Kronos International 10-K 2006 FY Annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934:
For the fiscal year ended December 31, 2006
Commission file number 333-100047
KRONOS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE	22-2949593
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2697
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 233-1700

No securities are registered pursuant to Section 12(b) of the Act.

No securities are registered pursuant to Section 12(g) of the Act.

Indicate by check mark:

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

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

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

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

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

No common stock was held by nonaffiliates of the Registrant as of June 30, 2006 (the last business day of the Registrant's most recently-completed second fiscal quarter).

As of February 28, 2007, 2,968 shares of the Registrant's common stock were outstanding.

The Registrant is a wholly-owned subsidiary of Kronos Worldwide, Inc. (File No. 1-31763) and meets the conditions set forth in General Instructions I(1) (a) and (b) and is therefore filing this Form 10-K with the reduced disclosure format.

Documents incorporated by reference

None.

TABLE OF CONTENTS

Part I		Page
Item 1.	Business	4
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff comments	11
Item 2.	Properties	11
Item 3.	Legal Proceedings	12
Item 4.	Submission of Matters to a Vote of Security Holders*	12
Part II
Item 5.	Market for our Common Equity and Related Stockholder Matters	12
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	15
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 8.	Financial Statements and Supplementary Data	31
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	31
Item 9A.	Controls and Procedures	31
Item 9B.	Other Information	32
Part III
Item 10.	Directors and Executive Officers of the Registrant*	32
Item 11.	Executive Compensation*	32
Item 12.	Security Ownership of Certain Beneficial Owners and Management*	32
Item 13.	Certain Relationships and related transactions*	32
Item 14.	Principal Accounting Fees and Services	32
Part IV
Item 15.	Exhibits and Financial Statement Schedules	33
Signatures
* We meet the conditions set forth in the General Instructions I (1)(a) and (b) and have therefore omitted these items.

Forward-Looking Information

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statement in this report that is not a statement of historical fact may be deemed to be a forward-looking statement. Because these forward-looking statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. We do not intend to assume any duty to update or revise any forward-looking statements for new information, future events or otherwise.

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 we believe the expectations reflected in such forward-looking statements are reasonable, we cannot give assurances that these expectations will prove to be correct. Forward-looking statements involve substantial risks and uncertainties which could significantly impact expected results, and actual results could differ materially from those described. It is not possible to identify all of the risks and uncertainties we face that could cause actual results to differ materially from those described in this report. But, we have included discussion on the following most significant risk factors in Item 1A of this document:

·   Future supply and demand for our products

·   The extent of the dependence of certain of our businesses on certain market sectors

·   The cyclicality of our businesses

·   Customer inventory levels (such as the extent to which our customers may, from time to time, accelerate purchases of titanium dioxide pigments (“TiO₂”) in advance of anticipated price increases or defer purchases of TiO₂ in advance of anticipated price decreases)

·   Changes in raw material and other operating costs (such as energy costs)

·   The possibility of labor disruptions

·   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 TiO₂)

·   Competitive products and substitute products

·   Customer and competitor strategies

·   Potential consolidation of our competitors

·   The impact of pricing and production decisions

·   Competitive technology positions

·   The introduction of trade barriers

·   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)

·   Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime and transportation interruptions)

·   The timing and amounts of insurance recoveries

·   Our ability to renew or refinance credit facilities

·   The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters

·   The ultimate ability to utilize income tax attributes, the benefits of which have been recognized under the “more-likely-than-not” recognition criteria

·   Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities)

·   Government laws and regulations and possible changes therein

·   The ultimate resolution of pending litigation

·   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. We disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of changes in information, future events or otherwise.

PART I

ITEM 1.BUSINESS

General

Kronos International, Inc., a Delaware corporation, is registered in the Commercial Register of the Federal Republic of Germany. We are a wholly-owned subsidiary of Kronos Worldwide, Inc. (“Kronos”). At December 31, 2006, (i) Valhi, Inc. (NYSE: VHI) held approximately 59% of Kronos’ common stock and NL Industries, Inc. (NYSE: NL) held an additional 36% of Kronos’ common stock, (ii) Valhi held 83% of NL’s outstanding common stock and (iii) Contran Corporation and its subsidiaries held approximately 92% of Valhi’s outstanding common stock. Substantially all of Contran’s outstanding voting stock is held by trusts established for the benefit of certain descendants of Harold C. Simmons (of which Mr. Simmons is trustee), or is held by persons or other entities related to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control all of these companies.

Our principal place of business is in Leverkusen, Germany. We conduct Kronos’ European value-added TiO₂ pigment operations. We, along with our distributors and agents sell and provide technical services for our products to over 3,000 customers in over 100 countries with the majority of sales in Europe. Our chemical businesses have operated in the European markets since the 1920’s. We believe that we have developed considerable expertise and efficiency in the manufacture, sale, shipment and service of our products.

TiO₂ is a white inorganic pigment used to impart whiteness, brightness and opacity for products such as coatings, plastics, paper, fibers, food, ceramics and cosmetics. TiO₂ is considered a “quality-of-life” product with demand and growth affected by gross domestic product and overall economic conditions in our markets in various parts of the world. TiO₂ derives its value from its whitening properties and hiding power (opacity), which is the ability to cover or mask other materials effectively and efficiently. TiO₂ is the largest commercially used whitening pigment because it has a high refractive rating giving it more hiding power than any other commercially produced white pigment. In addition, TiO₂ has excellent resistance to interaction with other chemicals, good thermal stability and resistance to ultraviolet degradation. We ship TiO₂ to our customers in either a powder form or a slurry form via rail, truck and ocean carrier. Including our predecessors, we have produced and marketed TiO₂ in North America and Europe for over 80 years.

Per capita utilization of TiO₂ in the United States and Western Europe far exceeds that in other areas of the world. We expect these markets to continue to be the largest consumers of TiO₂ for the foreseeable future. It is probable that significant markets for TiO₂ could emerge in Eastern Europe or the Far East as the economies in these regions develop to the point that quality-of-life products, including TiO₂, experience greater demand. In addition, China has developed into a significant market and as its economy continues to develop it is probable that quality-of-life products, including TiO₂ will experience greater demand in that country.

Sales of TiO₂ were about 87% of our net sales in 2006. The remaining 13% of net Sales is comprised of other product lines that are complementary to TiO₂. These other products are described as follows:

·   We also own and operate 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 our European sulfate-process plants. We also sell ilmenite ore to third-parties some of whom are our competitors. The mine has estimated reserves that are expected to last at least 50 years.

·   We also manufacture and sell iron-based chemicals, which are co-products and processed co-products of the TiO₂ pigment production process. These co-product chemicals are marketed through our 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.

·   We also manufacture and sell titanium oxychloride, which is a side-stream product 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.

Manufacturing and operation

We currently produce over 40 different TiO₂ grades under the Kronos^TM which provide a variety of performance properties to meet customers’ specific requirements. Our major customers include domestic and international paint, plastics and paper manufacturers.

Extenders, such as kaolin clays, calcium carbonate and polymeric opacifiers, are used in a number of the same end-use markets as white pigments. However, the opacity in these products is not able to duplicate the performance characteristics of TiO₂, and so we believe these products are not effective substitutes for TiO₂.

We produce TiO₂ in two crystalline forms: rutile and anatase. Rutile TiO₂ is manufactured using both a chloride production process and a sulfate production process, whereas anatase TiO₂ is only produced using a sulfate production process. 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. Although many end-use applications can use either form, chloride process rutile is the preferred form for use in coatings and plastics, the two largest end-use markets. Sulfate process anatase 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.

Chloride production process. Approximately two-thirds of our current production capacity is based on the chloride process. The chloride process is a continuous process in which chlorine is used to extract rutile TiO₂. The chloride process typically has lower manufacturing costs than the sulfate process due to newer technology, higher yield, less waste, lower energy requirements and lower labor costs. The chloride process produces less waste than the sulfate process because much of the chlorine is recycled and feedstock bearing a higher titanium content is used.

Sulfate production process. Approximately 32% of our current production capacity is based on the sulfate process. The sulfate process is a batch chemical process that uses sulfuric acid to extract both rutile and anatase TiO₂.

Once an intermediate TiO₂ pigment has been produced by either the chloride or sulfate process, it is “finished” into products with specific performance characteristics for particular end-use applications through proprietary processes involving various chemical surface treatments and intensive micronizing (milling). Due to environmental factors and customer considerations, the proportion of TiO₂ industry sales represented by chloride process pigments has increased relative to sulfate process pigments and, in 2006, chloride process production facilities represented over 60% of industry capacity.

We produced a new company record of 348,000 metric tons of TiO₂ in 2006, compared to 335,000 metric tons in 2005 and 328,000 metric tons in 2004. Our average production capacity utilization rates were near or at full capacity in 2004, 2005 and 2006. Our production capacity has increased by approximately 30% over the past ten years due to debottlenecking programs, with only moderate capital expenditures. We believe our annual attainable production capacity for 2007 is approximately 355,000 metric tons, with some slight additional capacity available in 2007 through our continued debottlenecking efforts.

Raw materials

The primary raw materials used in chloride process TiO₂ are titanium-containing feedstock (natural rutile ore or purchased slag), 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 principally in Australia, South Africa, Canada, India and the United States. Through Kronos (US), Inc., a wholly-owned subsidiary of Kronos, we purchase chloride process grade slag from Rio Tinto Iron and Titanium under a long-term supply contract that expires at the end of 2010. We purchase natural rutile ore primarily from Iluka Resources, Limited under a long-term supply contract that expires at the end of 2009. We expect to be successful in obtaining long-term extensions to these and existing supply contracts prior to their expiration. We expect the raw materials purchased under these contracts to meet our chloride process feedstock requirements over the next several years.

The primary raw materials used in sulfate process TiO₂ are titanium-containing feedstock (primarily ilmenite from our Norwegian mine or purchased slag) 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 principally in Norway, Canada, Australia, India and South Africa. As one of the few vertically integrated producers of sulfate process TiO₂, we own and operate a rock ilmenite mine in Norway, which provided all of our feedstock for our European sulfate process TiO₂ plants in 2006. We expect ilmenite production from our mine to meet our sulfate process feedstock requirements for the foreseeable future and any remaining will be sold to third parties.

The following table summarizes our raw materials procured or mined in 2006.

Production Process/Raw Material	Quantities of Raw Materials       Procured or Mined
	(In thousands of metric tons)
Chloride process plants - purchased slag or natural rutile ore	307
Sulfate process plants - raw ilmenite ore mined internally	319

Competition

The TiO₂ industry is highly competitive. Our principal competitors are E.I. du Pont de Nemours & Co.; Millennium Chemicals, Inc. (a subsidiary of Lyondell Chemicals); Tronox Incorporated; Huntsman International Holdings LLC; and Ishihara Sangyo Kaisha, Ltd. Our five largest competitors have estimated individual shares of TiO₂ production capacity ranging from 4% (for Ishihara) to 24% (for DuPont), and an estimated aggregate share of worldwide TiO₂ production volume in excess of 60%. Lyondell has announced that it intends to sell Millenium Chemicals to National Titanium Dioxide Company Ltd. in the first half of 2007.

We compete 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 our grades and substantially all of our production are considered commodity pigments with price generally being the most significant competitive factor. We believe that we are the leading seller of TiO₂ in Germany, are among the leading marketers in the Benelux and Scandinavian markets. We had an estimated 9% share of worldwide TiO₂ sales volume in 2006. Overall, we are Europe’s second largest producer of TiO₂.

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 our experience). We are not aware of any TiO2 plant currently under construction. Du Pont has announced its intention to build a greenfield facility in China, but it is not clear when construction will begin and it is not likely that any product would be available until 2010, at the earliest.

We expect that industry capacity will increase as we and our competitors continue to debottleneck our existing facilities. We expect 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 our expectations. If actual developments differ from our expectations, ours and the TiO₂ industry's performances could be unfavorably affected.

Research and development

Our research and development activities are directed primarily on improving the chloride and sulfate production processes, improving product quality and strengthening our competitive position by developing new pigment applications. Research and development activities are primarily conducted at the Leverkusen, Germany facility. Our expenditures for research and development and certain technical support programs were approximately $8 million in 2004, $9 million in 2005 and $11 million in 2006.

We continually seek to improve the quality of our grades, and have been successful at developing new grades for existing and new applications to meet the needs of customers and increase product life cycle. Since 2002, we have added eleven new grades for plastics, coatings, fiber and paper laminate applications.

Patents and trademarks

We believe that our patents held for products and production processes are important to us and our continuing business activities. We seek patent protection for our technical developments, principally in the United States, Canada and Europe, and from time to time enter into licensing arrangements with third parties. Our existing patents generally have terms of 20 years from the date of filing, and have remaining terms ranging from one to 19 years. We seek to protect our intellectual property rights, including our patent rights, and from time to time are engaged in disputes relating to the protection and use of intellectual property relating to our products.

Our trademarks, including Kronos, are protected by registration in the United States and elsewhere with respect to those products we manufacture and sell. We also rely on unpatented proprietary know-how and continuing technological innovation, and other trade secrets to develop and maintain our competitive position. Our proprietary chloride production process is an important part of our technology, and our business could be harmed if we fail to maintain confidentiality of our trade secrets used in this technology.

Major customers

We sell to a diverse customer base, and no single customer makes up more than 10% of our sales for 2006. Our largest ten customers, excluding sales to Kronos and affiliates accounted for approximately 20% of sales in 2006.

Seasonality

Neither our business as a whole nor that of any of our principal product groups is seasonal to any significant extent. However, TiO₂ sales are generally higher in the first half of the year. This is due in part to the increase in paint production in the spring to meet demand during the spring and summer painting season.

Employees

As of December 31, 2006, we employed approximately 1,960 persons. Hourly employees in European production facilities are represented by a variety of labor unions, with labor agreements having various expiration dates. Our union employees are covered by master collective bargaining agreements in the chemicals industry that are renewed annually. We believe our labor relations are good.

Regulatory and environmental matters

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

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. Germany and Belgium are members of the European Union and follow its initiatives. Norway is not a member but generally patterns its environmental regulatory actions after the European Union. We believe that we have obtained all required permits and are in substantial compliance with applicable environmental requirements for our European facilities.

At our sulfate plant facilities in Germany, we recycle weak sulfuric acid either through contracts with third parties or at our own facilities. In addition, at our German locations we have a contract with a third party to treat certain sulfate-process effluents. At our Norwegian plant, we ship spent acid to a third party location where it is treated and disposed. These contracts may be terminated by either party after giving three or four years advance notice, depending on the contract.

From time to time, our facilities may be subject to environmental regulatory enforcement under U.S. and foreign statutes. Typically we establish compliance programs to resolve these matters. Occasionally, we may pay penalties. To date such penalties have not involved amounts having a material adverse effect on our consolidated financial position, results of operations or liquidity. We believe that all of our facilities are in substantial compliance with applicable environmental laws.

Our capital expenditures in 2006 related to ongoing environmental compliance, protection and improvement programs were $4 million, and are currently expected to be approximately $5 million in 2007.

Website and other available information

Our fiscal year ends December 31. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports of Form 8-K, and any amendments to those reports are available on Kronos Worldwide’s website at www.kronostio2.com, as we do not maintain our own website. These reports are available, without charge, as soon as is reasonably practicable after we file or furnish them electronically with the Securities and Exchange Commission. Information contained on this website is not part of this report. We will also provide free copies of such documents upon written request. Such requests should be directed to the Corporate Secretary at our address on the cover page of this Form 10-K.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

ITEM 1A. RISK FACTORS

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

Demand for, and prices of, certain of our products are cyclical and we may experience prolonged depressed market conditions for our products, which may result in reduced earnings or operating losses.

Approximately 87% of our revenues are attributable to sales of TiO₂. Pricing within the global TiO₂ industry over the long term is cyclical, and changes in economic conditions, especially in Western industrialized nations, can significantly impact our earnings and operating cash flows. This may result in reduced earnings or operating losses.

Historically, the markets for many of our products have experienced periods of alternating periods of increasing and decreasing demand. Relative changes in the selling prices for our products is one of the main factors that affects the level of our profitability. In periods of increasing demand, our selling prices and profit margins generally will tend to increase, while in periods of decreasing demand our selling prices and profit margins generally tend to decrease. Future growth in demand for TiO₂ may not be sufficient to alleviate any future conditions of excess industry capacity, and such conditions may not be sustained or may be further aggravated by anticipated or unanticipated capacity additions or other events.

The demand for TiO₂ during a given year is also subject to annual seasonal fluctuations. TiO₂ sales are generally higher in the first half of the year. This is due in part to the increase in paint production in the spring to meet demand during the spring and summer painting season. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on production and price changes.

We sell several of our products in mature and highly competitive industries and face price pressures in the markets in which we operate, which may result in reduced earnings or operating losses.

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

Higher costs or limited availability of our raw materials may reduce our earnings and decrease liquidity.

The number of sources for and availability of, certain raw materials is specific to the particular geographical region in which a facility is located. For example, titanium-containing feedstocks suitable for use in our TiO₂ facilities are available from a limited number of suppliers around the world. Political and economic instability in the countries from which we purchase our raw material supplies could adversely affect their availability. If our worldwide vendors are not able to meet their contractual obligations and we were unable to obtain necessary raw materials, we may incur higher costs for raw materials or may be required to reduce production levels. We may not always be able to increase our selling prices to offset the impact of any higher costs or reduced production levels, which could reduce our earnings and decrease our liquidity.

Our leverage may impair our financial condition or limit our ability to operate our businesses.

We currently have a significant amount of debt. As of December 31, 2006, our total consolidated debt was approximately $530 million, substantially all of which relates to our 6.5% Senior Secured Notes. Our level of debt could have important consequences to our stockholders and creditors, including:

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

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

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

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

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

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

In addition to our indebtedness, we are party to various lease and other agreements pursuant to which, along with our indebtedness, we are committed to pay approximately $69 million in 2007. Our ability to make payments on and refinance our debt, and to fund planned capital expenditures, depends on our future ability to generate cash flow. To some extent, this is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, our ability to borrow funds under our subsidiaries’ credit facilities in the future will in some instances depend in part on these subsidiaries’ ability to maintain specified financial ratios and satisfy certain financial covenants contained in the applicable credit agreement.

Our business may not generate cash flows from operating activities sufficient to enable us to pay our debts when they become due and to fund our other liquidity needs. As a result, we may need to refinance all or a portion of our debt before maturity. We may not be able to refinance any of our debt on favorable terms, if at all. Any inability to generate sufficient cash flows or to refinance our debt on favorable terms could have a material adverse effect on our financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

We operate four TiO₂ facilities and an ilmenite mine at the following locations:

Location	Description
Leverkusen, Germany	TiO2 production, Chloride and sulfate process
Nordenham, Germany	TiO2 production, Sulfate process
Langerbrugge, Belgium	TiO2 production, Chloride process
Fredrikstad, Norway	TiO2 production, Sulfate process
Hauge i Dalane, Norway	Ilmenite mine

Our co-products are produced at our German, Norwegian and Belgian facilities.

We own all of our principal production facilities described above, except for the land under the Leverkusen, Germany and Fredrikstad, Norway facilities. The Norwegian plant is located on public land and is leased until 2013, with an option to extend the lease for an additional 50 years. Our principal German operating subsidiary leases the land under the Leverkusen plant pursuant to a lease with Bayer AG that expires in 2050. We own the Leverkusen plant facility, which represents approximately one-half of our current TiO₂ production capacity and is located within Bayer AG’s extensive manufacturing complex. Rent for such land lease associated with the Leverkusen facility is periodically established by agreement with Bayer AG for periods of at least two years at a time. Under separate supplies and services agreements, Bayer AG provides some raw materials, including chlorine, auxiliary and operating materials and utilities and services necessary to operate the Leverkusen facility.

Our corporate headquarters is located in Dallas, Texas. We have under lease various corporate and administrative offices located in the U.S. and various sales offices located in the U.S., France, the Netherlands, Denmark and the U.K. The roads leading to our facilities are generally maintained by the applicable local government and are adequate for our purposes.

Information on our properties is incorporated by reference to Item 1: Business and Manufacturing and Operations above. See Note 12 to our Consolidated Financial Statements for information on our leases.

ITEM 3.LEGAL PROCEEDINGS

We are involved in various environmental, contractual, product liability and other claims and disputes incidental to our business. Information called for by this Item is incorporated by reference to Note 12 to our Consolidated Financial Statements.

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

Omitted pursuant to the General Instruction I of Form 10-K.

PART II

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

All of our common stock is held by Kronos Worldwide, Inc. There is no established public trading market for our common stock. The indenture governing our 6.5% Senior Secured Notes Due 2013 limits our ability to pay dividends or make other restricted payments, as defined. The aggregate amount of dividends and other restricted payments since June 2002 may not exceed 75% of the aggregate consolidated net income, as defined in the indenture, plus $25 million. We currently expect to pay dividends or make other restricted payments as permitted by the indenture. However, declaration and payment of future dividends is discretionary and the amount thereof is dependent upon our results of operations, financial condition, contractual limitations, cash requirements for our businesses and other factors deemed relevant by our Board of Directors. See Note 6 to our Consolidated Financial Statements. At December 31, 2006, $79 million was available for dividends or other restricted payments, as defined.

We paid $60 million in dividends to Kronos in 2004 and paid $50 million in 2006. We did not pay any dividends in 2005.  

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with our Consolidated Financial Statements and Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations." Net income for 2002, 2003, 2004 and 2005 and stockholder’s equity at December 2003, 2004 and 2005 have each been adjusted from amounts previously disclosed due to the adoption of FSP No. AUG-AIR1, Accounting for Planned Major Maintenance Activities in the fourth quarter of 2006. See Note 15 to our Consolidated Financial Statements.

	Years ended December 31,
	2002			2003			2004			2005			2006(6)
	(As adjusted)			(As adjusted)			(As adjusted)			(As adjusted)
	(In millions, except ratios)
STATEMENTS OF OPERATIONS DATA:
Net sales	$	579.7		$	715.9		$	808.0		$	850.9		$	914.2
Gross margin(1)		125.9			199.5			197.8			238.4			223.1
Net income(2)		52.5			82.1			325.6			60.3			73.7
BALANCE SHEET DATA (at year end):
Total assets	$	611.3		$	750.5		$	985.2		$	955.3		$	1,080.6
Long-term debt including current maturities		325.9			356.7			533.2			453.8			529.8
Stockholder’s equity (deficit) (3)		77.7			113.1			207.7			183.3			211.4
STATEMENTS OF CASH FLOW DATA:
Net cash provided (used) by:
Operating activities	$	68.2		$	104.8		$	142.3		$	92.7		$	62.5
Investing activities		(29.7	)		(31.7	)		(34.2	)		(35.8	)		(47.1	)
Financing activities		(57.5	)		(54.9	)		(129.9	)		(8.5	)		(31.1	)
TiO2 OPERATING STATISTICS:
Sales volume*		297			310			336			326			353
Production volume*		293			320			328			335			348
Production rate as a percentage of capacity		93	%		Full			Full			Full			Full
OTHER FINANCIAL DATA:
Ratio of earnings to combined            fixed charges and preferred dividends(unaudited)(4)		1.5			3.3			2.6			3.6			2.0
Ratio of earnings to            fixed charges (unaudited) (5)		2.7			3.3			2.6			3.6			2.0

__________________________________

*   Metric tons in thousands

(1)   Gross margin as presented above is greater than amounts previously reported by $.4 million in 2002 and 2003. See Note 15 to our Consolidated Financial Statements.

(2)   Net income as presented above differs from amounts previously reported by $.2 million in 2002 and $.3 million in 2003. See Note 15 to our Consolidated Financial Statements.

(3)   Stockholder’s equity as presented above is greater than amounts previously reported by $.9 million at December 3, 2002 and $1.5 million at December 31, 2003. See Note 15 to our Consolidated Financial Statements.

(4)   Fixed charges represents, as applicable, the sum of (i) total interest expense and (ii) the interest component of rent expense (calculated as one-third of rent expense). Earnings represents, as applicable, the sum of (i) fixed charges, (ii) income before income taxes and minority interest and (iii) amortization of capitalized interest.

(5)   Combined fixed charges and preferred dividends represents, as applicable, the sum of (i) total interest expense, (ii) preferred stock dividends and accretion and (iii) the interest component of rent expense (calculated as one-third of rent expense). Earnings represents, as applicable, the sum of (i) combined fixed charges, (ii) income before income taxes and minority interest and (iii) amortization of capitalized interest.

(6)   We adopted Statement of Financial Accounting Standards No. 158 effective December 31, 2006. See Note 15 to our Consolidated Financial Statements.

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

Business overview

We are a leading global producer and marketer of value-added titanium dioxide pigments (“TiO₂”). TiO₂ is used for a variety of manufacturing applications, including plastics, paints, paper and other industrial products. For 2006, approximately three-fourths of our sales volumes were into European markets. We believe we are the second largest producer of TiO₂ in Europe with an estimated 20% share of European TiO₂ sales volumes. Our production facilities are located throughout Europe.

We consider TiO₂ to be a “quality of life” product, with demand affected by gross domestic product and overall economic conditions in our markets located in various regions of the world. Over the long-term, we expect demand for TiO₂ to grow by 2% to 3% per year. This is consistent with our expectations for the long-term growth in gross domestic product. However, demand for TiO₂ in any interim or annual period may not change in the same proportion as the change in GDP even if we and our competitors maintain consistent shares of the worldwide market. This is due in part to relative changes in the TiO₂ inventory levels of our customers. We believe that our customers’ inventory levels are partly influenced by their expectation for future changes in market TiO₂ selling prices.

The factors having the most impact on our reported operating results are:

·   our TiO₂ selling prices,

·   foreign currency exchange rates (particularly the exchange rate for the U.S. dollar relative to the euro),

·   our TiO₂ sales and production volumes, and

·   manufacturing costs, particularly maintenance and energy-related expenses.

Our key performance indicators are our TiO₂ average selling prices, and our level of TiO₂ sales and production volumes.

Executive summary

We reported net income of $73.7 million in 2006 compared to $60.3 million in 2005 and $325.6 million in 2004. The $13.4 million increase in net income from 2005 to 2006 is due primarily to net effect of (i) the favorable effect of certain net income tax benefits recognized in 2006, partially offset by (ii) lower income from operations in 2006, (iii) a charge in 2006 from the redemption of our 8.875% Senior Secured Notes and (iv) a gain from the sale of our passive interest in a Norwegian smelting operation in 2005.

We reported net income of $60.3 million in 2005 compared to $325.6 million. Our earnings decreased from 2004 to 2005 as the favorable effect of higher income from operations and lower interest expense in 2005 was more than offset by the favorable effect of the non-cash income tax benefit recognized in 2004.

Net income for 2006 includes (i) a charge related to the redemption of our 8.875% Senior Secured Notes of $22.3 million, (ii) a net income tax benefit of $33.8 million related to the net effect of the withdrawal of certain income tax assessments previously made by the Belgian and Norwegian tax authorities and the resolution of certain income tax issues related to our German and Belgian operations.

Net income for 2005 includes (i) a net non-cash income tax charge of $11.9 million for recent developments with respect to income tax audits, primarily in Germany and Belgium and (ii) a securities transaction gain of $3.5 million related to the sale of our passive interest in a Norwegian smelting operation.

Net income for 2004 includes an income tax benefit related to the reversal of our deferred income tax asset valuation allowance in Germany of $280.7 million.

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

We currently expect income from operations will be lower in 2007 compared to 2006 as the favorable effect of anticipated modest improvements in sales volumes and average TiO₂ selling prices are expected to be more than offset by the effect of higher production costs, particularly raw material and energy costs.

Critical accounting policies and estimates

The accompanying "Management's Discussion and Analysis of Financial Condition and Results of Operations" are based upon our 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 us 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 amount of revenues and expenses during the reported period. On an on-going basis, we evaluate our estimates, including those related to bad debts, impairments of investments in marketable securities and long-lived assets (including property and equipment), pension benefit obligations and the underlying actuarial assumptions related thereto, the realization of deferred income tax assets and accruals for, litigation, income tax and other contingencies. We base our estimates on historical experience and on various other assumptions we believe 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 significantly from previously-estimated amounts under different assumptions or conditions.

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

·   We recognize an impairment charge associated with our long-lived assets, including property and equipment, whenever we determine 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. We do not assess our property and equipment for impairment unless certain impairment indicators, as defined, are present.

·   We maintain various defined benefit pension plans. The amounts recognized as defined benefit pension expenses, and the reported amounts of prepaid and accrued pension 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 obligations, pension expenses and funding requirements. These assumptions are more fully described below under “Defined Benefit Pension Plans”.

·   We record a valuation allowance to reduce our deferred income tax assets to the amount that is believed to be realized under the "more-likely-than-not" recognition criteria. While we have 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 we may change our 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, we have substantial net operating loss carryforwards in Germany (the equivalent of $701 million for German corporate purposes and $247 million for German trade tax purposes at December 31, 2006). During 2004, we concluded that the more-likely-than-not recognition criteria had been met with respect to the income tax benefit associated with our net operating loss carryforwards in Germany. Prior to the complete utilization of such carryforwards, it is possible that we might conclude the benefit of such carryforwards would no longer meet the "more-likely-than-not" recognition criteria, at which point we would be required to recognize a valuation allowance against the then-remaining tax benefit associated with the carryforwards.

In addition, we make an evaluation at the end of each reporting period as to whether or not some or all of the undistributed earnings of our foreign subsidiaries are permanently reinvested (as that term is defined in GAAP). While we may have concluded in the past that some of such undistributed earnings are permanently reinvested, facts and circumstances can change in the future, and it is possible that a change in facts and circumstances, such as a change in the expectation regarding the capital needs of our foreign subsidiaries, could result in a conclusion that some or all of such undistributed earnings are no longer permanently reinvested. In such an event, we would be required to recognize a deferred income tax liability in an amount equal to the estimated incremental U.S. income tax and withholding tax liability that would be generated if all of such previously-considered permanently reinvested undistributed earnings were distributed to the U.S.

·   We record accruals for legal, income tax and other contingencies when estimated future expenditures associated with such contingencies and commitments 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).

Income from operations is impacted by certain of these significant judgments and estimates, such as allowance for doubtful accounts, reserves for obsolete or unmarketable inventories, impairment of equity method investees, goodwill and other long-lived assets, defined benefit pension plans and loss accruals. In addition, other income (expense) is impacted by the significant judgments and estimates for deferred income tax asset valuation allowances and loss accruals.

Comparison of 2006 to 2005 Results of Operations

	Year ended December 31,
	2005			2006
	(Dollars in millions)
Net sales	$	850.9	100%	$	914.2	100 %
Cost of sales**		612.4	72%		691.2	76%
Gross margin**		238.5	28%		223.0	24 %
Other operating income and expenses, net		100.2	12%		115.6	13%
Income from operations**	$	138.3	16%	$	107.4	11%
						Percent
						Change
TiO2 operating statistics:
Sales volumes*		326			353	8 %
Production volumes*		335			348	4 %
Percent change in net sales:
TiO2 product pricing						-1 %
TiO2 sales volumes						8 %
TiO2 product mix						- %
Changes in currency exchange rates						-%
Total						7%

    ______________________________

    *   Thousands of metric tons

    ** 2005 was adjusted for effects of adopting FSP No. AUG AIR-1. See Note 15 to our Consolidated Financial Statements.

Net sales - Net sales increased 7.4% or $63.3 million for 2006 compared to 2005, primarily due to an 8% increase in TiO₂ sales volumes. Product pricing and changes in currency exchange rates did not have a significant impact on the increase in net sales.

Our 8% increase in sales volumes for 2006 is primarily due to higher sales volumes in Europe and export markets.

Cost of sales - Cost of sales increased 12.9% or $78.8 million for 2006 compared to 2005, primarily due to the impact of increased sales volumes, a 22% increase in utility costs (primarily energy costs) and a 5% increase in raw materials costs. The cost of sales as a percent of net sales increased to 76% for 2006, compared to 72% for 2005 primarily due to increases in higher raw material and other operating costs (including energy costs).

The negative impact of the increase in energy costs and raw materials was somewhat offset by record production levels. TiO₂ production volumes increased 4% for 2006 compared to 2005, which favorably impacted our income from operations comparisons. Our operating rates were near full capacity in both periods. Our TiO₂ production volume in 2006 was a record for us for the fifth consecutive year. The increase in production volumes for 2006 was aided by enhancing our processes and our continued debottlenecking activities.

Income from operations - Income from operations for 2006 declined by 22% or $30.9 million compared to 2005. As a percentage of net sales declined to 11% for 2006 from 16% for 2005. These declines were driven by the $15.5 million decline in gross margin which as a percentage of net sales fell to 24% for 2006 from 28% for 2005. While our sales volumes were higher in 2006, our gross margin decreased as we were not able to achieve pricing levels to offset the negative impact of our increased operating costs (primarily energy and raw materials). In addition, we estimate the negative effect of changes in foreign currency exchange rates decreased income from operations by approximately $12 million.

As a percentage of net sales, selling, general and administrative expenses were relatively consistent at approximately 13% for 2006 and 2005.

Other non-operating income (expense) - In 2005 we recognized a gain on the sale of our passive interest in a Norwegian smelting operation, which had a nominal carrying value for financial reporting purposes, for aggregate consideration of approximately $5.4 million consisting of cash of $3.5 million and inventory with a value of $1.9 million. See Note 13 to our Consolidated Financial Statements.

In 2006, we issued our euro 400 million principal amount of 6.5% Senior Secured Notes, and used the proceeds to redeem our euro 375 million principal amount of 8.875% Senior Secured Notes. As a result of our prepayment of the 8.875% Senior Secured Notes, we recognized a $22.3 million pre-tax interest charge ($14.5 million net of income tax benefit) for the prepayment of the notes, representing (1) the call premium on the notes, (2) the write-off of deferred financing costs and (3) write off of the existing unamortized premium on the notes. See Note 6 to our Consolidated Financial Statements.

Interest expense decreased $3.0 million from $44.0 million for 2005 to $41.0 million for 2006 due to the redemption of the 8.875% Senior Secured Notes and the issuance of the 6.5% Senior Secured Notes during 2006, which was partially offset by unfavorable changes in currency exchange rates in 2006 compared to 2005. Excluding the effect of currency exchange rates, we expect that interest expense will be lower in 2007 as compared to the 2006. The annual interest expense on the new 6.5% Notes will be approximately euro 6 million less than the old 8.875% Notes. The interest expense we recognize will vary with fluctuations in the euro exchange rate.

Provision for income taxes(benefit) - Our income tax benefit was $7.7 million for 2006 compared to an income tax provision of $59.4 million for 2005.  See Note 7 to our Consolidated Financial Statements for a tabular reconciliation of the statutory tax expense to our actual tax benefit. Some of the more significant items impacting this reconciliation are summarized below.

Our income tax benefit for 2006 includes:

·   an income tax benefit of $21.7 million resulting from a favorable resolution of certain income tax audits in Germany that resulted in an increase in the amount of our German trade tax net operating loss carryforward;

·   an income tax benefit of $10.7 million resulting from the reduction in our income tax contingency reserves related to favorable developments with income tax audits in Belgium, Norway and Germany; and

·   an income tax benefit of $1.4 million related to the favorable resolution of certain income tax audit issues in Germany and Belgium.

Our income tax expense for 2005 includes:

·   an income tax benefit of $7.7 million for the aggregate effect of favorable developments with respect to income tax audits in Belgium; and

·   a charge of $17.5 million for the unfavorable effect related to the loss of certain of our German income tax attributes.

Comparison of 2005 to 2004 Results of Operations

	Year ended December 31,
	2004			2005
	(Dollars in millions)
Net sales	$	808.0	100%	$	850.9	100%
Cost of sales**		610.2	76%		612.4	72%
Gross margin**		197.8	24%		238.5	28%
Other operating income and expenses, net		100.9	12%		100.2	12%
Income from operations**	$	96.9	12%	$	138.3	16%
						Percent
						Change
TiO2 operating statistics:
Sales volumes*		336			326	-3%
Production volumes*		328			335	2%
Percent change in net sales:
TiO2 product pricing						5%
TiO2 sales volumes						-3%
TiO2 product mix						2%
Changes in currency exchange rates						1%
Total						5%

   ___________________________

   *   Thousands of metric tons

   ** As adjusted for effects of adopting FSP No. AUG AIR-1. See Note 15 to our Consolidated Financial Statements.

Net sales - Net sales increased 5% or $42.9 million for 2005 as compared to 2004 primarily due to a 5% increase in average TiO₂ selling prices and the favorable effect of fluctuations in foreign currency exchange rates offset somewhat by a 3% decline in sales volumes. We estimate the favorable effect of changes in foreign currency increased our net sales for 2005 by $13 million or 1% compared to the 2005 period.

Our 3% decrease in sales volumes for 2005 is primarily due to lower sales volumes in all regions of the world. Worldwide demand for TiO₂ in 2005 is estimated to have declined by approximately 5% from the exceptionally strong demand levels in 2004. We attribute this decline to slower overall economic growth in 2005 and inventory destocking by our customers.

Cost of sales - Cost of sales increased by less than 1% or $2.2 million for 2005 compared to 2004 as the effect of higher selling prices was offset by a 7% increase in utility costs and a 5% increase in raw materials. However, cost of sales as a percentage of net sales, decreased from 76% in 2004 to 72% in 2005 due primarily to the effects of higher average selling prices which more than offset the increases in raw material and other operating costs.

TiO2 production volumes increased 2% in 2005 compared to 2004, which favorably impacted our income from operations. Our operating rates were near full capacity in both periods. Our production volumes in 2005 was a new record for us.

Income from operations - Income from operations for 2005 improved by 43% to $138.3 million compared to 2004. Income from operations as a percentage of net sales improved to 16% for 2005 from 12% for 2004. The improvement in income from operations is driven by the improvement in gross margin, which rose to 28% in 2005 compared to 24% in 2004. While our sales volumes were lower in 2005, our gross margin increased primarily because of higher average TiO₂ selling prices and higher production volumes which more than offset the impact of lower sales volumes and higher raw material and maintenance costs. Changes in currency rates favorably affected our gross margin. We estimate the favorable effect of changes in foreign currency exchange rates increased income from operations by approximately $10 million, when comparing 2005 to 2004.

As a percentage of net sales, selling, general and administrative expenses were relatively consistent at approximately 13% for both 2004 and 2005. 

Other non-operating income (expense) - Interest expense increased $7.3 million to $44.0 million for 2005 from $36.7 million from 2004, primarily due to the November 2004 issuance of an additional euro 90 million principal amount of our prior 8.875% Senior Secured Notes.

The securities transaction gain in 2005 relates to the sale of our passive interest in a Norwegian smelting operation, which had a nominal carrying value for financial reporting purposes, for aggregate consideration of approximately $5.4 million consisting of cash of $3.5 million and inventory with a value of $1.9 million. See Note 13 to our Consolidated Financial Statements.

Provision for income taxes - Our provision for income taxes was $59.4 million for 2005 compared to a benefit of $261.5 million for 2004.  See Note 7 to our Consolidated Financial Statements for a tabular reconciliation of our statutory tax expense to our actual tax expense. Some of the more significant items impacting this reconciliation are summarized below.

Our income tax expense for 2005 includes:

·   an income tax benefit of $7.7 million for the aggregate effect of favorable developments with respect to income tax audits principally in Belgium and

·   a charge of $17.5 million for the unfavorable effect related to the loss of certain of our German income tax attributes.

Our income tax benefit for 2004 is primarily due to the reversal of our deferred income tax asset valuation allowance in Germany of $280.7 million which is more fully discussed in Note 7 to our Consolidated Financial statements.

Effects of foreign currency exchange rates

All of our operations and assets are located outside the United States (in Germany, Belgium and Norway). The majority of our sales are denominated in foreign currencies, principally the euro and other major European currencies. A portion of our sales generated from our operations are denominated in the U.S. dollar. Certain raw materials used worldwide, primarily titanium-containing feedstocks, are purchased in U.S. dollars, while labor and other production costs are purchased primarily in local currencies. Consequently, the translated U.S. dollar value of our sales and operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect the comparability of period-to-period operating results. Overall, fluctuations in foreign currency exchange rates had the following effects on our sales and income from operations for the periods indicated.

	Year ended December 31,
	2004 vs. 2005	2006 vs. 2005
	Increase (decrease), in millions
Impact on:
Net sales	$13	$ (2)
Income from operations	10	(12)

Outlook

We expect that our income from operations in 2007 will be lower than 2006, due to continued downward pricing pressures and increased energy costs and raw materials costs, offset in part by the effect of higher expected sales and production volumes. Our expectations as to the future of the TiO₂ industry are based upon a number of factors beyond our 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 our expectations, our results of operations could be unfavorably affected.

Our efforts to debottleneck our production facilities to meet long-term demand continue to prove successful. Such debottlenecking efforts included, among other things, the addition of finishing capacity in the German chloride process facility and equipment upgrades and enhancements in several locations to allow for reduced downtime for maintenance activities. Our production capacity has increased by approximately 30% over the past ten years due to debottlenecking programs, with only moderate capital expenditures. We believe our annual attainable production capacity for 2007 is approximately 355,000 metric tons, with some slight additional capacity expected to be available in 2008 through our continued debottlenecking efforts.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated cash flows

Operating activities

Trends in cash flows as a result of our operating activities (excluding the impact of significant asset dispositions and relative changes in assets and liabilities) are generally similar to trends in our earnings.

Our cash flows from operating activities provided $62.5 million for 2006, compared to $92.7 million for 2005. This decrease was due primarily to the net effects of the following items:

·   lower income from operations in 2006 of $30.9 million;

·   payment of the $20.9 million call premium as a result of the May 2006 prepayment of our 8.875% Senior Secured Notes, which is required to be included in cash flows from operating activities;

·   higher cash paid for income taxes in 2006 of $14.5 million, in part due to the net payment of $19.2 million in 2006 associated with the settlement of prior year income tax audits; offset by

·   lower cash paid for interest in 2006 of $9.0 million, primarily as a result of the May 2006 redemption of our 8.875% Senior Secured Notes and the April 2006 issuance of our lower interest 6.5% Senior Secured Notes (which will pay interest semi annually in April and October; and

·   a lower amount of net cash used from relative changes in our inventories, receivables, payables and accruals of $16.7 million in 2006 due primarily to relative changes in our accounts payable and accrued liabilities and inventory levels, as discussed below.

Cash flows provided from operating activities decreased from $142.3 million for 2004 to $92.7 million for 2005. This $49.6 million decrease was due primarily to the net effect of:

·   higher income from operations in 2005 of $41.4 million;

·   a lower amount of net cash provided from changes in our inventories, receivables, payables, accruals and accounts with affiliates in 2005 of $61.4 million as discussed below;

·   higher cash paid for interest in 2005 of $7.5 million due principally to the issuance of euro 90 million principal amount of the 8.875% Senior Secured Notes in November 2004; and

·   higher cash paid for income taxes in 2005 of $43.8 million, due primarily to net refunds of German income taxes of $23.8 million received in 2004.

Changes in working capital are affected by accounts receivable and inventory changes. Our average days sales outstanding (“DSO”) increased to 61 days at December 31, 2006 from 52 days at December 31, 2005 due to the timing of collection on higher accounts receivable balances at the end of 2006. For comparative purposes, our average DSO decreased to 52 days at December 31, 2005 from 58 days at December 31, 2004 due to the timing of collections. Our average days sales in inventory (“DSI”) decreased to 107 days at December 31, 2006 from 105 days at December 31, 2005, as our record TiO₂ sales volumes in the year ended 2006 exceeded our record TiO₂ production volumes during the period. For comparative purposes, our average DSI increased to 105 days at December 31, 2005 from 99 days at December 31, 2004.

Investing activities

Our capital expenditures were $47.1 million in 2006, $39.5 million in 2005 and $33.7 million in 2004. Capital expenditures are primarily for improvements and upgrades to existing facilities.

Our capital expenditures during the past three years include an aggregate of approximately $13.1 million ($4 million in 2006) for our ongoing environmental protection and compliance programs.

Other cash flows from investing activities include $3.5 million we received in 2005 from the sale of our passive interest in a Norwegian smelting operation.

Financing activities

During 2006, we:

·   issued euro 400 million principal amount of 6.5% Notes at 99.306% ($498.5 million when issued); and

·   redeemed our euro 375 million principal amount of 8.875% Senior Secured Notes ($470.5 million when redeemed) using the proceeds from the issuance of the 6.5% Notes.

During 2005, we:

·   repaid the outstanding balance of euro 10 million ($12.9 million when repaid) under our three-year euro 80 million secured revolving credit facility (“European Credit Facility”); and

·   entered into additional capital lease agreements for certain mining equipment for the equivalent of approximately $4.4 million.

During 2004, we:

·   issued an additional euro 90 million principal amount of our Senior Secured Notes at 107% of par (equivalent to $130 million when issued);

·   borrowed, at our operating subsidiaries in Germany, Belgium and Norway, an aggregate of euro 90 million ($112 million when borrowed) of borrowings under our European Credit Facility, of which euro 80 million ($100 million) was subsequently repaid; and

·   transferred an aggregate of euro 163.1 million ($209.5 million) to Kronos in return for two promissory notes. We have classified these notes receivable as a separate component of our stockholder’s equity. See Note 10 to our Consolidated Financial Statements.

We paid dividends of $50.2 million in 2006, none in 2005 and $60.0 million in 2004. No dividends have been declared for 2007. The declaration and payment of future dividends is discretionary, and the amount, if any, will be dependent upon our results of operations, financial condition, contractual restrictions and other factors deemed relevant by our Board of Directors.

Outstanding debt obligations and borrowing availability

At December 31, 2006, our consolidated debt was comprised of:

·   euro 400 million principal amount of our 6.5% Senior Secured Notes ($525.0 million at December 31, 2006) due in 2013;

·   approximately $4.8 million of other indebtedness.

Certain of our credit agreements contain provisions which could result in the acceleration of indebtedness prior to its stated maturity for reasons other than defaults for failure to comply with applicable covenants. For example, certain credit agreements allow the lender to accelerate the maturity of the indebtedness upon a change of control (as defined in the agreement) of the borrower. 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. We are in compliance with all of our debt covenants at December 31, 2006. See Note 6 to our Consolidated Financial Statements.

Our assets consist primarily of investments in operating subsidiaries, and our ability to service parent level obligations, including the Senior Secured Notes, depends in large part upon the distribution of earnings of our subsidiaries, whether in the form of dividends, advances or payments on account of intercompany obligation or otherwise. We have pledged 65% of the common stock or other ownership interests of certain of our first-tier operating subsidiaries as collateral for the Senior Secured Notes. At December 31, 2006, we had approximately $79 million available for payment of dividends and other restricted payments as defined in the 6.5% Senior Secured Notes indenture.

Liquidity

Our primary source of liquidity on an ongoing basis is cash flows from operating activities which is generally used to (i) fund working capital expenditures, (ii) repay any short-term indebtedness incurred for working capital purposes and (iii) provide for the payment of dividends. From time-to-time we will incur indebtedness, generally to (i) fund short-term working capital needs, (ii) refinance existing indebtedness or (iii) fund major capital expenditures or the acquisition of other assets outside the ordinary course of business. We will also from time-to-time sell assets outside the ordinary course of business, and use the proceeds to (i) repay existing indebtedness, (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.

Pricing within the TiO₂ industry is cyclical, and changes in industry economic conditions significantly impact earnings and operating cash flows. Changes in TiO₂ pricing, production volumes and customer demand, among other things, could significantly affect our liquidity.

We routinely evaluate our liquidity requirements, alternative uses of capital, capital needs and availability of resources in view of, among other things, our dividend policy, our debt service and capital expenditure requirements and estimated future operating cash flows. As a result of this process, we have in the past and may in the future seek to reduce, refinance, repurchase or restructure indebtedness, raise additional capital, repurchase shares of our common stock, modify our dividend policy, restructure ownership interests, sell interests in our subsidiaries or other assets, or take a combination of these steps or other steps to manage our liquidity and capital resources. Such activities have in the past and may in the future involve related companies. In the normal course of our business, we may investigate, evaluate, discuss and engage in acquisition, joint venture, strategic relationship and other business combination opportunities in the TiO₂ industry. In the event of any future acquisition or joint venture opportunity, we may consider using then-available liquidity, issuing our equity securities or incurring additional indebtedness.

At December 31, 2006, unused credit available under all of our existing credit facilities was approximately $106 million. Based upon our expectation for the TiO₂ industry and anticipated demands on cash resources, we expect to have sufficient liquidity to meet our future obligations including operations, capital expenditures, debt service and current dividend policy. If actual developments differ from our expectations, our liquidity could be adversely affected.

Capital Expenditures

We intend to spend approximately $45 million for major improvements and upgrades to our facilities during 2007 and approximately $5 million in the area of environmental protection and compliance.

Off-balance sheet financing

Other than operating lease commitments disclosed in Note 12 to our Consolidated Financial Statements, we are not party to any material off-balance sheet financing arrangements.

Cash, cash equivalents, restricted cash and restricted marketable debt securities

At December 31, 2006, we had current cash and cash equivalents aggregating $52.8 million, had current restricted cash equivalents of $1.5 million and noncurrent restricted marketable debt securities of $2.8 million.

Related party transactions

We are party to certain transactions with related parties. See Note 11 to our Consolidated Financial Statements. It is our policy to engage in transactions with related parties on terms, in our opinion, no less favorable to us than could be obtained from unrelated parties.

Commitments and contingencies

     See Notes 7 and 12 to our Consolidated Financial Statements for a description of certain income tax examinations currently underway and certain legal proceedings.

Recent accounting pronouncements

     See Note 15 to our Consolidated Financial Statements.

Debt and other contractual commitments

As more fully described in the Notes to our Consolidated Financial Statements, we are a party to various debt, lease and other agreements which contractually and unconditionally commit us to pay certain amounts in the future. See Notes 6 and 12 to our Consolidated Financial Statements. The following table summarizes such contractual commitments of ours and our consolidated subsidiaries contractual commitments as of December 31, 2006 by the type and date of payment.

	Payment due date
Contractual commitment	2007		2008/2009		2010/2011		2012 and  after		Total
	(In millions)
Indebtedness	$	.9	$	1.9	$	2.0	$	525.0	$	529.8
Interest on indebtedness		34.4		68.8		68.8		45.8		217.8
Operating leases		3.7		5.1		2.8		19.9		31.5
Fixed asset acquisitions		19.5		-		-		-		19.5
Estimated tax obligations		10.1		-		-		-		10.1
	$	68.6	$	75.8	$	73.6	$	590.7	$	808.7

The timing and amount shown for our 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 revolving credit facilities, the amount shown for indebtedness is based upon the actual amount outstanding at December 31, 2006, and the amount shown for interest for any outstanding variable-rate indebtedness is based upon the December 31, 2006 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, 2006, which is assumed to be paid during 2007. A significant portion of the amount shown for indebtedness relates to our Senior Secured Notes ($525.0 million at December 31, 2006). Such indebtedness is denominated in euro. See Item 7A - “Quantative and Qualitative Disclosures About Market Risk” and Note 6 to our Consolidated Financial Statements.

The above table does not reflect any amounts that we might pay to fund our defined benefit pension 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 are discussed above in greater detail. See Note 8 to our Consolidated Financial Statements.

Defined benefit pension plans

We maintain various defined benefit pension plans in Europe. See Note 8 to our Consolidated Financial Statements.

We account for our defined benefit pension plans using SFAS No. 87, Employer’s Accounting for Pensions, as amended. 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.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires the recognition of an asset or liability for the over or under funded status of each of our individual defined benefit pension plans on our Consolidated Balance Sheets. This standard does not change the existing recognition and measurement requirements that determine the amount of periodic benefit cost we recognize in net income. We adopted the asset and liability recognition and disclosure requirements of this standard effective December 31, 2006 on a prospective basis, in which we recognized through accumulated other comprehensive income all of our prior unrecognized gains and losses and prior service costs or credits, net of tax, as of December 31, 2006.

We recognized consolidated defined benefit pension plan expense of $10.4 million in 2004, $11.5 million in 2005 and $17.7 million in 2006. The amount of funding requirements for these defined benefit pension plans is generally based upon applicable regulations (such as ERISA in the U.S.), and will generally differ from pension expense recognized under SFAS No. 87 for financial reporting purposes. Our contributions to all of our plans aggregated $11.7 million in 2004, $13.3 million in 2005 and $18.5 million in 2006.

The discount rates we utilize 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, we receive advice about appropriate discount rates from our third-party actuaries, who may in some cases utilize their own market indices. The discount rates are adjusted as of each measurement date (September 30) 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 the measurement date, and such discount rates are also used to determine the interest component of defined benefit pension expense for the following year.

At December 31, 2006, approximately 80% and 16% of the projected benefit obligation related to our plans in Germany and Norway, respectively. We use several different discount rate assumptions in determining our consolidated defined benefit pension plan obligations and expense because we maintain defined benefit pension plans in several different countries in Europe and the interest rate environment differs from country to country.

We used the following discount rates for our defined benefit pension plans:

	Discount rates used for:
	Obligations at December 31, 2004 and expense in 2005	Obligations at December 31, 2005 and expense in 2006	Obligations at December 31, 2006 and expense in 2007
Germany	5.0%	4.0%	4.5%
Norway	5.0%	4.5%	4.8%

The assumed long-term rate of 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, 2006, approximately 68% and 25% of the plan assets related to our plans in Germany and Norway, respectively. We use several different long-term rates of return on plan asset assumptions in determining our consolidated defined benefit pension plan expense. This is because we maintain defined benefit pension plans in several different countries in Europe and the plan assets in different countries are invested in a different mix of investments and the long-term rates of return for different investments differ from country to country.

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

·   In Germany, the composition of our plan assets is established to satisfy the requirements of the German insurance commissioner. The plan asset allocation at December 31, 2006 was 23% to equity managers, 48% to fixed income managers, 14% to real estate and 15% to other investments (2005 - 23%, 48%, 14% and 15%, respectively).

·   In Norway, we currently have a plan asset target allocation of 14% to equity managers, 65% to fixed income managers and the remainder primarily to liquid investments such as money markets. The expected long-term rate of return for such investments is approximately 8%, 4.5% to 6% and 2.5%, respectively. The plan asset allocation at December 31, 2006 was 13% to equity managers, 64% to fixed income managers and the remaining 23% primarily to cash and liquid investments (2005 - 16%, 62% and 22%, respectively).

We regularly review our actual asset allocation for each of our plans and will periodically rebalance the investments in each plan to more accurately reflect the targeted allocation when considered appropriate.

Our assumed long-term rates of return on plan assets for 2004, 2005 and 2006 were as follows:

	2004	2005	2006
Germany	6.0%	5.5%	5.3%
Norway	6.0%	5.5%	5.0%

We currently expect to utilize the same long-term rate of return on plan asset assumptions in 2007 as we used in 2006 for purposes of determining the 2007 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 our plans for which the benefit formula is so calculated, we generally base the assumed expected increase in future compensation levels upon average long-term inflation rates for the applicable country.

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

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

During 2006, all of our defined benefit pension plans generated a net actuarial gain of $5.0 million. This actuarial gain resulted primarily from the general overall increase in the assumed discount rates, offset in part by an assumed rate of return on plan assets in excess of the actual rate of return.

Based on the actuarial assumptions described above and our current expectation for what actual average foreign currency exchange rates will be during 2007, we expect our defined benefit pension expense will approximate $19 million in 2007. In comparison, we expect to be required to make approximately $15 million of contributions to such plans during 2007.

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. We believe all of the actuarial assumptions used are reasonable and appropriate. If we had lowered the assumed discount rate by 25 basis points for all of our plans as of December 31, 2006, our aggregate projected benefit obligations would have increased by approximately $14 million at that date, and our defined benefit pension expense would be expected to increase by approximately $2 million during 2007. Similarly, if we lowered the assumed long-term rate of return on plan assets by 25 basis points for all of our plans, our defined benefit pension expense would be expected to increase by approximately $1 million during 2007.

Foreign operations

As discussed above, our operations are located outside the United States for which the functional currency is not the U.S. dollar. As a result, our reported amount for assets and liabilities related to our operations, and therefore our consolidated net assets, will fluctuate based upon changes in currency exchange rates. At December 31, 2006, we had substantial net assets denominated in the euro, Norwegian kroner and United Kingdom pound sterling.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General

We are exposed to market risk from changes in foreign currency exchange rates, interest rates and equity security prices. In the past, we have periodically entered into currency forward contracts, interest rate swaps or other types of contracts in order to manage a portion of our interest rate market risk. Otherwise, we do not generally enter into forward or option contracts to manage such market risks, nor do we enter into any such contract or other type of derivative instrument for trading or speculative purposes. Other than as described below, we were not a party to any material forward or derivative option contract related to foreign exchange rates, interest rates or equity security prices at December 31, 2005 and 2006. See Notes 1 and 14 to our Consolidated Financial Statements.

Interest rates

We are exposed to market risk from changes in interest rates, primarily related to our indebtedness and credit agreement. At December 31, 2005 and 2006, all of our aggregate indebtedness was comprised of fixed-rate instruments. The large percentage of our fixed-rate debt instruments minimizes earnings volatility that would result from changes in interest rates. The following table presents principal amounts and weighted average interest rates for our aggregate outstanding indebtedness at December 31, 2006. Information shown below for such foreign currency denominated indebtedness is presented in its U.S. dollar equivalent at December 31, 2006 using exchange rates of 1.32 U.S. dollars per euro. Certain Norwegian kroner denominated capital leases totaling $4.8 million in 2006 have been excluded from the table below.

	Amount
Indebtedness	Carrying   value		Fair   value		Interest   rate			Maturity   date
	(In millions)
Fixed-rate indebtedness - euro-denominated Senior Secured Notes	$	525.0	$	512.5		6.5	%		2013

At December 31, 2005, euro-denominated fixed rate indebtedness, consisting solely of the prior 8.875% Senior Secured Notes, aggregated $449.3 million (fair value - $463.6 million) with a weighted-average interest rate of 8.9%. There was no variable rate indebtedness outstanding at December 31, 2005 or 2006.

Foreign currency exchange rates

We are exposed to market risk arising from changes in foreign currency exchange rates as a result of manufacturing and selling our products worldwide. Earnings are primarily affected by fluctuations in the value of the U.S. dollar relative to the euro, the Norwegian kroner and the United Kingdom pound sterling.

As described above, at December 31, 2006, we had the equivalent of $525.0 million of outstanding euro-denominated indebtedness (2005 - the equivalent of $449.3 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 $52.8 million at December 31, 2006 (2005 - $44.4 million).

Other

We believe there may be a certain amount of incompleteness in the sensitivity analysis presented above. For example, the hypothetical effect of changes in exchange rates discussed above ignores the potential effect on other variables which affect our results of operations and cash flows, such as demand for our products, sales volumes and selling prices and operating expenses. Accordingly, the amounts presented above are not necessarily an accurate reflection of the potential losses we would incur assuming the hypothetical changes in exchange rates were actually to occur.

The above discussion and estimated sensitivity analysis amounts include forward-looking statements of market risk which assume hypothetical changes in currency exchange rates. Actual future market conditions will likely differ materially from such assumptions. Accordingly, such forward-looking statements should not be considered to be projections by us 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

We maintain a system of disclosure controls and procedures. The term "disclosure controls and procedures," as defined by Exchange Act Rule 13a-15(e), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit 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 we are required to disclose in the reports we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Each of Harold C. Simmons, our Chief Executive Officer, and Gregory M. Swalwell, our Vice President, Finance and Chief Financial Officer, have evaluated the design and effectiveness of our disclosure controls and procedures as of December 31, 2006. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures are effective as of December 31, 2006.

Internal Control Over Financial Reporting

We also maintain internal control over financial reporting. The term “internal control over financial reporting,” as defined by Exchange Act Rule 13a-15(f) means a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by the 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:

·   Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets,

·   Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors, and

·   Provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition, use or disposition of assets that could have a material effect on our Condensed Consolidated Financial Statements.

Beginning with our Annual Report on Form 10-K for the year ended December 31, 2007, we will be required to annually assess the effectiveness of our internal control over financial reporting. Our independent registered public accounting firm will also be required to annually attest to the effectiveness of our internal control over financial reporting, but under the rules of the SEC this attestation is not required until our Annual Report on Form 10-K for the year ended December 31, 2008.

Changes in Internal Control Over Financial Reporting

There has been no change to our internal control over financial reporting during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

ITEM 9B.OTHER INFORMATION

Not applicable

PART III

ITEM 10.DIRECTORS EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Omitted pursuant to the General Instruction I of Form 10-K.

ITEM 11.EXECUTIVE COMPENSATION

Omitted pursuant to the General Instruction I of Form 10-K.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Omitted pursuant to the General Instruction I of Form 10-K.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Omitted pursuant to the General Instruction I of Form 10-K.

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table shows the aggregate fees PricewaterhouseCoopers LLP, our independent registered public accounting firm (“PwC”), has billed or is expected to bill to us and our subsidiaries for services rendered for 2005 and 2006. No fees were billed or expected to be billed by PwC to us for services performed in 2005 and 2006 for financial information systems design and implementation.

	December 31,
	2005		2006
	(In thousands)
Audit(1)	$	1,523	$	1,699
Audit related(2)		19		18
Tax(3)		21		5
Total	$	1,563	$	1,722

1)   Fees for the following services:

a)   audits of our consolidated year-end financials statements for each year;

b)   reviews of the unaudited quarterly financial statements appearing in our Form 10-Q’s for each of the first three quarters of each year;

c)   consents and assistance with registration statements filed with the Commission;

d)   normally provided statutory or regulatory filings or engagements for each year; and

e)   the estimated out-of-pocket costs PwC incurred in providing all of such services for which we reimburse PwC.

2)   Fees for assurance and related services reasonably related to the audit or review of our financial statements for each year. These services include employee benefit plan audits, accounting consultations and attest services concerning financial accounting and reporting standards and advice concerning internal controls.

3)   Fees for tax compliance, tax advice and tax planning services.

PART IV

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) and (c)   Financial Statements and Schedules

The Registrant

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

Financial Statements of Guarantors

The consolidated financial statements of Kronos Titan GmbH and Kronos Denmark ApS listed on the accompanying Index of Financial Statements and Schedules (see page F-1) are filed as part of this Annual Report pursuant to Rule 3-16 of Regulation S-X. The Registrant is not required to provide any other financial statements pursuant to Rule 3-16 of Regulation S-X.

(b)  Exhibits

Included as exhibits are the items listed in the Exhibit Index. We will furnish a copy of any of the exhibits listed below upon payment of $4.00 per exhibit to cover the costs of furnishing the exhibits. 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, 2006 will be furnished to the Commission upon request.

Item No.Exhibit Index

3.1 Certificate of Incorporation of the Registrant - incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-4 (File No. 333-100047).

3.2 Certificate of Amendment to Certificate of Incorporation of the Registrant, dated March 15, 1989 - incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-4 (File No. 333-100047).

3.3 Certificate of Amendment to Certificate of Incorporation of the Registrant, dated January 1, 1999 - incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form S-4 (File No. 333-100047).

3.4 Certificate of Amendment to Certificate of Incorporation of the Registrant, dated February 8, 1999 - incorporated by reference to Exhibit 3.4 to the Registrant’s Registration Statement on Form S-4 (File No. 333-100047).

3.5 Certificate of Amendment to Certificate of Incorporation of the Registrant, dated December 15, 1999 - incorporated by reference to Exhibit 3.5 to the Registrant’s Registration Statement on Form S-4 (File No. 333-100047).

3.6 Amended and Restated Bylaws of the Registrant - incorporated by reference to Exhibit 3.6 to the Registrant’s Registration Statement on Form S-4 (File No. 333-100047). 

4.1 Indenture governing the 6.5% Senior Secured Notes due 2013, dated as of April 11, 2006, between Kronos International, Inc. and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 333-100047) that was filed with the U.S. Securities and Exchange Commission on April 11, 2006).

4.2 Form of certificate of Series A 6.5% Senior Secured Note due 2013 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 333-100047) that was filed with the U.S. Securities and Exchange Commission on April 11, 2006).

4.3 Form of certificate of Series B 6.5% Senior Secured Note due 2013 (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (File No. 333-100047) that was filed with the U.S. Securities and Exchange Commission on April 11, 2006).

4.4 Purchase Agreement dated April 5, 2006 between Kronos International, Inc. and Deutsche Bank AG London (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 333-100047) that was filed with the U.S. Securities and Exchange Commission on April 11, 2006).

4.5 Registration Rights Agreement dated as of April 11, 2006 between Kronos International, Inc. and Deutsche Bank AG London (incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K (File No. 333-100047) that was filed with the U.S. Securities and Exchange Commission on April 11, 2006)

4.6 Collateral Agency Agreement, dated April 11, 2006, among The Bank of New York, U.S. Bank, N.A. and Kronos International, Inc. (incorporated by reference to Exhibit 4.6 to the Registrant’s Current Report on Form 8-K (File No. 333-100047) that was filed with the U.S. Securities and Exchange Commission on April 11, 2006).

4.7 Security Over Shares Agreement, dated April 11, 2006, between Kronos International, Inc. and The Bank of New York (incorporated by reference to Exhibit 4.7 to the Registrant’s Current Report on Form 8-K (File No. 333-100047) that was filed with the U.S. Securities and Exchange Commission on April 11, 2006).

4.8 Pledge of Shares (shares in Kronos Denmark ApS), dated April 11, 2006, between Kronos International, Inc. and U.S. Bank, N.A. (incorporated by reference to Exhibit 4.8 to the Registrant’s Current Report on Form 8-K (File No. 333-100047) that was filed with the U.S. Securities and Exchange Commission on April 11, 2006).

4.9 Pledge Agreement (shares in Societe Industrielle du Titane S.A.), dated April 11, 2006, between Kronos International, Inc. and U.S. Bank, N.A. (incorporated by reference to Exhibit 4.9 to the Registrant’s Current Report on Form 8-K (File No. 333-100047) that was filed with the U.S. Securities and Exchange Commission on April 11, 2006)

4.10 Share Pledge Agreement (shares in Kronos Titan GmbH), dated April 11, 2006, between Kronos International, Inc. and U.S. Bank, N.A. (incorporated by reference to Exhibit 4.10 to the Registrant’s Current Report on Form 8-K (File No. 333-100047) that was filed with the U.S. Securities and Exchange Commission on April 11, 2006).

10.1 Euro 80,000,000 Facility Agreement, dated June 25, 2002, among Kronos Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos Titan A/S and Titania A/S, as borrowers, Kronos Titan GmbH & Co. OHG, Kronos Europe S.A./N.V. and Kronos Norge AS, as guarantors, Kronos Denmark ApS, as security provider, Deutsche Bank AG, as mandated lead arranger, Deutsche Bank Luxembourg S.A., as agent and security agent, and KBC Bank NV, as fronting bank, and the financial institutions listed in Schedule 1 thereto, as lenders - incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of NL Industries, Inc. for the quarter ended June 30, 2002.

10.2 First Amendment Agreement, dated September 3, 2004, Relating to a Facility Agreement dated June 25, 2002 among Kronos Titan GmbH, Kronos Europe S.A./N.V., Kronos Titan AS and Titania A/S, as borrowers, Kronos Titan GmbH, Kronos Europe S.A./N.V. and Kronos Norge AS, as guarantors, Kronos Denmark ApS, as security provider, with Deutsche Bank Luxembourg S.A., acting as agent - incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 of Kronos Worldwide, Inc. (File No. 333-119639).

10.3 Second Amendment Agreement Relating to a Facility Agreement dated June 25, 2002 executed as of June 14, 2005 by and among Deutsche Bank AG, as mandated lead arranger, Deutsche Bank Luxembourg S.A. as agent, the participating lenders, Kronos Titan GmbH, Kronos Europe S.A./N.V, Kronos Titan AS, Kronos Norge AS, Titania AS and Kronos Denmark ApS - incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K dated June 14, 2005. Certain schedules, exhibits, annexes and similar attachments to this Exhibit 10.3 have not been filed; upon request, the Reporting Persons will furnish supplementally to the Commission a copy of any omitted exhibit, annex or attachment. 

10.4 Lease Contract, dated June 21, 1952, between Farbenfabriken Bayer Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung (German language version and English translation thereof) - incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K of NL Industries, Inc. for the year ended December 31, 1985.

10.5 Contract on Supplies and Services, dated as of June 30, 1995, among Bayer AG, Kronos Titan-GmbH & Co. OHG and the Registrant (English translation from German language document) - incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q of NL Industries, Inc. for the quarter ended September 30, 1995.

10.6 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 10.32 of the Registration statement on Form 10 of the Registrant (File No. 001-31763).

10.7 Master Technology Exchange Agreement, dated as of October 18, 1993, among Kronos, Inc., Kronos Louisiana, Inc., the Registrant, Tioxide Group Limited and Tioxide Group Services Limited - incorporated by reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q of NL Industries, Inc. for the quarter ended September 30, 1993.

10.8 Intercorporate Services Agreement, dated as of January 1, 2005, among Kronos Worldwide, Inc., Kronos (US), Inc., Kronos International, Inc. and Kronos Canada, Inc.

10.9 Tax Agreement, dated as of May 28, 2002, between Kronos, Inc. and the Registrant - incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-4 (File No. 333-100047).

10.10 Services Agreement, dated as of January 1, 2004, among Kronos International, Inc., Kronos Europe S.A./N.V., Kronos (US), Inc., Kronos Titan GmbH, Kronos Denmark ApS, Kronos Canada, Inc., Kronos Limited, Societe Industrielle Du Titane, S.A., Kronos B.V., Kronos Titan AS and Titania AS.

10.11 Form of Assignment and Assumption Agreement, dated as of January 1, 1999, between Kronos, Inc. (formerly known as Kronos (USA), Inc.) and the Registrant - incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-4 (File No. 333-100047).

10.12 Form of Cross License Agreement, effective as of January 1, 1999, between Kronos Inc. (formerly known as Kronos (USA), Inc.) and the Registrant - incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-4 (File No. 333-100047).

10.13* NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A of NL Industries, Inc. for the annual meeting of shareholders held on May 6, 1998.

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

10.15* Form of Indemnity Agreement between the Registrant and the officers and directors of the Registrant - incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-4 (File No. 333-100047).

10.16* Summary of Consulting Arrangement, beginning on August 1, 2003, between Lawrence A. Wigdor and Kronos Worldwide, Inc. - incorporated by reference to Exhibit 10.50 to NL Industries, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004.

10.17 Agency Agreement, dated as of January 1, 2004, among Kronos International, Inc., Kronos Titan GmbH, Kronos Europe S.A./N.V., Kronos Canada, Inc., Kronos Titan AS and Societe Indutrielle Du Titane, S.A.

10.18 Titanium Dioxide Products and Titanium Chemicals Distribution Agreement, dated as of January 1, 2005, among Kronos Titan GmbH, Kronos Europe S.A./N.V., Kronos Canada, Inc., Kronos Titan AS, Kronos (US), Inc., Kronos Denmark ApS, Kronos Titan GmbH, Kronos Limited, Societe Industrielle Du Titane, S.A. and Kronos B.V.

10.19 Raw Material Purchase and Sale Agreement, dated as of January 1, 2004, among Kronos (US), Inc., Kronos Titan GmbH, Kronos Europe S.A./N.V. and Kronos Canada, Inc.

10.20 Promissory note in the amount of euro 65,000,000, dated as of October 12, 2004 between the Registrant and Kronos Worldwide, Inc.

10.21 Promissory note in the amount of euro 98,094,875, dated as of November 26, 2004 between the Registrant and Kronos Worldwide, Inc.

12.1 Statements of Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends

12.2 Statements of Computation of Ratio of Earnings to Fixed Charges

31.1 Certification.

31.2 Certification.

32.1 Certification.

___________________________________

* Management contract, compensatory plan or arrangement

SIGNATURES

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

Kronos International, Inc.

(Registrant)

By:/s/ Harold C. Simmons

Harold C. Simmons

March 13, 2007

(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/ Andrew Kasprowiak	/s/ Gregory M. Swalwell
Andrew Kasprowiak, March 13, 2007	Gregory M. Swalwell, March 13, 2007
(Director)	(Vice President, Finance; Principal Financial Officer)
s/ Dr. Ulfert Fiand	/s/ Volker Roth
Dr. Ulfert Fiand, March 13, 2007	Volker Roth, March 13, 2007
(Director)	(Director)
	/s/ Tim C. Hafer
	Tim C. Hafer, March 13, 2007
	(Vice President, Controller, Principal Accounting Officer)

KRONOS INTERNATIONAL, INC.
Annual Report on Form 10-K
Items 8, 15(a) and 15(c)
Index of Financial Statements and Schedules
Financial Statements	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets - December 31, 2005 (As adjusted); and December 31, 2006	F-3
Consolidated Statements of Income -
Years ended December 31, 2004 and 2005 (As adjusted); and Year ended December 31, 2006	F-5
Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2004 and 2005 (As adjusted); and Year ended December 31, 2006	F-6
Consolidated Statements of Stockholder’s Equity -
Years ended December 31, 2004 and 2005 (As adjusted); and Year ended December 31, 2006	F-7
Consolidated Statements of Cash Flows -
Years ended December 31, 2004 and 2005 (As adjusted); and Year ended December 31, 2006	F-8
Notes to Consolidated Financial Statements	F-10
Financial Statement Schedule
Schedule I - Condensed Financial Information of Registrant	S-1
Schedules II, III and IV are omitted either because they are not applicable or the required amounts are either not material, or are presented in the notes to our Consolidated Financial Statements.
Other Financial Statements filed pursuant to Rule 3-16 of Regulation S-X
Financial Statements of Kronos Titan GmbH	FA-1
Financial Statements of Kronos Denmark ApS	FB-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholder and Board of Directors of Kronos International, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Kronos International, Inc. and its subsidiaries at December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 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 15 to the consolidated financial statements, the Company changed the manner in which it accounts for planned major maintenance expense and the manner in which it accounts for pension and other postretirement benefit obligations in 2006.

PricewaterhouseCoopers LLP

Dallas, Texas

March 13, 2007

KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2006

(In thousands, except share data)

ASSETS
	2005		2006
	(As adjusted)
Current assets:
Cash and cash equivalents	$	63,284	$	52,820
Restricted cash		1,355		1,480
Accounts and other receivables		120,182		151,640
Receivables from affiliates		1,952		1,610
Refundable income taxes		1,053		1,360
Inventories		185,348		195,078
Prepaid expenses		2,680		3,948
Total current assets		375,854		407,936
Other assets:
Deferred financing costs, net		7,722		8,829
Restricted marketable debt securities		2,572		2,814
Pension asset		6,108		-
Deferred income taxes		213,275		264,377
Other		960		1,049
Total other assets		230,637		277,069
Property and equipment:
Land		30,288		34,285
Buildings		138,925		156,850
Equipment		644,271		740,677
Mining properties		68,163		82,140
Construction in progress		12,112		15,581
Total property and equipment		893,759		1,029,533
Less accumulated depreciation and amortization		544,984		633,969
Net property and equipment		348,775		395,564
Total assets	$	955,266	$	1,080,569

KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31, 2005 and 2006

(In thousands, except share data)

LIABILITIES AND STOCKHOLDER’S EQUITY
	2005			2006
	(As adjusted)
Current liabilities:
Current maturities of long-term debt	$	958		$	912
Accounts payable and accrued liabilities		115,912			115,338
Payable to affiliates		14,882			10,174
Income taxes		21,799			10,095
Deferred income taxes		4,993			1,751
Total current liabilities		158,544			138,270
Noncurrent liabilities:
Long-term debt		452,865			528,886
Deferred income taxes		19,265			14,446
Accrued pension cost		125,766			172,800
Other		15,434			14,682
Total noncurrent liabilities		613,330			730,814
Minority interest		75			41
Stockholder’s equity:
Common stock, $100 par value; 100,000 shares authorized; 2,968 shares issued		297			297
Additional paid-in capital		1,944,185			1,944,185
Retained deficit		(1,338,102	)		(1,314,633	)
Notes receivable from affiliate		(209,526	)		(209,526	)
Accumulated other comprehensive loss:
Currency translation		(129,892	)		(99,312	)
Defined benefit pension plans		(83,645	)		(109,567	)
Total stockholder’s equity		183,317			211,444
Total liabilities and stockholder’s equity	$	955,266		$	1,080,569

Commitments and contingencies (Notes 7 and 12)

See accompanying notes to the consolidated financial statements.

KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004			2005			2006
	(As adjusted)
Net sales	$	807,970		$	850,873		$	914,228
Cost of sales		610,196			612,434			691,150
Gross margin		197,774			238,439			223,078
Selling, general and administrative expense		104,110			110,185			116,944
Other operating income (expense):
Currency transaction gains (losses), net		(2,243	)		4,090			(4,449	)
Disposition of property and equipment		(895	)		(1,395	)		(1,845	)
Royalty income		6,034			6,827			7,224
Other income		426			576			392
Other expense		(72	)		(86	)		(106	)
Income from operations		96,914			138,266			107,350
Other income (expense):
Interest income from affiliates		2,767			18,943			18,843
Trade interest income		1,147			951			2,209
Other interest income		-			-			830
Securities transaction gain		-			5,439			-
Loss on prepayment of debt		-			-			(22,311	)
Interest expense		(36,692	)		(43,950	)		(40,953	)
Income before income taxes and minority interest		64,136			119,649			65,968
Provision (benefit) for income taxes		(261,468	)		59,383			(7,716	)
Minority interest		53			12			9
Net income	$	325,551		$	60,254		$	73,675

See accompanying notes to the consolidated financial statements.

KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004		2005			2006
	(As adjusted)		(As adjusted)
Net income	$	325,551	$	60,254		$	73,675
Other comprehensive (loss) income, net of tax:
Defined benefit pension plans		4,803		(54,051	)		8,206
Currency translation		33,759		(30,586	)		30,580
Total other comprehensive income (loss)		38,562		(84,637	)		38,786
Comprehensive income (loss)	$	364,113	$	(24,383	)	$	112,461

See accompanying notes to the consolidated financial statements.

KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

Years ended December 31, 2004, 2005 and 2006

(In thousands)

											Accumulated other
								Notes			comprehensive						Total
			Additional		Retained			receivable			income (loss)						common
	Common		paid-in		earnings			from			Currency			Pension			stockholder’s
	stock		capital		(deficit)			affiliates			translation			plans			equity
					(As adjusted)						(As adjusted)						(As adjusted)
Balance at December 31, 2003:
As previously reported	$	297	$	1,944,185	$	(1,665,098	)	$	-		$	(133,425	)	$	(34,397	)	$	111,562
Change in accounting principle		-		-		1,191			-			360			-			1,551
Balance as adjusted		297		1,944,185		(1,663,907	)		-			(133,065	)		(34,397	)		113,113
Net income*		-		-		325,551			-			-			-			325,551
Other comprehensive income (loss), net of tax*		-		-		-			-			33,759			4,803			38,562
Change in notes receivable from affiliates		-		-		-			(209,526	)		-			-			(209,526	)
Cash dividends		-		-		(60,000	)		-			-			-			(60,000	)
Balance at December 31, 2004		297		1,944,185		(1,398,356	)		(209,526	)		(99,306	)		(29,594	)		207,700
Net income*		-		-		60,254			-			-			-			60,254
Other comprehensive loss, net of tax*		-		-		-			-			(30,586	)		(54,051	)		(84,637	)
Balance at December 31, 2005		297		1,944,185		(1,338,102	)		(209,526	)		(129,892	)		(83,645	)		183,317
Net income		-		-		73,675			-			-			-			73,675
Other comprehensive loss, net of tax		-		-		-			-			30,580			8,206			38,786
Cash dividends		-		-		(50,206	)		-									(50,206	)
Adoption of SFAS No. 158		-		-		-			-			-			(34,128	)		(34,128	)
Balance at December 31, 2006	$	297	$	1,944,185	$	(1,314,633	)	$	(209,526	)	$	(99,312	)	$	(109,567	)	$	211,444

_________________________

*As adjusted

See accompanying notes to the consolidated financial statements.

KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004			2005			2006
		(As adjusted)			(As adjusted)
Cash flows from operating activities:
Net income	$	325,551		$	60,254		$	73,675
Depreciation and amortization		37,726			36,504			36,755
Loss on prepayment of debt		-			-			22,311
Call premium paid		-			-			(20,898	)
Noncash interest expense		2,044			2,566			1,848
Deferred income taxes		(274,137	)		30,969			(27,913	)
Minority interest		53			12			9
Net loss from disposition of property and equipment		895			1,395			1,845
Securities transaction gain		-			(5,439	)		-
Defined benefit pension plan expense greater (less) than cash funding		(800	)		(2,335	)		3,167
Other, net		987			(1,839	)		(952	)
Change in assets and liabilities:
Accounts and other receivables		(6,227	)		(9,641	)		(14,310	)
Inventories		11,582			(38,938	)		11,357
Prepaid expenses		(233	)		(228	)		(1,070	)
Accounts payable and accrued liabilities		28,503			10,159			(76	)
Income taxes		25,557			7,917			(15,752	)
Accounts with affiliates		(6,103	)		4,674			(5,783	)
Other noncurrent assets		1,981			(690	)		239
Other noncurrent liabilities		(5,124	)		(2,636	)		(1,922	)
Net cash provided by operating activities		142,255			92,704			62,530
Cash flows from investing activities:
Capital expenditures		(33,679	)		(39,522	)		(47,160	)
Purchase of interest in subsidiary		(575	)		-			-
Proceeds from disposal of interest in Norwegian smelting operation		-			3,542			-
Change in restricted cash equivalents and restricted marketable debt securities, net		(70	)		129			(33	)
Other, net		99			37			50
Net cash used by investing activities		(34,225	)		(35,814	)		(47,143	)

KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004			2005			2006
Cash flows from financing activities:
Indebtedness:
Borrowings	$	241,648		$	4,620		$	498,658
Principal payments		(100,073	)		(13,159	)		(470,662	)
Deferred financing fees		(1,989	)		-			(8,890	)
Loans to affiliates		(209,524	)		-			-
Dividends paid		(60,000	)		-			(50,206	)
Net cash used by financing activities		(129,938	)		(8,539	)		(31,100	)
Cash and cash equivalents - net change from:
Operating, investing and financing activities		(21,908	)		48,351			(15,713	)
Currency translation		2,292			(2,572	)		5,249
		(19,616	)		45,779			(10,464	)
Balance at beginning of year		37,121			17,505			63,284
Balance at end of year	$	17,505		$	63,284		$	52,820
Supplemental disclosures - cash paid (received) for:
Interest	$	33,425		$	40,912		$	31,951
Income taxes		(23,776	)		20,033			34,540
Inventories received as partial consideration for disposal of interest in Norwegian smelting operation	$	-		$	1,897		$	-

See accompanying notes to consolidated financial statements.

KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -Summary of significant accounting policies:

Organization and basis of presentation.  We are a Delaware corporation that is a wholly-owned subsidiary of Kronos Worldwide, Inc. (“Kronos”) At December 31, 2006, (i) Valhi, Inc. held approximately 59% of Kronos’ outstanding common stock and NL Industries, Inc. held an additional 36% of Kronos’ common stock, (ii) Valhi owned approximately 83% of NL's outstanding common stock and (iii) Contran Corporation and its subsidiaries held approximately 92% of Valhi's outstanding common stock. Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons (for which Mr. Simmons is sole trustee), or is held by Mr. Simmons or other persons or related companies to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control each of such companies.

Unless otherwise indicated, references in this report to “we,” “us” or “our” refer to Kronos International, Inc and its subsidiaries, taken as a whole.

Management’s estimates. In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results may differ significantly from previously-estimated amounts under different assumptions or conditions.

Principles of consolidation. Our consolidated financial statements include our accounts and those of our wholly-owned and majority-owned subsidiaries. We have eliminated all material intercompany accounts and balances. Minority interest relates to our 99% owned subsidiary in France, which conducts our marketing and sales activities in that country.

Translation of foreign currencies. We translate the assets and liabilities of our subsidiaries whose functional currency is other than the U.S. dollar at year-end rates of exchange, while we translate their revenues and expenses at average exchange rates prevailing during the year. We accumulate the resulting translation adjustments in stockholder’s equity as part of accumulated other comprehensive income (loss), net of related deferred income taxes and minority interest. We recognize currency transaction gains and losses in income.

Derivatives and hedging activities. We recognize derivatives as either assets or liabilities and measure them at fair value in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. We recognize the changes in the fair value of derivatives either in net income or other comprehensive income, depending on the intended use of the derivative.

Cash and cash equivalents. We classify bank time deposits and U.S. Treasury securities purchased under short-term agreements to resell with original maturities of three months or less as cash equivalents.  

Restricted marketable debt securities. We classify cash equivalents and marketable debt securities that have been segregated or otherwise limited in use as restricted. Restricted marketable debt securities are primarily invested in corporate debt securities and include amounts restricted in accordance with applicable Norwegian law regarding certain requirements of the Company’s Norwegian defined benefit pension plans ($2.6 million and $2.8 million at December 31, 2005 and 2006, respectively). The restricted marketable debt securities are generally classified as either a current or noncurrent asset depending upon the maturity date of each such debt security and are carried at market which approximates cost.

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

Property and equipment and depreciation. We state property and equipment at cost. We have a governmental concession with an unlimited term to operate an ilmenite mine in Norway. Mining properties consist of buildings and equipment used in our Norwegian ilmenite mining operations. While we own the land and ilmenite reserves associated with the mine, such land and reserves were acquired for nominal value and we have no material asset recognized for the land and reserves related to such mining operations. We compute depreciation of property and equipment for financial reporting purposes (including mining properties) 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. We use accelerated depreciation methods for income tax purposes, as permitted. Upon sale or retirement of an asset, we remove the related cost and accumulated depreciation from the accounts and recognize any gain or loss in income currently.

We expense expenditures for maintenance, repairs and minor renewals (including planned major maintenance), while we capitalize expenditures for major improvements. See Note 15.

We capitalize interest costs related to major long-term capital projects and renewals as a component of construction costs. Capitalized interest costs were not material in 2004, 2005 or 2006.

When events or changes in circumstances indicate that assets may be impaired, we perform an evaluation 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. We consider all relevant factors. We perform the impairment test 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. We assess impairment of property and equipment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Long-term debt. We state long-term debt net of any unamortized original issue premium or discount. We classify amortization of deferred financing costs and any premium or discount associated with the issuance of indebtedness as interest expense and compute such amortization by the interest method over the term of the applicable issue.

Employee benefit plans. Accounting and funding policies for our retirement plans are described in Note 8.

Income taxes. We and Valhi and our qualifying subsidiaries including us, are members of Contran’s consolidated U.S. federal income tax group (the "Contran Tax Group") and we and certain of our qualifying subsidiaries also file consolidated income tax returns with Contran in various U.S. state jurisdictions. As a member of the Contran Tax Group, we are jointly and severally liable for the federal income tax liability of Contran and the other companies included in the Contran Tax Group for all periods in which we are included in the Contran Tax Group. See Note 7. As a member of the Contran Tax Group, we are party to a tax sharing agreement that provides we compute provisions for U.S. income taxes on a separate-company basis using the tax elections made by Contran. Pursuant to the tax sharing agreement we make payments to or receive payments from Kronos using the tax elections made by Contran, in amounts we would have paid to or received from the U.S. Internal Revenue Service had we not been a member of Contran Tax Group. We made no payments to Kronos for income taxes during 2004, 2005 or 2006.

We recognize deferred income tax assets and liabilities 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 our 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. The earnings of foreign subsidiaries subject to permanent reinvestment plans aggregated $707 million at December 31, 2005 and $739 million at December 31, 2006. It is not practical for us to determine the amount of the unrecognized deferred income tax liability related to such earnings due to the complexities associated with the U.S. taxation on earnings of foreign subsidiaries repatriated to the U.S. We periodically evaluate our deferred tax assets in the various taxing jurisdictions in which we operate and adjust any related valuation allowance based on the estimate of the amount of such deferred tax assets that we believe does not meet the “more-likely-than-not” recognition criteria.

Net sales. We record sales 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 are generally FOB shipping point, although in some instances shipping terms are FOB destination point (for which we do not recognize sales until the product is received by the customer). We include amounts charged to customers for shipping and handling in net sales. We state sales net of price, early payment and distributor discounts and volume rebates. We report any tax assessed by a governmental authority that we collect from our customers that is both imposed on and concurrent with our revenue-producing activities (such as sales, use, value added and excise taxes) on a net basis (meaning we do not recognize these taxes either in our revenues or in our costs and expenses). 

Inventories and cost of sales. We state inventories at the lower of cost (principally average cost) or market, net of allowance for slow-moving inventories We remove amounts from inventories at average cost. Cost of sales includes costs for materials, packing and finishing, utilities, salary and benefits, maintenance and depreciation.

Selling, general and administrative expenses; shipping and handling costs. Selling, general and administrative expenses include costs related to marketing, sales, distribution, shipping and handling, research and development, legal and administrative functions such as accounting, treasury and finance, and includes costs for salaries and benefits, travel and entertainment, promotional materials and professional fees. We include shipping and handling costs in selling, general and administrative expense and these costs were $49 million in 2004, $52 million in 2005 and $55 million in 2006. We expense advertising costs as incurred and these costs were approximately $1 million in each of 2004, 2005 and 2006. We expense research, development and certain sales technical support costs as incurred and these costs approximated $8 million in 2004, $9 million in 2005 and $11 million in 2006.

Note 2 -Geographic information:

Our operations are associated with the production and sale of titanium dioxide (“TiO₂”). Titanium dioxide pigments are used to impart whiteness, brightness and opacity to a wide variety of products, including paints, plastics, paper, fibers and ceramics. All of our net assets are located in Europe.

For geographic information, we attribute net sales to the place of manufacture (point of origin) and the location of the customer (point of destination); we attribute property and equipment to their physical location.

	Years ended December 31,
	2004			2005			2006
	(In thousands)
Geographic areas
Net sales - point of origin:
Germany	$	576,138		$	613,081		$	671,986
Belgium		186,445			186,951			192,821
Norway		144,492			160,529			173,529
Eliminations		(99,105	)		(109,688	)		(124,108	)
	$	807,970		$	850,873		$	914,228

	Years ended December 31,
	2004		2005		2006
	(In thousands)
Net sales - point of destination:
Europe	$	666,271	$	689,516	$	728,598
North America		42,015		51,922		54,399
Other		99,684		109,435		131,231
	$	807,970	$	850,873	$	914,228

	December 31,
	2005		2006
	(In thousands)
Identifiable assets - net property and equipment:
Germany	$	235,932	$	262,541
Belgium		57,943		63,991
Norway		54,759		68,833
Other		141		199
	$	348,775	$	395,564

Note 3 -Accounts and other receivables:

	December 31,
	2005			2006
	(In thousands)
Trade receivables	$	110,268		$	137,298
Insurance claims		26			37
Recoverable VAT and other receivables		11,317			15,692
Allowance for doubtful accounts		(1,429	)		(1,387	)
	$	120,182		$	151,640

Note 4 -Inventories

	December 31,
	2005		2006
	(In thousands)
Raw materials	$	42,807	$	37,198
Work in process		13,654		18,612
Finished products		98,004		100,689
Supplies		30,883		38,579
	$	185,348	$	195,078

Note 5 -Accounts payable and accrued liabilities:

	December 31,
	2005		2006
	(As adjusted)
	(In thousands)
Accounts payable	$	61,009	$	65,900
Employee benefits		27,147		17,136
Accrued interest		117		7,255
Other		27,639		25,047
	$	115,912	$	115,338

Note 6 -Long-term debt:

	December 31,
	2005		2006
	(In thousands)
Long-term debt:
8.875% Senior Secured Notes	$	449,298	$	-
6.5% Senior Secured Notes		-		525,003
Other		4,525		4,795
		453,823		529,798
Less current maturities		958		912
	$	452,865	$	528,886

Senior Secured Notes - On April 11, 2006, we issued an aggregate of euro 400 million principal amount of new 6.5% Senior Secured Notes due April 2013, at 99.306% of their principal amount ($498.5 million when issued) to yield an effective interest rate of 7.1%. These Senior Secured Notes are collateralized by a pledge of 65% of the common stock or other ownership interests of certain of our first-tier operating subsidiaries. Such operating subsidiaries are Kronos Titan GmbH, Kronos Denmark ApS, Kronos Limited and Societe Industrielle Du Titane, S.A. We issued the 6.5% Notes pursuant to an indenture which contains a number of covenants and restrictions which, among other things, restricts our ability and that of our subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer all or substantially all of the assets of these subsidiaries to another entity. At our option, we may redeem the 6.5% Notes on or after October 15, 2009 at redemption prices ranging from 103.25% of the principal amount, declining to 100% on or after October 15, 2012. In addition, on or before April 15, 2009, we may redeem up to 35% of the 6.5% Notes with the net proceeds of a qualified public equity offering at 106.5% of the principal amount. In the event of a change of control, as defined, we would be required to make an offer to purchase the 6.5% Notes at 101% of the principal amount. We would also be required to make an offer to purchase a specified portion of the 6.5% Notes at par value in the event we generate 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, 2006, the estimated market price of the 6.5% Notes was approximately euro 970 per euro 1,000 principal amount. At December 31, 2006, the carrying amount of the 6.5% Notes includes euro 2.5 million ($3.3 million) of unamortized original issue discount.

We used the proceeds from the 6.5% Notes to fund the May 2006 redemption of our 8.875% Senior Secured Notes at 104.437% of the aggregate principal amount of euro 375 million for an aggregate of $491.4 million, including the $20.9 million call premium. We recognized a $22.3 million pre-tax interest charge in the second quarter of 2006 related to the prepayment of the 8.875% Notes, consisting of the call premium on the 8.875% Notes and the write-off of deferred financing costs and unamortized premium related to the notes.

Credit Facility - Our operating subsidiaries in Germany, Belgium, Norway and Denmark (collectively, the “Borrowers”) have a euro 80 million secured revolving bank credit facility that matures in June 2008 (“European Credit Facility”). Borrowings may be denominated in euros, Norwegian kroners or U.S. dollars, and bear interest at the applicable interbank market rate plus 1.125%. The facility also provides for the issuance of letters of credit up to euro 5 million. The European 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 European Credit Facility contains certain restrictive covenants which, among other things, restricts the ability of the Borrowers to incur debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer all or substantially all of their assets to, another entity. In addition, the European Credit Facility contains customary cross-default provisions with respect to other debt and obligations of the Borrowers, us and our other subsidiaries. At December 31, 2006, no amounts were outstanding under the European Credit Facility and the equivalent of $105.6 million was available for additional borrowing by the subsidiaries.

Under the cross-default provisions of the 6.5% Notes, the 6.5% Notes may be accelerated prior to their stated maturity if we or any of our 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 the European Credit Facility, any outstanding borrowings under the European Credit Facility may be accelerated prior to their stated maturity if the we or the borrowers 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). The European Credit Facility contains 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 the cross-default provisions of either the 6.5% Notes or the European Credit Facility become applicable, and such indebtedness is accelerated, we would be required to repay such indebtedness prior to their stated maturity.

Aggregate maturities of long-term debt at December 31, 2006 are shown in the table below.

Years ending December 31,	Amount
	(In thousands)
2007	$	912
2008		923
2009		954
2010		986
2011		1,019
2012 and thereafter		525,004
	$	529,798

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, 2006, the restricted net assets of consolidated subsidiaries approximated $79 million.

Note 7 - Income taxes:

	Years ended December 31,
	2004			2005			2006
	(As adjusted)			(As adjusted)
	(In millions)
Pre-tax income (loss):
Germany	$	30.1		$	65.0		$	18.5
Other non-U.S.		34.0			54.6			47.5
	$	64.1		$	119.6		$	66.0
Expected tax expense (benefit), at U.S. federal statutory income tax rate of 35%	$	22.4		$	41.9		$	23.1
Non-U.S. tax rates		.4			.5			(1.5	)
Incremental tax and rate differences on equity in earnings of non-tax group companies		-			-			.5
Adjustment of German tax attribute		-			17.5			(21.7	)
Nondeductible expenses		4.2			4.6			4.2
Change in deferred income tax valuation allowance, net		(280.7	)		-			-
Tax contingency reserve adjustment, net		(4.6	)		(7.7	)		(10.7	)
Assessment (refund) of prior year income taxes		(2.6	)		2.1			(1.4	)
Other, net		(.6	)		.5			(.2	)
	$	(261.5	)	$	59.4		$	(7.7	)
Components of income tax expense (benefit):
Currently payable (refundable):
Germany	$	(.2	)	$	10.8		$	5.0
Other non - U.S.		12.8			17.6			15.2
		12.6			28.4			20.2
Deferred income taxes (benefit):
Germany		(270.5	)		31.4			(23.5	)
Other non - U.S.		(3.6	)		(.4	)		(4.4	)
		(274.1	)		31.0			(27.9	)
	$	(261.5	)	$	59.4		$	(7.7	)

	Years ended December 31,
	2004			2005			2006
	(As adjusted)			(As adjusted)
	(In millions)
Comprehensive provision for income taxes (benefit) allocable to:
Net income	$	(261.5	)	$	59.4		$	(7.7	)
Other comprehensive income - Defined benefit pension liabilities		(8.1	)		(32.4	)		6.7
Adoption of SFAS No. 158		-			-			(18.6	)
	$	(269.6	)	$	27.0		$	(19.6	)

The components of the net deferred tax liability at December 31, 2005 and 2006, and changes in the deferred income tax valuation allowance during the past three years, are summarized in the following tables.

	December 31,
	2005						2006
	Assets			Liabilities			Assets			Liabilities
	(As adjusted
	(In millions)
Tax effect of temporary differences related to:
Inventories	$	1.6		$	(4.5	)	$	1.5		$	(3.1	)
Property and equipment		25.5			(20.5	)		20.7			(22.8	)
Pension asset		-			(35.6	)		-			(36.7	)
Accrued pension cost		51.9			-			64.2			-
Other accrued liabilities and deductible differences		25.6			-			27.8			-
Other taxable differences		-			(29.5	)		-			(20.2	)
Tax loss and tax credit carryforwards		174.5			-			216.8			-
Adjusted gross deferred tax assets (liabilities)		279.1			(90.1	)		331.0			(82.8	)
Netting of items by tax jurisdiction		(65.8	)		65.8			(66.6	)		66.6
		213.3			(24.3	)		264.4			(16.2	)
Less net current deferred tax asset (liability)		-			(5.0	)		-			(1.8	)
Net noncurrent deferred tax asset (liability)	$	213.3		$	(19.3	)	$	264.4		$	(14.4	)

	Year ended December 31,
	2004			2005		2006
	(In millions)
Increase (decrease) in valuation allowance:
Recognition of certain deductible tax attributes for which the benefit had not previously been recognized under the “more-likely-than-not” recognition criteria	$	(280.7	)	$	-	$	-
Foreign currency translation		(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		121.0			-		-
	$	(162.7	)	$	-	$	-

Tax authorities are examining certain of our non-U.S. tax returns and have or may propose tax deficiencies, including penalties and interest. For example:

·   We previously received a preliminary tax assessment related to 1993 from the Belgian tax authorities proposing tax deficiencies, including related interest, of approximately euro 6 million. The Belgian tax authorities filed a lien on the fixed assets of our Belgian TiO₂ operations in connection with their assessment. This lien did not interfere with on-going operations at the facility. We filed a protest to this assessment, and in July 2006 the Belgian tax authorities withdrew the assessment. The lien was subsequently released.

·   The Norwegian tax authorities previously notified us of their intent to assess tax deficiencies of approximately kroner 12 million relating to the years 1998 through 2000. We objected to this proposed assessment, and in May 2006 the Norwegian tax authorities withdrew the assessment.

Principally as a result of the withdrawal of the Belgian and Norwegian assessments discussed above and the resolution of our ongoing income tax audits in Germany, we recognized a $10.7 million income tax benefit in 2006 related to the total reduction in our income tax contingency reserve.

Due to the favorable resolution of certain income tax audits related to our German and Belgian operations during 2006, we recognized a net $1.4 million income tax benefit related to adjustments of prior year income taxes.

Due to the resolution of certain income tax audits in Germany, we also recognized a $21.7 million income tax benefit in 2006 primarily related to an increase in the amount of our German trade tax net operating loss carryforward. The increase resulted from a reallocation of expenses between our German units related to periods in which such units did not file on a consolidated basis for German trade tax purposes, with the net result that the amount of our German trade tax carryforward recognized by the German tax authorities has increased.

Other income tax examinations related to our operations continue, and we cannot guarantee that these tax matters will be resolved in our favor due to the inherent uncertainties involved in settlement initiatives and court and tax proceedings. We believe we have adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations. We believe the ultimate disposition of tax examinations should not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

In 2005, we reached an agreement in principle with the German tax authorities regarding such tax authorities’ objection to the value assigned to certain intellectual property rights held by our operating subsidiary in Germany. Under the agreement in principle, the value assigned to such intellectual property for German income tax purposes was reduced retroactively, resulting in a reduction in the amount of our net operating loss carryforward in Germany as well as a future reduction in the amount of amortization expense attributable to such intellectual property. As a result, we recognized a $17.5 million non-cash deferred income tax expense in the third quarter of 2005 related to such agreement. The $7.7 million tax contingency adjustment income tax benefit in 2005 relates primarily to the withdrawal of the Belgium tax authorities’ assessment related to 1999.

At December 31, 2003, we had a significant amount of net operating loss carryforwards for German corporate and trade tax purposes. These carryforwards have no expiration date. We generated these net operating loss carryforwards principally during the 1990’s when KII had a significantly higher level of outstanding indebtedness than we currently have. At December 31, 2003, we had not recognized the benefit of these carryforwards for financial reporting purposes because we concluded they did not meet the “more-likely-than-not” recognition criteria. Therefore, we had recognized a deferred income tax asset valuation allowance to completely offset the benefit of these carryforwards and our other tax attributes in Germany. During 2004, and based on all available evidence, we concluded that the benefit of these 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. The aggregate amount of the valuation allowance related to Germany that we reversed during 2004 was $280.7 million.

At December 31, 2006, we had the equivalent of $701 million and $247 million of net operating loss carryforwards for German corporate and trade tax purposes, respectively, all of which have no expiration date.

Note 8 - Employee benefit plans:

Defined contribution plans. We maintain various defined contribution pension plans with our contributions based on matching or other formulas. Defined contribution plan expenses were not material in 2004, 2005 or 2006.

Defined benefit plans. We maintain various defined benefit pension plans. Employees are covered by plans in their respective countries. Variances from actuarially assumed rates will result in increases or decreases in accumulated pension obligations, pension expense and funding requirements in future periods. Prior to 2004, we amended the provisions of our defined benefit pension plans in Belgium and Norway to exclude the admission of new employees as participants in the plans. New employees in these countries are eligible to participate in Company-sponsored defined contribution plans. At December 31, 2006, we expect to contribute the equivalent of approximately $15 million to all of our defined benefit pension plans during 2007.

The funded status of our defined benefit pension plan, the components of net periodic defined benefit pension cost and the rates used in determining the actuarial present value of benefit obligations are presented in the tables below. We use a September 30 measurement date for our defined benefit pension plan.

	Years ended December 31,
	2005			2006
	(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year	$	307,582		$	352,577
Service cost		5,885			5,494
Interest cost		14,038			15,009
Participant contributions		1,469			1,454
Actuarial losses (gain)		84,365			(15,433	)
Change in foreign currency exchange rates		(43,954	)		39,230
Benefits paid		(16,808	)		(17,457	)
Benefit obligations at end of the year	$	352,577		$	380,874
Change in plan assets:
Fair value of plan assets at beginning of the year	$	196,573		$	176,896
Actual return on plan assets		7,132			8,615
Employer contributions		13,323			18,537
Participant contributions		1,469			1,454
Change in foreign currency exchange rates		(24,793	)		20,029
Benefits paid		(16,808	)		(17,457	)
Fair value of plan assets at end of year	$	176,896		$	208,074
Accumulated benefit obligations	$	316,274		$	321,286
Funded status at end of the year:
Plan assets less than PBO	$	(175,681	)	$	(172,800	)
Unrecognized actuarial losses		175,482			170,445
Unrecognized prior service cost		5,550			5,643
Unrecognized net transition obligations		749			717
	$	6,100		$	4,005
Amounts recognized in the balance sheet:
Unrecognized net pension obligations	$	6,108		$	-
Accrued pension costs:
Current		(10,314	)		-
Noncurrent		(125,766	)		(172,800	)
Accumulated other comprehensive loss		136,072			176,805
	$	6,100		$	4,005

The amounts shown in the table above for actuarial losses, prior service cost and net transition obligations at December 31, 2005 and 2006 have not yet been recognized as components of our periodic defined benefit pension cost as of those dates. These amounts will be recognized as components of our periodic defined benefit cost in future years. However, upon adoption of SFAS No. 158, the December 31, 2006 amounts, net of deferred income taxes, are recognized in our accumulated other comprehensive income. Of the amounts included in accumulated other comprehensive income as of December 31, 2006 related to our pension plans, we expect to recognize net actuarial losses of $7 million, prior service costs of $500,000 and net transition obligations of $100,000 as a component of our net periodic pension expense during 2007.

The components of our net periodic defined benefit pension cost are presented in the table below.

	Years ended December 31,
	2004			2005			2006
	(In thousands)
Net periodic pension cost:
Service cost benefits	$	5,398		$	5,885		$	5,494
Interest cost on PBO		14,132			14,038			15,009
Expected return on plan assets		(12,318	)		(12,051	)		(11,150	)
Amortization of prior service cost		463			482			480
Amortization of net transition obligations		368			107			99
Recognized actuarial losses		2,335			3,035			7,768
	$	10,378		$	11,496		$	17,700

The weighted-average rate assumptions used in determining the actuarial present value of benefit obligations as of December 31, 2005 and 2006 are presented in the table below. Such weighted-average rates were determined using the projected benefit obligations at each date.

	December 31,
Rate	2005	2006
Discount rate	4.1%	4.6%
Increase in future compensation levels	2.8%	3.0%

The weighted-average rate assumptions used in determining the net periodic pension cost for 2004, 2005 and 2006 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 as of the beginning of each year, and the weighted-average long-term return on plan assets was determined using the fair value of plan assets as of the beginning of each year.

	Years ended December 31,
Rate	2004	2005	2006
Discount rate	5.3%	5.0%	4.1%
Increase in future compensation levels	2.8%	2.8%	2.8%
Long-term return on plan assets	6.4%	6.0%	5.5%

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

·   In Germany, the composition of our plan assets is established to satisfy the requirements of the German insurance commissioner. The plan asset allocation at December 31, 2006 was 23% to equity managers, 48% to fixed income managers, 14% to real estate and other investments 15% (2005 - 23%, 48%, 14% and 15%, respectively). 

·   In Norway, we currently have a plan asset target allocation of 14% to equity managers, 65% to fixed income managers and the remainder primarily to liquid investments such as money markets. The expected long-term rate of return for such investments is approximately 8%, 4.5% and 4%, respectively. The plan asset allocation at December 31, 2006 was 13% to equity managers, 64% to fixed income managers and the remaining 23% primarily to cash and liquid investments (2005 - 16%, 62% and 22%, respectively).

We regularly review our actual asset allocation for each of our plans, and will periodically rebalance the investments in each plan to more accurately reflect the targeted allocation when considered appropriate.

At December 31, 2005 and 2006, all of our defined benefit pension plans have accumulated benefit obligations in excess of fair value of plan assets.

We expect future benefits paid from all defined benefit pension plans to be as follows:

Years ending December 31,	Amount
		(In thousands)
2007	$	18,003
2008		17,907
2009		15,073
2010		15,130
2011		15,311
2012 to 2016		85,782

New accounting standard. We account for our defined benefit pension plans using SFAS No. 87, Employer’s Accounting for Pension, as amended, and we account for our OPEB plans under SFAS No. 106, Employers Accounting for Postretirement Benefits other than Pensions, as amended. In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.  SFAS No. 158, which further amended SFAS Nos. 87 and 106, requires us to recognize an asset or liability for the over or under funded status of each of our individual defined benefit pension and postretirement benefit plans on our Consolidated Balance Sheets.  This standard does not change the existing recognition and measurement requirements that determine the amount of periodic benefit cost we recognize in net income. We adopted the asset and liability recognition and disclosure requirements of this standard effective December 31, 2006 on a prospective basis, in which we recognized through other comprehensive income all of our prior unrecognized gains and losses and prior service costs or credits, net of tax, as of December 31, 2006. We will recognize all future changes in the funded status of these plans through comprehensive income, net of tax. These future changes will be recognized either in net income, to the extent they are reflected in periodic benefit cost, or through other comprehensive income.  In addition, we currently use September 30 as a measurement date for our defined benefit pension plans, but under this standard we will be required to use December 31 as the measurement date. The measurement date requirement of SFAF No. 158 will become effective for us by the end of 2008 and provides two alternate transition methods; we have not yet determined which transition method we will select. 

Adopting this standard had the following effects on our Consolidated Financial Statements as of December 31, 2006:

	Before application of SFAS No. 158			Adjustments			After application of SFAS No. 158
	(In thousands)
Assets:
Current deferred income tax asset	$	3,018		$	(3,018	)	$	-
Total current assets		410,954			(3,018	)		407,936
Unrecognized net pension obligations		4,386			(4,386	)		-
Noncurrent deferred income tax asset		247,101			17,276			264,377
Total other assets		264,179			12,890			277,069
Total assets		1,070,697			9,872			1,080,569
Liabilities:
Current accrued pension costs		11,590			(11,590	)		-
Current deferred income taxes		215			1,536			1,751
Total current liabilities		148,324			(10,054	)		138,270
Noncurrent accrued pension costs		112,845			59,955			172,800
Noncurrent deferred income taxes		20,347			(5,901	)		14,446
Total noncurrent liabilities		676,760			54,054			730,814
Stockholders’ equity:
Accumulated other comprehensive income - minimum pension liability		(75,439	)		75,439			-
Accumulated other comprehensive income - defined benefit pension plans		-			(109,567	)		(109,567	)
Total accumulated other comprehensive income		(174,751	)		(34,128	)		(208,879	)
Total stockholders’ equity		245,572			(34,128	)		211,444
Total liabilities and stockholders’ equity		1,070,697			9,872			1,080,569

Note 9 - Other noncurrent liabilities:

	December 31,
	2005		2006
	(In thousands)
Insurance claims and expenses	$	1,255	$	1,463
Employee benefits		4,735		6,887
Other		9,444		6,332
	$	15,434	$	14,682

Note 10 - Common stock and notes receivable from affiliates:

NL common stock options held by employees of the Company. At December 31, 2006, our employees held options to purchase approximately 50,000 shares of NL common stock. These options are exercisable at various dates through 2011 and 15,000 have exercise prices ranging from $2.66 to $5.63 per share and 35,000 have an exercise price of $11.49 per share. Such options generally vest over five years, and vesting ceases at the date the employee separates from service with us (including retirement).

No options were granted in 2004, 2005 or 2006. As discussed in Note 15, we adopted the fair value provisions of SFAS No. 123R on January 1, 2006.

Common stock dividends. We paid $60.0 million in cash dividends to Kronos during 2004, nil during 2005 and $50.2 million in 2006.

Notes receivable from affiliates - contra equity. In 2004, we loaned an aggregate euro 163.1 million ($209.5 million) to Kronos in return for two promissory notes instead of making a cash dividend distribution. Interest on both notes is payable to us on a quarterly basis at an annual rate of 9.25%, such interest was and is expected to be paid quarterly. The notes mature on December 31, 2010, with all principal due at that date. The notes are unsecured, contain no financial covenants and provide for default only upon Kronos’ failure to pay any amount when due (subject to a short grace period). Due to the long-term investment nature of these notes, settlement of the principal balance of the notes is not contemplated within the foreseeable future. We currently expect that settlement of the principal amount of the notes will occur through a capital transaction (i.e. a non-cash dividend to Kronos in the form of distributing such notes receivable to Kronos). Accordingly, we have classified these notes receivable as a separate component of stockholder’s equity in accordance with GAAP. We recognize interest income on such notes, which is expected to be paid quarterly, when earned. See Note 11. Until such time as the notes are settled, we benefit from the interest income earned on the promissory notes. We have reflected the $209.5 million principal amount of these loans as a component of cash flows from financing activities in the accompanying Consolidated Statements of Cash Flows.

Note 11 - Related party transactions:

We 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. While no transactions of the type described above are planned or proposed with respect to us other than as set forth in these financial statements, we continuously consider, review and evaluate, and understand 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 we might be a party to one or more such transactions in the future.

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

	December 31,
	2005		2006
	(In thousands)
Current receivables from affiliates:
Kronos Canada (“KC”)	$	1,948	$	1,421
Other		4		189
	$	1,952	$	1,610
Current payables to affiliate:
Kronos (US), Inc. (“KUS”)	$	14,882	$	10,174

Interest income on all loans to related parties, consisting of the interest income earned on our note receivable from Kronos discussed in Note 10, was $2.8 million in 2004, $18.9 million in 2005 and $18.8 million in 2006.

Net amounts between us and KUS were generally related to product sales and raw material purchases. Net amounts between us and KC were generally related to product sales and royalties. KUS and KC are both subsidiaries of Kronos.

Sales of TiO₂ to KUS and KC aggregated $50.8 million in 2004, $63.6 million in 2005 and $65.9 million in 2006.

KUS purchases the rutile and slag feedstock used as a raw material in all of our chloride process TiO₂ facilities. We purchase such feedstock from KUS for use in our facilities for an amount equal to the amount paid by KUS to the third-party supplier plus a 2.5% administrative fee. Such feedstock purchases were $106.2 million in 2004, $120.1 million in 2005 and $119.1 million in 2006.

Purchases of TiO₂ from KUS were $3.5 million in 2004 and nil in 2005 and 2006. Purchases of TiO₂ from KC were $700,000 in 2004, $600,000 in 2005 and $1.1 million in 2006.

Royalty income received from KC for use of certain of our intellectual property was $6.0 million in 2004, $6.8 million in 2005 and $7.2 million in 2006.

Under the terms of various intercorporate services agreements ("ISAs") entered into between us 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 associated expenses of such persons. Because of the large number of companies affiliated with Contran, Kronos Worldwide and NL, we believe we benefit from cost savings and economies of scale gained by not having certain management, financial and administrative staffs duplicated at each entity, thus allowing certain individuals to provide services to multiple companies but only be compensated by one entity. These ISA agreements are reviewed and approved by the applicable independent directors of the companies that are parties to the agreements. The net ISA fee charged to us and included in selling, general and administrative expense was $2.8 million in 2004, $2.9 million in 2005 and $3.5 million in 2006.

Tall Pines Insurance Company, and EWI RE, Inc. provide for or broker certain insurance policies for Contran and certain of its subsidiaries and affiliates, including us. Tall Pines and EWI are subsidiaries of Valhi. Consistent with insurance industry practices, Tall Pines and EWI receive commissions from insurance and reinsurance underwriters and/or assess fees for the policies that they provide or broker. The aggregate premiums paid to Tall Pines and EWI by us were $5.3 million in 2004, $5.5 million in 2005 and $6.7 million in 2006. These amounts principally included payments for insurance and reinsurance premiums paid to third parties, but also included commissions paid to Tall Pines and EWI. Tall Pines purchases reinsurance for substantially all of the risks it underwrites. We expect that these relationships with Tall Pines and EWI will continue in 2007.

Contran and certain of its subsidiaries and affiliates, including us, purchase certain of their insurance policies as a group, with the costs of the jointly-owned policies being apportioned among the participating companies. With respect to certain of such policies, it is possible that unusually large losses incurred by one or more insureds during a given policy period could leave the other participating companies without adequate coverage under that policy for the balance of the policy period. As a result, Contran and certain of its subsidiaries and its affiliates, including us, 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. We believe the benefit in the form of reduced premiums and broader coverage associated with the group coverage for such policies justifies the risk associated with the potential for uninsured loss.

Note 12 - Commitments and contingencies:

Environmental matters. Our operations are governed by various environmental laws and regulations. Certain of our businesses are, or have been engaged in the handling, manufacture or use of substances or compounds that may be considered toxic or hazardous within the meaning of applicable environmental laws. 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. We have implemented and continue to implement various policies and programs in an effort to minimize these risks. Our policy is to maintain compliance with applicable environmental laws and regulations at all of our facilities and to strive to improve our environmental performance. From time to time, we may be subject to environmental regulatory enforcement under various statutes, resolution of which typically involves the establishment of compliance programs. It is possible that future developments, such as stricter requirements of environmental laws and enforcement policies thereunder, could adversely affect our production, handling, use, storage, transportation, sale or disposal of such substances. We believe all of our plants are in substantial compliance with applicable environmental laws.

Litigation matters. We are involved in various other environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to our business. We currently believe the disposition of all claims and disputes, individually or in the aggregate, should not have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

Concentrations of credit risk. Sales of TiO₂ accounted for about 87% of our sales during each of the past three years. The remaining sales result from the mining and sale of ilmenite ore (a raw material used in the sulfate pigment production process), and the manufacture and sale of iron-based water treatment chemicals (derived from co-products of the TiO₂ production processes). TiO₂ is generally sold to the paint, plastics and paper industries. Such markets are generally considered “quality-of-life” markets whose demand for TiO₂ is influenced by the relative economic well-being of the various geographic regions. We sell TiO₂ to over 3,000 customers, with the top ten customers (excluding sales to KC and KUS) approximating 21%, 20%, and 20%, respectively, of net sales in 2004, 2005 and 2006. Approximately 77% of our TiO₂ sales by volume were to Europe in 2004, approximately 76% were to Europe in 2005 and approximately 77% were to Europe in 2006. Approximately 9% of sales by volume were attributable to North America in 2004, 10% attributable to North America in 2005 and 9% attributable to North America in 2006.

Long-term contracts. KUS has long-term supply contracts that provide for certain of its affiliates’, including ours, TiO₂ feedstock requirements through 2010. The agreements require KUS to purchase certain minimum quantities of feedstock with minimum annual purchase commitments aggregating approximately $776 million at December 31, 2006. The agreements require that us and certain of our affiliates purchase chloride feedstock underlying these long-term supply contracts from KUS.

Operating leases. Our principal German operating subsidiary leases the land under its Leverkusen TiO₂ production facility pursuant to a lease with Bayer AG that expires in 2050. The Leverkusen facility itself, which we own and which represents approximately one-half of our current TiO₂ production capacity, is located within Bayer’s extensive manufacturing complex. We periodically establish the amount of rent for the land lease associated with the Leverkusen facility by agreement with Bayer for periods of at least two years at a time. The lease agreement provides for no formula, index or other mechanism to determine changes in the rent for such land lease; rather, any change in the rent is subject solely to periodic negotiation between Bayer and the Company. We recognize any change in the rent based on such negotiations as part of lease expense starting from the time such change is agreed upon by both parties, as any such change in the rent is deemed “contingent rentals” under GAAP. Under a separate supplies and services agreement expiring in 2011, the lessor provides some raw materials, including chlorine, auxiliary and operating materials, utilities and services necessary to operate the Leverkusen facility.

We also lease 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 we expect that, in the normal course of business, such leases will be renewed or replaced by other leases. Net rent expense approximated $8 million in each of 2004, 2005 and 2006. At December 31, 2006, 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)
2007	$	3,681
2008		2,947
2009		2,153
2010		1,606
2011		1,165
2012 and thereafter		19,930
	$	31,482

Approximately $22 million of the $31.5 million aggregate future minimum rental commitments at December 31, 2006 relates to our 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, 2006. As discussed above, any change in the rent is based solely on negotiations between Bayer and the Company, and any such change in the rent is deemed “contingent rentals” under GAAP which is excluded from the future minimum lease payments disclosed above.

Income taxes. Contran and Valhi have agreed to a policy providing for the allocation of tax liabilities and tax payments as described in Note 1. Under applicable law, we, as well as every other member of the Contran Tax Group, are each jointly and severally liable for the aggregate federal income tax liability of Contran and the other companies included in the Contran Tax Group for all periods in which we were included in the Contran Tax Group. Contran has agreed, however, to indemnify us for any liability for income taxes of the Contran Tax Group in excess of our tax liability previously computed and paid by Valhi in accordance with the tax allocation policy.

Note 13 - Securities transaction gain:

A securities transaction gain in 2005, classified as nonoperating income, relates to the sale of our passive interest in a Norwegian smelting operation, this operation had a nominal carrying value for financial reporting purposes, and was sold for $5.4 million, which consisted of $3.5 million cash and $1.9 million of inventory.

Note 14 - Financial instruments:

Summarized below is the estimated fair value and related net carrying value of our financial instruments.

	December 31,				December 31,
	2005				2006
	Carrying amount		Fair value		Carrying amount		Fair value
	(In millions)
Cash, cash equivalents, restricted cash and current and noncurrent restricted marketable debt securities	$	67.2	$	67.2	$	57.1	$	57.1
Long-term debt:
Fixed rate with market quotes -
8.875% Senior Secured Notes	$	449.3	$	463.6	$	-	$	-
6.5% Senior Secured Notes		-		-		525.0		512.5

Fair value of our noncurrent restricted marketable debt securities, 8.875% Senior Secured Notes and 6.5% Senior Secured Notes are based upon quoted market prices at each balance sheet date.

Note 15 - Recent accounting pronouncements:

Variable interest entities. We 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. We do 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 us to consolidate such entity under FIN No. 46R which had not already been consolidated under prior applicable GAAP, and therefore the impact to us of adopting the consolidation requirements of FIN No. 46R was not material.

Inventory Costs. Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, became effective for us for inventory costs incurred on or after January 1, 2006. SFAS No. 151 requires that the allocation of fixed production overhead costs to inventory be based on normal capacity of the production facilities, as defined by SFAS No. 151. SFAS No. 151 also clarifies the accounting for abnormal amounts of idle facility expense, freight handling costs and wasted material, requiring those items be recognized as current-period charges. Our existing production cost policies complied with the requirements of SFAS No. 151, therefore the adoption of SFAS No. 151 did not affect our Consolidated Financial Statements.

Stock options.We adopted the fair value provisions of SFAS No. 123R, Share-Based Payment, on January 1, 2006, using the modified prospective application method. SFAS No. 123R, among other things, requires the cost of employee compensation paid with equity instruments to be measured based on the grant-date fair value. That cost is then recognized over the vesting period. Using the modified prospective method, we will apply the provisions of the standard to all new equity compensation granted after January 1, 2006 and any existing awards vesting after January 1, 2006. We have not issued any stock options to purchase Kronos common stock. However, certain of our employees have been granted options by NL to purchase NL common stock. The number of non-vested equity awards issued by NL to our employees at December 31, 2005 was not material. Prior to the adoption of SFAS No. 123R we accounted for equity compensation in accordance with APBO No. 25, Accounting for Stock Issued to Employees. We and NL accounted for these NL stock options under the variable accounting method whereby the options were revalued based on the current trading price at each balance sheet date. We now account for these awards using the liability method under SFAS No. 123R, which is substantially identical to the variable accounting method we previously used. We recorded compensation expense of $1.0 million in 2004, and compensation income of $600,000 in 2005 and $200,000 in 2006 for stock-based employee compensation. If we grant a significant number of equity awards or modify, repurchase or cancel existing equity awards in the future, the amount of equity compensation expense in our Consolidated Financial Statements could be material.

Planned Major Maintenance Activities.We adopted FSP No. AUG AIR-1 effective December 31, 2006. Accordingly, we have retroactively adjusted our Consolidated Financial Statements to reflect the direct expense method of accounting for planned major maintenance (a method permitted under this standard). The effect of adopting this standard on our previously reported Consolidated Financial Statements is summarized in the tables below.

	Years ended December 31,
	2004			2005
	(In thousands, except per share amounts)
Increase (decrease) in:
Cost of sales (repairs and maintenance expense)	$	637		$	(744	)
Provision (benefit) for income taxes		(208	)		276
Net income		(429	)		468
Other comprehensive income - foreign currency		98			(172	)
Total comprehensive income		(331	)		296

	December 31, 2005
	(In thousands)
Decrease in accrued maintenance costs	$	2,373
Increase in current deferred income tax		857
Decrease in retained deficit		1,230
Decrease in accumulated other comprehensive loss - foreign currency		286
Increase in total stockholders’ equity		1,516

    Pension and OPEB plans. We adopted the asset and liability recognition and disclosure requirements of SFAS No. 158 effective December 31, 2006. See Note 8.

Quantifying Financial Statement Misstatements. In the third quarter of 2006 the SEC issued Staff Accounting Bulletin (“SAB”) No. 108 expressing their views regarding the process of quantifying financial statement misstatements.  The SAB is effective for us as of December 31, 2006.  According to SAB 108 both the “rollover” and “iron curtain” approaches must be considered when evaluating a misstatement for materiality.  This is referred to as the “dual approach.”  For companies that have previously evaluated misstatements under one, but not both, of these methods, SAB 108 provides companies with a one-time option to record the cumulative effect of their prior unadjusted misstatements in a manner similar to a change in accounting principle in their 2006 annual financial statements if (i) the cumulative amount of the unadjusted misstatements as of January 1, 2006 would have been material under the dual approach to their annual financial statements for 2005 or (ii) the effect of correcting the unadjusted misstatements during 2006 would cause those annual financial statements to be materially misstated under the dual approach.  The adoption of SAB 108 did not have a material effect on our previously reported consolidated financial position or results of operations.

Fair Value Measurements.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which became effective for us on January 1, 2008. SFAS No. 157 generally provides a consistent, single fair value definition and measurement technique for GAAP pronouncements. SFAS No. 157 also establishes a fair value hierarchy for different measurement techniques based on the objective nature of the inputs in various valuation methods. We will be required to ensure all of our fair value measurements are in compliance with SFAS No. 157 on a prospective basis beginning in the first quarter of 2008. In addition, we will be required to expand our disclosures regarding the valuation methods and level of inputs we utilize in the first quarter of 2008. The adoption of this standard is not expected to have a material effect on our Consolidated Financial Statements.

Uncertain Tax Positions.In the second quarter of 2006 the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertain Tax Positions, which became effective for us on January 1, 2007.  FIN 48 clarifies when and how much of a benefit we can recognize in our Consolidated Financial Statements for certain positions taken in our income tax returns under SFAS No. 109, Accounting for Income Taxes, and enhances the disclosure requirements for our income tax policies and reserves. Among other things, FIN 48 will prohibit us from recognizing the benefits of a tax position unless we believe it is more-likely-than-not our position will prevail with the applicable tax authorities and limits the amount of the benefit to the largest amount for which we believe the likelihood of realization is greater than 50%.   FIN 48 also requires companies to accrue penalties and interest on the difference between tax positions taken on their tax returns and the amount of benefit recognized for financial reporting purposes under the new standard.  Our current income tax accounting policies comply with this aspect of the new standard.  We will also be required to reclassify any reserves we have for uncertain tax positions from deferred income tax liabilities, where they are currently recognized, to a separate current or noncurrent liability, depending on the nature of the tax position. In January 2007, the FASB indicated that they will issue clarifying guidance regarding certain aspects of the new standard by the end of March 2007. We are still in the process of evaluating the impact FIN 48 will have on our consolidated financial position and results of operations, and do not expect we will complete that evaluation until the FASB issues their clarifying guidance.

Fair Value Option. In the first quarter of 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits companies to chose, at specified election dates, to measure eligible items at fair value, with unrealized gains and losses included in the determination of net income. The decision to elect the fair value option is generally applied on an instrument-by-instrument basis, is irrevocable unless a new election date occurs, and is applied to the entire instrument and not to only specified risks or cash flows or a portion of the instrument. Items eligible for the fair value option include recognized financial assets and liabilities, other than an investment in a consolidated subsidiary, defined benefit pension plans, OPEB plans, leases and financial instruments classified in equity. An investment accounted for by the equity method is an eligible item. The specified election dates include the date the company first recognizes the eligible item, the date the company enters into an eligible commitment, the date an investment first becomes eligible to be accounted for by the equity method and the date SFAS No. 159 first becomes effective for the company. If we elect to measure eligible items at fair value under the standard, we would be required to present certain additional disclosures for each item we elect. SFAS No. 159 becomes effective for us on January 1, 2008, although we may apply the provisions earlier on January 1, 2007 if, among other things, we also adopt SFAS No. 157 on January 1, 2007 and elect to adopt SFAS No. 159 by April 30, 2007. We have not yet determined when we will choose to have SFAS No. 159 first become effective for us, nor have we determined which, if any, of our eligible items we will elect to be measured at fair value under the new standard. Therefore, we are currently unable to determine the impact, if any, this standard will have on our consolidated financial position or results of operations.

Note 16 -Quarterly results of operations (unaudited):

	Quarter ended
	March 31		June 30		Sept. 30		Dec. 31
	(In millions)
Year ended December 31, 2005
Net sales	$	209.5	$	227.6	$	206.0	$	207.8
Gross margin*		63.9		70.0		54.7		49.8
Net income*		19.2		28.2		6.1		6.7
Year ended December 31, 2006
Net sales	$	208.6	$	248.5	$	233.7	$	223.4
Gross margin*		53.5		57.8		52.6		59.2
Net income*		13.4		9.6		9.3		41.4

* All periods presented except fourth quarter 2006 have each been adjusted from amounts previously reported due to the adoption of FSP No. AUG-AIR 1, Accounting for planned major maintenance activities in the fourth quarter 2006. See Note 15.

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.

As discussed in Note 15, effective December 31, 2006 we retroactively adjusted our Consolidated Financial Statements to reflect the direct expense method of accounting for planned major maintenance in accordance with FSP No. AUG AIR-1. The adoption of the FSP had the following effect on our previously reported net income and gross margin for the periods indicated:

	Quarter ended
Increase/Decrease:	March 31		June 30			Sept. 30			Dec. 31
	(In millions)
Year Ended December 31, 2005
Gross margin	$	1.5	$	(.5	)	$	(.5	)	$	.2
Net income		1.0		(.3	)		(.3	)		.1
Year Ended December 31, 2006
Gross margin	$	.4	$	(.3	)	$	.5		$	-
Net income		.3		(.2	)		.3			-

KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Condensed Balance Sheets

December 31, 2005 and 2006

(In thousands)

	2005		2006
	(As adjusted)
Current assets:
Cash and cash equivalents	$	9,622	$	3,264
Accounts and notes receivable		9,013		10,262
Receivable from affiliates		36,210		51,671
Deferred income taxes		68		-
Other		56		118
Total current assets		54,969		65,315
Other assets:
Investment in subsidiaries		464,893		507,219
Deferred income taxes		168,642		217,208
Other		7,399		8,757
Property and equipment, net		5,814		6,809
Total other assets		646,748		739,993
	$	701,717	$	805,308
Current liabilities:
Payable to affiliates	$	34,715	$	31,128
Accounts payable and accrued liabilities		3,865		14,355
Income taxes		29,483		22,190
Deferred income taxes		14		9
Total current liabilities		68,077		67,682
Noncurrent liabilities:
Long-term debt		449,298		525,003
Other		1,025		1,179
Total noncurrent liabilities		450,323		526,182
Stockholder’s equity		183,317		211,444
	$	701,717	$	805,308

KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Condensed Statements of Income

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004			2005		2006
	(As adjusted)
Revenues and other income:
Net sales	$	40,038		$	47,682	$	50,627
Equity in earnings of subsidiaries		65,620			91,170		54,890
Interest income from affiliates		2,782			18,947		19,665
Royalty income		18,508			19,187		20,161
Currency translation gains (losses), net		(575	)		248		(91	)
Other income, net		71			1		79
		126,444			177,235		145,331
Costs and expenses:
Cost of sales		21,371			26,995		28,483
General and administrative		28,351			30,929		34,250
Loss on prepayment of debt		-			-		22,311
Interest expense		33,772			42,212		39,759
Interest expense to affiliates		5,754			10,302		3,888
		89,248			110,438		128,691
Income before income taxes		37,196			66,797		16,640
Provision for income taxes (benefit)		(288,355	)		6,543		(57,035	)
Net income	$	325,551		$	60,254	$	73,675

KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

Condensed Statements of Cash Flows

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004			2005			2006
	(As adjusted)
Cash flows from operating activities:
Net income	$	325,551		$	60,254		$	73,675
Cash distributions from subsidiaries		50,902			-			50,618
Loss on prepayment of debt		-			-			22,311
Call premium paid		-			-			(20,898	)
Noncash interest expense		1,487			2,124			1,581
Deferred income taxes		(276,806	)		21,827			(28,752	)
Equity in earnings of subsidiaries		(65,620	)		(91,170	)		(54,890	)
Other, net		(637	)		(719	)		3,256
Net change in assets and liabilities		25,963			11,901			(20,713	)
Net cash provided by operating activities		60,840			4,217			26,188
Cash flows from investing activities:
Capital expenditures		(1,544	)		(1,493	)		(1,904	)
Collection of loans to affiliates		88,656			-
Purchase of interest in subsidiaries		(575	)		-
Other, net		-			-			(48	)
Net cash provided (used) by investing activities		86,537			(1,493	)		(1,952	)
Cash flows from financing activities:
Indebtedness:
Borrowings		129,524			-			498,658
Deferred financing fees		(1,989	)		-			(470,513	)
Loans to affiliates		(209,524	)		-			(8,890	)
Dividends paid		(60,000	)		-			(50,206	)
Net cash used by financing activities		(141,989	)		-			(30,951	)
Net change during the year from operating investing and financing activities		5,388			2,724			(6,715	)
Currency translation		347			615			357
Balance at beginning of year		548			6,283			9,622
Balance at end of year	$	6,283		$	9,622		$	3,264

KRONOS INTERNATIONAL, 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 Kronos International, Inc. reflect our investment in subsidiaries on the equity method. The Consolidated Financial Statements of Kronos International, Inc. and the related Notes to Consolidated Financial Statements are incorporated herein by reference.

Note 2 - Investment in and advances to subsidiaries:

	December 31,
	2005		2006
	(In thousands)
Current:
Receivable from:
Kronos Titan GmbH (“TG”) - income taxes	$	30,172	$	44,593
Kronos Chemie GmbH - income taxes		582		1,399
Kronos Titan A/S		1,575		1,907
Kronos Europe S.A./N.V		1,721		1,805
Kronos Canada		1,716		1,407
Titania A/S		431		507	��
Other		13		53
	$	36,210	$	51,671
Payable to:
TG		32,833		27,621
KCH		1,826		3,447
Kronos (US), Inc.		-		54
Other		56		6
	$	34,715	$	31,128

	December 31,
	2005		2006
	(As adjusted)
	(In thousands)
Investment in:
TG	$	278,854	$	299,558
Kronos Denmark ApS (“KDK”)		163,201		179,445
Other		22,838		28,216
	$	464,893	$	507,219

	Years ended December 31,
	2004		2005		2006
	(As adjusted)
	(In thousands)
Equity in income from continuing operations of subsidiaries:
TG	$	40,937	$	52,254	$	17,144
KDK		23,429		35,875		33,727
Other		1,254		3,041		4,019
	$	65,620	$	91,170	$	54,890

Note 3 -Long-term debt:

	December 31,
	2005		2006
	(In thousands)
Long-term debt:
8.875% Senior Secured Notes	$	449,298	$	-
6.5% Senior Secured Notes		-		525,003
		449,298		525,003
Less current maturities		-		-
	$	449,298	$	525,003

Senior Secured Notes - On April 11, 2006, we issued an aggregate of euro 400 million principal amount of new 6.5% Senior Secured Notes due April 2013, at 99.306% of their principal amount ($498.5 million when issued). These Senior Secured Notes are collateralized by a pledge of 65% of the common stock or other ownership interests of certain of our first-tier operating subsidiaries. Such operating subsidiaries are Kronos Titan GmbH, Kronos Denmark ApS, Kronos Limited and Societe Industrielle Du Titane, S.A. We issued the 6.5% Notes pursuant to an indenture which contains a number of covenants and restrictions which, among other things, restricts our ability and that of our subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer all or substantially all of the assets of these subsidiaries to another entity. At our option, we may redeem the 6.5% notes on or after October 15, 2009 at redemption prices ranging from 103.25% of the principal amount, declining to 100% on or after October 15, 2012. In addition, on or before April 15, 2009, we may redeem up to 35% of the 6.5% Notes with the net proceeds of a qualified public equity offering at 106.5% of the principal amount. In the event of a change of control, as defined, we would be required to make an offer to purchase the 6.5% Notes at 101% of the principal amount. We would also be required to make an offer to purchase a specified portion of the 6.5% Notes at par value in the event we generate 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, 2006, the estimated market price of the 6.5% Notes was approximately euro 970 per euro 1,000 principal amount. At December 31, 2006, the carrying amount of the 6.5% Notes includes euro 2.5 million ($3.3 million) of unamortized original issue discount.

    We used the proceeds from the 6.5% Notes to fund the May 2006 redemption of our 8.875% Senior Secured Notes at 104.437% of the aggregate principal amount of euro 375 million for an aggregate of $491.4 million, including the $20.9 million call premium. We recognized a $22.3 million pre-tax interest charge in the second quarter of 2006 related to the prepayment of the 8.875% Notes, consisting of the call premium on the 8.875% Notes and the write-off of deferred financing costs and unamortized premium related to the notes.

KRONOS TITAN GMBH AND SUBSIDIARIES
Index of Consolidated Financial Statements
Financial Statements	Pages
Report of Independent Registered Public Accounting Firm	FA-2
Consolidated Balance Sheets -
December 31, 2005 (As adjusted); and December 31, 2006	FA-3
Consolidated Statements of Income -
Years ended December 31, 2004 and 2005 (As adjusted); and
Year ended December 31, 2006	FA-5
Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2004 and 2005 (As adjusted); and
Year ended December 31, 2006	FA-6
Consolidated Statements of Owner’s Equity -
Years ended December 31, 2004 and 2005 (As adjusted); and
Year ended December 31, 2006	FA-7
Consolidated Statements of Cash Flows -
Years ended December 31, 2004 and 2005 (As adjusted); and
Year ended December 31, 2006	FA-8
Notes to Consolidated Financial Statements	FA-9

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Owner of Kronos Titan GmbH:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income (loss), owner’s equity and cash flows present fairly, in all material respects, the financial position of Kronos Titan GmbH and its subsidiaries at December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 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 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 14 to the consolidated financial statements, the Company changed the manner in which it accounts for planned major maintenance expense and the manner in which it accounts for pension and other postretirement benefit obligations in 2006.

PricewaterhouseCoopers LLP

Dallas, Texas

March 13, 2007

KRONOS TITAN GMBH AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2006

(In thousands)

ASSETS	2005		2006
	(As adjusted)
Current assets:
Cash and cash equivalents	$	50,765	$	43,780
Accounts and notes receivable		73,059		92,595
Receivable from affiliates		43,021		30,327
Refundable income taxes		14,695		23,607
Inventories		113,677		118,696
Prepaid expenses		1,629		2,100
Total current assets		296,846		311,105
Other assets:
Unrecognized net pension obligations		3,000		-
Deferred income taxes		47,044		49,758
Other		808		742
Total other assets		50,852		50,500
Property and equipment:
Land		13,460		15,406
Buildings		101,151		114,367
Machinery and equipment		434,895		502,520
Construction in progress		9,853		7,534
		559,359		639,827
Less accumulated depreciation and amortization		332,840		387,630
Net property and equipment		226,519		252,197
	$	574,217	$	613,802

KRONOS TITAN GMBH AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31, 2005 and 2006

(In thousands)

LIABILITIES AND OWNERS’ EQUITY	2005			2006
	(As adjusted)
Current liabilities:
Accounts payable and accrued liabilities	$	70,797		$	57,577
Payables to affiliates		75,447			87,206
Deferred income taxes		3,961			1,508
Total current liabilities		150,205			146,291
Noncurrent liabilities:
Note payable to affiliate		11,239			-
Accrued pension cost		120,872			157,597
Other		13,047			10,356
Total noncurrent liabilities		145,158			167,953
Owner’s equity:
Subscribed capital		12,496			12,496
Paid in capital		227,037			228,605
Retained earnings		43,027			37,049
Accumulated other comprehensive income (loss):
Currency translation		69,155			110,572
Defined benefit pension plans		(72,861	)		(89,164	)
Total owner’s equity		278,854			299,558
	$	574,217		$	613,802
Commitments and contingencies (Notes 6, 7 and 12)

See accompanying notes to consolidated financial statements.

KRONOS TITAN GMBH AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004			2005			2006
	(As adjusted)
Net sales	$	552,216		$	584,219		$	641,212
Cost of sales		451,956			462,497			535,425
Gross margin		100,260			121,722			105,787
Selling, general and administrative expense		47,824			50,140			52,707
Other operating income (expense):
Currency transaction gains (losses), net		(2,533	)		3,906			(3,736	)
Disposition of property and equipment		(293	)		(1,080	)		(1,489	)
Income from operations		49,610			74,408			47,855
Other income (expense):
Trade interest income		949			733			1,907
Interest and other income from affiliates		8,813			13,224			6,672
Interest and other expense to affiliates		(304	)		(791	)		(1,375	)
Interest expense		(651	)		(595	)		(272	)
Income before income taxes		58,417			86,979			54,787
Provision for income taxes		17,480			34,725			37,643
Net income	$	40,937		$	52,254		$	17,144

See accompanying notes to consolidated financial statements.

KRONOS TITAN GMBH AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004		2005			2006
	(As adjusted)
Net income	$	40,937	$	52,254		$	17,144
Other comprehensive income (loss), net of tax:
Defined benefit pension plans		4,400		(53,451	)		3,355
Currency translation adjustment		36,538		(43,191	)		41,417
Total other comprehensive income		40,938		(96,642	)		44,772
Comprehensive income (loss)	$	81,875	$	(44,388	)	$	61,916

See accompanying notes to consolidated financial statements.

KRONOS TITAN GMBH AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OWNER’S EQUITY

Years ended December 31, 2004, 2005 and 2006

(In thousands)

									Accumulated other
									Comprehensive
	Owners’ Equity					Retained			income (loss)
	Subscribed		Paid-in			earnings			Currency			Pension
	capital		capital			(deficit)			translation			plans			Total
						(As adjusted)			(As adjusted)						(As adjusted)
Balance at December 31, 2003:
As previously reported	$	12,496	$	376,634		$	-		$	75,524		$	(23,810	)	$	440,844
Change in accounting principle		-		-			499			284			-			783
Balance as adjusted		12,496		376,634			499			75,808			(23,810	)		441,627
Net income*		-		-			40,937			-			-			40,937
Dividends paid		-		-			(50,663	)		-			-			(50,663	)
Other comprehensive income, net of tax*		-		-			-			36,538			4,400			40,938
Noncash capital transaction		-		(149,597	)		-			-			-			(149,597	)
Balance at December 31, 2004*		12,496		227,037			(9,227	)		112,346			(19,410	)		323,242
Net income*		-		-			52,254			-			-			52,254
Other comprehensive income, net of tax*		-		-			-			(43,191	)		(53,451	)		(96,642	)
Balance at December 31, 2005*		12,496		227,037			43,027			69,155			(72,861	)		278,854
Net income		-		-			17,144			-			-			17,144
Dividends paid		-		-			(23,122	)		-			-			(23,122	)
Noncash capital transaction		-		1,568			-			-			-			1,568
Other comprehensive income, net of tax		-		-			-			41,417			3,355			44,772
Adoption of SFAS No. 158		-		-			-			-			(19,658	)		(19,658	)
Balance at December 31, 2006	$	12,496	$	228,605		$	37,049		$	110,572		$	(89,164	)	$	299,558

_____________________

*As adjusted

See accompanying notes to consolidated financial statements.

KRONOS TITAN GMBH AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004			2005			2006
	(As adjusted)
Cash flows from operating activities:
Net income	$	40,937		$	52,254		$	17,144
Depreciation, depletion and amortization		23,583			20,980			20,637
Noncash interest expense		200			141			98
Deferred income taxes		6,151			9,467			5,112
Net loss from disposition of property and equipment		293			1,080			1,489
Pension, net		(4,540	)		(3,328	)		(326	)
Other, net		167			155			(422	)
Change in assets and liabilities:
Accounts and notes receivable		(3,205	)		(9,294	)		(8,080	)
Inventories		5,837			(26,334	)		7,897
Prepaid expenses		559			(144	)		(84	)
Accounts payable and accrued liabilities		13,751			5,351			(7,824	)
Income taxes		126,599			(13,859	)		(11,276	)
Accounts with affiliates		(82,855	)		29,420			24,714
Other noncurrent assets		(146	)		109			52
Other noncurrent liabilities		(5,334	)		(713	)		(4,316	)
Net cash provided by operating activities		121,997			65,285			44,815
Cash flows from investing activities - capital expenditures		(20,396	)		(22,896	)		(22,199	)
Cash flows from financing activities:
Indebtedness:
Borrowings		49,984			-			-
Principal payments		(49,984	)		-			-
Loans from affiliates:
Loans		11,597			4,860			-
Repayments		(88,656	)		-			(10,919	)
Dividends paid		-			-			(23,122	)
Cash distributions		(50,663	)		-			-
Net cash provided (used) by financing activities		(127,722	)		4,860			(34,041	)
Cash and cash equivalents - net change from:
Operating, investing and financing activities		(26,121	)		47,249			(11,425	)
Currency translation		1,706			(2,928	)		4,440
Balance at beginning of year		30,859			6,444			50,765
Balance at end of year	$	6,444		$	50,765		$	43,780
Supplemental disclosures:
Cash paid (received) for:
Interest	$	626		$	516		$	170
Income taxes		(132,629	)		6,517			25,423

See accompanying notes to consolidated financial statements.

KRONOS TITAN GMBH AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and basis of presentation:

Kronos Titan GmbH is a wholly-owned subsidiary of Kronos International, Inc. (“KII”). KII is a wholly-owned subsidiary of Kronos Worldwide, Inc. (“Kronos”). At December 31, 2006, (i) Valhi, Inc. held approximately 57% of Kronos’ common stock and NL Industries, Inc. held an additional 36% of the outstanding common stock of Kronos, (ii) Valhi owned 83% of NL’s outstanding common stock and (iii) Contran Corporation and its subsidiaries held approximately 92% of Valhi’s outstanding common stock. Substantially all of Contran’s outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee, or is held by Mr. Simmons or persons or other entities related to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control each of such companies.

Unless otherwise indicated, references in this report to “we”, “us” or “our” refer to Kronos Titan GmbH and its subsidiaries, taken as a whole.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), with the U.S. dollar as the reporting currency. We also prepare financial statements on other bases, as required in Germany.

In 2004, we forgave a $150 million receivable from KII. In 2006, KII made a capital contribution to us in the form of shares of Kronos World Services (“KWS”) common stock. At the date of contribution, the net assets of KWS were approximately $1.5 million. These transactions are reflected as a noncash capital transactions in the accompanying Consolidated Statement of Owner’s Equity.

We are not a registrant with the U.S. Securities and Exchange Commission and therefore are not subject to the SEC’s periodic reporting requirements, except as may be required by Rule 3-16 of Regulation S-X.

Note 2 - Summary of significant accounting policies:

Management’s estimates.In preparing our financial statements in conformity with GAAP we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results may differ from previously-estimated amounts under different assumptions or conditions.

Principles of consolidation. Our consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. We have eliminated all material intercompany accounts and balances. We have no involvement with any variable interest entity covered by the scope of FASB Interpretation (“FIN”) No. 46R, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, as amended as of March 31, 2004.

Translation of foreign currencies. Our functional currency is the euro. We translate our assets and liabilities to U.S. dollars at year-end rates of exchange, while we translate revenues and expenses at weighted average exchange rates prevailing during the year. Resulting translation adjustments are included in other comprehensive income (loss), net of related income taxes, if applicable. Currency transaction gains and losses are recognized in income currently.

Derivatives and hedging activities.We recognize derivative instruments as either assets or liabilities and measure them at fair value in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. We recognize the change in the fair value of derivatives either in net income or other comprehensive income depending on the intended use of the derivative.

Cash equivalents. We classify bank deposits with original maturities of three months or less as cash equivalents.

Accounts receivable. We provide an allowance for doubtful accounts for known and estimated potential losses arising from sales to customers based on a periodic review of the accounts.

Property and equipment and depreciation. We state property and equipment at cost. We compute depreciation of property and equipment for financial reporting purposes 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. We use accelerated depreciation methods for income tax purposes, as permitted. Upon sale or retirement of an asset, we remove cost and accumulated depreciation from the accounts and recognize any gain or loss in income currently.

We expense expenditures for maintenance, repairs and minor renewals (including planned major maintenance), while we capitalize expenditures for major improvements.

We capitalize interest costs related to major long-term capital projects and renewals as a component of construction costs. Interest costs capitalized were not significant in 2004, 2005 or 2006.

When events or changes in circumstances indicate that assets may be impaired, we perform an evaluation 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. We consider all relevant factors. We perform the impairment test 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. We assess impairment of other long-lived assets (such as property and equipment and mining properties) in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Long-term debt. We state long-term debt net of any unamortized original issue premium or discount. We classify amortization of deferred financing costs as interest expense, and compute it using the interest method over the term of the applicable issue.

Employee benefit plans. Accounting and funding policies for retirement plans are described in Note 8.

Income taxes. We are subject to the German corporation tax, with a statutory rate of 25%, in addition to solidarity-surcharge of 5.5% of corporate income tax and trade income taxes. We periodically evaluate our deferred tax assets in the various taxing jurisdictions in which we operate and adjust any related valuation allowance based on the estimate of the amount of such deferred tax assets that we believe does not meet the “more-likely-than-not” recognition criteria. See Note 7. We are included in KII’s Organschaft.

Net sales. We record net sales 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 are generally FOB shipping point. We include amounts charged to customers for shipping and handling in net sales. We state sales net of price, early payment and distributor discounts and volume rebates. We report any tax assessed by a governmental authority that we collect from our customers that is both imposed on and concurrent with our revenue-producing activities (such as sales, use, value added and excise taxes) on a net basis (meaning we do not recognize these taxes either in our revenues or in our costs and expenses).

Inventories and cost of sales. We state inventories at the lower of cost (principally average cost) or market, net of allowance for obsolete or slow-moving inventories. We remove amounts from inventories at average cost. Cost of sales includes costs for materials, packaging and finishing, utilities, salary and benefits, maintenance and depreciation.

Selling, general and administrative expenses; shipping and handling costs.Selling, general and administrative expenses include costs related to marketing, sales, distribution, shipping and handling, research and development, legal and administrative functions, such as accounting, treasury and finance, and includes costs for salary and benefits, travel and entertainment, promotional materials and professional fees. Shipping and handling costs are included in selling, general and administrative expense and were $22.3 million in 2004, $23.1 million in 2005 and $25.8 million in 2006. Advertising costs are expensed as incurred and were approximately $300,000 in each of 2004, 2005 and 2006.

Note 3 - Accounts and notes receivable:

	December 31,
	2005			2006
	(In thousands)
Trade receivables	$	69,019		$	85,011
Recoverable VAT and other receivables		5,189			8,794
Allowance for doubtful accounts		(1,149	)		(1,210	)
	$	73,059		$	92,595

Note 4 - Inventories:

	December 31,
	2005		2006
	(In thousands)
Raw materials	$	21,386	$	18,117
Work in process		11,884		16,030
Finished products		65,242		65,524
Supplies		15,165		19,025
	$	113,677	$	118,696

Note 5 - Accounts payable and accrued liabilities:

	December 31,
	2005		2006
	(As adjusted)
	(In thousands)
Accounts payable	$	39,206	$	37,133
Accrued liabilities:
Employee benefits		16,632		5,301
Waste acid recovery		9,149		8,836
Other		5,810		6,307
	$	70,797	$	57,577

Note 6 - Long-term debt:

Credit Facility - We and certain of KII’s subsidiaries in Belgium, Norway and Denmark (Kronos Europe S.A./N.V.-“KEU”, Kronos Titan A/S - “TAS” and Titania A/S - “TIA,” Kronos Norge A/S, the parent company of TAS and TIA, and Kronos Denmark ApS, the parent company of Kronos Norge and KEU), referred to as the “Borrowers”, have a euro 80 million secured revolving credit facility that matures in June 2008. Borrowings may be denominated in euros, Norwegian kroners or U.S. dollars, and bear interest at the applicable interbank market rate plus 1.125%. The facility also provides for the issuance of letters of credit up to euro 5 million. The 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 credit facility contains certain restrictive covenants which, among other things, restrict 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. In addition, the credit facility contains customary cross-default provisions with respect to other debt and obligations of ours and our other subsidiaries. At December 31, 2006, no amounts were outstanding under the credit facility and the equivalent of $105.7 million was available for additional borrowing.

Senior Secured Notes - On April 11, 2006, KII (our parent company) issued an aggregate of euro 400 million principal amount of new 6.5% Senior Secured Notes due April 2013, at 99.306% of their principal amount ($498.5 million when issued). These 6.5% Notes are collateralized by a pledge of 65% of the common stock or other ownership interests of certain of their first-tier operating subsidiaries. Such operating subsidiaries are us, Kronos Denmark ApS, Kronos Limited and Societe Industrielle Du Titane, S.A. KII issued the 6.5% Notes pursuant to an indenture which contains a number of covenants and restrictions which, among other things, restricts our ability and that of our subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer all or substantially all of our assets or those or our subsidiaries to another entity. At our option, we may redeem the 6.5% Notes on or after October 15, 2009 at redemption prices ranging from 103.25% of the principal amount, declining to 100% on or after October 15, 2012. In addition, on or before April 15, 2009, we may redeem up to 35% of the Notes with the net proceeds of a qualified public equity offering at 106.5% of the principal amount. In the event of a change of control, as defined, we would be required to make an offer to purchase the 6.5% Notes at 101% of the principal amount. We would also be required to make an offer to purchase a specified portion of the 6.5% Notes at par value in the event we generate 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, 2006, the estimated market price of the 6.5% Notes was approximately euro 970 per euro 1,000 principal amount. At December 31, 2006, the carrying amount of the 6.5% Notes includes euro 2.5 million ($3.3 million) of unamortized original issue discount.

Under the cross-default provisions of the 6.5% Notes, the 6.5% Notes may be accelerated prior to their stated maturity if KII, us or any of our 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 the European Credit Facility, any outstanding borrowings under this facility may be accelerated prior to their stated maturity if the we or any borrowers 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). The European Credit Facility contains 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 the cross-default provisions of either the 6.5% Notes or the European Credit Facility become applicable, and such indebtedness is accelerated, we would be required to repay such indebtedness prior to their stated maturity.

In April 2006, KII called all of its 8.875% Senior Secured Notes for redemption on May 11, 2006 at 104.437% of their aggregate principal amount of euro 375 million (an aggregate of $470.2 million at March 31, 2006 exchange rates). Funds for such redemption were provided by KII’s issuance of an aggregate of euro 400 million principal amount of new 6.5% Senior Secured Notes due April 2013, issued on April 11, 2006 at 99.306% of their principal amount. The new Senior Secured Notes were issued pursuant to an indenture that contains covenants, restrictions and collateral substantially identical to the covenants, restrictions and collateral of the 8.875% Senior Secured Notes.

Note 7 - Income taxes:

	Years ended December 31,
	2004			2005			2006
	(As adjusted)
	(In thousands)
Pretax income	$	58,417		$	86,979		$	54,787
Expected tax expense	$	15,422		$	22,962		$	14,464
Trade income tax		7,791			11,196			7,062
German tax refund		(2,508	)		-			-
Assessment of prior year income taxes		-			-			15,483
Change in deferred income tax valuation allowance, net		(3,146	)		-			-
Tax contingency reserve adjustment		-			1,387			81
Other, net		(79	)		(820	)		553
Income tax expense	$	17,480		$	34,725		$	37,643
Provision for income taxes:
Current income tax expense	$	11,329		$	25,258		$	32,531
Deferred income tax expense		6,151			9,467			5,112
	$	17,480		$	34,725		$	37,643
Comprehensive provision (benefit) for income taxes allocable to:
Pretax income	$	17,480		$	34,725		$	37,643
Other comprehensive loss - Defined benefit pension liabilities		(8,081	)		(32,649	)		4,220
Adoption of SFAS No. 158		-			-			(12,722	)
	$	9,399		$	2,076		$	29,141

The components of the net deferred tax liability are summarized below.

	December 31,
	2005						2006
	Assets			Liabilities			Assets			Liabilities
	(As Adjusted)
Tax effect of temporary differences relating to:
Inventories	$	-		$	(2,375	)	$	-		$	(1,267	)
Property and equipment		26,362			-			20,409			-
Pension asset		-			(24,398	)		-			(27,114	)
Accrued pension cost		47,420			-			57,827			-
Other taxable differences		-			(3,926	)		-			(1,605	)
Gross deferred tax assets (liabilities)		73,782			(30,699	)		78,236			(29,986	)
Reclassification, principally netting by tax jurisdiction		(26,738	)		26,738			(28,478	)		28,478
Net total deferred tax liabilities		47,044			(3,961	)		49,758			(1,508	)
Net current deferred tax liabilities		-			(3,961	)		-			(1,508	)
Net noncurrent deferred tax asset	$	47,044		$	-		$	49,758		$	-

We have no deferred income tax valuation allowance as of December 31, 2005 and 2006.

     In 2003, we were notified by the German Federal Fiscal Court (the “Court”) that the Court had ruled in our favor concerning a claim for refund suit in which we sought refunds of prior taxes paid during the periods 1990 through 1997. We were required to file amended tax returns with the German tax authorities in order to receive our refunds for such years, and all of such amended returns were filed during 2003. Such amended returns reflected an aggregate refund of taxes and related interest to us of euro 103.2 million ($123.0 million) and we recognized the benefit for these net funds in our 2003 results of operations. During 2004, we recognized a refund of euro 4.0 million ($5.3 million) related to additional net interest which has accrued on the outstanding refund amount. In 2004, we had received net refunds of euro 107.2 million ($135.4 million when received). All refunds relating from the periods 1990 to 1997 were received by December 31, 2004.

Tax authorities have examining certain of our income tax returns. Due to an unfavorable resolution of certain income tax audits, we recognized a $15.5 million provision for income taxes in 2006 related to adjustment to prior year income taxes. Other income tax examinations may occur, and we cannot guarantee that any tax matters will be resolved in our favor in view of the inherent uncertainties involved in settlement initiatives and court and tax proceedings. We believe that we have provided adequate accruals for additional taxes and related interest expense which may ultimately result from all such examinations and believe that the ultimate disposition of such examinations should not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Note 8 - Employee benefit plans:

We maintain a defined benefit pension plan and certain other benefits covering substantially all employees. Variances from actuarially assumed rates will result in increases or decreases in accumulated pension obligations, pension expense and funding requirements in future periods. At December 31, 2006, we expect to contribute the equivalent of approximately $12 million to our defined benefit pension plans during 2007.

The funded status of our defined benefit pension plan, the components of net periodic defined benefit pension cost and the rates used in determining the actuarial present value of benefit obligations are presented in the tables below. We use a September 30 measurement date for our defined benefit pension plan.

	December 31,
	2005			2006
	(In thousands)
Change in projected benefit obligations (“PBO”):
Benefit obligations at beginning of year	$	232,308		$	279,940
Service cost		3,742			3,139
Interest cost		10,540			11,684
Participant contributions		1,316			1,311
Actuarial losses		81,199			(11,189	)
Benefits paid		(35,385	)		(14,114	)
Change in currency exchange rates		(13,780	)		32,079
Benefit obligations at end of year	$	279,940		$	302,850
Change in fair value of plan assets:
Fair value of plan assets at beginning of year	$	136,919		$	122,029
Actual return on plan assets		4,596			7,045
Employer contributions		11,182			14,443
Participant contributions		1,316			1,311
Change in currency exchange rates		(18,204	)		14,539
Benefits paid		(13,780	)		(14,114	)
Fair value of plan assets at end of year	$	122,029		$	145,253
Accumulated benefit obligations	$	255,400		$	258,654
Funded status at year end:
Plan assets less than PBO	$	(157,911	)	$	(157,597	)
Unrecognized actuarial loss		147,873			144,764
Unrecognized prior service cost		3,000			3,140
	$	(7,038	)	$	(9,693	)
Amounts recognized in the balance sheet:
Unrecognized net pension obligations	$	3,000		$	-
Accrued pension cost:
Current		(9,858	)		-
Noncurrent		(120,872	)		(157,597	)
Accumulated other comprehensive loss		120,692			147,904
	$	(7,038	)	$	(9,693	)

The amounts shown in the table above for actuarial losses and prior service cost at December 31, 2005 and 2006 have not yet been recognized as components of our periodic defined benefit pension cost as of those dates. These amounts will be recognized as components of our periodic defined benefit cost in future years. However, upon adoption of SFAS No. 158, the December 31, 2006 amounts, net of deferred income taxes, are recognized in our accumulated other comprehensive income. Of the amounts included in accumulated other comprehensive income as of December 31, 2006 related to our pension plans, we expect to recognize net actuarial losses of $6 million and prior service costs of $200,000 as a component of our net periodic pension expense during 2007.

The components of the net periodic defined benefit pension cost are set forth below.

	Years ended December 31,
	2004			2005			2006
	(In thousands)
Net periodic pension cost:
Service cost benefits	$	3,289		$	3,742		$	3,139
Interest cost on PBO		10,558			10,540			11,684
Expected return on plan assets		(9,448	)		(8,841	)		(7,951	)
Amortization of prior service cost		196			200			199
Amortization of net transition obligations		69			-			-
Recognized actuarial losses		782			1,644			6,172
	$	5,446		$	7,285		$	13,243

The weighted-average rate assumptions used in determining the actuarial present value of benefit obligations as of December 31, 2005 and 2006 are presented in the table below. Such weighted-average rates were determined using the projected benefit obligations at each date.

	December 31,
Rate	2005	2006
Discount rate	4.0%	4.5%
Increase in future compensation levels	2.8%	3.0%

The weighted-average rate assumptions used in determining the net periodic pension cost for 2004, 2005 and 2006 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,
	2004	2005	2006
Rate
Discount rate	5.3%	5.0%	4.0%
Increase in future compensation levels	2.8%	2.8%	2.8%
Long-term return on plan assets	6.5%	6.0%	5.5%

Plan assets are comprised primarily of investments in corporate equity and debt securities, short-term investments, mutual funds and group annuity contracts.

In determining the expected long-term rate of return on plan asset assumptions, we consider the long-term asset mix (e.g. equity vs. fixed income) for the assets for each of our plans and the expected long-term rates of return for such asset components. In addition, we receive advice about appropriate long-term rates of return from third-party actuaries. The composition of our plan assets is established to satisfy the requirements of the German insurance commissioner. The plan asset allocation at December 31, 2006 was 23% to equity managers, 48% to fixed income managers, 14% to real estate and 15% to other (2005 - 23%, 48%, 14% and 15%, respectively).

We regularly review our actual asset allocation for each of our plans, and will periodically rebalance the investments in each plan to more accurately reflect the targeted allocation when considered appropriate.

Variances from actuarially assumed rates will change the actuarial valuation of accrued pension liabilities, pension expense and funding requirements in future periods.

We expect future benefits paid from all defined benefit pension plans to be as follows:

Years ending December 31,	Amount
		(In thousands)
2007	$	13,486
2008		13,541
2009		11,827
2010		11,980
2011		12,064
2012 to 2016		62,614

New accounting standard. We account for our defined benefit pension plans using SFAS No. 87, Employer’s Accounting for Pensions, as amended, and we account for our OPEB plans under SFAS No. 106, Employers Accounting for Postretirement Benefits other than Pensions, as amended. In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.  SFAS No. 158, which further amended SFAS Nos. 87 and 106, requires us to recognize an asset or liability for the over or under funded status of each of our individual defined benefit pension and postretirement benefit plans on our Consolidated Balance Sheets.  This standard does not change the existing recognition and measurement requirements that determine the amount of periodic benefit cost we recognize in net income. We adopted the asset and liability recognition and disclosure requirements of this standard effective December 31, 2006 on a prospective basis, in which we recognized through other comprehensive income all of our prior unrecognized gains and losses and prior service costs or credits, net of tax, as of December 31, 2006. We will recognize all future changes in the funded status of these plans through comprehensive income, net of tax. These future changes will be recognized either in net income, to the extent they are reflected in periodic benefit cost, or through other comprehensive income.  In addition, we currently use September 30 as a measurement date for our defined benefit pension plans, but under this standard we will be required to use December 31 as the measurement date. The measurement date requirement of SFAS No. 158 will become effective for us by the end of 2008 and provides two alternate transition methods; we have not yet determined which transition method we will select. 

Adopting this standard had the following effects on our Consolidated Financial Statements as of December 31, 2006:

	Before application of SFAS No. 158			Adjustments			After application of SFAS No. 158
	(In thousands)
Assets:
Current deferred income tax asset	$	3,046		$	(3,046	)	$	-
Total current assets		314,151			(3,046	)		311,105
Net pension asset		3,140			(3,140	)		-
Noncurrent deferred income tax asset		32,482			17,276			49,758
Total other assets		42,697			14,136			56,833
Total assets		609,045			11,090			620,135
Liabilities:
Current accrued pension costs		11,590			(11,590	)		-
Current deferred income taxes		-			1,508			1,508
Total current liabilities		156,373			(10,082	)		146,291
Noncurrent accrued pension costs		116,767			40,830			157,597
Total noncurrent liabilities		127,123			40,830			167,953
Owner’s equity:
Accumulated other comprehensive income - minimum pension liability		(69,506	)		69,506			-
Accumulated other comprehensive income - defined benefit pension plans					(89,164	)		(89,164	)
Total accumulated other comprehensive income		41,066			(19,658	)		21,408
Total stockholders’ equity		325,549			(19,658	)		305,891
Total liabilities and stockholders’ equity		609,045			11,090			620,135

 

Note 9 - Other noncurrent liabilities:

	December 31,
	2005		2006
	(In thousands)
Employee benefits	$	3,842	$	4,149
Insurance claims expense		1,124		1,319
Other		8,081		4,888
	$	13,047	$	10,356

Note 10 - Related party transactions:

We 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, tax sharing agreements, joint ventures, partnerships, loans, options, advances of funds on open account, and sales, leases and exchanges of assets, including securities issued by both related and unrelated parties and (b) common investment and acquisition strategies, business combinations, reorganizations, recapitalizations, securities repurchases, and purchases and sales (and other acquisitions and dispositions) of subsidiaries, divisions or other business units, which transactions have involved both related and unrelated parties and have included transactions which resulted in the acquisition by one related party of a publicly held minority equity interest in another related party. While no transactions of the type described above are planned or proposed with respect to us other than as set forth in these financial statements, we from time to time consider, review and evaluate such transactions and understand that Contran, Valhi, NL, Kronos, KII and related entities consider, review and evaluate, such transactions. Depending upon the business, tax and other objectives then relevant, it is possible that we might be a party to one or more such transactions in the future.

We are party to services and cost sharing agreements among several of our affiliates, including Kronos, whereby they provide us with certain management, financial, insurance and administrative services on a fee basis. Our expense was approximately $7.8 million in 2004, $7.9 million in 2005 and $6.3 million in 2006 related to these services and costs.

We charge affiliates for certain management, financial and administrative services costs, which totaled approximately $4.4 million in 2004, $4.8 million in 2005 and $4.5 million in 2006. These charges to affiliates were reflected primarily as a reduction of selling, general and administrative expense.

Tall Pines Insurance Company and EWI RE, Inc. provide for or broker certain insurance policies for Contran and certain of its subsidiaries and affiliates, including KII, Kronos and us. Tall Pines and EWI are subsidiaries of Valhi. Consistent with insurance industry practices, Tall Pines and EWI receive commissions from insurance and reinsurance underwriters and/or assess fees for the policies that they provide or broker. The aggregated premiums we paid to Tall Pines and EWI were $4.0 million, $3.5 million and $3.5 million in 2004, 2005 and 2006, respectively. These amounts principally included payments for insurance, but also included commissions paid to Tall Pines and EWI. Tall Pines purchases reinsurance for substantially all of the risks it underwrites. We expect that these relationships with Tall Pines and EWI will continue in 2007.

Contran and certain of its subsidiaries and affiliates, including us, purchase certain of their insurance policies as a group, with the costs of the jointly-owned policies being apportioned among the participating companies. With respect to certain of such policies, it is possible that unusually large losses incurred by one or more insureds during a given policy period could leave the other participating companies without adequate coverage under that policy for the balance of the policy period. As a result, Contran and certain of its subsidiaries and its affiliates, including Kronos, 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. We believe 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 for uninsured loss.

We purchase from and sell to our affiliates a significant amount of titanium dioxide pigments (“TiO₂”). Sales of TiO₂ to our affiliates was $133.4 million in 2004, $154.0 million in 2005 and $167.6 million in 2006. Purchases of TiO₂ from our affiliates was $53.9 million in 2004, $55.3 million in 2005 and $68.1 million in 2006.

Kronos purchases the rutile and slag feedstock we use a raw material in our chloride process TiO₂ facility. We purchase such feedstock from Kronos for an amount equal to the amount paid by KUS to the third-party supplier plus a 2.5% administrative fee. Such feedstock purchases were $66.7 million in 2004, $72.3 million in 2005 and $72.2 million in 2006.

We sell water treatment chemicals (derived from co-products of the TiO₂ production processes) to KII. Such water treatment chemical sales were $16.1 million in 2004, $18.8 million in 2005 and $19.9 million in 2006.

We purchase ilmenite (sulfate feedstock) from our Norwegian affiliate on a year-to-year basis. Such feedstock purchases were $17.4 million in 2004, $21.4 million in 2005 and $21.8 million in 2006.

We are party to an accounts receivable factoring agreement with certain European affiliates of ours pursuant to which these affiliates factored their export accounts receivable without recourse to us for a fee of 0.85%. Upon non-recourse transfer from these affiliates, we assume all risk pertaining to the factored receivables, including, but not limited to, exchange control risks, risks pertaining to the bankruptcy of a customer and risks related to late payments. Export receivables purchased by us during 2004, 2005 and 2006 aggregated $120 million, $124 million and $125 million, respectively.

Net amounts currently receivable from (payable to) affiliates are summarized in the following table.

	December 31,
	2005		2006
	(In thousands)
Receivable from:
KII	$	32,833	$	27,621
Other affiliates		10,188		2,706
	$	43,021	$	30,327
Current payable to:
KII - income taxes	$	30,173	$	44,593
TIA		25,090		25,382
Other affiliates		20,184		17,231
	$	75,447	$	87,206
Noncurrent payables to KDK	$	11,239	$	-

Our current receivable from affiliates generally relate to product sales and services rendered. Our current payable to affiliates generally relate to raw material purchases, accounts receivable factoring and services received.

In 2006, we repaid $10.9 million of our note payable to with KDK. The remaining $.3 million was reclassified to payable to affiliates.

We loaned our Norwegian affiliate euro 4 million ($5.4 million) during 2004. This note receivable bore interest at 3.1% and was repaid in 2005.

Included in other affiliate income and other affiliate expense was other affiliate interest income/expense, factoring fees and service fees.

Note 11 - NL common stock options held by our employees:

At December 31, 2006, our employees held options to purchase approximately 9,000 shares of NL common stock, which are exercisable at various dates through 2010 (approximately 4,000) at an exercise of $5.63 per share, and exercisable at various dates through 2011 (approximately 5,000) at an exercise price of $11.49 per share.

Note 12 - Commitments and contingencies:

Environmental, product liability and litigation matters. Our operations are governed by various environmental laws and regulations. Certain of our 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. As with other companies engaged in similar businesses, certain past and current operations and products of ours have the potential to cause environmental or other damage. We have implemented and continue to implement various policies and programs in an effort to minimize these risks. Our policy is to maintain compliance with applicable environmental laws and regulations at all of our facilities and to strive to improve our environmental performance. It is possible that future developments, such as stricter requirements of environmental laws and enforcement policies thereunder, could adversely affect our production, handling, use, storage, transportation, sale or disposal of such substances. We believe all of our plants are in substantial compliance with applicable environmental laws.

Concentrations of credit risk. Sales of TiO₂ accounted for more than 96% of our sales during each of 2004, 2005 and 2006. The remaining sales result from the manufacture and sale of iron-based water treatment chemicals (derived from co-products of the TiO₂ production processes). TiO₂ is generally sold to the paint, plastics and paper, as well as fibers, rubber, ceramics, inks and cosmetics markets. Such markets are generally considered "quality-of-life" markets whose demand for TiO₂ is influenced by the relative economic well-being of the various geographic regions. We sell TiO₂ to over 1,000 customers, with the top ten external customers approximating 22% of net sales in 2004 and 21% of net sales in 2005 and 2006. Approximately 78% of our TiO₂ sales by volume were to Europe in 2004 and 2005 and 79% in 2006. Approximately 7% in each of 2004, 2005 and 2006 of sales by volume were to North America.

Operating leases. We lease various manufacturing facilities and equipment pursuant to operating leases. Most of the leases contain purchase and/or various term renewal options at fair market and fair rental values, respectively. In most cases management expects that, in the normal course of business, leases will be renewed or replaced by other leases.

We lease the land under our Leverkusen TiO₂ production facility pursuant to a lease with Bayer AG that expires in 2050. The Leverkusen facility itself, which we own and which represents approximately two-thirds of our current TiO₂ production capacity, is located within the lessor's extensive manufacturing complex. We periodically establish the amount of rent for the land lease associated with the Leverkusen facility by agreement with Bayer for periods of at least two years at a time. The lease agreement provides for no formula, index or other mechanism to determine changes in the rent for such land lease; rather, any change in the rent is subject solely to periodic negotiation between us and Bayer. We recognize any change in the rent based on such negotiations as part of lease expense starting from the time such change is agreed upon by both parties, as any such change in the rent is deemed “contingent rentals” under GAAP. Under a separate supplies and services agreement expiring in 2011, the lessor provides some raw materials, including chlorine, auxiliary and operating materials, utilities and services necessary to operate the Leverkusen facility.

Net rent expense aggregated $4 million in each of 2004, 2005 and 2006. At December 31, 2006, minimum rental commitments under the terms of noncancellable operating leases were as follows:

Years ending December 31,	Amount
	(in thousands)
2007	$	2,528
2008		1,979
2009		1,821
2010		1,500
2011		1,105
2012 and thereafter		19,859
	$	28,792

Approximately $22.0 million of the $28.8 million aggregate future minimum rental commitments at December 31, 2006 relates to our 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, 2006. As discussed above, any change in the rent is based solely on negotiations between us and Bayer, and any such change in the rent is deemed “contingent rentals” under GAAP which is excluded from the future minimum lease payments disclosed above.

Purchase commitments. KUS has long-term supply contracts that provide for certain affiliates’ chloride feedstock requirements through 2010. We purchase chloride feedstock underlying these long-term supply contracts from KUS. The agreements require KUS to purchase certain minimum quantities of feedstock with minimum purchase commitments aggregating approximately $776 million at December 31, 2006.

Note 13 - Financial instruments:

Summarized below is the estimated fair value and related net carrying value of our financial instruments.

	December 31,
	2005				2006
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value
	(In millions)
Cash and cash equivalents	$	50.8	$	50.8	$	43.8	$	43.8
Note payable to affiliate		11.2		11.2		-		-

We periodically use interest rate swaps, currency swaps and other types of contracts to manage interest rate and foreign exchange risk with respect to financial assets or liabilities. We have not entered into these contracts for trading or speculative purposes in the past, nor do we currently anticipate doing so in the future. We were not a party to any such contracts during 2004, 2005 and 2006.

Other than as described above, we were not a party to any material derivative financial instruments during 2004, 2005 or 2006. There was no impact on our financial statements from adopting SFAS No. 133.

Note 14- Recent accounting pronouncements:

Variable interest entities. We 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. We do 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 us to consolidate such entity under FIN No. 46R which had not already been consolidated under prior applicable GAAP, and therefore the impact to us of adopting the consolidation requirements of FIN No. 46R was not material.

Inventory Costs. Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, became effective for us for inventory costs incurred on or after January 1, 2006. SFAS No. 151 requires that the allocation of fixed production overhead costs to inventory be based on normal capacity of the production facilities, as defined by SFAS No. 151. SFAS No. 151 also clarifies the accounting for abnormal amounts of idle facility expense, freight handling costs and wasted material, requiring those items be recognized as current-period charges. Our existing production cost policies complied with the requirements of SFAS No. 151, therefore the adoption of SFAS No. 151 did not affect our Consolidated Financial Statements.

Stock options.We adopted the fair value provisions of SFAS No. 123R, Share-Based Payment, on January 1, 2006, using the modified prospective application method. SFAS No. 123R, among other things, requires the cost of employee compensation paid with equity instruments to be measured based on the grant-date fair value. That cost is then recognized over the vesting period. Using the modified prospective method, we will apply the provisions of the standard to all new equity compensation granted after January 1, 2006 and any existing awards vesting after January 1, 2006. We have not issued any stock options to purchase Kronos common stock. However, certain of our employees have been granted options by NL to purchase NL common stock. The number of non-vested equity awards issued by NL at December 31, 2005 was not material. Prior to the adoption of SFAS No. 123R we accounted for equity compensation in accordance with APBO No. 25, Accounting for Stock Issued to Employees. Our affiliate NL accounted for their equity awards under the variable accounting method whereby the equity awards were revalued based on the current trading price at each balance sheet date. We now account for these awards using the liability method under SFAS No. 123R, which is substantially identical to the variable accounting method we previously used. We recorded compensation expense of $167,000 in 2004, and compensation income of $74,000 in 2005 and $27,000 in 2006 for stock-based employee compensation. If we grant a significant number of equity awards or modify, repurchase or cancel existing equity awards in the future, the amount of equity compensation expense in our Consolidated Financial Statements could be material.

Planned Major Maintenance Activities.We adopted FSP No. AUG AIR-1 effective December 31, 2006. Accordingly, we have retroactively adjusted our Consolidated Financial Statements to reflect the direct expense method of accounting for planned major maintenance (a method permitted under this standard). The effect of adopting this standard on our previously reported Consolidated Financial Statements is summarized in the tables below.

	Years ended December 31,
	2004			2005
	(In thousands, except per share amounts)
Increase (decrease) in:
Cost of sales (repairs and maintenance expense)	$	68		$	(61	)
Provision (benefit) for income taxes		(27	)		40
Net income		(41	)		21
Other comprehensive income - foreign currency		66			(92	)
Total comprehensive income		25			(71	)

	December 31, 2005
	(In thousands)
Decrease in accrued maintenance costs	$	1,190
Increase in current deferred income tax		453
Increase in retained earnings		479
Increase in accumulated other comprehensive loss - foreign currency		258
Increase in total owner’s equity		737

Pension and OPEB plans. We adopted the asset and liability recognition and disclosure requirements of SFAS No. 158 effective December 31, 2006. See Note 8.

Quantifying Financial Statement Misstatements. In the third quarter of 2006 the SEC issued Staff Accounting Bulletin (“SAB”) No. 108 expressing their views regarding the process of quantifying financial statement misstatements.  The SAB is effective for us as of December 31, 2006.  According to SAB 108 both the “rollover” and “iron curtain” approaches must be considered when evaluating a misstatement for materiality.  This is referred to as the “dual approach.”  For companies that have previously evaluated misstatements under one, but not both, of these methods, SAB 108 provides companies with a one-time option to record the cumulative effect of their prior unadjusted misstatements in a manner similar to a change in accounting principle in their 2006 annual financial statements if (i) the cumulative amount of the unadjusted misstatements as of January 1, 2006 would have been material under the dual approach to their annual financial statements for 2005 or (ii) the effect of correcting the unadjusted misstatements during 2006 would cause those annual financial statements to be materially misstated under the dual approach.  The adoption of SAB 108 did not have a material effect on our previously reported consolidated financial position or results of operations.

Fair Value Measurements.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which became effective for us on January 1, 2008. SFAS No. 157 generally provides a consistent, single fair value definition and measurement technique for GAAP pronouncements. SFAS No. 157 also establishes a fair value hierarchy for different measurement techniques based on the objective nature of the inputs in various valuation methods. We will be required to ensure all of our fair value measurements are in compliance with SFAS No. 157 on a prospective basis beginning in the first quarter of 2008. In addition, we will be required to expand our disclosures regarding the valuation methods and level of inputs we utilize in the first quarter of 2008. The adoption of this standard is not expected to have a material effect on our Consolidated Financial Statements.

Uncertain Tax Positions.In the second quarter of 2006 the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertain Tax Positions, which became effective for us on January 1, 2007.  FIN 48 clarifies when and how much of a benefit we can recognize in our Consolidated Financial Statements for certain positions taken in our income tax returns under SFAS No. 109, Accounting for Income Taxes, and enhances the disclosure requirements for our income tax policies and reserves. Among other things, FIN 48 will prohibit us from recognizing the benefits of a tax position unless we believe it is more-likely-than-not our position will prevail with the applicable tax authorities and limits the amount of the benefit to the largest amount for which we believe the likelihood of realization is greater than 50%.  FIN 48 also requires companies to accrue penalties and interest on the difference between tax positions taken on their tax returns and the amount of benefit recognized for financial reporting purposes under the new standard.  Our current income tax accounting policies comply with this aspect of the new standard.  We will also be required to reclassify any reserves we have for uncertain tax positions from deferred income tax liabilities, where they are currently recognized, to a separate current or noncurrent liability, depending on the nature of the tax position. In January 2007, the FASB indicated that they will issue clarifying guidance regarding certain aspects of the new standard by the end of March 2007. We are still in the process of evaluating the impact FIN 48 will have on our consolidated financial position and results of operations, and do not expect we will complete that evaluation until the FASB issues their clarifying guidance.

Fair Value Option. In the first quarter of 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits companies to chose, at specified election dates, to measure eligible items at fair value, with unrealized gains and losses included in the determination of net income. The decision to elect the fair value option is generally applied on an instrument-by-instrument basis, is irrevocable unless a new election date occurs, and is applied to the entire instrument and not to only specified risks or cash flows or a portion of the instrument. Items eligible for the fair value option include recognized financial assets and liabilities, other than an investment in a consolidated subsidiary, defined benefit pension plans, OPEB plans, leases and financial instruments classified in equity. An investment accounted for by the equity method is an eligible item. The specified election dates include the date we first recognize the eligible item, the date we enter into an eligible commitment, the date an investment first becomes eligible to be accounted for by the equity method and the date SFAS No. 159 first becomes effective for us. If we elect to measure eligible items at fair value under the standard, we would be required to present certain additional disclosures for each item we elect. SFAS No. 159 becomes effective for us on January 1, 2008, although we may apply the provisions earlier on January 1, 2007 if, among other things, we also adopt SFAS No. 157 on January 1, 2007 and elect to adopt SFAS No. 159 by April 30, 2007. We have not yet determined when we will choose to have SFAS No. 159 first become effective for us, nor have we determined which, if any, of our eligible items we will elect to be measured at fair value under the new standard. Therefore, we are currently unable to determine the impact, if any, this standard will have on our consolidated financial position or results of operations.

KRONOS DENMARK APS AND SUBSIDIARIES
Index of Consolidated Financial Statements
Financial Statements
Report of Independent Registered Public Accounting Firm	FB-2
Consolidated Balance Sheets -	FB-3
December 31, 2005 (As adjusted); and December 31, 2006
Consolidated Statements of Income -
Years ended December 31, 2004 and 2005 (As adjusted); and
Year ended December 31, 2006	FB-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2004 and 2005 (As adjusted); and
Year ended December 31, 2006	FB-6
Consolidated Statements of Stockholder’s Equity -
Years ended December 31, 2004 and 2005 (As adjusted); and
Year ended December 31, 2006	FB-7
Consolidated Statements of Cash Flows -
Years ended December 31, 2004 and 2005 (As adjusted); and
Year ended December 31, 2006	FB-8
Notes to Consolidated Financial Statements	FB-10

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of Kronos Denmark ApS:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, stockholder’s equity and cash flows present fairly, in all material respects, the financial position of Kronos Denmark ApS and its subsidiaries at December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 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 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 15 to the consolidated financial statements, the Company changed the manner in which it accounts for planned major maintenance expense and the manner in which it accounts for pension and other postretirement benefit obligations in 2006.

PricewaterhouseCoopers LLP

Dallas, Texas

March 13, 2007

KRONOS DENMARK APS AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2006

(In thousands, except share data)

ASSETS	2005		2006
Current assets:
Cash and cash equivalents	$	1,042	$	3,544
Restricted cash		1,355		1,480
Accounts and notes receivable		17,319		20,093
Receivable from affiliates		27,493		39,670
Refundable income taxes		205		-
Inventories		69,506		74,960
Prepaid expenses		900		1,641
Total current assets		117,820		141,388
Other assets:
Note receivable from affiliate		11,239		-
Other		6,153		3,145
Total other assets		17,392		3,145
Property and equipment:
Land		16,829		18,880
Buildings		36,995		41,613
Machinery and equipment		176,849		201,699
Mining properties		68,163		82,140
Construction in progress		1,964		7,796
		300,800		352,128
Less accumulated depreciation and amortization		188,090		219,296
Net property and equipment		112,710		132,832
	$	247,922	$	277,365

KRONOS DENMARK APS AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31, 2005 and 2006

(In thousands, except share data)

LIABILITIES AND STOCKHOLDER’S EQUITY	2005			2006
	(As adjusted)
Current liabilities:
Current maturities of long-term debt	$	958		$	912
Accounts payable and accrued liabilities		37,221			38,641
Payable to affiliates		9,058			10,649
Income taxes		6,564			10,009
Deferred income taxes		2,596			1,615
Total current liabilities		56,397			61,826
Noncurrent liabilities:
Long-term debt		3,567			3,883
Deferred income taxes		19,266			14,448
Accrued pension costs		4,129			14,615
Other		1,362			3,148
Total noncurrent liabilities		28,324			36,094
Stockholder's equity:
Common stock - 100 Danish kroner par value; 10,000 shares authorized; 10,000 shares issued and outstanding		136			136
Additional paid-in capital		216,996			216,996
Accumulated deficit		(33,462	)		(26,686	)
Accumulated other comprehensive loss:
Currency translation		(10,555	)		8,243
Defined benefit pension plans		(9,914	)		(19,244	)
Total stockholder's equity		163,201			179,445
	$	247,922		$	277,365
Commitments and contingencies (Notes 7, 8 and 12)

See accompanying notes to consolidated financial statements.

KRONOS DENMARK APS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004			2005			2006
	(As adjusted)
Net sales	$	345,962		$	364,865		$	384,382
Cost of sales		285,471			290,391			312,173
Gross margin		60,491			74,474			72,209
Selling, general and administrative expense		23,874			24,868			25,464
Other operating income (expense):
Currency transaction gains (losses), net		980			173			(399	)
Disposition of property and equipment		(596	)		(220	)		(322	)
Other, net		286			489			285
Income from operations		37,287			50,048			46,309
Other income (expense):
Trade interest income		73			88			109
Securities transaction gain		-			5,439			-
Other income from affiliates		202			387			927
Interest and other expense to affiliates		(2,943	)		(2,572	)		(2,519	)
Interest expense		(1,529	)		(1,142	)		(925	)
Income before income taxes		33,090			52,248			43,901
Provision for income taxes		9,661			16,373			10,174
Net income	$	23,429		$	35,875		$	33,727

See accompanying notes to consolidated financial statements.

KRONOS DENMARK APS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004		2005			2006
	(As adjusted)
Net income	$	23,429	$	35,875		$	33,727
Other comprehensive income (loss), net of tax:
Currency translation		13,921		(20,349	)		18,798
Defined benefit pension plans		1,188		(643	)		5,135
Total other comprehensive income		15,109		(20,992	)		23,933
Comprehensive income	$	38,538	$	14,883		$	57,660

See accompanying notes to consolidated financial statements.

KRONOS DENMARK APS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

Years ended December 31, 2004, 2005 and 2006

(In thousands)

								Accumulated other
								comprehensive income (loss)
			Additional
	Common		paid-in		Accumulated			Currency			Pension
	stock		capital		deficit			translation			plans			Total
					(As adjusted)			(As adjusted)						(As adjusted)
Balance at December 31, 2003:
As previously reported	$	136	$	216,996	$	(93,459	)	$	(4,204	)	$	(10,459	)	$	109,010
Change in accounting principle		-		-		693			77			-			770
Balance as adjusted		136		216,996		(92,766	)		(4,127	)		(10,459	)		109,780
Net income*		-		-		23,429			-			-			23,429
Other comprehensive income, net of tax*		-		-		-			13,921			1,188			15,109
Balance at December 31, 2004*		136		216,996		(69,337	)		9,794			(9,271	)		148,318
Net income*		-		-		35,875			-			-			35,875
Other comprehensive income, net of tax*		-		-		-			(20,349	)		(643	)		(20,992	)
Balance at December 31, 2005*		136		216,996		(33,462	)		(10,555	)		(9,914	)		163,201
Net income		-		-		33,727			-			-			33,727
Other comprehensive income, net of tax		-		-		-			18,798			5,135			23,933
Dividends		-		-		(26,951	)		-			-			(26,951	)
Adoption of SFAS No. 158		-		-		-			-			(14,465	)		(14,465	)
Balance at December 31, 2006	$	136	$	216,996	$	(26,686	)	$	8,243		$	(19,244	)	$	179,445

______________________

* As adjusted

See accompanying notes to consolidated financial statements.

KRONOS DENMARK APS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2004, 2005 and 2006

(In thousands)

	2004			2005			2006
	(As adjusted)
Cash flows from operating activities:
Net income	$	23,429		$	35,875		$	33,727
Depreciation and amortization		12,041			13,379			14,188
Noncash interest expense		358			302			169
Deferred income taxes		(3,165	)		(29	)		(4,556	)
Securities transaction gain		-			(5,439	)		-
Net loss (gain) from disposition of property and equipment		596			220			322
Pension, net		4,372			1,469			1,280
Change in assets and liabilities:
Accounts and notes receivable		(967	)		(1,727	)		(378	)
Inventories		6,500			(12,685	)		1,903
Prepaid expenses		17			(104	)		(886	)
Accounts payable and accrued liabilities		3,699			4,640			(1,056	)
Income taxes		(453	)		2,379			932
Accounts with affiliates		(37,220	)		(13,683	)		(6,675	)
Other noncurrent assets		2,257			(552	)		14
Other noncurrent liabilities		(1,420	)		(1,936	)		2,457
Net cash provided by operating activities		10,044			22,109			41,441
Cash flows from investing activities:
Capital expenditures		(11,725	)		(15,044	)		(22,852	)
Loans to affiliates		(11,597	)		-
Proceeds from disposal of interest in Norwegian smelting operation		-			3,542			-
Change in restricted cash equivalents and restricted marketable debt securities, net		(70	)		129			(33	)
Proceeds from disposition of property and equipment		100			29			30
Net cash used by investing activities		(23,292	)		(11,344	)		(22,855	)

KRONOS DENMARK APS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years ended December 31, 2003, 2004 and 2005

(In thousands)

	2004			2005			2006
Cash flows from financing activities:
Indebtedness:
Borrowings	$	62,140		$	4,620		$	-
Principal payments		(50,089	)		(13,159	)		(150	)
Dividends paid		-			-			(26,951	)
Loans to affiliates - repayments		-			-			10,919
Loans from affiliates - repayments		-			(4,648	)		-
Net cash provided (used) by financing activities		12,051			(13,187	)		(16,182	)
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing activities		(1,197	)		(2,422	)		2,404
Currency translation		82			(102	)		98
Balance at beginning of period		4,681			3,566			1,042
Balance at end of period	$	3,566		$	1,042		$	3,544
Supplemental disclosures:
Cash paid for:
Interest	$	4,198		$	446		$	380
Income taxes		13,331			13,885			11,762
Inventories received as partial consideration for disposal of interest in Norwegian smelting operation	$	-		$	1,897		$	-

See accompanying notes to consolidated financial statements.

KRONOS DENMARK APS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and basis of presentation:

Kronos Denmark ApS was incorporated in Denmark in October 1999 and is a wholly-owned subsidiary of Kronos International, Inc. (“KII”). KII is a wholly-owned subsidiary of Kronos Worldwide, Inc. (“Kronos”). At December 31, 2006, (i) Valhi, Inc. owned approximately 59% of Kronos’ common stock and NL Industries, Inc. held an additional 36% of the outstanding common stock of Kronos, (ii) Valhi owned 83% of NL’s outstanding common stock and (iii) Contran Corporation and its subsidiaries held approximately 92% of Valhi’s outstanding common stock. Substantially all of Contran’s outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons of which Mr. Simmons is sole trustee, or is held by Mr. Simmons or persons or other entities related to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control each of such companies.

Unless otherwise indicated, references in this report to “we”, “us” or “our” refer to Kronos Denmark AS and its subsidiaries, taken as a whole.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) with the U.S. dollar as the reporting currency. We also prepare financial statements on other bases, as required in countries in which we are resident.

Our current operations are conducted primarily through our Belgian and Norwegian subsidiaries with a titanium dioxide pigments (“TiO₂”) plant in Belgium and a TiO₂ plant and ilmenite ore mining operation in Norway. We also operate TiO₂ sales and distribution facilities in Denmark and the Netherlands.

We are not a registrant with the U.S. Securities and Exchange Commission and are not subject to their periodic reporting requirements, except as may be required by Rule 3-16 of Regulation S-X.

Note 2 - Summary of significant accounting policies:

Management’s estimates.In preparing our financial statements in conformity with GAAP we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results may differ from previously-estimated amounts under different assumptions or conditions.

Principles of consolidation.Our consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. We have eliminated all material intercompany accounts and balances.

Translation of foreign currencies.Our functional currencies include the Danish kroner, the euro and the Norwegian kroner. We translate assets and liabilities of subsidiaries whose functional currency is other than the U.S. dollar at year-end rates of exchange, while we translate revenues and expenses at average exchange rates prevailing during the year. Resulting translation adjustments are accumulated in stockholder’s equity as part of accumulated other comprehensive income, net of related deferred income taxes. Currency transaction gains and losses are recognized in income currently.

Derivatives and hedging activities.We recognize derivatives as either assets or liabilities and measure them at fair value in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The accounting for changes in fair value of derivatives depends upon the intended use of the derivative, and such changes are recognized either in net income or other comprehensive income.

Cash and cash equivalents. We classify bank deposits with original maturities of three months or less as cash equivalents.

Restricted marketable debt securities.Restricted marketable debt securities are primarily invested in corporate debt securities and include amounts restricted in accordance with applicable Norwegian law regarding certain requirements of our Norwegian defined benefit pension plans ($2.6 million and $2.8 million at December 31, 2005 and 2006, respectively). The restricted marketable debt securities are generally classified as either a current or noncurrent asset depending upon the maturity date of each such debt security and are carried at market, which approximates cost.

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

Property and equipment and depreciation. We state property and equipment at cost. We have a governmental concession with an unlimited term to operate an ilmenite mine in Norway. Mining properties consist of buildings and equipment used in our Norwegian ilmenite mining operations. While we own the land and ilmenite reserves associated with the mine, such land and reserves were acquired for nominal value and we have no material asset recognized for the land and reserves related to such mining operations. We compute depreciation of property and equipment for financial reporting purposes (including mining properties) 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. We use accelerated depreciation methods for income tax purposes, as permitted. Upon sale or retirement of an asset, we remove the related cost and accumulated depreciation from the accounts and recognize any gain or loss in income currently.

We expense expenditures for maintenance, repairs and minor renewals (including planned major maintenance), while we capitalize expenditures for major improvements.

We capitalize interest costs related to major long-term capital projects and renewals as a component of construction costs. Interest costs capitalized were not significant in 2004, 2005 or 2006.

When events or changes in circumstances indicate that assets may be impaired, we perform an evaluation 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. We consider all relevant factors. We perform the impairment test 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. We assess impairment of other long-lived assets (such as property and equipment and mining properties) in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Long-term debt. We state long-term debt net of any unamortized original issue premium or discount. We classify amortization of deferred financing costs us, interest expense, and compute it using the interest method over the term of the applicable issue.

Employee benefit plans. Accounting and funding policies for retirement plans are described in Note 9.

Income taxes. Deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the income tax and financial reporting carrying amounts of assets and liabilities, including investments in our 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. We periodically evaluate our deferred tax assets in the various taxing jurisdictions in which we operate and adjust any related valuation allowance based on the estimate of the amount of such deferred tax assets that we believe do not meet the “more-likely-than-not” recognition criteria.

Net sales. We record net sales when products and title and other risks and rewards of ownership have passed to the customer, or when services are performed. Shipping terms of products shipped 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). We include amounts charged to customers for shipping and handling in net sales. We state sales net of price, early payment and distributor discounts and volume rebates. We report any tax assessed by a governmental authority that we collect from our customers that is both imposed on and concurrent with our revenue-producing activities (such as sales, use, value added and excise taxes) on a net basis (meaning we do not recognize these taxes either in our revenues or in our costs and expenses).

Inventories and cost of sales. We state inventories at the lower of cost (principally average cost) or market, net of allowance for slow-moving inventories. We remove amounts from inventories at average cost. Cost of sales includes costs for materials, packaging and finishing, utilities, salary and benefits, maintenance and depreciation.

Selling, general and administrative expenses; shipping and handling costs.Selling, general and administrative expenses include costs related to marketing, sales, distribution, shipping and handling, research and development, legal 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 are included in selling, general and administrative expense and were $13.1 million in 2004, $13.2 million in 2005 and $13.0 million in 2006. Advertising costs are expensed as incurred and were approximately $100,000 in each of 2004, 2005 and 2006. Research, development and certain sales technical support costs are expensed as incurred and approximated $200,000 in 2004, $300,000 in 2005 and $400,000 in 2006.

Note 3 - Accounts and notes receivable:

	December 31,
	2005			2006
	(In thousands)
Trade receivables	$	13,992		$	16,063
Recoverable VAT and other receivables		3,349			4,054
Allowance for doubtful accounts		(22	)		(24	)
	$	17,319		$	20,093

Note 4 - Inventories:

	December 31,
	2005		2006
	(In thousands)
Raw materials	$	21,359	$	19,019
Work in process		1,771		2,581
Finished products		30,659		33,806
Supplies		15,717		19,554
	$	69,506	$	74,960

Note 5 - Other noncurrent assets:

	December 31,
	2005		2006
	(In thousands)
Unrecognized net pension obligations	$	3,108	$	-
Restricted marketable debt securities		2,572		2,814
Deferred financing costs, net		400		266
Other		73		65
	$	6,153	$	3,145

Note 6 - Accounts payable and accrued liabilities:

	December 31,
	2005		2006
	(As adjusted)
	(In thousands)
Accounts payable	$	20,048	$	23,447
Accrued liabilities:
Employee benefits		9,664		8,982
Other		7,509		6,212
	$	37,221	$	38,641

Note 7 - Notes payable and long-term debt:

	December 31,
	2005		2006
	(In thousands)
Long-term debt - other	$	4,525	$	4,795
Less current maturities		958		912
	$	3,567	$	3,883

Our long-term debt relates primarily to certain capital lease agreements which expire at various dates through 2011.

Credit Facility - We and certain of KII’s subsidiaries in Belgium, Norway and Germany (Kronos Europe S.A./N.V.-“KEU”, Kronos Titan A/S - “TAS” and Titania A/S - “TIA,” Kronos Norge A/S, the parent company of TAS and TIA, and Kronos Denmark ApS, the parent company of Kronos Norge and KEU), referred to as the “Borrowers”, have a euro 80 million secured revolving credit facility that matures in June 2008. Borrowings may be denominated in euros, Norwegian kroners or U.S. dollars, and bear interest at the applicable interbank market rate plus 1.125%. The facility also provides for the issuance of letters of credit up to euro 5 million. This 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. This facility contains certain restrictive covenants which, among other things, restricts the ability of the borrowers to incur debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer all or substantially all of their assets to, another entity. In addition, this facility contains customary cross-default provisions with respect to other debt and obligations of ours and our other subsidiaries. At December 31, 2006, no amounts were outstanding under the credit facility and the equivalent of $105.7 million was available for additional borrowing.

Senior Secured Notes - On April 11, 2006, KII issued an aggregate of euro 400 million principal amount of new 6.5% Senior Secured Notes due April 2013, at 99.306% of their principal amount ($498.5 million when issued). These 6.5% Notes are collateralized by a pledge of 65% of the common stock or other ownership interests of certain of their first-tier operating subsidiaries. Such operating subsidiaries are us, Kronos Titan GmbH (our parent company), Kronos Limited and Societe Industrielle Du Titane, S.A. KII issued the 6.5% Notes pursuant to an indenture which contains a number of covenants and restrictions which, among other things, restricts our ability and that of our subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer all or substantially all of our assets or those or our subsidiaries to another entity. At our option, we may redeem the 6.5% Notes on or after October 15, 2009 at redemption prices ranging from 103.25% of the principal amount, declining to 100% on or after October 15, 2012. In addition, on or before April 15, 2009, we may redeem up to 35% of the 6.5% Notes with the net proceeds of a qualified public equity offering at 106.5% of the principal amount. In the event of a change of control, as defined, we would be required to make an offer to purchase the 6.5% Notes at 101% of the principal amount. We would also be required to make an offer to purchase a specified portion of the 6.5% Notes at par value in the event we generate 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, 2006, the estimated market price of the 6.5% Notes was approximately euro 970 per euro 1,000 principal amount. At December 31, 2006, the carrying amount of the 6.5% Notes includes euro 2.5 million ($3.3 million) of unamortized original issue discount.

Under the cross-default provisions of the 6.5% Notes, the 6.5% Notes may be accelerated prior to their stated maturity if us, KII or any of their 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 the European Credit Facility, any outstanding borrowings under this facility may be accelerated prior to their stated maturity if the we or any borrowers 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). The European Credit Facility contains 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 the cross-default provisions of either the 6.5% Notes or the European Credit Facility become applicable, and such indebtedness is accelerated, we would be required to repay such indebtedness prior to their stated maturity.

In April 2006, KII called all of its 8.875% Senior Secured Notes for redemption on may 11, 2006 at 104.437% of their aggregate principal amount of euro 375 million (an aggregate of $470.2 million at March 31, 2006 exchange rates). Funds for such redemption were provided by KII’s issuance of an aggregate of euro 400 million principal amount of new 6.5% Senior Secured Notes due April 2013, issued on April 11, 2006 at 99.306% of their principal amount. The new Senior Secured Notes were issued pursuant to an indenture that contains covenants, restrictions and collateral substantially identical to the covenants, restrictions and collateral of the 8.875% Senior Secured Notes.

The aggregate maturities of long-term debt at December 31, 2006 are shown in the table below.

Years ending December 31,	Amount
	(In thousands)
2007	$	912
2008		923
2009		954
2010		986
2011		1,020
	$	4,795

Note 8 - Income taxes:

	Years ended December 31,
	2004			2005			2006
	(As adjusted)
	(In thousands)
Pretax income (loss):
Denmark	$	(101	)	$	526		$	634
Non-Denmark		33,191			51,722			43,267
	$	33,090		$	52,248		$	43,901
Expected tax expense	$	9,927		$	14,629		$	12,293
Non-Denmark tax rates		517			1,405			889
Non deductible expenses		-			281			290
Tax contingency reserve adjustment		(125	)		(653	)		(2,446	)
Other, net		(658	)		711			(852	)
Income tax expense	$	9,661		$	16,373		$	10,174
Provision for income taxes:
Current income tax expense:
Denmark	$	2		$	224		$	176
Non-Denmark		12,824			16,178			14,554
		12,826			16,402			14,730
Deferred income tax expense (benefit):
Denmark		(139	)		(644	)		(2,454	)
Non-Denmark		(3,026	)		615			(2,102	)
		(3,165	)		(29	)		(4,556	)
	$	9,661		$	16,373		$	10,174
Comprehensive provision for income taxes allocable to:
Pretax income	$	9,661		$	16,373		$	10,174
Other comprehensive loss - Defined benefit pension liabilities		5			180			2,564
Adoption of SFAS No. 158		-			-			(5,898	)
	$	9,666		$	16,553		$	6,840

The components of the net deferred tax liability are summarized below.

	December 31,
	2005						2006
	Assets			Liabilities			Assets			Liabilities
	(As adjusted)
	(In thousands)
Tax effect of temporary differences relating to:
Inventories	$	72		$	(2,067	)	$	42		$	(1,766	)
Property and equipment		-			(18,199	)		-			(19,238	)
Pension asset		-			(3,659	)		-			(1,903	)
Accrued pension cost		3,883			-			5,844			-
Accrued liabilities and other deductible differences		1,420			-			1,682			-
Other taxable differences		-			(3,312	)		-			(724	)
Gross deferred tax assets (liabilities)		5,375			(27,237	)		7,568			(23,631	)
Reclassification, principally netting by tax jurisdiction		(5,375	)		5,375			(7,568	)		7,568
Net total deferred tax liabilities		-			(21,862	)		-			(16,063	)
Net current deferred tax liabilities		-			(2,596	)		-			(1,615	)
Net noncurrent deferred tax liabilities	$	-		$	(19,266	)	$	-		$	(14,448	)

Changes in our deferred income tax valuation allowance are summarized below:

	December 31,
	2004			2005		2006
	(In thousands)
Balance at beginning of year	$	683		$	-	$	-
Increase in certain deductible temporary differences which we believe do not meet the “more-likely-than-not” recognition criteria		-			-		-
Foreign currency translation		-			-		-
Offset to the change in gross deferred income tax assets due principally to redeterminations of certain tax attributes and implementation of certain planning strategies		(683	)		-		-
Balance at end of year	$	-		$	-	$	-

Tax authorities are examining certain of our non-U.S. tax returns and have or may propose tax deficiencies, including penalties and interest. For example:

·   We previously received a preliminary tax assessment related to 1993 from the Belgian tax authorities proposing tax deficiencies, including related interest, of approximately euro 6 million. The Belgian tax authorities filed a lien on the fixed assets of our Belgian TiO₂ operations in connection with their assessment. This lien did not interfere with on-going operations at the facility. We filed a protest to this assessment, and in July 2006 the Belgian tax authorities withdrew the assessment. The lien was subsequently released.

·   The Norwegian tax authorities previously notified us of their intent to assess tax deficiencies of approximately kroner 12 million relating to the years 1998 through 2000. We objected to this proposed assessment, and in May 2006 the Norwegian tax authorities withdrew the assessment.

Principally as a result of the withdrawal of the Belgian and Norwegian assessments discussed above, we recognized a $2.5 million income tax benefit in 2006 related to the total reduction in our income tax contingency reserve.

Tax authorities are examining certain of our income tax returns. We cannot guarantee that these tax matters will be resolved in our favor in view of the inherent uncertainties involved in settlement initiatives and court and tax proceedings. We believe that we have 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 our consolidated financial position, results of operations or liquidity.

Note 9 - Employee benefit plans:

We maintain various defined benefit pension plans. Personnel are covered by plans in their respective countries. Variances from actuarially assumed rates will result in increases or decreases in accumulated pension obligations, pension expense and funding requirements in future periods. Prior to 2004, we amended our defined benefit pension plans for KEU, TAS and TIA to exclude the admission of new employees to the plans. New employees at these locations are eligible to participate in our defined contribution plans. Our expense related to our sponsored defined contribution plans was not material in 2004, 2005 or 2006. At December 31, 2006, we expect to contribute the equivalent of approximately $3.3 million to our defined benefit pension plans during 2007.

Certain actuarial assumptions used in measuring the defined benefit pension assets, liabilities and expenses are presented below. We use a September 30 measurement date for our defined benefit pension plans.

	December 31,
	2005			2006
	(In thousands)
Change in projected benefit obligations (“PBO”):
Benefit obligations at beginning of year	$	72,361		$	69,776
Service cost		2,133			2,343
Interest cost		3,345			3,177
Participant contributions		149			139
Actuarial gains (losses)		2,933			(4,196	)
Change in currency exchange rates		(8,259	)		6,753
Benefits paid		(2,886	)		(3,206	)
Benefit obligations at end of year	$	69,776		$	74,786
Change in fair value of plan assets:
Fair value of plan assets at beginning of year	$	57,754		$	52,822
Actual return on plan assets		2,203			1,398
Employer contributions		1,977			3,831
Participant contributions		149			139
Change in currency exchange rates		(6,375	)		5,187
Benefits paid		(2,886	)		(3,206	)
Fair value of plan assets at end of year	$	52,822		$	60,171
Accumulated benefit obligations	$	58,000		$	59,627
Funded status at year end:
Plan assets less than PBO	$	(16,954	)	$	(14,615	)
Unrecognized actuarial loss		26,024			24,181
Unrecognized prior service cost		2,550			2,503
Unrecognized net transition obligation		770			717
	$	12,390		$	12,786
Amounts recognized in the balance sheet:
Unrecognized net pension obligations	$	3,108		$	-
Accrued pension cost:
Current		(456	)		-
Non current		(4,129	)		(14,615	)
Accumulated other comprehensive loss		13,867			27,401
	$	12,390		$	12,786

The amounts shown in the table above for actuarial losses, prior service cost and net transition obligations at December 31, 2005 and 2006 have not yet been recognized as components of our periodic defined benefit pension cost as of those dates. These amounts will be recognized as components of our periodic defined benefit cost in future years. However, upon adoption of SFAS No. 158, the December 31, 2006 amounts, net of deferred income taxes, are recognized in our accumulated other comprehensive income. Of the amounts included in accumulated other comprehensive income as of December 31, 2006 related to our pension plans, we expect to recognize net actuarial losses of $1 million, prior service costs of $300,000 and net transition obligations of $100,000 as a component of our net periodic pension expense during 2007.

The components of the net periodic defined benefit pension cost are set forth below.

	Years ended December 31,
	2004			2005			2006
	(In thousands)
Net periodic pension cost:
Service cost benefits	$	2,096		$	2,133		$	2,343
Interest cost on PBO		3,436			3,345			3,177
Expected return on plan assets		(2,815	)		(3,142	)		(3,087	)
Amortization of prior service cost		267			282			281
Amortization of net transition obligations		321			129			121
Recognized actuarial losses		1,428			1,276			1,458
	$	4,733		$	4,023		$	4,293

The weighted-average rate assumptions used in determining the actuarial present value of benefit obligations as of December 31, 2005 and 2006 are presented in the table below. Such weighted-average rates were determined using the projected benefit obligations at each date.

	December 31,
Rate	2005	2006
Discount rate	4.4%	4.7%
Increase in future compensation levels	3.0%	3.0%

The weighted-average rate assumptions used in determining the net periodic pension cost for 2003, 2004 and 2005 are presented in the table below. The weighted-average discount rate and the weighted-average increase in future compensation levels were determined using the projected benefit obligations as of the beginning of each year, and the weighted-average long-term return on plan assets was determined using the fair value of plan assets as of the beginning of each year.

	Years ended December 31,
Rate	2004	2005	2006
Discount rate	5.5%	5.0%	4.4%
Increase in future compensation levels	3.0%	3.0%	3.0%
Long-term return on plan assets	6.0%	6.0%	5.5%

Plan assets are comprised primarily of investments in corporate equity and debt securities, short-term investments, mutual funds and group annuity contracts.

In determining the expected long-term rate of return on plan asset assumptions, we consider the long-term asset mix (e.g. equity vs. fixed income) for the assets for each of our plans and the expected long-term rates of return for such asset components. In addition, we receive advice about appropriate long-term rates of return from third-party actuaries. We currently have a plan asset target allocation of 14% to equity managers, 65% 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 5% and 4%, respectively. The plan asset allocation at December 31, 2006 was 13% to equity managers, 64% to fixed income managers and the remainder invested primarily cash and liquid investments (2005 - 16%, 62% and 22%, respectively).

We regularly review our actual asset allocation for each of our plans, and will periodically rebalance the investments in each plan to more accurately reflect the targeted allocation when considered appropriate.

We expect future benefits paid from our defined benefit plans to be as follows:

Years ending December 31,	Amount
		(In thousands)
2007	$	4,421
2008		4,263
2009		3,135
2010		3,021
2011		3,106
2012 to 2016		22,279

New accounting standard. We account for our defined benefit pension plans using SFAS No. 87, Employer’s Accounting for Pensions, as amended, and we account for our OPEB plans under SFAS No. 106, Employers Accounting for Postretirement Benefits other than Pensions, as amended. In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.  SFAS No. 158, which further amended SFAS Nos. 87 and 106, requires us to recognize an asset or liability for the over or under funded status of each of our individual defined benefit pension and postretirement benefit plans on our Consolidated Balance Sheets.  This standard does not change the existing recognition and measurement requirements that determine the amount of periodic benefit cost we recognize in net income. We adopted the asset and liability recognition and disclosure requirements of this standard effective December 31, 2006 on a prospective basis, in which we recognized through other comprehensive income all of our prior unrecognized gains and losses and prior service costs or credits, net of tax, as of December 31, 2006. We will recognize all future changes in the funded status of these plans through comprehensive income, net of tax. These future changes will be recognized either in net income, to the extent they are reflected in periodic benefit cost, or through other comprehensive income.  In addition, we currently use September 30 as a measurement date for our defined benefit pension plans, but under this standard we will be required to use December 31 as the measurement date. The measurement date requirement of SFAF No. 158 will become effective for us by the end of 2008 and provides two alternate transition methods; we have not yet determined which transition method we will select. 

Adopting this standard had the following effects on our Consolidated Financial Statements as of December 31, 2006:

	Before application of SFAS No. 158			Adjustments			After application of SFAS No. 158
	(In thousands)
Assets:
Pension asset	$	1,246		$	(1,246	)	$	-
Unrecognized net pension obligations		5,800			(5,800	)		-
Total other assets		10,191			(7,046	)		3,145
Total assets		284,411			(7,046	)		277,365
Liabilities:
Current accrued pension costs		52			(52	)		-
Total current liabilities		61,878			(52	)		61,826
Noncurrent accrued pension costs		1,246			13,369			14,615
Noncurrent deferred income taxes		20,346			(5,898	)		14,448
Total noncurrent liabilities		28,623			7,471			36,094
Owner’s equity:
Accumulated other comprehensive income - minimum pension liability		(4,779	)		4,779			-
Accumulated other comprehensive income - defined benefit pension plans		-			(19,244	)		(19,244	)
Total accumulated other comprehensive income		3,364			(14,465	)		(11,101	)
Total stockholders’ equity		193,910			(14,465	)		179,445
Total liabilities and stockholders’ equity		284,411			(7,046	)		277,365

Note 10 - Related party transactions:

We 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, tax sharing agreements, joint ventures, partnerships, loans, options, advances of funds on open account, and sales, leases and exchanges of assets, including securities issued by both related and unrelated parties and (b) common investment and acquisition strategies, business combinations, reorganizations, recapitalizations, securities repurchases, and purchases and sales (and other acquisitions and dispositions) of subsidiaries, divisions or other business units, which transactions have involved both related and unrelated parties and have included transactions which resulted in the acquisition by one related party of a publicly held minority equity interest in another related party. While no transactions of the type described above are planned or proposed with respect to us other than as set forth in these financial statements, we from time to time consider, review and evaluate such transactions and understand that Contran, Valhi, NL, Kronos, KII and related entities consider, review and evaluate such transactions. Depending upon the business, tax and other objectives then relevant, it is possible that we might be a party to one or more such transactions in the future.

We are party to services and cost sharing agreements among several of our affiliates whereby Kronos, KII and other affiliates provide certain management, financial, insurance and administrative services to us on a fee basis. Our expense was approximately $2.1 million in 2004, $2.5 million in 2005 and $900,000 in 2006 related to these services and costs.

Tall Pines Insurance Company and EWI RE, Inc. provide for or broker certain insurance policies for Contran and certain of its subsidiaries and affiliates, including us. Tall Pines and EWI are subsidiaries of Valhi. Consistent with insurance industry practices, Tall Pines and EWI receive commissions from insurance and reinsurance underwriters and/or assess fees for the policies that they provide or broker. The aggregate premiums we paid to Tall Pines and EWI were $1.1 million in 2004 and $2.0 million in 2005 and $3.1 million in 2006. These amounts principally included payments for insurance and reinsurance premiums paid to third parties, but also included commissions paid to Tall Pines and EWI. Tall Pines purchases reinsurance for substantially all of the risks it underwrites. We expect that these relationships with Tall Pines and EWI will continue in 2007.

Contran and certain of its subsidiaries and affiliates, including us, purchase certain of their insurance policies as a group, with the costs of the jointly-owned policies being apportioned among the participating companies. With respect to certain of such policies, it is possible that unusually large losses incurred by one or more insureds during a given policy period could leave the other participating companies without adequate coverage under that policy for the balance of the policy period. As a result, Contran and certain of its subsidiaries and its affiliates, including NL, 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. We believe 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 for uninsured loss.

     We purchase from and sell to our affiliates a significant amount of titanium dioxide pigments (“TiO₂”). Sales of TiO₂ to our affiliates was $109.6 million in 2004, $113.1 million in 2005 and $119.5 million in 2006. Purchases of TiO₂ from our affiliates was $52.3 million in 2004, $58.2 million in 2005 and $62.6 million in 2006.

Sales of ilmenite to our affiliate in Germany were $17.4 million in 2004, $21.4 million in 2005 and $21.8 million in 2006.

Kronos purchases the rutile and slag feedstock used as a raw material in all of our chloride process TiO₂ facilities. We purchase such feedstock from Kronos for use in our facilities for an amount equal to the amount paid by KUS to the third-party supplier plus a 2.5% administrative fee. Such feedstock purchases were $40.5 million in 2004, $47.8 million in 2005 and $46.9 million in 2006.

We pay royalties KII for use of certain of KII’s intellectual property. These royalties totaled $12.5 million in 2004, $12.4 million in 2005 and $12.9 million in 2006, and are included as a component of cost of sales.

During 2004, 2005 and 2006, we were party to an accounts receivable factoring agreement with one or more of our affiliates whereby we factored our export accounts receivable without recourse for a fee of 0.85% for our export receivables related to our Belgian operations and 1.2% for export receivables related to our Norwegian operations. Upon our non-recourse transfer, the affiliate assumed all risk pertaining to the factored receivables, including, but not limited to, exchange control risks, risks pertaining to the bankruptcy of a customer and risks related to late payments. Our export receivables sold pursuant to the factoring agreement during 2004, 2005 and 2006 aggregated $119.9 million, and $124.5 million and $124.9 million, respectively.

    Receivables from affiliates at December 31, 2005 and 2006 relate primarily to amounts owed to us by our affiliate in Germany, and payables to affiliates relate principally to KII and Kronos.These amounts generally relate to product purchases and sales. The receivable from our German affiliate also include accounts receivable factoring fees.

In 2006, we received payment on our note receivable from our German affiliate of $10.9 million. The remaining $.3 million balance of the note receivable has been reclassified to receivables from affiliates.

Note 11 - NL common stock options held by our employees:

At December 31, 2006, our employees held options to purchase approximately 15,000 shares of NL common stock, of which 5,000 are exercisable at various dates through 2010 at an exercise price of $5.63 per share and 10,000 are exercisable at various dates through 2011 at an exercise price of $11.49 per share.

Note 12 - Commitments and contingencies:

Environmental matters.Our operations are governed by various environmental laws and regulations. Certain of our businesses are, or have been engaged in the handling, manufacture or use of substances or compounds that may be considered toxic or hazardous within the meaning of applicable environmental laws and regulations. As with other companies engaged in similar businesses, certain past and current operations and products of ours have the potential to cause environmental or other damage. We have implemented and continue to implement various policies and programs in an effort to minimize these risks. Our policy is to maintain compliance with applicable environmental laws and regulations at all our facilities and to strive to improve our environmental performance. From time to time, we may be subject to environmental regulatory enforcement under various statutes, resolution of which typically involves the establishment of compliance programs. It is possible that future developments, such as stricter requirements of environmental laws and enforcement policies thereunder, could adversely affect our production, handling, use, storage, transportation, sale or disposal of such substances. We believe all of our plants are in substantial compliance with applicable environmental laws.

Litigation matters. We are involved in various other environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to our business.

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

Concentrations of credit risk. Sales of TiO₂ accounted for approximately 79%, 78% and 77% of our sales during 2004, 2005 and 2006, respectively. The remaining sales result from the mining and sale of ilmenite ore (a raw material used in the sulfate pigment production process) and the manufacture and sale of certain titanium chemical products (derived from co-products of the TiO₂ production process). We sell TiO₂ to the paint, plastics and paper industries. Such markets are generally considered "quality-of-life" markets whose demand for TiO₂ is influenced by the relative economic well-being of the various geographic regions. TiO₂ is sold to over 1,000 customers, with the top ten external customers approximating 24% of net sales in 2004, 17% of net sales in 2005 and 24% of net sales in 2006. Approximately 82% of our TiO₂ sales by volume were to Europe in 2004, approximately 80% were to Europe in 2005 and approximately 84% were to Europe in 2006. Approximately 10% of sales by volume were to North America in 2004, approximately 12% were to North America in 2005 and approximately 9% were to North America in 2006.

Long-term contracts. KUS has long-term supply contracts that provide for certain of its affiliates’, including ours, chloride feedstock requirements through 2010. We, along with certain of our affiliates purchase chloride feedstock underlying these long-term supply contracts from KUS. The agreements require KUS to purchase certain minimum quantities of feedstock with minimum purchase commitments aggregating approximately $776 million at December 31, 2006.

Operating leases.We lease various manufacturing and office space and transportation equipment pursuant to operating leases. Most of the leases contain purchase and/or various term renewal options at fair market and fair rental values, respectively. In most cases management expects that, in the normal course of business, leases will be renewed or replaced by other leases.

Net rent expense aggregated $3 million in each of 2004, 2005 and 2006. At December 31, 2006, minimum rental commitments under the terms of noncancellable operating leases were as follows:

Years ending December 31,	Amount
	(in thousands)
2007	$	571
2008		565
2009		278
2010		103
2011		60
2012 and thereafter		72
	$	1,649

Note 13 - Securities transaction gain:

A securities transaction gain in 2005, classified as nonoperating income, relates to our sale of our passive interest in a Norwegian smelting operation, which had a nominal carrying value for financial reporting purposes, we received aggregate consideration of approximately $5.4 million consisting of $3.5 million of cash and $1.9 million of inventory.

Note 14 - Financial instruments:

Summarized below is the estimated fair value and related net carrying value of our financial instruments.

	December 31,
	2005				2006
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In millions)
Cash, cash equivalents, restricted cash equivalents and noncurrent restricted marketable debt securities	$	5.0	$	5.0	$	7.8	$	7.8
Other fixed rate debt	$	4.5	$	4.5	$	4.8	$	4.8

We held no derivative financial instruments during 2004, 2005 or 2006.

Note 15 - Recent accounting pronouncements:

Variable interest entities. We 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. We do 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 us to consolidate such entity under FIN No. 46R which had not already been consolidated under prior applicable GAAP, and therefore the impact to us of adopting the consolidation requirements of FIN No. 46R was not material.

Inventory Costs. Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, became effective for us for inventory costs incurred on or after January 1, 2006. SFAS No. 151 requires that the allocation of fixed production overhead costs to inventory be based on normal capacity of the production facilities, as defined by SFAS No. 151. SFAS No. 151 also clarifies the accounting for abnormal amounts of idle facility expense, freight handling costs and wasted material, requiring those items be recognized as current-period charges. Our existing production cost policies complied with the requirements of SFAS No. 151, therefore the adoption of SFAS No. 151 did not affect our Consolidated Financial Statements.

Stock options.We adopted the fair value provisions of SFAS No. 123R, Share-Based Payment, on January 1, 2006, using the modified prospective application method. SFAS No. 123R, among other things, requires the cost of employee compensation paid with equity instruments to be measured based on the grant-date fair value. That cost is then recognized over the vesting period. Using the modified prospective method, we will apply the provisions of the standard to all new equity compensation granted after January 1, 2006 and any existing awards vesting after January 1, 2006. We have not issued any stock options to purchase Kronos common stock. However, certain of our employees have been granted options by NL to purchase NL common stock. The number of non-vested equity awards issued by NL at December 31, 2005 was not material. Prior to the adoption of SFAS No. 123R we accounted for equity compensation in accordance with APBO No. 25, Accounting for Stock Issued to Employees. Our affiliate NL accounted for their equity awards under the variable accounting method whereby the equity awards were revalued based on the current trading price at each balance sheet date. We now account for these awards using the liability method under SFAS No. 123R, which is substantially identical to the variable accounting method we previously used. We recorded compensation expense of $319,000 in 2004, and compensation income of $185,000 in 2005 and $67,000 in 2006 for stock-based employee compensation. If we grant a significant number of equity awards or modify, repurchase or cancel existing equity awards in the future, the amount of equity compensation expense in our Consolidated Financial Statements could be material.

Planned Major Maintenance Activities.We adopted FSP No. AUG AIR-1 effective December 31, 2006. Accordingly, we have retroactively adjusted our Consolidated Financial Statements to reflect the direct expense method of accounting for planned major maintenance (a method permitted under this standard). The effect of adopting this standard on our previously reported Consolidated Financial Statements is summarized in the tables below.

	Years ended December 31,
	2004			2005
	(In thousands, except per share amounts)
Increase (decrease) in:
Cost of sales (repairs and maintenance expense)	$	569		$	(684	)
Provision (benefit) for income taxes		(182	)		236
Net income		(387	)		448
Other comprehensive income - foreign currency		31			(79	)
Total comprehensive income		(356	)		369

	December 31, 2005
	(In thousands)
Decrease in accrued maintenance costs	$	1,185
Increase in current deferred income tax		402
Decrease in retained deficit		754
Decrease in accumulated other comprehensive loss - foreign currency		29
Increase in total stockholder’s equity		783

Pension and OPEB plans. We adopted the asset and liability recognition and disclosure requirements of SFAS No. 158 effective December 31, 2006. See Note 9.

Quantifying Financial Statement Misstatements. In the third quarter of 2006 the SEC issued Staff Accounting Bulletin (“SAB”) No. 108 expressing their views regarding the process of quantifying financial statement misstatements.  The SAB is effective for us as of December 31, 2006.  According to SAB 108 both the “rollover” and “iron curtain” approaches must be considered when evaluating a misstatement for materiality.  This is referred to as the “dual approach.”  For companies that have previously evaluated misstatements under one, but not both, of these methods, SAB 108 provides companies with a one-time option to record the cumulative effect of their prior unadjusted misstatements in a manner similar to a change in accounting principle in their 2006 annual financial statements if (i) the cumulative amount of the unadjusted misstatements as of January 1, 2006 would have been material under the dual approach to their annual financial statements for 2005 or (ii) the effect of correcting the unadjusted misstatements during 2006 would cause those annual financial statements to be materially misstated under the dual approach.  The adoption of SAB 108 did not have a material effect on our previously reported consolidated financial position or results of operations.

Fair Value Measurements.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which became effective for us on January 1, 2008. SFAS No. 157 generally provides a consistent, single fair value definition and measurement technique for GAAP pronouncements. SFAS No. 157 also establishes a fair value hierarchy for different measurement techniques based on the objective nature of the inputs in various valuation methods. We will be required to ensure all of our fair value measurements are in compliance with SFAS No. 157 on a prospective basis beginning in the first quarter of 2008. In addition, we will be required to expand our disclosures regarding the valuation methods and level of inputs we utilize in the first quarter of 2008. The adoption of this standard is not expected to have a material effect on our Consolidated Financial Statements.

Uncertain Tax Positions.In the second quarter of 2006 the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertain Tax Positions, which became effective for us on January 1, 2007.  FIN 48 clarifies when and how much of a benefit we can recognize in our Consolidated Financial Statements for certain positions taken in our income tax returns under SFAS No. 109, Accounting for Income Taxes, and enhances the disclosure requirements for our income tax policies and reserves. Among other things, FIN 48 will prohibit us from recognizing the benefits of a tax position unless we believe it is more-likely-than-not our position will prevail with the applicable tax authorities and limits the amount of the benefit to the largest amount for which we believe the likelihood of realization is greater than 50%.  FIN 48 also requires companies to accrue penalties and interest on the difference between tax positions taken on their tax returns and the amount of benefit recognized for financial reporting purposes under the new standard.  Our current income tax accounting policies comply with this aspect of the new standard.  We will also be required to reclassify any reserves we have for uncertain tax positions from deferred income tax liabilities, where they are currently recognized, to a separate current or noncurrent liability, depending on the nature of the tax position. In January 2007, the FASB indicated that they will issue clarifying guidance regarding certain aspects of the new standard by the end of March 2007. We are still in the process of evaluating the impact FIN 48 will have on our consolidated financial position and results of operations, and do not expect we will complete that evaluation until the FASB issues their clarifying guidance. 

Fair Value Option. In the first quarter of 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits companies to chose, at specified election dates, to measure eligible items at fair value, with unrealized gains and losses included in the determination of net income. The decision to elect the fair value option is generally applied on an instrument-by-instrument basis, is irrevocable unless a new election date occurs, and is applied to the entire instrument and not to only specified risks or cash flows or a portion of the instrument. Items eligible for the fair value option include recognized financial assets and liabilities, other than an investment in a consolidated subsidiary, defined benefit pension plans, OPEB plans, leases and financial instruments classified in equity. An investment accounted for by the equity method is an eligible item. The specified election dates include the date we first recognize the eligible item, the date we enter into an eligible commitment, the date an investment first becomes eligible to be accounted for by the equity method and the date SFAS No. 159 first becomes effective for us. If we elect to measure eligible items at fair value under the standard, we would be required to present certain additional disclosures for each item we elect. SFAS No. 159 becomes effective for us on January 1, 2008, although we may apply the provisions earlier on January 1, 2007 if, among other things, we also adopt SFAS No. 157 on January 1, 2007 and elect to adopt SFAS No. 159 by April 30, 2007. We have not yet determined when we will choose to have SFAS No. 159 first become effective for us, nor have we determined which, if any, of our eligible items we will elect to be measured at fair value under the new standard. Therefore, we are currently unable to determine the impact, if any, this standard will have on our consolidated financial position or results of operations.