Company's purchase of additional shares of the
subsidiary's  common  stock or the  subsidiary's  purchase  of its own shares of
common  stock,  are  accounted  for by the purchase  method (step  acquisition).
Unless  otherwise  noted,  such  purchase  accounting  generally  results  in an
adjustment  to the carrying  amount of goodwill.  The effect of decreases in the
Company's  ownership  interest  of its  consolidated  subsidiaries  through  the
Company's or the  subsidiary's  sale of the  subsidiary's  common stock to third
parties is reflected in net income,  with a gain or loss recognized equal to the
difference  between the proceeds  from such sale and the  carrying  value of the
shares sold. The effect of other decreases in the Company's  ownership  interest
of its  consolidated  subsidiaries,  which  usually  result from the exercise of
options granted by such subsidiaries to purchase their shares of common stock to
employees, is generally not material.

Translation of foreign  currencies.  Assets and liabilities of subsidiaries
and  affiliates  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.

Derivatives  and hedging  activities.  Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with Statement of
Financial  Accounting  Standards  ("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.

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  marketable  debt  securities,   primarily   invested  in  U.S.
government  securities  and money  market  funds that invest  primarily  in U.S.
government securities, includes $19 million at December 31, 2004 held by special
purpose trusts (2005 - nil) formed by NL  Industries,  the assets of which could
only be used to pay for certain of NL's  future  environmental  remediation  and
other  environmental  expenditures.   Such  restricted  amounts  were  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 marketable 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 and 8.

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.

Inventories and cost of sales.  Inventories are stated at the lower of cost
or market,  net of allowance  for obsolete and  slow-moving  inventories  ($10.2
million and $9.5 million at December 31, 2004 and 2005, respectively). 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.

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 $32 million
credit at December 31, 2005, relate  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.  Goodwill is not
subject to periodic  amortization.  Other  intangible  assets,  amortized by the
straight-line  method over their estimated  lives, are stated net of accumulated
amortization.  Goodwill and other intangible  assets are assessed for impairment
in accordance with SFAS No. 142, Goodwill and Other Intangible  Assets. See Note
9.

Capitalized  operating permits.  Direct costs related to the acquisition or
renewal  of  operating   permits  related  to  the  Company's  waste  management
operations are  capitalized and are amortized by the  straight-line  method over
the term of the applicable permit.  Amortization of capitalized operating permit
costs was $357,000 in 2003,  $623,000 in 2004 and $126,000 in 2005.  At December
31, 2005, net operating  permit costs include (i) $1.0 million  related to costs
to renew certain  permits for which the renewal  application is pending with the
applicable regulatory agency and (ii) $9.7 million related to costs to apply for
certain new permits which have not yet been issued by the applicable  regulatory
authority.  Renewal of the permits for which the application is still pending is
currently  expected  to occur in the  ordinary  course  of  business,  and costs
related to such  renewals  are being  amortized  from the date the prior  permit
expired.  Costs  related to the new permits  which have not yet been issued will
either be (i)  amortized  from the date the permit is issued or (ii) written off
to expense at the earlier of (a) the date the  applicable  regulatory  authority
rejects  the permit  application  or (b) the date the  Company  determines  that
issuance  of the  permit  to the  Company  is not  probable  of  occurring.  All
operating  permits are generally subject to renewal at the option of the issuing
governmental agency.

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.  While
the Company owns the land and ilmenite  reserves  associated with the mine, such
land and  reserves  were  acquired  for  nominal  value and the  Company  has no
material  asset  recognized  for the land and  reserves  related to such  mining
operations.  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, 2005,
accrued repair and maintenance costs,  included in other current liabilities and
consisting  primarily of materials and supplies,  were $5.0 million (2004 - $5.4
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
2003, 2004 or 2005.

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.   The  Company  assesses  impairment  of  property  and  equipment  in
accordance  with SFAS No.  144,  Accounting  for the  Impairment  or Disposal of
Long-Lived Assets.

Long-term debt.  Long-term debt is stated net of any  unamortized  original
issue  premium or discount.  Amortization  of deferred  financing  costs and any
premium or discount  associated with the issuance of indebtedness,  all included
in interest  expense,  is computed by the  interest  method over the term of the
applicable issue.

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

Income  taxes.  Valhi  and  its  qualifying  subsidiaries  are  members  of
Contran's  consolidated  U.S federal income tax group (the "Contran Tax Group"),
and Valhi and  certain of its  qualifying  subsidiaries  also file  consolidated
income tax returns with Contran in various U.S. state jurisdictions. As a member
of the Contran Tax Group,  the Company is jointly and  severally  liable for the
federal income tax liability of Contran and the other companies  included in the
Contran  Tax Group for all  periods  in which the  Company  is  included  in the
Contran Tax Group. See Note 18. Contran's policy for intercompany  allocation of
income  taxes  provides  that  subsidiaries  included  in the  Contran Tax Group
compute their 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 or the
applicable  state tax  authority  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.  The Company  made net cash  payments to Contran for
income taxes of $1.5 million in 2003, nil in 2004 and $.5 million in 2005.

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 permanently  reinvested.  In addition, the Company commenced recognizing
deferred  income  taxes with  respect to the excess of the  financial  reporting
carrying  amount  over the  income  tax basis of  Valhi's  investment  in Kronos
Worldwide,  Inc. common stock beginning in December 2003 following NL's pro-rata
distribution of shares of Kronos' common stock to NL's  shareholders,  including
Valhi,  because  as of such  date the  Company  could  not  avail  itself of the
exemption  otherwise  available under GAAP to avoid recognition of such deferred
income taxes. See Note 3. Earnings of foreign  subsidiaries subject to permanent
reinvestment  plans  aggregated  $713  million at December 31, 2005 (2004 - $558
million).  Determination of the amount of the  unrecognized  deferred income tax
liability  related to such earnings is not practicable  due to the  complexities
associated  with  the  U.S.   taxation  on  earnings  of  foreign   subsidiaries
repatriated  to the U.S.  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.

NL and Kronos are  members of the Contran Tax Group.  CompX,  previously  a
separate U.S. federal income taxpayer,  became a member of the Contran Tax Group
for federal  income tax  purposes in October  2004 with the  formation  of CompX
Group,  Inc.  See Note 3.  Most  members  of the  Contran  Tax  Group  also file
consolidated unitary state income tax returns in qualifying U.S.  jurisdictions.
NL, Kronos and CompX are each a party to a tax sharing  agreement with Valhi and
Contran  pursuant to which they  generally  compute  their  provision for income
taxes on a separate-company basis, and make payments to or receive payments from
Valhi in amounts that it would have paid to or received  from the U.S.  Internal
Revenue Service or the applicable state tax authority had they not been a member
of the Contran Tax Group. Tremont and Waste Control Specialists are also members
of the  Contran Tax Group.  The  Amalgamated  Sugar  Company LLC is treated as a
partnership for income tax purposes.

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, 2004 and 2005, 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. At  December  31,  2004,
refundable  insurance  deposits  (see  Note  8)  collateralized  certain  of the
Company's closure and post-closure  obligations.  Such deposits were refunded to
the Company during 2005 when the related policy terminated.

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 F.O.B.  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.

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 $63 million
in 2003,  $70 million in 2004 and $76  million in 2005.  Shipping  and  handling
costs of the Company's  component products and waste management segments are not
material.  Advertising  costs  related to  continuing  operations,  expensed  as
incurred,  were  approximately  $2  million  in each of  2003,  2004  and  2005.
Research,  development  and certain  sales  technical  support  costs related to
continuing  operations,  expensed as incurred,  were approximately $7 million in
2003, $8 million in 2004 and $9 million in 2005.

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
410,000 in 2003, 62,000 in 2004 and nil in 2005.

Stock options.  The Company  currently  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.
See Note 20. 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. Prior to 2003, and following the cash settlement
of certain stock  options held by employees of NL, NL and the Company  commenced
accounting for NL's 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  $1.9 million in 2003 and $3.4 million in 2004,  and  compensation
income was $1.1 million in 2005.  The total  income tax benefit  related to such
compensation  cost  recognized by the Company was  approximately  $.7 million in
2003 and $1.2 million in 2004, and the total income tax provision related to the
compensation   income  was  $.4  million  in  2005.  No  compensation  cost  was
capitalized as part of assets  (inventories  or fixed assets) during 2003,  2004
and 2005.

The following  table  presents what the Company's  consolidated  net income
(loss), and related per share amounts, would have been in 2003, 2004 and 2005 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,  
--------------------------------------
2003           2004           2005
----           ----           -----
(Restated)     (Restated)
(In millions, except
share amounts)

Net income (loss) as reported                                                 $(87.7)          $230.0         $ 81.4

Adjustments, net of applicable income tax
effects and minority interest - stock based
employee compensation expense determined under:
APBO No. 25                                                                   .9              1.7            (.4)
SFAS No. 123                                                                (1.4)             (.7)           (.2)
------           ------         ------

Pro forma net income (loss)                                                   $(88.2)          $231.0         $ 80.8
======           ======         ======

Basic earnings per share:
As reported                                                                 $ (.73)          $ 1.91         $  .69
Pro forma                                                                     (.74)            1.92            .68

Diluted earnings per share:
As reported                                                                 $ (.73)          $ 1.91         $  .68
Pro forma                                                                     (.74)            1.92            .68

Note 2 -       Business and geographic segments:

% owned at
Business segment                 Entity                    December 31, 2005
----------------                 ------                    -----------------

Chemicals             Kronos Worldwide, Inc.                      93%
Component products    CompX International Inc.                    70%
Waste management      Waste Control Specialists LLC              100%
Titanium metals       TIMET                                       39%

The Company's  ownership of Kronos  includes 57% held directly by Valhi and
36% held directly by NL Industries, Inc., an 83%-owned subsidiary of Valhi.

The  Company's  ownership of CompX is  principally  held  directly by CompX
Group, Inc, a majority-owned subsidiary of NL. NL owns 82.4% of CompX Group, and
TIMET owns the remaining 17.6% of CompX Group. CompX Group's sole asset consists
of shares of CompX  common  stock  representing  approximately  83% of the total
number of CompX shares outstanding,  and the percentage ownership of CompX shown
above  includes  NL's  ownership  interest  in CompX Group  multiplied  by CompX
Group's  ownership  interest in CompX,  or 68%. NL also owns an additional 2% of
CompX directly. See Note 3.

The  company's  ownership of TIMET  includes 35% owned  directly by Tremont
LLC, a wholly-owned  subsidiary of the Company,  and 4% owned directly by Valhi.
In  addition,  the  Combined  Master  Retirement  Trust  ("CMRT"),  a collective
investment  trust  sponsored by Contran to permit the  collective  investment by
certain master trusts which fund certain  employee  benefits plans  sponsored by
Contran  and  certain  of its  affiliates,  owned an  additional  11% of TIMET's
outstanding common stock at December 31, 2005. See Note 16.

TIMET owns directly an additional 3% of CompX,  .5% of NL and less than .1%
of Kronos,  and TIMET accounts for such CompX, NL and Kronos shares,  as well as
its shares of CompX Group, as  available-for-sale  marketable securities carried
at fair value (with the fair value of TIMET's  shares of CompX Group  determined
based on the fair value of the  underlying  CompX  shares held by CompX  Group).
Because the  Company  does not  consolidate  TIMET,  the shares of CompX  Group,
CompX,  NL and Kronos owned by TIMET are not considered as part of the Company's
consolidated investment in such companies.

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  manufactures  and  sells  component  products  (security   products,
precision ball bearing slides and ergonomic computer support systems) for office
furniture,  computer related  applications and a variety of other  applications.
CompX has production facilities in North America 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  low-level  radioactive  wastes.  Waste  Control
Specialists  is  seeking  additional  regulatory  authorizations  to expand  its
treatment and disposal  capabilities for low-level and mixed radioactive  wastes
at its facility in West Texas.

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
income includes the effect of amortization of any intangible assets attributable
to the segment.  Chemicals  operating income,  as presented below,  differs from
amounts separately reported by Kronos due to amortization of purchase accounting
basis adjustments  recorded by the Company.  Similarly,  the Company's equity in
earnings  of  TIMET  differs  from  the  Company's  pro-rata  share  of  TIMET's
separately-reported  results. Equity in earnings of TIMET for 2003 and 2004 have
been  restated  for  TIMET's  change  in  accounting  principle  related  to its
inventories.  See Note 1.  Component  products  operating  income,  as presented
below, may differ from amounts separately  reported by CompX because the Company
defines operating income differently than CompX.

Interest income included in the calculation of segment  operating income is
not material in 2003, 2004 or 2005.  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 intangible  assets  attributable  to the segment.
Amortization of deferred financing costs and any premium or discount  associated
with the issuance of indebtedness 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,  2005,  approximately  17% of  corporate  assets were held by NL
(2004 - 23%), 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, 2005, the net assets of non-U.S. subsidiaries included
in consolidated net assets approximated $599 million (2004 - $653 million).

Years ended December 31,
------------------------------------------
2003             2004             2005
----             ----             ----
(Restated)       (Restated)
(In millions)
Net sales:

Chemicals                                                        $1,008.2         $1,128.6         $1,196.7
Component products                                                  173.9            182.6            186.3
Waste management                                                      4.1              8.9              9.8
--------         --------         --------

Total net sales                                                $1,186.2         $1,320.1         $1,392.8
========         ========         ========

Operating income:
Chemicals                                                        $  122.3         $  103.5         $  164.9
Component products                                                    9.1             16.2             19.3
Waste management                                                    (11.5)           (10.2)           (12.1)
--------         --------         --------

Total operating income                                            119.9            109.5            172.1

Equity in:
TIMET                                                                (2.3)            22.7             64.9
Other                                                                  .8              2.2              3.6

General corporate items:
Interest and dividend income                                         33.7             34.6             57.8
Securities transaction gains, net                                      .5              2.1             20.2
Write-off of accrued interest                                        -                -               (21.6)
Gain on disposal of fixed assets                                     10.3               .6             -
Insurance recoveries                                                   .8               .5              3.0
General expenses, net                                               (64.0)           (28.0)           (33.2)
Interest expense                                                      (58.5)           (62.9)           (69.2)
--------         --------         --------

Income before income taxes                                     $   41.2         $   81.3         $  197.6
========         ========         ========

Net sales - point of origin:
United States                                                    $  409.0         $  558.1         $  618.8
Germany                                                             510.1            576.1            613.1
Belgium                                                             150.7            186.4            186.9
Norway                                                              131.5            144.5            160.5
Canada                                                              249.6            244.4            266.0
Taiwan                                                               13.4             15.8             14.2
Eliminations                                                       (278.1)          (405.2)          (466.7)
--------         --------         --------

$1,186.2         $1,320.1         $1,392.8
========         ========         ========

Net sales - point of destination:
United States                                                    $  427.7         $  462.9         $  511.8
Europe                                                              574.5            671.8            693.6
Canada                                                               85.5             80.8             77.4
Asia and other                                                       98.5            104.6            110.0
--------         --------         --------

$1,186.2         $1,320.1         $1,392.8
========         ========         ========

Years ended December 31,
-------------------------------------------
2003             2004              2005
----             ----              ----
(In millions)
Depreciation and amortization:

Chemicals                                                       $  54.5           $  60.2          $   60.1
Component products                                                 14.8              14.2              10.9
Waste management                                                    2.7               3.3               2.8
Corporate                                                           1.0                .7                .7
--------         --------         --------

$  73.0           $  78.4          $   74.5
========         ========         ========

Capital expenditures:
Chemicals                                                       $  35.2           $  39.3          $   43.4
Component products                                                  8.9               5.4              10.5
Waste management                                                     .4               3.7               7.0
Corporate                                                            .2                .1               1.9
--------         --------         --------

$  44.7           $  48.5          $   62.8
========         ========         ========

December 31,
---------------------------------------------
2003             2004              2005
----             ----              ----
(Restated)       (Restated)
(In millions)
Total assets:
Operating segments:

Chemicals                                                     $1,542.2          $1,773.5         $1,694.1
Component products                                               209.4             170.2            155.2
Waste management                                                  24.5              36.4             49.6
Investment in:
TIMET common stock                                                28.1              55.4            138.7
TIMET preferred stock                                             -                   .2               .2
TIMET debt securities                                               .3              -                -
Other joint ventures                                              12.2              13.9             16.5
Corporate and eliminations                                         490.5             640.9            524.1
--------          --------         --------

$2,307.2          $2,690.5         $2,578.4
========          ========         ========

Net property and equipment:
United States                                                   $   72.3          $   69.8         $   75.2
Germany                                                            319.7             331.3            278.9
Canada                                                              91.7              91.4             87.9
Norway                                                              67.4              72.5             64.4
Belgium                                                             71.1              73.8             61.7
Taiwan                                                               5.7               5.7              8.3
Netherlands                                                          9.6               8.3             -
--------          --------         --------

$  637.5          $  652.8         $  576.4
========          ========         ========

Note 3 -  Business combinations and related transactions:

NL  Industries,  Inc.  At the  beginning  of 2003,  Valhi  held 63% of NL's
outstanding  common  stock,  and  Tremont  held  an  additional  21% of NL.  The
Company's  aggregate ownership of NL was reduced to 83% at December 31, 2005 due
to NL's  issuance of shares of its common  stock upon the exercise of options to
purchase NL common stock.  In January  2005,  Tremont  distributed  to Valhi its
ownership interest in NL.

Kronos  Worldwide,  Inc. Prior to December 2003,  Kronos was a wholly-owned
subsidiary of NL. In December 2003, and in conjunction  with a  recapitalization
of Kronos,  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.  During  2004 and the first  quarter  of
2005, NL paid an aggregate of five quarterly  dividends in the form of shares of
Kronos common stock, in which an aggregate of  approximately  1.5 million shares
of Kronos common stock (3.0% of Kronos'  outstanding shares) were distributed to
NL shareholders (including Valhi and Tremont) in the form of pro-rata dividends.
Valhi and Tremont received an aggregate of  approximately  1.2 million shares of
Kronos with respect to these distributions. In January 2005, Tremont distributed
to Valhi its ownership interest in Kronos.

NL's December  2003,  2004 and 2005  quarterly  distributions  of shares of
common  stock of Kronos are  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 on the various dates of distribution and NL's
adjusted  tax basis in such stock at such dates of  distribution.  The amount of
such  tax  liability  related  to  the  shares  of  Kronos   distributed  to  NL
shareholders  other than Valhi and Tremont was  approximately  $22.5  million in
2003, $2.5 million in 2004 and $664,000 in 2005, and such amounts are recognized
as a component of the Company's  consolidated provision for income taxes in such
periods.  Other than the Company's  recognition of such NL tax liabilities,  the
completion of the December  2003 and 2004 and 2005  quarterly  distributions  of
Kronos common stock had no other impact on the Company's  consolidated financial
position, results of operations or cash flows.

The amount of NL's  separate  tax  liability  with respect to the shares of
Kronos distributed to Valhi and Tremont,  while recognized by NL at its separate
company  level,  is not  recognized  in  the  Company's  consolidated  financial
statements  because the separate tax  liability is eliminated at the Valhi level
due to Valhi,  Tremont and NL all being  members of the Contran Tax Group.  With
respect to such shares of Kronos  distributed  to Valhi and  Tremont,  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 separate tax liability  generated  from
the  distribution  of such Kronos  shares to Valhi and Tremont.  On November 30,
2004  Valhi  and NL  agreed to  further  amend  the  terms of their tax  sharing
agreement  to  provide  that NL would  now be  required  to pay up to Valhi  the
separate  tax  liability  generated  from the  distribution  of shares of Kronos
common  stock to Valhi and  Tremont,  including  the tax  related to such shares
distributed  to Valhi and  Tremont in  December  2003 and the tax related to the
shares distributed to Valhi and Tremont during all of 2004. In determining to so
amend the terms of the tax sharing  agreement,  NL and Valhi  considered,  among
other things,  the changed  expectation  for the generation of taxable income at
the NL level resulting from the inclusion of CompX in NL's consolidated  taxable
income  effective in the fourth  quarter of 2004,  as discussed in Note 1. Valhi
and NL further  agreed that in lieu of a cash income tax payment,  such separate
tax  liability  could be paid by NL to Valhi in the  form of  shares  of  Kronos
common  stock  held by NL.  Such tax  liability  related to the shares of Kronos
distributed  to Valhi and Tremont in December  2003 and 2004,  including the tax
liability  resulting  from  the  use of  Kronos  common  stock  to  settle  such
liability,  aggregated  approximately $227 million.  Accordingly,  in the fourth
quarter of 2004 NL transferred approximately 5.5 million shares of Kronos common
stock  to Valhi in  satisfaction  of such  separate  tax  liability  and the tax
liability  generated  from the use of such  Kronos  shares  to  settle  such tax
liability. In agreeing to settle such tax liability with such 5.5 million shares
of Kronos common stock, the Kronos shares were valued at an agreed-upon price of
$41 per  share.  Kronos'  average  closing  market  prices  during the months of
November  and  December  2004 were  $41.53  and  $41.77,  respectively.  NL also
considered  the fact that the shares of Kronos held by  non-affiliates  are very
thinly traded, and consequently an average price over a period of days mitigates
the effect of the thinly-traded  nature of Kronos' common stock. The transfer of
such 5.5 million  shares of Kronos common  stock,  accounted for under GAAP as a
transfer of net assets among entities  under common control at carryover  basis,
had no effect on the Company's consolidated  financial statements,  and as noted
above  such  tax  liability  is not  recognized  in the  Company's  consolidated
financial  statements  because it is eliminated at the Valhi level due to Valhi,
Tremont  and NL all being  members  of Valhi's  tax group on a  separate-company
basis and of the Contran Tax Group.  Such tax liability related to the shares of
Kronos  distributed  to Valhi  in the  first  quarter  of 2005  aggregated  $3.3
million,  and such tax liability was paid by NL to Valhi in cash. This aggregate
$230  million  tax  liability  has not been  paid by Valhi to  Contran,  nor has
Contran paid such tax liability to the applicable tax authority. Such income tax
liability  would  become  payable  by Valhi to  Contran,  and by  Contran to the
applicable tax authority,  when the shares of Kronos  transferred or distributed
by NL to Valhi and Tremont are sold or otherwise transferred outside the Contran
Tax Group or in the event of certain restructuring transactions involving NL and
Valhi.  However,  as discussed in Note 1, the Company  does  recognize  deferred
income taxes with respect to its  investment in Kronos,  and in accordance  with
GAAP the amount of such deferred income taxes  recognized by Valhi ($184 million
at December 31, 2005) is limited to this $230 million tax liability.

During 2003 and 2004 and 2005,  Valhi purchased an aggregate of 1.1 million
shares of Kronos common stock in market  transactions  for an aggregate of $30.5
million.  During the fourth  quarter of 2004 and 2005,  NL sold an  aggregate of
534,000 shares of Kronos common stock in market transactions for an aggregate of
$21.9 million, and the Company recognized pre-tax gains related to the reduction
of its ownership  interest in Kronos related to such sales ($2.2 million in 2004
and $14.7 million in 2005). See Note 12.

During  2004,  Kronos  acquired  additional  shares  of its  majority-owned
subsidiary in France for approximately $575,000. See Note 13.

TIMET.  At the beginning of 2003,  the Company  owned 39% of TIMET.  During
2003 and 2005, the Company purchased an aggregate of 1.4 million shares of TIMET
common stock (as adjusted for certain TIMET stock splits discussed in Note 7) in
market transactions for an aggregate of $18.9 million.  During 2003, the Company
also purchased  certain  convertible  debt  securities  issued by a wholly-owned
subsidiary  of TIMET,  and during 2004 such  convertible  debt  securities  were
exchanged for convertible preferred stock of TIMET. See Note 7.

CompX  International Inc. At the beginning of 2003, the Company held 69% of
CompX's common stock. Of such 69%, 66% was held by Valcor,  Inc., a wholly-owned
subsidiary  of Valhi,  and 3% was owned by Valhi  directly.  Prior to  September
2004,  the  Company's  aggregate  ownership  in CompX was  reduced to 68% due to
CompX's  issuance of shares of its common  stock upon the exercise of options to
purchase CompX common stock. On September 24, 2004, NL completed the acquisition
of the CompX shares  previously  held by Valhi and Valcor at a purchase price of
$16.25 per share, or an aggregate of $168.6 million. The purchase price was paid
by NL's transfer to Valhi and Valcor of an aggregate $168.6 million of NL's $200
million  long-term  note  receivable  from  Kronos  (which  long-term  note  was
eliminated  in  the   preparation  of  the  Company's   consolidated   financial
statements).  The acquisition was approved by a special  committee of NL's board
of directors comprised of directors who were not affiliated with Valhi, and such
special committee  retained their own legal and financial  advisors who rendered
an opinion to the special  committee  that the purchase  price was fair,  from a
financial point of view, to NL. NL's acquisition was accounted for under GAAP as
a transfer of net assets among entities under common control at carryover basis,
and such  transaction  had no effect  on the  Company's  consolidated  financial
statements.

Effective October 1, 2004, NL and TIMET contributed  shares of CompX common
stock  representing 68% and 15%,  respectively,  of CompX's  outstanding  common
stock to newly-formed  CompX Group in return for their 82.4% and 17.6% ownership
interests in CompX Group, respectively,  and CompX Group became the owner of the
83% of CompX  that NL and TIMET had  previously  owned in the  aggregate.  These
CompX shares are the sole asset of CompX Group.  CompX Group recorded the shares
of  CompX  received  from  NL at NL's  carryover  basis.  The  shares  of  CompX
contributed to CompX Group by TIMET are excluded from the Company's consolidated
investment in CompX.  See Note 2. During 2005, NL purchased  233,500  additional
shares  of CompX  common  stock  in  market  transactions  for an  aggregate  of
approximately $3.6 million,  increasing NL's aggregate ownership of CompX to 70%
at December 31, 2005.

In August 2005,  CompX completed the  acquisition of a components  products
business for aggregate cash consideration of $7.3 million, net of cash acquired.
The purchase  price has been  allocated  among the tangible and  intangible  net
assets acquired (including goodwill) based upon an estimate of the fair value of
such net assets. The pro forma effect on the Company's results of operations for
2005, assuming such acquisition had been completed as of January 1, 2005, is not
material.

Tremont Corporation,  Tremont Group, Inc. and Tremont LLC. At the beginning
of 2003, Valhi and NL owned 80% and 20%,  respectively,  of Tremont Group,  Inc.
Tremont Group was a holding company which owned 80% of Tremont  Corporation.  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 and 2004,
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 group 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 was allocated  based upon an 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
relate to such assets of NL and Kronos, 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).

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,  2004 and 2005,  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).

Waste Control Specialists LLC. In 1995, the Company acquired a 50% interest
in newly-formed Waste Control  Specialists LLC. The Company's ownership of Waste
Control  Specialists  is held by Andrews County  Holding,  Inc., a subsidiary of
Valhi.  The Company  contributed  $25 million to Waste  Control  Specialists  at
various dates through early 1997 for its 50% interest.  The Company  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.  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
accrued to the Company for financial reporting purposes. See Note 13.

Andrews County had also previously loaned  approximately $1.5 million to an
individual who controlled KNB Holdings,  and such loan was collateralized by KNB
Holdings'  subordinated  10% membership  interest in Waste Control  Specialists.
During 2004,  KNB Holdings  entered  into an  agreement  with Andrews  County in
which,  among other things,  Andrews County acquired the remaining 10% ownership
interest in Waste Control  Specialists and the outstanding  balance of such loan
($2.5 million,  including  accrued and unpaid  interest),  was  cancelled.  As a
result,  Waste Control Specialists became wholly owned by Andrews County.  Valhi
owns 100% of the outstanding common stock of Andrews County.

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

Note 4 - Accounts and other receivables:

December 31,
--------------------
2004            2005
----            ----
(In thousands)

Accounts receivable                                                                    $219,749        $211,156
Notes receivable                                                                          1,993           4,267
Accrued interest and dividends receivable                                                    15           6,158
Allowance for doubtful accounts                                                          (3,826)         (2,815)
--------        --------

$217,931        $218,766
========        ========

Accrued  interest and  dividends  receivable  at December 31, 2005 includes
$6.0 million of distributions from the Amalgamated Sugar Company LLC declared in
December 2005 but not paid to the Company until January 3, 2006. See Note 5.

Note 5 -       Marketable securities:

December 31,
--------------------
2004            2005
----            ----
(In thousands)

Current assets (available for sale):

Restricted debt securities                                                           $  9,446        $  9,265
Other debt securities                                                                    -              2,490
--------        --------

$  9,446        $ 11,755
========        ========

Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC                                                    $250,000        $250,000
Restricted debt securities                                                              6,725           2,572
Other debt securities and common stocks                                                    45           6,133
--------        --------

$256,770        $258,705
========        ========

Amalgamated.  Prior to 2003, 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.
When the Company transferred control of such operations to Snake River in return
of its interest in the LLC, the Company  recognized a gain in earnings  equal to
the difference between $250 million (the fair value of the Company's  investment
in the LLC as  evidenced  by its $250  million  redemption  price,  as discussed
below) and the $34 million cost basis of the net assets  contributed to the LLC,
net of  applicable  deferred  income  taxes.  Therefore,  the cost  basis of the
Company's  investment in the LLC is $250 million.  As part of such  transaction,
Snake River made certain loans to Valhi  aggregating  $250  million.  Such loans
from Snake River were 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 2002
when Snake River  obtained an equal amount of third-party  term loan  financing,
and the remaining  $80 million was repaid during 2005 when Snake River  obtained
new  third-party  term loan  financing  following its complete  repayment of its
original third-party term loan financing. 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 2012, 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,  subject to
satisfaction of certain conditions imposed by Snake River's current  third-party
senior lenders.

Prior  to 2003,  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 2005,  and  following the
complete repayment of the Company's $80 million loan to Snake River, Snake River
agreed that the annual  amount of  distributions  paid by the LLC to the Company
would at least  exceed,  by  approximately  $1.8  million,  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 previously made among
the  Company,  Snake River and the LLC,  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, 2005,
Snake River and the LLC  maintained the applicable  minimum  required  levels of
cash flows to the Company.

The  Company  reports  the  cash  distributions  received  from  the LLC as
dividend  income.  Such  distributions  are recognized when declared by the LLC,
which is generally the same months that such  distributions  are received by the
Company,  although such  distributions may in certain cases be paid on the first
business  day of the  following  month.  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,  with
fair value  determined to be the $250 million  redemption price of the Company's
investment  in the LLC. The Company also provides  certain  services to the LLC.
See Note 17.  The  Company  does not  expect  to report a gain in  earnings  for
financial  reporting  purposes at the time its LLC interest is redeemed,  as the
redemption  price of $250 million is expected to equal the carrying value of its
investment in the LLC at the time of redemption.

Other.  During 2003, Valhi sold  approximately  2,500 shares of Halliburton
Company  common  stock  in  market   transactions  for  aggregate   proceeds  of
approximately  $50,000.  The aggregate cost of the  restricted and  unrestricted
debt securities and other available-for-sale  marketable securities approximates
their net carrying value at December 31, 2004 and 2005. During 2005, the Company
purchased  other  available-for-sale  marketable  securities  (primarily  common
stocks and debt securities) for an aggregate of $29.4 million,  and subsequently
sold a portion of such  securities  for an aggregate of $19.7  million for a net
securities transaction gain of approximately $200,000. See Note 12.

Note 6 -       Inventories:

December 31,
------------------------
2004            2005
----            ----
(In thousands)

Raw materials:

Chemicals                                                                            $ 45,961        $ 52,343
Component products                                                                      8,193           7,022
--------        --------
54,154          59,365
--------        --------

In process products:
Chemicals                                                                              16,612          17,959
Component products                                                                     10,827           9,898
--------        --------
27,439          27,857
--------        --------

Finished products:
Chemicals                                                                             131,161         150,675
Component products                                                                      9,696           5,542
--------        --------
140,857         156,217
--------        --------

Supplies (primarily chemicals)                                                           40,964          39,718
--------        --------

$263,414        $283,157
========        ========

Note 7 -       Investment in affiliates:

December 31,   
------------------------
2004            2005
------          --------
(Restated)
(In thousands)

TIMET:

Common stock                                                                         $ 55,425        $138,677
Preferred stock                                                                           183             183
--------        --------
55,608         138,860

Ti02 manufacturing joint venture                                                        120,251         115,308
Basic Management and Landwell                                                            13,867          16,464
--------        --------

$189,726        $270,632
========        ========

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
both 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. Kronos' share of the joint ventures  production costs
are  reported as cost of sales as the related  Ti02  acquired  from LPC is sold.
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 $900,000 in
2003,  $8.6  million  in 2004  and  $4.9  million  in  2005  are  stated  net of
contributions  of $13.1 million in 2003, $15.6 million in 2004 and $10.1 million
in 2005.

LPC's net sales aggregated  $202.9 million in 2003,  $210.4 million in 2004
and $219.8 million in 2005, of which $101.3  million,  $104.8 million and $109.4
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, 2005,  LPC reported  total assets and  partners'  equity of
$263.3  million  and $233.4  million,  respectively  (2004 - $269.8  million and
$243.3 million, respectively). Approximately 76% of LPC's assets at December 31,
2005 are comprised of property and equipment (2004 - 78%).  Substantially all of
LPC's  liabilities  at  December  31,  2004  and 2005  are  current.  LPC has no
indebtedness at December 31, 2004 and 2005.

On September 22, 2005, LPC's facility  temporarily halted production due to
Hurricane  Rita.  Although  storm damage to core  processing  facilities was not
extensive, a variety of factors, including loss of utilities, limited access and
availability of employees and raw materials, prevented the resumption of partial
operations  until  October 9, 2005 and full  operations  until  late  2005.  LPC
expects  the  majority of its  property  damage and  unabsorbed  fixed costs for
periods in which normal  production  levels were not achieved will be covered by
insurance, and Kronos believes insurance will cover its lost profits (subject to
applicable  deductibles)  resulting from its share of the lost  production  from
LPC.  Insurance  proceeds  from the lost profit for product  that Kronos was not
able to sell as a result of the loss of  production  from LPC are expected to be
recognized  by Kronos  during  2006,  although  the  amount  and  timing of such
insurance  recoveries  is not  presently  determinable.  The  effect on  Kronos'
financial results will depend on the timing and amount of insurance  recoveries.
Kronos'  warehouse and slurry  facilities  located near LPC's facility were also
temporarily closed due to the storm, but property damage to these facilities was
not significant.

TIMET.  At December 31, 2005, the Company held 14.0 million shares of TIMET
with a quoted market price of $63.26 per share, or an aggregate  market value of
$885.5  million  (2004 - 13.0 million  shares with an aggregate  market value of
$157 million).  In 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,  in 2004 TIMET effected a 5:1 split of its common stock
and in 2005 TIMET  effected an additional  2:1 split of its common  stock.  Such
stock splits had no financial statement impact to the Company, and the Company's
ownership interest in TIMET did not change as a result of such splits. The share
disclosures  related to TIMET  common  stock as of  December  31, 2004 have been
adjusted to give effect to the 2:1 split in 2005.

At December 31, 2005,  TIMET  reported  total assets of $907.3  million and
stockholders'  equity  of  $562.2  million  (2004 - $692.3  million  and  $406.4
million,  respectively).  TIMET's  total  assets at December  31,  2005  include
current  assets of $550.3  million,  property and  equipment of $253.0  million,
marketable securities of $46.5 million and investment in joint ventures of $26.0
million (2004 - $370.4 million, $228.2 million, $47.2 million and $22.6 million,
respectively).  TIMET's total  liabilities at December 31, 2005 include  current
liabilities of $166.9 million,  accrued OPEB and pension costs aggregating $74.0
million, long-term debt of $51.4 million and debt payable to TIMET Capital Trust
I (the subsidiary of TIMET that issued the convertible  preferred securities) of
$5.9 million  (2004 - $162.2  million,  $92.0  million,  nil and $12.0  million,
respectively).  During  2005,  TIMET  reported  net  sales  of  $749.8  million,
operating income of $171.1 million and income before cumulative effect of change
in accounting  principle  attributable to common  stockholders of $143.7 million
(2004 - net sales of $501.8  million,  operating  income  of $43.0  million  and
income  before  cumulative  effect of change in  accounting  principle  of $43.3
million; 2003 - net sales of $385.3 million,  operating loss of $6.0 million and
a loss before cumulative effect of change in accounting  principle  attributable
to common stockholders of $24.3 million).  All of such amounts for 2003 and 2004
have been  restated for TIMET's  change in accounting  principle  related to its
inventories discussed in Note 1.

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
TIMET  Capital  Trust I, a  wholly-owned  subsidiary  of  TIMET,  and have  been
guaranteed by TIMET. Such securities represented 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.   In  April  2004,   TIMET  paid  all   previously-deferred
distributions  with respect to the  convertible  preferred  debt  securities and
resumed  quarterly  distributions  with the next scheduled  distribution in June
2004. The convertible  preferred  securities  mature in 2026, and do not require
any amortization  prior to maturity.  The convertible  preferred  securities are
accounted for as  available-for-sale  marketable securities carried at estimated
fair value.

In August 2004,  TIMET  completed an exchange offer in which  approximately
3.9 million shares of the  outstanding  convertible  preferred  debt  securities
issued by TIMET Capital  Trust I were  exchanged for an aggregate of 3.9 million
shares of a newly-created Series A Preferred Stock of TIMET at the exchange rate
of one share of Series A Preferred  Stock for each  convertible  preferred  debt
security.  Dividends on the Series A shares  accumulate at the rate of 6 3/4% of
their  liquidation  value of $50 per share,  and are convertible  into shares of
TIMET common stock at the rate of one and  two-thirds of a share of TIMET common
stock per Series A share.  The Series A shares are not  mandatorily  redeemable,
but are  redeemable  at the  option  of TIMET in  certain  circumstances.  Valhi
exchanged its 14,700 shares of the convertible  preferred debt securities in the
exchange offer for 14,700 Series A shares, and recognized a nominal gain related
to such  exchange.  The Series A shares are accounted for as  available-for-sale
marketable securities carried at estimated fair value. At December 31, 2005, the
cost basis of the Series A shares  approximated  their carrying amount,  and Mr.
Simmons'  spouse held an additional  54% of such Series A shares  outstanding at
that date.

Basic  Management and Landwell.  At December 31, 2004 and 2005, other joint
ventures, held by TRECO LLC, a wholly-owned subsidiary of Tremont, 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 September 30, 2005, the combined  balance sheets of Basic Management and
Landwell reflected total assets and partners' equity of $118.8 million and $68.1
million,  respectively (2004 - $124.8 million and $57.3 million,  respectively).
The combined total assets at September 30, 2005 include  current assets of $36.9
million,  property and equipment of $12.7 million, prepaid costs and expenses of
$5.4 million,  land and development costs of $18.7 million,  long-term notes and
other  receivables of $3.7 million and investment in undeveloped  land and water
rights of $41.4 million (2004 - $44.4  million,  $15.9  million,  $19.3 million,
$16.7  million,  $4.6 million and $21.9 million,  respectively).  Combined total
liabilities at September 30, 2005 include current  liabilities of $20.9 million,
long-term debt of $22.7 million and deferred  income taxes of $6.3 million (2004
- $31.2 million, $29.8 million and $5.7 million, respectively).

During  the 12 months  ended  September  30,  2005,  Basic  Management  and
Landwell reported combined revenues of $30.4 million, income before income taxes
of $14.9  million and net income of $12.8 million  (2004 - $27.5  million,  $8.9
million and $7.7 million,  respectively;  2003 - $20.1 million, $3.3 million and
$2.9 million, respectively). Landwell is treated for federal income tax purposes
as a partnership,  and accordingly  the combined  results of operations of Basic
Management  and  Landwell  include a provision  for income  taxes on  Landwell's
earnings only to the extent that such earnings accrue to Basic Management.

Other.  The  Company  has  certain   transactions  with  certain  of  these
affiliates,  as more fully  described in Note 17. The Company  records equity in
earnings of Basic  Management  and Landwell on a  one-quarter  lag because their
financial  statements are generally not available on a timely basis. The Company
records equity in earnings for all other equity method investees  without such a
lag because their financial statements are available on a timely basis.

Note 8 -       Other noncurrent assets:

December 31,
-----------------------
2004            2005
------          -------
(In thousands)
Loans and other receivables:
Snake River Sugar Company:

Principal                                                                          $ 80,000        $   -   
Interest                                                                             38,294            -   
Other                                                                                   3,151           6,769
---------        --------
121,445           6,769
Less current portion                                                                    1,993           4,267
---------        --------

Noncurrent portion                                                                   $119,452        $  2,502
========        ========

Other assets:
IBNR receivables                                                                     $ 11,646        $ 16,735
Deferred financing costs                                                               10,933           8,278
Waste disposal site operating permits, net                                              9,269          14,133
Refundable insurance deposit                                                            2,483            -   
Restricted cash equivalents                                                               494             382
Other                                                                                  17,501          19,609
---------        --------

$ 52,326        $ 59,137
========        ========

Valhi's loan to Snake River was  subordinate  to Snake River's  third-party
senior term loan and bore interest at a fixed rate of 6.49%. Covenants contained
in Snake River's prior third-party  senior term loan allowed Snake River,  under
certain  conditions,  to pay periodic  installments  for debt service on the $80
million loan prior to the maturity of the senior term loan in 2007.  The Company
did not expect to receive any significant debt service payments from Snake River
during 2004, and accordingly all accrued and unpaid interest was classified as a
noncurrent asset as of December 31, 2004.

Prior to 2003, 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.

In August 2005, Snake River repaid its prior  third-party  senior loan, and
Snake  River  commenced  to make debts  service  payments to Valhi under its $80
million loan from Valhi. Such debt service  payments,  all of which were applied
to accrued and unpaid interest,  aggregated $5.5 million in August and September
2005.  In October  2005,  the Company and Snake River  entered into an agreement
pursuant to which, among other things,  Snake River agreed to make an additional
$94.8 million  prepayment on its loan payable to Valhi ($80 million of which was
applied to principal and the remainder to accrued interest), in return for which
Valhi agreed to forgive and cancel all remaining  amounts Snake River  otherwise
owed Valhi under such loan.  Snake River  subsequently  made such  prepayment to
Valhi in October  2005.  Accordingly,  in the  fourth  quarter of 2005 Valhi has
recognized a $21.6 million charge to earnings related to the accrued interest on
its loan to Snake River that was forgiven and cancelled by Valhi in October. See
Note 12.

The IBNR receivables relate to certain insurance  liabilities,  the risk of
which has been  reinsured  with  certain  third party  insurance  carriers.  The
insurance  liabilities  which  have  been  reinsured  are  reported  as  part of
noncurrent accrued insurance claims and expenses. See Notes 11 and 17.

Note 9 - Goodwill and other intangible assets:

Goodwill.  Changes in the carrying amount of goodwill during the past three
years by operating segment 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  and  Kronos.
Substantially  all of the goodwill related to the component  products  operating
segment was  generated  from  CompX's  acquisitions  of certain  business  units
completed prior to 2002, and to a 2005 acquisition. See Note 3.

Operating segment
-----------------------------
Component
Chemicals          products            Total
---------         ----------           -----
(In millions)

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

Goodwill acquired during the year                                        8.4              -                 8.4
Elimination of deferred income taxes                                      -             (26.9)            (26.9)
Impairment charge                                                         -              (6.5)             (6.5)
Changes in foreign exchange rates                                         -               1.5               1.5
------           ------            ------

Balance at December 31, 2004                                           339.7             14.4             354.1
Goodwill acquired during the year                                        1.3              8.0               9.3
Assets sold                                                               -              (1.4)             (1.4)
Changes in foreign exchange rates                                         -               (.2)              (.2)
------           ------            ------

Balance at December 31, 2005                                          $341.0           $ 20.8            $361.8
======           ======            ======

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 Kronos 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  Michigan,  Canadian  and  Taiwanese
operations.  Under SFAS No. 142,  such  goodwill is 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 Kronos  reporting unit, the
Company considers quoted market prices for Kronos' common stock, as adjusted for
an appropriate  control premium.  The Company uses other  appropriate  valuation
techniques,  such as  discounted  cash flows,  to estimate the fair value of the
three CompX reporting units.

In accordance  with the  requirements  of SFAS No. 142, the Company reviews
goodwill of its four reporting units for impairment  during the third quarter of
each year.  Goodwill is also 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 related to continuing operations were deemed
to exist as a result of the Company's annual impairment reviews completed during
2003,  2004 and 2005.  However,  in December  2004  CompX's  board of  directors
committed  to a formal  plan to  dispose of CompX's  European  operations.  As a
result,  the Company  recognized a non-cash charge of $6.5 million in the fourth
quarter of 2004,  representing  an impairment of goodwill  associated  with such
operations,  to write-down  the Company's  investment in such  operations to its
estimated  realizable value based upon the expected net proceeds  resulting from
the sale of such operations. See Note 22.

As discussed in Note 1, the Company provides  deferred income taxes for the
expected future tax consequences of temporary differences between the income tax
and financial reporting carrying amounts of investments in subsidiaries that are
not  members of the  Contran Tax Group.  Also as  discussed  in Note 1, prior to
October  2004 CompX was not a member of the Contran  Tax Group,  and the Company
provided  deferred  income  taxes  with  respect  to its  investment  in  CompX.
Effective  October 2004, CompX became a member of the Contran Tax Group, and the
Company  no  longer  provides  such  deferred  income  taxes as it was no longer
required to do so under  applicable  GAAP.  In  accordance  with GAAP,  and as a
result of CompX  becoming a member of the Contran Tax Group, a net $26.9 million
deferred  tax  liability,  previously  provided  with  respect to the  Company's
investment in CompX, was eliminated  through a reduction in goodwill at December
31, 2004.

Other intangible assets.

December 31,
-----------------------   
2004            2005  
------          ------
(In millions)

CompX - patents and other:

Cost                                                                                   $3.4         $4.4
Less accumulated amortization                                                           1.7          2.1
----         ----

Net                                                                                   1.7          2.3
----         ----

NL - customer list:
Cost                                                                                    2.6          2.6
Less accumulated amortization                                                           1.1          1.5
----         ----

Net                                                                                   1.5          1.1
----         ----

$3.2         $3.4
====         ====

CompX's intangible assets relate principally to the estimated fair value of
certain patents  acquired in connection with the acquisition of certain business
units by CompX. NL's intangible asset relates to its acquisition of an insurance
broker acquired prior to 2003.  CompX's  intangible  assets are amortized by the
straight-line  method over their estimated useful lives  (approximately 10 years
remaining at December 31, 2005),  with no assumed  residual  value at the end of
the  life of the  intangible  assets.  The  customer  list  intangible  asset is
amortized by the straight-line method over the estimated seven-year life of such
intangible asset (approximately 3 years remaining at December 31, 2005), with no
assumed  residual  value  at the  end  of the  life  of  the  intangible  asset.
Amortization expense of intangible assets was approximately  $600,000 in each of
2003 and 2004 and  approximately  $700,000 in 2005, and amortization  expense of
intangible  assets is expected to be approximately  $700,000 in each of calendar
2006 through 2008 and $300,000 in each of 2009 and 2010.

Note 10 -      Long-term debt:

December 31,
-------------------------
2004              2005
------            -------
(In thousands)

Valhi - Snake River Sugar Company                                                      $250,000         $250,000
--------         --------

Subsidiaries:
Kronos International Senior Secured Notes                                             519,225          449,298
Kronos U.S. bank credit facility                                                            -           11,500
Kronos European bank credit facility                                                   13,622             -   
Other                                                                                   1,090            6,637
--------         --------

533,937          467,435
--------         --------

783,937          717,435

Less current maturities                                                                  14,412            1,615
--------         --------

$769,525         $715,820
========         ========

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. At December 31, 2005,  $37.5 million of such loans are recourse to
Valhi and the remaining  $212.5 million is  nonrecourse to Valhi.  Under certain
conditions,  Snake River has the  ability to  accelerate  the  maturity of these
loans. See Note 5.

At  December  31,  2005,  Valhi has a $100  million  revolving  bank credit
facility which matures in October 2006,  generally  bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings),  and is
collateralized  by 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 Kronos  common  stock  pledged as  collateral.  Based on
Kronos' December 31, 2005 quoted market price of $29.01 per share, the shares of
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,  2005,  Valhi  would  only have  become  limited to
borrowing  less than the full $100 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 quoted market price of Kronos' common stock was less than
$20 per share.  At December 31, 2005, no amounts have been borrowed,  letters of
credit  aggregating $1.5 million had been issued and $98.5 million was available
for borrowing under the facility.

Kronos and its subsidiaries.  In June 2002, Kronos  International  ("KII"),
which conducts  Kronos' TiO2 operations in Europe,  issued at par value euro 285
million principal amount ($280 million when issued) of its 8.875% Senior Secured
Notes due 2009,  and in  November  2004 KII issued at 107% of par an  additional
euro 90 million  principal  amount ($130  million when issued) of the KII Senior
Secured Notes.  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.  Such operating subsidiaries are Kronos Titan
GmbH,  Kronos Denmark ApS,  Kronos Limited and Societe  Industrielle  Du Titane,
S.A. 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,  at  redemption  prices  ranging  from
104.437% of the  principal  amount,  declining to 100% on or after  December 30,
2008.  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, 2005, the
market price of the KII Senior  Secured Notes was  approximately  euro 1,045 per
euro 1,000 principal amount (2004 - euro 1,075 per euro 1,000 principal amount).
At December  31,  2005,  the  carrying  amount of the KII Senior  Secured  Notes
includes euro 4.8 million ($5.7 million) of unamortized  premium associated with
the November 2004 issuance (2004 - euro 6.2 million, or $8.4 million).

KII's operating subsidiaries in Germany,  Belgium and Norway have a euro 80
million secured  revolving bank credit facility (nil outstanding at December 31,
2005)  that  matures  in June  2008.  Borrowings  may be  denominated  in euros,
Norwegian kroners or U.S. dollars, and bear interest at the applicable interbank
market rate plus 1.125%.  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  that,  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, 2005, the equivalent of $92.3
million was available for additional borrowing by the subsidiaries.

Certain of Kronos' U.S.  subsidiaries  have a $50 million  revolving credit
facility  ($11.5  million  outstanding  at December  31,  2005) that  matures in
September  2008.  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
(7.0% at December 31, 2005). 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, 2005,  $33.5 million was available for borrowing
under the facility.

Kronos'  Canadian  subsidiary  has a  Cdn.  $30  million  revolving  credit
facility  (nil  outstanding  at December 31, 2005) 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.  At December 31,  2005,  the
equivalent  of $12.8  million was  available  for  additional  borrowing  by the
subsidiary.

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).
Under the cross-default  provisions of the U.S.  revolving credit facility,  any
outstanding  borrowing  under such  facility may be  accelerated  prior to their
stated maturity in the event of the bankruptcy of Kronos. The Canadian revolving
credit facility  contains no cross-default  provisions.  The European,  U.S. and
Canadian  revolving  credit  facilities  each contain  provisions that allow the
lender to accelerate the maturity of the  applicable  facility in the event of a
change of control, as defined, of the applicable  borrower.  In the event any of
these cross-default or change-of-control  provisions become applicable, and such
indebtedness is accelerated, Kronos would be required to repay such indebtedness
prior to their stated maturity.

CompX. At December 31, 2005,  CompX has a $50.0 million  secured  revolving
bank credit  facility  maturing in January 2009 with  interest at rates based on
the prime rate or LIBOR.  The credit facility is  collateralized  by a pledge of
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.  At
December 31, 2005, no amounts were outstanding and $50 million was available for
additional borrowing under the facility.

Other  indebtedness.  In February 2003,  Valcor  redeemed for par value the
remaining $2.4 million  principal amount of its 9 5/8% Senior Notes due November
2003.

Aggregate maturities of long-term debt at December 31, 2005:

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

2006                                                                                              $  1,615
2007                                                                                                 1,048
2008                                                                                                12,526
2009                                                                                               450,349
2010                                                                                                 1,897
2011 and thereafter (all due in 2027)                                                              250,000
--------

$717,435
========

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, 2005, none of the net assets
of Valhi's consolidated subsidiaries were restricted.

At December 31, 2005,  amounts available for the payment of Valhi dividends
pursuant to the terms of Valhi's revolving bank credit facility  aggregated $.10
per Valhi share outstanding per quarter,  plus an additional $67.9 million.  Any
purchases of treasury  stock  subsequent  to December 31, 2005 would reduce this
$67.9 million amount.

Note 11 - Accrued liabilities:

December 31,
--------------------------
2004              2005
------            --------
(In thousands)
Current:

Employee benefits                                                                     $ 53,295         $ 48,341
Environmental costs                                                                     21,316           16,565
Deferred income                                                                          5,276            5,101
Interest                                                                                   243            1,067
Other                                                                                   50,989           58,355
--------         --------

$131,119         $129,429
========         ========

Noncurrent:
Insurance claims and expenses                                                         $ 22,718         $ 24,257
Employee benefits                                                                        5,380            4,998
Deferred income                                                                          1,427              573
Asset retirement obligations                                                             1,357            1,381
Other                                                                                   10,179            8,119
--------         --------

$ 41,061         $ 39,328
========         ========

The  asset  retirement  obligations  are  discussed  in Note 19.  The risks
associated with certain of the Company's  accrued  insurance claims and expenses
have  been  reinsured,  and  the  related  IBNR  receivable  are  recognized  as
noncurrent assets. See Note 8.

Note 12 -      Other income, net:

Years ended December 31,    
----------------------------------------
2003             2004            2005
----             ----            ----
(In thousands)

Securities earnings:

Dividends and interest                                                $33,724           $34,576       $ 57,843
Securities transactions, net                                              487             2,113         20,259
Write-off of accrued interest                                            -                 -           (21,638)
-------           -------       --------
34,211            36,689         56,464
Contract dispute settlement                                                   -             6,289           -   
Insurance recoveries                                                        823               552          2,970
Currency transactions, net                                               (8,288)           (3,764)         5,163
Disposal of property and equipment, net                                   9,845              (855)        (1,555)
Other, net                                                                4,836             5,333          4,947
-------           -------       --------

$41,427           $44,244        $67,989
=======           =======        =======

Dividends and interest income includes  distributions  from The Amalgamated
Sugar  Company  LLC of $23.7  million in 2003,  $23.8  million in 2004 and $45.0
million in 2005,  and  interest  income of $5.2 million in each of 2003 and 2004
and $3.9  million in 2005  related to the  Company's  loan to Snake  River Sugar
Company.  The $21.6  million  write-off of accrued  interest  receivable in 2005
relates to accrued interest on Valhi's loan to Snake River that was forgiven and
cancelled by Valhi in October  2005.  See Notes 5 and 8.  Dividends and interest
income also  includes  interest of $1.4 million in 2003 and $1.5 million in 2004
of  interest  on  certain  intercompany  receivables  of  CompX  related  to its
operations in The Netherlands. The related interest expense on such intercompany
indebtedness is included as a component of discontinued operations. See Note 22.

Net securities transaction gains in 2005 relate primarily to (i) NL's $14.7
million  pre-tax gain from the sale of  approximately  470,000  shares of Kronos
common stock in market  transactions for aggregate proceeds of $19.2 million and
(ii) Kronos' $5.4 million pre-tax gain from the sale of its passive  interest in
a Norwegian smelting operation, which had a nominal carrying value for financial
reporting  purposes,  for aggregate  consideration of approximately $5.4 million
consisting of cash of $3.5 million and inventories with a value of $1.9 million.
Net securities  transactions  gains in 2004 includes a $2.2 million gain related
to NL's sale of shares of Kronos common stock in market transactions.

The  contract  dispute  settlement  relates  to Kronos'  settlement  with a
customer.  As part of the  settlement,  the customer  agreed to make payments to
Kronos through 2007 aggregating  $7.3 million.  The $6.3 million gain recognized
in 2004  represents  the present value of the future  payments to be paid by the
customer to Kronos.  Of such $7.3  million,  $1.5  million was paid to Kronos in
2004 and $1.75  million was paid in 2005,  and $1.75  million is due in 2006 and
$2.25  million is due in 2007.  At December 31, 2005,  the present  value of the
remaining  amounts  due to be  paid  to  Kronos  aggregated  approximately  $3.7
million,  of which $1.7  million is  included in  accounts  receivable  and $2.0
million is included in other noncurrent assets.

Insurance  recoveries of $823,000 in 2003, $552,000 in 2004 and $804,000 in
2005 relate to NL's settlements  with certain of its former insurance  carriers.
These  settlements,  as well as similar  prior  settlements  NL reached prior to
2003,  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.
Insurance recoveries in 2005 also include $2.2 million received by NL in 2005 in
recovery from certain insolvent former insurance carriers relating to settlement
of excess insurance coverage claims that were paid to NL. See Note 19. 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.

Note 13 - Minority interest:

December 31,
-----------------------
2004            2005
----            -----
(In thousands)
Minority interest in net assets:

NL Industries                                                                        $ 51,662        $ 51,177
Kronos Worldwide                                                                       29,569          28,167
CompX International                                                                    49,153          45,630
Subsidiary of NL                                                                        9,250               -
Subsidiary of Kronos                                                                       76              75
--------        --------

$139,710        $125,049
========        ========

Years ended December 31,
-------------------------------------
2003            2004           2005
----            ----           ----
(In thousands)
Minority interest in net earnings (losses) -
continuing operations:

NL Industries                                                           $ (8,149)       $24,891        $ 6,336
Kronos Worldwide                                                             246         19,659          5,057
CompX International                                                        1,814          2,993            290
Subsidiary of NL                                                             371            747             61
Subsidiary of Kronos                                                          72             53             12
Tremont Corporation                                                         (217)          -              -
-------        -------        -------

$(5,863)       $48,343        $11,756
=======        =======        =======

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.

Subsidiary  of NL.  Minority  interest in NL's  subsidiary  related 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
were based, in part, upon its ability to favorably  resolve these liabilities on
an aggregate  basis. 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.

In June 2005, EMS, received notices from the three minority shareholders of
EMS indicating they were each exercising their right,  which became  exercisable
on June 1, 2005,  to require EMS to purchase  their shares in EMS as of June 30,
2005  for a  formula-determined  amount  as  provided  in  EMS'  certificate  of
incorporation.  In accordance with the certificate of incorporation,  EMS made a
determination  in good faith of the amount payable to the three former  minority
shareholders to purchase their shares of EMS stock,  which amount may be subject
to review by a third party. In June 2005, EMS set aside funds as payment for the
shares of EMS,  but as of December 31, 2005,  the former  minority  shareholders
have not tendered  their shares,  and  accordingly  the liability  owed to these
former  minority  shareholders,  which has not been  extinguished  for financial
reporting  purposes as of December 31, 2005,  has been  classified  as a current
liability  at such  date.  Similarly,  the funds  which  have been set aside are
classified as a current asset at such date.

Tremont  Corporation.  The Company no longer reports  minority  interest in
Tremont's  net assets or net earnings  (losses)  subsequent to the February 2003
mergers of Valhi and Tremont. See Note 3.

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 prior to the
time when Waste  Control  Specialists  became a  wholly-owned  subsidiary of the
Company in the second  quarter of 2004 have accrued to the Company for financial
reporting  purposes.   Accordingly,   no  minority  interest  in  Waste  Control
Specialists  has  been  recognized  in  the  Company's   consolidated  financial
statements.

Subsidiary of Kronos.  Minority interest in Kronos'  subsidiary  relates to
Kronos'  majority-owned  subsidiary in France,  which conducts Kronos' sales and
marketing activities in that country.

Discontinued  operations.  Minority  interest  in  losses  of  discontinued
operations was $1.4 million in 2003,  $4.1 million in 2004 and $205,000 in 2005.
See Note 22.

Note 14 - Stockholders' equity:

Shares of common stock
------------------------------------------
Issued         Treasury        Outstanding
------         --------        -----------
(In thousands)

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

Issued                                                                     25             -                25
Retired                                                                (9,857)           9,857           -
-------         --------        -------

Balance at December 31, 2004                                          124,195           (3,984)       120,211

Issued                                                                     65             -                65
Acquired                                                                    -           (3,512)        (3,512)
Retired                                                                (3,512)           3,512           -
-------         --------        -------

Balance at December 31, 2005                                          120,748           (3,984)       116,764
=======         ========        =======

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 2003, 2004
and 2005 consist of (i) shares  issued upon  exercise of stock  options and (ii)
stock awards issued to members of Valhi's board of directors.

In 2005, the Company's  board of directors  authorized the repurchase of up
to 5.0  million  shares of Valhi's  common  stock in open  market  transactions,
including block purchases,  or in privately negotiated  transactions,  which may
include  transactions  with affiliates of Valhi. The stock may be purchased from
time to time as market conditions  permit. The stock repurchase program does not
include  specific  price targets or timetables and may be suspended at any time.
Depending  on  market  conditions,  the  program  could be  terminated  prior to
completion.  The  Company  will  use its  cash on hand to  acquire  the  shares.
Repurchased  shares  will be retired  and  cancelled  or may be added to Valhi's
treasury and used for  employee  benefit  plans,  future  acquisitions  or other
corporate purposes. Subsequently during 2005, the Company purchased an aggregate
of 3.5 million shares of its common stock pursuant to this repurchase program in
market or other transactions for an aggregate of $62.1 million. See Note 17.

During 2004 and 2005,  the  Company  cancelled  9.9 million  shares and 3.5
million  shares,  respectively,  of its common stock that had either  previously
been  reported  as  treasury  stock  in  the  Company's  consolidated  financial
statements  (for the shares  cancelled in 2004) or had been acquired by Valhi in
market or other  transactions  (for the shares  cancelled in 2005).  Of such 9.9
million  shares  cancelled in 2004,  8.9 million shares were held in treasury by
Valhi, and 1 million shares had been held by a wholly-owned subsidiary of Valhi.
During 2004,  these 1 million  Valhi shares  previously  held by a subsidiary of
Valhi were distributed to Valhi and cancelled.  The aggregate $64.6 million cost
of such  treasury  shares  cancelled in 2004 and the $62.1  million cost of such
treasury  shares  cancelled  in 2005 have been  allocated to common stock at par
value, additional paid in capital and retained earnings in accordance with GAAP.
Such  cancellations  had no  impact  on the net  Valhi  shares  outstanding  for
financial reporting purposes.  The 4.0 million shares of treasury stock reported
for financial  reporting  purposes at December 31, 2004 and 2005  represents the
Company's  proportional  interest in 4.7 million  Valhi shares held by NL. Under
Delaware Corporation Law, 100% (and not the proportionate  interest) of a parent
company's  shares  held  by  a  majority-owned  subsidiary  of  the  parent  are
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 5 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.  Shares  issued  under the  incentive  stock plan are
generally newly-issued shares (i.e., not the re-issuance of treasury shares).

Outstanding  options at December 31, 2005 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 2.7 years.  At December 31, 2005, all of the
options  outstanding to purchase 814,000 Valhi shares were exercisable,  with an
aggregate  amount  payable  upon  exercise  of  $8.1  million  and an  aggregate
intrinsic  value  (defined as the excess of the market  price of Valhi's  common
stock over the exercise price) of $7.0 million.  All of such outstanding options
are exercisable at various dates through 2013 at prices lower than the Company's
December  31, 2005 market price of $18.50 per share.  At December  31, 2005,  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                                Weighted
payable             Exercise           average
upon               price per         exercise
Shares          exercise               share             price
------          --------             ---------          ------
(In thousands, except per share amounts)

Outstanding at December 31, 2002                      1,181          $10,663                $4.96-$12.45     $ 9.03

Granted                                                   8               80                       10.05      10.05
Exercised                                               (20)            (210)                9.50- 12.00      10.50
Canceled                                                (76)            (417)                4.96-  6.56       5.49
-----          -------

Outstanding at December 31, 2003                      1,093           10,116                 5.48- 12.45       9.26

Exercised                                               (20)            (177)                5.72- 12.00       8.85
Canceled                                               (198)          (1,231)                5.48- 12.45       6.22
-----          -------

Outstanding at December 31, 2004                        875            8,708                 6.38- 12.45       9.95

Exercised                                               (61)            (648)                6.38- 12.00      10.64
-----          -------

Balance at December 31, 2005                            814          $ 8,060                $6.38-$12.45       9.90
=====          =======

The intrinsic  value of Valhi options  exercised  aggregated  approximately
$85,000 in 2003,  $135,000 in 2004 and $535,000 in 2005,  and the related income
tax benefit from such exercises was  approximately  $30,000 in 2003,  $50,000 in
2004 and $190,000 in 2005.

Stock option plans of  subsidiaries  and affiliate.  NL, Kronos,  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, 2005 are  summarized  below.  There are no  outstanding  options to purchase
Kronos common stock at December 31, 2005.

Amount
Exercise           payable
price per            upon
Shares            share            exercise
------          ---------          --------
(In thousands, except
per share amounts)

NL Industries                                                        120     $ 2.66 -$11.49              $ 1,097
CompX                                                                470      10.00 -$20.00                8,637
TIMET                                                              1,038        .83 -$17.66               12,664

Other.  Prior to and within six months of Contran's sale of the 2.0 million
shares  of Valhi  common  stock  to Valhi  described  in Note  17,  Contran  had
purchased shares of Valhi common stock in market transactions.  In settlement of
any alleged  short-swing  profit derived from these  transactions  as calculated
pursuant to Section  16(b) of the  Securities  Exchange Act of 1934, as amended,
Contran  remitted  approximately  $645,000 to the Company in 2005, which amount,
net of $226,000 of related  income taxes,  has been recorded by the Company as a
capital contribution, increasing additional paid-in capital.

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 2003 (no options were granted
during 2004 or 2005) 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.  For purposes
of such pro forma  disclosure,  the estimated fair value of options is amortized
to expense over the options' vesting period. See also Note 21.

Note 15 - Income taxes:

Years ended December 31,
--------------------------------------
2003            2004           2005
--------          ------         -----
(Restated)      (Restated)
(In millions)

Components of pre-tax income - income (loss) from continuing
operations:
United States:

Contran Tax Group                                                    $(39.0)         $  78.9        $  80.1
CompX tax group                                                         6.3              6.1           -
------          -------        -------
(32.7)            85.0           80.1
Non-U.S. subsidiaries                                                    73.9             (3.7)         117.5
------          -------        -------

$ 41.2          $  81.3        $ 197.6
======          =======        =======

Expected tax expense (benefit), at U.S.
federal statutory income tax rate of 35%                                $ 14.4          $  28.4        $  69.1
Non-U.S. tax rates                                                         (1.5)             (.3)           (.1)
Incremental U.S. tax and rate differences
On equity in earnings                                                    106.8             93.0           23.4
Excess of book basis over tax basis of
shares of Kronos common stock sold                                         -                 .2            1.9
Loss of German income tax attribute                                         -               -              17.5
Income tax on distribution of shares of Kronos                             22.5              2.5             .7
Change in deferred income tax valuation
allowance, net                                                            (7.2)          (311.8)          -
Assessment (refund) of prior year income
taxes, net                                                               (38.0)            (2.5)           2.3
U.S. state income taxes, net                                                (.6)             1.0            4.3
Tax contingency reserve adjustment, net                                    30.5            (16.5)         (19.1)
Nondeductible expenses                                                      3.7              5.1            5.2
Other, net                                                                  1.8              7.6           (1.1)
------          -------        -------

$ 132.4         $(193.3)       $ 104.1
======          =======        =======

Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state                                               $ 15.2          $    .9        $  25.9
Non-U.S.                                                              (34.0)            17.6           35.9
------          -------        -------
(18.8)            18.5           61.8
------          -------        -------
Deferred income taxes (benefit):
U.S. federal and state                                              120.0               69.4           20.6
Non-U.S.                                                               31.2           (281.2)          21.7
------          -------        -------
151.2           (211.8)          42.3
------          -------        -------

$132.4          $(193.3)       $ 104.1
======          =======        =======

Comprehensive provision for
income taxes (benefit) allocable to:
Income from continuing operations                                      $132.4          $(193.3)       $ 104.1
Discontinued operations                                                  (2.6)            (4.6)           (.4)
Additional paid-in capital                                                -               -                .2
Cumulative effect of change in
accounting principle                                                      .3             -              -
Other comprehensive income:
Marketable securities                                                   2.1              2.1           -
Currency translation                                                    4.9             (8.2)          (8.6)
Pension liabilities                                                   (15.4)            (6.9)         (38.7)
------          -------        -------

$121.7          $(210.9)       $  56.6
======          =======        =======

The  components  of the net deferred tax liability at December 31, 2004 and
2005, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables.

December 31,
---------------------------------------------------------
2004                          2005
---------------------------   ---------------------------
Assets      Liabilities      Assets       Liabilities
------      -----------   -----------     -----------
(Restated)    (Restated)
(In millions)
Tax effect of temporary differences
related to:

Inventories                                           $   2.6           $  (6.3)     $   3.0         $  (3.6)
Marketable securities                                     -              (107.5)         -            (106.9)
Property and equipment                                   38.3            (104.6)        26.4           (87.8)
Accrued OPEB costs                                       13.9              -            12.7            -
Accrued environmental liabilities and
other deductible differences                           120.1              -           111.1            -
Other taxable differences                                -               (185.8)         -            (125.8)
Investments in subsidiaries and
affiliates                                              24.9            (202.0)         -            (209.6)
Tax loss and tax credit carryforwards                   245.3              -           199.4            -
-------           -------      -------         -------
Adjusted gross deferred tax assets
(liabilities)                                         445.1            (606.2)       352.6          (533.7)
Netting of items by tax jurisdiction                     (195.9)            195.9       (128.4)          128.4
-------           -------      -------         -------
249.2            (410.3)       224.2          (405.3)
Less net current deferred tax asset
(liability)                                                9.7             (24.2)        10.5            (4.3)
-------           -------      -------         -------

Net noncurrent deferred tax asset
(liability)                                        $ 239.5           $(386.1)     $ 213.7         $(401.0)
=======           =======      =======         =======

Years ended December 31,
-------------------------------------
2003           2004             2005
----           ----             ----
(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                                                   $   -         $   -            $   -
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria                              (7.2)        (311.8)             -
Foreign currency translation                                              28.2           (3.0)             -
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                                                     (11.8)         121.0              -
Valhi/Tremont merger                                                     (10.8)          -                 -
Other, net                                                                 (.1)          -                 -
------        -------          -------

$ (1.7)       $(193.8)         $   -
======        =======          =======

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  penalties
and interest. For example:

o    Kronos received a preliminary tax assessment  related to 1993 from the
Belgian tax authorities proposing tax deficiencies,  including related
interest,  of approximately euro 6 million ($7 million at December 31,
2005). Kronos filed a protest to this assessment,  and believes that a
significant  portion of the assessment was 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, would have aggregated approximately euro 9 million
($11 million). Kronos filed a written response to the assessment,  and
in September 2005 the Belgian tax authorities withdrew the assessment.

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.

o    Kronos has received a tax assessment from the Canadian tax authorities
related  to the  years  1998  and  1999  proposing  tax  deficiencies,
including  interest,  of  approximately  Cdn. $5 million ($4 million).
Kronos  filed  a  protest,  and in  October  2005,  the  Canadian  tax
authorities  agreed to reduce the  assessment  and settle all  issues,
including interest, for approximately Cdn. $2 million ($1.7 million).

During the third quarter of 2005,  Kronos reached an agreement in principle
with the German tax authorities regarding such tax authorities' objection to the
value assigned to certain intellectual property rights held by Kronos' operating
subsidiary in Germany.  Under the agreement in principle,  the value assigned to
such  intellectual  property  for  German  income tax  purposes  will be reduced
retroactively,  resulting in a reduction in the amount of Kronos' net  operating
loss  carryforwards  in Germany as well as a future  reduction  in the amount of
amortization  expense attributable to such intellectual  property.  As a result,
Kronos  recognized a $17.5 million  non-cash  deferred income tax expense in the
third quarter of 2005 related to such agreement.  The $19.1 million non-cash tax
contingency  adjustment  income tax  benefit in 2005  relates  primarily  to the
withdrawal of the Belgium tax  authorities'  assessment  related to 1999 and the
Canadian tax authorities' reduction of one of its assessments, both as discussed
above,  as well as favorable  developments  with  respect to certain  income tax
items of NL in the U.S.

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  and 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.

Under  GAAP,  a company is  required  to  recognize  a deferred  income tax
liability  with respect to the  incremental  U.S.  taxes (federal and state) and
foreign withholding taxes that would be incurred when undistributed  earnings of
a  foreign  subsidiary  are  subsequently  repatriated,  unless  management  has
determined that those undistributed  earnings are permanently reinvested for the
foreseeable future. Prior to the third quarter of 2005, CompX had not recognized
a  deferred  tax  liability  related  to such  incremental  income  taxes on the
undistributed earnings of its foreign operations, as those earnings were subject
to specific  permanent  reinvestment  plans. GAAP requires a company to reassess
the  permanent  reinvestment  conclusion  on an ongoing  basis to  determine  if
management's  intentions  have  changed.  As of September  30,  2005,  and based
primarily upon changes in CompX management's  strategic plans for certain of its
non-U.S.  operations,  CompX's  management has determined that the undistributed
earnings of such  subsidiaries  can no longer be  considered  to be  permanently
reinvested,  except  for the  pre-2005  earnings  of its  Taiwanese  subsidiary.
Accordingly,  and in accordance  with GAAP,  CompX  recognized an aggregate $9.0
million  provision  for  deferred  income taxes on the  aggregate  undistributed
earnings of these foreign subsidiaries.

In October  2004,  the American  Jobs Creation Act of 2004 was enacted into
law.  The new law  provided for a special 85%  deduction  for certain  dividends
received from a controlled foreign  corporation in 2005. In the third quarter of
2005, the Company  completed its evaluation of this new provision and determined
that it would not benefit from such special dividends received deduction.

At December 31, 2003, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes,  all of which have no
expiration  date. These net operating loss  carryforwards  were generated by KII
principally  during  the 1990's  when KII had a  significantly  higher  level of
outstanding indebtedness than is currently outstanding.  For financial reporting
purposes,  however, the benefit of such net operating loss carryforwards had not
previously  been  recognized  because  Kronos  did  not  believe  they  met  the
"more-likely-than-not"  recognition  criteria,  and  accordingly  Kronos  had  a
deferred income tax asset valuation allowance offsetting the benefit of such net
operating loss carryforwards and Kronos' other tax attributes in Germany. At the
end of the second quarter of 2004, and based on all available  evidence,  Kronos
concluded  that the benefit of the net operating  loss  carryforwards  and other
German tax attributes now met the  "more-likely-than-not"  recognition criteria,
and that reversal of the deferred income tax asset valuation  allowance  related
to Germany was appropriate. Given the magnitude of the German net operating loss
carryforwards  and the fact that  current  provisions  of  German  law limit the
annual  utilization of net operating loss carryforwards to 60% of taxable income
after the first euro 1 million  of taxable  income,  KII  believes  it will take
several years to fully utilize the benefit of such loss carryforwards.  However,
given that Kronos generated  positive  taxable income in Germany,  combined with
the fact that the net operating  loss  carryforwards  have no  expiration  date,
Kronos  concluded,  among other things, it was now appropriate to reverse all of
the valuation allowance related to the net operating loss carryforwards  because
the   benefit   of   such   operating   loss    carryforwards   now   meet   the
"more-likely-than-not"  recognition  criteria.  Of the $280.7 million  valuation
allowance  related to Germany which was reversed  during 2004, and in accordance
with the  applicable  GAAP  related to  accounting  for income  taxes at interim
periods,  (i) $8.7 million was reversed during the first six months of 2004 that
related   primarily  to  the  utilization  of  the  German  net  operating  loss
carryforwards  during such period,  (ii) $268.6  million was reversed as of June
30, 2004 and (iii) $3.4 million was reversed during the last six months of 2004.

NL's and NL's  subsidiary  EMS, 1998 U.S.  federal  income tax returns were
being examined by the U.S. tax authorities, and NL and EMS granted extensions of
the statute of  limitations  for  assessments of tax with respect to their 1998,
1999 and 2000 income tax returns until September 30, 2005.  During the course of
the  examination,  the IRS  proposed 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,  a final settlement with the IRS is to be reached through  expedited
negotiations and, if necessary,  through a specified arbitration  procedure.  NL
reached an  agreement  with the IRS  concerning  the  settlement  of this matter
pursuant to which,  among other things,  the Company agreed to pay approximately
$21 million, including interest, up front as a partial payment of the settlement
amount  (which  amount  was paid  during  2005 and was  classified  as a current
liability  at December  31,  2004),  and NL will be required  to  recognize  the
remaining  settlement  amount in its taxable income over the 15-year time period
beginning in 2004. NL had  previously  provided  accruals to cover its estimated
additional tax liability (and related  interest)  concerning  this matter.  As a
result of the  settlement,  NL decreased its previous  estimate of the amount of
additional  income  taxes  and  interest  it will  be  required  to pay,  and NL
recognized an $17.4 million tax benefit in 2004 related to the revised estimate.
In addition,  during 2004,  the Company  recognized a $31.1  million tax benefit
related to the  reversal  of a deferred  income  tax asset  valuation  allowance
related  to  certain  tax  attributes  of EMS  which  NL  believed  now  met the
"more-likely-than-not"  recognition  criteria. A majority of the deferred income
tax asset  valuation  allowance at December 31, 2003,  related to net  operating
loss  carryforwards of EMS. As a result of the settlement  agreement,  NL (which
previously was not allowed to utilize such net operating loss  carryforwards  of
EMS) utilized such carryforwards in its 2003 taxable year,  eliminating the need
for a valuation  allowance related to such  carryforwards.  The remainder of the
deferred income tax asset  valuation  allowance  reversed  related to deductible
temporary differences  associated with accrued environmental  obligations of EMS
which NL now believed met the "more-likely-than-not" recognition criteria since,
as a result of the settlement  agreement,  such  obligations and the related tax
deductions have been or will be included in NL's taxable income.

In the first quarter of 2003, KII was notified by the German Federal Fiscal
Court that the Court 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  net refund of taxes and related  interest to KII and its
German  operating  subsidiary  of euro 26.9  million  ($32.1  million),  and the
Company  recognized  the  benefit of these net  refunds  in its 2003  results of
operations.  During  2004,  Kronos  recognized  a net refund of euro 2.5 million
($3.1  million)  related to  additional  net  interest  which has accrued on the
outstanding  refund amount.  Through December 2004, KII and its German operating
subsidiary  had received net refunds of euro 35.6  million  ($44.7  million when
received).  All refunds  relating to the periods  1990 to 1997 were  received by
December 31, 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
Kronos recognized euro 21.5 million (24.6 million) in 2003.

At December 31,  2005,  (i) Kronos had the  equivalent  of $593 million and
$104 million of the net operating loss  carryforwards  for German  corporate and
trade tax purposes,  respectively,  all of which have no expiration  date,  (ii)
Tremont had $6 million of U.S. net operating loss carryforwards expiring in 2018
through  2020,  (iii)  CompX  had  $1.6  million  of  U.S.  net  operating  loss
carryforwards  expiring in 2007  through  2017 and (iv) Valhi had $36 million of
U.S.  net  operating  loss  carryforwards  expiring in 2019  through 2025 and $6
million of capital loss carry  forwards  expiring in 2009. At December 31, 2005,
the U.S. net operating loss carryforwards of CompX are limited in utilization to
approximately  $400,000  per year.  In  addition,  approximately  $6  million of
Valhi's net  operating  loss  carryforwards  may only be used to offset  taxable
income of NL and are not  available  to offset  future  taxable  income of other
members of the Contran Tax Group.

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. At December 31,
2005, the Company  currently expects to contribute the equivalent of $18 million
to all of its defined benefit  pension plans during 2006, and aggregate  benefit
payments  to  plan  participants  out of  plan  assets  are  expected  to be the
equivalent of $25 million in 2006, $24 million in 2007, $26 million in 2008, $25
million in 2009, $26 million in 2010 and $140 million during 2011 through 2015.

Years ended December 31,
------------------------
2004              2005
----              ----
(In thousands)
Change in projected benefit obligations ("PBO"):

Benefit obligations at beginning of the year                                      $ 409,517        $ 454,911
Service cost                                                                          6,758            7,373
Interest cost                                                                        22,219           22,589
Participant contributions                                                             1,420            1,538
Actuarial losses                                                                      7,218          101,416
Change in foreign currency exchange rates                                            30,820          (42,292)
Benefits paid                                                                       (23,041)         (25,001)
---------        ---------

Benefit obligations at end of the year                                        $ 454,911        $ 520,534
=========        =========

Change in plan assets:
Fair value of plan assets at beginning of the year                                $ 263,773        $ 311,898
Actual return on plan assets                                                         31,951           54,083
Employer contributions                                                               17,812           19,244
Participant contributions                                                             1,420            1,538
Change in foreign currency exchange rates                                            19,983          (23,613)
Benefits paid                                                                       (23,041)         (25,001)
---------        ---------

Fair value of plan assets at end of year                                      $ 311,898        $ 338,149
=========        =========

Funded status at end of the year:
Plan assets less than PBO                                                         $(143,013)       $(182,385)
Unrecognized actuarial losses                                                       147,264          194,783
Unrecognized prior service cost                                                       8,757            7,441
Unrecognized net transition obligations                                               4,878            4,603
---------        ---------

$  17,886        $  24,442
=========        =========

Amounts recognized in the balance sheet:
Unrecognized net pension obligations                                              $  13,518        $  11,916
Prepaid pension cost                                                                      -            3,529
Accrued pension costs:
Current                                                                            (9,090)         (12,756)
Noncurrent                                                                        (77,360)        (140,742)
Accumulated other comprehensive loss                                                 90,818          162,495
---------        ---------

$  17,886        $  24,442
=========        =========

Years ended December 31,  
----------------------------------------
2003             2004              2005
-----             ----              ----
(In thousands)

Net periodic pension cost:

Service cost benefits                                                   $  5,347      $  6,758           $  7,373
Interest cost on PBO                                                      20,063        22,219             22,589
Expected return on plan assets                                           (19,294)      (20,975)           (22,223)
Amortization of prior service cost                                           354           502                597
Amortization of net transition obligations                                   733           657                350
Recognized actuarial losses                                                2,423         4,361              4,450
--------      --------           --------

$  9,626      $ 13,522           $ 13,136
========      ========           ========

The  weighted-average  rate  assumptions  used in determining the actuarial
present  value of  benefit  obligations  as of  December  31,  2004 and 2005 are
presented in the table below. Such weighted-average  rates were determined using
the projected benefit obligations at each date.

December 31,
-------------------------
Rate                                                                     2004                 2005
----                                                                     ----                 ----

Discount rate                                                                        5.3%                 4.5%
Increase in future compensation levels                                               2.3%                 2.3%

The weighted-average  rate assumptions used in determining the net periodic
pension  cost for 2003,  2004 and 2005 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                                                       2003                2004                2005
----                ----                ----

Discount rate                                                            6.0%                  5.6%             5.3%
Increase in future compensation levels                                   2.7%                  2.2%             2.3%
Long-term return on plan assets                                          7.4%                  7.8%             7.2%

At December 31, 2005, the accumulated  benefit  obligations for all defined
benefit pension plans was approximately  $482 million (2004 - $403 million).  At
December 31, 2005, the projected  benefit  obligations  for all defined  benefit
pension  plans was  comprised  of $98  million  related  to U.S.  plans and $422
million  related  to  non-U.S.  plans  (2004 - $100  million  and $355  million,
respectively). At December 31, 2004 and 2005, substantially all of the projected
benefit obligations  attributable to non-U.S.  plans relates to plans maintained
by Kronos.  At December 31,  2005,  approximately  49% and 15% of the  projected
benefit obligations  attributable to U.S. plans relate to plans maintained by NL
and Kronos,  respectively,  and 36% relates to a plan  maintained  by a disposed
business  unit of Valhi  (2004 - 52% relates to NL, 14% to Kronos and 34% to the
disposed business unit). 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, 2005, the fair value of plan assets for all defined benefit
pension  plans was  comprised  of $112  million  related to U.S.  plans and $226
million  related  to  non-U.S.  plans  (2004 - $82  million  and  $230  million,
respectively).  At  December  31, 2004 and 2005,  substantially  all of the plan
assets attributable to non-U.S.  plans relates to plans maintained by Kronos. At
December 31, 2005,  approximately 46% and 16% of the plan assets attributable to
U.S. plans relates to plans maintained by NL and Kronos,  respectively,  and 38%
relates to a plan  maintained  by a disposed  business unit of Valhi (2004 - 54%
relates to NL, 15% relate to Kronos and 31% to the disposed business unit).

At December  31,  2005,  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  $415  million,  $377  million  and  $220  million,
respectively (2004 - $455 million, $403 million and $312 million, respectively).
At December 31, 2004 and 2005, approximately 78% and 100%, respectively, of such
unfunded amount relates to non-U.S.  plans maintained by Kronos, and most of the
remainder at December 31, 2004 relates to U.S.  plans  maintained  by NL and the
disposed business unit of Valhi.

At December 31, 2004 and 2005, substantially all of the assets attributable
to U.S. plans were invested in the CMRT, a collective investment trust sponsored
by Contran 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,  2005,  the asset mix of the CMRT was 86% in U.S.
equity  securities,  3% in U.S.  fixed income  securities,  7% in  international
equity  securities and 4% in cash and other investments (2004 - 77%, 14%, 7% 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.  Harold
Simmons is the sole trustee of the CMRT. The trustee of the CMRT, along with the
CMRT's investment committee,  of which Mr. Simmons is a member,  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 years ended
December 31, 2003, 2004 and 2005, 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
18-year  history of the CMRT from its  inception  in 1987  through  December 31,
2005, the average annual rate of return has been  approximately  14% (with a 36%
return for 2005).

At December 31, 2004 and 2005, plan assets attributable to Kronos' non-U.S.
plans  related  primarily  to Germany,  Canada and Norway.  In  determining  the
expected  long-term  rate of return on plan asset  assumptions  for its non-U.S.
plans,  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    In Germany,  the  composition of Kronos' plan assets is established to
satisfy the  requirements of the German  insurance  commissioner.  The
plan asset allocation at December 31, 2005 was 23% to equity managers,
48% to fixed  income  managers and 29% to real estate (2004 - 23%, 48%
and 29%, respectively).
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 plan  asset  allocation  at  December  31,  2005 was 64% to equity
managers,  32% to fixed income  managers  and 4% to other  investments
(2004 - 60%, 40% and nil, respectively).
o    In Norway,  Kronos currently has a plan asset target allocation of 14%
to equity  managers and 64% to fixed income managers and the remainder
to liquid  investments such as money markets.  The expected  long-term
rate of return for such investments is approximately  8%, 4.5% to 6.5%
and 2.5%, respectively. The plan asset allocation at December 31, 2005
was 16% to  equity  managers,  62% to fixed  income  managers  and the
remainder  invested  primarily in cash and liquid  investments (2004 -
16%, 64% and 20%, respectively).

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

Postretirement benefits other than pensions. Certain subsidiaries currently
provide  certain  health care and life insurance  benefits for eligible  retired
employees.  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, 2005,  the expected rate of increase in future
health  care  costs  ranges  from  8.0% to 9.0% in 2006,  declining  to rates of
between 4% to 5.5% in 2010 and thereafter (2004 - 8% to 9.3% in 2005,  declining
to 4% 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 $221,000  (decreased by $188,000) in 2005,  and the actuarial
present value of  accumulated  OPEB  obligations at December 31, 2005 would have
increased by $2.7 million (decreased by $2.4 million). At December 31, 2005, the
Company  currently  expects to contribute the equivalent of  approximately  $3.9
million to all of its OPEB plans during 2006, and aggregate  benefit payments to
OPEB plan  participants  are  expected to be the  equivalent  of $3.9 million in
2006,  $3.4 million in 2007,  $3.3 million in 2008,  $3.2 million in 2009,  $3.1
million in 2010 and $13.4 million during 2011 through 2015.

Years ended December 31,
-------------------------
2004             2005
------           --------
(In thousands)

Change in accumulated OPEB obligations:

Obligations at beginning of the year                                               $ 46,177        $ 36,603
Service cost                                                                            232             222
Interest cost                                                                         2,418           2,010
Actuarial losses (gains)                                                             (4,925)          1,901
Plan amendments                                                                      (2,044)              -
Change in foreign currency exchange rates                                               411             286
Benefits paid                                                                        (5,666)         (5,026)
--------        --------

Obligations at end of the year                                                     $ 36,603        $ 35,996
========        ========

Change in plan assets:
Employer contributions                                                             $  5,666        $  5,026
Benefits paid                                                                        (5,666)         (5,026)
--------        --------

Fair value of plan assets at end of the year                                       $   -           $   -
========        ========

Funded status at end of the year:
Plan assets less than benefit obligations                                          $(36,603)       $(35,996)
Unrecognized net actuarial losses (gains)                                              (606)          1,531
Unrecognized prior service credit                                                    (2,818)         (1,893)
--------        --------

$(40,027)       $(36,358)
========        ========

Accrued OPEB costs recognized in the balance sheet:
Current                                                                            $ (5,039)       $ (4,079)
Noncurrent                                                                          (34,988)        (32,279)
--------        --------

$(40,027)       $(36,358)
========        ========

Years ended December 31,  
--------------------------------------
2003           2004           2005
------          ----           -------
(In thousands)

Net periodic OPEB cost:

Service cost                                                           $   152       $  232         $   222
Interest cost                                                            2,820        2,418           2,010
Amortization of prior service credit                                    (2,075)        (859)           (925)
Recognized actuarial losses (gains)                                         38          192            (135)
-------       ------         -------

$   935       $1,983         $ 1,172
=======       ======         =======

The  weighted  average  discount  rate used in  determining  the  actuarial
present  value of benefit  obligations  as of December 31, 2005 was 5.5% (2004 -
5.7%).  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 2005 was 5.7% (2004 - 5.9%;  2003 - 6.4%).  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.

As of December 31, 2004 and 2005, the accumulated  benefit  obligations for
all OPEB plans were equal to the projected benefit obligations.  At December 31,
2005,  the  projected  benefit  obligations  for all OPEB plans was comprised of
$29.1 million related to U.S. plans and $6.9 million  related to non-U.S.  plans
(2004 - $31.2 million and $5.4 million,  respectively). At December 31, 2004 and
2005, all of the projected benefit  obligations  attributable to non-U.S.  plans
relates to plans maintained by Kronos.  At December 31, 2005,  approximately 48%
and 15% of the projected benefit obligations  attributable to U.S. plans relates
to plans  maintained by NL and Kronos,  respectively,  and 36% relates to a plan
maintained by Tremont (2004 - 51% maintained by NL, 16% maintained by Kronos and
32% maintained by Tremont).  Kronos and NL use a September 30th measurement date
for their OPEB plans, and Tremont uses a December 31st measurement date.

The Medicare  Prescription Drug,  Improvement and Modernization Act of 2003
(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  actuarially
equivalent  to Medicare  Part D. During the third  quarter of 2004,  the Company
determined  that  benefits  provided  by its  two  U.S.  plans  are  actuarially
equivalent  to the Medicare Part D benefit and therefore the Company is eligible
for the federal  subsidy  provided for by the Medicare 2003 Act for those plans.
The effect of such subsidy,  which is accounted for prospectively  from the date
actuarial  equivalence  was  determined,  as permitted by and in accordance with
FASB Staff Position No. 106-2,  did not have a material impact on the applicable
accumulated  postretirement  benefit  obligation,  and will not have a  material
impact on the net periodic OPEB cost going forward.

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 million in each of 2003 and 2004
and $3 million in 2005.

Note 17 - Related party transactions:

The Company may be deemed to be controlled  by Mr.  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.

Receivables  from and payables to  affiliates  are  summarized in the table
below.

December 31,
--------------------
2004            2005
----            ----
(In thousands)

Current receivables from affiliates:
Contran:

Demand loan                                                                           $ 4,929       $  -   
Income taxes, net                                                                         578            33
TIMET                                                                                        24             1
-------       -------

$ 5,531       $    34
=======       =======

Noncurrent receivable from affiliate -
loan to Contran family trust                                                            $10,000       $  -
=======       =======

Current payables to affiliates:
Louisiana Pigment Company                                                               $ 8,844       $ 9,803
Contran - trade items                                                                     2,753         3,940
Other                                                                                        10            11
-------       -------

$11,607       $13,754
=======       =======

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.

Prior to 2003, EMS, NL's environmental management subsidiary,  entered into
a $25 million  revolving credit facility with one of the family trusts discussed
in Note 1 ($10 million outstanding at December 31, 2004). The loan bore interest
at prime,  was due on  demand  with 60 days  notice  and was  collateralized  by
certain  shares  of  Contran's  Class A  common  stock  and  Class E  cumulative
preferred  stock  held by the  trust.  The terms of this loan were  approved  by
special  committees of both NL's and EMS' respective board of directors composed
of independent  directors.  During 2005, the family trust repaid the $10 million
balance  outstanding at December 31, 2004, and the loan facility was terminated.
At December 31, 2004, the loan was classified as a noncurrent  asset because EMS
did not intend to demand repayment within the next 12 months.

During 2003 and 2004,  Valhi  borrowed  varying  amounts from Contran,  and
during 2004 and 2005 Contran  borrowed  varying amounts from Valhi,  pursuant to
the terms of demand notes. Such unsecured  borrowings bear interest at a rate of
prime less .5%.

Interest income on all loans to related parties, including EMS' loan to one
of the  Contran  family  trusts,  was  $723,000  in 2003,  $645,000  in 2004 and
$572,000  in 2005.  Interest  expense  on all loans  from  related  parties  was
$154,000  in  2003,  $131,000  in 2004  and nil in 2005 and  relates  solely  to
borrowings from Contran.

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.

The net ISA fees charged by Contran to the Company,  including NL,  Kronos,
Tremont,  TIMET,  CompX and Waste  Control  Specialists,  included  in  selling,
general and administrative  expense,  aggregated  approximately $10.0 million in
2003,  $17.3  million in 2004 and $20.0  million in 2005.  The  increase  in the
aggregate  ISA fee charged to the Company from 2003 to 2004 is due  primarily to
approximately  30 staff positions who had previously been  compensated by NL and
Kronos,  who in 2004 commenced  being  compensated by Contran.  TIMET had an ISA
with  Tremont   whereby  TIMET   provided   certain   services  to  Tremont  for
approximately  $180,000  in 2003.  NL had an ISA with TIMET  whereby NL provided
certain  services  to TIMET  for  approximately  $14,000  in  2003.  Both of the
TIMET/Tremont  ISA and the  NL/TIMET  ISA have been  terminated.  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  (including a predecessor  company,  Valmont
Insurance  Company,  which was merged into Tall Pines in December  2004) 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 is
wholly-owned  by  Tremont,  and  EWI  is  wholly-owned  by NL.  Consistent  with
insurance industry  practices,  Tall Pines and EWI receive  commissions from the
insurance and reinsurance  underwriters and/or access fees for the policies that
they provide or broker.  Tall Pines purchases  reinsurance for substantially all
of the risks it underwrites.  The Company expects that these  relationships with
Tall Pines and EWI will continue in 2006.

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  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 $1.2  million in 2003,  $1.3  million in 2004 and $1.4 million in
2005. TIMET also paid BMI an electrical  facilities  upgrade fee of $1.3 million
in each of 2003 and 2004 and  $800,000  in 2005.  Such  $800,000  annual  fee is
scheduled to terminate after January 2010.

In 2005, the Company purchased 2.0 million shares of its common stock, at a
discount to the then-current  market price, from Contran for $17.50 per share or
an aggregate  purchase price of $35.0  million.  Valhi's  independent  directors
approved such purchase.  During the third quarter of 2005, the Company purchased
175,000  shares of its common  stock for an  aggregate  of $3.1 million from The
Simmons Family Foundation,  a charitable  organization of which Mr. Simmons is a
trustee,  based  on the  market  price  of  Valhi  common  stock  on the date of
purchase. All of such shares were purchased under the Company's stock repurchase
program described in Note 14.

COAM Company is a partnership which has a sponsored research agreement with
the  University of Texas  Southwestern  Medical  Center at Dallas to develop and
commercially  market  patents and technology  resulting  from a cancer  research
program (the "Cancer Research  Agreement").  At December 31, 2005, COAM partners
are Contran, Valhi and another Contran subsidiary.  Mr. Harold C. Simmons is the
manager of COAM. The Cancer Research Agreement,  as amended through December 31,
2005, provides for funds of up to $70 million through 2015. Funding requirements
pursuant  to the  Cancer  Research  Agreement  is 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 2006.

Amalgamated  Research,  Inc.,  a  wholly-owned  subsidiary  of the Company,
provides  certain  research,  laboratory and quality control services 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,  royalty-free  perpetual license to use all currently existing or
hereafter  developed  technology  which is  applicable to sugar  operations  and
provides for payment of certain  royalties to The Amalgamated  Sugar Company LLC
from future sales or licenses of the  subsidiary's  technology to third parties.
Research and development  services charged to The Amalgamated Sugar Company LLC,
included  in other  income,  were  $865,000  in 2003,  $956,000 in 2004 and $1.0
million  in  2005.   The   Amalgamated   Sugar  Company  LLC  provides   certain
administrative  services to Amalgamated Research,  and the cost of such services
(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 considered in
the  agreed-upon  research  and  development  services  fee  paid  by the LLC to
Amalgamated Research and is not separately quantified.

Note 18 - Commitments and contingencies:

Lead pigment litigation - NL.

NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. NL, other former  manufacturers of lead pigments for
use in paint and lead-based  paint, and the Lead Industries  Association  (which
discontinued business operations prior to 2003) 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   or  risk   contribution   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 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.  A number of cases are  inactive  or 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 either the  defendants or the  plaintiffs.  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 in the future.

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 never settled any of these cases, nor have any final adverse
judgments  against NL been  entered.  NL has not accrued any amounts for pending
lead pigment and lead-based paint litigation. Liability that may result, if any,
cannot currently be reasonably estimated. There can be no assurance that NL will
not incur liability in the future in respect of this pending  litigation in view
of the inherent  uncertainties involved in court and jury rulings in pending and
possible  future cases.  If any such future  liability  were to be incurred,  it
could have a material  adverse  effect on the Company's  consolidated  financial
statements, results of operations and liquidity.

In one of  these  lead  pigment  cases  (State  of  Rhode  Island  v.  Lead
Industries Association), a trial before a Rhode Island state court jury began in
September  2002 on the question of whether lead pigment in paint on Rhode Island
buildings is a public  nuisance.  In October  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. In
November  2005,  the State of Rhode  Island  began a retrial  of the case on the
State's claims of public nuisance,  indemnity and unjust  enrichment  against NL
and three other defendants.  Following the state's presentation of its case, the
trial court dismissed the state's claims of indemnity and unjust enrichment. The
public  nuisance claim was sent to the jury in February 2006, and the jury found
that NL and two other defendants substantially  contributed to the creation of a
public  nuisance  as a result of the  collective  presence  of lead  pigments in
paints and coatings on buildings  in Rhode  Island.  The jury also found that NL
and the two other  defendants  should be ordered  to abate the public  nuisance.
Following  the jury  verdict,  the trial court  dismissed  the state's claim for
punitive  damages.  The scope of the abatement  remedy will be determined by the
judge.  The extent,  nature and cost of such remedy is not  currently  known and
will be determined only following additional proceedings. Various motions remain
pending before the trial court,  including NL's motion to dismiss. NL intends to
appeal any adverse judgment which the trial court may enter against NL.

The Rhode  Island  case is  unique  in that this is the first  time that an
adverse  verdict in the lead pigment  litigation has been entered against NL. NL
does not believe it is currently  possible to determine  the nature or extent of
any potential liability resulting from the verdict. In addition,  liability that
might  result to NL, if any,  with  respect to this and the other  lead  pigment
litigation can not currently be reasonably estimated. However, as with any legal
proceeding, there is no assurance that any of these appeals would be successful,
and it is reasonably possible, based on the outcome of the appeals process, that
NL would in the near term  conclude  that it was probable NL had  incurred  some
liability in this Rhode Island matter that would result in the  recognition of a
loss contingency accrual. Such potential liability could have a material adverse
impact  on net  income  for the  interim  or annual  period  during  which  such
liability  is  recognized,  and a  material  adverse  impact  on NL's  financial
condition and liquidity.  NL believes it is reasonably  possible that additional
legal  proceedings  in these  matter  could be  scheduled  for trial in 2006 and
beyond  in other  jurisdictions,  including  cases in  which NL is  currently  a
defendant or in cases not yet filed  against NL, the  resolution  of which could
also  result in  recognition  of a loss  contingency  accrual  that could have a
material  adverse  impact on net income for the interim or annual  period during
which  such  liability  is  recognized,  and a material  adverse  impact on NL's
financial  condition and liquidity.  An estimate of the potential impact on NL's
results of operations, financial condition or liquidity related to these matters
can not currently be reasonably estimated.

Environmental matters and litigation.

General.  The Company's  operations  are governed by various  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 and  regulations.  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 maintain  compliance  with
applicable environmental laws and regulations at all of its plants and to strive
to improve its environmental performance.  From time to time, the Company may be
subject to environmental regulatory enforcement under U.S. and foreign 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  believes  all of its plants are in
substantial compliance with applicable environmental laws.

Certain  properties and facilities used in the Company's former businesses,
including  divested  primary  and  secondary  lead  smelters  and former  mining
locations of NL, 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, potentially 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.  EPA's  Superfund  National
Priorities List or similar state lists.  These  proceedings  seek cleanup costs,
damages for  personal  injury or property  damage  and/or  damages for injury to
natural resources.  Certain of these proceedings  involve claims for substantial
amounts.  Although  the  Company may be jointly  and  severally  liable for such
costs,  in most cases it is only one of a number of PRPs who may also be jointly
and severally liable.

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  respecting  site cleanup  costs or allocation of such costs among PRPs,
solvency of other 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 or 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. If any such future liability
were to be incurred,  it could have a material  adverse  effect on the Company's
consolidated financial statements, results of operations and liquidity.

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, 2005, no receivables for such 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  that 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 three years is presented in the table below. The amount shown in
the table below for payments against the Company's accrued  environmental  costs
in  2004 is net of a $1.5  million  recovery  of  remediation  costs  previously
expended  by NL that  was  paid to NL by  other  PRPs  in  2004  pursuant  to an
agreement entered into by NL and the other PRPs.

Years ended December 31,
------------------------------------------
2003              2004              2005
----              ----              -----
(In thousands)

Balance at the beginning of the year                               $101,166         $ 86,681          $ 76,766
Additions charged to expense, net                                    29,524            2,477             5,703
Payments, net                                                       (44,009)         (12,392)          (16,743)
--------         --------          --------

Balance at the end of the year                                     $ 86,681         $ 76,766          $ 65,726
========         ========          ========

Amounts recognized in the balance sheet:
Current liability                                                                 $ 21,316          $ 16,565
Noncurrent liability                                                                55,450            49,161
--------          --------

$ 76,766          $ 65,726
========          ========

NL.  Certain  properties  and  facilities  used in NL's former  businesses,
including  divested  primary  and  secondary  lead  smelters  and former  mining
locations of NL, 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  CERCLA,  and  similar  state  laws in
approximately 60 governmental and private actions associated with waste disposal
sites, mining locations and facilities  currently or previously owned,  operated
or used by NL, or its subsidiaries or their  predecessors,  certain of which are
on the U.S. 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.

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, 2005,  NL had
accrued  $54.9  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  $80 million.  NL's  estimates of such  liabilities  have not been
discounted to present value.

At December  31,  2005,  there are  approximately  20 sites for which NL is
currently  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.  On  certain  of these  sites  that had
previously  been  inactive,  NL has  received  general  and  special  notices of
liability  from the EPA alleging  that NL, along with other PRPs,  is liable for
past and  future  costs of  remediating  environmental  contamination  allegedly
caused by former  operations  conducted at such sites.  These  notifications may
assert that NL, along with other PRP's,  is liable for past clean-up  costs that
could be material to NL if liability for such amounts ultimately were determined
against NL.

At December 31, 2004, NL had $19 million in restricted cash equivalents and
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.  During 2005, all of such  restricted  balances had
been so utilized.  Use of such restricted  balances did not affect the Company's
consolidated net cash flows.

Tremont.  Prior to  2003,  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  ($3.8  million at  December  31,  2005) to cover its share of
probable  and  reasonably   estimable   environmental   obligations   for  these
activities. Tremont has entered into an agreement with another PRP of this site,
Halliburton  Energy  Services,  Inc., that provides for, among other thing,  the
interim  sharing of remediation  costs  associated with the site pending a final
allocation  of  costs  and  an  agreed-upon  procedure  through  arbitration  to
determine such final  allocation of costs. On December 9, 2005,  Halliburton and
DII Industries,  LLC,  another PRP of this site, filed suit in the United States
District Court for the Southern District of Texas,  Houston  Division,  Case No.
H-05-4160,  against NL, Tremont and certain of its  subsidiaries,  M-I,  L.L.C.,
Milwhite,  Inc. and Georgia-Pacific  Corporation seeking (i) to recover response
and  remediation  costs incurred at the site, (ii) a declaration of the parties'
liability  for  response and  remediation  costs  incurred at the site,  (iii) a
declaration of the parties'  liability for response and remediation  costs to be
incurred  in the  future  at the  site  and  (iv) a  declaration  regarding  the
obligation  of Tremont to indemnify  Halliburton  and DII for costs and expenses
attributable  to the site.  On December 27, 2005, a subsidiary  of Tremont filed
suit in the United States  District Court for the Western  District of Arkansas,
Hot Springs  Division,  Case No. 05-6089,  against  Georgia-Pacific,  seeking to
recover response costs it has incurred and will incur at the site. Subsequently,
plaintiffs in the Houston litigation verbally agreed to stay that litigation and
enter into with NL, Tremont and its  affiliates an amendment to the  arbitration
agreement  previously  agreed upon for resolving the  allocation of costs at the
site. Tremont has also agreed to stay the Arkansas litigation. Tremont has based
its  accrual  for this site  based upon the  agreed-upon  interim  cost  sharing
allocation.  Tremont  currently  expects that the nature and extent of any final
remediation measures that might be imposed with respect to this site will not be
known until 2008.  Currently,  no reasonable estimate can be made of the cost of
any such final  remediation  measures,  and  accordingly  Tremont has accrued no
amounts at December 31, 2005 for any such cost.  The amount  accrued at December
31, 2005 represents  Tremont's estimate of the costs to be incurred through 2008
with respect to the interim remediation measures.

TIMET. At December 31, 2005, TIMET had accrued  approximately  $3.2 million
for environmental  cleanup matters,  principally  related to TIMET's facility in
Nevada. The upper end of the range of reasonably possible costs related to these
matters is approximately $5.4 million.

Other. The Company has also accrued  approximately $7.0 million at December
31, 2005 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
primarily to products manufactured by formerly-owned operations of NL containing
asbestos,  silica and/or mixed dust.  Approximately  500 of these types of cases
involving a total of  approximately  12,500  plaintiffs and their spouses remain
pending.  NL has not accrued any amounts for this litigation  because  liability
that might result to NL, if any, cannot  currently be reasonably  estimated.  To
date,  NL has not been  adjudicated  liable  in any of these  matters.  Based on
information   available  to  NL,   including  facts  concerning  its  historical
operations,  the rate of new claims, the number of claims from which NL has been
dismissed and NL's prior experience in the defense of these matters, NL believes
that  the  range of  reasonably  possible  outcomes  of  these  matters  will be
consistent with NL's  historical  costs with respect to these matters (which are
not material), and no reasonably possible outcome is expected to involve amounts
that are material to NL. NL has and will continue to vigorously  seek  dismissal
from  each  claim  and/or a  finding  of no  liability  by NL in each  case.  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.

Kronos' Belgian  subsidiary and certain of its 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. In May 2004,  the court ruled and,
among other  things,  imposed a fine of euro  200,000  against  Kronos and fines
aggregating less than euro 40,000 against various Kronos  employees.  Kronos and
the individual employees have appealed the ruling.

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.  In certain
cases, the Company has insurance  coverage for such items,  although the Company
does not currently  expect any additional  material  insurance  coverage for its
environmental claims. The Company currently believes that the disposition of all
claims and disputes,  individually  or in the aggregate,  and including the lead
pigment litigation and environmental  matters discussed above, should not have a
material  adverse  effect on its  consolidated  financial  position,  results of
operations and liquidity.

Insurance coverage claims

In October  2005,  NL was served with a  complaint  in  OneBeacon  American
Insurance Company v. NL Industries, Inc., et. al. (Supreme Court of the State of
New York,  County of New York,  Index No.  603429-05).  The plaintiff,  a former
insurance carrier,  seeks a declaratory  judgment of its obligations to NL under
insurance  policies issued to NL by the plaintiff's  predecessor with respect to
certain lead pigment lawsuits. NL filed a motion to dismiss the New York action.
NL  filed an  action  against  OneBeacon  and  certain  other  former  insurance
companies, captioned NL Industries, Inc. v. OneBeacon America Insurance Company,
et. al. (District Court for Dallas County,  Texas, Case No. 05-11347)  asserting
that OneBeacon has breached its obligations to NL under such insurance  policies
and seeking a declaratory  judgment of OneBeacon's  obligations to NL under such
policies.  Certain of the former  insurance  companies  have filed a petition to
remove the Texas action to federal court.

In February 2006, NL was served with a complaint in Certain Underwriters at
Lloyds,  London v. Millennium Holdings LLC et. al (Supreme Court of the State of
New York,  County of New York,  Index No.  06/60026).  The  plaintiff,  a former
insurance  carrier of NL, seeks a  declaratory  judgment of its  obligations  to
defendants  under  insurance  policies  issued to defendants  by plaintiff  with
respect to certain lead pigment lawsuits.

NL has reached an agreement with a former  insurance  carrier in which such
carrier  would  reimburse  NL for a portion of its past and future lead  pigment
litigation  defense costs,  although the amount that NL will ultimately  recover
from such carrier with respect to such defense  costs  incurred by NL is not yet
determinable. In addition, during 2005, NL recognized $2.2 million of recoveries
from certain  insolvent  former  insurance  carriers  relating to  settlement of
excess insurance claims that were paid to NL. See Note 12. While NL continues to
seek additional insurance recoveries,  there can be no assurance that NL will be
successful in obtaining reimbursement for either defense costs or indemnity. Any
such additional  insurance  recoveries would be recognized when their receipt is
deemed probable and the amount is determinable.

The issue of whether  insurance  coverage for defense costs or indemnity or
both will be found to exist  for NL's 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  or  environmental   litigation  matters  in  determining  related
accruals.

NL has settled insurance  coverage claims concerning  environmental  claims
with certain of its principal  former  carriers.  A portion of the proceeds from
these  settlements were placed into special purpose trusts,  as discussed above.
No further material settlements  relating to environmental  remediation coverage
are expected.

Other matters

Concentrations  of credit risk.  Sales of TiO2 accounted for  substantially
all of Kronos' 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, 2004 and 2005, the ten largest  customers
accounted for approximately  43% of component  products sales. In 2004 and 2005,
one customer  accounted  for 11% and 10%,  respectively  of  component  products
sales. No single customer accounted for more than 10% of such sales in 2003.

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 44% in 2003, 48% in 2004 and 45% in 2005.

At December 31, 2005,  consolidated  cash, cash  equivalents and restricted
cash includes $56.0 million invested in U.S. Treasury securities purchased under
short-term  agreements to resell (2004 - $120.9 million),  substantially  all of
which were held in trust for the Company by a single U.S.  bank. At December 31,
2005,   consolidated   cash,  cash  equivalents  and  restricted  cash  includes
approximately  $125  million  on  deposit  at a  single  U.S.  bank  (2004 - $96
million).

Royalties.  Royalty  expense,  which relates  principally  to the volume of
certain component products  manufactured in Canada and sold in the United States
under the terms of a third-party patent license agreement  approximated $450,000
in 2003, $222,000 in 2004 and $66,000 in 2005.

Long-term contracts. Kronos has long-term supply contracts that provide for
Kronos' TiO2 feedstock  requirements through 2010. The agreements require Kronos
to purchase  certain  minimum  quantities  of feedstock  with  minimum  purchase
commitments aggregating approximately $681 million at December 31, 2005.

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,  Kronos
Titan  GmbH,  leases  the land under its  Leverkusen  TiO2  production  facility
pursuant to a lease with Bayer AG that expires in 2050. The Leverkusen  facility
itself, which is owned by Kronos and which represents approximately one-third of
Kronos' current TiO2 production  capacity,  is located within Bayer's  extensive
manufacturing  complex.  Rent for the land lease  associated with the Leverkusen
facility is  periodically  established by agreement with Bayer for periods of at
least two years at a time. The lease agreement provides for no formula, index or
other  mechanism to determine  changes in the rent for such land lease;  rather,
any change in the rent is subject solely to periodic  negotiation  between Bayer
and Kronos.  Any change in the rent based on such  negotiations is recognized as
part of lease expense  starting from the time such change is agreed upon by both
parties,  as any such change in the rent is deemed  "contingent  rentals"  under
GAAP.  Under a separate  supplies and services  agreement  expiring in 2011, the
lessor provides some raw materials,  including chlorine, auxiliary and operating
materials, utilities and services necessary to operate 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  continuing
operations  approximated  $13  million in 2003,  $12 million in each of 2004 and
2005.  At December  31,  2005,  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)

2006                                              $ 5,396
2007                                                3,850
2008                                                3,111
2009                                                2,303
2010                                                1,400
2011 and thereafter                                21,083
-------

$37,143
=======

Approximately  $20.1 million of the $37.1 million  aggregate future minimum
rental commitments at December 31, 2005 relates to Kronos'  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, 2005. As discussed above,
any change in the rent is based solely on negotiations between Bayer and Kronos,
and any such change in the rent is deemed "contingent  rentals" under GAAP which
is excluded from the future minimum lease payments disclosed above.

Income taxes.  Contran and Valhi have agreed to a policy  providing for the
allocation  of tax  liabilities  and tax  payments as described in Note 1. Under
applicable  law, the  Company,  as well as every other member of the Contran Tax
Group,  are each jointly and severally  liable for the aggregate  federal income
tax  liability  of Contran and the other  companies  included in the Contran Tax
Group for all periods in which the Company is included in the Contran Tax Group.
Contran has agreed,  however,  to indemnify  the Company for any  liability  for
income taxes of the Contran Tax Group in excess of the  Company's  tax liability
previously  computed  and paid by Valhi in  accordance  with the tax  allocation
policy.

Note 19  - Accounting principles newly adopted in 2003 and 2004:

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 cases, 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 change in the asset  retirement  obligations from January 1, 2003 ($1.3
million) to December  31, 2003 ($1.7  million)  is due  primarily  to  accretion
expense,  which is reported as a component  of cost of good sold.  The change in
the asset  retirement  obligations  from  December 31, 2003 to December 31, 2004
($1.4 million) is due primarily to the net effects of accretion  expense as well
as a $492,000 payment charged to the asset retirement  obligation related to the
settlement of a portion of the retirement  obligations  related to the Company's
waste management operations. The change in the asset retirement obligations from
December 31, 2004 ($1.4  million) to December 31, 2005 ($1.4 million) was nil as
the  effects  of  accretion  expense  were  offset by the  effects of changes in
foreign currency exchange rates.

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.

Variable  interest  entities.  The Company complied with the  consolidation
requirements of FASB Interpretation  ("FIN") No. 46R,  Consolidation of Variable
Interest Entities,  an interpretation of ARB No. 51, as amended, as of March 31,
2004.  The Company  does not have any  involvement  with any  variable  interest
entity (as that term is defined in FIN No. 46R)  covered by the scope of FIN No.
46R that would require the Company to consolidate  such entity under FIN No. 46R
which had not  already  been  consolidated  under  prior  applicable  GAAP,  and
therefore the impact to the Company of adopting the  consolidation  requirements
of FIN No. 46R was not material.

Note 20 - Accounting principles not yet adopted:

Inventory costs.  The Company will adopt SFAS No. 151,  Inventory Costs, an
amendment of ARB No. 43,  Chapter 4, for  inventory  costs  incurred on or after
January 1, 2006.  SFAS No. 151 requires that the allocation of fixed  production
overhead costs to inventory shall be based on normal  capacity.  Normal capacity
is not defined as a fixed amount;  rather,  normal capacity refers to a range of
production  levels expected to be achieved over a number of periods under normal
circumstances,  taking into account the loss of capacity  resulting from planned
maintenance  shutdowns.  The amount of fixed overhead  allocated to each unit of
production is not increased as a consequence of idle plant or production  levels
below the low end of normal  capacity,  but instead a portion of fixed  overhead
costs is charged to expense as incurred. Alternatively, in periods of production
above the high end of  normal  capacity,  the  amount  of fixed  overhead  costs
allocated to each unit of  production is decreased so that  inventories  are not
measured above cost.  SFAS No. 151 also clarifies  existing GAAP to require that
abnormal freight and wasted materials (spoilage) are to be expensed as incurred.
The Company  believes its production cost accounting  already  complies with the
requirements  of SFAS No. 151, and the Company does not expect  adoption of SFAS
No. 151 will have a material effect on its consolidated financial statements.

Stock  options.  As permitted by  regulations  of the SEC, the Company will
adopt SFAS No. 123R,  Share-Based Payment, as of January 1, 2006. SFAS No. 123R,
among other  things,  eliminates  the  alternative  in existing  GAAP to use the
intrinsic value method of accounting for stock-based employee compensation under
APBO No. 25. Upon  adoption of SFAS No.  123R,  the Company  will  generally  be
required to recognize the cost of employee  services received in exchange for an
award of equity  instruments  based on the  grant-date  fair value of the award,
with the cost recognized over the period during which an employee is required to
provide services in exchange for the award (generally, the vesting period of the
award).  No  compensation  cost will be  recognized  in the aggregate for equity
instruments  for  which the  employee  does not  render  the  requisite  service
(generally, if the instrument is forfeited before it has vested). The grant-date
fair value will be estimated using option-pricing models (e.g. Black-Sholes or a
lattice model). Under the transition alternatives permitted under SFAS No. 123R,
the Company  will apply the new  standard to all new awards  granted on or after
January 1, 2006,  and to all awards  existing as of December  31, 2005 which are
subsequently modified, repurchased or cancelled.  Additionally, as of January 1,
2006,  the Company will be required to recognize  compensation  cost  previously
measured under SFAS No. 123 for the portion of any non-vested  award existing as
of December 31, 2005 over the remaining  vesting  period.  Because the number of
non-vested  awards as of December  31, 2005 with  respect to options  granted by
Valhi  and its  subsidiaries  and  affiliates  is not  material,  the  effect of
adopting SFAS No. 123R is not expected to be significant in so far as it relates
to the recognition of compensation cost in the Company's consolidated statements
of income for  existing  stock  options.  Should Valhi or its  subsidiaries  and
affiliates,  however,  either grant a  significant  number of options or modify,
repurchase or cancel  existing  options in the future,  the Company could in the
future recognize  material amounts of compensation  cost related to such options
in its consolidated financial statements.

Also upon adoption of SFAS No. 123R, the cash income tax benefit  resulting
from the  exercise  of stock  options  in excess of the  cumulative  income  tax
benefit  related  to such  options  previously  recognized  for  GAAP  financial
reporting purposes in the Company's  consolidated  statements of income, if any,
will be reflected as a cash inflow from  financing  activities  in the Company's
consolidated  statements  of cash  flows,  and the  Company's  cash  flows  from
operating  activities  will  reflect  the effect of cash paid for  income  taxes
exclusive of such cash income tax benefit.

SFAS No. 123R also  requires  certain  expanded  disclosures  regarding the
Company's stock options, and such expanded disclosure have been provided in Note
14.

Note 21 - Financial instruments:

December 31,
--------------------------------------------------
2004                      2005
-------------------------  -----------------------
Carrying        Fair       Carrying       Fair
amount       value        Amount        value
-------      -------       -------       -----
(Restated)
(In millions)

Cash, cash equivalents and restricted cash

equivalents                                                       $277.9       $  277.9      $281.4       $ 281.4

Marketable securities:
Current                                                          $  9.4       $    9.4      $ 11.8       $  11.8
Noncurrent                                                        256.8          256.8       258.7         258.7

Loan to Snake River Sugar Company                                  $ 80.0       $   96.3      $  -         $  -

Long-term debt (excluding capitalized leases):
Publicly-traded fixed rate debt -
KII Senior Secured Notes                                       $519.2       $  549.1      $449.3       $  463.6
Snake River Sugar Company loans                                   250.0          250.0       250.0          250.0
Other fixed-rate debt                                                .6             .6         2.0            2.0
Variable rate debt                                                 13.6           13.6        11.5           11.5

Minority interest in:
NL common stock                                                  $ 51.7       $  178.8      $ 51.2       $  115.7
Kronos common stock                                                29.6          125.3        28.2           97.7
CompX common stock                                                 49.2           79.4        45.6           74.1

Valhi common stockholders' equity                                  $874.7       $1,934.2      $795.6       $2,160.1

The fair value of the Company's  publicly-traded  marketable securities and
debt,  minority  interest in NL Industries,  Kronos and CompX and Valhi's common
stockholders'  equity are all based upon quoted  market  prices at each  balance
sheet  date.  The  estimated  fair  value  of the  Company's  investment  in The
Amalgamated  Sugar  Company LLC is $250  million  (the  redemption  price of the
Company's  investment in the LLC).  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 Kronos'  sales  generated  by its  non-U.S.  operations  are
denominated in U.S. dollars. Kronos 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.  Kronos has
not entered  into these  contracts  for trading or  speculative  purposes in the
past,  nor does Kronos  currently  anticipate  entering into such  contracts for
trading  or  speculative  purposes  in the  future.  Derivatives  used to  hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated  financial assets and liabilities  which meet the criteria for hedge
accounting  are  designated  as cash flow hedges.  Consequently,  the  effective
portion of gains and losses is  deferred  as a component  of  accumulated  other
comprehensive  income and is  recognized in earnings at the time the hedged item
affects  earnings.  Contracts that do not meet the criteria for hedge accounting
are  marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. During 2004
and 2005,  Kronos has not used hedge  accounting  for any of its  contracts.  To
manage such exchange  rate risk,  at December 31, 2005,  Kronos held a series of
contracts,  which mature at various dates through March 31, 2006, to exchange an
aggregate of U.S. $7.5 million for an equivalent  amount of Canadian  dollars at
exchange rate of Cdn.  $1.19 per U.S.  dollar.  At December 31, 2005, the actual
exchange rate was Cdn. $1.16 per U.S.  dollar.  The estimated fair value of such
foreign currency forward contracts at December 31, 2005 was not material. Kronos
held no such currency forward contracts at December 31, 2004.

Certain of the CompX's  sales  generated  by its  non-U.S.  operations  are
denominated in U.S. dollars.  CompX periodically uses currency forward contracts
to manage a portion of foreign  exchange rate risk associated  with  receivables
denominated in a currency other than the holder's functional currency. CompX has
not entered  into these  contracts  for trading or  speculative  purposes in the
past,  nor does CompX  currently  anticipate  entering  into such  contracts for
trading  or  speculative  purposes  in the  future.  Derivatives  used to  hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated  financial assets and liabilities  which meet the criteria for hedge
accounting  are  designated  as cash flow hedges.  Consequently,  the  effective
portion of gains and losses is  deferred  as a component  of  accumulated  other
comprehensive  income and is  recognized in earnings at the time the hedged item
affects  earnings.  Contracts that do not meet the criteria for hedge accounting
are  marked-to-market at each balance sheet date 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, 2005,  CompX held a series of contracts
to  exchange an  aggregate  of U.S.  $6.5  million  for an  equivalent  value of
Canadian  dollars  at an  exchange  rate of Cdn.  $1.19  per U.S.  dollar.  Such
contracts mature through March 2006. The exchange rate was $1.17 per U.S. dollar
at December 31, 2005. At December 31, 2004 CompX held contracts maturing through
March 2005 to exchange an aggregate of U.S. $7.2 million for an equivalent value
of Canadian  dollars at an exchange  rates of Cdn.  $1.19 to Cdn. $1.23 per U.S.
dollar.  At December 31, 2004, the actual  exchange rate was Cdn. $1.21 per U.S.
dollar.  The estimated  fair value of such contracts is not material at December
31, 2004 and 2005.

The Company may  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 2003, 2004 or 2005.

Note 22 - Discontinued operations:

In December 2004, CompX's board of directors  committed to a formal plan to
dispose of its  Thomas  Regout  operations  in Europe.  Such  operations,  which
previously were included in the Company's  component  products operating segment
(see Note 3), met all of the criteria  under GAAP to be  classified  as an asset
held for sale at December 31, 2004, and accordingly the results of operations of
Thomas Regout have been  classified as  discontinued  operations for all periods
presented.  The Company has not reclassified its December 31, 2004  consolidated
balance sheet or its 2003, 2004 and 2005  consolidated  statements of cash flows
to  separately  present  the  financial  positions  or cash  flows of the assets
disposed.  In classifying  the net assets of the Thomas Regout  operations as an
asset held for sale, the Company  concluded that the carrying  amount of the net
assets of such  operations  exceeded the estimated fair value less costs to sell
of such  operations,  and  accordingly in the fourth quarter of 2004 the Company
recognized a $6.5 million  impairment charge to write-down its investment in the
Thomas Regout  operations to its estimated  net  realizable  value.  Such charge
represented an impairment of goodwill. See Note 9.

In January 2005,  CompX  completed the sale of such operations for proceeds
(net of expenses) of approximately $22.3 million.  The net proceeds consisted of
approximately  $18.1  million  in cash at the  date of sale  and a $4.2  million
principal amount note receivable from the purchaser  bearing interest at a fixed
rate of 7% and payable over four years. The note receivable is collateralized by
a secondary lien on the assets sold and is subordinated  to certain  third-party
indebtedness of the purchaser.  Accordingly,  the Company no longer includes the
results of operations  of Thomas  Regout  subsequent to December 31, 2004 in its
consolidated  financial statements.  The net proceeds from the January 2005 sale
of European Thomas Regout operations were approximately  $860,000 (before income
tax benefit)  less than the net  realizable  value  estimated at the time of the
goodwill impairment charge (primarily due to higher expenses associated with the
disposal of the Thomas Regout operations),  and discontinued  operations in 2005
includes a first quarter charge related to such differential  ($272,000,  net of
income tax benefit and minority interest).

Condensed  income  statement  data for  Thomas  Regout for 2003 and 2004 is
presented  below.  The $6.5 million  goodwill  impairment  charge is included in
Thomas  Regout's   operating  loss  for  2004.   Interest  expense  included  in
discontinued operations represents interest on certain intercompany indebtedness
with CompX, which indebtedness arose at the time of CompX's  acquisition of such
operations  prior to 2003 and corresponded to certain  third-party  indebtedness
CompX  incurred  at  the  time  such  operations  were  acquired.   Discontinued
operations in 2004 includes a $4.2 million  income tax benefit  associated  with
the U.S.  capital loss realized in the first quarter of 2005 upon  completion of
the sale of the Thomas  Regout  operations.  Recognition  of the benefit of such
capital loss by the Company is  appropriate  under GAAP in the fourth quarter of
2004 at the time such operations were classified as held for sale.

Years ended December 31,
------------------------
2003               2004
------            ------
(In millions)

Net sales                                                                         $35.3              $41.7
=====              =====

Operating loss                                                                    $(5.5)             $(3.5)
Interest expense                                                                   (1.4)              (1.5)
Income tax benefit                                                                  2.6                4.6
Minority interest in losses                                                         1.4                4.1
-----              -----

Net income (loss)                                                           $(2.9)             $ 3.7
=====              =====

Condensed  balance  sheet  data for Thomas  Regout at  December  31,  2004,
included in the Company's consolidated balance sheets, is presented below.

(Amount)
--------
(In millions)

Current assets                                                                                 $18.0
Noncurrent assets                                                                               11.0
-----

$29.0
=====

Current liabilities                                                                            $ 5.0
Net assets                                                                                      24.0
-----

$29.0
=====

Included in the net assets of Thomas Regout are certain  intercompany loans
payable  by  Thomas  Regout  to CompX  which  are  eliminated  in the  Company's
consolidated balance sheet.

Note 23 -      Quarterly results of operations (unaudited):

Quarter ended
---------------------------------------------------------
March 31         June 30        Sept. 30         Dec. 31
----------       ---------      ----------       --------
(Restated)      (Restated)      (Restated)      (Restated)
(In millions, except per share data)

Year ended December 31, 2004

Net sales                                              $307.7          $343.3         $336.8           $332.3
Operating income                                         21.5            37.7           30.2             20.1

Income (loss) from continuing
operations                                            $  1.0          $246.2         $ 10.5           $(31.4)
Discontinued operations                                   -                .2             .2              3.3
------          ------         ------           ------

Net income (loss)                                $  1.0          $246.4         $ 10.7           $(28.1)
======          ======         ======           ======

Per basic share:
Continuing operations                                $  .01          $ 2.05         $  .09           $ (.26)
Discontinued operations                                 -               -              -                .03
------          ------         ------           ------

$  .01          $ 2.05         $  .09           $ (.23)
======          ======         ======           ======

Year ended December 31, 2005

Net sales                                              $341.2          $359.5         $342.2           $349.9
Operating income                                         44.9            56.4           37.6             33.2

Income from continuing operations                      $ 25.1          $ 28.3         $ 13.4           $ 14.7
Discontinued operations                                   (.3)            -              -                -
------          ------         ------           ------

Net income                                       $ 24.8          $ 28.3         $ 13.4           $ 14.7
======          ======         ======           ======

Per basic share:
Continuing operations                                $  .21          $  .24         $  .11           $  .13
Discontinued operations                                 -               -              -                -
------          ------         ------           ------

$  .21          $  .24         $  .11           $  .13
======          ======         ======           ======

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.

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Condensed Balance Sheets

December 31, 2004 and 2005

(In thousands)

2004              2005
---------       -----------
(Restated)

Current assets:

Cash and cash equivalents                                                          $   94,337       $  119,763
Restricted cash equivalents                                                               270              325
Accounts and notes receivable                                                             226            6,241
Receivables from subsidiaries and affiliates:
Demand loan to Contran Corporation                                                    4,929                -
Other                                                                                 2,165            2,281
Deferred income taxes                                                                     201              633
Other                                                                                     267              233
----------       ----------

Total current assets                                                              102,395          129,476
----------       ----------

Other assets:
Marketable securities                                                                 250,023          250,000
Restricted cash equivalents                                                               494              382
Investment in and advances to subsidiaries and
affiliate                                                                            942,633          955,851
Other receivable from subsidiary                                                          696                -
Loan receivable - Snake River Sugar Company                                           118,294                -
Other assets                                                                              206              210
Property and equipment, net                                                             1,893            1,705
----------       ----------

Total other assets                                                              1,314,239        1,208,148
----------       ----------

$1,416,634       $1,337,624
==========       ==========

Current liabilities:
Payables to subsidiaries and affiliates:
Income taxes, net                                                                $    1,050       $    2,351
Other                                                                                    20               16
Accounts payable and accrued liabilities                                                  822            3,321
Income taxes                                                                              381               66
----------       ----------

Total current liabilities                                                           2,273            5,754
----------       ----------

Noncurrent liabilities:
Long-term debt - Snake River Sugar Company                                            250,000          250,000
Deferred income taxes                                                                 288,372          284,782
Other                                                                                   1,314            1,495
----------       ----------

Total noncurrent liabilities                                                      539,686          536,277
----------       ----------

Stockholders' equity                                                                    874,675          795,593
----------       ----------

$1,416,634       $1,337,624
==========       ==========

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Condensed Statements of Operations

Years ended December 31, 2003, 2004 and 2005

(In thousands)

2003             2004            2005
-----            ------          ------
(Restated)       (Restated)

Revenues and other income:

Interest and dividend income                                          $30,432         $ 32,438        $ 52,351
Write-off of accrued interest on loan to
Snake River Sugar Company                                                  -                -         (21,638)
Securities transaction gains, net                                           3                -              (3)
Other, net                                                              3,419            3,306           2,289
--------         --------         -------

33,854           35,744          32,999
--------         --------         -------

Costs and expenses:
General and administrative                                              8,385            9,302           8,424
Interest                                                               24,613           25,202          24,116
--------         --------         -------

32,998           34,504          32,540
--------         --------         -------

856            1,240             459

Equity in earnings of subsidiaries and
affiliate                                                               12,630          305,597          88,222
--------         --------         -------

Income before income taxes                                             13,486          306,837          88,681

Provision for income taxes                                               98,893           80,578           6,958
--------         --------         -------

Income (loss) from continuing operations                              (85,407)         226,259          81,723

Discontinued operations                                                  (2,874)           3,732            (272)

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

Net income (loss)                                                    $(87,695)        $229,991        $ 81,451
========         ========        ========

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Condensed Statements of Cash Flows

Years ended December 31, 2003, 2004 and 2005

(In thousands)

2003             2004             2005
------           ------           ------
(Restated)       (Restated)

Cash flows from operating activities:

Net income (loss)                                                  $ (87,695)        $ 229,991         $ 81,451
Securities transactions gains, net                                        (3)                -                3
Proceeds from disposal of marketable
securities (trading)                                                     50                 -                -
Write-off of accrued interest receivable                                   -                 -           21,638
Deferred income taxes                                                106,019            75,503           10,722
Equity in earnings of subsidiaries
and affiliate:
Continuing operations                                              (12,630)         (305,597)         (88,222)
Discontinued operations                                              2,874            (3,732)             272
Cumulative effect of change in
accounting principle                                                 (586)                -                -
Dividends from subsidiaries and
affiliates                                                           25,405            37,209           58,639
Other, net                                                               (37)              683             (276)
Net change in assets and liabilities                                  (2,838)           (9,264)          17,199
--------          --------         --------

Net cash provided by operating
activities                                                       30,559            24,793          101,426
--------          --------         --------

Cash flows from investing activities:
Purchase of:
Kronos common stock                                                 (6,428)          (17,057)          (7,039)
TIMET common stock                                                    (840)                -          (17,972)
TIMET debt securities                                                 (238)                -                -
Loans to subsidiaries and affiliates:
Loans                                                               (9,689)          (32,328)         (35,416)
Collections                                                          1,000           178,227           18,137
Investment in other subsidiary                                             -                 -           (2,937)
Collection of loan to Snake River
Sugar Company                                                             -                 -           80,000
Change in restricted cash equivalents, net                                94                44               57
Other, net                                                              (919)             (558)             (42)
--------          --------         --------

Net cash provided (used) by
investing activities                                            (17,020)          128,328           34,788
--------          --------         --------

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Condensed Statements of Cash Flows (Continued)

Years ended December 31, 2003, 2004 and 2005

(In thousands)

2003               2004             2005
----               ----             ----
(Restated)         (Restated)

Cash flows from financing activities:
Indebtedness:

Borrowings                                                       $ 10,000           $ 53,000         $   5,000
Principal payments                                                 (5,000)           (58,000)           (5,000)
Loans from affiliates:
Loans                                                              34,583             30,529                 -
Repayments                                                        (23,262)           (54,154)                -
Dividends                                                           (29,796)           (29,804)          (48,805)
Treasury stock acquired                                                   -                  -           (62,060)
Other, net                                                              264               (424)               77
--------          ---------         ---------

Net cash used by financing activities                           (13,211)           (58,853)         (110,788)
--------          ---------         ---------

Cash and cash equivalents:
Net increase                                                            328             94,268            25,426
Valmont Insurance Company                                                 -             (5,374)                -
Balance at beginning of year                                          5,115              5,443            94,337
--------          ---------         ---------

Balance at end of year                                             $  5,443           $ 94,337         $ 119,763
========           ========         =========

Supplemental disclosures - cash paid
(received) for:
Interest                                                           $ 24,613           $ 25,116         $  23,342
Income taxes, net                                                    (4,231)            (2,134)           (8,023)

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  preferred  stock  securities  of  TIMET as an  available-for-sale
marketable security carried at fair value. The Consolidated Financial Statements
of Valhi, Inc. and Subsidiaries,  including the notes thereto,  are incorporated
herein by reference.

Note 2 -       Marketable securities:

December 31,
-----------------------
2004           2005
------         --------
(In thousands)

Noncurrent assets (available-for-sale):

The Amalgamated Sugar Company LLC                                                     $250,000      $250,000
Other securities                                                                            23          -
--------      --------

$250,023      $250,000
========      ========

Note 3 -       Investment in and advances to subsidiaries and affiliate:

December 31,
------------------------
2004             2005
-------           ------
(Restated)
(In thousands)

Investment in:

NL Industries (NYSE: NL)                                                             $209,681        $292,226
Kronos Worldwide, Inc. (NYSE: KRO)                                                    398,628         483,293
Tremont LLC                                                                           319,690         126,025
Valcor and subsidiaries                                                               (15,803)         (8,864)
Waste Control Specialists LLC                                                          23,766          34,345
TIMET (NYSE: TIE) common stock                                                          1,905          24,059
TIMET preferred stock                                                                     183             183
--------        --------
938,050         951,267

Noncurrent loans to Waste Control Specialists LLC                                         4,583           4,584
--------        --------

$942,633        $955,851
========        ========

Noncurrent  receivable  from  subsidiary  at  December  31,  2004  and 2005
consists of accrued interest due from Waste Control Specialists on the Company's
loans to Waste Control  Specialists.  During 2004 and 2005, Valhi contributed an
aggregate of $47.5 million and $23.9 million,  respectively of loans and related
accrued interest to Waste Control Specialists' equity.

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.
During  2004  and the  first  quarter  of  2005,  NL paid an  aggregate  of five
quarterly  dividends in the form of shares of Kronos common  stock,  in which an
aggregate of approximately 1.2 million shares of Kronos' common stock (2.5%) was
distributed to Valhi and Tremont in the form of pro-rata dividends.

During the fourth quarter of 2004, NL transferred approximately 5.5 million
shares of Kronos common stock to Valhi in  satisfaction of an NL separate income
tax liability and the tax liability generated from the use of such Kronos shares
to settle such tax liability.  The transfer of such 5.5 million shares of Kronos
common  stock,  accounted  for under  GAAP as a  transfer  of net  assets  among
entities under common control at carryover basis, had no effect on the Company's
consolidated financial statements.

At the beginning of 2003, 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, 2005 are a 35% interest in TIMET and interests
in other joint ventures.  In January 2005, Tremont  distributed to Valhi its 21%
ownership interest in NL and its 11% ownership interest in Kronos.

Prior to September  2004,  Valcor's  principal  asset was a 66% interest in
CompX  International,  Inc., and Valhi owned an additional 3% of CompX directly.
Valhi's  direct  investment in CompX was  considered  part of its  investment in
Valcor. On September 24, 2004, NL completed the acquisitions of the CompX shares
previously  held by Valhi and Valcor at a purchase price of $16.25 per share, or
an aggregate of  approximately  $168.6  million.  The purchase price was paid by
NL's  transfer to Valhi and Valcor of an aggregate  $168.6  million of NL's $200
million  long-term note  receivable from Kronos.  Subsequently  in 2004,  Valcor
distributed to Valhi its notes  receivable  from Kronos that Valcor  received in
this transaction, and Kronos prepaid the entire note balance.

In December 2004, Valmont Insurance Company, a subsidiary of Valhi,  merged
into Tall Pines  Insurance  Company,  a subsidiary  of Tremont,  with Tall Pines
surviving  the  merger.   Valmont  was  previously   included  as  part  of  the
registrant's  consolidated financial information.  At December 27, 2004, the net
assets  of  Valmont  were  transferred  to Tall  Pines for  financial  reporting
purposes at Valhi's carryover basis, and such net assets are included as part of
Valhi's investment in Tremont at December 31, 2004 and 2005.  Valmont's cash and
cash equivalents was  approximately  $5.4 million at December 27, 2004, and such
cash is shown as a reconciling item on the accompanying  condensed statements of
cash flows.

See the notes to the  Company's  Consolidated  Financial  Statements  for a
discussion of these and other transactions affecting the Company's investment in
its subsidiaries and affiliates.

Years ended December 31,
-----------------------------------------
2003            2004            2005
------          ------          ---------
(Restated)      (Restated)
(In thousands)

Equity in earnings of subsidiaries and
affiliate from continuing operations

NL Industries                                                            $ 12,369       $124,035        $ 23,051
Kronos Worldwide                                                              804         99,948          33,828
Tremont LLC                                                                 8,954         88,035          40,576
Valcor                                                                      3,503          5,399               -
Waste Control Specialists LLC                                             (12,923)       (12,379)        (13,358)
TIMET                                                                         (77)           559           4,125
--------       --------        --------

$ 12,630       $305,597        $ 88,222
========       ========        ========

Cash dividends from subsidiaries

NL Industries                                                            $ 24,108       $   -           $ 30,264
Kronos Worldwide                                                             -            17,586          27,887
Tremont LLC                                                                     -         19,623             488
Valcor                                                                      1,297              -            -
Waste Control Specialists LLC                                                -              -               -
--------       --------        --------

$ 25,405       $ 37,209        $ 58,639
========       ========        ========

Equity in earnings of discontinued operations relates to CompX's operations
in The Netherlands.

Note 4 -       Loan receivable - Snake River Sugar Company:

December 31,
---------------------
2004             2005
----             ----
(In thousands)

Snake River Sugar Company:

Principal                                                                             $ 80,000        $   -   
Interest                                                                                38,294            -
--------        --------

$118,294        $   -
========        ========

Note 5 -       Long-term debt:

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. At
December  31,  2005,  $37.5  million of such loans are recourse to Valhi and the
remaining  $212.5  million is nonrecourse  to Valhi.  Under certain  conditions,
Snake River has the ability to accelerate the maturity of these loans.  See Note
4 to the Consolidated Financial Statements.

At  December  31,  2005,  Valhi has a $100  million  revolving  bank credit
facility which matures in October 2006,  generally  bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings),  and is
collateralized  by 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 Kronos  common  stock  pledged as  collateral.  Based on
Kronos' December 31, 2005 quoted market price of $29.01 per share, the shares of
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,  2005,  Valhi  would  only have  become  limited to
borrowing  less than the full $100 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 quoted market price of the shares of Kronos  pledged was
less than $20 per share.  At December  31, 2005,  no amounts  were  outstanding,
letters of credit  aggregating  $1.5 million had been issued,  and $98.5 million
was available for borrowing under this facility.

Note 6 -       Income taxes:

The  Amalgamated  Sugar Company LLC is treated as a partnership 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,  as  recognition  of such  income  tax
(benefit) is not appropriate at the Waste Control Specialist level.

Years ended December 31,
---------------------------------------
2003           2004            2005
------         ------          --------
(Restated)     (Restated)
(In thousands)

Components of provision for income taxes
(benefit):

Currently payable (refundable)                                         $ (7,126)       $  5,075        $(3,764)
Deferred income tax expense                                             106,019          75,503         10,722
--------        --------        -------

$ 98,893        $ 80,578        $ 6,958
========        ========        =======

Cash paid (received) for income taxes, net:
Received from subsidiaries, net                                         $(5,768)        $(2,174)       $(9,030)
Paid to Contran                                                           1,490               -            503
Paid to tax authorities, net                                                 47              40            504
--------        --------        -------

$(4,231)        $(2,134)       $(8,023)
========        ========        =======

Deferred tax
Asset (liability)
------------------------
December 31,
------------------------
2004                2005
----                ----
(Restated)
(In thousands)

Components of the net deferred tax asset (liability) -
tax effect of temporary differences related to:
Marketable securities - primarily The Amalgamated

Sugar Company LLC                                                                  $(104,151)       $(102,945)
Investment in Kronos Worldwide                                                       (192,996)        (184,454)
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                                                              (7,984)          (8,283)
Tax attributes of Valhi:
Federal loss carryforwards                                                           16,627           12,458
Federal capital loss carryforward                                                         -            2,058
State net operating and capital loss carryforwards                                    2,941            3,751
AMT credit carryforwards                                                                381              381
Accrued liabilities and other deductible differences                                    4,601            2,836
Other taxable differences                                                              (7,590)          (9,951)
---------         --------

$(288,171)       $(284,149)
=========        =========

Current deferred tax asset                                                               $    201        $     633
Noncurrent deferred tax liability                                                        (288,372)        (284,782)
---------         --------

$(288,171)       $(284,149)
=========        =========

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, 2003:

Allowance for doubtful accounts              $ 6,356       $(1,768)       $  (425)     $   486        $   -          $ 4,649
=======       =======        =======      =======        ======         =======

Reserve for slow moving or
obsolete inventories                        $ 9,314       $ 2,076        $(1,699)     $   182        $   -          $ 9,873
=======       =======        =======      =======        ======         =======

Accrual for planned major
maintenance activities                      $ 3,986       $ 5,337        $(3,896)     $   900        $   -          $ 6,327
=======       =======        =======      =======        ======         =======

Year ended December 31, 2004:
Allowance for doubtful accounts              $ 4,649       $   (30)       $(1,013)     $   220        $   -          $ 3,826
=======       =======        =======      =======        ======         =======

Reserve for slow moving or
obsolete inventories                        $ 9,873       $ 1,675        $(2,136)     $   793        $   -          $10,205
=======       =======        =======      =======        ======         =======

Accrual for planned major
maintenance activities                      $ 6,327       $ 6,602        $(8,001)     $   425        $   -          $ 5,353
=======       =======        =======      =======        ======         =======

Year ended December 31, 2005:
Allowance for doubtful accounts              $ 3,826       $   658        $  (915)     $  (201)       $   (553)      $ 2,815
=======       =======        =======      =======        ======         =======

Reserve for slow moving or
obsolete inventories                        $10,205       $   547        $  (681)     $  (852)       $    254       $ 9,473
=======       =======        =======      =======        ======         =======

Accrual for planned major
maintenance activities                      $ 5,353       $ 9,385        $(9,333)     $  (448)       $   -          $ 4,957
=======       =======        =======      =======        ======         =======

Note - Certain  information  has been omitted from this  Schedule  because it is
disclosed in the notes to the Consolidated Financial Statements.

* - Business units acquired and/or disposed.

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

% of Voting
Jurisdiction Of               Securities Held at
Incorporation                    December
Name of Corporation                      or  Organization                 31,  2005 (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                          100%
Tecsafe LLC                                               Delaware                          100%

Kronos Worldwide, Inc. (2)                                         Delaware                           57%

NL Industries, Inc. (2), (3), (5)                                  New Jersey                         83%
CompX Group, Inc. (4)                                          Delaware                           82%
CompX International Inc. (5)                                 Delaware                           83%

Tremont LLC                                                        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 (2) - (6)                       Delaware                           37%

Valcor, Inc.                                                       Delaware                          100%
Medite Corporation                                          Delaware                          100%

Impex Realty Holding, Inc.                                         Delaware                          100%

(1) Held by the Registrant or the indicated subsidiary of the Registrant.

(2)  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, 2005 (File
No.  333-100047).  NL owns an additional 36% of Kronos directly and a subsidiary
of TIMET owns an additional .1% of Kronos directly.

(3)  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,  2005  (File No.
1-640). A subsidiary of TIMET owns an additional .5% of NL directly.

(4) Titanium Metals Corporation ("TIMET") owns the other 18% of CompX Group.

(5)  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, 2005 (File
No.  1-13905).  NL and a  subsidiary  of  TIMET  own an  additional  2% and  3%,
respectively, of CompX International directly.

(6)  Subsidiaries  of TIMET are  incorporated  by  reference  to Exhibit 21.1 of
TIMET's  Annual  Report on Form 10-K for the year ended  December 31, 2005 (File
No. 0-28538). The Registrant owns an additional 4% of TIMET directly.

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby  consent to the  incorporation  by reference in the  Registration
Statements  on  Form  S-8  (Nos.  33-53633,  33-48146,  33-41507,  33-21758  and
333-48391)  of Valhi,  Inc. of our report  dated March 24, 2006  relating to the
consolidated financial statements,  financial statement schedules,  management's
assessment of the effectiveness of internal control over financial reporting and
the effectiveness of internal control over financial reporting, which appears in
this on Form 10-K.

PricewaterhouseCoopers LLP

Dallas, Texas
March 24, 2006

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby  consent to the  incorporation  by reference in the  Registration
Statements  on  Form  S-8  (Nos.  33-53633,  33-48146,  33-41507,  33-21758  and
333-48391)  of Valhi,  Inc. of our report  dated March 24, 2006  relating to the
consolidated financial statements,  management's assessment of the effectiveness
of internal control over financial  reporting and the  effectiveness of internal
control over financial reporting, of Titanium Metals Corporation,  which appears
in Titanium Metals  Corporation's  Annual Report on Form 10-K for the year ended
December 31, 2005, which is incorporated by reference in this Form 10-K.

PricewaterhouseCoopers LLP

Denver, Colorado
March 24, 2006

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))  and internal  control over
financial  reporting  (as  defined  in  Exchange  Act Rules  13a-15(f)  and
15d-15(f)) 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)   Designed such internal  control over  financial  reporting,  or caused
such internal  control over  financial  reporting to be designed under
our  supervision,   to  provide  reasonable  assurance  regarding  the
reliability  of financial  reporting and the  preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;

c)   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

d)   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 24, 2006

/s/ Steven L. Watson
-------------------------------------
Steven L. Watson
President and Chief Executive Officer

Exhibit 31.2

I, Bobby D. O'Brien,  the Vice President and Chief  Financial  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))  and internal  control over
financial  reporting  (as  defined  in  Exchange  Act Rules  13a-15(f)  and
15d-15(f)) 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)   Designed such internal  control over  financial  reporting,  or caused
such internal  control over  financial  reporting to be designed under
our  supervision,   to  provide  reasonable  assurance  regarding  the
reliability  of financial  reporting and the  preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;

c)   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

d)   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 24, 2006

/s/ Bobby D. O'Brien
Bobby D. O'Brien
Vice President and Chief Financial Officer

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, 2005 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
and Chief  Financial  Officer 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 and
March 24, 2006                            Chief Financial Officer
March 24, 2006

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.