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, 2004

Commission file number 1-5467

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

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

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

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

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

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

None.

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

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

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

The  aggregate  market value of the 10.4 million  shares of voting stock held by
nonaffiliates  of Valhi,  Inc. as of June 30, 2004 (the last business day of the
Registrant's most recently-completed  second fiscal quarter) approximated $118.4
million.

As of February 28, 2005,  119,485,878  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, 2004, (i) Valhi's 62% ownership of NL
Industries,  Inc., 46% ownership of Kronos  Worldwide,  Inc.,  100% ownership of
Waste Control Specialists LLC, 100% ownership of Tremont LLC and 1% ownership of
Titanium  Metals  Corporation  ("TIMET"),  (ii)  NL's 37%  ownership  of  Kronos
Worldwide and 68% ownership of CompX  International  Inc.,  (iii)  Tremont's 21%
ownership of NL, 11%  ownership of Kronos  Worldwide  and 40% ownership of TIMET
and (x) TIMET's 17% ownership of CompX.  The chart also  indicates  that Tremont
distributed its ownership interest in NL and Kronos to Valhi in January 2005.

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  and
Kronos Worldwide, Inc.            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 2004,  with
sales   of   other    products    that   are
complementary   to  Kronos'  TiO2   business
comprising the remainder.

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

Waste Management                    Waste Control  Specialists owns and operates
Waste Control Specialists LLC     a facility in West Texas for the processing,
treatment,    storage   and    disposal   of
hazardous,   toxic  and  certain   types  of
low-level  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  ("TIMET") is a
Titanium Metals Corporation       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
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   91%  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 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 aerospace industry),
o    The  cyclicality  of  certain  of the  Company's  businesses  (such as
Kronos' TiO2 operations and TIMET's titanium metals operations),
o    The impact of certain long-term  contracts on certain of the Company's
businesses  (such as the impact of TIMET's  long-term  contracts  with
certain of its customers and such  customers'  performance  thereunder
and the  impact of TIMET's  long-term  contracts  with  certain of its
vendors on its ability to reduce or increase  supply or achieve  lower
costs),
o    Customer  inventory  levels  (such  as the  extent  to  which  Kronos'
customers  may,  from time to time,  accelerate  purchases  of TiO2 in
advance of anticipated  price  increases or defer purchases of TiO2 in
advance of anticipated  price decreases,  or the relationship  between
inventory  levels of TIMET's  customers  and such  customers'  current
inventory  requirements  and the impact of such  relationship on their
purchases from TIMET),
o    Changes in raw  material  and other  operating  costs  (such as energy
costs),
o    The possibility of labor disruptions,
o    General global economic and political  conditions  (such as changes in
the level of gross  domestic  product in various  regions of the world
and the impact of such  changes on demand  for,  among  other  things,
TiO2),
o    Competitive products and substitute products,
o    Customer and competitor strategies,
o    The impact of pricing and production decisions,
o    Competitive technology positions,
o    The introduction of trade barriers,
o    Fluctuations  in  currency  exchange  rates  (such as  changes  in the
exchange  rate  between  the U.S.  dollar  and each of the  euro,  the
Norwegian kroner and the Canadian dollar),
o    Operating  interruptions   (including,   but  not  limited  to,  labor
disputes, leaks, fires, explosions,  unscheduled or unplanned downtime
and transportation interruptions),
o    The ability 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 emission and discharge
standards for existing and new facilities),
o    Government laws and regulations and possible  changes therein (such as
changes  in  government   regulations   which  might  impose   various
obligations  on present and former  manufacturers  of lead pigment and
lead-based  paint,  including  NL,  with  respect to  asserted  health
concerns associated with the use of such products),
o    The  ultimate  resolution  of  pending  litigation  (such as NL's lead
pigment litigation and litigation surrounding environmental matters of
NL, Tremont and TIMET), and
o    Possible future litigation.

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

CHEMICALS - KRONOS WORLDWIDE, INC.

Products and  operations.  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,  fiber,  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' 2004 TiO2 sales  volumes were to Europe,
with about 38% to North America and the balance to export markets. Kronos is the
second-largest  producer  of TiO2 in  Europe,  with an  estimated  20%  share of
European TiO2 sales volumes in 2004.  Kronos has an estimated 14% share of North
American TiO2 sales volumes.

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.

Per capita  consumption of Ti02 in the United States and Western Europe far
exceeds  consumption  in other areas of the world and these regions are expected
to continue to be the largest  consumers of TiO2.  Significant  markets for TiO2
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.

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. Kronos distributes its TiO2 by rail, truck
and ocean carrier in either dry or slurry form. Kronos and its predecessors have
produced and marketed  TiO2 in North  America and Europe for over 80 years,  and
Kronos is the only leading TiO2 producer committed to producing TiO2 and related
products  as  its  sole  business.   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 2004. Sales
of other products,  complementary to Kronos' TiO2 business, are comprised of the
following:

o    Kronos  operates an ilmenite mine in Norway 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 20 years.  Ilmenite  sales
to  third-parties  represented  approximately 4% of chemicals sales in
2004.
o    Kronos  manufactures  and  sells  iron-based   chemicals,   which  are
by-products  and process  by-products  of the TiO2 pigment  production
process.  These  co-products  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 3% of chemical sales in 2004.
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 2004.

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  industry-wide  chloride-process  production  facilities in 2004 represented
approximately 64% of industry capacity.

During 2004, Kronos operated four TiO2 facilities in Europe (one in each of
Leverkusen, Germany, Nordenham, Germany, Langerbrugge,  Belgium and Fredrikstad,
Norway). In North America,  Kronos has a Ti02 facility in Varennes,  Quebec and,
through a manufacturing  joint venture discussed below, a one-half interest in a
Ti02 plant in Lake  Charles,  Louisiana.  TiO2 is  produced  using the  chloride
process at the Leverkusen,  Langerbrugge,  Varennes and Lake Charles facilities,
while TiO2 is produced using the sulfate  process at the Nordenham,  Leverkusen,
Fredrikstad and Varennes facilities.  Kronos operates an ilmenite mine in Norway
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,  representing  about  one-third  of Kronos'  current  TiO2  production
capacity,  is located within an extensive  manufacturing  complex owned by Bayer
AG. Rent for the Leverkusen  facility is  periodically  established by agreement
with  Bayer AG for  periods  of at least two years at a time.  Under a  separate
supplies  and  services  agreement  expiring in 2011,  Bayer  provides  some raw
materials  (including chlorine and certain amounts of sulfuric acid),  auxiliary
and  operating  materials  and  utilities  services  necessary  to  operate  the
Leverkusen  facility.  The lease and the supplies and  services  agreement  have
certain restrictions regarding ownership and use of the Leverkusen facility.

Kronos  produced a new company  record 484,000 metric tons of TiO2 in 2004,
compared to the prior records of 476,000  metric tons in 2003 and 442,000 metric
tons in 2002. Such production  amounts include Kronos' one-half  interest in the
joint-venture owned Louisiana plant discussed below.  Kronos' average production
capacity utilization rate in 2003 and 2004 were near full capacity,  up from 96%
in 2002. Kronos' production capacity has increased by approximately 30% over the
past ten years due to  debottlenecking  programs,  with  only  moderate  capital
investment.  Kronos believes its annual attainable  production capacity for 2005
is  approximately  500,000  metric tons,  with some slight  additional  capacity
available in 2006 through Kronos' 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 410,000 metric tons
of chloride  feedstock  in 2004,  of which the vast  majority  was slag.  Kronos
purchased chloride process grade slag in 2004 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 2007.  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 operates a rock ilmenite mine in Norway which
provided  all of Kronos'  feedstock  for its  European  sulfate-process  pigment
plants in 2004. Kronos produced approximately 867,000 metric tons of ilmenite in
2004, of which approximately 311,000 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  20,000 metric
tons in 2004),  primarily from Q.I.T. Fer et Titane Inc. of Canada, a subsidiary
of Rio Tinto, 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 has sought to minimize the impact of potential  changes in the price
of its feedstock raw  materials by entering into the contracts  discussed  above
which fix, to a large  extent,  the price of its raw  materials.  The  contracts
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 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  based on a fixed price with price
escalation clauses primarily based on consumer price indices,  as defined in the
respective contracts.

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.

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 two members  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 the Company's financial statements. The Company 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 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.  During 2004,
Kronos had an estimated 12% share of worldwide  TiO2 sales  volumes,  and Kronos
believes that it is the leading seller of TiO2 in several  countries,  including
Germany and Canada.  Overall,  Kronos is the world's  fifth-largest  producer of
Ti02, with an estimated 12% share of sales volumes in 2004.

Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont"),
Millennium Chemicals, Inc., Huntsman, Kerr-McGee Corporation 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).  No greenfield
plants are currently under construction in North America or Europe.  Kronos does
expect  that  industry  capacity  will  increase  as Kronos and its  competitors
continue to debottleneck  their existing  facilities.  Certain  competitors have
recently  either  idled  or shut  down  facilities.  In the past  year,  certain
competitors  have  announced  the  idling  or  shut  down  of  an  aggregate  of
approximately  135,000 metric tons of sulfate production capacity by early 2005.
Based on the factors  described  above,  Kronos  expects that the average annual
increase in industry  capacity from announced  debottlenecking  projects will be
less than the  average  annual  demand  growth for TiO2 during the next three to
five years. However, no assurance can be given that future increases in the TiO2
industry  production  capacity and future average annual demand growth rates for
TiO2 will conform to Kronos'  expectations.  If actual  developments differ from
Kronos'  expectations,  Kronos  and the TiO2  industry's  performances  could be
unfavorably affected.

Research and  development.  Kronos'  annual  expenditures  for research and
development,  process technology and quality assurance  activities have averaged
approximately  $6  million  in 2002,  $7 million in 2003 and $8 million in 2004.
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.  Over the last five
years,  ten 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 19 years at December  31,  2004.  Kronos  seeks to protect  its  intellectual
property  rights,  including  patent  rights,  and from  time to time  Kronos is
engaged in disputes  related 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 25% of
its sales during 2004.  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, 2004,  Kronos employed  approximately  2,420
persons (excluding employees of the Louisiana joint venture),  with 50 employees
in the United States, 420 employees in Canada and 1,950 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,  our 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
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
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 and operated by
the joint  venture  and a  Louisiana  slurry  facility  owned by  Kronos  are in
substantial compliance with applicable  requirements of these laws or compliance
orders issued thereunder. Kronos has no other U.S. plants.

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  members of the EU and follow its
initiatives.  Norway,  although not a member of the EU,  generally  patterns its
environmental  regulatory  actions after the EU. Kronos believes it has obtained
all  required  permits  and is in  substantial  compliance  with  applicable  EU
requirements.

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  generated  from its German sulfate  process  plants.
Either  party may  terminate  the  contract  after giving four years notice with
regard to the Nordenham plant.

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  penalities 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 were approximately $7 million in
2004, and are currently expected to approximate $7 million in 2005.

COMPONENT PRODUCTS - COMPX INTERNATIONAL INC.

General.  CompX is a leading manufacturer of precision ball bearing slides,
security  products  (cabinet locks and other locking  mechanisms)  and ergonomic
computer support systems used office  furniture,  computer-related  applications
and a variety of other industries. CompX's products are principally designed for
use in medium- to  high-end  product  applications,  where  design,  quality and
durability  are critical to CompX's  customers.  CompX believes that it is among
the world's  largest  producers  of  precision  ball  bearing  slides,  security
products  and  ergonomic  computer  support  systems . In 2004,  precision  ball
bearing  slides,  security  products  and  ergonomic  computer  support  systems
accounted for approximately 43%, 42% 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.  See Note 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,  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  Butterfly  Take Apart  System,  which is  designed to easily
disengage drawers from cabinets.

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
industry.  These products 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 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  capabilities  for  the  design  and
manufacture  of  products on a  proprietary  basis for key  customers  for those
Canadian manufactured products.

CompX's  precision ball bearing  slides are sold under the CompX  Waterloo,
Waterloo Furniture  Components and 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 and CompX  Waterloo brand
names. 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 2004,
the ten largest  customers  accounted for about 43% of component  products sales
(2003 - 44%;  2002 - 38%).  In 2004,  one customer  accounted for 11% of CompX's
sales. No single customer accounted for more than 10% of CompX's sales in either
2002 or 2003.

Manufacturing  and  operations.  At December 31, 2004,  CompX operated five
manufacturing  facilities in North America related to its continuing  operations
(two in Illinois and one in each of South Carolina, Michigan 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.  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 and a warehouse
in Taiwan.  CompX  believes  that all its  facilities  are well  maintained  and
satisfactory for their intended purposes.

Raw  materials.  Coiled  steel  is  the  major  raw  material  used  in the
manufacture  of precision  ball bearing  slides and ergonomic  computer  support
systems.  Plastic  resins for  injection  molded  plastics  are also an integral
material for ergonomic computer support systems.  Purchased components 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,  such as rapidly increasing  worldwide
steel prices in 2002through  2004. Due to the competitive  nature of the markets
served by CompX's  products,  it is often difficult to recover such increases in
raw material  costs through  increased  product  selling  prices.  Consequently,
overall operating margins can be affected by such raw material cost pressures.

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

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

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

Regulatory and  environmental  matters.  CompX's  operations are subject to
federal,  state,  local and foreign  laws and  regulations  relating to the use,
storage, handling, generation,  transportation,  treatment, emission, discharge,
disposal  and  remediation  of, and  exposure to,  hazardous  and  non-hazardous
substances,  materials  and  wastes.  CompX's  operations  are also  subject  to
federal, state, local and foreign laws and regulations relating to worker health
and safety.  CompX believes that it is in substantial  compliance  with all such
laws and  regulations.  The costs of 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, 2004,  CompX  employed  approximately  1,450
persons,  including 800 in the United States,  470 in Canada, and 180 in Taiwan.
Approximately  76% 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 expiring in January
2006. Wage increases for these Canadian employees historically have also been in
line with overall  inflation  indices.  CompX  believes its labor  relations are
satisfactory.

WASTE MANAGEMENT - WASTE CONTROL SPECIALISTS LLC

General.   Waste  Control  Specialists  LLC,  formed  in  1995,   completed
construction  in early 1997 of the initial  phase of its  facility in West Texas
for the  processing,  treatment,  storage and disposal of certain  hazardous and
toxic  wastes,  and the first of such wastes were received for disposal in 1997.
Subsequently,   Waste   Control   Specialists   has  expanded   its   permitting
authorizations to include the processing, treatment and storage of low-level and
mixed 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.  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 11.3 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 as well as  third-party  brokers 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 Envirocare of Utah,  American Ecology  Corporation and Perma-Fix
Environmental  Services,  Inc. These  competitors are well  established and have
significantly  greater resources than Waste Control Specialists,  which could be
important  competitive factors.  However,  Waste Control Specialists believes it
may have certain competitive advantages, including its environmentally-desirable
location,  broad level of local community support, a rail transportation network
leading to the facility and capability for future site expansion.

Employees.  At  December  31,  2004,  Waste  Control  Specialists  employed
approximately 110 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 2014,  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 TCEQ to issue a low-level radioactive waste disposal license
to  a  private  entity,  such  as  Waste  Control  Specialists.   Waste  Control
Specialists  applied for such a disposal  license  with TCEQ in 2004,  and Waste
Control  Specialists  was the only  entity to submit an  application  for such a
disposal license.  The length of time that TCEQ will take to review and act upon
the license  application is uncertain,  although Waste Control  Specialists does
not  currently  expect the agency would issue any final  decision on the license
application   before  2007.  There  can  be  no  assurance  that  Waste  Control
Specialists will be successful in obtaining any such license.

Waste Control  Specialists applied to the TDSHS for a license to dispose of
by product  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 expects the TDSHS will
issue a final decision on the license  application by the end of 2005. There can
be no assurance that Waste Control  Specialists  will be successful in obtaining
any such license.

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

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

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

TITANIUM METALS - TITANIUM METALS CORPORATION

General.  TIMET is 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 2004
it  accounted  for  approximately  18% of worldwide  industry  shipments of mill
products  and  approximately  10% of  worldwide  sponge  production.  Demand for
titanium  is also  increasing  in emerging  markets  with such  diverse  uses as
offshore  oil and gas  production  installations,  military  armor,  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.
Established  industrial uses for titanium include  chemical  plants,  industrial
power plants,  desalination  plants and pollution  control  equipment.  TIMET is
currently the only commercial  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.  Aerospace
demand for titanium  products,  which includes both jet engine  components (e.g.
blades, discs, rings and engine cases) and air frame components (e.g. bulkheads,
tail  sections,  landing gear,  wing supports and  fasteners) can be broken down
into  commercial and military  sectors.  The commercial  aerospace  sector has a
significant influence on titanium companies, particularly mill product producers
such as  TIMET.  Military  aerospace  sector  shipments  are  largely  driven by
government defense spending in North America and Europe.

The following table illustrates TIMET's estimates of titanium industry mill
product shipments during 2003 and 2004:

Year ended December 31,
2003                 2004               % change
--------             --------             --------
(metric tons)
Mill product shipments to:

Commercial aerospace sector                                  16,000                20,900              +31%
Military aerospace sector                                     4,100                 4,000               -2%
------                ------

Total aerospace industry                                   20,100                24,900              +24%
======                ======

Aggregate mill product shipments
to all industries                                             50,200                61,800              +23%
======                ======

As  discussed  further  below,  new  aircraft  programs  generally  are  in
development  for several years,  followed by multi-year  procurement  contracts.
TIMET's business is more dependent on aerospace demand than the overall titanium
industry,  as approximately  70% of TIMET's mill product shipment volume in 2004
was to the  aerospace  industry  (58%  commercial  aerospace  and  12%  military
aerospace) as compared to approximately 40% for the overall titanium industry.

The cyclical nature of the aerospace industry has been the principal driver
of the historical  fluctuations in the  performance of most titanium  companies.
Over the past 20 years, the titanium industry had cyclical peaks in mill product
shipments in 1989, 1997 and 2001 and cyclical lows in 1983, 1991, 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  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  50,200 metric tons in 2003 and 61,800  metric tons in 2004.  TIMET
currently  expects total industry mill product shipments will increase from 2004
levels to approximately 71,000 metric tons in 2005.

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 2004
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 602 (including 147 wide bodies) in 2004.
The following  table  summarizes  The Airline  Monitor's  most  recently  issued
forecast (January 2005) for large commercial  aircraft  deliveries over the next
five years:

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

2005                     680                 172                13%                 17%
2006                     720                 171                 6%                 (1%)
2007                     760                 200                 6%                 17%
2008                     805                 240                 6%                 20%
2009                     795                 255                (1%)                 6%

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 global traffic  increased in 2004 compared to
2003,  persistently  high oil  prices had an  adverse  impact on the  commercial
airline  industry.  According to The Airline Monitor,  the worldwide  commercial
airline industry's  estimated operating loss for 2004 was $5.9 billion,  and the
projected  2005  operating  loss is $2.9 billion.  According to ROM  Associates,
Inc., a leading  aerospace  research  company,  global airline passenger traffic
returned to pre-September  11, 2001 levels in October 2003. TIMET estimates that
industry  mill  product  shipments  into the  commercial  aerospace  sector will
approximate 26,000 metric tons in 2005.

Military  aerospace  programs were the first to utilize  titanium's  unique
properties  on a large  scale,  beginning  in the 1950s.  Titanium  shipments to
military  aerospace  markets  reached  a peak in the  1980s  before  falling  to
historical lows in the early 1990s after the end of the Cold War.  However,  the
importance of military  markets to the titanium  industry is expected to rise in
coming  years as defense  spending  budgets  increase in  reaction to  terrorist
activities and global conflicts.

Several of today's  active  U.S.  military  programs,  including  the C-17,
F/A-18,  F-16 and F-15 began  during the Cold War and are  forecast  to continue
production  through  the  end  of the  current  decade.  In  addition  to  these
established U.S.  programs,  new U.S.  programs offer growth  opportunities  for
increased  titanium  consumption.  The F/A-22  Raptor is  currently  in low-rate
initial  production,  and the U.S. Air Force currently plans to purchase between
276 and 300 aircraft over the life of the program,  depending on funding levels.
The recent budget proposed by President Bush provides for an overall increase in
spending  compared to current levels,  principally to continue  funding military
ground efforts in Iraq and  Afghanistan.  The current budget proposal also calls
for an end to  procurement of the F/A-22 in 2008,  with total F/A-22  production
capped at 179  aircraft.  However,  final  procurement  decisions  must  receive
Congressional approval.

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 2006,  and 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.  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.

Since titanium's  initial  applications in the aerospace sector, the number
of  end-use  markets  for  titanium  has  significantly  expanded.   Established
industrial uses for titanium include chemical plants, 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.  Titanium continues to gain acceptance in many
emerging market applications,  including automotive,  military armor, energy and
architecture.  Although  titanium is generally  higher cost than other competing
metals,  in many cases customers find the physical  properties of titanium to be
attractive  from  the  standpoint  of  weight,  performance,  longevity,  design
alternatives,  life cycle value and other factors. Although TIMET estimates that
emerging  market  demand  presently  represents  only about 5% of the 2004 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 is actively pursuing these markets.

The automotive market continues to be an attractive emerging market segment
due to its potential for sustainable long-term growth. For this reason, in 2002,
TIMET established a new division,  TIMET  Automotive,  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 and engine valves in consumer  vehicles.  In exhaust systems,
titanium provides for significant weight savings, while its corrosion resistance
provides   life-of-vehicle   durability.   In  suspension  spring  applications,
titanium's low modulus of elasticity allows the spring's height to be reduced by
20% to 40% compared to a steel spring,  which, when combined with the titanium's
low density,  permits 30% to 60% weight  savings  over steel  spring  suspension
systems.   Titanium  suspension  springs  and  exhaust   applications  are  also
attractive compared to alternative lightweight technologies because the titanium
component  can often be formed and  fabricated  on the same tooling used for the
steel component it is typically replacing.

Titanium  is  also  making  inroads  into  other  automotive  applications,
including turbo charger wheels, brake parts and connecting rods. Titanium engine
components  provide  mass-reduction   benefits  that  directly  improve  vehicle
performance  and fuel economy.  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.

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

The oil and gas market  utilizes  titanium  for  down-hole  logging  tools,
critical riser  components,  fire water systems and  saltwater-cooling  systems.
Additionally,  as offshore  development of new oil and gas fields moves into the
ultra   deep-water   depths,   market   demand  for   titanium's   light-weight,
high-strength and corrosion-resistance  properties is creating new opportunities
for the material.  TIMET has a 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 processed titanium products,  (ii) melted products (ingot
and slab), the result of melting sponge and titanium scrap, either alone or with
various other alloying elements,  (iii) mill products that are forged and rolled
from ingot or slab,  including  long  products  (billet and bar),  flat products
(plate, sheet and strip) and pipe and (iv) fabrications  (spools,  pipefittings,
manifolds and vessels) 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 and which,  in TIMET's case,
weighs up to 8 metric  tons.  Titanium  slab is a  rectangular  solid  shape and
which,  in TIMET's case,  weighs up to 16 metric tons in the case of slab.  Each
ingot or slab is formed by melting titanium sponge,  scrap or both, usually with
various other alloying elements such as vanadium, aluminum,  molybdenum, tin and
zirconium.  Titanium scrap is a by-product of the forging,  rolling, milling and
machining operations,  and significant  quantities of scrap are generated in the
production  process for finished titanium  products and components.  The melting
process  for  ingot  and slab is  closely  controlled  and  monitored  utilizing
computer control systems to maintain product quality and consistency and to meet
customer  specifications.  In most  cases,  TIMET uses its ingot and slab as the
starting material for further  processing into mill products.  However,  it also
sells ingot and slab to third parties.

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  Company-owned  service centers
(five in the U.S.  and  three in  Europe),  which  sell  TIMET's  products  on a
just-in-time   basis.  The  service  centers   primarily  sell  value-added  and
customized  mill products  including  bar,  flat-rolled  sheet and strip.  TIMET
believes its service  centers provide a competitive  advantage  because of their
ability to foster customer  relationships,  customize  products to suit specific
customer requirements and respond quickly to customer needs.

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 2004, TIMET's raw material usage requirements for its melted and
mill  products  were provided by  internally  produced  sponge (30%),  purchased
sponge (32%), titanium scrap (31%) and other alloying elements (7%).

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 2004, TIMET was the only major U.S. producer of titanium sponge, and
one of only five worldwide  producers.  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
Japan and  Kazakhstan.  In September  2002,  TIMET  entered into a sponge supply
agreement,  effective  from  January 1, 2002 through  December  31, 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  is
expected to become  fully  depleted  during 2005.  TIMET  expects to continue to
purchase sponge from a variety of sources during 2005.

TIMET utilizes a combination of internally produced,  customer returned and
externally  purchased  titanium  scrap  at its  melting  locations.  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.  Customer  returned  scrap  is  generally  part of a supply
agreement with a customer,  which provides a "closed loop" arrangement resulting
in supply and cost stability. Externally purchased scrap comes from a wide range
of sources,  including  customers,  collectors,  processors  and brokers.  TIMET
anticipates  that 50% to 60% of the scrap it will  utilize  during  2005 will be
purchased  from  external  suppliers,  as compared  to 52% for 2004.  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.  During  cycles in the titanium  business,  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 market
prices for scrap.  Increasing  or  decreasing  cycles tend to cause  significant
changes in the market  price of scrap.  Early in the  titanium  cycle,  when the
demand  for  titanium  melted  and mill  products  begins to  increase,  TIMET's
requirements (and those of other titanium manufacturers) precede the increase in
scrap  generation by downstream  customers and the supply chain,  placing upward
pressure on the market price of scrap. The opposite situation occurs when demand
for  titanium  melted and mill  products  begins to  decline,  placing  downward
pressure on the market price of scrap.  As a net  purchaser  of scrap,  TIMET is
susceptible to price  increases  during periods of increasing  demand,  Although
this  phenomenon  normally  results in higher selling prices for melted and mill
products,  which tends to offset the increased material costs, TIMET is somewhat
limited in its ability to raise  prices by the portion of its  business  that is
under long-term pricing agreements.

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. These events
created a  significantly  tightened  supply of titanium  scrap during 2004,  and
TIMET  expects  this trend to continue  and possibly  worsen  during  2005.  The
shortage of titanium  scrap and  consequently  higher scrap prices will directly
impact the scrap TIMET purchases from external sources. For TIMET, this trend is
expected  to  result  in lower  availability  and  higher  cost  for  externally
purchased  scrap in the near term.  TIMET's  ability to recover  these  material
costs via higher  selling  prices to its  customers is  uncertain.  The expected
increase in  commercial  aircraft  build rates over the next several  years,  as
previously  discussed,  could  have the  effect of  relieving  the  shortage  of
titanium scrap.

Various  alloys  elements 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 also has resulted in a significant  increase in
the prices for  several  alloying  elements,  such as vanadium  and  molybdenum.
Although  availability  is not expected to be a problem,  TIMET's cost for these
alloying elements during 2005 could be as much as double that of 2004.

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 the
other facilities.  The facilities in Nevada,  Ohio and Pennsylvania,  and one of
the facilities in the United  Kingdom,  are owned,  and all of the remainder are
leased.

In addition to its U.S. sponge capacity discussed below,  TIMET's worldwide
melting  capacity  presently   aggregates   approximately   45,000  metric  tons
(estimated  29% of world  capacity),  and its mill product  capacity  aggregates
approximately  20,000 metric tons (estimated 16% of world capacity).  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. In 2004, the plants operated at
approximately 73% of practical  capacity,  as compared to 56% in 2003 and 55% in
2002. In 2005,  TIMET's plants are expected to operate at  approximately  75% to
80% 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 2005,  which is consistent  with
2004.  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.

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 85% of aggregate annual practical  capacity
in 2005, up from 76% in 2004.

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  83% of annual  practical  capacity in 2005, up from
66% in 2004.  Capacity  utilization across TIMET's individual mill product lines
varies.

One of TIMET  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
2005 is  expected  to operate at  approximately  76% and 59%,  respectively,  of
annual practical capacity, compared to 73% and 54%, respectively, in 2004.

The capacity of TIMET's facility in France is to a certain extent dependent
upon the level of activity of the other owner of such  business,  which may from
time to time  provide  TIMET with  capacity  in excess of that to which TIMET is
contractually entitled. During 2005, the other owner has agreed to provide TIMET
more than the maximum annual capacity that TIMET is contractually entitled.

Sponge  for  melting   requirements  at  both  United  Kingdom  and  French
facilities that is not supplied by TIMET's Nevada plant is purchased principally
from suppliers in Kazakhstan and Japan.

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 (Pratt &
Whitney and related  companies) and  Wyman-Gordon  Company,  a unit of Precision
Castparts Corporation ("PCC"). Most of these agreements expire from 2005 through
2008,  subject to certain  conditions,  and  generally  provide  for (i) minimum
market  shares of the  customers'  titanium  requirements  or firm annual volume
commitments and (ii) fixed or  formula-determined  prices (although some contain
elements based on market pricing).  Generally,  the LTAs 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  long-term  agreements have been amended in the past and may
be amended in the future to meet changing business conditions.

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

During 2001, TIMET reached a settlement of certain litigation between TIMET
and Boeing  related to the parties'  LTA entered  into in 1997.  Pursuant to the
settlement,  TIMET received a cash payment of $82 million from Boeing. Under the
terms of the long-term  agreement with Boeing, as amended, in 2002 through 2007,
Boeing  advances  TIMET $28.5 million  annually less $3.80 per pound of titanium
product purchased by Boeing  subcontractors under the long-term agreement during
the preceding year. Effectively,  TIMET collects $3.80 less from Boeing than the
LTA selling price for each pound of titanium product sold directly to Boeing and
reduces the related customer  advance  recorded by TIMET. For titanium  products
sold to Boeing  subcontractors,  TIMET  collects  the full  long-term  agreement
selling  price,  but gives  Boeing  credit by reducing  the next  year's  annual
advance by $3.80 per pound. The Boeing customer advance is also reduced as TIMET
recognizes income under the take-or-pay  provisions of the long-term  agreement.
Under a separate agreement TIMET must establish and hold buffer stock for Boeing
at TIMET's  facilities,  for which  Boeing  will be  invoiced by TIMET when such
material is produced into a mill product.

TIMET also has an long-term  agreement with VALTIMET SAS, a manufacturer of
welded  stainless  steel and titanium  tubing that is principally  sold into the
industrial  markets.  VALTIMET is a 44%-owned  affiliate of TIMET. The agreement
with  VALTIMET  was  entered  into in 1997  and  expires  in  2007.  Under  this
agreement,  VALTIMET has agreed to provide a certain  percentage  of  VALTIMET's
titanium requirements from TIMET 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 2004,  approximately 55% of TIMET's sales
were to customers  located in North America,  with 40% 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 over  two-thirds of its
sales revenue from sales to the commercial and military  aerospace industry (70%
in 2004). TIMET expects that a similar percentage of its 2005 sales revenue will
be to the aerospace industry. As discussed above, TIMET has long-term agreements
with certain major aerospace customers,  including Boeing, Rolls-Royce,  UTC and
Wyman-Gordon.  During  2004,  approximately  44% of  TIMET's  total  sales  were
attributable  to  such  long-term  agreements.  TIMET's  ten  largest  customers
accounted  for 48% of its  sales  in 2004  (2003 - 44%;  2002-  43%),  including
Rolls-Royce  and suppliers  under the  Rolls-Royce  long-term  agreement (15% of
TIMET's  sales in 2004).  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
industry  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
Societe Nationale d'Etude et de Construction de Moteurs  d'Aviation  ("Snecma").
TIMET's  sales  are made  both  directly  to these  major  manufacturers  and to
companies  (including forgers such as Wyman-Gordon) that use TIMET's titanium to
produce parts and other  materials for such  manufacturers.  If any of the major
aerospace  manufacturers were to significantly reduce aircraft and/or jet engine
build rates from those  currently  expected,  there could be a material  adverse
effect, both directly and indirectly, on TIMET.

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:

At December 31,
2002              2003             2004
------            ------           -----

Firm order backlog - all planes:

Airbus                                                               1,505              1,454            1,500
Boeing                                                               1,144              1,101            1,089
-----              -----            -----

2,649              2,555            2,589
=====              =====            =====

Firm order backlog - wide body planes:
Airbus                                                                 423                471              466
Boeing                                                                 286                230              287
-----              -----            -----

709                701              753
=====              =====            =====

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

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

At December  31,  2004,  a total of 139 firm orders had been placed for the
Airbus  A380  superjumbo  jet,  a  program  officially  launched  in  2000  with
anticipated first deliveries in 2006.  Current estimates are that  approximately
77 metric tons of titanium  (50 metric tons for the  airframe and 27 metric tons
for the engines) will be purchased for each A380 manufactured.  Additionally, at
year-end  2004,  a total of 56 firm  orders  have been placed for the Boeing 787
Dreamliner,  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's preliminary estimates are 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.  Howeveer,  the
final  titanium  buy  weight is likely to vary  because  the 787 is still in the
design phase.

Outside of aerospace markets,  TIMET manufactures a wide range of products,
including sheet,  plate, tube, bar, billet, pipe and skelp, for customers in the
chemical  process,  oil and gas,  consumer,  sporting goods,  automotive,  power
generation and  armor/armament  industries.  Approximately  18% of TIMET's sales
revenue  in  2002,  19% in 2003  and 17% in 2004 was  generated  by  sales  into
industrial and emerging markets,  including sales to VALTIMET for the production
of welding 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 armor and
armament,  TIMET sells plate  products for  fabrication  into applique plate for
protection of the entire ground  combat  vehicle as well as the primary  vehicle
structure.

In addition to melted and mill products, which are sold into the aerospace,
industrial  and emerging  markets,  TIMET sells certain  other  products such as
titanium sponge, titanium tetrachloride and certain titanium fabrications. Sales
of these other products represented 15% of TIMET's sales revenue in 2002 and 13%
in both 2004 and 2003.

During  2004,  TIMET  modified  its method of  calculating  its  backlog to
include  replenishment  purchase orders placed under consignment  relationships.
TIMET believes inclusion of these orders provides a more accurate  reflection of
TIMET's overall backlog. Using the modified methodology for all periods, TIMET's
backlog of unfilled orders was approximately  $450 million at December 31, 2004,
compared to $205  million at December  31, 2003 and $185 million at December 31,
2002.  Over 94% of the 2004 year-end  backlog is scheduled  for shipment  during
2005.  TIMET's order backlog may not be a reliable  indicator of future business
activity.

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

Competition.  The  titanium  metals  industry  is highly  competitive  on a
worldwide basis.  Producers of melted and mill products are located primarily in
the United States, Japan, France,  Germany,  Italy, Russia, China and the United
Kingdom.  In  addition,  producers  of other  metal  products,  such a 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  five major,  and several  minor,  producers  of
titanium sponge in the world.  TIMET is currently the only major sponge producer
in the U.S..  Three of the major  producers  have  announced  plans to  increase
sponge capacity.  TIMET believes that entry as 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 RTI and
VSMPO,  RTI  and  certain  Japanese   producers  are  the  Company'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).

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

For most periods since 1993,  imports of titanium wrought products from any
beneficiary  developing  country  (notably  Russia,  as a  producer  of  wrought
products) were exempted from U.S. import duties under the GSP program.  In 2002,
TIMET filed a petition seeking the removal of duty-free  treatment under the GSP
program for imports of titanium  wrought  products  into the U.S.  from  Russia.
During the third quarter of 2004,  President  Bush  approved the petition.  This
action  resulted  in a return to the normal  15%  tariff on imports of  titanium
wrought product from Russia.

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

The  Japanese   government   has  recently   raised  the   elimination   or
harmonization of tariffs on titanium  products,  including  titanium sponge, for
consideration in the next round of multi-lateral trade negotiations  through the
World Trade Organization (the so-called "Doha Round") scheduled to start in late
2005. A U.S.  competitor has  recommended  the  elimination  of U.S.  tariffs on
titanium  sponge imports for  consideration  in the Doha Round.  TIMET has urged
that no  change  be made to  these  tariffs,  either  on  wrought  or  unwrought
products.

TIMET has successfully  resisted,  and will continue to resist,  efforts to
eliminate duties on sponge and unwrought  titanium products (whether through the
GSP or otherwise), and TIMET has pursued and will continue to pursue the removal
of GSP status for titanium wrought products,  although no assurances can be made
that  TIMET  will  continue  to  be  successful  in  these  activities.  Further
reductions  in, or the  complete  elimination  of, any or all of these  tariffs,
including  expansion of the GSP program to unwrought  titanium  products,  could
lead to increased  imports of foreign  sponge,  ingot and mill products into the
U.S.  and an  increase in the amount of such  products on the market  generally,
which  could  adversely  affect  pricing  for  titanium  sponge,  ingot and mill
products and thus TIMET's business, 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 $2.9 million
in 2002, $2.8 million in 2003 and $2.9 million in 2004.

Patents and trademarks. TIMET holds U.S. and non-U.S. patents applicable to
certain of its titanium alloys and manufacturing  technology.  TIMET continually
seeks patent  protection with respect to its technical base and has occasionally
entered into cross-licensing arrangements with third parties. TIMET believes the
trademarks  TIMET(R) and TIMETAL(R),  which are protected by registration in the
U.S. and other countries,  are important to its business.  Further,  TIMET feels
its  proprietary  TIMETAL  Exhaust  Grade,  patented  TIMETAL 62S connecting rod
alloy,  patented  TIMETAL LCB spring alloy and patented  TIMETAL  Ti-1100 engine
valve alloy give it competitive  advantages in the automotive  market.  However,
most of the titanium  alloys and  manufacturing  technology used by TIMET do not
benefit from patent or other  intellectual  property  protection.  These patents
expire at various dates from 2004 through 2013.

Employees.  The cyclical nature of the aerospace industry and its impact on
TIMET's  business is the principal  reason TIMET  periodically  implements  cost
reduction restructurings,  reorganizations and other changes that impact TIMET's
employment  levels.  At December 31, 2004,  TIMET employed  approximately  1,380
persons  in the  U.S.  and  850  persons  in  Europe.  TIMET  currently  expects
employment  to slightly  increase  throughout  2005 as  production  continues to
increase.

TIMET's production, maintenance, clerical and technical workers in Toronto,
Ohio,  and its  production  and  maintenance  workers in  Henderson,  Nevada 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
60% of the salaried  and hourly  employees at TIMET's  European  facilities  are
represented  by various  European labor unions.  TIMET has a labor  agreement in
place with its U.K.  employees  through 2005.  TIMET's labor  agreement with its
French employees is 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.  As a result,  risk of  environmental,
health and safety issues is inherent in TIMET's  operations.  TIMET's operations
pose a  continuing  risk of  accidental  releases  of, and worker  exposure  to,
hazardous  or  toxic   substances.   There  is  also  a  risk  that   government
environmental requirements, or enforcement thereof, may become more stringent in
the future.  There can be no 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
$1.4 million in 2002,  $1.9  million in 2003 and $5.1 million in 2004.  The 2004
amount  includes  $3.9  million  related  to the  construction  of a  wastewater
treatment  facility at its Henderson,  Nevada  location.  TIMET's capital budget
provides  for  approximately  $16 million for  environmental,  health and safety
capital expenditures in 2005, including approximately $13 million for completion
of the wastewater treatment facility.

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 68%  ownership  of CompX  (through
CompX Group) and its 37% ownership of Kronos at December 31, 2004, 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,
2004 owns 21% of NL, 40% of TIMET and 11% of Kronos.  In addition,  Tremont owns
indirect ownership interests in Basic Management,  Inc. ("BMI"),  which provides
utility services to, and owns property (the "BMI Complex")  adjacent to, TIMET's
facility in Nevada, and The Landwell Company L.P. ("Landwell"), which is engaged
in efforts to develop  certain land  holdings  for  commercial,  industrial  and
residential  purposes  surrounding  the BMI Complex.  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
72% of Kronos'  2004 TiO2  sales were to  non-U.S.  customers,  including  9% to
customers  in areas other than Europe and Canada.  Approximately  24% of CompX's
2004 sales were to non-U.S.  customers located principally in Canada.  About 45%
of TIMET's 2004 sales are to non-U.S.  customers,  primarily in Europe.  Foreign
operations  are  subject  to,  among  other  things,   currency   exchange  rate
fluctuations and the Company's  results of operations have in the past been both
favorably and unfavorably  affected by fluctuations in currency  exchange rates.
See Item 7 -  "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations" and Item 7A - "Quantitative  and Qualitative  Disclosures
About Market Risk."

CompX's  Canadian  component  products  subsidiary  has, from time to time,
entered into currency  forward  contracts to mitigate  exchange rate fluctuation
risk for a portion of its receivables  denominated in currencies  other than the
Canadian dollar  (principally  the U.S.  dollar) or for similar risks associated
with future sales.  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  --  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
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 availability of Company reports filed with the SEC. 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, 2004,  copies of the
Company's  Quarterly  Reports  on Form  10-Q for  2004 and 2005 and any  Current
Reports on Form 8-K for 2004 and 2005,  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,  may 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,  and may obtain  information on the operation of the Public  Reference
Room by calling the SEC at  1-800-SEC-0330.  The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains  reports,
proxy and information  statements and other  information  regarding issuers that
file electronically with the SEC, including the Company.

ITEM 2.  PROPERTIES

Valhi 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   (together,   the   "former   pigment
manufacturers"), 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 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 the defendants. In addition,  various other cases are pending (in which
NL is not a  defendant)  seeking  recovery for injury  allegedly  caused by lead
pigment and lead-based paint. Although NL is not a defendant in these cases, the
outcome of these  cases may have an impact on cases that might be 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  neither  lost nor settled  any of these  cases.  NL has not
accrued  any  amounts  for  the  pending  lead  pigment  and  lead-based   paint
litigation.  Liability that may result,  if any, cannot reasonably be estimated.
There can be no  assurance  that NL will not incur  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.

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

In August 1992, NL was served with an amended complaint in Jackson,  et al.
v. The Glidden Co., et al., Court of Common Pleas,  Cuyahoga County,  Cleveland,
Ohio (Case No. 236835).  Plaintiffs seek  compensatory  and punitive damages for
personal  injury  caused  by the  ingestion  of  lead,  and an  order  directing
defendants  to  abate  lead-based  paint in  buildings.  Plaintiffs  purport  to
represent a class of similarly  situated  persons  throughout the State of Ohio.
The trial  court has  denied  plaintiffs'  motion  for class  certification.  In
September  2003,  defendants  have filed a motion for  summary  judgment  on all
claims. The court has not yet ruled on the motion.

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. The matter is now before the Wisconsin Supreme 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. The court also set September 2005 as the date for the retrial of
all claims in this case.

In October  1999,  NL was served with a complaint in Smith,  et al. v. Lead
Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case
No.  24-C-99-004490).  Plaintiffs,  seven minors from four  families,  each seek
compensatory  damages of $5 million  and  punitive  damages of $10  million  for
alleged  injuries due to  lead-based  paint.  Plaintiffs  allege that the former
pigment  manufacturers and other companies  alleged to have  manufactured  paint
and/or  gasoline  additives,  the  LIA  and  the  National  Paint  and  Coatings
Association are jointly and severally liable. NL has denied liability. The trial
court,  on defendants'  motion,  dismissed all claims of the first four families
except  those  relating  to product  liability  for lead paint and the  Maryland
Consumer  Protection  Act.  Plaintiff  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.  Pre-trial proceedings
and discovery  against the other plaintiffs are continuing,  but trial dates for
these plaintiffs are stayed pending the appeal of the summary judgment ruling.

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. A trial date
has been set for January 2006.

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

In June 2000, 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. The time for plaintiffs' appeal has not yet run.

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.  Two of these  plaintiffs  have  been
dismissed  without  prejudice  with  respect  to NL.  With  respect to the eight
plaintiffs  remaining in Jefferson County,  one plaintiff dropped his claim, and
in July 2004 the  Mississippi  Supreme  Court denied  plaintiffs'  motion to add
additional defendants. Pre-trial proceedings are continuing.

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.

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

In January  2002,  NL was served  with a complaint  in Jackson,  et al., v.
Phillips  Building  Supply of Laurel,  et al.  (Circuit  Court of Jones  County,
Mississippi,  Dkt.  Co.  2002-10-CV1).  The  complaint  seeks  joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for  compensatory  and  punitive  damages  on behalf of 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 allegations of 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 June 2000, NL was served with a complaint in Houston  Independent School
District  v.  Lead  Industries  Association,  et al.  (District  Court of Harris
County, Texas, No. 2000-33725).  The complaint seeks actual and punitive damages
resulting from the presence of lead-based paint in the district's buildings from
the former pigment manufacturers and the LIA. NL has denied all liability.  This
case has been abated since 2003, and no further proceedings are anticipated.

In May 2001, NL was served with a complaint in Harris County, Texas v. Lead
Industries  Association,  et al.  (District Court of Harris County,  Texas,  No.
2001-21413).  The complaint  seeks actual and punitive  damages and asserts that
the former pigment  manufacturers  and the LIA are jointly and severally  liable
for past and future  damages due to the  presence of lead paint in  county-owned
buildings.  NL has denied all  liability.  This case has been abated since 2003,
and no further proceedings are anticipated.

In February  2002,  NL was served with a complaint  in Liberty  Independent
School  District  v. Lead  Industries  Association,  et al.  (District  Court of
Liberty  County,  Texas,  No.  63,332).  The compliant  seeks  compensatory  and
punitive damages jointly and severally from the former pigment manufacturers and
the LIA for property  damage to its buildings.  The complaint was amended to add
Liberty County, the City of Liberty,  and the Dayton Independent School District
as plaintiffs and drop the LIA as a defendant.  NL has denied all allegations of
liability.  This case has been abated since 2003, and no further proceedings are
anticipated.

In May 2002,  NL was served with a  complaint  in  Brownsville  Independent
School  District  v. Lead  Industries  Association,  et al.  (District  Court of
Cameron County,  Texas,  No.  2002-052081 B), seeking  compensatory and punitive
damages  jointly and  severally  from NL,  other  former  manufacturers  of lead
pigment  and the LIA for  property  damage.  NL has  denied all  allegations  of
liability.  This case has been abated since 2003, and no further proceedings are
anticipated.

In  September  2002,  NL was served with a complaint  in City of Chicago v.
American  Cyanamid,  et  al.  (Circuit  Court  of  Cook  County,  Illinois,  No.
02CH16212),  seeking  damages to abate lead  paint in a  single-count  complaint
alleging public nuisance against NL and seven other former manufacturers of lead
pigment. In October 2003, the trial court granted defendants' motion to dismiss.
In  January  2005,  the  appellate  court  affirmed  the trial  court's  ruling.
Plaintiff  has  notified  the  court of its  intention  to seek  review  of this
decision by the Illinois Supreme Court.

In  October  2002,  NL was  served  with  a  complaint  in  Walters  v.  NL
Industries,  et al. (Kings County Supreme Court, New York, No.  28087/2002),  in
which an adult seeks  compensatory  and punitive  damages from NL and five other
former  manufacturers of lead pigment for childhood exposures to lead paint. The
complaint alleges negligence and strict product  liability,  and seeks joint and
several liability with claims of civil conspiracy, concert of action, enterprise
liability,  and market share or alternative liability.  In March 2003, the court
granted  defendants'  motion to dismiss the product  defect  allegations  in the
negligence and strict liability counts. In December 2004, the case was dismissed
for plaintiff's failure to file a notice of entry.

In April 2003, NL was served with a complaint in Russell v. NL  Industries,
Inc., et al.  (Circuit Court of LeFlore  County,  Mississippi,  Civil Action No.
No.2002-0235-CICI).  Initially six painters sued NL, four paint companies, and a
local retailer, alleging strict liability,  negligence,  fraudulent concealment,
misrepresentation, and conspiracy, and seeking compensatory and punitive damages
for alleged injuries caused by lead paint. NL denied all liability, and the case
has been,  removed to federal  court.  In May 2004,  four of the six  defendants
voluntarily  dismissed their claims. In November 2004, defendants filed a motion
for summary judgment, and in January 2005 defendants filed a motion to dismiss.

In April 2003,  NL was served with a complaint  in Jones v. NL  Industries,
Inc., et al.  (Circuit Court of LeFlore  County,  Mississippi,  Civil Action No.
2002-0241-CICI). The plaintiffs, fourteen children from five families, have sued
NL  and  one  landlord   alleging  strict  liability,   negligence,   fraudulent
concealment and  misrepresentation,  and seek  compensatory and punitive damages
for alleged  injuries  caused by lead  paint.  Defendants  removed  this case to
federal court,  and in June 2004 the federal court set a trial date for February
2006. Discovery is proceeding.

In November  2003,  NL was served with a  complaint  in Lauren  Brown v. NL
Industries,  Inc.,  et al.  (Circuit  Court  of Cook  County,  Illinois,  County
Department,  Law Division,  Case No. 03L 012425).  The  complaint  seeks damages
against  NL and two local  property  owners  on  behalf of a minor for  injuries
alleged to be due to exposure to lead paint contained in the minor's  residence.
NL has denied all allegations of liability. Discovery is proceeding.

In 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  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. 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,  potential  responsible party ("PRP") or both, pursuant to
the 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.

The  Company  records  liabilities  related  to  environmental  remediation
obligations  when  estimated  future  expenditures  are probable and  reasonably
estimable.  Such accruals are adjusted as further  information becomes available
or  circumstances  change.  Estimated  future  expenditures  are  generally  not
discounted to their present value.  Recoveries of  remediation  costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At  December  31,  2003 and  2004,  no  receivables  for  recoveries  have  been
recognized.

The exact time frame over which the Company makes  payments with respect to
its accrued  environmental  costs is unknown and is dependent upon,  among other
things,  the timing of the actual  remediation  process  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, 2004, NL had accrued $68 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 $93 million. NL's estimates of
such liabilities have not been discounted to present value.

At December  31,  2004,  there are  approximately  20 sites for which NL is
unable  to  estimate  a  range  of  costs.   For  these  sites,   generally  the
investigation is in the early stages,  and it is either unknown as to whether or
not NL actually had any association with the site, or if NL had association with
the site, the nature of its responsibility, if any, for the contamination at the
site and the  extent of  contamination.  The  timing on when  information  would
become  available  to NL to allow NL to  estimate a range of loss is unknown and
dependent on events  outside the control of NL, such as when the party  alleging
liability provides information to NL.

In July 1991, the United States filed an action in the U.S.  District Court
for the Southern  District of Illinois  against NL and others  (United States of
America v. NL  Industries,  Inc.,  et al., Civ. No. 91-CV 00578) with respect to
the Granite City,  Illinois lead smelter  formerly  owned by NL. NL and the U.S.
EPA entered into a court-approved  consent decree settling NL's liability at the
site for $31.5  million,  including  $1 million in  penalties.  Pursuant  to the
consent decree, in June 2003 NL paid $30.8 million to the United States,  and NL
will pay up to an additional $700,000 upon completion of an EPA audit of certain
response costs.

In 1996,  the U.S. EPA ordered NL to perform a removal action at a facility
in Chicago,  Illinois  formerly  owned by NL. NL has complied with the order and
has substantially completed the clean-up work associated with the facility.

In January  2003, NL received a general  notice of liability  from the U.S.
EPA  regarding  the site of a formerly  owned  primary  lead  smelting  facility
located in  Collinsville,  Illinois.  The U.S.  EPA  alleges  the site  contains
elevated  levels of lead.  In July 2004,  NL and the U.S.  EPA  entered  into an
administrative order on consent to perform a removal action at the site.

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 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.

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

Tremont.  In  July  2000  Tremont,  entered  into  a  voluntary  settlement
agreement  with the Arkansas  Department  of  Environmental  Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will  undertake  certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County,  Arkansas.  Tremont  currently  believes that it has accrued
adequate  amounts  ($2.7  million at  December  31,  2004) to cover its share of
probable  and  reasonably   estimable   environmental   obligations   for  these
activities.  Tremont  currently  expects that the nature and extent of any final
remediation measures that might be imposed with respect to this site will not be
known until 2007.  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, 2004 for any such cost.  The amount  accrued at December
31, 2004 represents  Tremont's estimate of the costs to be incurred through 2007
with respect to the interim remediation measures.

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

TIMET.  TIMET and BMI entered into an agreement in 1999 providing that upon
BMI's  payment  to TIMET of the  cost to  design,  purchase  and  install  a new
wastewater  neutralization facility necessary to allow TIMET to stop discharging
liquid and solid  effluents  and  co-products  into  settling  ponds  located on
certain  lands owned by TIMET  adjacent to its Nevada  facility (the "TIMET Pond
Property"),  TIMET would convey the TIMET Pond Property to BMI, at no additional
cost.  In November  2004,  TIMET and BMI entered into several  agreements  which
superceded the 1999 agreement.  Under these new  agreements,  TIMET conveyed the
TIMET Pond Property to BMI in exchange for (i) $12.0  million  cash,  (ii) BMI's
assumption of the liability for certain environmental issues associated with the
TIMET Pond Property,  including  certain possible  groundwater  issues and (iii)
other  consideration,  including TIMET's potential receipt of an additional $3.3
million  from  BMI in the  event  that BMI is  unable  to add  TIMET to  certain
insurance  policies by a specified  date.  TIMET will continue to use certain of
the settling ponds located on the TIMET Pond Property  pursuant to a lease until
a wastewater  treatment  facility is  operational,  construction  of which TIMET
currently expects to be completed during the second quarter of 2005.

TIMET is also  continuing  assessment  work with  respect to its own active
plant site in Nevada.  TIMET  currently  has $4.3 million  accrued  based on the
undiscounted  cost  estimates of the  probable  costs for  remediation  of these
sites, which TIMET expects will be paid over a period of up to thirty years.

At December 31, 2004, TIMET had accrued an aggregate of approximately  $4.5
million for these  environmental  matters  discussed above. The upper end of the
range of reasonably  possible  costs  related to these matters is  approximately
$7.0 million.

Other.  In  addition  to  amounts  accrued  by NL,  Tremont  and  TIMET for
environmental  matters, at December 31, 2004, the Company also had approximately
$6.3 million  accrued for the estimated cost to complete  environmental  cleanup
matters at certain of its other former facilities.

Insurance coverage claims.

NL has settled insurance  coverage claims concerning  environmental  claims
with  certain  of the  defendants  in  the  environmental  coverage  litigation,
including NL's principal former  carriers.  A portion of the proceeds from these
settlements  were placed into special purpose trusts,  as discussed  below.  See
Note  12  to  the  Consolidated   Financial  Statements.   No  further  material
settlements relating to litigation concerning 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 (2003 -
$24  million).  Use of such  restricted  balances  does not affect the Company's
consolidated net cash flows. Such restricted  balances declined by approximately
$35 million  during 2003 due  primarily  to a $30.8  million  payment made by NL
related to the final settlement of the Granite City, Illinois site.

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 defense costs or  environmental  litigation in determining  related
accruals.

fITEM 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, 2004.

PART II

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

Valhi's common stock is listed and traded on the New York and Pacific Stock
Exchanges (symbol: VHI). As of February 28, 2005, 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, 2005 the closing price of Valhi common stock according to Bloomberg
was $15.53.

Dividends
High             Low              paid
----           ------          ---------
Year ended December 31, 2003

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

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

Valhi paid  regular  quarterly  dividends  of $.06 per share during each of
2003 and 2004. In February 2005,  Valhi's board of directors  increased  Valhi's
regular quarterly dividend to $.10 per share, with the first such dividend to be
paid on March 31,  2005 to Valhi  shareholders  of record as of March 14,  2005.
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 $.06 per share,  plus an  additional  aggregate
amount of $125 million at December 31, 2004.

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,
-------------------------------------------------------------
2000          2001          2002           2003          2004
----          ----          ----           ----          ----
(In millions, except per share data)

STATEMENTS OF OPERATIONS DATA:
Net sales:

Chemicals                                  $  922.3      $  835.1     $  875.2       $1,008.2       $1,128.6
Component products                            217.5         179.6        166.7          173.9          182.6
Waste management                               16.3          13.0          8.4            4.1            8.9
--------      --------     --------       --------       --------

$1,156.1      $1,027.7     $1,050.3       $1,186.2       $1,320.1
========      ========     ========       ========       ========

Operating income:
Chemicals                                  $  187.4      $  143.5     $   84.4       $  122.3       $  103.5
Component products                             33.3          13.3          4.4            9.1           16.2
Waste management                               (7.2)        (14.4)        (7.0)         (11.5)         (10.2)
--------      --------     --------       --------       --------

$  213.5      $  142.4     $   81.8       $  119.9       $  109.5
========      ========     ========       ========       ========

Equity in earnings (losses) of
TIMET                                       $   (9.0)     $   (9.2)    $  (32.9)      $    1.9       $   19.5
========      ========     ========       ========       ========

Income from continuing
operations (1)                              $   76.0      $   94.3     $    1.4       $   41.8       $  308.7
Discontinued operations                            .6          (1.1)         (.2)          (2.9)           3.7
Cumulative effect of change in
accounting principle                            -             -            -                .6           -
--------      --------    ---------       --------       -----

Net income                               $   76.6      $   93.2     $    1.2       $   39.5       $  312.4
========      ========     ========       ========       ========

DILUTED EARNINGS PER SHARE DATA:
Income from continuing
operations                                  $    .65      $    .81     $    .01       $    .35       $   2.56

Net income                                   $    .66      $    .80     $    .01       $    .33       $   2.59

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

Weighted average common shares
outstanding                                    116.3         116.1        115.8          119.9          120.4

BALANCE SHEET DATA (at year end):
Total assets                                 $2,256.8      $2,150.7     $2,074.8       $2,219.5       $2,599.5
Long-term debt                                  595.4         497.2        605.7          632.5          769.5
Stockholders' equity                            628.2         622.3        614.8          659.7          989.5

(1)  The Company's  results of operations in 2000 and 2001 include the impact of
goodwill amortization of $13.3 million and $15.7 million, respectively, 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 2002, 2003 and 2004.

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 $308.7 million,
or $2.56 per diluted share, in 2004 compared to income of $41.8 million, or $.35
per  diluted  share,  in 2003 and income of $1.4  million,  or $.01 per  diluted
share, in 2002.

The increase in the Company's  diluted earnings per share from 2003 to 2004
is due  primarily to the net effects of (i) lower  chemicals  operating  income,
(ii) higher  component  products  operating  income,  (iii) lower  environmental
remediation  and legal  expenses of NL, (iv) higher  equity in earnings of TIMET
and (v) certain  income tax  benefits.  The  increase in the  Company's  diluted
earnings per share from 2002 to 2003 is due  primarily to the net effects of (i)
higher chemicals  operating income,  (ii) higher components  products  operating
income, (iii) a higher operating loss in the Company's waste management segment,
(iv) higher environmental  remediation expenses of NL and (v) certain income tax
benefits.

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) an 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 $.30 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.

Income from  continuing  operations in 2002 includes (i) income  related to
certain  settlements NL reached with certain of its former  principal  insurance
carriers  of $.02  per  diluted  share,  (ii) a loss  related  to the  Company's
pro-rata share of TIMET's  provision for an other than temporary  decline in the
value of certain convertible  preferred securities of Special Metals Corporation
held by TIMET of $.05 per diluted  share,  (iii) a loss related to an other than
temporary decline in the value of the Company's  investment in TIMET of $.07 per
diluted share, (iv) net securities  transactions gains of $.04 per diluted share
related to the disposition of shares of Halliburton Company common stock held by
the Company,  (v) an income tax benefit  related to the reduction in the Belgian
corporate  income tax rate of $.02 per diluted share and (vi) income of $.04 per
diluted share related to Kronos'  foreign  currency  transaction  gain resulting
from the extinguishment of certain intercompany indebtedness of NL and Kronos.

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 2005 as compared to 2004 due  primarily to the net effects of higher
expected  chemicals  operating  income  in 2005  and  the  income  tax  benefits
recognized in 2004.

Critical accounting policies and estimates

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

The Company believes the following critical  accounting policies affect its
more  significant  judgments  and  estimates  used  in  the  preparation  of its
Consolidated Financial Statements:

o    The Company  maintains  allowances for doubtful accounts for estimated
losses  resulting from the inability of its customers to make required
payments and other factors.  The Company takes into  consideration the
current  financial  condition  of  its  customers,   the  age  of  the
outstanding   balance  and  the  current  economic   environment  when
assessing the adequacy of the allowance. If the financial condition of
the  Company's   customers  were  to  deteriorate,   resulting  in  an
impairment of their ability to make  payments,  additional  allowances
may be required.  During 2002,  2003 and 2004,  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 22%.

o    The  Company   provides   reserves  for  estimated   obsolescence   or
unmarketable  inventories equal to the difference  between the cost of
inventories and the estimated net realizable  value using  assumptions
about future demand for its products and market conditions.  If actual
market   conditions  are  less  favorable  than  those   projected  by
management,  additional  inventories reserves may be required.  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,  2004,  the  carrying  value (which  equals their fair
value) of all of the Company's marketable securities exceeded the cost
basis  of each of such  investments.  With  respect  to the  Company's
investment  in The  Amalgamated  Sugar Company LLC,  which  represents
approximately  91%  of  the  aggregate  carrying  value  of all of the
Company's marketable securities at December 31, 2004, the $170 million
carrying value of such investment  exceeded its $34 million cost basis
by about  400%.  At December  31,  2004,  the $24.14 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  three  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 2004,  impairment  indicators  were present only with
respect to the property and  equipment  associated  with the Company's
waste management operating segment, which represented approximately 3%
of  the  Company's  consolidated  net  property  and  equipment  as of
December 31, 2004. Waste Control  Specialists  completed an impairment
review of its net property and  equipment and related net assets as of
December 31, 2004.  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  Notes  9 and 19 to the  Consolidated
Financial  Statements,  the Company has  assigned its goodwill to four
reporting  units (as that term is defined in SFAS No.  142).  Goodwill
attributable  to the chemicals  operating  segment was assigned to the
reporting unit consisting of 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  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 2004,  as the  estimated  fair value of each such
reporting  unit  exceeded  the net  carrying  value of the  respective
reporting unit (Kronos  reporting unit - 136%, CompX security products
reporting unit - 124%, CompX European operations  reporting unit - 61%
and CompX  Canadian and Taiwanese  operations  reporting unit - 395%).
The  estimated  fair  values of the three  CompX  reporting  units are
determined  based  on  discounted  cash  flow  projections,   and  the
estimated  fair value of the 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. The Company did, however, recognize a $6.5 million
impairment with respect to CompX's  European  operations in the fourth
quarter  of 2004,  following  CompX's  decision  to  dispose  of those
assets. See Note 22 to the Consolidated Financial Statements.

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 $671  million for German  corporate  purposes  and $232
million for German trade tax purposes at December  31,  2004).  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.

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:
decreasing  during the first quarter of 2002,  flat during the second quarter of
2002,  increasing  during  the last half of 2002 and 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.

Years ended December 31,                       % Change
-----------------------------               --------------
2002           2003            2004           2002-03       2003-04
----           ----            ----           -------       -------
(In $ millions, except selling 
price data)

Net sales                                $875.2          $1,008.2         $1,128.6           +15%          +12%
Operating income                           84.4             122.3            103.5           +45%          -15%

Operating income margin                     10%               12%               9%

TiO2 operating
statistics:
Sales volumes*                            455               462              500            +2%           +8%
Production volumes*                       442               476              484            +8%           +2%
Production rate as
percent of capacity                      96%               Full             Full
Average selling prices
index (1990=100)                      $   81          $     84         $     82            +3%           -2%

Percent change in Ti02 average selling prices:
Using actual foreign currency exchange rates                                             +13%           +4%
Impact of changes in foreign exchange rates                                              -10%          - 6%
---           --- 

In billing currencies                                                                  + 3%          - 2%
===           === 

* Thousands of metric tons

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  increased  $133.0 million (15%) in 2003 compared to 2002 due
primarily to higher  average TiO2 selling  prices,  higher sales volumes and the
favorable  effect of fluctuations  in foreign  currency  exchange  rates,  which
increased  sales by  approximately  $93  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
2003 were 3% higher than 2002,  with the  greatest  improvement  in European and
export markets.  When translated from billing  currencies to U.S.  dollars using
actual foreign currency exchange rates prevailing during the respective periods,
Kronos' average TiO2 selling prices in 2003 increased 13% compared to 2002.

Kronos' sales are  denominated  in various  currencies,  including the U.S.
dollar,  the euro, other major European  currencies and the Canadian dollar. The
disclosure of the  percentage  change in Kronos'  average TiO2 selling prices in
billing  currencies  (which excludes the effects of fluctuations in the value of
the U.S.  dollar  relative  to other  currencies)  is  considered  a  "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos'  average TiO2 selling  prices  using actual  foreign  currency
exchange rates prevailing  during the respective  periods is considered the most
directly  comparable  financial measure presented in accordance with 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 13% and 4%
increases  in  Kronos'  average  TiO2  selling  prices  during  2003  and  2004,
respectively,  as compared to the  respective  prior year using  actual  foreign
currency  exchange  rates  prevailing  during the  respective  periods (the GAAP
measure),  and the 3% increase  and 2% decrease in Kronos'  average TiO2 selling
prices in billing  currencies (the non-GAAP  measure) during such periods is due
to the effect of changes in foreign  currency  exchange  rates.  The above table
presents in a tabular format (i) the percentage  change in Kronos'  average TiO2
selling prices using actual foreign currency  exchange rates  prevailing  during
the respective periods (the GAAP measure), (ii) the percentage change in Kronos'
average TiO2 selling  prices in billing  currencies  (the non-GAAP  measure) and
(iii) the percentage  change due to changes in foreign  currency  exchange rates
(or the reconciling item between the non-GAAP measure and the GAAP measure).

Chemicals  operating income in 2004 includes $6.3 million of income related
to the  settlement  of a  contract  dispute  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  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. Under the settlement,  the customer agreed to pay an
aggregate of $7.3 million to Kronos  through 2007 to resolve such  dispute.  See
Note 12 to the Consolidated Financial Statements.

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'
operating  income  increased  $37.9  million  (45%) in 2003 compared to 2002 due
primarily  to higher  average  TiO2  selling  prices and  higher  TiO2 sales and
production volumes.

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.
Approximately  one-half of Kronos' 2004 TiO2 sales volumes were  attributable to
markets in Europe,  with 38%  attributable  to North  America and the balance to
export markets.  Demand for TiO2 has remained strong  throughout 2004, and while
Kronos  believes that the strong demand is 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%.  Kronos'  operating  rates were near full capacity in both
periods,  and Kronos' sales and production volumes in 2004 were both new records
for  Kronos,  setting new volume  records  for Kronos for the third  consecutive
year.

Kronos'  TiO2 sales  volumes in 2003  increased  2% from 2002,  with higher
volumes in  European  and North  American  markets  more than  offsetting  lower
volumes  in export  markets.  Kronos'  TiO2  production  volumes in 2003 were 8%
higher than 2002, with operating rates near full capacity in both years.

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 $60  million  in 2004 as
compared to 2003,  and increased  sales by a net $93 million in 2003 as compared
to  2002.  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 2004 and 2003 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 2004 as  compared  to 2003,  and  resulted  in a net $6 million  decrease  in
Kronos' operating income in 2003 as compared to 2002.

Reflecting  the impact of partial  implementation  of prior price  increase
announcements,  Kronos' average TiO2 selling prices in billing currencies in the
fourth  quarter of 2004 were 2% higher  than the third  quarter of 2004.  Kronos
expects its average  selling  prices will be higher in 2005 as compared to 2004,
reflecting   the   expected   continued   implementation   of   price   increase
announcements, including Kronos' latest price increases announced in March 2005.
The  extent to which  all of such  price  increases,  and any  additional  price
increases  which may be announced  subsequently  in 2005,  will be realized will
depend on, among other things, economic factors.

Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful.  Kronos' production  capacity has increased
by approximately  30% over the past ten years due to  debottlenecking  programs,
with only moderate  capital  investment.  Kronos believes its annual  attainable
production  capacity for 2005 is  approximately  500,000 metric tons,  with some
slight  additional   capacity   available  in  2006  through  Kronos'  continued
debottlenecking efforts.

Kronos expects its TiO2 production  volumes in 2005 will be slightly higher
than its 2004 volumes,  with sales volumes  comparable to slightly lower in 2005
as compared to 2004.  Kronos'  average TiO2  selling  prices,  which  started to
increase  during the second half of 2004,  are  expected to continue to increase
during 2005, and consequently  Kronos currently expects its average TiO2 selling
prices,  in  billing  currencies,  will be higher in 2005 as  compared  to 2004.
Overall,  Kronos  expects it chemicals  operating  income in 2005 will be higher
than 2004, due primarily to higher expected selling prices. 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 $12.2 million in 2002, $15.0 million
in 2003 and $16.2 million in 2004 as compared to amounts separately  reported by
Kronos.  Changes  in the  aggregate  amount of  purchase  accounting  adjustment
amortization  during  the past  three  years is due  primarily  to the effect of
relative changes in foreign currency exchange rates.

Component products - CompX

Years ended December 31,                       % Change
----------------------------                 ------------
2002             2003            2004         2002-03       2003-04
----             ----            ----         -------       -------
(In millions)

Net sales                                      $166.7           $173.9          $182.6            +4%           +5%
Operating income                                  4.4              9.1            16.2          +105%          +80%

Operating income margin                            3%               5%              9%

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.
Fluctuations in the value of the U.S. dollar  relative to other  currencies,  as
discussed below,  increased  component products sales by $2.5 million in 2004 as
compared to 2003.  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.  The  percentage  changes in both
slide and  ergonomic  products  include  the impact  resulting  from  changes in
foreign  currency  exchange  rates.  Sales of security  products  are  generally
denominated in U.S. dollars.

Component  products  operating  income  comparisons  in 2004 were favorably
impacted by the effect of certain cost reduction initiatives undertaken in 2003.
Component  products  operating income  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.

Component  products  sales  were  higher  in 2003 as  compared  to 2002 due
primarily to the favorable effect of fluctuations in foreign  currency  exchange
rates.  Fluctuations  in  the  value  of  the  U.S.  dollar  relative  to  other
currencies,  as discussed below,  increased net sales by $3.3 million in 2003 as
compared  to 2002.  In addition  to the  favorable  impact of changes in foreign
currency exchange rates,  component products sales increased in 2003 as compared
to 2002 due to the net effects of higher sales volumes of security  products and
precision  slide products in North American  markets  partially  offset by lower
sales volumes of ergonomic products.

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

Component  products  operating income increased in 2003 as compared to 2002
due in part to the favorable  effect of cost  improvement  initiatives,  such as
consolidating  CompX's two  Canadian  facilities  into one  facility.  Component
products operating income  comparisons were negatively  affected by the expenses
associated  with  such  facility  consolidation   (approximately  $900,000)  and
increases in the cost for steel.  Fluctuations  in the value of the U.S.  dollar
relative to other currencies,  as discussed below, decreased operating income by
$3.1  million in 2003 as  compared  to 2002.  In  addition,  component  products
operating  income in 2002 includes  charges  aggregating $3.5 million related to
the  re-tooling of one of CompX's  manufacturing  facilities  and provisions for
changes in  estimate  with  respect to  obsolete  and  slow-moving  inventories,
overhead absorption rates and other items.

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 (principally in
Canada) 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 2004,  currency
exchange  rate  fluctuations   positively   impacted  component  products  sales
comparisons  with  2003,  while  currency  exchange  rate  fluctuations  did not
significantly  impact component  products  operating income  comparisons for the
same periods.  During 2003,  currency exchange rate fluctuations of the Canadian
dollar  positively  impacted  component  products  sales  comparisons  with 2002
(principally  with  respect  to slide  products),  but  currency  exchange  rate
fluctuations  of the Canadian  dollar  negatively  impacted  component  products
operating income comparisons for the same periods.

While  demand  has  stabilized  in  2004  across  most of  CompX's  product
segments, certain customers are seeking lower cost 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 as Asian manufacturers, particularly those located in
China,  gain  market  share.  CompX has  responded  to the  competitive  pricing
pressure in part by reducing  production  cost  through  product  reengineering,
improvement  in  manufacturing  processes  or moving  production  to  lower-cost
facilities including CompX's own 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.

Additionally,  CompX's cost for steel continues to rise dramatically due to
the continued high demand and shortages worldwide. While CompX has thus far been
able to pass a majority  of its higher raw  material  costs on to its  customers
through price increases and  surcharges,  there is no assurance that it would be
able to continue to pass along any additional higher costs to its customers. The
price  increases and  surcharges  may  accelerate the efforts of some of CompX's
customers to find less expensive products from foreign manufacturers. 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 to improve operating results.
These actins,  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,
2002            2003            2004
----            ----            ----
(In millions)

Net sales                                                               $ 8.4            $  4.1         $  8.9
Operating loss                                                           (7.0)            (11.5)         (10.2)

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  also continues to explore  opportunities to obtain certain types of
new business  (including  treatment and storage of certain types of waste) that,
if  obtained,  could  help to  further  increase  its sales,  and  decrease  its
operating loss, in 2005.

Waste management sales decreased, and its operating loss increased, in 2003
compared to 2002 due to continued weak demand for waste  management  services as
well as costs  incurred  in 2003  related to certain  licensing  and  permitting
activities. Waste Control Specialists' continued emphasis on cost control helped
to mitigate the effect of lower sales.

Waste  Control  Specialists  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.
Although sales improved in the third quarter,  the waste management  industry is
still experiencing a relative decline in the number of environmental remediation
projects  generating  wastes. In addition,  efforts on the part of generators to
reduce the volume of waste and/or manage waste onsite at their  facilities  also
have resulted in weak demand for Waste  Control  Specialists'  waste  management
services.  These factors have led to reduced demand and increased downward price
pressure for waste management services. While Waste Control Specialists believes
its broad range of authorizations for the treatment and storage of low-level and
mixed  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 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 TCEQ, and Waste Control
Specialists  was the only  entity to submit an  application  for such a disposal
license. The length of time that it will take to review and act upon the license
application is uncertain,  although Waste Control Specialists does not currently
expect the agency  would issue any final  decision  on the  license  application
before 2007.  There can be no assurance that Waste Control  Specialists  will be
successful in obtaining any such license.

Waste Control  Specialists  applied to TDSHS for a license to dispose of by
product  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 expects the TDSHS will
issue a final decision on the license  application by the end of 2005. 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,
2002            2003            2004
----            ----            ----
(In millions)

TIMET historical:

Net sales                                                              $366.5          $385.3          $501.8
======          ======          ======

Operating income (loss):
Boeing take-or-pay income                                            $ 23.4          $ 23.1          $ 22.1
Tungsten accrual adjustment                                              .2             1.7            -
LIFO income (expense)                                                  (9.3)           11.4            (7.8)
Contract termination charge                                             -              (6.8)           -
Other, net                                                            (35.1)          (24.0)           21.0
------          ------          ------
(20.8)            5.4            35.3
Gain on exchange of convertible
preferred securities                                                     -               -              15.5
Impairment of convertible
preferred securities                                                   (27.5)            -              -
Other general corporate, net                                             (2.5)            (.3)             .7
Interest expense                                                        (17.1)          (16.4)          (12.5)
------          ------          ------ 
(67.9)          (11.3)           39.0

Income tax benefit (expense)                                              2.0            (1.2)            2.1
Minority interest                                                        (1.3)            (.4)           (1.2)
Dividends on preferred stock                                              -               -              (4.4)
------          ------          ------ 

Income (loss) before cumulative effect
of change in accounting principle
attributable to common stock                                        $(67.2)         $(12.9)         $ 35.5
======          ======          ======

Equity in earnings (losses) of TIMET                                     $(32.9)         $  1.9          $ 19.5
======          ======          ======

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 aggregated  $8.7 million in 2002 (exclusive of the
2002  provision  for  an  other  than  temporary  impairment  of  the  Company's
investment in TIMET discussed  below),  $7.0 million in 2003 and $5.0 million in
2004.

In February 2003, TIMET completed a reverse stock split of its common stock
at a ratio of one share of  post-split  common  stock for each  outstanding  ten
shares  of  pre-split  common  stock,  and in  August  2004  TIMET  subsequently
completed a 5:1 split of its common stock. The per share disclosures  related to
TIMET  discussed  herein  have been  adjusted  to give  effect  to such  splits.
Implementing such splits had no financial  statement impact to the Company,  and
the Company's ownership interest in TIMET did not change as a result thereof.

The Company periodically  evaluates the net carrying value of its long-term
assets,  including its  investment in TIMET,  to determine if there has been any
decline in value below its amortized cost basis that is other than temporary and
would,  therefore,  require  a  write-down  which  would be  accounted  for as a
realized loss. At September 30, 2002,  after  considering what it believed to be
all relevant factors,  including,  among other things,  TIMET's then-recent NYSE
stock prices, and TIMET's operating results, financial position, estimated asset
values and prospects,  the Company recorded a $15.7 million impairment provision
for an other than temporary  decline in value of its  investment in TIMET.  Such
impairment  provision is reported as part of the  Company's  equity in losses of
TIMET in 2002.  In  determining  the amount of the  impairment  charge,  Tremont
considered, among other things, then- recent ranges of TIMET's NYSE market price
and current  estimates of TIMET's  future  operating  losses that would  further
reduce  Tremont's  carrying  value of its  investment  in  TIMET  as it  records
additional equity in losses of TIMET.  While GAAP may require an investment in a
security  accounted  for by the equity  method to be written  down if the market
value of that  security  declines,  they do not  permit a writeup  if the market
value  subsequently  recovers.  At December 31, 2004, the Company's net carrying
value of its  investment in TIMET was $6.86 per share  compared to a NYSE market
price at that date of $24.14 per share.

TIMET  reported  higher  sales in 2004 as compared to 2003,  and  operating
income  improved  from $5.4  million  to $35.3  million,  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 relative changes in TIMET's LIFO inventory  reserves,  which reduced
TIMET's operating income in 2004 by $19.2 million as compared with 2003, as well
as 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.

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
will result in TIMET  reporting lower interest  expense going forward,  although
the effect on TIMET's  income  attributable  to common  stock of lower  interest
expense will be substantially  offset by dividends accruing on the new preferred
stock.

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

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

Under TIMET's  previously-reported amended long-term agreement with Boeing,
Boeing  advanced TIMET $28.5 million for each of 2002,  2003, 2004 and 2005, and
Boeing is required to continue to advance  TIMET $28.5 million  annually  during
2006 and 2007. The agreement is structured as a take-or-pay  agreement such that
Boeing,  beginning in calendar year 2002, will forfeit a  proportionate  part of
the $28.5 million annual advance,  or effectively $3.80 per pound, to the extent
that its orders for  delivery for such  calendar  year are less than 7.5 million
pounds.  TIMET can only be required,  however, to deliver up to 3 million pounds
per quarter.  Based on TIMET's actual  deliveries to Boeing of approximately 1.3
million  pounds  during  2002,  1.4 million  pounds  during 2003 and 1.7 million
pounds during 2004,  TIMET  recognized  income of $23.4  million in 2002,  $23.1
million in 2003 and $22.1 million in 2004 related to the take-or-pay  provisions
of the contract.  These earnings related to the take-or-pay  provisions  distort
TIMET's  operating  income  percentages  as  there  is no  corresponding  amount
reported in TIMET's sales.

TIMET's results in 2002 also include a $27.5 million provision for an other
than temporary  impairments of TIMET's  investment in the convertible  preferred
securities of Special Metals Corporation ("SMC"). The Company's equity in losses
of TIMET in 2002  includes (i) an  impairment  provision of $15.7  million ($8.0
million,  or $.07 per diluted  share,  net of income tax  benefit  and  minority
interest)  related to an other than temporary  decline in value of the Company's
investment in TIMET and (ii) a $10.6 million charge ($5.4  million,  or $.05 per
diluted share, net of income tax benefit and minority  interest)  related to the
Company's  pro-rata  share of  TIMET's  impairment  provision  for an other than
temporary decline in value of the SMC securities.

TIMET's  effective  income tax rate in 2002,  2003 and 2004 varies from the
35% U.S. federal statutory income tax rate primarily because TIMET has concluded
it is not currently  appropriate  to recognize an income tax benefit  related to
its U.S. and U.K. losses under the "more-likely-than-not"  recognition criteria.
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.

See  Note  18 to the  Consolidated  Financial  Statements  for  information
concerning  certain  workers'  compensation  bonds  issued on behalf of a former
subsidiary of TIMET.

Over the past  several  quarters,  TIMET has seen the  availability  of raw
materials  tighten,  and,  consequently,  the  prices  for  such  raw  materials
increase.  TIMET currently expects that a shortage in raw materials is likely to
continue  throughout  2005 and into 2006,  which could limit TIMET's  ability to
produce enough  titanium  products to fully meet customer  demand.  In addition,
TIMET has certain  customer  long-term  agreements that limit TIMET's ability to
pass on all of its increased raw material costs.

TIMET  currently  expects its 2005 net sales  revenue  will range from $650
million to $680 million.  TIMET's mill product sales volumes,  which were 11,365
metric tons in 2004, are expected to range from 13,600 and 14,300 metric tons in
2005, while melted product sales volumes,  which were 5,360 metric tons in 2004,
are  expected  to range from  5,400 and 5,700  metric  tons in 2005.  TIMET also
expects mill product  average selling prices will increase by 10% to 15% in 2005
as compared to 2004, and melted product  average  selling prices are expected to
increase from 17% to 22% in 2005 as compared to 2004.

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 and energy costs.  Raw material  costs,  which include  sponge,  scrap and
alloys,  represent the largest portion of TIMET's  manufacturing cost structure,
and, as previously discussed, continued cost increases are expected during 2005.
Scrap and certain alloy prices have more than doubled from year ago prices,  and
increased  energy costs also continue to have a negative impact on gross margin.
In addition,  TIMET's cost of sales can be significantly affected by adjustments
to its LIFO inventory reserve, as was the case during 2004 and 2003.

TIMET currently expects its production volumes will continue to increase in
2005, with overall  capacity  utilization  expected to approximate 75% to 80% in
2005 (as  compared  to 73% in 2004).  However,  practical  capacity  utilization
measures can vary significantly based on product mix.

TIMET  anticipates that Boeing will purchase a significantly  higher amount
of metal during 2005 as compared to 2004 and,  therefore,  expects the amount of
take-or-pay income recognized during 2005 to decrease to between $15 million and
$20 million. Overall, TIMET presently expects its operating income for 2005 will
be between $50 million to $65 million.  Dividends on TIMET's  Series A Preferred
Stock should  approximate $13.2 million in 2005, with TIMET currently  expecting
net income  attributable to common stockholders to range from $35 million to $50
million.

TIMET's net income estimates include a net $12.6 million non-operating gain
currently expected to be recognized in the second quarter of 2005 related to the
sale of certain real property adjacent to TIMET's Nevada facility,  which closed
in the fourth quarter of 2004.  TIMET's net income  estimates  exclude an income
tax benefit of $35 million to $40 million that TIMET might recognize during 2005
if TIMET  determines  that  reversal of a portion of TIMET's  deferred tax asset
valuation  allowance  with  respect  to its U.S.  and U.K.  net  operating  loss
carryforwards  is determined to be  appropriate  under the  more-likely-than-not
recognition criteria.

General corporate and other items

General corporate interest and dividend income.  General corporate interest
and dividend  income in 2004 was  comparable to 2003,  while  general  corporate
interest and dividend income  decreased $2.0 million in 2003 as compared to 2002
due to a lower  average  level of invested  funds and lower  average  yields.  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.  See  Notes  5,  8 and  12 to the  Consolidated  Financial  Statements.
Aggregate  general  corporate  interest and dividend income in 2005 is currently
expected to be comparable to 2004, with distributions from The Amalgamated Sugar
Company LLC in 2005 expected to be comparable to the aggregate  amount  received
in 2004.

Legal settlement gains. Net legal settlement gains of $5.2 million in 2002,
$823,000 in 2003 and $552,000 in 2004 relate to NL's settlements with certain of
its former  insurance  carriers.  These  settlements,  as well as similar  prior
settlements NL reached in 2000 and 2001,  resolved court proceedings in which NL
had sought reimbursement from the carriers for legal defense costs and indemnity
coverage for certain of its environmental remediation  expenditures.  No further
material settlements relating to litigation concerning environmental remediation
coverages are expected. See Note 12 to the Consolidated Financial Statements.

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

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

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.  The gain on disposal of fixed  assets in 2002  relates to the sale of
certain  real  estate  held  by  Tremont.  The  $6.3  million  foreign  currency
transaction gain in 2002 relates to the  extinguishment of certain  intercompany
indebtedness of NL. See Note 12 to the Consolidated Financial Statements.

General corporate  expenses.  Net general  corporate  expenses in 2004 were
$36.0 million lower than 2003 due primarily to lower  environmental  remediation
and legal  expenses  of NL. Net  general  corporate  expenses in 2003 were $18.8
million  higher  than 2002 due  primarily  to higher  environmental  remediation
expenses of NL (principally  related to one formerly-owned  site of NL for which
the  remediation  process is  expected  to occur over the next  several  years).
Environmental  expenses  are  included  in selling,  general and  administrative
expenses.  In  addition,  NL's $20 million of proceeds  from the disposal of its
specialty  chemicals  business unit in January 1998 related to its agreement not
to compete in the rheological products business was recognized as a component of
general corporate income (expense) ratably over the five-year non-compete period
ended in January 2003 ($4 million recognized in 2002 and $333,000  recognized in
2003). See Note 12 to the Consolidated Financial Statements.

Net general corporate  expenses in calendar 2005 are currently  expected to
be higher as compared to 2004,  primarily 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  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.
Accordingly,  the reported  amount of interest  expense  will vary  depending on
relative  changes in foreign currency  exchange rates.  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 both years by  approximately  $3 million as  compared  to the  respective
prior year.  In addition,  KII issued an  additional  euro 90 million  principal
amount of KII Senior Secured Notes in November  2004,  and the interest  expense
associated with these additional Senior Secured Notes was $1 million in 2004.

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

Assuming interest rates and foreign currency exchange rates do not increase
significantly  from current levels,  interest  expense in 2005 is expected to be
higher than 2004 due  primarily to the effect of the  issuance of an  additional
euro 90 million principal amount of KII Senior Secured Notes in November 2004.

At  December  31,  2004,   approximately   $770  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%
(2003 - $607 million with a weighted  average interest rate of 9.1%; 2002 - $552
million  with a weighted  average  fixed  interest  rate of 9.1%).  The weighted
average interest rate on $14 million of outstanding  variable rate borrowings at
December 31, 2004 was 3.8% (2003 - 3.1%; 2002 - 4.4%).  Relative  changes in the
weighted  average  interest  rate on  outstanding  variable  rate  borrowings at
December 31, 2002,  2003 and 2004 are due primarily to relative  differences  in
the mix of such  borrowings,  with higher  relative  outstanding  borrowings  at
December  31,  2002 and 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.

At December 31, 2004,  Kronos had the  equivalent  of $671 million and $232
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. Because the benefit of such net operating loss carryforwards
and other deductible  temporary  differences in Germany has now been recognized,
the  Company's  effective  income tax rate in 2005 is expected to be higher than
what it would have otherwise been, although its future cash income tax rate will
not be  affected  by the  reversal  of the  valuation  allowance.  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 $43.1 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) a $12.6 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.

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

In October  2004,  the American  Jobs Creation Act of 2004 was enacted into
law.  The new law  contains  several  provisions  that could impact the Company.
These provisions  provide for, among other things, a special deduction from U.S.
taxable  income  equal to a  stipulated  percentage  of  qualified  income  from
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends  received  deduction for certain  dividends  received from  controlled
foreign  corporations.  Both of these  provisions  are  complex  and  subject to
numerous limitations. See Note 15 to the Consolidated Financial Statements.

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

As previously  reported,  Waste Control Specialists was formed by Valhi and
another entity in 1995. Waste Control Specialists assumed certain liabilities of
the other owner and such  liabilities  exceeded the carrying value of the assets
contributed  by the other  owner.  Since its  inception in 1995,  Waste  Control
Specialists  has  reported  aggregate  net  losses.  Consequently,  all of Waste
Control Specialists aggregate,  inception-to-date net losses have accrued to the
Company for financial reporting purposes.  Accordingly,  no minority interest in
Waste Control  Specialists  has been  recognized  in the Company's  consolidated
financial statements. Waste Control Specialists LLC became wholly owned by Valhi
during the second quarter of 2004.

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

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

Accounting  principles newly adopted in 2002, 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.

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, 2004, the projected benefit
obligations  for all defined benefit plans was comprised of $100 million related
to U.S. plans and $355 million related to non-U.S.  plans. All of such projected
benefit obligations  attributable to non-U.S.  plans related to plans maintained
by  Kronos,  and  approximately  52%,  14%  and  34%  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 $6.8  million in 2002,  $9.6 million in 2003 and $13.5
million in 2004. 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 to all defined benefit
pension plans  aggregated $9.6 million in 2002,  $14.8 million in 2003 and $17.8
million in 2004.

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  63%,  17%, 13% and 5% of the projected  benefit  obligations
attributable  to plans  maintained  by Kronos at December  31,  2004  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, 2002 and expense     December 31, 2003 and expense       December 31, 2004 and
in 2003                           in 2004                     expense in 2005
-------------------------------  --------------------------------  -----------------------------

Kronos and NL plans:

Germany                            5.5%                             5.3%                              5.0%
Norway                             6.0%                             5.5%                              5.0%
Canada                             7.0%                             6.3%                              6.0%
U.S.                               6.5%                             5.9%                              5.8%
Medite plan                          6.5%                             6.0%                              5.7%

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

At December 31, 2004, the fair value of plan assets for all defined benefit
plans was  comprised  of $82  million  related  to U.S.  plans and $230  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 54%, 15% and 31%
of the plan assets  attributable to U.S. plans related to plans maintained by NL
and Kronos and the Medite plan, respectively. Approximately 56%, 21%, 13% and 5%
of the plan assets  attributable  to plans  maintained by Kronos at December 31,
2004  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  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  2004,  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 established by Valhi to
permit the  collective  investment by certain master trusts which fund
certain  employee  benefits plans  sponsored by Contran and certain of
its  affiliates.  Harold  Simmons is the sole trustee of the CMRT. The
CMRT's long-term  investment  objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income  indices
(including  the S&P 500 and certain  Russell  indices)  utilizing both
third-party investment managers as well as investments directed by Mr.
Simmons.  During the 17-year history of the CMRT, through December 31,
2004 the average annual rate of return has been approximately 13%.
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, 2004 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,  62% 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 6.5% and
2.5%, respectively. The plan asset allocation at December 31, 2004 was
16% to equity managers, 64% 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, 2004 was 60% to
equity managers and 40% to fixed income managers.

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 2002, 2003 and 2004 were as follows:

2002                  2003                   2004
--------              --------               ------

Kronos and NL plans:

Germany                                               6.8%                   6.5%                   6.0%
Norway                                                7.0%                   6.0%                   6.0%
Canada                                                7.0%                   7.0%                   7.0%
U.S.                                                  8.5%                  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 2005 as it used in 2004 for purposes of determining
the 2005 defined benefit pension plan expense.

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

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

Based on the  actuarial  assumptions  described  above and Kronos'  current
expectations  for what actual average  foreign  currency  exchange rates will be
during 2005, the Company  currently  expects  aggregate  defined benefit pension
expense will  approximate  $12.5  million in 2005.  In  comparison,  the Company
currently expects to be required to make approximately $9.4 million of aggregate
contributions to such plans during 2005.

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, 2004,  their
aggregate  projected  benefit  obligations would have increased by approximately
$14.2 million at that date, and their aggregate  defined benefit pension expense
would be expected  to  increase  by  approximately  $1.7  million  during  2005.
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
2005.  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, 2004, approximately
34% and 31% of the  Company's  aggregate  accrued  OPEB  costs  relate to NL and
Kronos, respectively, and substantially all of the remainder relates to Tremont.
Kronos  provides such OPEB benefits to retirees in the U.S.,  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 $555,000 in 2002,  $935,000 in 2003 and
$2 million in 2004.  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
$5.3  million  in  2002,  $5.2  million  in  2003  and  $5.7  million  in  2004.
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, 2004,  the expected  rate of increase in future health
care costs ranges from 8% to 9.3% in 2005,  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 2005, the Company expects its consolidated  OPEB expense will approximate
$650,000 in 2005.  In  comparison,  the  Company  expects to be required to make
approximately $4.5 million of contributions to such plans during 2005.

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, 2004,  the  Company's  aggregate  projected
benefit  obligations would have increased by approximately  $1.5 million at that
date,  and the Company's OPEB expense would be expected to increase by less than
$100,000  during 2005.  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  $2.5 million at December 31,
2004, and OPEB expense would have increased by $200,000 in 2004.

Foreign operations

Kronos. Kronos has substantial operations located outside the United States
(principally  Europe and  Canada) for which the  functional  currency is not the
U.S. dollar. As a result,  the reported amount of Kronos' assets and liabilities
related to its non-U.S. operations, and therefore the Company's consolidated net
assets,  will  fluctuate  based upon  changes in  currency  exchange  rates.  At
December 31, 2004,  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 43% of TIMET's European sales are denominated in
currencies  other than the U.S.  dollar,  principally  the British pound and the
euro.  Certain  purchases  of raw  materials  for TIMET's  European  operations,
principally  titanium sponge and alloys,  are denominated in U.S.  dollars while
labor and other production costs are primarily  denominated in local currencies.
The U.S.  dollar value of TIMET's  foreign sales and operating costs are subject
to currency exchange rate fluctuations that can impact reported earnings.

LIQUIDITY AND CAPITAL RESOURCES

Summary

The Company's  primary  source of liquidity on an ongoing basis is its cash
flows from  operating  activities,  which is generally  used to (i) fund capital
expenditures,  (ii) repay short-term indebtedness incurred primarily for working
capital  purposes  and (iii)  provide  for the payment of  dividends  (including
dividends paid to Valhi by its subsidiaries). In addition, from time-to-time the
Company  will  incur  indebtedness,  generally  to (i) fund  short-term  working
capital needs, (ii) refinance existing  indebtedness,  (iii) make investments in
marketable and other securities  (including the acquisition of securities issued
by  subsidiaries  and  affiliates  of the  Company)  or (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,  2004,  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 $519 million principal amount  outstanding) due in 2009 and (iii)
KII's European credit facility (the equivalent of $13.6 million outstanding) due
in June 2005.  KII  expects to seek a renewal of its  European  credit  facility
during the first  half of 2005.  Accordingly,  the  Company  does not  currently
expect that a  significant  amount of its cash flows from  operating  activities
generated during 2005 will be required to be used to repay  indebtedness  during
2005.

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,  the Company  expects to have
sufficient  liquidity  to meet its  obligations  including  operations,  capital
expenditures,  debt  service and  current  dividend  policy.  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,   asset
impairment  charges and  unrealized  securities  transactions  gains and losses.
Non-cash  interest expense relates  principally to Valhi and 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 flow from operations from period
to period, as the income statement impact of such items may occur in a different
period from when the  underlying  cash  transaction  occurs.  For  example,  raw
materials may be purchased in one period, but the payment for such raw materials
may  occur  in a  subsequent  period.  Similarly,  inventory  may be sold in one
period,  but the cash  collection  of the  receivable  may occur in a subsequent
period.  Relative  changes in accounts  receivable  are affected by, among other
things,  the timing of sales and the  collection  of the  resulting  receivable.
Relative changes in inventories,  accounts  payable and accrued  liabilities are
affected by, among other  things,  the timing of raw material  purchases and the
payment  for such  purchases  and the  relative  difference  between  production
volumes and sales volumes.  Relative changes in accrued  environmental costs are
affected  by,  among  other  things,  the  period  in which  recognition  of the
environmental  accrual is  recognized  and the  period in which the  remediation
expenditure is actually made.

Cash flows 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 $272.9  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 $329.8 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 $17.6 million improvement in equity in earnings
(losses) of TIMET,  (viii) higher  minority  interest of $42.7  million,  (ix) a
higher  amount of net cash used to fund  changes in the  Company's  inventories,
receivables,  payables,  accruals and accounts with  affiliates of $22.3 million
and (x) higher cash received for income taxes of $16.3 million.

Cash flows from operating  activities increased from $106.8 million in 2002
to $108.5 million in 2003.  This $1.7 million  increase was due primarily to the
net effect of (i) higher net income of $38.2 million,  (ii) higher  depreciation
expense of $11.2  million,  (iii) lower proceeds from the disposal of marketable
securities (trading) of $18.1 million, (iv) higher gains on disposal of property
and equipment of $9.9 million,  (v) higher minority interest in earnings of $7.0
million,  (vi) lower distributions from NL's TiO2 manufacturing joint venture of
$7.1 million,  (vii) lower equity in losses of TIMET of $34.9 million,  (viii) a
higher  amount of net cash used to fund  changes in the  Company's  inventories,
receivables,  payables,  accruals and accounts with affiliates of $31.7 million,
(ix) lower cash paid for income taxes of $19.0  million and (x) a higher  amount
of net cash  provided to fund relative  changes in other assets and  liabilities
(primarily noncurrent accruals) of $31.0 million.

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, NL Parent and Tremont).

Years ended December 31,
2002            2003            2004
----            ----            ----
(In millions)

Cash provided (used) by operating activities:

Kronos                                                                 $ 111.1         $107.7          $151.0
NL Parent                                                                 98.1          (10.2)            8.8
CompX                                                                     16.9           24.4            30.2
Waste Control Specialists                                                 (5.7)          (6.6)           (7.4)
Tremont                                                                   24.6            7.2             2.0
Valhi Parent                                                             113.3           30.6            24.8
Other                                                                      4.0           (2.7)            (.3)
Eliminations                                                            (255.5)         (41.9)          (67.0)
-------         ------          ------ 

$ 106.8         $108.5          $142.1
=======         ======          ======

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

At December 31, 2004,  the estimated cost to complete  capital  projects in
process  approximated  $10.0 million,  of which $6.7 million  relates to Kronos'
Ti02  facilities  and the  remainder  relates to CompX's  facilities.  Aggregate
capital  expenditures  for 2005 are  expected to  approximate  $60 million  ($41
million  for Kronos,  $13  million  for CompX and $6 million  for Waste  Control
Specialists). Capital expenditures in 2005 are expected to be financed primarily
from operations or existing cash resources and credit facilities.

In January  2005,  CompX  received a net $18.4 million from the sale of its
Thomas Regout operations. See Note 22 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 described in Note 1 to the  Consolidated  Financial
Statements,  (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.

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

Financing  activities.  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.

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

At December  31,  2004,  unused  credit  available  under  existing  credit
facilities  approximated  $282.4 million,  which was comprised of: CompX - $47.5
million under its revolving  credit  facility;  Kronos - $92.6 million under its
European credit facility,  $8 million under its Canadian credit facility,  $38.0
million  under its U.S.  credit  facility and $.4 million  under other  non-U.S.
facilities;  and Valhi - $95.9 million under its revolving bank credit facility.
See Note 10 to the Consolidated Financial Statements.

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

In February  2005,  Valhi's board of directors  increased  Valhi's  regular
quarterly  dividend from its previous $.06 per share to $.10 per share, with the
first such dividend to be paid on March 31, 2005 to Valhi shareholders of record
as of March 14, 2005. 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  and  Related  Stockholder
Matters."

Chemicals - Kronos

At December 31, 2004, Kronos had cash, cash equivalents and marketable debt
securities of $65.2 million,  including restricted balances of $4.4 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 and  anticipated  demands on Kronos' cash  resources as discussed
herein,  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, 2004, Kronos'  outstanding debt was comprised of (i) $519.2
million  related to KII's Senior  Secured Notes,  (ii) $13.6 million  related to
KII's European revolving bank credit facility and (iii)  approximately  $348,000
of other  indebtedness.  Prior to December 31, 2004,  Kronos had $200 million of
long-term  notes  payable  to  affiliates,  which  Kronos  prepaid in the fourth
quarter of 2004. Prior to such prepayment, such notes payable to affiliates were
eliminated in the Company's Consolidated Financial Statements.

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

Kronos' capital  expenditures during the past three years aggregated $107.1
million,  including  $18  million  ($7  million  in 2004)  for  Kronos'  ongoing
environmental protection and compliance programs. Kronos' estimated 2005 capital
expenditures are $41 million,  including $7 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 periodically evaluates its liquidity requirements,  alternative uses
of capital,  capital needs and availability of resources in view of, among other
things,  its  dividend  policy,   its  debt  service  and  capital   expenditure
requirements  and estimated  future  operating  cash flows.  As a result of this
process, Kronos has in the past and may in the future seek to reduce, refinance,
repurchase or restructure  indebtedness,  raise additional  capital,  repurchase
shares of its common stock,  modify its dividend policy,  restructure  ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital  resources.  In
the normal  course of its  business,  Kronos may  review  opportunities  for the
acquisition,  divestiture,  joint venture or other business  combinations in the
chemicals or other  industries,  as well as the acquisition of interests in, and
loans to, related  entities.  In the event of any such  transaction,  Kronos may
consider  using  available  cash,   issuing  equity   securities  or  increasing
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' net assets,  will fluctuate based upon changes in currency
exchange rates.

NL Industries

At December 31, 2004,  NL  (exclusive  of Kronos and CompX) had cash,  cash
equivalents  and  marketable   debt  securities  of  $99.3  million,   including
restricted balances of $21.1 million. Of such restricted  balances,  $19 million
was held by special purpose trusts,  the assets of which can only be used to pay
for certain of NL's future  environmental  remediation  and other  environmental
expenditures. See Note 18 to the Consolidated Financial Statements.

See Note 15 to the Consolidated Financial Statements for certain income tax
examinations  currently  underway  with  respect to  certain of NL's  income tax
returns,  and see Note 18 to the Consolidated  Financial Statements and Part II,
Item 1,  "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,   various  legislation  and  administrative
regulations  have,  from time to time,  been  proposed  that seek to (i)  impose
various  obligations  on present and former  manufacturers  of lead  pigment and
lead-based  paint with respect to asserted health  concerns  associated with the
use of such products and (ii)  effectively  overturn court decisions in which NL
and other pigment manufacturers have been successful.  Examples of such proposed
legislation  include bills which would permit civil liability for damages on the
basis of market  share,  rather  than  requiring  plaintiffs  to prove  that the
defendant's  product  caused the alleged  damage,  and bills which would  revive
actions  barred  by  the  statute  of  limitations.   While  no  legislation  or
regulations  have been  enacted  to date that are  expected  to have a  material
adverse effect on NL's consolidated financial position, results of operations or
liquidity,  imposition of market share liability or other legislation could have
such an effect.

In December 2003, NL completed the distribution of  approximately  48.8% of
Kronos' outstanding common stock to its shareholders under which NL shareholders
received  one share of  Kronos'  common  stock for every two shares of NL common
stock  held.  Approximately  23.9  million  shares of Kronos  common  stock were
distributed.  Immediately  prior to the  distribution of shares of Kronos common
stock, Kronos distributed a $200 million promissory note payable by Kronos to NL
(of which NL  transferred  an aggregate of $168.6 million to Valhi and Valcor in
connection with NL's  acquisition of the shares of CompX common stock previously
held by Valhi and Valcor,  as discussed in Note 3 to the Consolidated  Financial
Statements).  During 2004, NL paid each of its $.20 per share regular  quarterly
dividends in the form of shares of Kronos  common stock in which an aggregate of
approximately  2.5% of Kronos'  outstanding  common stock were distributed to NL
shareholders  (including  Valhi and Tremont) in the form of pro-rata  dividends.
Completion of these  distributions  had no impact on the Company's  consolidated
financial position,  results of operations or cash flows other than as discussed
in Note 3 to the Consolidated Financial Statements. During the fourth quarter of
2004, NL transferred  approximately 5.5 million shares of Kronos common stock to
Valhi in  satisfaction  of a 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.  See Note 3 to
the Consolidated  Financial  Statements.  In the fourth quarter of 2004, NL also
sold  64,500  shares  of  Kronos  common  stock in  market  transactions  for an
aggregate of approximately $2.7 million.

Following  the second of such  quarterly  dividends  in 2004,  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 and Tremont.

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  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 is 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
chemicals or other  industries,  as well as the acquisition of interests in, and
loans  to,  related  entities.  In the  event  of any such  transaction,  NL may
consider using its available cash,  issuing its equity  securities or increasing
its  indebtedness  to the extent  permitted  by the  agreements  governing  NL's
existing debt.

Component products - CompX International

CompX's capital  expenditures  during the past three years aggregated $27.0
million.  Such  capital  expenditures  included  manufacturing   equipment  that
emphasizes improved production efficiency.

CompX  received  approximately  $18.4  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.  To the extent that CompX's actual operating  results or 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.

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, 2004,  Waste Control  Specialists'  indebtedness  consisted
principally of $4.6 million of borrowings  owed to a wholly-owned  subsidiary of
Valhi  (December 31, 2003  intercompany  indebtedness - $30.9  million).  During
2004,  the Company  loaned an  additional  net of $17.5 million to Waste Control
Specialists, and Valhi subsequently contributed an aggregate of $47.5 million of
loans and related accrued  interest to Waste Control  Specialists'  equity.  The
additional  borrowings  during  2004  were  used by  Waste  Control  Specialists
primarily  to fund  its  operating  loss  and  its  capital  expenditures.  Such
indebtedness is eliminated in the Company's  Consolidated  Financial Statements.
Waste Control Specialists will likely borrow additional amounts during 2005 from
such Valhi subsidiary under the terms of a $15 million revolving credit facility
that matures in March 2006.

Waste Control Specialists capital expenditures and capitalized permit costs
during the past three years aggregated  $11.6 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, 2004,  TIMET had $109  million of  borrowing  availability
under its various U.S. and European credit agreements.  During the first quarter
of 2004,  TIMET  amended  its U.S.  credit  facility  to  remove  the  equipment
component from the determination of TIMET's  borrowing  availability in order to
avoid the cost of an  appraisal.  This  amendment  effectively  reduced  TIMET's
current borrowing  availability in the U.S. by $12 million.  However,  TIMET can
regain this  availability,  upon request,  by  completing  an updated  equipment
appraisal.  TIMET  presently  expects to  generate  cash  flows  from  operating
activities  of $50  million to $60  million  in 2005.  TIMET  received  the 2005
advance of $27.9 million from Boeing in January 2005.

TIMET's capital  expenditures  during the past three years aggregated $43.8
million.  TIMET's capital  expenditures during 2005 are currently expected to be
about  $42  million,   including  $13  million  related  to  completion  of  the
construction  of a wastewater  treatment  facility to be used at TIMET's  Nevada
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 August 2004, TIMET effected a 5:1 split of its common stock.  Such stock
split had no  financial  statement  impact  to the  Company,  and the  Company's
ownership interest in TIMET did not change as a result of the split.

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.

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.  In February 2004,
Kronos announced it would pay its first regular  quarterly cash dividend of $.25
per share.  At that rate, and based on the 27.6 million shares of Kronos held by
Valhi and Tremont at December  31, 2004 (22.2  million  shares held by Valhi and
5.4 million shares held by Tremont, a wholly-owned  subsidiary of Valhi),  Valhi
would receive aggregate annual dividends from Kronos of $27.6 million. NL, which
paid regular  quarterly  cash  dividends of $.20 per share in 2003, has paid its
2004  regular  quarterly  dividends  of $.20 per  share in the form of shares of
Kronos common stock.  NL increased its regular  quarterly  dividend in the first
quarter of 2005 to $.25 per share.  The  Company  does not  currently  expect to
receive any  distributions  from Waste Control  Specialists  during 2005.  CompX
dividends, which resumed in the fourth quarter of 2004, are paid to NL.

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.

At December 31, 2004, Valhi had $94.3 million of parent level cash and cash
equivalents  and had no amounts  outstanding  under its  revolving  bank  credit
agreement. In addition,  Valhi had $95.9 million of borrowing availability under
its  revolving  bank credit  facility,  and Valhi had $4.9 million in short-term
demand loans to Contran.

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 are 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 2005,  Valhi  currently
expects that  distributions  received from the LLC in 2005 will  approximate its
debt service  requirements  under its $250 million  loans from Snake River Sugar
Company.

Certain covenants  contained in Snake River's third-party senior debt allow
Snake River to pay periodic installments of debt service payments (principal and
interest)  under  Valhi's $80  million  loan to Snake River prior to its current
scheduled  maturity  in 2007,  and such loan is  subordinated  to Snake  River's
third-party  senior debt. At December 31, 2004, the accrued and unpaid  interest
on the  $80  million  loan  to  Snake  River  aggregated  $38.3  million  and is
classified  as a  noncurrent  asset.  The  Company  currently  believes  it will
ultimately  realize  both the $80 million  principal  amount and the accrued and
unpaid  interest,  whether through cash generated from the future  operations of
Snake River and the LLC or otherwise  (including any  liquidation of Snake River
or the LLC).  Following  the  currently  scheduled  complete  repayment of Snake
River's  third-party  senior debt in April 2007,  Valhi believes it will receive
significant  debt service  payments on its loan to Snake River as the cash flows
that Snake River  previously  would have been using to fund debt  service on its
third-party  senior debt ($10.0  million of  scheduled  payments in 2005),  plus
other cash  resources at Snake River would then become  available,  and would be
required, to be used to fund debt service payments on its loan from Valhi. Prior
to the  repayment of the  third-party  senior debt,  Snake River might also make
debt service payments to Valhi, if permitted by the terms of the senior debt, or
if Snake  River  would  refinance  with a third  party all or a  portion  of the
amounts it owes to Valhi under such $80 million loan.

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

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

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

Non-GAAP financial measures

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

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

Summary of debt and other contractual commitments

As  more  fully  described  in  the  notes  to the  Consolidated  Financial
Statements,  the Company is a party to various debt,  lease and other agreements
which  contractually  and  unconditionally  commit the  Company  to pay  certain
amounts  in the  future.  See  Notes  10 and  18 to the  Consolidated  Financial
Statements.  The Company's  obligations related to the long-term supply contract
for the  purchase of 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,  2004 by the  type  and date of
payment.

Payment due date
-----------------------------------------------------------------------
2010 and
Contractual commitment                 2005        2006/2007       2008/2009           after          Total
----------------------                 ----        ---------       ---------          -------         -----
(In millions)

Third-party indebtedness:

Principal                                     $ 14.4             $ .3          $519.2          $250.0          $ 783.9
Interest                                        68.5            136.4            91.7           399.5            696.1

Operating leases                                   5.7              7.4             4.8            21.6             39.5

Kronos' long-term supply
contract for the purchase
of TiO2 feedstock                               165.7            349.2            10.5              -             525.4

CompX raw material and
other purchase commitments                        12.6               -               -               -              12.6

Fixed asset acquisitions                          10.0               -               -               -              10.0

Income taxes                                      21.2               -               -               -              21.2
-----              ---             ---             ---            -----

$298.1           $493.3          $626.2          $671.1         $2,088.7
======           ======          ======          ======         ========

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,  2004,  and the amount  shown for
interest  for any  outstanding  variable-rate  indebtedness  is  based  upon the
December 31, 2004 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,
2004,  which is assumed to be paid during  2005.  A  significant  portion of the
amount shown for  indebtedness  relates to KII's Senior  Secured  Notes  ($519.2
million at December 31, 2004).  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,  the  Company is a party to  certain  other  agreements  that
conditionally  commit the Company to pay certain  amounts in the future.  Due to
the  provisions  of such  agreements,  it is possible that the Company might not
ever be required to pay any amounts under these agreements.  Agreements to which
the Company is a party that fall into this  category,  more fully  described  in
Notes 5, 8 and 18 to the Consolidated Financial Statements, are described below.
The Company has not included any amounts for these  conditional  commitments  in
the above table because the Company  currently  believes it is not probable that
the Company will be required to pay any amounts pursuant to these agreements.

o    The  Company's  requirement  to escrow funds in amounts up to the next
three years of debt service of Snake River's  third-party term debt to
collateralize  such debt in order to exercise its conditional right to
temporarily take control of The Amalgamated Sugar Company LLC;
o    The Company's  requirement  to pledge $5 million of cash or marketable
securities as collateral for Snake River's  third-party  debt in order
to permit Snake River to continue to make debt service payments on its
$80 million loan from Valhi; and
o    Waste Control  Specialists'  requirement to pay certain  amounts based
upon specified percentages of qualifying revenues.

The above table does not reflect any amounts that the Company  might pay to
fund its defined  benefit pension plans and OPEB plans, as the timing and amount
of any such future  fundings are unknown and  dependent  on, among other things,
the future  performance of defined  benefit  pension plan assets,  interest rate
assumptions  and actual  future  retiree  medical  costs.  Such defined  benefit
pension plans and OPEB plans are discussed  above in greater  detail.  The above
table also does not reflect any  amounts  that the Company  might pay related to
its asset  retirement  obligation,  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,
2003 and 2004. 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, 2003 and 2004.

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,  2004,  the  Company's  aggregate  indebtedness  was split
between 98% of fixed-rate instruments and 2% of variable-rate borrowings (2003 -
95% of fixed-rate  instruments  and 5% 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, 2004. Information shown below
for such  foreign  currency  denominated  indebtedness  is presented in its U.S.
dollar equivalent at December 31, 2004 using exchange rates of 1.36 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                              $519.2          $549.1              8.9%               2009
Valhi loans from Snake River                        250.0           250.0              9.4%               2027
Other                                                  .6              .6              8.2%              various
------          ------              ---
769.8           799.7              9.1%
------          ------              ---

Variable-rate indebtedness -
KII euro-denominated
European revolver                                   13.6            13.6              3.9%               2005
------          ------              ---

$783.4          $813.3              9.0%
======          ======              ===

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

At December 31, 2003,  fixed rate  indebtedness  aggregated  $606.3 million
(fair value - $606.3  million)  with a  weighted-average  interest rate of 9.1%;
variable  rate  indebtedness  at  such  date  aggregated  $31.0  million,  which
approximates  fair value,  with a  weighted-average  interest rate of 3.1%. Such
fixed rate  indebtedness  was  denominated in the euro (59% of the total) or the
U.S.   dollars  (41%).  At  December  31,  2003,  all   outstanding   fixed-rate
indebtedness  was  denominated in U.S.  dollars or the euro, and the outstanding
variable rate borrowings were denominated in U.S. dollars.

The  Company  has an $80  million  loan to Snake  River  Sugar  Company  at
December 31, 2003 and 2004. Such loan bears interest at a fixed interest rate of
6.49% at such dates,  the estimated  fair value of such loan  aggregated  $111.5
million and $96.3  million at  December  31,  2003 and 2004,  respectively.  The
potential  decrease in the fair value of such loan resulting from a hypothetical
100 basis point increase in market  interest rates would be  approximately  $5.4
million at December 31, 2004 (2003 - $6.7 million).

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

As described  above,  at December 31, 2004,  Kronos had the  equivalent  of
$532.8  million  of  outstanding   euro-denominated   indebtedness   (2003-  the
equivalent of $356.1 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  $52.4  million  at  December  31,  2004  (2003 - $35.6
million).

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

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

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, 2003
and 2004 was $183.0  million and $186.2  million,  respectively.  The  potential
change in the aggregate fair value of these  investments,  assuming a 10% change
in prices,  would be $18.3  million at December  31,  2003 and $18.6  million at
December 31, 2004.

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

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  regulations  of the SEC,  means  controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and  reported,  within the time periods  specified in the SEC's rules and forms.
Disclosure  controls and procedures include,  without  limitation,  controls and
procedures  designed to ensure that information  required to be disclosed by the
Company  in the  reports  that it files or  submits  to the SEC under the Act is
accumulated  and  communicated  to  the  Company's  management,   including  its
principal  executive  officer and its principal  financial  officer,  or persons
performing  similar  functions,  as appropriate to allow timely  decisions to be
made  regarding  required  disclosure.  Each of Steven L. Watson,  the Company's
President and Chief Executive Officer,  and Bobby D. O'Brien, the Company's Vice
President and Chief Financial Officer,  have evaluated the Company's  disclosure
controls and  procedures as of December 31, 2004.  Based upon their  evaluation,
these executive officers have concluded that the Company's  disclosure  controls
and procedures are effective as of the date of such evaluation.

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

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

Section  404 of the  Sarbanes-Oxley  Act of 2002  requires  the  Company to
annually  include  a  management  report  on  internal  control  over  financial
reporting  starting  in the  Company's  Annual  Report on Form 10-K for the year
ended December 31, 2004. The Company's independent  registered public accounting
firm is also  required to annually  audit the  Company's  internal  control over
financial reporting.

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.  See  Note 7 to the  Consolidated  Financial  Statements  and the  index of
financial  statements and schedules on page F-1 of this Annual Report.  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.

Changes in Internal  Control Over  Financial  Reporting.  There has been no
change to the Company's  internal  control over financial  reporting  during the
quarter ended December 31, 2004 that has materially  affected,  or is reasonably
likely to materially  affect,  the  Company's  internal  control over  financial
reporting.

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  Rule  13a-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,  2004.  See  Scope of
Management's Report on Internal Control Over Financial Reporting above.

PricewaterhouseCoopers  LLP, the independent  registered  public accounting
firm that has audited the Company's  Consolidated  Financial Statements included
in this Annual Report, has audited management's  assessment of the effectiveness
of the Company's  internal  control over financial  reporting as of December 31,
2004,  as stated in their report which is included in this Annual Report on Form
10-K.

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 2004, the Company's chief executive officer filed
such annual certification with the NYSE, indicating that he was not aware of any
violations by the Company of the NYSE corporate  governance  listing  standards.
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, 2004 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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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

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

(a) and (d) Financial Statements and Schedules

The Registrant

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

50%-or-less owned persons

The consolidated  financial statements of TIMET (41%-owned at December
31, 2004) 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) Reports on Form 8-K

Reports on Form 8-K filed for the quarter ended December 31, 2004:

October 28, 2004 - Reported Items 7.01 and 9.01. November 8,
2004 - Reported Items 2.02, 7.01 and 9.01. November 18, 2004 -
Reported Items 1.01, 1.02 and 9.01. November 24, 2004 -
Reported Items 1.01, 2.03 and 9.01. December 29, 2004 -
Reported Items 2.05 and 2.06.

(c)     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, 2004 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.

Item No.                         Exhibit Item

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   Intercompany  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.

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.

Item No.                         Exhibit Item

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

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

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

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

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

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

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

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

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

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

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

Item No.                         Exhibit Item

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

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

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

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

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

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

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

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

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

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

Item No.                         Exhibit Item

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

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

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

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

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

10.41     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.

10.42     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.

10.43     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.

10.44     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.

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

Item No.                         Exhibit Item

10.46     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.

10.47     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.

10.48     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.

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

10.50     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.

10.51**   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.

10.52**   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.

10.53**   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.

10.54**   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.

10.55**   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.

Item No.                         Exhibit Item

10.56     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.

10.57     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.

10.58     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.

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

10.60     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.

10.61**   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.

10.62**   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.

10.63**   Termination Agreement by and between Wyman-Gordon Company and Titanium
Metals  Corporation  effective as of September 28, 2003 - incorporated
by reference to Exhibit No. 10.3 to TIMET's  Quarterly  Report on Form
10-Q (File No. 0-28538) for the quarter ended June 30, 2004.

10.64     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.

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

Item No.                         Exhibit Item

10.66     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.

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

21.1      Subsidiaries of the Registrant.

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

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

31.1      Certification

31.2      Certification

32.1      Certification

99.1      Consolidated  financial  statements of Titanium  Metals  Corporation -
incorporated  by reference to TIMET's Annual Report on Form 10-K (File
No. 0-28538) for the year ended December 31, 2004.

* Management contract, compensatory plan or agreement.

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

SIGNATURES

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

VALHI, INC.
(Registrant)

By: /s/ Steven L. Watson          
----------------------------------
Steven L. Watson, March 30, 2005
(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 30, 2005           Steven L. Watson, March 30, 2005
(Chairman of the Board)                     (President, Chief Executive Officer
and Director)

/s/ Thomas E. Barry                           /s/ Glenn R. Simmons              
---------------------------------------     ------------------------------------
Thomas E. Barry, March 30, 2005             Glenn R. Simmons, March 30, 2005
(Director)                                  (Vice Chairman of the Board)

/s/ Norman S. Edelcup                        /s/ Bobby D. O'Brien               
--------------------------------------      ------------------------------------
Norman S. Edelcup, March 30, 2005           Bobby D. O'Brien, March 30, 2005
(Director)                                  (Vice President and Chief
Financial Officer, Principal
Financial Officer)

/s/ W. Hayden McIlroy                       /s/ Gregory M. Swalwell             
--------------------------------------      ------------------------------------
W. Hayden McIlroy, March 30, 2005           Gregory M. Swalwell, March 30, 2005
(Director)                                  (Vice President and Controller,
Principal Accounting Officer)

/s/ J. Walter Tucker, Jr.             
--------------------------------------
J. Walter Tucker, Jr. March 30, 2005
(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, 2003 and 2004           F-4

Consolidated Statements of Income -
Years ended December 31, 2002, 2003 and 2004                      F-6

Consolidated Statements of Comprehensive Income -
Years ended December 31, 2002, 2003 and 2004                      F-8

Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2002, 2003 and 2004                      F-9

Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2003 and 2004                      F-10

Notes to Consolidated Financial Statements                         F-13

Financial Statement Schedules

Schedule I - Condensed Financial Information of Registrant         S-2

Schedule II - Valuation and Qualifying Accounts                    S-11

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 an integrated  audit of Valhi,  Inc.'s 2004  consolidated
financial  statements and of its internal control over financial reporting as of
December  31,  2004 and  audits  of its 2002  and  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 

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, 2003 and 2004, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004 in conformity with  accounting  principles
generally accepted in the United States of America.  These financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express  an  opinion  on these  financial  statements  based on our  audits.  We
conducted our audits of these 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 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, 2004 based on criteria  established  in Internal  Control -
Integrated Framework issued by the Committee of Sponsoring  Organizations of the
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,  2004,  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 30, 2005

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2004

(In thousands, except per share data)

ASSETS
2003               2004
----               ----

Current assets:

Cash and cash equivalents                                                        $  103,394          $  267,829
Restricted cash equivalents                                                          19,348               9,609
Marketable securities                                                                 6,147               9,446
Accounts and other receivables                                                      184,633             217,931
Refundable income taxes                                                              37,712               3,330
Receivable from affiliates                                                              317               5,484
Inventories                                                                         293,113             263,414
Prepaid expenses                                                                     11,747              12,342
Deferred income taxes                                                                14,435               9,705
----------          ----------

Total current assets                                                            670,846             799,090
----------          ----------

Other assets:
Marketable securities                                                               176,941             176,770
Investment in affiliates                                                            161,818             178,815
Receivable from affiliate                                                            14,000              10,000
Loans and other receivables                                                         116,566             119,452
Unrecognized net pension obligations                                                 13,747              13,518
Goodwill                                                                            377,591             354,051
Other intangible assets                                                               3,805               3,189
Deferred income taxes                                                                 7,033             239,521
Other assets                                                                         39,621              52,326
----------          ----------

Total other assets                                                              911,122           1,147,642
----------          ----------

Property and equipment:
Land                                                                                 35,557              38,493
Buildings                                                                           217,744             234,152
Equipment                                                                           805,081             894,023
Mining properties                                                                    14,848              20,277
Construction in progress                                                             10,625              21,557
----------          ----------
1,083,855           1,208,502
Less accumulated depreciation                                                       446,369             555,707
----------          ----------

Net property and equipment                                                      637,486             652,795
----------          ----------

$2,219,454          $2,599,527
==========          ==========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31, 2003 and 2004

(In thousands, except per share data)

LIABILITIES AND STOCKHOLDERS' EQUITY
2003               2004
----               ----

Current liabilities:

Current maturities of long-term debt                                            $    5,392          $   14,412
Accounts payable                                                                   118,781             109,158
Accrued liabilities                                                                130,091             131,119
Payable to affiliates                                                               21,454              11,607
Income taxes                                                                        13,105              21,196
Deferred income taxes                                                                3,941              24,170
----------          ----------

Total current liabilities                                                      292,764             311,662
----------          ----------

Noncurrent liabilities:
Long-term debt                                                                     632,533             769,525
Accrued pension costs                                                               90,517              77,360
Accrued OPEB costs                                                                  37,410              34,988
Accrued environmental costs                                                         61,725              55,450
Deferred income taxes                                                              301,648             161,758
Other                                                                               43,334              41,061
----------          ----------

Total noncurrent liabilities                                                 1,167,167           1,140,142
----------          ----------

Minority interest                                                                     99,789             158,240
----------          ----------

Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued                                                             -                       -
Common stock, $.01 par value; 150,000 shares
authorized; 134,027 and 124,195 shares issued                                       1,340               1,242
Additional paid-in capital                                                          99,048              85,213
Retained earnings                                                                  639,463             864,821
Accumulated other comprehensive income:
Marketable securities                                                             85,124              88,367
Currency translation                                                              (3,573)             45,561
Pension liabilities                                                              (59,154)            (57,779)
Treasury stock, at cost - 13,841 and 3,984 shares                                 (102,514)            (37,942)
----------          ---------- 

Total stockholders' equity                                                     659,734             989,483
----------          ----------

$2,219,454          $2,599,527
==========          ==========

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

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2002, 2003 and 2004

(In thousands, except per share data)

2002                2003              2004
----                ----              ----

Revenues and other income:

Net sales                                                        $1,050,287         $1,186,185         $1,320,128
Other, net                                                           60,896             41,427             44,244
----------         ----------         ----------

1,111,183          1,227,612          1,364,372
----------         ----------         ----------

Cost and expenses:
Cost of sales                                                       831,846            905,658          1,036,950
Selling, general and administrative                                 187,593            220,753            208,101
Interest                                                             60,155             58,524             62,901
----------         ----------         ----------

1,079,594          1,184,935          1,307,952
----------         ----------         ----------

31,589             42,677             56,420
Equity in earnings of:
Titanium Metals Corporation ("TIMET")                               (32,873)             1,910             19,503
Other                                                                   566                771              2,175
----------         ----------         ----------

Income (loss) before taxes                                           (718)            45,358             78,098

Income tax benefit                                                      5,904              8,496            288,055

Minority interest in after-tax earnings                                 3,743             12,080             57,493
----------         ----------         ----------

Income from continuing operations                                   1,443             41,774            308,660

Discontinued operations                                                  (206)            (2,874)             3,732

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

Net income                                                     $    1,237         $   39,486         $  312,392
==========         ==========         ==========

Pro forma income from continuing
operations*                                                       $    1,495         $   41,774         $  308,660
==========         ==========         ==========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)

Years ended December 31, 2002, 2003 and 2004

(In thousands, except per share data)

2002                2003              2004
----                ----              ----

Basic earnings per share:

Income from continuing operations                            $    .01            $    .35           $   2.57
Discontinued operations                                          -                   (.03)               .03
Cumulative effect of change in
accounting principle                                            -                    .01               -
--------            --------           -----

Net income                                                 $    .01            $    .33           $   2.60
========            ========           ========

Diluted earnings per share:
Income from continuing operations                            $    .01            $    .35           $   2.56
Discontinued operations                                          -                   (.03)               .03
Cumulative effect of change in
accounting principle                                            -                    .01               -
--------            --------           -----

Net income                                                 $    .01            $    .33           $   2.59
========            ========           ========

Pro forma income from continuing operations per share:*
Basic                                                        $    .01            $    .35           $   2.57
Diluted                                                           .01            $    .35           $   2.56

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

Shares used in the calculation of per share amounts:
Basic earnings per share                                      115,419             119,696            120,197
Diluted impact of stock options                                   416                 213                243
--------            --------           --------

Diluted earnings per share                                    115,835             119,909            120,440
========            ========           ========

*Assumes SFAS No. 143 had been adopted as of January 1, 2002.  See Note 19.

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2002, 2003 and 2004

(In thousands)

2002           2003            2004
----           ----            ----

Net income                                                                    $  1,237       $ 39,486       $312,392
--------       --------       --------

Other comprehensive income (loss), net of tax: Marketable securities
adjustment:
Unrealized net gains arising during
the year                                                                    1,779            860          3,243
Reclassification for realized net gains
included in net income                                                     (4,169)          -              -
--------       --------       -----
(2,390)           860          3,243

Currency translation adjustment                                               43,814         32,017         49,134

Pension liabilities adjustment                                               (25,040)       (22,193)         1,375
--------       --------       --------

Total other comprehensive income, net                                       16,384         10,684         53,752
--------       --------       --------

Comprehensive income                                                    $ 17,621       $ 50,170       $366,144
========       ========       ========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years ended December 31, 2002, 2003 and 2004

(In thousands)

Additional                       Accumulated other comprehensive income   
--------------------------------------   
Common        paid-in        Retained      Marketable      Currency      Pension   
stock        capital         earnings      securities    Translation   liabilities 
- -------  -   ---------       --------      ----------    -----------   ----------- 

Balance at December 31, 2001                  $1,258        $44,982         $656,408      $86,654       $(79,404)   $(11,921)

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

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

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

Balance at December 31, 2003                   1,340         99,048          639,463       85,124         (3,573)    (59,154)

Net income                                       -             -             312,392         -              -           -    
Cash dividends                                   -             -             (29,804)        -              -           -    
Other comprehensive income, net                  -             -                -           3,243         49,134       1,375 
Income tax related to Kronos
distribution                                      -         (6,816)                            -              -           - 
Retirement of treasury stock                     (99)        (7,243)         (57,230)           -           -              - 
Other, net                                         1            224             -            -              -           -    
------       --------         --------     --------       --------    -------- 

Balance at December 31, 2004                  $1,242       $ 85,213         $864,821     $ 88,367       $ 45,561    $(57,779)
======       ========         ========     ========       ========    ======== 

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

Years ended December 31, 2002, 2003 and 2004

(In thousands)

Total
Treasury      stockholders'
stock           equity
---------   -   --------

Balance at December 31, 2001                   $(75,649)         $622,328

Net income                                         -                1,237
Cash dividends                                     -              (27,872)
Other comprehensive income
(loss), net                                       -               16,384
Other, net                                         -                2,679
--------          --------

Balance at December 31, 2002                    (75,649)          614,756

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

Balance at December 31, 2003                   (102,514)          659,734

Net income                                         -              312,392
Cash dividends                                     -              (29,804)
Other comprehensive income, net                    -               53,752
Income tax related to Kronos
distribution                                         -            (6,816)
Retirement of treasury stock                     64,572                 -
Other, net                                         -                  225
--------          --------

Balance at December 31, 2004                  $ (37,942)         $989,483
=========          ========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2002, 2003 and 2004

(In thousands)

2002           2003            2004
----           ----            ----

Cash flows from operating activities:

Net income                                                              $  1,237       $ 39,486       $ 312,392
Depreciation and amortization                                             61,776         72,969          78,352
Goodwill impairment                                                            -              -           6,500
Securities transactions gains, net                                        (6,413)          (487)         (2,113)
Proceeds from disposal of marketable
securities (trading)                                                     18,136             50               -
Loss (gain) on disposal of property and
equipment                                                                   261         (9,845)            855
Noncash:
Interest expense                                                         3,911          2,366           2,543
Defined benefit pension expense                                         (2,324)        (5,478)         (2,977)
Other postretirement benefit expense                                    (4,692)        (4,078)         (2,839)
Deferred income taxes:
Continuing operations                                                   (9,430)        32,139        (296,716)
Discontinued operations                                                   (222)        (2,590)         (3,508)
Minority interest:
Continuing operations                                                    3,743         12,080          57,493
Discontinued operations                                                   (101)        (1,414)         (4,124)
Equity in:
TIMET                                                                   32,873         (1,910)        (19,503)
Other                                                                     (566)          (771)         (2,175)
Cumulative effect of change in accounting
principle                                                                     -           (586)              -
Distributions from:
Manufacturing joint venture                                              7,950            875           8,600
Other                                                                      361          1,205             494
Other, net                                                                (2,228)        (1,195)          4,391
Change in assets and liabilities:
Accounts and other receivables                                           2,395          3,795         (25,148)
Inventories                                                             45,301        (20,938)         46,937
Accounts payable and accrued liabilities                               (35,615)        (8,948)        (10,116)
Income taxes                                                              (475)       (26,646)         30,759
Accounts with affiliates                                                (4,199)         2,293         (19,892)
Other noncurrent assets                                                  4,149         (1,812)           (812)
Other noncurrent liabilities                                            (5,187)        21,115         (17,764)
Other, net                                                              (3,818)         6,871             500
--------       --------       ---------

Net cash provided by operating activities                            106,829        108,546         142,129
--------       --------       ---------

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 2002, 2003 and 2004

(In thousands)

2002            2003            2004
----            ----            ----

Cash flows from investing activities:

Capital expenditures                                                  $ (45,995)       $ (44,659)      $ (48,521)
Purchases of:
Kronos common stock                                                      -              (6,428)        (17,057)
TIMET common stock                                                       (534)            (976)              -
TIMET debt securities                                                       -             (238)              -
NL common stock                                                       (21,254)            -                  -
Other subsidiary                                                            -                -            (575)
Business unit                                                          (9,149)            -                  -
Capitalized permit costs                                                      -             (672)         (6,274)
Proceeds from disposal of:
Property and equipment                                                  2,957           13,472           2,964
Kronos common stock                                                         -                -           2,745
Change in restricted cash equivalents, net                                2,539             (248)         10,068
Loans to affiliates
Loans                                                                       -             -            (12,929)
Collections                                                             2,000            4,000          12,000
Other, net                                                                2,294            1,984            (508)
---------        ---------       --------- 

Net cash used by investing activities                                 (67,142)         (33,765)        (58,087)
---------        ---------       --------- 

Cash flows from financing activities:
Indebtedness:
Borrowings                                                            364,068           27,106         297,439
Principal payments                                                   (390,761)         (59,782)       (186,274)
Deferred financing costs paid                                         (10,706)            (426)         (2,017)
Loans from affiliates:
Loans                                                                  13,421           16,354          26,117
Repayments                                                            (26,825)         (20,193)        (33,449)
Valhi dividends paid                                                    (27,872)         (29,796)        (29,804)
Distributions to minority interest                                      (27,846)          (6,509)         (3,577)
NL common stock issued                                                      454            1,738           9,201
Other, net                                                                2,800              264             802
---------        ---------       ---------

Net cash provided (used) by financing
activities                                                          (103,267)         (71,244)         78,438
---------        ---------       ---------

Net increase (decrease)                                                 $ (63,580)        $  3,537       $ 162,480
=========         ========       =========

VALHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 2002, 2003 and 2004

(In thousands)

2002             2003              2004
----             ----              ----

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

activities                                                       $(63,580)         $  3,537         $162,480
Currency translation                                                 3,650             5,178            1,955
Business unit acquired                                                 196              -                -
--------          --------         -----
(59,734)            8,715          164,435

Balance at beginning of year                                       154,413            94,679          103,394
--------          --------         --------

Balance at end of year                                            $ 94,679          $103,394         $267,829
========          ========         ========

Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized                              $ 61,016          $ 53,990         $ 59,446
Income taxes, net                                                   14,734            (4,237)         (20,583)

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

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

VALHI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -       Summary of significant accounting policies:

Organization  and  basis of  presentation.  Valhi,  Inc.  (NYSE:  VHI) is a
subsidiary of Contran Corporation.  At December 31, 2004, Contran held, directly
or through subsidiaries,  approximately 91% 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.  Certain  prior year  amounts  have been
reclassified to conform to the current year presentation,  including  presenting
the  results of  operations  of CompX  International  Inc.'s  operations  in The
Netherlands as discontinued operations. See Note 22.

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 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 are 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  and money  market  funds that invest  primarily  in U.S.  government
securities,  includes $19 million at December  31, 2004 held by special  purpose
trusts (2003 - $24  million)  formed by NL  Industries,  the assets of which can
only be used to pay for certain of NL's  future  environmental  remediation  and
other  environmental   expenditures.   Such  restricted  amounts  are  generally
classified   as  either  a  current  or  noncurrent   asset   depending  on  the
classification  of  the  liability  to  which  the  restricted  amount  relates.
Additionally,  the restricted debt securities are generally classified as either
a current or noncurrent asset depending upon the maturity date of each such debt
security. See Notes 5, 8 and 12.

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

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

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

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 $41 million
credit at December 31, 2004, related principally to the Company's  investment in
TIMET and are charged or credited to income as the entities depreciate, amortize
or dispose of the related net assets.

Goodwill  and  other  intangible  assets;  amortization  expense.  Goodwill
represents the excess of cost over fair value of individual net assets  acquired
in business combinations  accounted for by the purchase method.  Goodwill is not
subject to periodic  amortization.  Other intangible assets are amortized by the
straight-line  method over their estimated lives.  Other  intangible  assets are
stated net of accumulated amortization, and goodwill and other intangible assets
are assessed for impairment in accordance with SFAS No. 142,  Goodwill and Other
Intangible Assets. See Notes 9 and 19.

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 each of 2002 and 2003 and  $623,000 in 2004.  At December
31, 2004, net operating  permit costs include (i) $1.1 million  related to costs
to renew certain  permits for which the renewal  application is pending with the
applicable regulatory agency and (ii) $5.8 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.  The
Company  does  not  own  the  ilmenite   reserves   associated  with  the  mine.
Depreciation  of  property  and  equipment  for  financial   reporting  purposes
(including  mining  properties)  is computed  principally  by the  straight-line
method over the  estimated  useful  lives of ten to 40 years for  buildings  and
three to 20 years for equipment.  Accelerated  depreciation methods are used for
income tax  purposes,  as permitted.  Upon sale or  retirement of an asset,  the
related cost and accumulated  depreciation are removed from the accounts and any
gain or loss is recognized in income currently.

Expenditures  for  maintenance,  repairs and minor  renewals are  expensed;
expenditures  for major  improvements  are  capitalized.  The  Company  performs
certain planned major  maintenance  activities  during the year,  primarily with
respect to the chemicals  segment.  Repair and maintenance costs estimated to be
incurred in  connection  with such  planned  major  maintenance  activities  are
accrued in advance and are included in cost of goods sold. At December 31, 2004,
accrued repair and maintenance costs,  included in other current liabilities and
consisting  primarily of materials and supplies,  were $5.4 million (2003 - $6.3
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
2002, 2003 or 2004.

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.  Effective January 1, 2002, the Company commenced assessing impairment
of property and equipment in accordance  with SFAS No. 144,  Accounting  for the
Impairment or Disposal of Long-Lived  Assets,  which among other things provided
certain implementation guidance in relation to prior GAAP. See Note 19.

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.  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 nil in 2002,  $1.5 million in
2003 and nil in 2004.

Deferred  income tax assets and liabilities are recognized for the expected
future tax  consequences  of  temporary  differences  between the income tax and
financial  reporting  carrying  amounts  of assets  and  liabilities,  including
investments in the Company's  subsidiaries and affiliates who are not members of
the Contran Tax Group and undistributed  earnings of foreign  subsidiaries which
are not deemed to be permanently  reinvested.  Earnings of foreign  subsidiaries
deemed permanently reinvested aggregated $662 million at December 31, 2004 (2003
- $654 million).  The Company periodically  evaluates its deferred tax assets in
the various  taxing  jurisdictions  in which it operates and adjusts any related
valuation  allowance  based on the  estimate of the amount of such  deferred tax
assets  which  the  Company  believes  does not meet the  "more-likely-than-not"
recognition criteria.

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, 2003 and 2004, no receivables
for recoveries have been recognized.

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

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

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 $51 million
in 2002,  $63 million in 2003 and $70  million in 2004.  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 2002, 2003 and 2004. Research
and development  costs related to continuing  operations,  expensed as incurred,
were approximately $7 million in each of 2002 and 2003 and $8 million in 2004.

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
184,000 in 2002, 410,000 in 2003 and 62,000 in 2004.

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.  During 2002, and following the cash  settlement
of certain stock  options held by employees of NL, NL and the Company  commenced
accounting for its remaining stock options using the variable  accounting method
because NL could not overcome the  presumption  that it would not similarly cash
settle its remaining stock options.  Under the variable  accounting  method, the
intrinsic  value of all  unexercised  stock  options  (including  those  with an
exercise  price at least  equal to the  market  price on the date of grant)  are
accrued as an expense  over their  vesting  period,  with  subsequent  increases
(decreases)  in the market price of the  underlying  common  stock  resulting in
additional  compensation  expense  (income).  Compensation cost related to stock
options   recognized  by  the  Company  in  accordance  with  APBO  No.  25  was
approximately  $3.3  million in 2002,  $1.9  million in 2003 and $3.4 million in
2004.

The following  table presents what the Company's  consolidated  net income,
and related per share amounts,  would have been in 2002,  2003 and 2004 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,   
2002            2003            2004
----            ----            ----
(In millions, except
Per share amounts)

Net income as reported                                                      $ 1.2          $39.5         $312.4

Adjustments, net of applicable income tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25                                               1.7             .9            1.7
Stock-based employee compensation expense
determined under SFAS No. 123                                             (2.6)          (1.4)           (.7)
-----          -----         ------ 

Pro forma net income                                                        $  .3          $39.0         $313.4
=====          =====         ======

Basic earnings per share:
As reported                                                               $ .01          $ .33         $ 2.60
Pro forma                                                                   -              .33           2.61

Diluted earnings per share:
As reported                                                               $ .01          $ .33         $ 2.59
Pro forma                                                                   -              .33           2.60

Note 2 -       Business and geographic segments:

% owned at
Business segment                 Entity                    December 31, 2004 

Chemicals             Kronos Worldwide, Inc.                      94%
Component products    CompX International Inc.                    68%
Waste management      Waste Control Specialists LLC              100%
Titanium metals       TIMET                                       41%

The Company's  ownership of Kronos includes 46% held directly by Valhi, 37%
held directly by NL Industries,  Inc., a majority-owned subsidiary of Valhi, and
11% owned by Tremont LLC, a wholly-owned  subsidiary of Valhi. Valhi owns 62% of
NL directly,  and Tremont owns an additional 21% of NL. Tremont  distributed its
shares of Kronos and NL to Valhi in January 2005.

The Company's  ownership of CompX is 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
represents  NL's ownership  interest in CompX Group  multiplied by CompX Group's
ownership interest in CompX. See Note 3.

The company's ownership of TIMET includes 40% owned directly by Tremont and
1% owned directly by Valhi. In addition,  the Combined Master  Retirement  Trust
("CMRT"),  a  collective  investment  trust  established  by Valhi to permit the
collective  investment  by certain  master  trusts which fund  certain  employee
benefits  plans  sponsored  by Contran and certain of its  affiliates,  owned an
additional  12% of TIMET's  outstanding  common stock at December 31, 2004.  See
Note 16.

TIMET  owns an  additional  2% 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 produces and sells component  products  (ergonomic  computer  support
systems,  precision  ball  bearing  slides  and  security  products)  for office
furniture,  computer related  applications and a variety of other  applications.
CompX has production facilities in North America and Asia.

Waste  Control  Specialists  operates  a  facility  in West  Texas  for the
processing,  treatment and storage of  hazardous,  toxic and low-level and mixed
radioactive  wastes,  and for the  disposal of  hazardous  and toxic and certain
types of low-level and mixed radioactive  wastes.  Waste Control  Specialists is
seeking  additional  regulatory  authorizations  to  expand  its  treatment  and
disposal capabilities for low-level and mixed radioactive wastes 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.  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 2002, 2003 or 2004.  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,  2004,  approximately  23% of  corporate  assets were held by NL
(2003 - 16%), 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, 2004, the net assets of non-U.S. subsidiaries included
in consolidated net assets approximated $653 million (2003 - $570 million).

Years ended December 31,
------------------------------------------
2002             2003             2004
----             ----             ----
(In millions)
Net sales:

Chemicals                                                        $  875.2         $1,008.2         $1,128.6
Component products                                                  166.7            173.9            182.6
Waste management                                                      8.4              4.1              8.9
--------         --------         --------

Total net sales                                                $1,050.3          1,186.2          1,320.1
========         ========         ========

Operating income:
Chemicals                                                        $   84.4         $  122.3         $  103.5
Component products                                                    4.4              9.1             16.2
Waste management                                                     (7.0)           (11.5)           (10.2)
--------         --------         -------- 

Total operating income                                             81.8            119.9            109.5

General corporate items:
Interest and dividend income                                         35.7             33.7             34.6
Securities transaction gains, net                                     6.4               .5              2.1
Gain on disposal of fixed assets                                      1.6             10.3               .6
Legal settlement gains, net                                           5.2               .8               .5
Foreign currency transaction gain                                     6.3            -                -
General expenses, net                                               (45.2)           (64.0)           (28.0)
Interest expense                                                      (60.2)           (58.5)           (62.9)
--------         --------         -------- 
31.6             42.7             56.4

Equity in:
TIMET                                                               (32.9)             1.9             19.5
Other                                                                  .6               .8              2.2
--------         --------         --------

Income (loss) before income taxes                              $    (.7)        $   45.4         $   78.1
========         ========         ========

Net sales - point of origin:
United States                                                    $  387.0         $  409.0         $  558.1
Germany                                                             404.3            510.1            576.1
Belgium                                                             123.8            150.7            186.4
Norway                                                              111.8            131.5            144.5
Other Europe                                                         89.6            110.4            124.8
Canada                                                              229.2            249.6            244.4
Taiwan                                                               14.7             13.4             15.8
Eliminations                                                       (310.1)          (388.5)          (530.0)
--------         --------         -------- 

$1,050.3         $1,186.2         $1,320.1
========         ========         ========

Net sales - point of destination:
United States                                                    $  406.5         $  427.7         $  462.9
Europe                                                              463.3            574.5            671.8
Canada                                                               82.8             85.5             80.8
Asia and other                                                       97.7             98.5            104.6
--------         --------         --------

$1,050.3         $1,186.2         $1,320.1
========         ========         ========

Years ended December 31,
-----------------------------------------
2002             2003              2004
----             ----              ----
(In millions)
Depreciation and amortization:

Chemicals                                                       $  44.3           $  54.5          $  60.2
Component products                                                 13.0              14.8             14.2
Waste management                                                    3.0               2.7              3.3
Corporate                                                           1.5               1.0               .7
-------           -------          -------

$  61.8           $  73.0          $  78.4
=======           =======          =======

Capital expenditures:
Chemicals                                                       $  32.6           $  35.2          $  39.3
Component products                                                 12.7               8.9              5.4
Waste management                                                     .6                .4              3.7
Corporate                                                            .1                .2               .1
-------           -------          -------

$  46.0           $  44.7          $  48.5
=======           =======          =======

December 31,
-------------------------------------------
2002             2003              2004
----             ----              ----
(In millions)
Total assets:
Operating segments:

Chemicals                                                     $1,346.5          $1,542.2         $1,773.5
Component products                                               202.1             209.4            170.2
Waste management                                                  28.5              24.5             36.4
Investment in:
TIMET common stock                                                12.9              20.4             44.5
TIMET debt securities                                             -                   .3             -
TIMET preferred stock                                             -                 -                  .2
Other joint ventures                                              12.6              12.2             13.9
Corporate and eliminations                                         472.2             410.5            560.8
--------          --------         --------

$2,074.8          $2,219.5         $2,599.5
========          ========         ========

Net property and equipment:
United States                                                   $   78.2          $   72.3         $   69.8
Germany                                                            275.9             319.7            331.3
Canada                                                              82.1              91.7             91.4
Norway                                                              68.1              67.4             72.5
Belgium                                                             60.5              71.1             73.8
Netherlands                                                         10.0               9.6              8.3
Taiwan                                                               5.9               5.7              5.7
--------          --------         --------

$  580.7          $  637.5         $  652.8
========          ========         ========

Note 3 -  Business combinations and related transactions:

NL  Industries,  Inc.  At the  beginning  of 2002,  Valhi  held 61% of NL's
outstanding common stock, and Tremont held an additional 21% of NL. During 2002,
NL purchased  shares of its own common stock in market and private  transactions
for an aggregate of $21.3  million,  thereby  increasing  Valhi's and  Tremont's
ownership of NL to 62% and 21% at December 31, 2004, respectively. See Note 17.

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

Kronos  Worldwide,  Inc. Prior to December 2003,  Kronos was a wholly-owned
subsidiary of NL. In December 2003, 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,  NL paid each of its four
$.20 per  share  regular  quarterly  dividends  in the form of  shares of Kronos
common stock in which an aggregate of approximately 2.5% of Kronos'  outstanding
common stock were  distributed to NL shareholders  (including Valhi and Tremont)
in the form of pro-rata  dividends.  Valhi and Tremont  received an aggregate of
approximately  20.2 million shares and 1.0 million shares of Kronos with respect
to the December 2003 distribution and the 2004 distributions, respectively.

NL's December  2003 and 2004  quarterly  distributions  of shares of common
stock of Kronos is taxable to NL, and NL is required to recognize a taxable gain
equal to the  difference  between the fair market  value of the shares of Kronos
common stock  distributed on the various dates of distribution and NL's adjusted
tax basis in such  stock at such  dates of  distribution.  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 tax liability  generated  from the  distribution  of such
Kronos  shares to Valhi and  Tremont.  During 2003 and 2004,  NL was required to
recognize a tax liability  with respect to the Kronos shares  distributed  to NL
shareholders  other  than  Valhi  and  Tremont,   and  such  tax  liability  was
approximately  $22.5  million  and $8.7  million,  respectively.  The  Company's
pro-rata share of such tax liability, based on the Company's ownership of NL, is
approximately  $19.0 million and $6.8 million,  respectively,  and in accordance
with GAAP has been recognized as a reduction of the Company's additional paid-in
capital in such periods.  Other than the Company's  recognition  of its pro-rata
share of such NL tax  liabilities,  the completion of the December 2003 and 2004
distributions  of  Kronos  had no other  impact  on the  Company's  consolidated
financial position, results of operations or cash flows.

During the fourth quarter of 2004,  Valhi and NL further  amended the terms
of their tax sharing  agreement  to provide that NL would now be required to pay
up to Valhi  the 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 first three
quarters  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 such
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  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 $41 per share.  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 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 the Contran Tax Group.

During  December  2003 and 2004,  Valhi  purchased  shares of Kronos common
stock in market  transactions  for an  aggregate  of $23.5  million.  During the
fourth  quarter  of 2004,  NL sold  shares  of  Kronos  common  stock in  market
transactions for an aggregate of $2.7 million, and the Company recognized a $2.2
million  pre-tax gain  related to the  reduction  of its  ownership  interest in
Kronos related to such sales. 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 2002,  the Company  owned 39% of TIMET.  During
2002 and 2003, the Company purchased  additional shares of TIMET common stock in
market  transactions for an aggregate of $1.5 million,  increasing the Company's
ownership of TIMET to 41% as of December 31, 2003. During 2003, the Company also
purchased   certain   convertible  debt  securities  issued  by  a  wholly-owned
subsidiary  of TIMET,  and during 2004 such  convertible  debt  securities  were
exchanged for convertible preferred stock of TIMET. See Note 7.

Tremont Corporation,  Tremont Group, Inc. and Tremont LLC. At the beginning
of 2002, 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).

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

As noted  above,  the  Company's  proportional  interest in shares of Valhi
common  stock  held  by NL are  reported  as  treasury  stock  in the  Company's
consolidated  balance sheet.  As a result of the merger  transactions  discussed
above, the acquisition of minority interest in Tremont  effectively  resulted in
an  increase in the  Company's  overall  ownership  of NL due to  Tremont's  21%
ownership interest in NL.  Accordingly,  as a result of the merger  transactions
noted above, the Company also recognized a $7.6 million increase in its treasury
stock  attributable  to the shares of Valhi common stock held by NL. At December
31,  2003 and 2004,  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).

CompX  International Inc. At the beginning of 2002, 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
interest 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.

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,
--------------------------
2003            2004
----            ----
(In thousands)

Accounts receivable                                                                    $187,256        $219,764
Notes receivable                                                                          2,026           1,993
Allowance for doubtful accounts                                                          (4,649)         (3,826)
--------        -------- 

$184,633        $217,931
========        ========

Note 5 -       Marketable securities:

December 31,
-------------------------
2003            2004
----            ----
(In thousands)

Current assets - available for sale

restricted debt securities                                                            $  6,147        $  9,446
========        ========

Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC                                                    $170,000        $170,000
Restricted debt securities                                                              6,870           6,725
Other common stocks                                                                        71              45
--------        --------

$176,941        $176,770
========        ========

Amalgamated.  Prior to 2002, the Company transferred control of the refined
sugar operations previously conducted by the Company's wholly-owned  subsidiary,
The  Amalgamated  Sugar  Company,  to  Snake  River  Sugar  Company,  an  Oregon
agricultural  cooperative  formed by certain  sugarbeet growers in Amalgamated's
areas  of  operations.  Pursuant  to the  transaction,  Amalgamated  contributed
substantially  all of its net assets to the  Amalgamated  Sugar  Company  LLC, a
limited liability company  controlled by Snake River, on a tax-deferred basis in
exchange for a non-voting  ownership  interest in the LLC. The cost basis of the
net assets  transferred by Amalgamated to the LLC was approximately $34 million.
As part of such transaction, Snake River made certain loans to Valhi aggregating
$250 million.  Such loans from Snake River are  collateralized  by the Company's
interest in the LLC. Snake River's  sources of funds for its loans to Valhi,  as
well as for the $14 million it contributed to the LLC for its voting interest in
the LLC,  included  cash capital  contributions  by the grower  members of Snake
River and $180  million  in debt  financing  provided  by Valhi,  of which  $100
million was repaid  prior to 2002 when Snake River  obtained an equal  amount of
third-party term loan financing.  After such repayments,  $80 million  principal
amount of Valhi's loans to Snake River remain outstanding. See Notes 8 and 10.

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

The LLC Company Agreement contains certain  restrictive  covenants intended
to protect the Company's interest in the LLC,  including  limitations on capital
expenditures  and additional  indebtedness  of the LLC. The Company also has the
ability  to  temporarily  take  control  of the LLC in the event  the  Company's
cumulative  distributions  from  the  LLC  fall  below  specified  levels.  As a
condition to  exercising  temporary  control,  the Company  would be required to
escrow  funds in  amounts up to the next  three  years of debt  service of Snake
River's third-party term loan (an aggregate of $22 million at December 31, 2004)
unless the Company  and Snake  River's  third-party  lender  otherwise  mutually
agree.  Through December 31, 2004, the Company's  cumulative  distributions from
the LLC had not fallen below the specified levels.

Prior  to 2002,  Snake  River  agreed  that the  annual  amount  of (i) the
distributions paid by the LLC to the Company plus (ii) the debt service payments
paid by Snake River to the  Company on the $80 million  loan will at least equal
the  annual  amount of  interest  payments  owed by Valhi to Snake  River on the
Company's  $250 million in loans from Snake  River.  In the event that such cash
flows  to the  Company  are less  than  the  required  minimum  amount,  certain
agreements  among the  Company,  Snake  River and the LLC made in 2000 and 2003,
including a reduction in the amount of  cumulative  distributions  which must be
paid by the LLC to the Company in order to prevent  the Company  from having the
ability to temporarily take control of the LLC, would retroactively  become null
and void.  Through  December 31, 2004,  Snake River and the LLC  maintained  the
minimum required levels of cash flows to the Company.

The  Company  reports  the  cash  distributions  received  from  the LLC as
dividend  income.  See Note 12.  The  amount  of such  future  distributions  is
dependent  upon,  among  other  things,  the  future  performance  of the  LLC's
operations. Because the Company receives preferential distributions from the LLC
and has the right to  require  the LLC to redeem its  interest  in the LLC for a
fixed and determinable  amount  beginning at a fixed and determinable  date, the
Company  accounts  for  its  investment  in  the  LLC  as an  available-for-sale
marketable security carried at estimated fair value. In estimating fair value of
the Company's  interest in the LLC, the Company  considers,  among other things,
the  outstanding  balance  of  the  Company's  loans  to  Snake  River  and  the
outstanding  balance of the Company's  loans from Snake River.  The Company also
provides certain services to the LLC. See Note 17.

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 debt  securities,  restricted
pursuant  to the  terms  of one of NL's  environmental  special  purpose  trusts
discussed in Note 1, approximates  their net carrying value at December 31, 2003
and 2004. The aggregate cost of other noncurrent  available-for-sale  securities
is nominal at December 31, 2003 and 2004. See Note 12.

Note 6 -       Inventories:

December 31,
-------------------------
2003            2004
----            ----
(In thousands)

Raw materials:

Chemicals                                                                            $ 61,960        $ 45,961
Component products                                                                      6,170           8,193
--------        --------
68,130          54,154
--------        --------

In process products:
Chemicals                                                                              19,854          16,612
Component products                                                                     10,852          10,827
--------        --------
30,706          27,439
--------        --------

Finished products:
Chemicals                                                                             148,047         131,161
Component products                                                                      9,166           9,696
--------        --------
157,213         140,857

Supplies (primarily chemicals)                                                           37,064          40,964
--------        --------

$293,113        $263,414
========        ========

Note 7 -       Investment in affiliates:

December 31,   
----------------------
2003            2004
----            ----
(In thousands)

TIMET:

Common stock                                                                         $ 20,357        $ 44,514
Preferred stock                                                                             -             183
Debt securities                                                                           265            -
--------        --------
20,622          44,697

Ti02 manufacturing joint venture                                                        129,010         120,251
Basic Management and Landwell                                                            12,186          13,867
--------        --------

$161,818        $178,815
========        ========

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 $8.0 million
in  2002,  $900,000  in  2003  and  $8.6  million  in  2004  are  stated  net of
contributions  of $14.2 million in 2002, $13.1 million in 2003 and $15.6 million
in 2004.

LPC's net sales aggregated  $186.3 million in 2002,  $202.9 million in 2003
and $210.4  million in 2004, of which $92.4  million,  $101.3 million and $104.9
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, 2004,  LPC reported  total assets and  partners'  equity of
$269.8  million  and $243.3  million,  respectively  (2003 - $284.0  million and
$260.8 million, respectively). Approximately 80% of LPC's assets at December 31,
2003 and 2004 are  comprised of property and  equipment.  LPC's  liabilities  at
December 31, 2003 and 2004 are current.  LPC has no indebtedness at December 31,
2003 and 2004.

TIMET.  At December 31, 2004,  the Company held 6.5 million shares of TIMET
with a quoted market price of $24.14 per share, or an aggregate  market value of
$157 million  (2003 - 6.5 million  shares with an aggregate  market value of $68
million).  In February 2003,  TIMET effected a reverse split of its common stock
at a ratio of one share of  post-split  common  stock for each  outstanding  ten
shares of  pre-split  common  stock,  and in the  third  quarter  of 2004  TIMET
effected a 5:1 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, 2003 have been  adjusted to give effect to
the 5:1 split in 2004.

At December 31, 2004,  TIMET  reported  total assets of $665.5  million and
stockholders'  equity  of  $379.7  million  (2003 - $567.4  million  and  $158.8
million,  respectively).  TIMET's  total  assets at December  31,  2004  include
current  assets of $343.6  million,  property and  equipment of $228.2  million,
marketable securities of $47.2 million and investment in joint ventures of $22.6
million  (2003  -  $276.0  million,  $239.2  million,  nil  and  $22.5  million,
respectively).  TIMET's total  liabilities at December 31, 2004 include  current
liabilities of $162.2 million, capital lease obligations of $.2 million, accrued
OPEB and pension  costs  aggregating  $92.2  million  and debt  payable to TIMET
Capital Trust I (the subsidiary of TIMET that issued the  convertible  preferred
securities) of $12.0 million (2003 - $77.8 million, $9.8 million,  $76.0 million
and $207.5  million,  respectively).  During 2004,  TIMET  reported net sales of
$501.8 million,  operating income of $35.3 million and income before  cumulative
effect of change in  accounting  principle of $39.9 million (2003 - net sales of
$385.3 million,  operating  income  attributable to common  stockholders of $5.4
million and a loss before  cumulative  effect of change in accounting  principle
attributable to common stockholders of $12.9 million; 2002 - net sales of $366.5
million,  an operating loss of $20.8 million and a loss before cumulative effect
of change in accounting  principle  attributable to common stockholders of $67.2
million).

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

During 2003, the Company  purchased  14,700 of TIMET's  6.625%  convertible
preferred  securities (with an aggregate  liquidation amount of $735,000) for an
aggregate cost of $238,000,  including  expenses.  The securities were issued by
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.  At December 31, 2003,  the quoted  market price of the  convertible
preferred  securities  was  $33.00 per share,  the  amortized  cost basis of the
convertible preferred securities approximated their carrying amount, and Contran
held an additional 1.6 million shares of such convertible preferred securities.

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, 2004, the
cost basis of the Series A shares  approximated  their carrying amount,  and Mr.
Simmons' spouse held an additional 41% of such Series A shares.

Basic  Management and Landwell.  At December 31, 2003 and 2004, 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, 2004, the combined  balance sheets of Basic Management and
Landwell reflected total assets and partners' equity of $124.8 million and $57.3
million,  respectively  (2003 - $91.9 million and $49.8 million,  respectively).
The combined total assets at September 30, 2004 include  current assets of $44.4
million,  property and equipment of $15.9 million, prepaid costs and expenses of
$19.3 million, land and development costs of $16.7 million,  long-term notes and
other  receivables of $4.6 million and investment in undeveloped  land and water
rights of $21.9 million (2003 - $26.6  million,  $16.7  million,  $19.1 million,
$21.5  million,  $5.4 million and $2.2 million,  respectively).  Combined  total
liabilities at September 30, 2004 include current  liabilities of $31.2 million,
long-term debt of $29.8 million and deferred  income taxes of $5.7 million (2003
- $17.8 million, $17.2 million and $6.2 million, respectively).

During  the 12 months  ended  September  30,  2004,  Basic  Management  and
Landwell reported combined revenues of $27.5 million, income before income taxes
of $8.9  million  and net income of $7.7  million  (2003 - $20.1  million,  $3.3
million and $2.9 million,  respectively;  2002 - $20.7 million, $1.9 million and
$1.7 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,
--------------------------
2003            2004
----            ----
(In thousands)
Loans and other receivables:
Snake River Sugar Company:

Principal                                                                          $ 80,000        $ 80,000
Interest                                                                             33,102          38,294
Other                                                                                   5,490           3,151
--------        --------
118,592         121,445
Less current portion                                                                    2,026           1,993
--------        --------

Noncurrent portion                                                                   $116,566        $119,452
========        ========

Other assets:
IBNR receivables                                                                     $ 11,788         $11,646
Deferred financing costs                                                               10,569          10,933
Waste disposal site operating permits                                                   1,654           9,269
Refundable insurance deposit                                                            1,972           2,483
Restricted cash equivalents                                                               488             494
Other                                                                                  13,166          17,501
--------        --------

$ 39,621        $ 52,326
========        ========

Valhi's loan to Snake River is  subordinate  to Snake  River's  third-party
senior term loan and bears  interest at a fixed rate of 6.49%,  with all amounts
due no later than 2010.  Covenants contained in Snake River's third-party senior
term  loan  allow  Snake  River,  under  certain  conditions,  to  pay  periodic
installments  for debt  service on the $80 million loan prior to the maturity of
the senior term loan in 2007.  The Company does not currently  expect to receive
any  significant  debt  service  payments  from Snake  River  during  2005,  and
accordingly  all accrued and unpaid interest has been classified as a noncurrent
asset as of December 31, 2004. Under certain conditions,  Valhi will be required
to  pledge  $5  million  in  cash   equivalents  or  marketable   securities  to
collateralize  Snake  River's  third-party  senior term loan as a  condition  to
permit continued  repayment of the $80 million loan. No such cash equivalents or
marketable securities have yet been required to be pledged at December 31, 2004,
and the Company does not currently expect it will be required to pledge any such
amount during 2005.

Prior to 2002, the Company  amended its loan to Snake River to, among other
things, reduce the interest rate from 12.99% to 6.49%. The reduction of interest
income  resulting from such interest rate reduction will be recouped and paid to
the Company via additional future LLC  distributions  from The Amalgamated Sugar
Company LLC upon achievement of specified levels of future LLC profitability. If
Snake River and the LLC do not maintain minimum specified levels of cash flow to
the Company,  the interest  rate on the loan to Snake River would revert back to
12.99%  retroactive to April 1, 2000. Through December 31, 2004, Snake River and
the LLC maintained the minimum required levels of cash flows to the Company. See
Note 5. Snake  River has granted to Valhi a lien on  substantially  all of Snake
River's  assets to  collateralize  the $80  million  loan,  such  lien  becoming
effective  generally upon the repayment of Snake River's third-party senior term
loan with a current scheduled maturity date of April 2007.

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 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.

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

Balance at December 31, 2001                                          $307.2           $ 41.9            $349.1
Goodwill acquired during the year                                       14.1               -               14.1
Changes in foreign exchange rates                                         -               1.8               1.8
---           ------            ------

Balance at December 31, 2002                                           321.3             43.7             365.0
Goodwill acquired during the year                                       10.0              -                10.0
Changes in foreign exchange rates                                         -               2.6               2.6
---           ------            ------

Balance at December 31, 2003                                           331.3             46.3             377.6

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
======           ======            ======

Upon adoption of SFAS No. 142 effective  January 1, 2002 (see Note 19), the
goodwill  related  to  the  chemicals  operating  segment  was  assigned  to the
reporting unit (as that term is defined in SFAS No. 142) consisting of Kronos in
total, and the goodwill related to the components  product operating segment was
assigned to three reporting units within that operating segment,  one consisting
of CompX's  security  products  operations,  one consisting of CompX's  European
operations and one consisting of CompX's Canadian and Taiwanese operations.

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. 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.

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.

Other intangible assets.

December 31,   
------------------------
2003            2004  
-----          ------ 
(In millions)

Patents:

Cost                                                                                  $3.4          $3.4
Less accumulated amortization                                                          1.5           1.7
----          ----

Net                                                                                  1.9           1.7
----          ----

Customer list:
Cost                                                                                   2.6           2.6
Less accumulated amortization                                                           .7           1.1
----          ----

Net                                                                                  1.9           1.5
----          ----

$3.8          $3.2
====          ====

The patents intangible asset relates to the estimated fair value of certain
patents acquired in connection with the acquisition of certain business units by
CompX, and the customer list intangible asset relates to NL's acquisition of EWI
discussed  in  Note  3.  The  patents  intangible  asset  is  amortized  by  the
straight-line  method  over the  lives  of the  patents  (approximately  9 years
remaining at December 31, 2004),  with no assumed  residual  value at the end of
the life of the patents.  The customer list intangible asset is amortized by the
straight-line method over the estimated seven-year life of such intangible asset
(approximately 4 years remaining at December 31, 2004), 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 2002, 2003 and 2004, and
amortization  expense  of  intangible  assets is  expected  to be  approximately
$600,000 in each of calendar 2005 through 2008 and $250,000 in 2009.

Note 10 -      Long-term debt:

December 31,     
--------------------------
2003              2004
----              ----
(In thousands)

Valhi:

Snake River Sugar Company                                                            $250,000         $250,000
Bank credit facility                                                                    5,000             -
--------         -----

255,000          250,000
--------         --------

Subsidiaries:
Kronos International Senior Secured Notes                                             356,136          519,225
Kronos European bank credit facility                                                        -           13,622
CompX bank credit facility                                                             26,000                -
Other                                                                                     789            1,090
--------         --------

382,925          533,937
--------         --------

637,925          783,937

Less current maturities                                                                   5,392           14,412
--------         --------

$632,533         $769,525

Valhi.  Valhi's $250  million in loans from Snake River Sugar  Company bear
interest at a weighted  average fixed interest rate of 9.4%, are  collateralized
by the Company's  interest in The  Amalgamated  Sugar Company LLC and are due in
January  2027.  Currently,  these loans are  nonrecourse  to Valhi.  Up to $37.5
million  principal  amount of such loans will  become  recourse  to Valhi to the
extent  that the  balance  of Valhi's  loan to Snake  River  (including  accrued
interest) becomes less than $37.5 million. Under certain conditions, Snake River
has the ability to accelerate the maturity of these loans. See Notes 5 and 8.

At  December  31,  2004,  Valhi has a $100  million  revolving  bank credit
facility which matures in October 2005,  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, 2004 quoted market price of $40.75 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,  2004,  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, 2004, no amounts have been borrowed,  letters of
credit  aggregating $4.1 million had been issued and $95.9 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.  The KII  Senior  Secured  Notes are issued
pursuant to an indenture  which contains a number of covenants and  restrictions
which, among other things,  restricts the ability of KII and its subsidiaries to
incur debt, incur liens, pay dividends or merge or consolidate  with, or sell or
transfer all or  substantially  all of their assets to, another entity.  The KII
Senior Secured Notes are redeemable,  at KII's option,  on or after December 30,
2005 at  redemption  prices  ranging  from  104.437%  of the  principal  amount,
declining to 100% on or after December 30, 2008. In addition,  on or before June
30,  2005,  KII may  redeem up to 35% of its Senior  Secured  Notes with the net
proceeds  of a qualified  public  equity  offering at 108.875% of the  principal
amount.  In the event of a change of control of KII,  as  defined,  KII would be
required to make an offer to purchase  its Senior  Secured  Notes at 101% of the
principal  amount.  KII would also be  required  to make an offer to  purchase a
specified  portion  of its  Senior  Secured  Notes at par value in the event KII
generates a certain  amount of net proceeds from the sale of assets  outside the
ordinary  course of business,  and such net proceeds are not otherwise  used for
specified  purposes  within a specified  time  period.  At December 31, 2003 and
2004,  the market price of the KII Senior Secured Notes was  approximately  euro
1,000 and euro 1,075, respectively, per euro 1,000 principal amount. At December
31, 2004, the carrying  amount of the KII Senior Secured Notes includes euro 6.2
million ($8.4 million) of unamortized  premium associated with the November 2004
issuance.

Also in June 2002,  KII's operating  subsidiaries  in Germany,  Belgium and
Norway entered into a euro 80 million  secured  revolving  bank credit  facility
that matures in June 2005.  Borrowings may be  denominated  in euros,  Norwegian
kroners or U.S.  dollars,  and bear interest at the applicable  interbank market
rate plus 1.75%.  The  facility  also  provides  for the  issuance of letters of
credit up to euro 5 million.  The KII bank credit facility is  collateralized by
the accounts receivable and inventories of the borrowers,  plus a limited pledge
of all of the other assets of the Belgian borrower. The KII bank credit facility
contains certain restrictive  covenants 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, 2004,  euro 10 million ($13.6 million) was
outstanding at an interest rate of 3.85% and the equivalent of $92.6 million was
available for additional borrowing by the subsidiaries.

In September 2002, certain of Kronos' U.S.  subsidiaries entered into a $50
million  revolving  credit facility (nil  outstanding at December 31, 2004) that
matures in  September  2005.  The  facility is  collateralized  by the  accounts
receivable,  inventories  and certain fixed assets of the borrowers.  Borrowings
under  this   facility   are   limited  to  the  lesser  of  $45  million  or  a
formula-determined  amount based upon the accounts receivable and inventories of
the borrowers.  Borrowings bear interest at either the prime rate or rates based
upon the eurodollar rate. The facility  contains certain  restrictive  covenants
which,  among other  things,  restricts  the abilities of the borrowers to incur
debt, incur liens, pay dividends in certain circumstances,  sell assets or enter
into mergers.  At December 31, 2004, no amounts were outstanding and $38 million
was available for borrowing under the facility.

In January  2004,  Kronos'  Canadian  subsidiary  entered  into a Cdn.  $30
million  revolving credit facility that matures in January 2009. The facility is
collateralized  by the accounts  receivable  and  inventories  of the  borrower.
Borrowings  under this facility are limited to the lesser of Cdn. $26 million or
a  formula-determined  amount based upon the accounts receivable and inventories
of the  borrower.  Borrowings  bear  interest  at rates  based  upon  either the
Canadian prime rate, the U.S. prime rate or LIBOR. The facility contains certain
restrictive  covenants which,  among other things,  restricts the ability of the
borrower to incur debt,  incur liens,  pay  dividends in certain  circumstances,
sell  assets or enter into  mergers.  At  December  31,  2004,  no amounts  were
outstanding  and the  equivalent  of $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.

NL. In 2002,  NL redeemed  $194 million  principal  amount of the NL Senior
Secured  Notes at par value,  using  available  cash on hand ($25 million) and a
portion of the net proceeds from the issuance of the KII Senior  Secured  Notes.
In accordance  with the terms of the indenture  governing the NL Senior  Secured
Notes,  on June 28, 2002,  NL  irrevocably  placed on deposit with the NL Senior
Secured Note trustee funds in an amount sufficient to pay in full the redemption
price plus all accrued and unpaid  interest due on the July 28, 2002  redemption
date for the $169 million of NL Senior Notes redeemed using a portion of the net
proceeds from the issuance of the KII Senior Notes.  Immediately thereafter,  NL
was released  from its  obligations  under such  indenture,  the  indenture  was
discharged  and all  collateral was released to NL. Because NL had been released
as the primary  obligor under the  indenture as of June 30, 2002,  the NL Senior
Secured Notes were  eliminated from the balance sheet as of that date along with
the funds  placed on  deposit  with the  trustee  to  effect  the July 28,  2002
redemption.  NL  recognized  a loss  on the  early  extinguishment  of  debt  of
approximately $2 million in the second quarter of 2002,  consisting primarily of
the interest on the NL Senior  Secured  Notes for the period from July 1 to July
28, 2002. Such loss is recognized as a component of interest expense.

CompX. At December 31, 2004,  CompX has a $47.5 million  secured  revolving
bank credit  facility  maturing in January 2006 with  interest at rates based on
the prime rate or LIBOR. The credit facility is  collateralized by substantially
all of  CompX's  U.S.  tangible  assets  and a  pledge  of at  least  65% of the
ownership  interests in CompX's  first-tier foreign  subsidiaries.  The facility
contains certain covenants and restrictions customary in lending transactions of
this type which,  among  other  things,  restricts  the ability of CompX and its
subsidiaries to incur debt,  incur liens,  pay dividends or merge or consolidate
with, or transfer all or substantially  all of their assets,  to another entity.
In the event of a change of control of CompX, as defined, the lenders would have
the right to  accelerate  the  maturity  of the  facility.  CompX  would also be
required  under  certain  conditions  to use the net  proceeds  from the sale of
assets outside the ordinary course of business to reduce outstanding  borrowings
under the  facility,  and such a  transaction  would also  result in a permanent
reduction of the size of the  facility.  At December  31, 2004,  no amounts were
outstanding  and $47.5 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, 2004:

Years ending December 31,                                                                          Amount
(In thousands)

2005                                                                                              $ 14,412
2006                                                                                                   240
2007                                                                                                    57
2008                                                                                                     3
2009                                                                                               519,225
2010 and thereafter                                                                                250,000
--------

$783,937
========

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, 2004, none of the net assets
of Valhi's consolidated subsidiaries were restricted.

At December 31, 2004,  amounts available for the payment of Valhi dividends
pursuant to the terms of Valhi's revolving bank credit facility  aggregated $.06
per Valhi share outstanding per quarter, plus an additional $125 million.

Note 11 -      Accrued liabilities:

December 31,
--------------------------
2003              2004
----              ----
(In thousands)
Current:

Employee benefits                                                                     $ 48,827         $ 53,295
Environmental costs                                                                     24,956           21,316
Deferred income                                                                          4,699            5,276
Interest                                                                                   383              243
Other                                                                                   51,226           50,989
--------         --------

$130,091         $131,119

Noncurrent:
Insurance claims and expenses                                                         $ 21,729         $ 22,718
Employee benefits                                                                        9,705            5,380
Deferred income                                                                          1,634            1,427
Asset retirement obligations                                                             1,670            1,357
Other                                                                                    8,596           10,179
--------         --------

$ 43,334         $ 41,061
========         ========

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  is  recognized  as a
noncurrent asset. See Note 8.

Note 12 -      Other income, net:

Years ended December 31,   
-------------------------------------
2002             2003            2004
----             ----            ----
(In thousands)

Securities earnings:

Dividends and interest                                                $35,642           $33,724        $34,576
Securities transactions, net                                            6,413               487          2,113
-------           -------        -------
42,055            34,211         36,689
Contract dispute settlement                                                   -                 -          6,289
Legal settlement gains, net                                               5,225               823            552
Currency transactions, net                                                4,997            (8,288)        (3,764)
Noncompete agreement income                                               4,000               333              -
Disposal of property and equipment, net                                    (259)            9,845           (855)
Other, net                                                                4,878             4,503          5,333
-------           -------        -------

$60,896           $41,427        $44,244
=======           =======        =======

Dividends and interest income includes  distributions  from The Amalgamated
Sugar  Company  LLC of $23.6  million in 2002,  $23.7  million in 2003 and $23.8
million in 2004, and interest  income of $5.2 million in each of 2002,  2003 and
2004 related to the Company's loan to Snake River Sugar Company. See Notes 5 and
8. Dividends and interest income also includes interest of $1.3 million in 2002,
$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  transactions  gains in 2004  includes a $2.2  million gain
related to NL's sale of shares of Kronos  common  stock in market  transactions.
See Note 3. Net  securities  transactions  gains in 2002 are  comprised of (i) a
$3.0 million unrealized gain related to the  reclassification  of 621,000 shares
of Halliburton  common stock from  available-for-sale  to trading securities and
(ii)  a $3.4  million  gain  relates  to  changes  in the  market  value  of the
Halliburton common stock classified as trading securities.

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 the
second  quarter of 2004,  $1.75 million is due in each of the second  quarter of
2005 and  2006 and  $2.25  million  is due in the  second  quarter  of 2007.  At
December 31, 2004, the present value of the remaining  amounts due to be paid to
Kronos aggregated  approximately $5.1 million, of which $1.7 million is included
in accounts receivable and $3.4 million is included in other noncurrent assets.

The legal  settlement  gains  relate to  settlements  with  certain of NL's
former  insurance  carriers.  These and similar NL  settlements in 2000 and 2001
resolved court  proceedings in which NL sought  reimbursement  from the carriers
for legal  defense  expenditures  and  indemnity  coverage  for  certain  of its
environmental remediation expenditures.  Proceeds from substantially all of such
settlements  NL reached in 2000 and 2001 were  transferred  by the  carriers  to
special purpose trusts formed by NL to pay for certain of its future remediation
and other environmental expenditures.  At December 31, 2003 and 2004, restricted
cash equivalents and debt securities include an aggregate of $24 million and $19
million, respectively, held by such special purpose trusts. See Note 18.

Net currency transaction gains in 2002 includes $6.3 million related to the
extinguishment  of certain  intercompany  indebtedness  of NL. Prior to June 28,
2002, KII had certain intercompany  indebtedness payable to Kronos, a portion of
which was denominated in U.S. dollars, and a portion of which was denominated in
euro. Through June 19, 2002, such intercompany  indebtedness was deemed to be of
a long-term  nature for which  settlement  was not planned or anticipated in the
foreseeable   future,   and  in  accordance  with  GAAP,  the  foreign  currency
transaction gains and losses related to such intercompany  indebtedness were not
recognized in net income, but instead were reported as part of accumulated other
comprehensive  income. On June 19, 2002, when the purchase agreement was entered
into in  connection  with KII's 2002  issuance of the KII Senior  Secured  Notes
discussed above in Note 10, the expectation that such intercompany  indebtedness
was of a long-term  nature was no longer  applicable,  as KII had stated that it
intended  to use a portion of the net  proceeds  of such  offering to repay such
intercompany indebtedness owed to Kronos.  Accordingly,  from the time period of
June 19, 2002 (the date the  purchase  agreement  related to KII Senior  Secured
Notes was executed)  until June 28, 2002 (the closing date for the 2002 issuance
of the KII  Senior  Secured  Note  offering,  and  the  date  such  intercompany
indebtedness  was repaid),  the foreign  currency  transaction  gains and losses
related  to such  intercompany  indebtedness  during  such  time  period,  which
aggregated  a net  gain  of  $6.3  million,  was  recognized  in net  income  in
accordance with GAAP.

Noncompete agreement income related to NL's agreement not to compete in the
specialty  chemicals  industry  and was  recognized  in income  ratably over the
five-year  noncompete  period  that  ended in January  2003.  Net gains from the
disposal of property and equipment in 2002 includes $1.6 million  related to the
sale of certain  real  estate held by  Tremont.  Net gains from the  disposal of
property and equipment in 2003 includes $10.3 million  related  primarily to the
sale of certain real property of NL not associated with Kronos' TiO2 operations.

Note 13 - Minority interest:

December 31,
-------------------------
2003            2004
----            ----
(In thousands)
Minority interest in net assets:

NL Industries                                                                         $31,262        $ 70,192
Kronos Worldwide                                                                       11,076          29,569
CompX International                                                                    48,424          49,153
Subsidiary of NL                                                                        8,502           9,250
Subsidiary of Kronos                                                                      525              76
-------         -------

$99,789        $158,240
=======        ========

Years ended December 31,
--------------------------------------
2002            2003           2004
----            ----           ----
(In thousands)
Minority interest in net earnings (losses) - continuing operations:

NL Industries                                                            $ 6,331        $ 9,794        $34,041
Kronos Worldwide                                                               -            246         19,659
Tremont Corporation                                                       (4,151)          (217)             -
CompX International                                                          299          1,814          2,993
Subsidiary of NL                                                           1,209            371            747
Subsidiary of Kronos                                                          55             72             53
-------        -------        -------

$ 3,743        $12,080        $57,493
=======        =======        =======

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  relates to NL's
majority-owned  environmental management subsidiary, NL Environmental Management
Services,  Inc.  ("EMS").  EMS was  established  in  1998,  at  which  time  EMS
contractually assumed certain of NL's environmental  liabilities.  EMS' earnings
are based, in part, upon its ability to favorably  resolve these  liabilities on
an aggregate  basis. The shareholders of EMS, other than NL, actively manage the
environmental  liabilities  and  share in 39% of EMS'  cumulative  earnings.  NL
continues to consolidate EMS and provides accruals for the reasonably  estimable
costs for the settlement of EMS' environmental liabilities, as discussed in Note
18.

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 $101,000 in 2002,  $1.4 million in 2003 and $4.1 million in 2004.
See Note 22.

Note 14 - Stockholders' equity:

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

Balance at December 31, 2001                                          125,811          (10,570)       115,241

Issued                                                                    350             -               350
-------          -------        -------

Balance at December 31, 2002                                          126,161          (10,570)       115,591

Issued:
Tremont merger                                                        7,840           (2,981)         4,859
Other                                                                    26             -                26
Other                                                                    -                (290)          (290)
-------          -------        -------

Balance at December 31, 2003                                          134,027          (13,841)       120,186

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

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

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 2002, 2003
and 2004 consist of (i) shares  issued upon  exercise of stock  options and (ii)
stock awards issued to members of Valhi's board of directors.

During 2004,  the Company  cancelled 9.9 million shares of its common stock
that   previously   had  been  reported  as  treasury  stock  in  the  Company's
consolidated  financial  statements.  Of such 9.9  million  shares,  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
was  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 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 five million shares of Valhi common stock may
be issued  pursuant to this plan.  Options are generally  granted at a price not
less than fair market value on the date of grant,  generally vest ratably over a
five-year  period  beginning one year from the date of grant and expire 10 years
from the date of grant. Restricted stock, when granted, is generally forfeitable
unless  certain  periods of  employment  are completed and held in escrow in the
name of the grantee until the restriction period expires.  No stock appreciation
rights have been granted.

Outstanding  options at December 31, 2004 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 3.8 years. At December 31, 2004,  options to
purchase  840,000 Valhi shares were  exercisable at prices ranging from $6.38 to
$12.45 per share, or an aggregate  amount payable upon exercise of $8.3 million.
All of such exercisable options are exercisable at various dates through 2013 at
prices  lower than the  Company's  December  31, 2004 market price of $16.09 per
share.  At  December  31,  2004,   options  to  purchase  35,000  shares  become
exercisable  during the first  quarter of 2005,  at which point all  outstanding
options will be fully vested  according to their  original  vesting  schedule at
issuance,  and an  aggregate  of 4.1 million  shares were  available  for future
grants.

The following  table sets forth changes in  outstanding  options during the
past three years under all Valhi option plans in effect during such periods.

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

Outstanding at December 31, 2001                                     2,384            $4.96-$12.06       $18,644

Granted                                                                  8                   12.45           100
Exercised                                                             (346)            4.96- 12.00        (2,564)
Canceled                                                              (865)                   6.38        (5,517)
------                   -----       -------

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

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

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

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

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

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, 2004 are  summarized  below.  There are no  outstanding  options to purchase
Kronos common stock at December 31, 2004.

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

NL Industries                                                        245     $ 2.66-$13.34               $ 2,401
CompX                                                                562      10.00- 20.00                 9,952
TIMET                                                                534       3.32- 70.63                19,139

Other. The pro forma  information  included in Note 1, required by SFAS No.
123,  "Accounting  for  Stock-Based  Compensation,"  as amended,  is based on an
estimation  of the fair value of options  issued  subsequent  to January 1, 1995
using the  Black-Scholes  stock option valuation model. The aggregate fair value
of the nominal number of Valhi options  granted during 2002 and 2003 (no options
were granted  during 2004) 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.  See also Note
21.

Note 15 - Income taxes:

Years ended December 31,
2002            2003           2004
----            ----           ----
(In millions)
Components of pre-tax income - income (loss) from continuing operations:
United States:

Contran Tax Group                                                    $(60.2)           $(34.8)      $  75.7
CompX tax group                                                        (1.9)              6.3           6.1
------            ------       -------
(62.1)            (28.5)         81.8
Non-U.S. subsidiaries                                                    61.4              73.9          (3.7)
------            ------       ------- 

$  (.7)           $ 45.4       $  78.1
======            ======       =======

Expected tax expense (benefit), at U.S.
federal statutory income tax rate of 35%                                $  (.3)           $ 15.9       $  27.3
Non-U.S. tax rates                                                         (7.2)             (1.5)          (.3)
Incremental U.S. tax and rate differences
on equity in earnings of non-tax group
companies                                                                 (1.5)              2.8           3.5
Change in deferred income tax valuation
allowance, net                                                              .4              (7.2)       (311.8)
Refund of prior year income taxes                                           -               (38.0)         (2.5)
Change in Belgian income tax law                                           (2.7)              -            -
U.S. state income taxes, net                                               (1.8)              (.6)          1.0
Tax contingency reserve adjustment, net                                     2.9              14.7         (18.1)
Nondeductible expenses                                                      3.4               3.7           5.1
Other, net                                                                   .9               1.7           7.7
------            ------       -------

$ (5.9)           $ (8.5)      $(288.1)
======            ======       ======= 

Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state                                               $ (9.3)           $ (6.6)      $  (9.0)
Non-U.S.                                                               12.8             (34.0)         17.6
------            ------       -------
3.5             (40.6)          8.6
------            ------       -------
Deferred income taxes (benefit):
U.S. federal and state                                                 (9.7)               .9         (15.5)
Non-U.S.                                                                 .3              31.2        (281.2)
------            ------       ------- 
(9.4)             32.1        (296.7)
------            ------       ------- 

$ (5.9)           $ (8.5)      $(288.1)
======            ======       ======= 

Comprehensive provision for income taxes (benefit) allocable to:
Income from continuing operations                                      $ (5.9)           $ (8.5)      $(288.1)
Discontinued operations                                                   (.2)             (2.6)         (4.6)
Cumulative effect of change in
accounting principle                                                     -                  .3          -
Additional paid-in-capital                                                -                22.5           8.2
Other comprehensive income:
Marketable securities                                                  (1.6)              2.1           2.1
Currency translation                                                    3.9               4.7            .8
Pension liabilities                                                   (16.4)            (11.5)         (7.3)
------            ------       ------- 

$(20.2)           $  7.0       $(288.9)
======            ======       ======= 

The  components  of the net deferred tax liability at December 31, 2003 and
2004, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following  tables.  At December 31, 2003, the
deferred tax valuation  allowance relates to Kronos tax jurisdictions in Germany
and NL tax jurisdictions in the U.S.

December 31,
------------------------------------------------------
2003                         2004
-------------------------      -----------------------
Assets        Liabilities      Assets      Liabilities
--------      -----------      ------      -----------
(In millions)
Tax effect of temporary differences related to:

Inventories                                              $    .9        $  (3.3)     $   2.6         $  (6.3)
Marketable securities                                       -             (71.5)         -             (76.3)
Property and equipment                                      46.3         (108.4)        38.3          (104.6)
Accrued OPEB costs                                          15.1           -            13.9            -
Accrued environmental liabilities and
other deductible differences                               72.9           -           120.1            -
Other taxable differences                                   -            (205.0)        -             (189.5)
Investments in subsidiaries and
affiliates not members of the
Contran Tax Group                                          27.2          (31.2)        24.9            (5.2)
Tax loss and tax credit carryforwards                      166.7           -           245.3            -
Valuation allowance                                         (193.8)          -            -               -
-------        -------      -------         ----
Adjusted gross deferred tax assets
(liabilities)                                            135.3         (419.4)       445.1          (381.9)
Netting of items by tax jurisdiction                        (113.9)         113.9       (195.9)          195.9
-------        -------      -------         -------
21.4         (305.5)       249.2          (186.0)
Less net current deferred tax asset
(liability)                                                  14.4           (3.9)         9.7           (24.2)
-------        -------      -------         ------- 

Net noncurrent deferred tax asset
(liability)                                           $   7.0        $(301.6)     $ 239.5         $(161.8)
========        =======      =======         ======= 

Years ended December 31,
---------------------------------------
2002           2003             2004
----           ----             ----
(In millions)

Increase (decrease) in valuation allowance:
Increase in certain deductible temporary
differences which the Company believes do
not meet the "more-likely-than-not"

recognition criteria                                                   $ 3.8         $   -            $   -
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria                             (3.4)          (7.2)           (311.8)
Foreign currency translation                                             21.6           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                                                     10.1          (11.8)            121.0
Valhi/Tremont merger                                                       -           (10.8)             -
Other, net                                                                 .1            (.1)             -
-----         ------           ----

$32.2         $ (1.7)          $(193.8)
=====         ======           ======= 

A reduction  in the Belgian  income tax rate from 40% to 34% was enacted in
December  2002 and became  effective  in January  2003.  This  reduction  in the
Belgian  income tax rate  resulted in a $2.7 million  decrease in the  Company's
income tax expense in 2002 because the Company had  previously  recognized a net
deferred income tax liability with respect to Belgium temporary differences.

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    NL's and NL's majority-owned subsidiary, EMS, 1998 U.S. federal income
tax returns are being examined by the U.S. tax authorities, and NL and
EMS  have  granted  extensions  of  the  statute  of  limitations  for
assessments  of tax with  respect to their 1998,  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 has reached an agreement  with the IRS  concerning  the
settlement of this matter pursuant to which,  among other things,  the
Company agreed to pay approximately $26 million,  including  interest,
up front as a partial  payment of the settlement  amount (which amount
is  expected to be paid in the next 12 months and is  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  has  signed  the
settlement  agreement that was prepared by the IRS. The IRS signed the
settlement  agreement  in  January  2005,  and the case will be closed
after  certain  procedural  matters are  concluded,  which  procedural
matters both NL and its outside legal counsel believe are perfunctory.
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  a $12.6  million  tax  benefit in the second
quarter of 2004 related to the revised estimate.  In addition,  during
the second quarter of 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
believes now meet the  "more-likely-than-not"  recognition criteria. A
majority of the deferred income tax asset valuation  allowance relates
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   relates  to
deductible temporary differences associated with accrued environmental
obligations    of   EMS    which    NL   now    believes    meet   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.

o    Kronos has received a preliminary tax assessment  related to 1993 from
the Belgian tax  authorities  proposing  tax  deficiencies,  including
related  interest,  of  approximately  euro 6 million  ($8  million at
December 31, 2004). Kronos has filed a protest to this assessment, and
believes  that a  significant  portion  of the  assessment  is without
merit.  The  Belgian  tax  authorities  have filed a lien on the fixed
assets of Kronos'  Belgian TiO2  operations  in  connection  with this
assessment.  In April 2003,  Kronos  received a notification  from the
Belgian tax  authorities  of their  intent to assess a tax  deficiency
related  to  1999  that,   including  interest,   is  expected  to  be
approximately  euro 9  million  ($13  million).  Kronos  believes  the
proposed  assessment is  substantially  without merit,  and Kronos has
filed a written response.

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 preliminary tax assessment from the Canadian tax
authorities   related  to  the  years  1998  and  1999  proposing  tax
deficiencies  of Cdn. $11.4 million ($7.7  million).  Kronos is in the
process of filing a protest and believes a significant  portion of the
assessment is without merit.

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

At December 31, 2003, 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.  KII
had generated  positive  taxable income in Germany for both German corporate and
trade tax purposes  since 2000, and starting with the quarter ended December 31,
2002 and for each  quarter  thereafter,  KII had  cumulative  taxable  income in
Germany for the most recent twelve quarters.  However,  offsetting this positive
evidence was the fact that prior to the end of 2003,  Kronos  believed there was
significant uncertainty regarding its ability to utilize such net operating loss
carryforwards  under German tax law and,  principally because of the uncertainty
caused by this  negative  evidence,  Kronos had concluded the benefit of the net
operating loss carryforwards did not meet the  "more-likely-than-not"  criteria.
By the end of 2003, and primarily as a result of a favorable German court ruling
in 2003 and the procedures  Kronos had completed during 2003 with respect to the
filing of certain  amended German tax returns (as discussed  below),  Kronos had
concluded that the significant uncertainty regarding its ability to utilize such
net  operating  loss  carryforwards  under  German tax law had been  eliminated.
However, at the end of 2003, Kronos believed at that time that it would generate
a taxable loss in Germany during 2004. Such expectation was based primarily upon
then-current   levels  of  prices  for  TiO2,  and  the  fact  that  Kronos  was
experiencing a downward trend in its TiO2 selling prices and Kronos did not have
any positive evidence to indicate that the downward trend would improve.  If the
price trend continued  downward  throughout all of 2004 (which was a possibility
given  Kronos'  prior  experience),  Kronos  would likely have a taxable loss in
Germany  for 2004.  If the  downward  trend in prices  had  abated,  ceased,  or
reversed at some point during 2004, then Kronos would likely have taxable income
in Germany during 2004. Accordingly,  Kronos continued to conclude at the end of
2003 that the benefit of the German net  operating  loss  carryforwards  did not
meet the "more-likely-than-not" criteria and that it would not be appropriate to
reverse the deferred income tax asset valuation allowance,  given the likelihood
that  Kronos  would  generate  a  taxable  loss  in  Germany  during  2004.  The
expectation for a taxable loss in Germany continued through the end of the first
quarter of 2004. By the end of the second quarter of 2004, however, Kronos' TiO2
selling prices had started to increase,  and Kronos  believed its selling prices
would  continue to increase  during the second half of 2004 after Kronos and its
major  competitors  announced an additional round of price  increases.  The fact
that Kronos'  selling  prices  started to increase  during the second quarter of
2004,  combined  with the fact that  Kronos and its  competitors  had  announced
additional price increases  (which based on past experience  indicated to Kronos
that some portion of the  additional  price  increases  would be realized in the
marketplace),  provided  additional  positive  evidence  that was not present at
December 31, 2003.  Consequently,  Kronos'  revised  projections  now  reflected
taxable  income for Germany in 2004 as well as 2005.  Accordingly,  based on all
available  evidence,  including  the fact  that (i) KII had  generated  positive
taxable  income in Germany  since 2000,  and  starting  with the  quarter  ended
December 31, 2002 and for each quarter  thereafter,  KII had cumulative  taxable
income in Germany  for the most  recent  twelve  quarters,  (ii)  Kronos was now
projecting  positive  taxable  income in Germany for 2004 and 2005 and (iii) the
German  net  operating  loss  carryforwards  have  no  expiration  date,  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 the number of years for which Kronos has now  generated  positive  taxable
income  in  Germany,  combined  with  the  fact  that  the  net  operating  loss
carryforwards  were generated during a time when KII had a significantly  higher
level of outstanding  indebtednesss  than it currently has outstanding,  and the
fact that the net operating loss  carryforwards  have no expiration date, Kronos
concluded  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.  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
later is  recognized  at the time the change in estimate  is made.  Accordingly,
Kronos has recognized a $280.7 million income tax benefit in 2004 related to the
reversal of such deferred income tax asset valuation  allowance  attributable to
Kronos'  income tax  attributes in Germany  (principally  the net operating loss
carryforwards).  Of such $280.7 million,  (i) $8.7 million relates  primarily to
the utilization of the German net operating loss carryforwards  during the first
six  months  of  2004,   the  benefit  of  which  had  previously  not  met  the
"more-likely-than-not"  recognition criteria, (ii) $268.6 million relates to the
valuation  allowance  reversal  recognized  as of June 30,  2004 and (iii)  $3.4
million relates to the valuation  allowance reversal  recognized during the last
six months of 2004.

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, the Company recognized the benefit of euro 2.5 million
($3.1  million)  related to  additional  net  interest  which has accrued on the
outstanding refund amount.  Assessments and refunds will be processed by year as
the respective  returns are reviewed by the tax  authorities.  Certain  interest
components  may also be refunded  separately.  The German tax  authorities  have
reviewed and accepted the amended  returns with respect to the 1990 through 1994
tax years.  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  for which KII received
euro 21.5  million  ($24.6  million)  in 2003,  and the Company  recognized  the
benefit of this refund in the second quarter of 2003.

At December 31,  2004,  (i) Kronos had the  equivalent  of $671 million and
$232 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  $8  million  of  U.S.  net  operating   loss
carryforwards  expiring in 2007  through  2018 and (iv) Valhi had $35 million of
U.S. net operating loss carryforwards expiring in 2019 through 2024. At December
31, 2004,  the U.S. tax attribute  carryforwards  of Tremont may only be used to
offset future  taxable  income of Tremont and are not available to offset future
taxable  income of other  members of the  Contran  Tax Group,  and the U.S.  net
operating loss  carryforwards of CompX may only be used to offset future taxable
income of a subsidiary  of CompX  acquired  prior to 2001,  are not available to
offset future  taxable  income of other members of the Contran Tax Group and 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.

In October  2004,  the American  Jobs Creation Act of 2004 was enacted into
law.  The new law  contains  several  provisions  that could impact the Company.
These provisions  provide for, among other things, a special deduction from U.S.
taxable  income  equal to a  stipulated  percentage  of  qualified  income  from
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends  received  deduction for certain  dividends  received from  controlled
foreign  corporations.  Both of these  provisions  are  complex  and  subject to
numerous  limitations.  The Company is still studying the new law, including the
technical guidance related to the two complex provisions noted above. The effect
on the  Company of the new law,  if any,  has not yet been  determined,  in part
because the  Company  has not  definitively  determined  whether its  operations
qualify for the special  deduction or whether it would  benefit from the special
dividends  received  deduction.  If the Company  determines it qualifies for the
special deduction, the tax benefit of such special deduction would be recognized
in the period earned.  With respect to the special dividends  received deduction
for certain dividends received from controlled foreign corporations, the Company
will likely not be able to complete its  evaluation  of whether it would benefit
from the special  dividends  received  deduction  until  sometime after the U.S.
government  has issued  clarifying  regulations  regarding this provision of the
Act, the timing for the issuance of which is not known.  The aggregate amount of
unremitted  earnings  that  is  potentially  subject  to the  special  dividends
received  deduction is  approximately  $662  million at December  31, 2004.  The
Company is unable to  reasonably  estimate a range of income tax effects if such
unremitted  earnings  would be repatriated  and became  eligible for the special
dividends received deduction, as the calculation would be extremely complex.

Note 16 - Employee benefit plans:

Defined  benefit  plans.  The Company  maintains  various  U.S. and foreign
defined benefit  pension plans.  Variances from  actuarially  assumed rates will
result in increases or decreases in  accumulated  pension  obligations,  pension
expense and funding  requirements  in future  periods.  The funded status of the
Company's  defined  benefit  pension  plans and, the  components of net periodic
defined  benefit  pension  cost are  presented  in the tables  below.  Effective
January 1, 2001,  CompX ceased  providing  future defined pension benefits under
its plan in The Netherlands.  Certain obligations related to the terminated plan
were not fully  settled  until 2002,  at which time CompX  recognized a $677,000
settlement  gain.  See Note 22. At December  31,  2004,  the  Company  currently
expects to  contribute  the  equivalent  of $9.4  million to all of its  defined
benefit  pension  plans  during 2005,  and  aggregate  benefit  payments to plan
participants  out of plan  assets are  expected  to be the  equivalent  of $23.1
million in 2005,  $24.6 million in 2006, $23.7 million in 2007, $25.8 million in
2008, $24.8 million in 2009 and $138.1 million during 2010 through 2014.

Years ended December 31,
2003              2004
----              ----
(In thousands)
Change in projected benefit obligations ("PBO"):

Benefit obligations at beginning of the year                                      $ 331,452        $ 409,517
Service cost                                                                          5,347            6,758
Interest cost                                                                        20,063           22,219
Participant contributions                                                             1,357            1,420
Plan amendments                                                                       3,200                -
Actuarial losses                                                                     28,583            7,218
Change in foreign currency exchange rates                                            43,514           30,820
Benefits paid                                                                       (23,999)         (23,041)
---------        --------- 

Benefit obligations at end of the year                                        $ 409,517        $ 454,911
=========        =========

Change in plan assets:
Fair value of plan assets at beginning of the year                                $ 244,655        $ 263,773
Actual return on plan assets                                                           (327)          31,951
Employer contributions                                                               14,838           17,812
Participant contributions                                                             1,357            1,420
Change in foreign currency exchange rates                                            27,249           19,983
Benefits paid                                                                       (23,999)         (23,041)
---------        --------- 

Fair value of plan assets at end of year                                      $ 263,773        $ 311,898
=========        =========

Funded status at end of the year:
Plan assets less than PBO                                                         $(145,744)       $(143,013)
Unrecognized actuarial losses                                                       143,786          147,264
Unrecognized prior service cost                                                       8,566            8,757
Unrecognized net transition obligations                                               5,079            4,878
---------        ---------

$  11,687        $  17,886
=========        =========

Amounts recognized in the balance sheet:
Unrecognized net pension obligations                                              $  13,747        $  13,518
Accrued pension costs:
Current                                                                            (8,374)          (9,090)
Noncurrent                                                                        (90,517)         (77,360)
Accumulated other comprehensive loss                                                 96,831           90,818
---------        ---------

$  11,687        $  17,886
=========        =========

Years ended December 31,  
2002             2003              2004
----             ----              ----
(In thousands)

Net periodic pension cost:

Service cost benefits                                                   $  4,538       $  5,347          $  6,758
Interest cost on PBO                                                      18,387         20,063            22,219
Expected return on plan assets                                           (18,135)       (19,294)          (20,975)
Amortization of prior service cost                                           307            354               502
Amortization of net transition obligations                                   515            733               657
Recognized actuarial losses                                                1,223          2,423             4,361
--------       --------          --------

$  6,835       $  9,626          $ 13,522
========       ========          ========

The  weighted-average  rate  assumptions  used in determining the actuarial
present  value of  benefit  obligations  as of  December  31,  2003 and 2004 are
presented in the table below. Such weighted-average  rates were determined using
the projected benefit obligations at each date.

December 31,
Rate                                                                     2003                 2004
----                                                                     ----                 ----

Discount rate                                                                        5.5%                 5.3%
Increase in future compensation levels                                               2.9%                 2.3%

The weighted-average  rate assumptions used in determining the net periodic
pension  cost for 2002,  2003 and 2004 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                                                           2002                2003                2004
--------------------------------------                                     ----                ----                ----

Discount rate                                                              6.3%              6.0%                  5.6% 
Increase in future compensation levels                                     2.9%              2.7%                  2.2% 
Long-term return on plan assets                                            7.7%              7.4%                  7.8% 

At December 31, 2004, the accumulated  benefit  obligations for all defined
benefit pension plans was approximately  $403 million (2003 - $364 million).  At
December 31, 2004, the projected  benefit  obligations  for all defined  benefit
pension  plans was  comprised  of $100  million  related to U.S.  plans and $355
million  related  to  non-U.S.  plans  (2003 - $86  million  and  $324  million,
respectively).  At December  31,  2003 and 2004,  all of the  projected  benefit
obligations  attributable  to  non-U.S.  plans  relates to plans  maintained  by
Kronos. At December 31, 2004, approximately 52% and 14% of the projected benefit
obligations  attributable  to U.S.  plans relate to plans  maintained  by NL and
Kronos,  respectively,  and  34%  relates  to a plan  maintained  by a  disposed
business  unit of Valhi  (2003 - 63%  relates  to NL and  Kronos  and 37% 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, 2004, the fair value of plan assets for all defined benefit
pension  plans was  comprised  of $82  million  related  to U.S.  plans and $230
million  related  to  non-U.S.  plans  (2003 - $67  million  and  $197  million,
respectively).   At  December  31,  2003  and  2004,  all  of  the  plan  assets
attributable  to  non-U.S.  plans  relates to plans  maintained  by  Kronos.  At
December 31, 2004,  approximately 54% and 15% of the plan assets attributable to
U.S. plans relates to plans maintained by NL and Kronos,  respectively,  and 31%
relates to a plan  maintained  by a disposed  business unit of Valhi (2003 - 66%
relates to NL and Kronos and 34% to the disposed business unit).

At December  31,  2004,  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  $455  million,  $403  million  and  $312  million,
respectively (2003 - $410 million, $364 million and $264 million, respectively).
At December 31, 2003 and 2004, approximately 79% and 78%, respectively,  of such
unfunded amount relates to non-U.S.  plans maintained by Kronos, and most of the
remainder relates to U.S. plans maintained by NL and the disposed business unit.

At December 31, 2003 and 2004, substantially all of the assets attributable
to  U.S.  plans  were  invested  in The  CMRT,  a  collective  investment  trust
established  by Valhi to permit the  collective  investment  by  certain  master
trusts  which fund  certain  employee  benefits  plans  sponsored by Contran and
certain of its  affiliates.  At December 31, 2004, the asset mix of the CMRT was
77% in U.S.  equity  securities,  14% in U.S.  fixed  income  securities,  7% in
international  equity  securities and 2% in cash and other  investments  (2003 -
63%, 24%, 7% and 6%, 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, 2002, 2003 and 2004, 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
17-year  history of the CMRT from its  inception  in 1987  through  December 31,
2004, the average annual rate of return has been approximately 13%.

At December 31, 2004, 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 current plan asset allocation at December 31, 2004 was 23% to
equity  managers and 48% to fixed income  managers and 29% to real estate.  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, 2004 was 60% to equity managers and 40% to fixed income managers. o
In Norway, Kronos' currently has a plan asset target allocation of 14% to equity
managers  and  62%  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
current plan asset  allocation at December 31, 2004 was 16% to equity  managers,
64% to fixed income  managers and the remainder  invested  primarily in cash and
liquid 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.

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 2002, 2003 and
2004.

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, 2004,  the expected rate of increase in future
health care costs ranges from 8% to 9.3% in 2005,  declining to rates of between
4% to 5.5% in 2010 and thereafter  (2003 - 8% to 10.4% in 2004,  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 $198,000  (decreased by $196,000) in 2004,  and the actuarial
present value of  accumulated  OPEB  obligations at December 31, 2004 would have
increased by $2.5 million (decreased by $2.3 million). At December 31, 2004, the
Company  currently  expects to contribute the equivalent of  approximately  $4.5
million to all of its OPEB plans during 2005, and aggregate  benefit payments to
OPEB plan  participants  are  expected to be the  equivalent  of $4.5 million in
2005,  $4.1 million in 2006,  $4.2 million in 2007,  $4.1 million in 2008,  $4.0
million in 2009 and $17.3 million during 2010 through 2014.

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

Change in accumulated OPEB obligations:

Obligations at beginning of the year                                               $ 48,866        $ 46,177
Service cost                                                                            152             232
Interest cost                                                                         2,820           2,418
Plan amendments                                                                           -          (2,044)
Actuarial gains                                                                      (1,278)         (4,925)
Change in foreign currency exchange rates                                               772             411
Benefits paid                                                                        (5,155)         (5,666)
--------        -------- 

Obligations at end of the year                                                     $ 46,177        $ 36,603
========        ========

Change in plan assets:
Employer contributions                                                             $  5,155        $  5,666
Benefits paid                                                                        (5,155)         (5,666)
--------        -------- 

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

Funded status at end of the year:
Plan assets less than benefit obligations                                          $(46,177)       $(36,603)
Unrecognized net actuarial losses (gains)                                             4,364            (606)
Unrecognized prior service credit                                                    (1,633)         (2,818)
--------        -------- 

$(43,446)       $(40,027)
========        =========

Accrued OPEB costs recognized in the balance sheet:
Current                                                                            $ (6,036)       $ (5,039)
Noncurrent                                                                          (37,410)        (34,988)
--------        -------- 

$(43,446)       $(40,027)
========        =========

Years ended December 31,  
--------------------------------------
2002           2003           2004
----           ----           ----
(In thousands)

Net periodic OPEB cost (credit):

Service cost                                                          $   103        $   152         $  232
Interest cost                                                           3,030          2,820          2,418
Expected return on plan assets                                             (3)             -              -
Amortization of prior service credit                                   (2,516)        (2,075)          (859)
Recognized actuarial gains                                                (59)            38            192
-------        -------         ------

$   555        $   935         $1,983
=======        =======         ======

The  weighted  average  discount  rate used in  determining  the  actuarial
present  value of benefit  obligations  as of December 31, 2004 was 5.7% (2003 -
5.9%).  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 2004 was 5.9% (2003 - 6.4%;  2003 - 7.0%).  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, 2003 and 2004, the accumulated  benefit  obligations for
all OPEB plans was equal to the projected benefit  obligations.  At December 31,
2004,  the  projected  benefit  obligations  for all OPEB plans was comprised of
$31.2 million related to U.S. plans and $5.4 million  related to non-U.S.  plans
(2003 - $40.6 million and $5.5 million,  respectively). At December 31, 2003 and
2004, all of the projected benefit  obligations  attributable to non-U.S.  plans
relates to plans maintained by Kronos.  At December 31, 2004,  approximately 51%
and 16% of the projected benefit obligations  attributable to U.S. plans relates
to plans  maintained by NL and Kronos,  respectively,  and 32% relates to a plan
maintained by Tremont (2003 - 69% maintained by NL and Kronos and 31% 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  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.

Note 17 - Related party transactions:

The Company may be deemed to be controlled  by Harold C. Simmons.  See Note
1.  Corporations  that may be deemed to be controlled by or affiliated  with Mr.
Simmons sometimes engage in (a) intercorporate  transactions such as guarantees,
management and expense  sharing  arrangements,  shared fee  arrangements,  joint
ventures,  partnerships,  loans, options, advances of funds on open account, and
sales,  leases and  exchanges  of assets,  including  securities  issued by both
related  and  unrelated  parties,  and (b)  common  investment  and  acquisition
strategies,   business   combinations,    reorganizations,    recapitalizations,
securities  repurchases,  and  purchases and sales (and other  acquisitions  and
dispositions)  of  subsidiaries,   divisions  or  other  business  units,  which
transactions  have involved both related and unrelated parties and have included
transactions  which  resulted  in the  acquisition  by one  related  party  of a
publicly-held  minority equity  interest in another  related party.  The Company
continuously considers,  reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business,  tax and other  objectives then relevant,  it is possible that the
Company might be a party to one or more such transactions in the future.

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

Receivables  from and payables to  affiliates  are  summarized in the table
below.

December 31,   
-------------------------
2003           2004
----           ----
(In thousands)

Current receivables from affiliates:
Contran:

Demand loan                                                                             $  -        $ 4,929
Income taxes                                                                            -               531
TIMET                                                                                       50             24
Other                                                                                      267           -
-------        -------

$   317        $ 5,484
=======        =======

Noncurrent receivable from affiliate -
loan to Contran family trust                                                           $14,000        $10,000
=======        =======

Current payables to affiliates:
Louisiana Pigment Company                                                              $ 8,560        $ 8,844
Contran:
Demand loan                                                                            7,332           -   
Income taxes                                                                           3,759              -
Trade items                                                                            1,790          2,753
Other                                                                                       13             10
-------        -------

$21,454        $11,607
=======        =======

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  2002,   EMS,  NL's   majority-owned   environmental   management
subsidiary, entered into a $25 million revolving credit facility with one of the
family  trusts  discussed  in Note 1 ($10  million  outstanding  at December 31,
2004).  The loan bears  interest at prime,  is due on demand with 60 days notice
and is  collateralized  by certain shares of Contran's  Class A common stock and
Class  E  cumulative  preferred  stock  held  by the  trust.  The  value  of the
collateral  is  dependent,  in part,  on the value of the  Company as  Contran's
beneficial   ownership  interest  in  the  Company  is  one  of  Contran's  more
substantial  assets.  The terms of this loan were approved by special committees
of both NL's and EMS'  respective  board of  directors  composed of  independent
directors.  At December 31, 2004,  $15 million is available for borrowing by the
family trust, and the loan has been classified as a noncurrent asset because EMS
does not presently intend to demand repayment within the next 12 months.

During 2002,  2003 and 2004,  Valhi borrowed  varying amounts from Contran,
and during 2004 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  $964,000  in 2002,  $723,000  in 2003 and
$645,000  in 2004.  Interest  expense  on all loans  from  related  parties  was
$922,000 in 2002,  $154,000 in 2003 and  $131,000 in 2004 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,  aggregated  approximately
$9.6  million  in 2002,  $10.0  million in 2003 and $17.3  million in 2004.  The
increase  in the  aggregate  ISA  fee  charged  to the  Company  in  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  $400,000 in 2002 and $180,000 in 2003.  NL had an
ISA with TIMET whereby NL provided certain  services to TIMET for  approximately
$300,000 in 2002 and $14,000 in 2003.  Certain other subsidiaries of the Company
are also parties to similar ISAs among themselves,  and expenses associated with
these agreements are eliminated in Valhi's consolidated financial statements.

Tall Pines  Insurance  Company  (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. Prior to January 2002,
an entity controlled by one of Harold C. Simmons'  daughters owned a majority of
EWI, and Contran  owned the  remainder of EWI. In January 2002, NL purchased EWI
from its previous  owners for an aggregate cash purchase price of  approximately
$9 million. See Note 3. The purchase was approved by a special committee of NL's
board of  directors  consisting  of two of its  independent  directors,  and the
purchase  price  was  negotiated  by  the  special   committee  based  upon  its
consideration  of relevant  factors,  including but not limited to due diligence
performed by  independent  consultants  and an appraisal of EWI  conducted by an
independent  third  party  selected by the special  committee.  Consistent  with
insurance industry  practices,  Tall Pines and EWI receive  commissions from the
insurance  and  reinsurance  underwriters  for the policies that they provide or
broker.  The Company  expects that these  relationships  with Tall Pines and EWI
will continue in 2005.

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 $1.0  million in 2002,  $1.2  million in 2003 and $1.3 million in
2004. TIMET also paid BMI an electrical  facilities  upgrade fee of $1.3 million
in each of 2002,  2003 and 2004.  Such fee is  scheduled  to decline to $800,000
annually for 2005 through 2009,  and then  terminates  completely  after January
2010.

During 2002, NL purchased  approximately  52,200 shares of its common stock
from certain of its  officers  and  directors,  in part in  connection  with the
exercise of certain  options to purchase NL common  stock held by such  officers
and directors,  at a net cost to NL (after  considering  the proceeds to NL from
the exercise of such options) of approximately  $500,000.  All of such shares of
NL common stock purchased had been held by the respective owner for at least six
months, and all of such purchases were valued at market prices on the respective
date of purchase. See Notes 3 and 10.

COAM Company is a partnership which has sponsored research  agreements with
the  University of Texas  Southwestern  Medical  Center at Dallas to develop and
commercially market a safe and effective treatment for arthritis (the "Arthritis
Research  Agreement")  and  to  develop  and  commercially  market  patents  and
technology  resulting  from a cancer  research  program  (the  "Cancer  Research
Agreement").  At December 31, 2004, COAM partners are Contran, Valhi and another
Contran subsidiary.  Harold C. Simmons is the manager of COAM. The final payment
under the Arthritis  Research  Agreement was made in 2004.  The Cancer  Research
Agreement,  as amended,  provides for funds of up to $22 million  through  2015.
Funding  requirements  pursuant to the Arthritis and Cancer Research  Agreements
are without recourse to the COAM partners and the partnership agreement provides
that no  partner  shall  be  required  to make  capital  contributions.  Capital
contributions are expensed as paid. The Company's contributions to COAM were nil
in each of the past three years,  and the Company does not  currently  expect it
will make any capital contributions to COAM in 2005.

Amalgamated  Research,  Inc.,  a  wholly-owned  subsidiary  of the Company,
conducts  certain  research and  development  activities  within and outside the
sweetener industry for The Amalgamated Sugar Company LLC and others. Amalgamated
Research has also granted to The Amalgamated  Sugar Company LLC a non-exclusive,
perpetual  royalty-free  license  to use all  currently  existing  or  hereafter
developed  technology  which is applicable to sugar  operations and provides for
certain royalties to The Amalgamated Sugar Company from future sales or licenses
of the subsidiary's technology. Research and development services charged to The
Amalgamated  Sugar  Company  LLC were  $849,000  in 2002,  $865,000  in 2003 and
$956,000  in 2004.  The  Amalgamated  Sugar  Company LLC also  provides  certain
administrative  services  to  Amalgamated  Research.  The cost of such  services
provided by the LLC,  based upon  estimates  of the time devoted by employees of
the LLC to the affairs of Amalgamated  Research,  and the  compensation  of such
persons, is netted against the agreed-upon research and development services fee
paid by the LLC to Amalgamated Research.

Note 18 - Commitments and contingencies:

Lead pigment litigation - NL.

NL's former operations included the manufacture of lead pigments for use in
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  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 liability,  intentional tort, fraud and  misrepresentation,  violations of
state consumer protection statutes, supplier negligence and similar claims.

The plaintiffs in these actions  generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns  associated
with the use of  lead-based  paints,  including  damages  for  personal  injury,
contribution  and/or  indemnification  for medical expenses,  medical monitoring
expenses and costs for educational  programs.  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 the defendants. In addition, various other cases are pending
(in which NL is not a defendant) seeking recovery for injury allegedly caused by
lead  pigment and  lead-based  paint.  Although  NL is not a defendant  in these
cases,  the outcome of these cases may have an impact on additional  cases being
filed against NL 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  neither  lost nor settled  any of these  cases.  NL has not
accrued any amounts for pending lead pigment and  lead-based  paint  litigation.
Liability that may result, if any, cannot reasonably be estimated.  There can be
no assurance  that NL will not incur  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.

Whether  insurance  coverage for defense costs or indemnity or both will be
found to exist for lead pigment litigation depends on 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 litigation in
determining related accruals.

Environmental matters and litigation.

General.  The Company's  operations  are governed by various  environmental
laws and  regulations.  Certain of the  Company's  operations  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,  potential  responsible party ("PRP") or both, pursuant to
the  Comprehensive  Environmental  Response,  Compensation and Liability Act, as
amended by the Superfund  Amendments  and  Reauthorization  Act  ("CERCLA")  and
similar state laws in various  governmental and private actions  associated with
waste disposal sites, mining locations,  and facilities  currently or previously
owned,  operated  or  used  by  the  Company  or  its  subsidiaries,   or  their
predecessors,  certain  of  which  are  on the  U.S.  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.

The  Company  records  liabilities  related  to  environmental  remediation
obligations  when  estimated  future  expenditures  are probable and  reasonably
estimable.  Such accruals are adjusted as further  information becomes available
or  circumstances  change.  Estimated  future  expenditures  are  generally  not
discounted to their present value.  Recoveries of  remediation  costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At  December  31,  2003 and  2004,  no  receivables  for  recoveries  have  been
recognized.

The exact time frame over which the Company makes  payments with respect to
its accrued  environmental  costs is unknown and is dependent upon,  among other
things,  the timing of the actual  remediation  process  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.

Years ended December 31,
--------------------------------------------
2002              2003              2004
----              ----              ----
(In thousands)

Balance at the beginning of the year                               $110,640         $101,166          $ 86,681
Additions charged to expense                                         12,777           29,524             2,477
Payments                                                            (22,251)         (44,009)          (12,392)
--------         --------          -------- 

Balance at the end of the year                                     $101,166         $ 86,681          $ 76,766
========         ========          ========

Amounts recognized in the balance sheet:
Current liability                                                                 $ 24,956          $ 21,316
Noncurrent liability                                                                61,725            55,450
--------          --------

$ 86,681          $ 76,766
========          ========

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.  See Note 12. At December 31,
2004,  NL had  accrued  $68 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 $93 million.  NL's estimates of such liabilities have not
been discounted to present value.

At December  31,  2004,  there are  approximately  20 sites for which NL is
unable  to  estimate  a  range  of  costs.   For  these  sites,   generally  the
investigation is in the early stages,  and it is either unknown as to whether or
not NL actually had any association with the site, or if NL had association with
the site, the nature of its responsibility, if any, for the contamination at the
site and the  extent of  contamination.  The  timing on when  information  would
become  available  to NL to allow NL to  estimate a range of loss is unknown and
dependent on events  outside the control of NL, such as when the party  alleging
liability provides information to NL.

At December 31, 2004, NL had $19 million in restricted cash equivalents and
marketable debt  securities held by special purpose trusts,  the assets of which
can only be used to pay for certain of NL's future environmental remediation and
other  environmental  expenditures (2003 - $24 million).  Use of such restricted
balances  does not  affect  the  Company's  consolidated  net cash  flows.  Such
restricted  balances  declined  by  approximately  $35  million  during 2003 due
primarily to a $30.8 million payment made by NL related to the final  settlement
of one of NL's sites.

Tremont.  In  July  2000  Tremont,  entered  into  a  voluntary  settlement
agreement  with the Arkansas  Department  of  Environmental  Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will  undertake  certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County,  Arkansas.  Tremont  currently  believes that it has accrued
adequate  amounts  ($2.7  million at  December  31,  2004) to cover its share of
probable  and  reasonably   estimable   environmental   obligations   for  these
activities.  Tremont  currently  expects that the nature and extent of any final
remediation measures that might be imposed with respect to this site will not be
known until 2007.  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, 2004 for any such cost.  The amount  accrued at December
31, 2004 represents  Tremont's estimate of the costs to be incurred through 2007
with respect to the interim remediation measures.

TIMET.  TIMET and BMI entered into an agreement in 1999 providing that upon
BMI's  payment  to TIMET of the  cost to  design,  purchase  and  install  a new
wastewater  neutralization facility necessary to allow TIMET to stop discharging
liquid and solid  effluents  and  co-products  into  settling  ponds  located on
certain  lands owned by TIMET  adjacent to its Nevada  facility (the "TIMET Pond
Property"),  TIMET would convey the TIMET Pond Property to BMI, at no additional
cost.  In November  2004,  TIMET and BMI entered into several  agreements  which
superceded the 1999 agreement.  Under these new  agreements,  TIMET conveyed the
TIMET Pond Property to BMI in exchange for (i) $12.0  million  cash,  (ii) BMI's
assumption of the liability for certain environmental issues associated with the
TIMET Pond Property,  including  certain possible  groundwater  issues and (iii)
other  consideration,  including TIMET's potential receipt of an additional $3.3
million  from  BMI in the  event  that BMI is  unable  to add  TIMET to  certain
insurance  policies by a specified date..  TIMET will continue to use certain of
the settling ponds located on the TIMET Pond Property  pursuant to a lease until
a wastewater  treatment  facility is  operational,  construction  of which TIMET
currently expects to be completed during the second quarter of 2005.

TIMET is also  continuing  assessment  work with  respect to its own active
plant site in Nevada.  TIMET  currently  has $4.3 million  accrued  based on the
undiscounted  cost  estimates of the  probable  costs for  remediation  of these
sites, which TIMET expects will be paid over a period of up to thirty years.

At December  31,  2004,  TIMET had accrued  approximately  $4.5 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 $7.0 million.

Other. The Company has also accrued  approximately $6.3 million at December
31, 2004 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  22,000  plaintiffs and their spouses remain
pending, down from cases involving approximately 32,000 plaintiffs from one year
ago. Of these  plaintiffs,  approximately  4,700 are  represented  by five cases
pending in Mississippi state courts and  approximately  5,000 are represented by
four cases that have been removed to federal  court in  Mississippi,  where they
have been,  or are in the process of being,  transferred  to the  multi-district
litigation  pending in the United States District Court for the Eastern District
of  Pennsylvania.  NL has not accrued any  amounts for this  litigation  because
liability that might result to NL, if any,  cannot be reasonably  estimated.  In
addition,  from time to time,  NL has  received  notices  regarding  asbestos or
silica  claims  purporting  to be brought  against  former  subsidiaries  of NL,
including   notices  provided  to  insurers  with  which  NL  has  entered  into
settlements  extinguishing  certain insurance policies.  These insurers may seek
indemnification from NL.

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. The Company
currently believes that the disposition of all claims and disputes, individually
or in  the  aggregate,  should  not  have  a  material  adverse  effect  on  its
consolidated financial position, results of operations or liquidity.

Other matters

Concentrations  of credit risk.  Sales of TiO2 accounted for  substantially
all of 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 30% to 40%  attributable  to North
America.

Component products are sold primarily to original  equipment  manufacturers
in North America and Europe.  In 2004, the ten largest  customers  accounted for
approximately 43% of component products sales (2003 - 44%; 2002 - 38%).

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 43% of its sales in 2002, 44% in 2003 and 48% in 2004.

At December 31, 2004,  consolidated  cash, cash  equivalents and restricted
cash includes  $120.9 million  invested in U.S.  Treasury  securities  purchased
under  short-term  agreements to resell (2003 - $38  million),  all of which are
held in trust for the Company by a single  U.S.  bank (2003 - $17  million).  At
December 31, 2004,  consolidated  cash,  cash  equivalents  and restricted  cash
includes  approximately  $96  million on deposit at a single  U.S.  bank (2003 -
$328,000).

Capital  expenditures.  At December 31, 2004, firm  commitments for capital
projects in process approximated $10.0 million, of which $6.7 million relates to
Kronos' TiO2 facilities and the remainder relates to CompX.

Royalties.  Royalty  expense,  which relates  principally  to the volume of
certain products  manufactured in Canada and sold in the United States under the
terms of a third-party patent license agreement  approximated  $700,000 in 2002,
$450,000 in 2003 and $222,000 in 2004.

Long-term  contracts.  Kronos has certain  long-term  supply contracts that
provide for Kronos' TiO2  feedstock  requirements  through 2009.  The agreements
require Kronos to purchase certain minimum quantities of feedstock with purchase
commitments aggregating approximately $525 million at December 31, 2004. CompX's
open purchase  orders and  contractual  obligations,  primarily  commitments  to
purchase raw materials, approximated $12.6 million at December 31, 2004.

TIMET has a long-term supply agreement with Boeing pursuant to which Boeing
advanced TIMET $28.5 million for each of 2002,  2003,  2004 and 2005, and Boeing
is required to advance TIMET $28.5 million  annually from 2006 through 2007. The
agreement is structured as a take-or-pay  agreement such that Boeing,  beginning
in calendar year 2002,  will forfeit a  proportionate  part of the $28.5 million
annual  advance,  or effectively  $3.80 per pound,  in the event that its annual
orders or those of Boeing's  subcontractors  for delivery for such calendar year
are less than 7.5  million  pounds.  TIMET  can only be  required,  however,  to
deliver up to 3 million pounds per quarter.  Under a separate  agreement,  TIMET
must establish and hold buffer stock for Boeing at TIMET's facilities, for which
Boeing pays TIMET as such stock is produced.

In  addition to its  agreement  with  Boeing,  TIMET has  long-term  supply
agreements  with  certain  other major  aerospace  customers,  including,  among
others, Rolls-Royce plc and its German and U.S. affiliates,  United Technologies
Corporation (Pratt & Whitney and related companies) and Wyman-Gordon  Company (a
unit of  Precision  Castparts  Corporation).  These  agreements  expire  in 2007
through  2008,  subject to certain  conditions,  and  generally  provide for (i)
minimum market shares of the  customers'  titanium  requirements  or firm annual
volume commitments and (ii) fixed or formula-determined prices. Certain of these
agreements  also contain  market  pricing  provisions  that may,  under  certain
circumstances,  become  applicable.  Generally,  the agreements  require TIMET's
service and product performance to meet specified  criteria,  and also contain a
number of other terms and conditions  customary in  transactions of these types.
In certain events of nonperformance by TIMET or the customer, the agreements may
be terminated early.

TIMET also has a long-term  agreement  with  VALTIMET,  a  manufacturer  of
welded stainless steel and titanium tubing  principally for industrial  markets.
TIMET owns 44% of VALTIMET at December 31, 2004.  The agreement was entered into
in 1997 and  expires  in 2007.  Under  the  agreement,  VALTIMET  has  agreed to
purchase a certain percentage of its titanium  requirements from TIMET.  Selling
prices are formula determined, subject to certain conditions. Certain provisions
of this  contract have been amended in the past and may be amended in the future
to meet changing business conditions.

In 2002, TIMET entered into a long-term agreement,  effective through 2007,
for the purchase of titanium  sponge.  This agreement  replaced and superceded a
previous agreement. The new agreement requires annual minimum purchases by TIMET
of  approximately  $10  million.  TIMET  has no other  long-term  sponge  supply
agreements.

Waste Control Specialists has agreed to pay an independent  consultant fees
for performing  certain  services  based on specified  percentages of certain of
Waste  Control  Specialists'  revenues  through  2009.  Expense  related to this
agreement was not significant during the past three years.

Operating leases.  Kronos' principal German operating subsidiary leases the
land under its Leverkusen TiO2 production  facility pursuant to a lease expiring
in 2050.  The  Leverkusen  facility,  with  approximately  one-third  of Kronos'
current TiO2  production  capacity,  is located  within the  lessor's  extensive
manufacturing   complex.  Rent  for  the  Leverkusen  facility  is  periodically
established  by agreement with the lessor for periods of at least two years at a
time.  Under a separate  supplies and services  agreement  expiring in 2011, the
lessor  provides  some raw  materials,  auxiliary  and  operating  materials and
utilities services necessary to operate the Leverkusen facility.  Both the lease
and the supplies  and  services  agreements  restrict  ownership  and use of the
Leverkusen facility.

The  Company  also  leases  various  other  manufacturing   facilities  and
equipment.  Some of the leases  contain  purchase  and/or  various  term renewal
options at fair market and fair rental values,  respectively.  In most cases the
Company  expects  that,  in the normal  course of business,  such leases will be
renewed  or  replaced  by other  leases.  Rent  expense  related  to  continuing
operations approximated $12 million in 2002, $13 million in 2003 and $12 million
in 2004. At December 31, 2004,  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)

2005                                                                                               $ 5,701
2006                                                                                                 4,076
2007                                                                                                 3,306
2008                                                                                                 2,688
2009                                                                                                 2,121
2010 and thereafter                                                                                 21,613
-------

$39,505
=======

Approximately  $25.3 million of the $39.5 million  aggregate future minimum
rental commitments at December 31, 2004 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, 2004.

Other. TIMET is the primary obligor on workers' compensation bonds having a
maximum  aggregate  obligation  of $3.0  million that were issued on behalf of a
divested  subsidiary that is currently  under Chapter 11 bankruptcy  protection.
The issuers of the bonds have been  required  to make  payments on the bonds for
applicable claims and have requested  reimbursement from TIMET. Through December
31, 2004, TIMET has reimbursed the issuer approximately $1.1 million under these
bonds, and $600,000  remains accrued for future  payments.  TIMET may revise its
estimated  liability under these bonds in the future as additional  facts become
known or claims develop.

Note 19 - Accounting principles newly adopted in 2002, 2003 and 2004:

Impairment  of  long-lived  assets.  The  Company  adopted  SFAS  No.  144,
Accounting  for the  Impairment  or Disposal  of  Long-Lived  Assets,  effective
January 1, 2002. SFAS No. 144 retains the  fundamental  provisions of prior GAAP
with respect to the recognition and measurement of long-lived  asset  impairment
contained in SFAS No. 121,  Accounting for the  Impairment of Long-Lived  Assets
and for Lived-Lived Assets to be Disposed Of. However, SFAS No. 144 provides new
guidance intended to address certain  implementation issues associated with SFAS
No. 121,  including  expanded guidance with respect to appropriate cash flows to
be used to determine  whether  recognition of any long-lived asset impairment is
required, and if required how to measure the amount of the impairment.  SFAS No.
144 also  requires  that net assets to be disposed of by sale are to be reported
at the lower of carrying  value or fair value less cost to sell, and expands the
reporting of discontinued  operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity.

Goodwill.  The Company adopted SFAS No. 142,  Goodwill and Other Intangible
Assets,  effective  January 1, 2002.  Under SFAS No.  142,  goodwill,  including
goodwill arising from the difference between the cost of an investment accounted
for by the equity method and the amount of the  underlying  equity in net assets
of  such  equity  method  investee  ("equity  method  goodwill"),  is no  longer
amortized on a periodic basis.  Goodwill (other than equity method  goodwill) is
subject to an impairment  test to be performed at least on an annual basis,  and
impairment  reviews  may  result  in  future  periodic  write-downs  charged  to
earnings. Equity method goodwill is not tested for impairment in accordance with
SFAS No. 142;  rather,  the overall carrying amount of an equity method investee
will continue to be reviewed for  impairment in accordance  with existing  GAAP.
There  is  currently  no  equity  method  goodwill  associated  with  any of the
Company's equity method investees.  Under the transition  provisions of SFAS No.
142,  all  goodwill  existing  as of June 30,  2001  ceased  to be  periodically
amortized as of January 1, 2002, and all goodwill arising in a purchase business
combination (including step acquisitions) completed on or after July 1, 2001 was
not periodically amortized from the date of such combination.

As  discussed  in Note 9, the Company  has  assigned  its  goodwill to four
reporting units (as that term is defined in SFAS No. 142). Goodwill attributable
to the chemicals operating segment was assigned to the reporting unit consisting
of 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  Candaian  and  Taiwanese
operations.  Under SFAS No. 142, such goodwill will be deemed to not be impaired
if the  estimated  fair  value of the  applicable  reporting  unit  exceeds  the
respective net carrying value of such  reporting  unit,  including the allocated
goodwill.  If the fair value of the reporting unit is less than carrying  value,
then a goodwill impairment loss would be recognized equal to the excess, if any,
of the net carrying  value of the reporting  unit goodwill over its implied fair
value (up to a maximum  impairment equal to the carrying value of the goodwill).
The implied fair value of reporting  unit goodwill  would be the amount equal to
the excess of the  estimated  fair value of the  reporting  unit over the amount
that  would be  allocated  to the  tangible  and  intangible  net  assets of the
reporting unit (including  unrecognized  intangible assets) as if such reporting
unit had been  acquired  in a purchase  business  combination  accounted  for in
accordance with GAAP as of the date of the impairment testing.

In determining  the estimated fair value of the Kronos  reporting unit, the
Company will consider quoted market prices for Kronos' common stock, as adjusted
for an appropriate control premium.  The Company will also use other appropriate
valuation techniques,  such as discounted cash flows, to estimate the fair value
of the three CompX reporting units.

The  Company  completed  its  initial,   transitional  goodwill  impairment
analysis under SFAS No. 142 as of January 1, 2002,  and no goodwill  impairments
were deemed to exist as of such date. In  accordance  with the  requirements  of
SFAS No. 142, the Company  began  reviewing  the goodwill of its four  reporting
units for  impairment  during the third  quarter of each year  starting in 2002.
Goodwill  will also be reviewed for  impairment  at other times during each year
when events or changes in  circumstances  indicate that an  impairment  might be
present.  No  goodwill  impairments  were  deemed  to exist  as a result  of the
Company's  annual  impairment  reviews  completed  during  2002,  2003 and 2004.
However, as a result of CompX's decision to dispose of its European  operations,
the Company  recognized a goodwill  impairment  charge in the fourth  quarter of
2004. See Notes 9 and 22.

Debt  extinguishment  gains and losses.  The Company  adopted  SFAS No. 145
effective April 1, 2002. SFAS No. 145, among other things,  eliminated the prior
requirement that all gains and losses from the early extinguishment of debt were
to be classified as an extraordinary  item. Upon adoption of SFAS No. 145, gains
and  losses  from the  early  extinguishment  of debt are now  classified  as an
extraordinary  item  only if they meet the  "unusual  and  infrequent"  criteria
contained in Accounting  Principles  Board Opinion ("APBO") No. 30. In addition,
upon   adoption  of  SFAS  No.  145,   all  gains  and  losses  from  the  early
extinguishment  of debt that had previously been classified as an  extraordinary
item are to be  reassessed  to determine if they would have met the "unusual and
infrequent"  criteria  of APBO No. 30; any such gain or loss that would not have
met the APBO No. 30 criteria is to be retroactively reclassified and reported as
a component of income before  extraordinary item. The Company concluded that all
of its  previously-recognized  gains and losses from the early extinguishment of
debt that  occurred on or after  January 1, 1998 would not have met the APBO No.
30 criteria for  classification  as an extraordinary  item, and accordingly such
previously-reported  gains and losses from the early extinguishment of debt were
retroactively  reclassified and are now reported as a component of income before
extraordinary item.

Guarantees.  The Company  complied with the disclosure  requirements of FIN
No. 45,  Guarantor's  Accounting and  Disclosure  Requirements  for  Guarantees,
Including  Indirect  Guarantees of  Indebtedness  of Others,  as of December 31,
2002. As required by the transition  provisions of FIN No. 45, beginning in 2003
the Company will apply the  recognition  and initial  measurement  provisions of
this FIN on a  prospective  basis for any  guarantees  issued or modified  after
December 31, 2002.  The Company is not a party to any such guarantee at December
31, 2003 or 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 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.  The Company will adopt SFAS No. 123R,  Share-Based Payment,
as of  July  1,  2005.  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,  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 July 1, 2005,  and to all awards  existing as of
June 30,  2005  which  are  subsequently  modified,  repurchased  or  cancelled.
Additionally,  as of July 1, 2005,  the Company  will be  required to  recognize
compensation  cost for the portion of any  non-vested  award existing as of June
30, 2005 over the  remaining  vesting  period.  Because the number of non-vested
awards as of June 30,  2005 with  respect  to  options  granted by Valhi and its
subsidiaries  and  affiliates  is not  expected  to be  material,  the effect of
adopting SFAS No. 123R is not expected to be significant in so far as it relates
to 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 effect on the Company's  consolidated
financial statements could be material.

Impairment of  investments.  In June 2004,  the Emerging  Issues Task Force
("EITF") issued EITF No. 03-01, The Meaning of  Other-Than-Temporary  Impairment
and Its Application to Certain  Investments.  EITF No. 03-01, the effective date
of which  is still  pending  based  upon a  deferral  granted  by the  Financial
Accounting Standards Board, provides guidance for determining when an investment
covered by its scope is  considered  impaired,  whether any  impairment is other
than  temporary and the date when an impairment  loss is to be  recognized.  The
Company does not  currently  expect  compliance  with EITF No. 03-01 will have a
material affect on its consolidated  financial  statements,  whenever it becomes
effective.

Note 21 - Financial instruments:

December 31,
-------------------------------------------
2003                  2004
-------------------    --------------------
Carrying      Fair      Carrying      Fair
amount      value       amount       value
--------    -------    --------      ------
(In millions)

Cash, cash equivalents and restricted cash

equivalents                                                          $123.2     $  123.2     $277.9     $  277.9

Marketable securities:
Current                                                             $  6.1     $    6.1     $  9.4     $    9.4
Noncurrent                                                           176.9        176.9      176.8        176.8

Loan to Snake River Sugar Company                                     $ 80.0     $  111.5     $ 80.0     $   96.3

Long-term debt (excluding capitalized leases):
Publicly-traded fixed rate debt -
KII Senior Secured Notes                                          $356.1     $  356.1     $519.2     $  549.1
Snake River Sugar Company loans                                      250.0        250.0      250.0        250.0
Other fixed-rate debt                                                   .1           .1         .6           .6
Variable rate debt                                                    31.0         31.0       13.6         13.6

Minority interest in:
NL common stock                                                     $ 31.3     $   87.0     $ 70.2     $  178.8
Kronos common stock                                                   11.1         75.8       29.6        125.3
CompX common stock                                                    48.4         30.4       49.2         79.4

Valhi common stockholders' equity                                     $659.7     $1,798.0     $989.5     $1,934.2

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 fair value of the Company's  investment in The Amalgamated Sugar
Company LLC is based upon the $250 million  redemption price of such investment,
less the $80 million  outstanding  balance of the Company's  loan to Snake River
Sugar Company.  The fair value of the Company's  fixed-rate  loan to Snake River
Sugar Company is based upon relative  changes in market interest rates since the
interest  rates were  fixed.  The fair value of Valhi's  fixed-rate  nonrecourse
loans from Snake River Sugar  Company is based upon the $250 million  redemption
price  of  Valhi's  investment  in the  Amalgamated  Sugar  Company  LLC,  which
investment  collateralizes  such  nonrecourse  loans.  Fair  values of  variable
interest  rate debt and other  fixed-rate  debt are deemed to  approximate  book
value. See Notes 5 and 10.

Certain of the Company's  sales  generated by its non-U.S.  operations  are
denominated in U.S.  dollars.  The Company  periodically  uses currency  forward
contracts  to  manage a very  nominal  portion  of  foreign  exchange  rate risk
associated  with  receivables  denominated in a currency other than the holder's
functional  currency or similar exchange rate risk associated with future sales.
The Company  has not entered  into these  contracts  for trading or  speculative
purposes in the past, nor does the Company  currently  anticipate  entering into
such  contracts for trading or speculative  purposes in the future.  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,  2004,  the
Company held a series of contracts  maturing  through  March 2005 to exchange an
aggregate of U.S. $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 (2003 - contracts
maturing through February 2004 to exchange an aggregate of U.S. $4.2 million for
an equivalent  amount of Canadian  dollars at an exchange rates of Cdn. $1.30 to
Cdn. $1.33 per U.S. dollar).  At December 31, 2003 and 2004, the actual exchange
rate was Cdn. $1.31 and Cdn. $1.21 per U.S. dollar, respectively.  The estimated
fair values of such foreign currency forward  contracts at December 31, 2003 and
2004 is insignificant.

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

The  Company  periodically  uses  interest  rate  swaps and other  types of
contracts  to manage  interest  rate risk with  respect to  financial  assets or
liabilities.  The Company has not entered  into these  contracts  for trading or
speculative  purposes  in the past,  nor does the Company  currently  anticipate
entering into such contracts for trading or speculative  purposes in the future.
The Company was not a party to any such contract during 2002, 2003 or 2004.

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 The  Netherlands.  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 consolidated balance
sheets or statements of cash flows.  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 $22.6 million.  The net proceeds consisted of
approximately  $18.4  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 will no longer include
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 Thomas Regout  approximated  the net realizable  value  estimated at the
time the goodwill impairment charge was recognized.

Condensed  income  statement data for Thomas Regout 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 2002 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 expected to be
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,
----------------------------------------
2002              2003              2004
----              ----              ----
(In millions)

Net sales                                                          $ 31.3           $ 35.3            $ 41.7
======           ======            ======

Operating income (loss)                                            $   .1           $ (5.5)           $ (3.5)
Pension settlement gain                                                .7             -                 -
Interest expense                                                     (1.3)            (1.4)             (1.5)
Income tax benefit                                                     .2              2.6               4.6
Minority interest in losses                                            .1              1.4               4.1
------           ------            ------

Net income (loss)                                            $  (.2)          $ (2.9)           $  3.7
======           ======            ======

Condensed  balance sheet data for Thomas Regout,  included in the Company's
consolidated balance sheets, is presented below.

December 31,   
-------------------
2003           2004
----           ----
(In millions)

Current assets                                                                           $12.7          $18.0
Noncurrent assets                                                                         25.9           11.0
-----          -----

$38.6          $29.0
=====          =====

Current liabilities                                                                      $ 7.1          $ 5.0
Net assets                                                                                31.5           24.0
-----          -----

$38.6          $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
--------         -------        --------         -------
(In millions, except per share data)

Year ended December 31, 2003

Net sales                                              $296.7          $309.5         $287.5           $292.5
Operating income                                         30.7            29.9           31.5             27.8

Income from continuing operations                      $  2.0          $ 18.4         $ 10.3           $ 11.1
Discontinued operations                                   (.4)            (.6)          (1.5)             (.4)
Cumulative effect of change in
accounting principle                                      .6             -              -                -
------          ------         ------           ----

Net income                                       $  2.2          $ 17.8         $  8.8           $ 10.7
======          ======         ======           ======

Per basic share:
Continuing operations                                $  .01          $  .15         $  .08           $  .09
Discontinued operations                                 -               -             (.01)             -
Cumulative effect of change
in accounting principle                                .01             -              -                -
------          ------         ------           ----

$  .02          $  .15         $  .07           $  .09
======          ======         ======           ======

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 from continuing operations                      $  3.4          $278.3         $ 17.1           $  9.9
Discontinued operations                                   -                .2             .2              3.3
------          ------         ------           ------

Net income                                       $  3.4          $278.5         $ 17.3           $ 13.2
======          ======         ======           ======

Per basic share:
Continuing operations                                $  .03          $ 2.32         $  .14           $  .08
Discontinued operations                                 -               -              -                .03
------          ------         ------           ------

$  .03          $ 2.32         $  .14           $  .11
======          ======         ======           ======

The sum of the  quarterly  per share  amounts  may not equal the annual per
share amounts due to relative  changes in the weighted  average number of shares
used in the per share computations.

During the fourth quarter of 2004,  Kronos  determined  that it should have
recognized an additional  $17.3 million net deferred  income tax benefit  during
the second  quarter of 2004,  primarily  related to the amount of the  valuation
allowance  related to Kronos' German operations which should have been reversed.
While the additional tax benefit is not material to the Company's second quarter
2004 results,  the quarterly results of operations for 2004, as presented above,
reflects  this  additional  tax  benefit.  Accordingly,  income from  continuing
operations  for the second  quarter of 2004 of $278.3  million  ($2.32 per basic
share),  as reflected  above,  differs from the $263.5  million ($2.19 per basic
share) previously reported by the Company. Such $14.8 million increase in income
from  continuing  operations is comprised of (i) the additional  deferred income
tax  benefit  of $17.3  million  and (ii) an  additional  minority  interest  in
earnings of $2.5 million.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors of Valhi, Inc.:

Our  audits  of the  consolidated  financial  statements,  of  management's
assessment of the effectiveness of internal control over financial reporting and
of the effectiveness of internal control over financial reporting referred to in
our report  dated March 30, 2005  appearing  in this Annual  Report on Form 10-K
also included an audit of the financial  statement schedules listed in the index
on page  F-1 of this  Form  10-K.  In our  opinion,  these  financial  statement
schedules  present fairly, in all material  respects,  the information set forth
therein  when  read in  conjunction  with  the  related  consolidated  financial
statements.

PricewaterhouseCoopers LLP

Dallas, Texas
March 30, 2005

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Condensed Balance Sheets

December 31, 2003 and 2004

(In thousands)

2003              2004
----              ----

Current assets:

Cash and cash equivalents                                                          $    5,443       $   94,337
Restricted cash equivalents                                                               320              270
Accounts and notes receivable                                                             342              226
Receivables from subsidiaries and affiliates:
Demand loan to Contran Corporation                                                        -            4,929
Income taxes, net                                                                     5,953                -
Other                                                                                 1,953            2,165
Deferred income taxes                                                                     219              201
Other                                                                                   1,350              267
----------       ----------

Total current assets                                                               15,580          102,395
----------       ----------

Other assets:
Marketable securities                                                                 170,033          170,023
Restricted cash equivalents                                                               488              494
Investment in and advances to subsidiaries and
affiliate                                                                            724,231          913,189
Other receivable from subsidiary                                                        2,258              696
Loans and notes receivable                                                            115,535          118,294
Other assets                                                                            3,564              206
Property and equipment, net                                                             2,160            1,893
----------       ----------

Total other assets                                                              1,018,269        1,204,795
----------       ----------

$1,033,849       $1,307,190
==========       ==========

Current liabilities:
Current maturities of long-term debt                                               $    5,000       $     -   
Payables to subsidiaries and affiliates:
Demand loan from Tremont LLC and subsidiaries                                        16,293                -
Demand loan from Contran Corporation                                                  7,332                -
Income taxes, net                                                                         -            1,097
Other                                                                                    10               20
Accounts payable and accrued liabilities                                                7,372              822
Income taxes                                                                              381              381
----------       ----------

Total current liabilities                                                          36,388            2,320
----------       ----------

Noncurrent liabilities:
Long-term debt                                                                        250,000          250,000
Deferred income taxes                                                                  76,450           64,073
Other                                                                                  11,277            1,314
----------       ----------

Total noncurrent liabilities                                                      337,727          315,387
----------       ----------

Stockholders' equity                                                                    659,734          989,483
----------       ----------

$1,033,849       $1,307,190
==========       ==========

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Condensed Statements of Income

Years ended December 31, 2002, 2003 and 2004

(In thousands)

2002             2003            2004
----             ----            ----

Revenues and other income:

Interest and dividend income                                         $ 30,424          $30,432        $ 32,438
Securities transaction gains, net                                       6,413                3               -
Other, net                                                              3,184            3,419           3,306
--------          -------        --------

40,021           33,854          35,744
--------          -------        --------

Costs and expenses:
General and administrative                                             10,283            8,385           9,302
Interest                                                               28,216           24,613          25,202
--------          -------        --------

38,499           32,998          34,504
--------          -------        --------

1,522              856           1,240

Equity in earnings of subsidiaries and
affiliate                                                               (4,511)          35,830         304,265
--------          -------        --------

Income (loss) before income taxes                                      (2,989)          36,686         305,505

Income tax benefit                                                        4,432            5,088           3,155
--------          -------        --------

Income from continuing operations                                       1,443           41,774         308,660

Discontinued operations                                                    (206)          (2,874)          3,732

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

Net income                                                           $  1,237          $39,486        $312,392
========          =======        ========

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Condensed Statements of Cash Flows

Years ended December 31, 2002, 2003 and 2004

(In thousands)

2002             2003             2004
----             ----             ----

Cash flows from operating activities:

Net income                                                          $  1,237          $ 39,486        $ 312,392
Securities transactions gains, net                                    (6,413)               (3)               -
Proceeds from disposal of marketable
securities (trading)                                                 18,136                50                -
Noncash interest expense                                               2,143              -                   -
Deferred income taxes                                                  5,981             2,038           (8,230)
Equity in earnings of subsidiaries
and affiliate:
Continuing operations                                                4,511           (35,830)        (304,265)
Discontinued operations                                                206             2,874           (3,732)
Cumulative effect of change in
accounting principle                                                    -              (586)               -
Dividends from subsidiaries and
affiliates                                                          105,786            25,405           37,209
Other, net                                                               591               (37)             683
Net change in assets and liabilities                                 (18,908)           (2,838)          (9,264)
---------          --------         --------

Net cash provided by operating
activities                                                      113,270            30,559           24,793
---------          --------         --------

Cash flows from investing activities:
Purchase of:
Kronos common stock                                                      -            (6,428)         (17,057)
TIMET common stock                                                       -              (840)               -
TIMET debt securities                                                    -              (238)               -
Loans to subsidiaries and affiliates:
Loans                                                               (7,303)           (9,689)         (32,328)
Collections                                                            184             1,000          178,227
Change in restricted cash equivalents, net                              (902)               94               44
Other, net                                                               (83)             (919)            (558)
---------          --------         --------

Net cash provided (used) by
investing activities                                             (8,104)          (17,020)         128,328
---------          --------         --------

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Condensed Statements of Cash Flows (Continued)

Years ended December 31, 2002, 2003 and 2004

(In thousands)

2002               2003             2004
----               ----             ----

Cash flows from financing activities:
Indebtedness:

Borrowings                                                      $  27,300           $ 10,000          $ 53,000
Principal payments                                                (92,572)            (5,000)          (58,000)
Loans from affiliates:
Loans                                                              13,718             34,583            30,529
Repayments                                                        (26,825)           (23,262)          (54,154)
Dividends                                                           (27,872)           (29,796)          (29,804)
Other, net                                                            2,680                264              (424)
--------           --------           -------

Net cash used by financing activities                          (103,571)           (13,211)          (58,853)
--------           --------           -------

Cash and cash equivalents:
Net increase                                                          1,595                328            94,268
Valmont Insurance Company                                                 -                  -            (5,374)
Balance at beginning of year                                          3,520              5,115             5,443

Balance at end of year                                            $   5,115           $  5,443          $ 94,337
=========           ========          ========

Supplemental disclosures - cash paid
(received) for:
Interest                                                          $  26,153           $ 24,613          $ 25,116
Income taxes, net                                                     2,456             (4,231)           (2,134)

VALHI, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Notes to Condensed Financial Information

Note 1 -       Basis of presentation:

The  accompanying  financial  statements  of Valhi,  Inc.  reflect  Valhi's
investment in (i) the common stocks (or  equivalent  thereof) of NL  Industries,
Inc.,  Kronos  Worldwide,   Inc.,  Tremont  LLC,  Valcor,  Inc.,  Waste  Control
Specialists LLC and Titanium Metals  Corporation  ("TIMET") on the equity method
and (ii) the debt and preferred stock securities of TIMET as  available-for-sale
marketable  securities  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,
-----------------------
2003           2004
------         --------
(In thousands)

Noncurrent assets (available-for-sale):

The Amalgamated Sugar Company LLC                                                     $170,000      $170,000
Other securities                                                                            33            23
--------      --------

$170,033      $170,023
========      ========

Note 3 -       Investment in and advances to subsidiaries and affiliate:

December 31,
-----------------------
2003            2004
----            -------
(In thousands)

Investment in:

NL Industries (NYSE: NL)                                                               $217,516      $187,432
Kronos Worldwide, Inc. (NYSE: KRO)                                                      191,662       398,628
Tremont LLC                                                                             231,054       312,789
Valcor and subsidiaries                                                                  65,677       (15,803)
Waste Control Specialists LLC                                                           (13,815)       23,766
TIMET (NYSE: TIE) common stock                                                            1,013         1,611
TIMET preferred stock                                                                         -           183
TIMET debt securities                                                                       265          -
---------      --------
693,372       908,606

Noncurrent loans to Waste Control Specialists LLC                                          30,859         4,583
---------      --------

$724,231      $913,189
=========      ========

Noncurrent  receivable  from  subsidiary  at  December  31,  2003  and 2004
consists of accrued interest due from Waste Control Specialists on the Company's
loans to Waste Control Specialists.  During 2004, Valhi contributed an aggregate
of  $47.5  million  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, NL paid each of its four $.20 per share regular quarterly  dividend
in the  form of  shares  of  Kronos  common  stock  in  which  an  aggregate  of
approximately was 2.5% of Kronos'  outstanding common stock, were distributed to
NL shareholders (including 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 a 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 December  31,  2002,  Valhi and NL owned 80% and 20%,  respectively,  of
Tremont  Group,  Inc.  Tremont  Group was a holding  company  that  owned 80% of
Tremont  Corporation.  In  February  2003,  Valhi  completed  a series of merger
transactions  pursuant to which,  among other things,  both Tremont  Group,  and
Tremont became wholly-owned  subsidiaries of Valhi and Tremont Group and Tremont
subsequently  merged to form Tremont LLC. Tremont LLC is a holding company whose
principal  assets at  December  31,  2004 are a 40%  interest  in  TIMET,  a 21%
interest in NL, a 11% interest in Kronos and interests in other joint  ventures.
In January 2005,  Tremont  distributed to Valhi its ownership interest in NL and
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  acquisition  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.  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 accompany  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,
--------------------------------------
2002            2003            2004
----            ----            ------
(In thousands)

Equity in earnings of subsidiaries and
affiliate from continuing operations

NL Industries                                                            $ 15,198       $ 32,781        $124,791
Kronos Worldwide                                                                -            804          99,948
Tremont LLC                                                               (11,965)        11,617          86,033
Valcor                                                                        462          3,503           5,399
Waste Control Specialists LLC                                              (8,206)       (12,923)        (12,379)
TIMET                                                                        -                48             473
--------       --------        --------

$ (4,511)      $ 35,830        $304,265
========       ========        ========

Cash dividends from subsidiaries

NL Industries                                                            $ 99,447       $ 24,108        $   -   
Kronos Worldwide                                                                -           -             17,586
Tremont LLC                                                                 1,152              -          19,623
Valcor                                                                      5,187          1,297            -
Waste Control Specialists LLC                                                -              -               -
--------       --------        --------

$105,786       $ 25,405        $ 37,209
========       ========        ========

Equity in earnings of discontinued operations relates to CompX's operations
in The Netherlands.

Note 4 -       Loans and notes receivable:

December 31,
------------------------
2003           2004
------         --------
(In thousands)

Snake River Sugar Company:

Principal                                                                            $ 80,000         $ 80,000
Interest                                                                               33,102           38,294
Other                                                                                     2,433             -
--------         --------

$115,535         $118,294
========         ========

Note 5 -       Long-term debt:

December 31,
-----------------------
2003           2004
------         -------
(In thousands)

Snake River Sugar Company                                                              $250,000         $250,000
Bank credit facility                                                                      5,000             -
--------         --------
255,000          250,000

Less current maturities                                                                   5,000             -
--------         --------

$250,000         $250,000
========         ========

Valhi's $250 million in loans from Snake River bear  interest at a weighted
average  fixed  interest  rate of  9.4%,  are  collateralized  by the  Company's
interest  in The  Amalgamated  Sugar  Company  LLC and are due in January  2027.
Currently,  these loans are  nonrecourse  to Valhi.  Up to $37.5 million of such
loans will  become  recourse  to Valhi to the extent that the balance of Valhi's
loan to Snake  River  (including  accrued  interest)  becomes  less  than  $37.5
million.  See Note 4. Under certain  conditions,  Snake River has the ability to
accelerate the maturity of these loans.

At  December  31,  2004,  Valhi has a $100  million  revolving  bank credit
facility which matures in October 2005,  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, 2004 quoted market price of $40.75 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,  2004,  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, 2004,  no amounts  were  outstanding,
letters of credit  aggregating  $4.1 million had been issued,  and $95.9 million
was available for borrowing under this facility.

Note 6 -       Income taxes:

Years ended December 31,
------------------------------------
2002           2003            2004
------         ------         ------
(In thousands)

Components of income tax benefit:

Currently refundable (payable)                                          $10,413         $ 7,126        $(5,075)
Deferred income tax benefit (expense)                                    (5,981)         (2,038)         8,230
-------         -------        -------

$ 4,432         $ 5,088        $ 3,155
=======         =======        =======

Cash paid (received) for income taxes, net:
Paid to (received from) subsidiaries, net                               $ 2,455         $(5,768)       $(2,174)
Paid to Contran                                                               -           1,490              -
Paid to tax authorities, net                                                  1              47             40
-------         -------        -------

$ 2,456         $(4,231)       $(2,134)
=======         =======        =======

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.

Deferred tax
asset (liability)
---------------------------
December 31,
---------------------------
2003            2004
---------        ----------
(In thousands)

Components of the net deferred tax asset (liability) -
tax effect of temporary differences related to:

Marketable securities                                                               $ (68,109)       $(72,951)
Investment in Waste Control Specialists LLC                                             1,373           1,952
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                                                              (6,808)         (7,984)
Tax attributes of Valhi:
Federal loss carryforwards                                                             -             16,627
State net operating and capital loss carryforwards                                        -           2,941
AMT credit carryforwards                                                                381             381
Accrued liabilities and other deductible differences                                    4,532           2,649
Other taxable differences                                                              (7,600)         (7,487)
--------        --------

$(76,231)       $(63,872)
========        ========

Current deferred tax asset                                                               $    219        $    201
Noncurrent deferred tax liability                                                         (76,450)        (64,073)
--------        --------

$(76,231)       $(63,872)
========        ========

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, 2002:

Allowance for doubtful accounts               $ 6,326       $   692        $(1,014)     $   352         $   -      $ 6,356
=======       =======        =======      =======         =====      =======

Amortization of intangible assets             $ 1,010       $   612        $  -         $    (1)        $   -      $ 1,621
=======       =======        =======      =======         =====      =======

Accrual for planned major
maintenance activities                       $ 3,389       $ 3,848        $(3,746)     $   495         $   -      $ 3,986
=======       =======        =======      =======         =====      =======

Year ended December 31, 2003:
Allowance for doubtful accounts               $ 6,356       $(1,768)       $  (425)     $   486         $   -      $ 4,649
=======       =======        =======      =======         =====      =======

Amortization of intangible assets             $ 1,621       $   605        $  -         $    19         $   -      $ 2,245
=======       =======        =======      =======         =====      =======

Accrual for planned major
maintenance activites                        $ 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
=======       =======        =======      =======         =====      =======

Amortization of intangible assets             $ 2,245       $   603        $  -         $    14         $   -      $ 2,862
=======       =======        =======      =======         =====      =======

Accrual for planned major
maintenance activities                       $ 6,327       $ 6,602        $(8,001)     $   425         $   -      $ 5,353
=======       =======        =======      =======         =====      =======

Note -    Certain  information has been omitted from this Schedule because it is
disclosed in the notes to the Consolidated Financial Statements.

EXHIBIT 21.1     SUBSIDIARIES OF THE REGISTRANT

% of Voting
Securities
Jurisdiction of        Held at December
Incorporation or              31,
Name of Corporation                                                          Organization             2004 (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%
Greenhill Technologies LLC                                      Delaware                            50%
Tecsafe LLC                                                     Delaware                           100%

Kronos Worldwide, Inc. (2)                                             Delaware                            46%

NL Industries, Inc. (2), (3)                                           New Jersey                          62%
CompX Group, Inc. (4)                                              Delaware                            82%
CompX International Inc. (5)                                     Delaware                            83%

Tremont LLC (2), (3)                                                   Delaware                           100%
TRECO L.L.C.                                                      Nevada                             100%
Basic Management, Inc.                                          Nevada                              32%
The Landwell Company LP                                       Delaware                            50%
The Landwell Company LP                                         Delaware                            12%
TRE Holding Corporation                                           Delaware                           100%
TRE Management Company                                          Delaware                           100%
Tremont Colorado Corporation                                      Delaware                           100%
Tall Pines Insurance Company                                      Vermont                            100%
Titanium Metals Corporation (2) - (6)                             Delaware                            40%

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, 2004
(File  No.  333-100047).  NL owns an  additional  37% of  Kronos  directly,
Tremont LLC owns an additional  11% 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, 2004 (File No.
1-640).  Tremont LLC owns an additional 21% of NL directly and 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, 2004
(File No.  1-13905).  TIMET owns an  additional  2% 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, 2004
(File No. 0-28538). The Registrant owns an additional 1% of TIMET directly.

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the  incorporation  by reference in Valhi,  Inc.'s (i)
Registration  Statement  on Form S-8  (Nos.  33-53633,  33-48146,  33-41507  and
33-21758) and related  Prospectus  pertaining to the Valhi,  Inc. 1987 Incentive
Stock Option - Stock Appreciation Rights Plan and (ii) Registration Statement on
Form S-8 (No.  333-48391) and related  Prospectus  pertaining to the Valhi, Inc.
1997 Long-Term  Incentive  Plan, of our reports dated March 30, 2005 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, of
Valhi, Inc., which appear in this Annual Report on Form 10-K.

PricewaterhouseCoopers LLP

Dallas, Texas
March 30, 2005

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the  incorporation  by reference in Valhi,  Inc.'s (i)
Registration  Statement  on Form S-8  (Nos.  33-53633,  33-48146,  33-41507  and
33-21758) and related  Prospectus  pertaining to the Valhi,  Inc. 1987 Incentive
Stock Option - Stock Appreciation Rights Plan and (ii) Registration Statement on
Form S-8 (No.  333-48391) and related  Prospectus  pertaining to the Valhi, Inc.
1997  Long-Term  Incentive  Plan, of our report dated March 16, 2005 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, 2004,  which is  incorporated  by reference in this
Annual Report on Form 10-K of Valhi, Inc.

PricewaterhouseCoopers LLP

Denver, Colorado
March 30, 2005

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 30, 2005

/s/ Steven L. Watson
Steven L. Watson
President and Chief Executive Officer

Exhibit 31.2

I, Bobby D. O'Brien,  the Vice President,  Chief Financial Officer and Treasurer
of Valhi, Inc., certify that:

1)   I have reviewed this annual report on Form 10-K of Valhi, Inc.;

2)   Based on my knowledge, this report does not contain any untrue statement of
a material  fact or omit to state a  material  fact  necessary  to make the
statements made, in light of the circumstances  under which such statements
were made,  not  misleading  with  respect  to the  period  covered by this
report;

3)   Based on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in  this  report,  fairly  present  in all  material
respects the financial  condition,  results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;

4)   The  registrant's  other  certifying  officer  and  I are  responsible  for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules  13a-15(e) and 15d-15(e))  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 30, 2005

/s/ Bobby D. O'Brien
Bobby D. O'Brien
Vice President, Chief Financial Officer and Treasurer

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Valhi, Inc. (the "Company") on Form 10-K
for the year ended  December 31, 2004 as filed with the  Securities and Exchange
Commission on the date hereof (the  "Report"),  we, Steven L. Watson,  President
and  Chief  Executive  Officer  of the  Company,  and  Bobby  D.  O'Brien,  Vice
President,  Chief  Financial  Officer and  Treasurer  of the  Company,  certify,
pursuant to 18 U.S.C.  Section 1350,  as adopted  pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

(1) The Report fully  complies  with the  requirements  of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2)  The  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and result of  operations of the
Company.

/s/  Steven L. Watson                    /s/  Bobby D. O'Brien
-------------------------------------    ---------------------
Steven L. Watson                         Bobby D. O'Brien
President and Chief Executive Officer    Vice President, Chief Financial Officer
March 30, 2005                           and Treasurer
March 30, 2005

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.