SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

  X     ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -----   EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 2002

                                       OR

        TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -----   EXCHANGE ACT OF 1934

                        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                                (IRS Employer
incorporation or organization)                              Identification No.)

16825 Northchase Drive, Suite 1200, Houston, Texas              77060-2544
- --------------------------------------------------         ---------------------
      (Address of principal executive offices)                    (Zip Code)

Registrant's telephone number, including area code:           (281)  423-3300
                                                           ---------------------

Securities registered pursuant to Section 12(B) of the Act:  None.

Securities registered pursuant to Section 12(G) of the Act:  None.

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

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

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

No common stock is held by non-affiliates of the registrant.

The number of shares of common stock of the registrant  outstanding at March 26,
2003 was 2,968.

The Registrant is an indirect  wholly owned  subsidiary of NL  Industries,  Inc.
(File No.  1-640) 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.




Forward-Looking Information.

        The  statements  contained in this Annual  Report on Form 10-K  ("Annual
Report")  which  are  not  historical  facts,  including,  but not  limited  to,
statements found (i) under the captions  "Industry,"  "Products and operations,"
"Manufacturing   process  and  raw  materials,"   "Competition,"   "Patents  and
Trademarks," "Foreign  Operations," and "Regulatory and Environmental  Matters,"
all contained in Item 1. Business;  (ii) under Item 3. Legal Proceedings;  (iii)
under  the  captions   "Results  of  Operations"   and  "Liquidity  and  Capital
Resources,"  both contained in Item 7.  Management's  Discussion and Analysis of
Financial Condition and Results of Operations; (iv) under the captions "Currency
exchange rates," "Restricted  marketable debt security prices," and "Other," all
contained in Item 7A.  Quantitative  and  Qualitative  Disclosures  About Market
Risk;  and (v) in Note  19,  "Commitments  and  contingencies  -  Environmental,
Product  Liability  and  Litigation  Matters"  to  the  Consolidated   Financial
Statements,  are forward-looking  statements that represent management's beliefs
and  assumptions  based  on  currently  available  information.  Forward-looking
statements can be identified by the use of words such as "believes,"  "intends,"
"may,"  "will,"  "should,"  "anticipates,"   "expects,"  "could"  or  comparable
terminology  or by  discussions  of  strategy  or trends.  Although  the Company
believes that the expectations reflected in such forward-looking  statements are
reasonable,  it cannot give any assurances that these expectations will prove to
be correct. Such statements by their nature involve risks and uncertainties that
could  significantly  affect expected  results,  and actual future results could
differ materially from those described in such forward-looking statements.

        Among the  factors  that could  cause  actual  future  results to differ
materially are the risks and  uncertainties  discussed in this Annual Report and
those  described  from  time to time in the  Company's  other  filings  with the
Securities and Exchange Commission ("SEC"). While it is not possible to identify
all  factors,  the  Company  continues  to face  many  risks  and  uncertainties
including, but not limited to, the cyclicality of the titanium dioxide industry,
global economic and political conditions,  global productive capacity,  customer
inventory  levels,  changes in  product  pricing,  changes  in product  costing,
changes in foreign currency exchange rates,  competitive  technology  positions,
operating interruptions  (including,  but not limited to, labor disputes, leaks,
fires, explosions,  unscheduled downtime,  transportation interruptions, war and
terrorist activities),  recoveries from insurance claims and the timing thereof,
the ultimate resolution of NL Industries, Inc.'s pending or possible future lead
pigment  litigation  and  legislative  developments  related  to the lead  paint
litigation,  the outcome of other  litigation and tax  controversies,  and other
risks and  uncertainties  included in the  Company's and NL  Industries,  Inc.'s
filings  with the SEC.  Should one or more of these  risks  materialize  (or the
consequences of such a development worsen), or should the underlying assumptions
prove incorrect, actual results could differ materially from those forecasted or
expected.  The  Company  and NL  Industries,  Inc.  disclaim  any  intention  or
obligation to update publicly or revise such  statements  whether as a result of
new information, future events or otherwise.



                                     PART I

ITEM 1.        BUSINESS

General

        Kronos  International,  Inc.  ("KII")  is  incorporated  in the State of
Delaware,  U.S.A.,  and is registered in the Commercial  Register of the Federal
Republic  of  Germany.  KII's  principal  place of  business  is in  Leverkusen,
Germany. KII is a wholly owned subsidiary of Kronos, Inc.  ("Kronos"),  a wholly
owned subsidiary of NL Industries, Inc. ("NL"). NL conducts its titanium dioxide
pigments ("TiO2") operations through Kronos,  which is the world's fifth largest
producer of TiO2 . KII conducts Kronos'  European TiO2  operations.  KII and its
consolidated  subsidiaries are sometimes referred to herein  collectively as the
"Company."

        The Company's  objective is to increase  stockholder value by maximizing
earnings,  cash  flows  and  return  on  capital  employed  by  reducing  costs,
increasing  efficiencies and optimizing assets.  Further, the Company strives to
increase its  competitiveness by expanding the Company's market presence through
internal growth initiatives and technology innovation.

Industry

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

        Pricing  within the global  TiO2  industry is  cyclical,  and changes in
industry economic conditions can significantly impact the Company's earnings and
operating cash flows.  The Company's  average TiO2 selling  price,  on a billing
currency basis,  increased from the preceding  quarter during the second,  third
and fourth  quarters of 2002,  reversing the downward trend in prices that began
in the first  quarter of 2001 and  continued  through the first quarter of 2002.
Industry-wide  demand  for TiO2  strengthened  throughout  2002,  with full year
demand  estimated as 9% higher than the previous year.  This is believed to have
been the result of economic growth and restocking of customer  inventory levels.
Volume  demand in 2003 is  expected  to  increase  slightly  over  2002  levels.
However,  volume demand and pricing improvements will depend on improving market
conditions and global  economic  recovery,  which may be negatively  impacted by
international conflict, among other things.

        The  Company is the second  largest  producer  of TiO2 in Europe with an
estimated  18% share of  European  TiO2 sales  volume.  The Company is a leading
producer and marketer of TiO2 in Germany,  with an estimated  26% share of sales
volume in 2002,  and is among the leading  marketers  of TiO2 in the Benelux and
Scandinavian  markets.  By sales volume, the Company sells  approximately 10% of
its total sales to the North  American  market  through its  affiliates,  Kronos
(US), Inc.  ("KUS") and Kronos Canada,  Inc. ("KC").  Per capita  consumption of
TiO2 in the United States and Western  Europe far exceeds that in other areas of
the world and these regions are expected to continue to be the largest consumers
of TiO2.  Significant  regions  for TiO2  consumption  could  emerge in  Eastern
Europe,  the Far East or China if the economies in these regions  develop to the
point that quality-of-life products,  including TiO2, are in greater demand. The
Company believes that, due to its strong presence in Western Europe,  it is well
positioned to participate  in growth in  consumption of TiO2 in Eastern  Europe.

                                      -1-


Geographic  segment  information  is  contained  in  Note 3 to the  Consolidated
Financial Statements.

Products and operations

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

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

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

        The Company has manufacturing facilities located in Germany, Belgium and
Norway.  The Company and its distributors and agents sell and provide  technical
services for its products to over 4,000 customers.  TiO2 is distributed by rail,
truck and ocean carrier in either dry or slurry form.  The Company has sales and
marketing   activities  in  over  100  countries   worldwide.   Kronos  and  its
predecessors  have  produced and marketed  TiO2 in North  America and Europe for
over  80  years.  As a  result,  the  Company  believes  that  it has  developed
considerable  expertise and efficiency in the  manufacture,  sale,  shipment and
service of its products. By volume, approximately 75% of the Company's 2002 TiO2
sales were to Europe, with approximately 10% to North America and the balance to
export markets.

        The Company is also  engaged in the mining and sale of  ilmenite  ore, a
titanium-bearing  raw material  used as a feedstock by certain TiO2 plants.  The
Company has estimated ilmenite reserves of at least 20 years at the current rate
of usage. The Company uses ilmenite ore internally in its  sulfate-process  TiO2
plants and sells ilmenite ore to third-party customers.  Approximately 7% of the
Company's  consolidated  net sales in 2002 and 2001, and 4% in 2000  represented
ilmenite sales to third-party customers.

        In  addition,  the  Company is engaged  in the  manufacture  and sale of
iron-based water treatment chemicals  worldwide (derived  co-products of pigment
production  processes).  The Company's water treatment chemicals (marketed under
the Ecochem  trademark) are used primarily as treatment and conditioning  agents
for industrial  effluents and municipal  wastewater treatment plants, and in the
manufacture  of  iron  pigments.   Sales  of  water  treatment   chemicals  were
approximately 5% of the Company's revenue in 2002.

                                      -2-


Manufacturing process and raw materials

        TiO2 is manufactured by the Company using both the chloride  process and
the sulfate  process.  Approximately  63% of the  Company's  current  production
capacity is based on its chloride  process which  generates  less waste than the
sulfate process.  The chloride process is a continuous process in which chlorine
is used to  extract  rutile  TiO2.  In  general,  the  chloride  process is less
intensive  than the sulfate  process in terms of capital  investment,  labor and
energy. Because much of the chlorine is recycled and higher  titanium-containing
feedstock is used, the chloride process produces less waste. The sulfate process
is a batch  chemical  process that uses sulfuric  acid to extract TiO2.  Sulfate
technology produces either anatase or rutile pigment.  Once an intermediate TiO2
pigment has been  produced  by either the  chloride  or sulfate  process,  it is
`finished'  into  products  with  specific   performance   characteristics   for
particular end-use applications through proprietary  processes involving various
chemical surface treatments and intensive milling and micronizing.

        Due to environmental factors and customer considerations, the proportion
of TiO2 industry sales  represented by  chloride-process  pigments has increased
relative to sulfate-process pigments and, in 2002,  chloride-process  production
facilities represented approximately 62% of industry capacity.

        The Company  produced  293,000 metric tons of TiO2 in 2002,  compared to
269,000  metric tons produced in 2001 and 297,000  metric tons in 2000.  Kronos'
average  production  capacity  utilization  rate in 2002 was 93%, up from 87% in
2001.  Capacity  utilization rates in 2001 were down due in part to lost sulfate
production  volume  resulting  from the Leverkusen  fire,  which is described in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations."  The Company believes its current annual
attainable production capacity is approximately 319,000 metric tons. The Company
expects its  production  capacity  will be increased  over the next two years by
approximately  9,000  metric tons  primarily at its  chloride  facilities,  with
moderate capital  expenditures,  bringing its capacity to approximately  328,000
metric tons during 2004.

        The primary raw materials used in the TiO2 chloride  production  process
are  titanium-containing  feedstock  derived from beach sand  ilmenite,  natural
rutile ore, 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  number of  suppliers  around  the world,
principally in Australia, South Africa, Canada, India and the United States.

        Through KUS, the Company purchases slag refined from beach sand ilmenite
from Richards Bay Iron and Titanium  (Proprietary)  Limited  (South  Africa),  a
51%-owned  subsidiary of Rio Tinto plc (U.K.), under a long-term supply contract
that  expires  at the end of 2007.  Natural  rutile ore is  purchased  by KUS on
behalf of the Company  primarily from Iluka Resources,  Limited  (Australia),  a
company formed through the merger of Westralian  Sands Limited  (Australia)  and
RGC Mineral Sands,  Ltd.,  under a long-term supply contract that expires at the
end of  2004.  The  Company  and KUS do not  expect  to  encounter  difficulties
obtaining  long-term  extensions  to  existing  supply  contracts  prior  to the
expiration of the contracts.  Raw materials  purchased under these contracts and
extensions  thereof  are  expected  to meet  the  Company's  chloride  feedstock
requirements over the next several years.

                                      -3-


        The primary raw materials  used in the TiO2 sulfate  production  process
are  titanium-containing  feedstock  derived  primarily from rock and beach sand
ilmenite  and  sulfuric  acid.  Sulfuric  acid is  available  from a  number  of
suppliers. Titanium-containing feedstock suitable for use in the sulfate process
is available from a limited number of suppliers around the world. Currently, the
principal  active sources are located in Norway,  Canada,  Australia,  India and
South  Africa.   As  one  of  the  few   vertically   integrated   producers  of
sulfate-process  pigments,  the Company operates a rock ilmenite mine in Norway,
which provided all of the Company's  feedstock for its  sulfate-process  pigment
plants in 2002.

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

Competition

        The TiO2 industry is highly competitive.  The Company competes primarily
on  the  basis  of  price,  product  quality  and  technical  service,  and  the
availability of high  performance  pigment grades.  Although certain TiO2 grades
are  considered  specialty  pigments,  the majority of the Company's  grades and
substantially all of its production are considered commodity pigments with price
generally being the most significant competitive factor. During 2002 the Company
had an estimated 18% share of European  TiO2 sales volume,  and believes that it
is the leading  seller of TiO2 in Germany and is among the leading  marketers in
the Benelux and Scandinavian markets.

        The Company's (along with KUS and KC) principal  competitors are E.I. du
Pont  de  Nemours  &  Co.  ("DuPont");  Millennium  Chemicals,  Inc.;  Huntsman;
Kerr-McGee  Corporation;  and Ishihara  Sangyo  Kaisha,  Ltd. The Company's five
largest competitors have estimated individual shares of TiO2 production capacity
ranging from 24% to 5%, and an estimated  aggregate 70% share of worldwide  TiO2
production volume.

        Capacity  additions  that are the result of  construction  of greenfield
plants in the worldwide TiO2 market require  significant capital and substantial
lead time, typically three to five years in the Company's experience.  As no new
plants are currently under construction,  additional  greenfield capacity is not
expected in the next three to five years, but industry  capacity can be expected
to increase as the Company and its competitors  debottleneck existing plants. In
addition to potential capacity additions,  certain competitors have either idled
or shut down  facilities.  Based on the  factors  described  under  the  caption
"Industry"  above,  the  Company  expects  that the average  annual  increase in
industry capacity from announced  debottlenecking projects will be less than the
average annual demand growth for TiO2 over the next three to five years.

        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 the Company's  expectations.  If actual  developments differ from the

                                      -4-


Company's expectations, the Company and the TiO2 industry's performance could be
unfavorably affected.

Research and Development

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

Patents and Trademarks

        Patents held for products and  production  processes  are believed to be
important to the Company and its continuing business activities. The Company and
its   affiliates   continually   seek  patent   protection   for  its  technical
developments, principally in the United States, Canada and Europe, and from time
to time enter into licensing arrangements with third parties.

        The Company's major  trademarks,  including  Kronos(TM) and Ecochem(TM),
are protected by  registration  in Europe,  the United States and elsewhere with
respect to those products it manufactures and sells.

Foreign Operations

        The Company's  chemical  businesses have operated in the European market
since the 1920s. The Company's current production  capacity is located in Europe
with its net property and equipment  aggregating  approximately  $318 million at
December 31, 2002. The Company's  operations  include  production  facilities in
Germany,  Belgium and Norway, and sales and distribution  facilities in England,
France, Denmark and the Netherlands. Approximately $456 million of the Company's
2002  consolidated  sales were to  European  customers  and  approximately  $124
million to  customers in areas other than Europe,  including  approximately  $39
million of sales to customers in the U.S through affiliates.  Foreign operations
are subject to, among other things,  currency exchange rate fluctuations and the
Company's  results of  operations  have,  in the past,  been both  favorably and
unfavorably  affected by  fluctuations in currency  exchange  rates.  Effects of
fluctuations in currency  exchange rates on the Company's  results of operations
are  discussed  in Item 7.  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations" and Item 7A.  "Quantitative and Qualitative
Disclosures about Market Risk."

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

                                      -5-

Customer Base and Seasonality

        The Company  believes that neither its aggregate  sales nor those of any
of its principal product groups are concentrated in or materially dependent upon
any single  customer  or small group of  customers.  The  Company's  largest ten
customers  accounted  for  approximately  21% of net sales in 2002.  Neither the
Company's business as a whole nor that of any of its principal product groups is
seasonal  to any  significant  extent.  Due in part  to the  increase  in  paint
production in the spring to meet the spring and summer  painting  season demand,
TiO2 sales are generally higher in the first half of the year than in the second
half of the year.

Employees

        As of December  31,  2002,  the  Company  employed  approximately  1,950
persons. Hourly employees in European production facilities are represented by a
variety of labor unions,  with labor agreements having various expiration dates.
The Company believes its labor relations are good.

Regulatory and Environmental Matters

        Certain of the  Company's  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.  The Company has implemented and continues to implement new and
improve existing policies and programs in an effort to minimize these risks. The
policy of the Company is to maintain  compliance with  applicable  environmental
laws  and  regulations  at all its  facilities  and to  strive  to  improve  its
environmental  performance.  It is possible that future changes in environmental
laws and enforcement policies thereunder, could affect the Company's production,
handling, use, storage,  transportation,  sale or disposal of such substances as
well as adversely affect the Company's consolidated financial position,  results
of operations or liquidity.

        The Company's  production  facilities  operate  within an  environmental
regulatory  framework in which  governmental  authorities  typically are granted
broad  discretionary  powers which allow them to issue  operating  permits under
which the plants must operate.  The Company  believes that all its plants are in
substantial compliance with applicable environmental laws.

        While the laws regulating  operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU").  Germany and Belgium are members of the EU and follow
its  initiatives.   Norway,  although  not  a  member,  generally  patterns  its
environmental  regulatory actions after the EU. The Company believes that Kronos
has  obtained  all  required  permits  and  is in  substantial  compliance  with
applicable  EU  requirements,   including  EU  Directive   92/112/EEC  regarding
establishment of procedures for reduction and eventual  elimination of pollution
caused by waste from the TiO2 industry.

        At all of the Company's sulfate plant facilities other than Fredrikstad,
Norway,  the Company  recycles  spent acid either  through  contracts with third
parties or using the Company's own facilities. At its Fredrikstad, Norway plant,
the Company ships its spent acid to a third party  location  where it is treated

                                      -6-


and  disposed.  The Company has a contract  with a third party to treat  certain
by-products of its German sulfate-process plants. Either party may terminate the
contract  after giving four years advance  notice with regard to its  Nordenham,
Germany  plant.  Under  certain  circumstances,  the Company may  terminate  the
contract after giving six months notice with respect to treatment of by-products
from the Leverkusen, Germany plant.

        The Company  landfills  waste  generated at its  Nordenham,  Germany and
Langerbrugge,  Belgium  plants,  and mine tailings waste generated at its mining
facility in Norway. The Company maintains reserves, in conformity with generally
accepted  accounting  principles in the U.S. ("GAAP"),  to cover the anticipated
cost of closure of these landfills,  which were  approximately $.5 million as of
December 31, 2002. These  requirements for landfills are expected to increase in
the future in view of recently adopted EU requirements.

        The Company is also  responsible  for certain closure costs at landfills
used and formerly used by its Leverkusen, Germany TiO2 plants. The Company has a
reserve of approximately $6 million related to such landfills as of December 31,
2002.

        The   Company  is  also   involved  in  various   other   environmental,
contractual,  product liability and other claims and disputes  incidental to its
business.

        The Company's capital expenditures related to its ongoing  environmental
protection and improvement  programs in 2002 were approximately $4 million,  and
are currently expected to be approximately $5 million in 2003.

Principal Shareholders

        At December 31, 2002,  Valhi,  Inc.  ("Valhi")  and Tremont  Corporation
("Tremont"),   each  affiliates  of  Contran   Corporation   ("Contran"),   held
approximately 63% and 21%,  respectively,  of NL's outstanding  common stock. At
December  31,  2002,  Contran and its  subsidiaries  held  approximately  93% of
Valhi's outstanding common stock, and a company 80% owned by Valhi and 20% owned
by  NL  held   approximately   80%  of  Tremont's   outstanding   common  stock.
Substantially  all of  Contran's  outstanding  voting  stock  is held by  trusts
established for the benefit of certain  children and  grandchildren of Harold C.
Simmons, of which Mr. Simmons is the sole trustee.  Mr. Simmons, the Chairman of
the Board of each of Contran,  Valhi and NL and a director  of  Tremont,  may be
deemed to control each of such companies. See Notes 1 and 17 to the Consolidated
Financial Statements.

Website and other available information

        The Company does not  maintain a website on the  Internet.  However,  NL
maintains a website on the Internet with the address of  www.nl-ind.com.  Copies
of this  Annual  Report on Form 10-K for the year ended  December  31,  2002 and
copies of the Company's Quarterly Reports on Form 10-Q for 2002 and 2003 and any
Current Reports on Form 8-K for 2002 and 2003, and any amendments  thereto,  are
or will be available free of charge as soon as reasonably  practical  after they
are filed with the SEC at such website. Information contained on NL's website is
not part of this report.

                                      -7-


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

ITEM 2.        PROPERTIES

        The Company  currently  operates  five TiO2  plants (two in  Leverkusen,
Germany;  one in Nordenham,  Germany;  one in Langerbrugge,  Belgium; and one in
Fredrikstad,  Norway). The Company also operates an ilmenite ore mine in Hauge i
Dalane, Norway. See Notes 8 and 17 to the Consolidated Financial Statements.

        The Company's  principal  German  operating  subsidiary  leases the land
under its Leverkusen  TiO2 production  facility  pursuant to a lease expiring in
2050. The  Leverkusen  facility,  with almost 50% of the Company's  current TiO2
production capacity, is located within an extensive  manufacturing complex owned
by Bayer AG. Rent for the  Leverkusen  facility is  periodically  established by
agreement  with Bayer AG for  periods  of at least two years at a time.  Under a
separate supplies and services  agreement  expiring in 2011, Bayer provides some
raw  materials,  including  chlorine  and  certain  amounts  of  sulfuric  acid,
auxiliary and operating  materials and utilities  services  necessary to operate
the Leverkusen facility.  Both the lease and the supplies and services agreement
have certain restrictions regarding Kronos' ability to transfer ownership or use
of the Leverkusen facility.

        The Company owns all of its principal  production  facilities  described
above, except for the land under the Leverkusen and Fredrikstad facilities.  The
Company has a  governmental  concession  with an  unlimited  term to operate its
ilmenite mine in Norway.

        The Company has under lease various corporate and administrative offices
located in Leverkusen,  Germany and Brussels,  Belgium and various sales offices
located in France, the Netherlands, Denmark and England.

ITEM 3.  LEGAL PROCEEDINGS

        See Item 1.  "Business - Regulatory and Environmental Matters."

        The Company's  Belgian  subsidiary and various of its Belgian  employees
are the  subject of an  investigation  by  Belgian  authorities  relating  to an
accident resulting in two fatalities that occurred in its Langerbrugge,  Belgium
facility in October 2000. The investigation stage, which could ultimately result
in civil and criminal  sanctions against the Company,  was completed in 2002. In
April 2003 the Belgian  authorities  are  expected to announce if the Company or
any of its employees will be prosecuted.

        In  addition,  NL  is  a  defendant  in  numerous  lawsuits,   including
environmental  claims and claims  involving the past manufacture and sale in the
United States of lead pigments for use in paint for buildings,  all as disclosed
in NL's filings with the SEC.  Neither the Company nor its subsidiaries has ever

                                      -8-


been named as a defendant  in any of such  lawsuits  against  NL.  Nevertheless,
judgments  against NL in  litigation  could have  adverse  consequences  for the
Company.  Such events could impose economic hardships on NL, which in turn could
make future financings, including bank borrowings, more difficult for Kronos and
the Company and also could adversely affect the Company's customers' perceptions
of the Company as an affiliate of NL. In  addition,  judgments  against NL might
force NL to divest its equity  ownership of Kronos or the Company to raise cash,
which could result in a change of control of the Company.

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 KII's  common  stock is held by Kronos.  There is no  established
public  trading  market for KII's common stock.  The indenture  governing  KII's
8.875%  Senior Notes Due 2009 limits the ability of the Company 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.  KII currently  expects to pay dividends as permitted by the indenture;
however  declaration  and payment of future  dividends and the amount thereof is
dependent  upon  the  Company's  results  of  operations,  financial  condition,
contractual limitations,  cash requirements for its businesses and other factors
deemed  relevant  by  the  Company's  Board  of  Directors.  See  Note  8 to the
Consolidated  Financial  Statements.  At  December  31,  2002,  $36  million was
available for dividends or other restricted payments, as defined.

                                      -9-


ITEM 6.        SELECTED FINANCIAL DATA

        The selected consolidated  financial data set forth below should be read
in conjunction with the Consolidated Financial Statements and Notes thereto, and
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of  Operations."  Certain  amounts  have been  reclassified  to conform with the
current year's consolidated financial statement presentation.


                                                           Years ended December,
                                             ------------------------------------------------
                                               2002      2001      2000      1999      1998
                                             --------  --------  --------  --------  --------
                                              (In millions, except operating statistics data)

                                                                      
INCOME STATEMENT DATA:
Net sales ................................   $  579.7  $  554.6  $  620.5  $  620.3  $  631.6
Operating income .........................       60.0     123.8     146.1      90.5     100.0
Income from continuing operations ........       52.3     113.7      80.1      41.9      38.6
Net income ...............................       52.3     113.7      80.1      41.9      39.6

BALANCE SHEET DATA at year end:
Cash, cash equivalents and noncurrent
  restricted marketable debt securities ..   $   17.5  $   30.3  $   36.7  $   62.8  $   25.3
Current assets ...........................      259.8     246.3     252.3     279.2     281.9
Total assets .............................      611.3     532.5     530.1     580.4     626.5
Current liabilities ......................      125.4     142.1     178.3     208.6     202.4
Long-term debt including current
maturities ...............................      325.9     482.9     196.1     244.5     549.7
Total liabilities ........................      534.1     692.3     452.6     533.9     833.3
Redeemable preferred stock and profit
  participation certificates .............     --         617.4     504.9     489.1    --
Stockholder's equity (deficit) ...........       76.8    (777.5)   (427.7)   (442.9)   (207.1)

CASH FLOW DATA:
Operating activities .....................   $   67.0  $   76.0  $   97.8  $   77.6  $    8.9
Investing activities .....................      (28.5)    (28.5)    (26.6)    (26.9)    (17.6)
Financing activities .....................      (57.5)    (52.8)    (96.1)    (10.2)     (1.6)
Operating, investing and financing
activities ...............................      (19.0)     (5.3)    (24.9)     40.5     (10.3)

OTHER NON-GAAP FINANCIAL DATA:
EBITDA (1) ...............................   $   87.1  $  146.4  $  170.2  $  118.9  $  129.7
Depreciation, depletion and amortization .       27.1      24.1      24.1      28.4      29.7
Net debt at year end (2) .................      308.4     498.8     229.4     238.8     560.8
Cash interest expense, net (3) ...........        7.2      13.4       7.5      35.3      38.5


                                      -10-




                                                          Years ended December,
                                             ------------------------------------------------
                                               2002      2001      2000      1999      1998
                                             --------  --------  --------  --------  --------
                                              (In millions, except operating statistics data)

                                                                      
OTHER DATA:
Interest expense (4) .....................   $ 35.4    $   38.4  $   30.6  $   37.5  $   68.3
Capital expenditures (5) .................     24.5        26.1      26.7      29.2      19.6

TiO2 OPERATING STATISTICS:
    Sales volumes* .......................      297         265       294       291       283
    Production volume* ...................      293         269       297       272       293
    Production rate as a percentage of
      capacity ...........................      93%         87%      Full       90%      Full


*  Metric tons in thousands

(1)     EBITDA,  as presented,  represents  operating income plus  depreciation,
        depletion and amortization less other general corporate  expenses,  net,
        of $1.5 million in 2001.  EBITDA is  presented  as a  supplement  to the
        Company's  operating  income and cash flow from  operations  because the
        Company believes that EBITDA is a widely accepted financial indicator of
        cash  flows and the  ability  to  service  debt.  EBITDA  should  not be
        considered as an  alternative  to, or more  meaningful  than,  operating
        income  or net  income  determined  under  GAAP as an  indicator  of the
        Company's operating performance, or cash flows from operating, investing
        and  financing  activities   determined  under  GAAP  as  a  measure  of
        liquidity.  EBITDA  is  not  intended  to  depict  funds  available  for
        reinvestment or other discretionary uses, as the Company has significant
        debt  requirements  and other  commitments.  Investors  should  consider
        certain factors in evaluating the Company's EBITDA,  including  interest
        expense,  income taxes,  noncash  income and expense  items,  changes in
        assets and liabilities, capital expenditures and other items included in
        GAAP cash flows as well as future debt repayment  requirements and other
        commitments,  including  those  described  in  Notes 8, 13 and 19 to the
        Consolidated  Financial Statements.  The Company believes that the trend
        of its EBITDA is consistent with the trend of its GAAP operating income.
        See "Item 7. Management's Discussion and Analysis of Financial Condition
        and Results of Operations" for a discussion of operating income and cash
        flows during the last three years and the Company's outlook. EBITDA as a
        measure  of a  company's  performance  may not be  comparable  to  other
        companies,  unless  substantially  all companies and analysts  determine
        EBITDA as computed and presented herein.

(2)     Net debt  represents  notes payable and long-term  debt less cash,  cash
        equivalents,  current and noncurrent  restricted  cash  equivalents  and
        current and noncurrent restricted marketable debt securities.

(3)     Cash interest expense,  net represents interest expense,  net as defined
        in (4) below less noncash  interest expense and noncash interest expense
        to affiliates  plus noncash  interest  income from  affiliates.  Noncash
        interest expense includes amortization of deferred financing costs.

(4)     Interest expense,  net represents interest expense plus interest expense
        to affiliates.

(5)     Capital  expenditures  in 2002 and 2001  exclude  an  aggregate  of $3.1
        million and $22.3  million,  respectively,  related to the rebuilding of
        our Leverkusen,  Germany sulfate plant destroyed by fire,  substantially
        all of which was  reimbursed  by  insurance  proceeds.  See  "Management

                                      -11-


        Discussion and Analysis of Financial Condition and Results of Operations
        - Liquidity and Capital Resources - Investing cash flows" and Note 15 to
        the consolidated financial statements.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

        Under  applicable  GAAP  (Statement  of Financial  Accounting  Standards
        ("SFAS")  No.  144,  "Accounting  for  the  Impairment  or  Disposal  of
        Long-Lived  Assets"),   property  and  equipment  is  not  assessed  for

                                      -12-


        impairment  unless  certain  impairment  indicators,   as  defined,  are
        present.  During 2002, no such  impairment  indicators were present with
        respect to the Company's net property and equipment.

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

o       Defined  benefit  pension plans.  The Company's  defined benefit pension
        expenses and  obligations  are  calculated  based on several  estimates,
        including  discount  rates and expected rates of returns on plan assets.
        The Company  reviews  these rates  annually  with the  assistance of its
        actuaries.  See  further  discussion  of the  potential  effect of these
        estimates in the Assumptions on defined benefit pension plans section in
        the Liquidity and Capital Resources section of this MD&A.

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

        Other significant accounting policies and use of estimates are described
in the Notes to the Consolidated Financial Statements.

                                      -13-


RESULTS OF OPERATIONS

  General

        The Company derives the majority of its revenues, earnings and cash flow
from the production and sale of TiO2 . As discussed below,  average TiO2 selling
prices in billing  currencies  (which  excludes the effects of foreign  currency
translation)  were  generally  increasing  during most of 2000,  were  generally
decreasing  during all of 2001 and the first quarter of 2002, and were generally
increasing  during the second,  third and fourth quarters of 2002. The Company's
operating  income declined $63.8 million in 2002 compared with 2001 and declined
$22.3 million in 2001 compared with 2000.  Gross profit margins were 22% in 2002
and 32% in 2001.

        Many factors  influence  TiO2 pricing  levels,  including (i) competitor
actions,  (ii) industry capacity,  (iii) worldwide demand growth,  (iv) customer
inventory  levels and purchasing  decisions and (v) relative  changes in foreign
currency  exchange  rates.  The  Company  believes  that the TiO2  industry  has
long-term growth potential, as discussed in "Item 1. Business - Industry" and "-
Competition."


                                              Years ended December 31,           % Change
                                            -----------------------------   ------------------
                                             2002       2001       2000     2002-01   2001-00
                                            -------    -------    -------   -------  ---------
                                                    (In millions)

                                                                        
Net sales and operating income
    Net sales ........................      $ 579.7    $ 554.6    $ 620.5      +5%     -11%
    Operating income .................         60.0      123.8      146.1     -52%     -15%
    Operating income margin percentage          10%        22%        24%

TiO2 operating statistics
    Percent change in average selling
      prices (in billing currencies) .                                        -10%      -2%
    Sales volume (metric tons in
      thousands) .....................          297        265        294     +12%     -10%
    Production volume (metric tons in
      thousands) .....................          293        269        297      +9%      -9%
    Production rate as a percent of
      capacity .......................          93%        87%       Full



        Operating  income for  full-year  2002 was $60.0  million  compared with
$123.8 million for full-year 2001 due to lower average selling prices, partially
offset by higher sales and production  volumes.  Operating  income for full-year
2001 included $27.3 million of business interruption  insurance proceeds related
to losses (unallocated period costs and lost margin) incurred resulting from the
previously  disclosed fire at the Company's  Leverkusen,  Germany plant in March
2001.  The lower  sales and  production  volumes in 2001 were due in part to the
effect of the Leverkusen fire. The Company's operating income in 2001, including
business  interruption proceeds of $27.3 million, was lower than 2000, primarily
due to lower average TiO2 selling  prices in billing  currencies and lower sales
and production volumes.

        Average TiO2 selling prices in billing  currencies  during 2002 were 10%
lower than 2001, with lower prices in all major regions.  Average selling prices
decreased  from the  preceding  quarter  in each  quarter of 2001 and during the
first quarter of 2002. In the second  quarter of 2002,  average  selling  prices
began to trend upward with the upward trend continuing  through the end of 2002.
Average  selling  prices in the fourth  quarter of 2002 were 2% higher  than the

                                      -14-


third  quarter of the year,  with  increases in all major  markets.  The average
selling  price in billing  currencies  in  December  2002 was 4% higher than the
December 2001 average selling price.  Average TiO2 selling prices have continued
to trend  upward in the first  quarter of 2003 and the  Company  expects  higher
average  selling prices for full-year 2003 compared to full-year  2002.  Average
TiO2 selling prices in billing  currencies in 2001 were 2% lower than 2000, with
lower prices in all major regions.

        Industry-wide  demand was strong in 2002 as compared to 2001 due in part
to customers  restocking inventory levels ahead of first and second quarter 2002
price increases. Sales volume of 297,000 metric tons in 2002 was 12% higher than
2001,  primarily due to higher sales in Europe and North America.  The Company's
sales volume in the fourth  quarter of 2002 increased 8% from the fourth quarter
of 2001 and  seasonally  decreased  14%  from the  third  quarter  of 2002.  The
increase  from the  comparable  prior year  period was due in part to lost sales
volume in 2001 as a result of the Leverkusen fire in 2001.  Approximately 75% of
the Company's 2002 TiO2 sales volume was  attributable to markets in Europe with
approximately  10%  attributable  to North  America,  and the  balance  to other
regions. Industry demand was weak throughout 2001 and the Company's sales volume
in 2001 was 10% lower  than  2000,  primarily  due to lower  sales in Europe and
North  America.  Industry-wide  demand was strong in the first three quarters of
2000 and weakened in the fourth quarter of 2000.

        The  Company's  production  volume was 293,000  metric tons in 2002,  an
increase of 9% from 269,000 metric tons produced in 2001.  Operating  rates were
at 93% in 2002 up from 87% in 2001. Operating rates in 2001 were lower, compared
with  2002  and  2000,  primarily  due to lost  production  resulting  from  the
Leverkusen fire. The Company's  production  volume in 2001 decreased 9% compared
with the 297,000  metric tons produced in 2000.  Operating  rates were near full
capacity  in 2000.  Finished  goods  inventory  levels  increased  in the fourth
quarter of 2002 and at the end of 2002 represented slightly less than two months
of sales.  Compared with year-end 2001,  inventory levels decreased 2,000 metric
tons, or 5%.

        The  Company   settled  the  insurance   coverage  claim  involving  the
Leverkusen  fire for $56.4  million  during  the fourth  quarter of 2001  ($46.9
million  received as of December  31,  2001,  with the  remaining  $9.5  million
received  in  January  2002),   of  which  $27.3  million  related  to  business
interruption  and $29.1 million related to property  damage,  clean-up costs and
other extra  expenses.  The Company  recognized a $17.5 million  pre-tax gain in
2001 related to the property  damage  recovery after  deducting $11.6 million of
clean-up  costs and other extra  expenses  incurred  and the  carrying  value of
assets  destroyed in the fire. The gain was excluded from the  determination  of
operating income. The $27.3 million of business interruption proceeds recognized
in 2001 were allocated between other income, excluding corporate, which reflects
recovery of lost margin  ($7.2  million)  and as a reduction of cost of sales to
offset  unallocated  period costs  ($20.1  million).  The business  interruption
insurance  proceeds distorted Kronos' operating income margin percentage in 2001
as  there  were no  sales  associated  with the  lost  margin  operating  income
recognized.  No additional  insurance  recoveries related to the Leverkusen fire
are expected to be received.  See Notes 14 and 15 to the Consolidated  Financial
Statements.

        The Company  expects TiO2 industry  demand in 2003 to increase  slightly
over 2002 levels.  The Company's TiO2  production  volume in 2003 is expected to
approximate  its 2003 TiO2 sales volume.  In December 2002 and January 2003, the
Company  announced  additional price increases in Europe and North America which
averaged 8% and 7%,  respectively.  The Company is hopeful  that it will realize

                                      -15-


price  increases,  but the extent to which it can realize price increases during
2003 will depend on improving  market  conditions and global economic  recovery,
which may be negatively impacted by international conflict,  among other things.
Overall,  the Company  expects its TiO2 operating  income in 2003 will be higher
than 2002,  primarily due to higher average TiO2 selling  prices.  The Company's
expectations as to the future prospects of the Company and the TiO2 industry are
based upon a number of factors beyond the Company's control, including worldwide
growth of gross domestic product, competition in the market place, unexpected or
earlier-than-expected  capacity additions and technological  advances. If actual
developments  differ from the Company's  expectations,  the Company's results of
operations could be unfavorably affected.

        The Company's efforts to debottleneck its production  facilities to meet
long-term  demand  continue  to  prove  successful.   The  Company  expects  its
production  capacity of 319,000  metric tons will be increased to  approximately
328,000  metric tons during 2004,  primarily at its  chloride  facilities,  with
moderate capital expenditures.

        Excluding the effects of foreign currency  translation,  which increased
the Company's  expenses in 2002 and  decreased  the  Company's  expenses in 2001
compared to the year earlier  periods,  the Company's  cost of sales in 2002 was
higher  than 2001 due to higher  sales  volume  partially  offset by lower  unit
costs,  which resulted  primarily from higher production  levels. The effects of
lower  TiO2  sales  and  production  volumes  in 2001 were  partially  offset by
business  interruption  proceeds.  The Company's cost of sales in 2001 was lower
than 2000 primarily due to lower sales volume,  partially  offset by higher unit
costs, which resulted primarily from lower production levels.  Cost of sales, as
a percentage of net sales,  increased in 2002 primarily due to the impact on net
sales of lower average selling prices partially offset by lower unit costs. Cost
of sales,  as a percentage  of net sales,  increased in 2001  compared  with the
prior year  primarily  due to the impact on net sales of lower  average  selling
prices  and  higher  unit  costs,  partially  offset  by  business  interruption
insurance recoveries.

        Excluding the effects of foreign currency  translation,  which increased
the Company's expense in 2002 and reduced the Company's expense in 2001 compared
to the  year-earlier  periods,  selling,  general  and  administrative  expenses
("SG&A"),  was higher than 2001 primarily due to higher selling and distribution
expenses associated with higher sales volume and higher administrative expenses.
SG&A  decreased  in 2001  from the  year-earlier  period  due to lower  variable
compensation expense and lower selling and distribution expenses associated with
lower 2001 sales volume. SG&A, excluding corporate expenses,  as a percentage of
net sales,  was 12% in each of 2002,  2001 and 2000. See discussion of corporate
expenses below.

        The  Company's  operations  and assets are  located  outside  the United
States  (particularly in Germany,  Norway and Belgium).  The Company's  non-U.S.
sales and operating  costs are subject to currency  exchange  rate  fluctuations
which  may  impact  reported  earnings  and  may  affect  the  comparability  of
period-to-period  revenues and expenses expressed in U.S. dollars. A significant
amount of the Company's  sales  (approximately  80% in 2002) are  denominated in
currencies  other than the U.S.  dollar,  principally  the euro, and other major
European   currencies.   Certain   purchases   of   raw   materials,   primarily
titanium-containing  feedstocks  for  the  Company's  chloride  facilities,  are
denominated  in U.S.  dollars,  while  labor  and  other  production  costs  are
primarily denominated in local currencies. Fluctuations in the value of the U.S.
dollar  relative  to other  currencies  increased  sales by $22  million in 2002
compared to 2001 primarily due to a weaker U.S.  dollar compared to the euro and
decreased sales by $17 million in 2001 compared to 2000 primarily as a result of

                                      -16-


a stronger U.S. dollar  compared to the euro.  When  translated to U.S.  dollars
using currency exchange rates prevailing during the respective periods,  Kronos'
average selling prices for 2002 decreased 6% from 2001.  Kronos' average selling
prices in U.S. dollars for 2001 decreased 2% from 2000. The effect of the weaker
U.S.  dollar  on  Kronos'  operating  costs,  that are not  denominated  in U.S.
dollars, increased operating costs in 2002 compared with 2001. The effect of the
stronger U.S. dollar on Kronos' operating costs that are not denominated in U.S.
dollars reduced  operating costs in 2001 compared with 2000. In addition,  sales
to export markets are typically  denominated  in U.S.  dollars and a weaker U.S.
dollar decreases margins on these sales at the Company's non-U.S.  subsidiaries.
The unfavorable  margin on export sales tends to offset the favorable  effect of
translating local currency profits to U.S. dollars when the dollar is weaker. As
a result,  the net  impact of  currency  exchange  rate  fluctuations  decreased
operating  income in 2002 and 2001 by  approximately  3% and 8% when compared to
the year-earlier periods.

  General corporate

        The following  table sets forth certain  information  regarding  general
corporate income (expense).


                                              Years ended December 31,                 Change
                                            -------------------------------     -------------------
                                             2002         2001        2000      2002-01     2001-00
                                            -------     -------     -------     -------     -------
                                                               (In millions)

                                                                             
Interest income from affiliates ......      $  22.8     $  36.2     $  23.1     $ (13.4)    $  13.1
Insurance recoveries, net ............       --            17.5      --           (17.5)       17.5
Currency transaction gains (losses) on
  affiliate loans ....................         13.1        (9.4)      (15.6)       22.5         6.2
Currency gains on refinancing of debt           2.7      --          --             2.7      --
Other, net ...........................       --            (1.5)     --             1.5        (1.5)
Interest expense - bank debt .........        (16.7)       (4.3)       (1.9)      (12.4)       (2.4)
Interest expense - affiliate debt ....        (18.7)      (34.1)      (28.7)       15.4        (5.4)
                                            -------     -------     -------     -------     -------

                                            $   3.2     $   4.4     $ (23.1)    $  (1.2)    $  27.5
                                            =======     =======     =======     =======     =======


        The Company had certain  loans to  affiliates,  more fully  described in
Note 12 to the Consolidated Financial Statements.  Interest income on such notes
receivable  from  affiliates was lower in 2002 as compared to 2001 due primarily
to lower average balances of outstanding loans to affiliates. Interest income on
such notes  receivable  from affiliates was higher in 2001 compared to 2000, due
primarily to higher  average  balances of outstanding  loans to affiliates.  The
Company  transferred such notes receivable from affiliates to Kronos on July 30,
2002,  and  accordingly  no longer  reports  interest  income  on such  loans to
affiliates after such date.

        The  insurance  recoveries,  net in 2001 related to  insurance  proceeds
received  from  property  damage  resulting  from the  Leverkusen  fire,  as the
insurance  proceeds received exceeded the carrying value of the assets destroyed
and  the  clean-up  costs  and  extra  expense  incurred.  See  Note  15 to  the
Consolidated Financial Statements.

        The Company had certain loans from  affiliates  that are  denominated in
U.S. dollars. Under GAAP, changes in the euro-equivalent of such indebtedness is

                                      -17-


recognized  in  earnings as a foreign  currency  transaction  gain or loss.  The
amount of such currency  transaction gain or loss is dependent upon the relative
change in the  exchange  rate between the euro and the U.S.  dollar  during each
period, and the amount of such U.S. dollar-denominated indebtedness outstanding.
As more fully described in Note 9 to the Consolidated Financial Statements, such
U.S. dollar-denominated loans from affiliates were repaid using a portion of the
proceeds of the June 2002 offering of the notes discussed below, and accordingly
the Company no longer reports such currency  transaction gains or losses related
to such loans from affiliates after such date.

        In June 2002 the Company issued (euro)285  million 8.875% Senior Secured
Notes (the  "Notes")  due 2009.  The Company  used the net proceeds of the Notes
offering to repay  certain  intercompany  indebtedness  owed to NL, a portion of
which NL used to  redeem at par all of its  outstanding  11.75%  Senior  Secured
Notes due 2003,  plus  accrued  interest.  As a result of the  refinancing,  the
Company  recognized a foreign currency  transaction gain of $2.7 million in 2002
related to the extinguishment of certain intercompany  indebtedness.  See Note 8
to the Consolidated Financial Statements.

        Other corporate expenses, net in 2001 of $1.5 million, related to German
real  estate  transfer  taxes  associated  with  a  legal  restructuring  of the
Company's German operations.

        Interest  expense in 2002 was lower than 2001  primarily  due to a lower
level of outstanding affiliate  indebtedness,  partially offset by higher levels
of bank debt and the amount paid to extinguish  affiliate  indebtedness  in June
2002 included interest for the month of July 2002  (approximately $1.5 million).
Interest  expense in 2001 was higher than 2000 primarily due to higher levels of
bank debt and affiliate  debt.  As more fully  described in Notes 8 and 9 to the
Consolidated  Financial Statements,  a portion of such loans from affiliates was
repaid  using the  proceeds  of the  offering of the Notes and  accordingly  the
Company no longer  reports  interest  expense  on such  loans  from  affiliates.
Interest expense to third parties is expected to be higher in 2003 than 2002 due
to higher levels of outstanding third party indebtedness.

  Provision for income taxes

        The  principal  reasons  for the  difference  between  the U.S.  Federal
statutory  income  tax rates and the  Company's  effective  income tax rates are
explained in Note 13 to the  Consolidated  Financial  Statements.  The Company's
operations  are conducted in numerous  jurisdictions,  and the geographic mix of
income can significantly impact the Company's effective income tax rate. In 2002
the Company's  effective income tax rate varied from the normally  expected rate
in part due to a reduction in the Belgian income tax rate and the recognition of
certain   deductible   tax   assets   which   previously   did  not   meet   the
"more-likely-than-not"  recognition  criteria.  In 2001 the Company's  effective
income tax rate varied from the  normally  expected  rate  primarily  due to the
recognition  of certain German income tax  attributes  which  previously did not
meet the  "more-likely-than-not"  recognition  criteria.  In 2000 the  Company's
effective  income tax rate varied from the normally  expected rate primarily due
to the  geographic  mix of income and  changes  in the German  income tax "base"
rate.  In each of 2002,  2001 and 2000,  no income tax  provision or benefit has
been provided on certain currency  transaction  losses. Also in 2000 the Company
recognized certain one-time benefits related to German tax settlements.

        KII is a member of NL's  consolidated U.S. federal income tax group (the
"NL Tax Group").  KII is a party to a U.S. federal income tax sharing  agreement
(the  "Kronos  Tax  Agreement").  Effective  January 1, 2001,  the NL Tax Group,

                                      -18-


including KII, is included in the consolidated  U.S. federal income tax group of
Contran (the "Contran Tax Group"). As a member of the Contran Tax Group, NL is a
party to a separate tax sharing  agreement  (the "Contran Tax  Agreement").  The
Contran Tax Agreement  provides that NL calculate its liability for U.S.  income
taxes on a  separate-company  basis  using the tax  elections  made by  Contran.
During  2002 the Kronos Tax  Agreement  was  amended  (the  "Amended  Kronos Tax
Agreement").  The Amended  Kronos Tax Agreement  provides that Kronos  calculate
KII's  liability  for U.S.  income taxes on a  separate-company  basis using tax
elections consistent with Kronos' tax elections.  Pursuant to the Amended Kronos
Tax Agreement,  KII is to make  distributions to or receive  contributions  from
Kronos in the amounts it would have paid to or received  from the U.S.  Internal
Revenue  Service  had it not been a member  of the NL Tax  Group,  but  rather a
separate  taxpayer.  Contributions  under the Amended  Kronos Tax  Agreement are
limited to amounts previously distributed under the agreement.  No distributions
have yet been made or  contributions  received  under  the  Amended  Kronos  Tax
Agreement. KII would not have reported a different provision for income taxes in
2001 or 2000 if the provision for income taxes in such periods had been computed
in accordance with the tax allocation policy contained in the Amended Kronos Tax
Agreement.

  Related party transactions

        The Company is a party to certain transactions with related parties. See
"Liquidity  and Capital  Resources  -  Financing  cash flows" and Note 17 to the
Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's  consolidated  cash flows for each of the past three years
are presented below.


                                                             Years ended December 31,
                                                         --------------------------------
                                                           2002        2001        2000
                                                         -------     -------     --------
                                                                  (In millions)
                                                                        
    Operating activities:
        Before changes in assets and liabilities ..      $  54.8     $  96.3     $  100.3
        Changes in assets and liabilities .........         12.2       (20.3)        (2.5)
                                                         -------     -------     --------
                                                            67.0        76.0         97.8
    Investing activities ..........................        (28.5)      (28.5)       (26.6)
    Financing activities ..........................        (57.5)      (52.8)       (96.1)
                                                         -------     -------     --------

Net cash used by operating, investing and financing
  activities ......................................      $ (19.0)    $  (5.3)    $  (24.9)
                                                         =======     =======     ========


  Operating cash flows

        Certain  items  included  in  the  determination  of net  income  do not
represent  current  inflows or outflows of cash. For example,  noncash  currency
transaction  gains of  $13.1  million  in 2002,  noncash  interest  income  from
affiliates of $21.8 million in 2002,  noncash  interest expense to affiliates of
$5.5 million in 2002 and insurance recoveries,  net of $17.5 million in 2001 are
excluded from the  determination of operating cash flow. The insurance  proceeds
are shown in the statement of cash flows under investing activities to partially
offset the cash outflow impact of capital expenditures related to the Leverkusen
sulfate plant reconstruction.  Certain other items included in the determination
of net income have an impact on cash flows from  operating  activities,  but the
impact of such items on cash will differ from their impact on net income.

                                      -19-


        The TiO2 industry is cyclical and changes in economic  conditions within
the industry  significantly  impact the earnings and operating cash flows of the
Company. Cash flow from operations is considered the primary source of liquidity
for the Company. Changes in TiO2 pricing, production volume and customer demand,
among other  things,  could  significantly  affect the liquidity of the Company.
Cash flow from operations,  before changes in assets and liabilities,  decreased
$41.5  million in 2002 and  decreased  $4.0  million in 2001 from the  preceding
year.

        Cash flows from operations, before changes in assets and liabilities, in
2002  compared  with 2001 were  unfavorably  affected by $63.8  million of lower
operating  income,  partially  offset  by $15.8  million  of lower  current  tax
expense.

        Operating  cash  flows  in 2001  compared  with  2000  were  unfavorably
affected by $22.3 million of lower operating  income,  partially offset by $16.6
million of lower current tax expense.

        Changes in the Company's assets and liabilities, excluding the effect of
currency  translation in 2002 compared to 2001, were favorably affected by lower
accounts and notes receivable of $12.5 million, higher accounts with affiliates,
net of $25.5 million and lower inventories of $5.7 million. The Company's assets
and liabilities  were unfavorably  affected  primarily by lower accounts payable
and accrued liabilities of $9.9 million.

        Changes in the Company's assets and liabilities (excluding the effect of
currency  translation) in 2001 compared with 2000 were  unfavorably  affected by
higher  affiliate  balances of $21.4 million,  partially  offset by $5.5 million
lower accounts and notes receivable balances.

  Investing cash flows

        The Company's capital expenditures were $27.6 million, $48.4 million and
$26.7 million in 2002, 2001 and 2000, respectively. Capital expenditures in 2002
and 2001 included an aggregate of $3.1 million and $22.3 million,  respectively,
for the rebuilding of the Company's  Leverkusen,  Germany sulfate plant. In 2001
the Company  received  $23.4 million of insurance  proceeds for property  damage
resulting from the Leverkusen fire and paid $3.2 million of expenses  related to
repairs and clean-up costs.

        The Company's capital  expenditures  during the past three years include
an aggregate  of  approximately  $16.4  million  ($3.7  million in 2002) for the
Company's  ongoing  environmental   protection  and  compliance  programs.   The
Company's  estimated 2003 capital  expenditures are approximately  $28.0 million
and include approximately $5 million in the area of environmental protection and
compliance.

        As of December  31, 2002 and 2001,  the Company had  approximately  $2.5
million and approximately $.6 million,  respectively,  of restricted  marketable
debt  securities  used to support  certain  capital  requirements  regarding the
Company's  Norwegian  operating  subsidiaries'  defined benefit pension plans in
accordance  with  applicable  Norwegian  law.  See  Note 2 to  the  Consolidated
Financial Statements.

                                      -20-


  Financing cash flows

        In March 2002 the  Company  repaid $25  million in  principal  amount of
affiliate  indebtedness to Kronos.  In June 2002 the Company repaid $169 million
principal amount, plus accrued interest of affiliate indebtedness to Kronos with
proceeds from the Notes offering  discussed  below.  Further,  in June 2002, the
Company repaid (euro)113.8 million ($111.8 million),  including interest, of the
euro-denominated  note payable to Kronos with proceeds from the Notes  offering.
See Notes 8 and 9 to the Consolidated Financial Statements.

        In June 2002 the Company  issued  (euro)285  million  ($280 million when
issued and $297  million at December  31,  2002)  principal  amount of Notes due
2009. The Notes are  collateralized by first priority liens on 65% of the common
stock  or  other  equity  interests  of  certain  of  the  Company's  first-tier
subsidiaries.  The Notes are issued  pursuant to an indenture  which  contains a
number of covenants and  restrictions  which,  among other things,  restrict the
ability  of KII and its  subsidiaries  to  incur  debt,  incur  liens,  merge or
consolidate  with, or sell or transfer all or substantially  all of their assets
to, another entity.  The indenture  further  restricts the ability of KII to pay
dividends. See Note 8 to the Consolidated Financial Statements.

        In June 2002,  KII's  operating  subsidiaries  in  Germany,  Belgium and
Norway entered into a new three-year  (euro)80 million secured  revolving credit
facility  ("European  Credit  Facility")  and  borrowed  (euro)13  million  ($13
million) and NOK 200 million ($26 million) which, along with available cash, was
used to repay and terminate  KII's short term notes payable  ($53.2 million when
repaid).  In the third and fourth  quarters of 2002,  the  Company  repaid a net
euro-equivalent  12.7 million  ($12.4 million when repaid) and 1.7 million ($1.6
million when repaid),  respectively, of the European Credit Facility. See Note 8
to the Consolidated Financial Statements.

        Deferred financing costs of $10.0 million for the Notes and the European
Credit Facility are being  amortized over the life of the respective  agreements
and are included in other noncurrent assets as of December 31, 2002.

        Cash flows related to capital  contributions and other transactions with
affiliates  aggregated a net cash inflow of $2.9 million for 2002 and a net cash
outflow of $35.6 million for 2001. Such amounts relate principally to cash flows
related to dividends or loans KII received  from,  or capital  contributions  or
loans KII made to  affiliates  (such  notes  receivable  from  affiliates  being
reported as a reduction of the  Company's  stockholder's  equity,  and therefore
considered  financing  cash flows).  As discussed in Note 1 of the  Consolidated
Financial Statements, KII transferred its Canadian operations to Kronos in April
2002,  and  accordingly  KII will no longer report any such capital  transaction
cash  flows  related  to such  Canadian  operations  subsequent  to April  2002.
Additionally, settlement of the above-mentioned notes receivable from affiliates
was not  currently  contemplated  in the  foreseeable  future.  In July 2002 KII
transferred  such  notes  receivable  from  affiliates  to Kronos in one or more
non-cash  transactions,  and as a result  KII will no longer  report  cash flows
related to such notes receivable from affiliates.

        In 2001 the Company  repaid  (euro)7.6  million ($6.5 million when paid)
and  (euro)16.4  million  ($14.9  million  when  paid),  respectively,   of  its
euro-denominated short-term debt with excess cash flow from operations.

                                      -21-


        In 2000 the Company repaid (euro)17.9  million ($16.7 million when paid)
and  (euro)13.0  million  ($12.2  million  when  paid),  respectively,   of  its
euro-denominated  short-term  debt with cash flow from  operations.  In December
2000 the Company borrowed $43 million of short-term non-U.S.  dollar-denominated
bank debt and used the proceeds  along with cash on hand to repay  certain loans
to affiliates.

        Other  than  operating  lease  commitments  disclosed  in Note 19 to the
Consolidated  Financial Statements,  the Company is not party to any off-balance
sheet financing arrangements.

  Cash, cash equivalents,  and noncurrent  restricted marketable debt securities
  and borrowing availability

        At  December  31,  2002,  the  Company  had cash  and  cash  equivalents
aggregating   approximately  $15  million  and  approximately  $2.5  million  of
noncurrent restricted marketable debt securities.  At December 31, 2002, certain
of the  Company's  subsidiaries  had  approximately  $54 million  available  for
borrowing under the European Credit Facility.  At December 31, 2002, the Company
had  approximately  $36 million  available  for payment of  dividends  and other
restricted payments as defined in the Notes indenture. At December 31, 2002, the
Company had complied with all financial covenants governing its debt agreements.

        Based  upon  the  Company's  expectations  for  the  TiO2  industry  and
anticipated  demands on the Company's  cash resources as discussed  herein,  the
Company expects to have sufficient  liquidity to meet its near-term  obligations
including operations,  capital  expenditures,  debt service and current dividend
policy.   To  the  extent  that  actual   developments   differ  from  Company's
expectations, the Company's liquidity could be adversely affected.

  Income taxes

        A  reduction  in the  German  "base"  income  tax rate  from 30% to 25%,
enacted in October 2000,  became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of  additional  deferred  income
tax expense in the fourth  quarter of 2000 due to a reduction  of the  Company's
deferred income tax asset related to certain German tax attributes.

        A  reduction  in the  Belgian  income  tax rate from  40.17% to  33.99%,
enacted in December 2002, became effective January 1, 2003. The reduction in the
Belgian income tax rate resulted in a $2.3 million  decrease in deferred  income
tax expense in the fourth  quarter of 2002 due to a reduction  of the  Company's
deferred   income  tax  liabilities   related  to  certain   Belgian   temporary
differences.

        Certain  of the  Company's  tax  returns in various  U.S.  and  non-U.S.
jurisdictions  are being  examined  and tax  authorities  have  proposed  or may
propose tax deficiencies,  including penalties and interest.  See Note 13 to the
Consolidated Financial Statements.

                                      -22-


        The  Company  has  received  a  notification   from  the  Norwegian  tax
authorities of their intent to assess tax deficiencies of approximately NOK 12.2
million ($1.7 million at December 31, 2002)  relating to 1998 through 2000.  The
Company has objected to this proposed  assessment  in a written  response to the
Norwegian tax authorities.

        The Company has received  preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities  proposing tax deficiencies,  including
related interest, of approximately (euro)10.4 million ($10.8 million at December
31, 2002).  The Company has filed protests to the assessments for the years 1991
to 1997.  The Company is in  discussions  with the Belgian tax  authorities  and
believes that a significant portion of the assessments is without merit.

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

        At December 31, 2002,  the Company had net deferred tax  liabilities  of
$50 million.  The Company operates in numerous tax jurisdictions,  in certain of
which it has  temporary  differences  that net to  deferred  tax assets  (before
valuation  allowance).  The  Company  has  provided  a  deferred  tax  valuation
allowance of $154 million at December 31, 2002,  principally related to Germany,
partially  offsetting  deferred  tax assets  which the  Company  believes do not
currently meet the "more-likely-than-not" recognition criteria.

        At December 31, 2002,  the Company had the  equivalent of  approximately
$414  million of income tax loss  carryforwards  in Germany  with no  expiration
date.  However,  the Company has  provided a deferred  tax  valuation  allowance
against  substantially  all of these income tax loss  carryforwards  because the
Company  currently   believes  they  do  not  meet  the   "more-likely-than-not"
recognition criteria. The German federal government has proposed certain changes
to its income tax law,  including certain changes that would impose  limitations
on the annual  utilization of income tax loss  carryforwards  that, as proposed,
would become  effective  retroactively to January 1, 2003. Since the Company has
provided a deferred income tax asset valuation  allowance against  substantially
all of the  German  tax loss  carryforwards,  any  limitation  on the  Company's
ability to utilize such  carryforwards  resulting from enactment of any of these
proposals  would not have a material impact on the Company's net deferred income
tax liability.  However, if enacted,  the proposed changes could have a material
impact on the Company's ability to make full annual use of its German income tax
loss carryforwards, which would significantly affect the Company's future income
tax expense and future income tax payments.

   Redeemable  preferred  stock,  profit  participation  certificates  and notes
   receivable from affiliates

        The Company had issued and outstanding  Series A and Series B redeemable
preferred stock and profit  participation  certificates  totaling $694.8 million
and  $617.4  million  at June 30,  2002 and  December  31,  2001,  respectively,
including  cumulative and unpaid  dividends.  The Series A redeemable  preferred
stock  was  issued  to  Kronos  in  February  1999  as a  result  of  a  capital
contribution  to the Company  through the reduction of the  Company's  affiliate
notes  payable to NL and Kronos.  The Series B  redeemable  preferred  stock was

                                      -23-


issued to Kronos in February 1999 as a result of a contribution  of intellectual
property by Kronos to the Company. The intellectual  property was contributed to
the  Company at  Kronos'  carryover  basis of zero due to common  control of the
Company and Kronos. The profit participation  certificates were issued to Kronos
in December 1999 as part of a  recapitalization.  The Company had $753.0 million
and $700.8 million of outstanding  notes  receivable from affiliates at June 30,
2002 and December 31, 2001,  respectively.  Settlement of such notes  receivable
was not currently  contemplated in the then foreseeable future, and consequently
such  notes   receivable   from   affiliates  were  reported  in  the  Company's
consolidated balance sheet as a reduction of the Company's  stockholder's equity
in accordance  with GAAP.  These notes arose between the Company,  NL and Kronos
through a series of transactions with affiliates, a substantial portion of which
were noncash in nature.  The Company  periodically  converted  accrued  interest
receivable from affiliates to notes receivable from affiliates.

        See Note 12 to the Consolidated  Financial  Statements for the effect of
the recapitalization in July 2002 on the Company.

  Environmental matters and litigation

        See  Item  3.  "Legal  Proceedings"  and  Note  19  to  the Consolidated
Financial Statements.

  Foreign operations

        As discussed  above,  the Company's  operations are located  outside the
United States for which the  functional  currency is not the U.S.  dollar.  As a
result,  the reported amount of the Company's assets and liabilities  related to
its non-U.S.  operations,  and therefore the Company's  consolidated net assets,
will fluctuate  based upon changes in currency  exchange rates. As of January 1,
2001, the functional currency of the Company's German, Belgian, Dutch and French
operations  have been  converted  to the euro  from  their  respective  national
currencies.  At  December  31,  2002,  the Company  had  substantial  net assets
denominated in the euro, Norwegian kroner and United Kingdom pound sterling.

  New accounting principles not yet adopted

        See Note 2 to the Consolidated Financial Statements.

  Other

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

                                      -24-


Company  may  consider  using  available  cash,  issuing  equity  securities  or
increasing its indebtedness to the extent permitted by the agreements  governing
the  Company's  existing  debt.  See  Note  8  to  the  Consolidated   Financial
Statements.

  Summary of debt and other contractual commitments

        As more  fully  described  in the  Notes to the  Consolidated  Financial
Statements,  the Company is a party to various debt,  lease and other agreements
which  contractually  and  unconditionally  commit the  Company  to pay  certain
amounts  in  the  future.  See  Notes  8 and 19 to  the  Consolidated  Financial
Statements. The following table summarizes such contractual commitments that are
unconditional  both in  terms  of  timing  and  amount  by the  type and date of
payment.


                                      Unconditional Payment Due Date
                            ----------------------------------------------------
                                        2004-      2006-      2008 and
Contractual Commitment       2003       2005       2007         after     Total
- ---------------------       ------     ------     ------      --------    ------
                                               (In millions)

                                                           
Indebtedness .........      $  1.3     $ 27.5     $   .2      $296.9      $325.9
                            ------     ------     ------      ------      ------

Property and equipment         5.1       --         --          --           5.1
                            ------     ------     ------      ------      ------

Operating leases .....         2.7        4.1        2.1        17.6        26.5
                            ------     ------     ------      ------      ------

                            $  9.1     $ 31.6     $  2.3      $314.5      $357.5
                            ======     ======     ======      ======      ======


        In addition,  KUS is party to certain  agreements that contractually and
unconditionally  commit KUS to pay certain  amounts in the future.  The Company,
and certain of its affiliates,  purchase  chloride  feedstock  underlying  these
long-term  supply  contracts from KUS and are more fully described in Note 19 to
the Consolidated Financial Statements.

  Assumptions on defined benefit pension plans

        The Company maintains various defined benefit pension plans. The Company
accounts for its defined  benefit  pension plans using SFAS No. 87,  "Employer's
Accounting  for  Pensions."  Under SFAS No. 87,  defined  benefit  pension  plan
expense  and  prepaid  and accrued  pension  cost are each  recognized  based on
certain  actuarial  assumptions,  principally  the assumed  discount  rate,  the
assumed  long-term  rate of return on plan  assets and the  assumed  increase in
future compensation levels. The Company recognized  consolidated defined benefit
pension  plan  expense of $5.7  million in 2002,  $4.6  million in 2001 and $3.9
million in 2000. The amount of funding  requirements  for these defined  benefit
pension plans is generally based upon  applicable  regulation and will generally
differ from pension expense recognized under SFAS No. 87 for financial reporting
purposes.  Contributions made by the Company to all of its plans aggregated $7.8
million in 2002, $7.0 million in 2001 and $7.1 million in 2000.

        The discount rates the Company utilizes for determining  defined benefit
pension  expense  and the  related  pension  obligations  are  based on  current
interest  rates  earned on  long-term  bonds that receive one of the two highest
ratings given by recognized rating agencies in the applicable  country where the
defined  benefit  pension  benefits  are being paid.  In  addition,  the Company
receives advice about  appropriate  discount rates to use based upon discussions

                                      -25-


with the Company's  third-party  actuaries,  who may in some cases utilize their
own market  indices.  The discount  rates are adjusted as of each valuation date
(September 30th for the Company's plans) to reflect then-current  interest rates
on such long-term bonds. Such discount rates are used to determine the actuarial
present value of the pension  obligations  as of December 31st of that year, and
such discount rates are also used to determine the interest component of defined
benefit pension expense for the following year.

        At December 31, 2002, approximately 75% and 20% of the projected benefit
obligations  for  all  of the  Company's  defined  benefit  pension  plans  were
attributable to Germany and Norway, respectively.  Because the Company maintains
defined  benefit  pension plans in several  different  countries in Europe,  and
because the interest  rate  environment  differs  from  country to country,  the
Company uses different  discount rate  assumptions  in  determining  its defined
benefit pension plan obligations and expense.

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



                      Discount rates used for the following periods:
           ---------------------------------------------------------------------
              Obligation at           Obligation at           Obligation at
           December 31, 2002 and   December 31, 2001 and   December 31, 2000 and
             expense in 2003         expense in 2002         expense in 2001
           ---------------------   ----------------------  ---------------------

                                                           
  Germany           5.5%                    5.8%                    6.0%
  Norway            6.0%                    6.0%                    6.0%


        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 obligation. 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 or the average
remaining life expectancy of the inactive participants.

        At December  31,  2002,  approximately  70% and 26% of total plan assets
related  to  plan  assets  for  the  Company's  plans  in  Germany  and  Norway,
respectively.  Because the Company  maintains  defined  benefit pension plans in
several  different  countries  in Europe,  because the plan assets in  different
countries  are  invested  in a  different  mix of  investments  and  because the
long-term  rates of return for  different  investments  differs  from country to
country,  the Company  uses  different  long-term  rates of return on plan asset
assumptions in determining its defined benefit pension plan expense.

        In  determining  the  expected  long-term  rate of return on plan  asset
assumptions,  the Company  considers  the long-term  asset mix (e.g.  equity vs.
fixed  income) for the assets for each of its plans and the  expected  long-term
rates of return for such asset  components.  In addition,  the Company  receives
advice about appropriate long-term rates of return to use based upon discussions

                                      -26-


with  the  Company's  third-party  actuaries.   Such  assumed  asset  mixes  are
summarized below:

o       In Germany, the composition of plan assets is established to satisfy the
        requirements  of the German  insurance  commissioner.  The current  plan
        asset allocation at December 31, 2002 was 30% to equity managers and 70%
        to fixed income managers.

o       In Norway,  the Company  currently has a plan asset target allocation of
        15% to  equity  managers  and  85% to  fixed  income  managers,  with an
        expected  long-term rate of return for such investments of approximately
        8% and 6%,  respectively.  The current plan asset allocation at December
        31, 2002 was 13% to equity managers and 87% to fixed income managers.

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

        The Company's assumed long-term rates of return on plan assets for 2002,
2001 and 2000 were as follows:



                     2002                      2001                     2000
                     -----                     -----                    -----

                                                                
  Germany             6.8%                      7.3%                     7.5%
  Norway              7.0%                      7.0%                     7.0%


        The  Company  currently  expects to utilize the same  long-term  rate of
return on plan  asset  assumptions  in 2003 as it used in 2002 for  purposes  of
determining the 2003 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  obligation and the pension expense
will be based in part upon expected increases in future compensation levels. For
all of the Company's plans for which the benefit  formula is so calculated,  the
Company  generally bases the assumed  expected  increase in future  compensation
levels based upon average long-term inflation rates for the applicable country.

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

        Based on the  actuarial  assumptions  described  above and the Company's
current expectation for what actual average foreign currency exchange rates will
be during 2003, the Company  expects its defined  benefit  pension  expense will
approximate  $6  million  in 2003.  In  comparison,  the  Company  expects to be
required to make  approximately $9 million of contributions to such plans during
2003.

                                      -27-


        Defined benefit pension expense and the amount recognized as prepaid and
accrued pension costs are based upon the actuarial  assumptions discussed above.
The Company  believes all of the actuarial  assumptions  used are reasonable and
appropriate.  If the Company had lowered the assumed  discount  rate by 25 basis
points for all of its plans as of December 31,  2002,  the  Company's  aggregate
projected benefit  obligation would have increased by approximately $6.6 million
at that  date,  and the  Company's  defined  benefit  pension  expense  would be
expected to increase by approximately  $1.0 million during 2003.  Similarly,  if
the Company  lowered the assumed  long-term  rate of return on plan assets by 25
basis points for all of its plans, the Company's defined benefit pension expense
would be expected to increase by approximately $.4 million during 2003.

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  General

        The Company is exposed to market risk from changes in currency  exchange
rates,  interest rates and equity security prices.  In the past, the Company has
periodically  entered  into  interest  rate swaps or other types of contracts in
order to manage a portion of its  interest  rate  market  risk.  Otherwise,  the
Company has not  generally  entered into  forward or option  contracts to manage
such market risks,  nor has the Company  entered into any such contract or other
type of derivative instrument for trading purposes.  The Company was not a party
to any forward or  derivative  option  contracts  related to  currency  exchange
rates,  interest rates or equity  security  prices at December 31, 2002 or 2001.
See Notes 2 and 20 to the Consolidated Financial Statements.

  Interest rates

        The  Company is exposed to market risk from  changes in interest  rates,
primarily related to indebtedness. At December 31, 2002, the Company's aggregate
indebtedness  was  split  between  92%  of  fixed-rate  instruments  and  8%  of
variable-rate  borrowings  (2001 - 81%  fixed-rate and 19%  variable-rate).  The
large percentage of fixed-rate debt instruments  minimizes  earnings  volatility
which would result from changes in interest rates.  The following table presents
principal amounts and  weighted-average  interest rates, by contractual maturity
dates, for the Company's  aggregate  indebtedness at December 31, 2002 and 2001.
At December 31, 2002, all outstanding fixed-rate indebtedness was denominated in
euros (2001-all fixed-rate  indebtedness  denominated in U.S. dollars),  and all
outstanding  variable-rate  indebtedness  was  denominated  in  either  euros or
Norwegian  kroner.   Information  shown  below  for  such  euro-  and  Norwegian
kroner-denominated  indebtedness is presented in its U.S.  dollar  equivalent at
December 31, 2002 using that date's  exchange  rate of .96 euro per U.S.  dollar
(2001 - 1.13 euro per U.S.  dollar) and 6.99  Norwegian  kroner per U.S.  dollar
(2001  -  9.02   Norwegian   kroner   per  U.S.   dollar).   Certain   Norwegian
kroner-denominated  capital  leases  totaling  $1.9  million  in 2002  have been
excluded from the table below.

                                      -28-




                                                         Amount
                                                 ----------------------
                                                 Carrying      Fair         Interest    Maturity
        Indebtedness                               value      value           rate        date
        ------------                             ---------   ----------     --------    --------

                                                   (In millions)

                                                                               
Fixed-rate indebtedness (euro-denominated):
    KII Notes .............................      $  296.9    $    299.9       8.875%       2009
                                                 --------    ----------       ------
                                                    296.9         299.9       8.875%
                                                 --------    ----------       ------

Variable-rate indebtedness (non U.S. dollar
  denominated):
    European Credit Facility:
    euro-denominated ......................          15.6          15.6         4.8%       2005
    Norwegian kroner-denominated ..........          11.5          11.5         8.9%       2005
                                                 --------    ----------       ------
                                                     27.1          27.1         6.5%
                                                 --------    ----------       ------

                                                 $  324.0    $    327.0         8.7%
                                                 ========    ==========       ======


        At December  31,  2001,  fixed-rate  affiliate  indebtedness  aggregated
$194.0 million (fair value - $194.9  million) with a  weighted-average  interest
rate of  11.75%;  variable  rate  indebtedness  at such  date  aggregated  $46.2
million, which approximated fair value, with a weighted-average interest rate of
5.45%.  All of such fixed rate affiliate  indebtedness  was  denominated in U.S.
dollars.  Such variable rate  indebtedness was denominated in the euro (52%) and
the Norwegian kroner (48%). Certain Norwegian  kroner-denominated capital leases
totaling  $2.5  million at December 31, 2001 have been  excluded  from the above
analysis.

  Currency exchange rates

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

        At December 31,  2002,  the Company had $312.5  million of  indebtedness
denominated  in euros (2001 - $24.0  million) and $11.5 million of  indebtedness
denominated in Norwegian kroner (2001 - $22.2 million).  The potential  increase
in the U.S. dollar equivalent of the principal amount outstanding resulting from
a hypothetical 10% adverse change in exchange rates would be approximately $32.4
million (2001 - $4.6 million).

  Restricted marketable debt security prices

        The fair value of restricted  marketable debt securities at December 31,
2002 and 2001 was  approximately  $2.5  million and  approximately  $.6 million,
respectively.  The  potential  change  in the  aggregate  fair  value  of  these
investments  assuming a 10% change in prices would be approximately  $.2 million
and approximately $.1 million, respectively.

                                      -29-


  Other

        The Company  believes there are certain  shortcomings in the sensitivity
analyses   presented  above,   which  analyses  are  required  under  the  SEC's
regulations.  For example,  the hypothetical effect of changes in interest rates
discussed above ignores the potential effect on other variables which affect the
Company's results of operations and cash flows, such as demand for the Company's
products,  sales volumes and selling prices and operating expenses.  Contrary to
the above  assumptions,  changes in interest rates rarely result in simultaneous
parallel shifts along the yield curve. Accordingly,  the amounts presented above
are not necessarily an accurate  reflection of the potential  losses the Company
would incur assuming the hypothetical  changes in market prices were actually to
occur.

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

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

        Not applicable.

                                    PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        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

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

                                      -30-



ITEM 14.       CONTROLS AND PROCEDURES

        The Company  maintains a system of disclosure  controls and  procedures.
The term "disclosure  controls and procedures," as defined by regulations of the
SEC,  means  controls  and other  procedures  that are  designed  to ensure that
information  required to be disclosed  in the reports that the Company  files or
submits to the SEC under the  Securities  Exchange Act of 1934,  as amended (the
"Act"), is recorded, processed, summarized and reported, within the time periods
specified  in the SEC's  rules and forms.  Disclosure  controls  and  procedures
include,  without  limitation,  controls and procedures  designed to ensure that
information required to be disclosed by the Company in the reports that it files
or  submits  to the SEC under the Act is  accumulated  and  communicated  to the
Company's  management,   including  its  principal  executive  officer  and  its
principal financial officer, as appropriate to allow timely decisions to be made
regarding  required  disclosure.  Each of Dr. Lawrence A. Wigdor,  the Company's
Chief  Executive  Officer,  and Robert D. Hardy,  the Company's  Chief Financial
Officer, have evaluated the Company's disclosure controls and procedures as of a
date  within 90 days of the  filing  date of this Form  10-K.  Based  upon their
evaluation,   these  executive   officers  have  concluded  that  the  Company's
disclosure  controls  and  procedures  are  effective  as of the  date  of  such
evaluation.

        The  Company  also  maintains a system of  internal  controls.  The term
"internal  controls," as defined by the American  Institute of Certified  Public
Accountants'  Codification of Statement on Auditing  Standards,  AU Section 319,
means controls and other  procedures  designed to provide  reasonable  assurance
regarding the  achievement  of objectives  in the  reliability  of the Company's
financial   reporting,   the  effectiveness  and  efficiency  of  the  Company's
operations and the Company's  compliance with  applicable laws and  regulations.
There have been no significant  changes in the Company's internal controls or in
other factors that could  significantly  affect such controls  subsequent to the
date of their last evaluation,  including any corrective  actions with regard to
significant deficiencies and material weaknesses.

                                      -31-



                                     PART IV

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

 (a) and (d)      Financial Statements and Schedules

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

 (b)              Reports on Form 8-K

                  There  were no Reports  on Form 8-K filed  during the  quarter
                  ended December 31, 2002.

                  February 13, 2003 - reported items 5 and 7.

 (c)              Exhibits

                  Included  as  exhibits  are the items  listed  in the  Exhibit
                  Index.  KII will furnish a copy of any of the exhibits  listed
                  below upon  payment of $4.00 per exhibit to cover the costs to
                  KII of  furnishing  the  exhibits.  Instruments  defining  the
                  rights of  holders of debt  issues  which do not exceed 10% of
                  consolidated  total assets will be furnished to the Securities
                  and Exchange Commission upon request.

                                      -32-



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 8.875%  Senior  Secured Notes due 2009,
               dated as of June 28, 2002, between the Registrant and The Bank of
               New York, as trustee -  incorporated  by reference to Exhibit 4.1
               to the Quarterly  Report on Form 10-Q of NL Industries,  Inc. for
               the quarter ended June 30, 2002.

4.2            Form of  certificate  of  8.875%  Senior  Secured  Note  due 2009
               (included  as  Exhibit  A  to  Exhibit  4.1)  -  incorporated  by
               reference  to  Exhibit  4.2  to  the  Registrant's   Registration
               Statement on Form S-4 (File No. 333-100047).

4.3            Form of  certificate  of  8.875%  Senior  Secured  Note  due 2009
               (included  as  Exhibit  B  to  Exhibit  4.1)  -  incorporated  by
               reference  to  Exhibit  4.3  to  the  Registrant's   Registration
               Statement on Form S-4 (File No. 333-100047).

4.4            Purchase  Agreement,  dated  as  of  June  19,  2002,  among  the
               Registrant,  Deutsche  Bank AG London,  Dresdner  Bank AG, London
               Branch,  and  Commerzbank  Aktiengesellschaft,  London  Branch  -
               incorporated by reference to Exhibit 4.4 to the Quarterly  Report
               on Form 10-Q of NL  Industries,  Inc. for the quarter  ended June
               30, 2002.

                                      -33-


4.5            Registration  Rights Agreement,  dated as of June 28, 2002, among
               the Registrant, Deutsche Bank AG London, Dresdner Bank AG, London
               Branch,  and  Commerzbank  Aktiengesellschaft,  London  Branch  -
               incorporated by reference to Exhibit 4.5 to the Quarterly  Report
               on Form 10-Q of NL  Industries,  Inc. for the quarter  ended June
               30, 2002.

4.6            Collateral Agency Agreement, dated as of June 28, 2002, among The
               Bank of New York,  U.S.  Bank,  N.A.  and the  Registrant  (filed
               herewith  only with  respect to Sections 2, 5, 6 and 8 thereof) -
               incorporated by reference to Exhibit 4.6 to the Quarterly  Report
               on Form 10-Q of NL  Industries,  Inc. for the quarter  ended June
               30, 2002.

4.7            Security Over Shares Agreement (shares of Kronos Limited),  dated
               June 28, 2002,  between the  Registrant and The Bank of New York,
               U.S.,  as trustee -  incorporated  by reference to Exhibit 4.7 to
               the Quarterly Report on Form 10-Q of NL Industries,  Inc. for the
               quarter ended June 30, 2002.

4.8            Pledge of Shares (shares of Kronos  Denmark ApS),  dated June 28,
               2002,  between the Registrant and U.S. Bank,  N.A., as collateral
               agent - incorporated by reference to Exhibit 4.8 to the Quarterly
               Report on Form 10-Q of NL Industries,  Inc. for the quarter ended
               June 30, 2002.

4.9            Pledge  Agreement  (pledge of shares of Societe  Industrielle  du
               Titane,  S.A.),  dated June 28, 2002,  between the Registrant and
               U.S. Bank,  N.A., as collateral agent - incorporated by reference
               to  Exhibit  4.9 to the  Quarterly  Report  on  Form  10-Q  of NL
               Industries, Inc. for the quarter ended June 30, 2002.

4.10           Partnership  Interest Pledge  Agreement  (pledge of fixed capital
               contribution  in Kronos  Titan  GmbH & Co.  OHG),  dated June 28,
               2002,  between the Registrant and U.S. Bank,  N.A., as collateral
               agent  -  incorporated  by  reference  to  Exhibit  4.10  to  the
               Quarterly  Report on Form  10-Q of NL  Industries,  Inc.  for the
               quarter ended June 30, 2002.

4.11           Recapitalization Agreement, dated as of June 5, 2002, between the
               Registrant  and  Kronos,  Inc. -  incorporated  by  reference  to
               Exhibit 4.12 to the Registrant's  Registration  Statement on Form
               S-4 (File No. 333-100047).

4.12           Redemption  Agreement,  dated  as of June 6,  2002,  between  the
               Registrant and NL Industries, Inc. - incorporated by reference to
               Exhibit 4.13 to the Registrant's  Registration  Statement on Form
               S-4 (File No. 333-100047).

4.13           Form of Profit  Participation  Certificate  (English  translation
               from German  language  document) -  incorporated  by reference to
               Exhibit 4.14 to the Registrant's  Registration  Statement on Form
               S-4 (File No. 333-100047).

                                      -34-


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           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.

10.3           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.

10.4           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.

10.5           Services  Agreement,  dated as of January 1, 1995,  amended as of
               April 1, 2002, among NL Industries,  Inc.,  Kronos (US), Inc. and
               the Registrant - incorporated by reference to Exhibit 10.6 to the
               Registrant's   Registration  Statement  on  Form  S-4  (File  No.
               333-100047).

10.6           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).

10.7           Form of Kronos Cost Sharing Agreement, effective as of January 1,
               2002, among the Registrant, Kronos Europe S.A./N.V., Kronos (US),
               Inc., NL Industries,  Inc.,  Kronos Titan GmbH & Co. OHG, Societe
               Industrielle  du Titane,  S.A.,  Kronos  Titan A/S,  Titania A/S,
               Kronos  Limited,  Kronos  Canada,  Inc.,  Kronos  Denmark ApS and
               Kronos Louisiana Inc. - incorporated by reference to Exhibit 10.8
               to the Registrant's  Registration Statement on Form S-4 (File No.
               333-100047).

10.8           Form of Assignment and Assumption Agreement,  dated as of January
               1,  1999,   between  Kronos  (US),  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).

                                      -35-


10.9           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).

10.10          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.

10.11          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).

10.12*         Richards  Bay Slag Sales  Agreement,  dated May 1, 1995,  between
               Richards Bay Iron and Titanium  (Proprietary) Limited and Kronos,
               Inc. -  incorporated  by reference to Exhibit 10.17 to the Annual
               Report on Form 10-K for NL  Industries,  Inc.  for the year ended
               December 31, 1995.

10.13*         Amendment  to  Richards  Bay Slag Sales  Agreement,  dated May 1,
               1999,  between  Richards  Bay  Iron  and  Titanium  (Proprietary)
               Limited and Kronos,  Inc. - incorporated  by reference to Exhibit
               10.4 to the Annual  Report on Form 10-K for NL  Industries,  Inc.
               for the year ended December 31, 1999.

10.14*         Amendment  to Richards  Bay Slag Sales  Agreement,  dated June 1,
               2001,  between  Richards  Bay  Iron  and  Titanium  (Proprietary)
               Limited and Kronos,  Inc. - incorporated  by reference to Exhibit
               10.5 to the Annual  Report on Form 10-K for NL  Industries,  Inc.
               for the year ended December 31, 2001.

10.15*         Amendment to Richards Bay Slag Sales Agreement dated December 20,
               2002 between Richards Bay Iron and Titanium (Proprietary) Limited
               and Kronos,  Inc. - incorporated  by reference to Exhibit 10.7 to
               the Annual  Report on Form 10-K for NL  Industries,  Inc. for the
               year ended December 31, 2002.

10.16          Agreement  between  Sachtleben  Chemie GmbH and Kronos Titan-GmbH
               effective  December  30,  1986 -  incorporated  by  reference  to
               Exhibit 10.1 of the  Registrant's  Quarterly  Report on Form 10-Q
               for the quarter ended September 30, 2002.

10.17          Supplementary  Agreement  to the  Agreement  of December 30, 1986
               between Sachtleben Chemie GmbH and Kronos Titan-GmbH dated May 3,
               1996  -  incorporated   by  reference  to  Exhibit  10.2  of  the
               Registrant's  Quarterly Report on Form 10-Q for the quarter ended
               September 30, 2002.

                                      -36-


10.18          Second Supplementary Agreement to the Contract dated December 30,
               1986 between  Sachtleben  Chemie GmbH and Kronos Titan-GmbH dated
               January 8, 2002 -  incorporated  by  reference to Exhibit 10.3 of
               the  Registrant's  Quarterly  Report on Form 10-Q for the quarter
               ended September 30, 2002.

 99.1          Certification  of Chief Executive  Officer  pursuant to 18 U.S.C.
               Section  1350,  as  adopted   pursuant  to  Section  906  of  the
               Sarbanes-Oxley Act of 2002.

 99.2          Certification  of Chief Financial  Officer  pursuant to 18 U.S.C.
               Section  1350,  as  adopted   pursuant  to  Section  906  of  the
               Sarbanes-Oxley Act of 2002.

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

                                      -37-




                                   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/ Dr. Lawrence A. Wigdor
                                          --------------------------------------
                                          Dr. Lawrence A. Wigdor, March 26, 2003
                                          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 date indicated:

/s/ Dr. Lawrence A. Wigdor                     /s/ Robert D. Hardy
- ---------------------------------------        ---------------------------------
Dr. Lawrence A. Wigdor, March 26, 2003         Robert D. Hardy, March 26, 2003
Chief Executive Officer                        Vice President and Chief
(Principal Executive Officer)                  Financial Officer
                                               (Principal Financial Officer
                                               and Principal Accounting
                                               Officer)


/s/ Dr. Ulfert Fiand                           /s/ Dr. Henry Basson
- ---------------------------------------        ---------------------------------
Dr. Ulfert Fiand, March 26, 2003               Dr. Henry Basson, March 26, 2003
Director                                       Director


/s/ Volker Roth                                /s/ Andrew Kasprowiak
- ---------------------------------------        ---------------------------------
Volker Roth, March 26, 2003                    Andrew Kasprowiak, March 26, 2003
Director                                       Director


                                      -38-



                                 CERTIFICATIONS

I, Dr. Lawrence A. Wigdor, the Chief Executive Officer of Kronos  International,
Inc., certify that:

1)  I have  reviewed  this annual  report on Form 10-K of Kronos  International,
    Inc.

2)  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
    statement of a material fact or omit to state a material  fact  necessary to
    make the  statements  made, in light of the  circumstances  under which such
    statements  were made, not misleading  with respect to the period covered by
    this annual report;

3)  Based  on my  knowledge,  the  financial  statements,  and  other  financial
    information  included in this annual report,  fairly present in all material
    respects the financial  condition,  results of operations  and cash flows of
    the registrant as of, and for, the periods presented in this annual report;

4)  The  registrant's  other  certifying  officer  and  I  are  responsible  for
    establishing and maintaining  disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

    a) designed such disclosure  controls and procedures to ensure that material
       information  relating  to  the  registrant,  including  its  consolidated
       subsidiaries,  is made  known  to us by  others  within  those  entities,
       particularly  during  the  period in which  this  annual  report is being
       prepared;

    b) evaluated the effectiveness of the registrant's  disclosure  controls and
       procedures  as of a date  within 90 days prior to the filing date of this
       annual report (the "Evaluation Date"); and

    c) presented in this annual report our conclusions  about the  effectiveness
       of the disclosure  controls and procedures  based on our evaluation as of
       the Evaluation Date;

5)  The registrant's other certifying officer and I have disclosed, based on our
    most recent evaluation, to the registrant's auditors and the audit committee
    of  registrant's  board of directors (or persons  performing  the equivalent
    functions):

    a) all  significant  deficiencies  in the design or  operation  of  internal
       controls which could adversely affect the registrant's ability to record,
       process,  summarize and report financial data and have identified for the
       registrant's auditors any material weaknesses in internal controls; and

    b) any fraud,  whether or not material,  that  involves  management or other
       employees  who  have a  significant  role  in the  registrant's  internal
       controls; and

6)  The  registrant's  other  certifying  officer and I have  indicated  in this
    annual  report  whether or not there were  significant  changes in  internal
    controls  or in other  factors  that  could  significantly  affect  internal
    controls subsequent to the date of our most recent evaluation, including any
    corrective  actions  with regard to  significant  deficiencies  and material
    weaknesses.


Date:  March 26, 2003


/s/ Dr. Lawrence A. Wigdor
- --------------------------
Dr. Lawrence A. Wigdor
Chief Executive Officer

                                      -39-



                                 CERTIFICATIONS

I, Robert D. Hardy, the Chief Financial Officer of Kronos  International,  Inc.,
certify that:

1)  I have  reviewed  this annual  report on Form 10-K of Kronos  International,
    Inc.

2)  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
    statement of a material fact or omit to state a material  fact  necessary to
    make the  statements  made, in light of the  circumstances  under which such
    statements  were made, not misleading  with respect to the period covered by
    this annual report;

3)  Based  on my  knowledge,  the  financial  statements,  and  other  financial
    information  included in this annual report,  fairly present in all material
    respects the financial  condition,  results of operations  and cash flows of
    the registrant as of, and for, the periods presented in this annual report;

4)  The  registrant's  other  certifying  officer  and  I  are  responsible  for
    establishing and maintaining  disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

    a) designed such disclosure  controls and procedures to ensure that material
       information  relating  to  the  registrant,  including  its  consolidated
       subsidiaries,  is made  known  to us by  others  within  those  entities,
       particularly  during  the  period in which  this  annual  report is being
       prepared;

    b) evaluated the effectiveness of the registrant's  disclosure  controls and
       procedures  as of a date  within 90 days prior to the filing date of this
       annual report (the "Evaluation Date"); and

    c) presented in this annual report our conclusions  about the  effectiveness
       of the disclosure  controls and procedures  based on our evaluation as of
       the Evaluation Date;

5)  The registrant's other certifying officer and I have disclosed, based on our
    most recent evaluation, to the registrant's auditors and the audit committee
    of  registrant's  board of directors (or persons  performing  the equivalent
    functions):

    a) all  significant  deficiencies  in the design or  operation  of  internal
       controls which could adversely affect the registrant's ability to record,
       process,  summarize and report financial data and have identified for the
       registrant's auditors any material weaknesses in internal controls; and

    b) any fraud,  whether or not material,  that  involves  management or other
       employees  who  have a  significant  role  in the  registrant's  internal
       controls; and

6)  The  registrant's  other  certifying  officer and I have  indicated  in this
    annual  report  whether or not there were  significant  changes in  internal
    controls  or in other  factors  that  could  significantly  affect  internal
    controls subsequent to the date of our most recent evaluation, including any
    corrective  actions  with regard to  significant  deficiencies  and material
    weaknesses.


Date:  March 26, 2003


/s/ Robert D. Hardy
- -----------------------
Robert D. Hardy
Chief Financial Officer

                                      -40-



                           KRONOS INTERNATIONAL, INC.

                           ANNUAL REPORT ON FORM 10-K

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

                   Index of Financial Statements and Schedules


Financial Statements                                                    Pages
- --------------------                                                  ----------

Report of Independent Accountants                                     F-2

Consolidated Balance Sheets - December 31, 2002 and 2001              F-3 / F-4

Consolidated Statements of Income - Years ended
December 31, 2002, 2001 and 2000                                      F-5

Consolidated Statements of Comprehensive Income - Years
ended December 31, 2002, 2001 and 2000                                F-6

Consolidated Statements of Redeemable Preferred Stock,
Profit Participation Certificates, and Common Stockholder's
Equity (Deficit) - Years ended December 31, 2002, 2001 and 2000       F-7

Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2001 and 2000                                      F-8 / F-9

Notes to Consolidated Financial Statements                            F-10/ F-38


Financial Statement Schedules
- -----------------------------

Report of Independent Accountants                                     S-1

Schedule I - Condensed Financial Information of Registrant            S-2 / S-7

Schedule II - Valuation and Qualifying Accounts                       S-8


Other Financial Statements
- --------------------------

Financial Statements of Kronos Titan GmbH & Co. OHG                   FA-1/FA-30

Financial Statements of Kronos Denmark ApS                            FB-1/FB-30

                                      F-1







                        REPORT OF INDEPENDENT ACCOUNTANTS



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

        In our opinion,  the  accompanying  consolidated  balance sheets and the
related  consolidated  statements of income,  comprehensive  income,  redeemable
preferred stock, profit  participation  certificates,  and common  stockholder's
equity (deficit) and cash flows present fairly,  in all material  respects,  the
consolidated  financial position of Kronos  International,  Inc. at December 31,
2002 and 2001, and the  consolidated  results of their operations and their cash
flows for each of the three  years in the  period  ended  December  31,  2002 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 auditing  standards  generally  accepted in the United States of
America,  which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

        As discussed in Note 1, the accompanying  financial  statements  exclude
the accounts of Kronos Canada, Inc., formerly a wholly owned subsidiary that was
sold to Kronos, Inc. on April 30, 2002.





                                                      PricewaterhouseCoopers LLP

Houston, Texas
February 12, 2003



                                      F-2




                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2002 and 2001

                                 (In thousands)



                        ASSETS                               2002         2001
                                                           --------     --------
                                                                  
Current assets:
    Cash and cash equivalents ........................     $ 15,023     $ 30,343
    Accounts and notes receivable ....................       92,493       87,422
    Receivable from affiliates .......................          972        1,134
    Refundable income taxes ..........................        1,718        1,347
    Inventories ......................................      143,664      121,316
    Prepaid expenses .................................        5,266        4,267
    Deferred income taxes ............................          695          497
                                                           --------     --------

        Total current assets .........................      259,831      246,326
                                                           --------     --------


Other assets:
    Prepaid pension cost .............................       17,572       14,696
    Other ............................................       16,135        2,896
                                                           --------     --------

        Total other assets ...........................       33,707       17,592
                                                           --------     --------


Property and equipment:
    Land .............................................       25,487       20,996
    Buildings ........................................      115,812       96,874
    Machinery and equipment ..........................      536,835      441,216
    Mining properties ................................       65,296       48,167
    Construction in progress .........................        7,749        2,995
                                                           --------     --------
                                                            751,179      610,248
    Less accumulated depreciation and depletion ......      433,416      341,649
                                                           --------     --------

        Net property and equipment ...................      317,763      268,599
                                                           --------     --------

                                                           $611,301     $532,517
                                                           ========     ========


                                      F-3


                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                           December 31, 2002 and 2001

                                 (In thousands)




LIABILITIES AND COMMON STOCKHOLDER'S EQUITY (DEFICIT)    2002            2001
                                                      -----------    -----------

                                                               
Current liabilities:
    Notes payable .................................   $      --      $    46,201
    Current maturities of long-term debt ..........         1,298          1,033
    Accounts payable and accrued liabilities ......        93,563         78,846
    Payable to affiliates .........................        21,430          7,929
    Income taxes ..................................         5,845          6,597
    Deferred income taxes .........................         3,219          1,530
                                                      -----------    -----------

        Total current liabilities .................       125,355        142,136
                                                      -----------    -----------

Noncurrent liabilities:
    Long-term debt ................................       324,608          1,465
    Notes payable to Kronos, Inc. .................          --          480,363
    Deferred income taxes .........................        49,688         37,783
    Accrued pension cost ..........................        21,486         18,696
    Other .........................................        12,933         11,846
                                                      -----------    -----------

        Total noncurrent liabilities ..............       408,715        550,153
                                                      -----------    -----------

Minority interest .................................           383            284
                                                      -----------    -----------

Redeemable preferred stock and profit participation
  certificates ....................................          --          571,119
Accrued dividends .................................          --           46,290
                                                      -----------    -----------

        Total redeemable preferred stock and profit
          participation certificates ..............          --          617,409
                                                      -----------    -----------

Common stockholder's equity (deficit):
    Common stock - $100 par value; 100,000 shares
      authorized; 2,968 and 3,196 shares issued ...           297            320
    Additional paid-in capital ....................     1,944,185      1,870,935
    Retained deficit ..............................    (1,721,859)    (1,774,150)
    Notes receivable from affiliates ..............          --         (700,843)
    Accumulated other comprehensive loss:
        Currency translation ......................      (139,025)      (169,758)
        Pension liabilities .......................        (6,750)        (3,969)
                                                      -----------    -----------

        Total common stockholder's equity (deficit)        76,848       (777,465)
                                                      -----------    -----------

                                                      $   611,301    $   532,517
                                                      ===========    ===========


Commitments and contingencies (Notes 13 and 19)

          See accompanying notes to consolidated financial statements.
                                      F-4




                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                  Years ended December 31, 2002, 2001 and 2000

                                 (In thousands)



                                                           2002         2001         2000
                                                        ---------    ---------    ---------
                                                                         
Revenues and other income:
    Net sales .......................................   $ 579,665    $ 554,637    $ 620,525
    Interest from affiliates ........................      22,754       36,220       23,069
    Insurance recoveries, net .......................        --         17,468         --
    Other income, net ...............................      22,288        6,201       (3,835)
                                                        ---------    ---------    ---------

                                                          624,707      614,526      639,759
                                                        ---------    ---------    ---------

Costs and expenses:
    Cost of sales ...................................     454,154      379,558      413,475
    Selling, general and administrative .............      72,008       68,277       72,534
    Interest ........................................      16,696        4,305        1,942
    Interest expense to affiliates ..................      18,698       34,145       28,724
                                                        ---------    ---------    ---------

                                                          561,556      486,285      516,675
                                                        ---------    ---------    ---------

        Income before income taxes and minority
          interest ..................................      63,151      128,241      123,084

Income tax expense ..................................      10,805       14,497       42,888
                                                        ---------    ---------    ---------

        Income before minority interest .............      52,346      113,744       80,196

Minority interest ...................................          55           16           47
                                                        ---------    ---------    ---------

        Net income ..................................      52,291      113,728       80,149

Dividends and accretion applicable to redeemable
  preferred stock and profit participation
  certificates ......................................     (78,600)    (112,466)     (15,867)
                                                        ---------    ---------    ---------

        Net (loss) income available to common stock $     (26,309)   $   1,262    $  64,282
                                                        =========    =========    =========


          See accompanying notes to consolidated financial statements.
                                      F-5



                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                  Years ended December 31, 2002, 2001 and 2000

                                 (In thousands)



                                                    2002         2001         2000
                                                 ---------    ---------    ---------

                                                                  
Net income ...................................   $  52,291    $ 113,728    $  80,149
                                                 ---------    ---------    ---------

Other comprehensive income (loss), net of tax:

    Minimum pension liabilities adjustment ...      (2,781)      (3,969)        --

    Currency translation adjustment ..........      30,733       (3,153)     (12,239)
                                                 ---------    ---------    ---------

        Total other comprehensive income
          (loss) .............................      27,952       (7,122)     (12,239)
                                                 ---------    ---------    ---------

    Comprehensive income .....................   $  80,243    $ 106,606    $  67,910
                                                 =========    =========    =========

          See accompanying notes to consolidated financial statements.
                                      F-6

                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK,
   PROFIT PARTICIPATION CERTIFICATES AND COMMON STOCKHOLDER'S EQUITY (DEFICIT)
                  Years ended December 31, 2002, 2001 and 2000
                                 (In thousands)


                                                   Redeemable              Common stockholder's equity (deficit)
                                                   preferred      ----------------------------------------------------------
                                                   stock and                                                        Notes
                                                     profit                       Additional                     receivable
                                                 participation      Common         paid-in        Retained          from
                                                  certificates      stock          capital         deficit       affiliates
                                                 -------------    ----------     -----------     -----------     -----------
                                                                                                  
Balance at December 31, 1999 ................    $   489,076      $      320     $ 1,675,378     $(1,964,220)    $      --

Net income ..................................           --              --              --            80,149            --
Other comprehensive loss ....................           --              --              --              --              --
Change in notes receivable from affiliates ..           --              --              --              --           (64,840)
Preferred dividends and accretion ...........         15,867            --           (15,867)           --              --
Capital contribution:
    NL Capital Corporation merger ...........           --              --           291,910            --          (278,937)
    Other ...................................           --              --            15,043            --              --
                                                 -----------      ----------     -----------     -----------     -----------

Balance at December 31, 2000 ................        504,943             320       1,966,464      (1,884,071)       (343,777)

Net income ..................................           --              --              --           113,728            --
Other comprehensive loss, net of tax ........           --              --              --              --              --
Change in notes receivable from affiliates ..           --              --              --              --          (357,066)
Preferred dividends and accretion ...........        112,466            --          (112,466)           --              --
Capital contribution ........................           --              --            16,937            --              --
Common dividends declared ...................           --              --              --            (3,807)           --
                                                 -----------      ----------     -----------     -----------     -----------

Balance at December 31, 2001 ................        617,409             320       1,870,935      (1,774,150)       (700,843)

Net income ..................................           --              --              --            52,291            --
Other comprehensive income (loss), net of tax           --              --              --              --              --
Change in notes receivable from affiliates ..           --              --              --              --           156,661
Preferred dividends and accretion ...........         78,600            --           (78,600)           --              --
Capital contribution ........................           --              --           217,000            --          (217,000)
Recapitalization ............................       (696,009)            (23)        (65,150)           --           761,182
                                                 -----------      ----------     -----------     -----------     -----------

Balance at December 31, 2002 ................    $      --        $      297     $ 1,944,185     $(1,721,859)    $      --
                                                 ===========      ==========     ===========     ===========     ===========



                                                       Common stockholder's equity (deficit)
                                                 -----------------------------------------------
                                                      Accumulated other
                                                     comprehensive loss                Total
                                                 ----------------------------         common
                                                   Currency                        stockholder's
                                                  translation       Pension           equity
                                                  adjustment      liabilities        (deficit)
                                                 ------------     -----------     --------------
                                                                         
Balance at December 31, 1999 ................    $  (154,366)     $     --        $ (442,888)

Net income ..................................           --              --            80,149
Other comprehensive loss ....................        (12,239)           --           (12,239)
Change in notes receivable from affiliates ..           --              --           (64,840)
Preferred dividends and accretion ...........           --              --           (15,867)
Capital contribution:
    NL Capital Corporation merger ...........           --              --            12,973
    Other ...................................           --              --            15,043
                                                 -----------      ----------      ----------

Balance at December 31, 2000 ................       (166,605)           --          (427,669)

Net income ..................................           --              --           113,728
Other comprehensive loss, net of tax ........         (3,153)         (3,969)         (7,122)
Change in notes receivable from affiliates ..           --              --          (357,066)
Preferred dividends and accretion ...........           --              --          (112,466)
Capital contribution ........................           --              --            16,937
Common dividends declared ...................           --              --            (3,807)
                                                 -----------      ----------      ----------

Balance at December 31, 2001 ................       (169,758)         (3,969)       (777,465)

Net income ..................................           --              --            52,291
Other comprehensive income (loss), net of tax         30,733          (2,781)         27,952
Change in notes receivable from affiliates ..           --              --           156,661
Preferred dividends and accretion ...........           --              --           (78,600)
Capital contribution ........................           --              --              --
Recapitalization ............................           --              --           696,009
                                                 -----------      ----------      ----------

Balance at December 31, 2002 ................    $  (139,025)     $   (6,750)     $   76,848
                                                 ===========      ==========      ==========

          See accompanying notes to consolidated financial statements.
                                      F-7

                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years ended December 31, 2002, 2001 and 2000

                                 (In thousands)



                                                    2002         2001         2000
                                                 ---------    ---------    ---------

                                                                  
Cash flows from operating activities:
    Net income ...............................   $  52,291    $ 113,728    $  80,149
    Depreciation, depletion and amortization .      27,144       24,119       24,108
    Noncash currency transaction (gain) loss .     (13,121)       9,355       15,591
    Noncash interest income from affiliates ..     (21,849)     (25,044)     (23,069)
    Noncash interest expense to affiliates ...       5,521         --           --
    Noncash interest expense .................         860         --           --
    Deferred income taxes ....................       5,514       (6,565)       5,226
    Minority interest ........................          55           16           47
    Net loss from disposition of property and
      equipment ..............................         534          548        1,404
    Pension cost, net ........................      (2,118)      (2,342)      (3,162)
    Insurance recoveries, net ................        --        (17,468)        --
                                                 ---------    ---------    ---------

                                                    54,831       96,347      100,294

    Change in assets and liabilities:
      Accounts and notes receivable ..........      10,726       (1,797)      (7,312)
      Inventories ............................      (1,907)      (7,617)      (7,859)
      Prepaid expenses .......................        (323)      (1,546)        (666)
      Accounts payable and accrued liabilities      (5,784)       4,088        1,885
      Income taxes ...........................      (2,114)         386        6,069
      Accounts with affiliates ...............      12,189      (13,332)       8,046
      Other noncurrent assets ................         162          366          (91)
      Other noncurrent liabilities ...........        (788)        (932)      (2,595)
                                                 ---------    ---------    ---------

          Net cash provided by operating
            activities .......................      66,992       75,963       97,771
                                                 ---------    ---------    ---------

                                      F-8



                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Years ended December 31, 2002, 2001 and 2000

                                 (In thousands)




                                                         2002         2001         2000
                                                      ---------    ---------    ---------
                                                                       
Cash flows from investing activities:
    Capital expenditures ..........................   $ (27,632)   $ (48,417)   $ (26,663)
    Change in restricted marketable debt
      securities, net .............................      (1,665)        (577)        --
    Property damaged by fire:
        Insurance proceeds ........................        --         23,361         --
        Other, net ................................        --         (3,205)        --
    Proceeds from disposition of property and
      equipment ...................................         864          364          110
    Other, net ....................................        --           --            (33)
                                                      ---------    ---------    ---------

        Net cash used by investing activities .....     (28,433)     (28,474)     (26,586)
                                                      ---------    ---------    ---------

Cash flows from financing activities:
    Indebtedness:
        Borrowings ................................     335,768        1,437       44,923
        Principal payments ........................     (84,814)     (22,428)     (29,162)
        Deferred financing fees ...................      (9,963)        --           --
    Repayments of loans from affiliates ...........    (301,432)        --        (93,000)
    Capital contribution ..........................        --          3,815         --
    Other capital transactions with affiliates, net       2,925      (35,631)     (18,831)
    Distributions to minority interests ...........         (11)          (5)          (6)
                                                      ---------    ---------    ---------

        Net cash used by financing activities .....     (57,527)     (52,812)     (96,076)
                                                      ---------    ---------    ---------

Cash and cash equivalents:
    Net change during the year from:
        Operating, investing and financing
          activities ..............................     (18,968)      (5,323)     (24,891)
        Currency translation ......................       3,648       (1,065)      (1,159)
                                                      ---------    ---------    ---------

                                                        (15,320)      (6,388)     (26,050)

        Balance at beginning of year ..............      30,343       36,731       62,781
                                                      ---------    ---------    ---------

        Balance at end of year ....................   $  15,023    $  30,343    $  36,731
                                                      =========    =========    =========

Supplemental disclosures - cash paid for:
    Interest ......................................   $  34,061    $  38,607    $  32,290
    Income taxes ..................................       6,748       20,690       25,544

          See accompanying notes to consolidated financial statements.
                                      F-9

                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Organization and basis of presentation:

        Kronos  International,  Inc.  ("KII")  is  incorporated  in the state of
Delaware,  U.S.A., with its seat of management in Leverkusen,  Germany. KII is a
wholly owned subsidiary of Kronos, Inc. ("Kronos"), a wholly owned subsidiary of
NL Industries,  Inc. ("NL").  NL conducts its titanium dioxide pigments ("TiO2")
operations  through Kronos.  KII conducts Kronos'  European TiO2 operations.  At
December 31, 2002, Valhi, Inc.  ("Valhi") and Tremont  Corporation  ("Tremont"),
each affiliates of Contran Corporation  ("Contran"),  held approximately 63% and
21%,  respectively,  of NL's  outstanding  common  stock.  At December 31, 2002,
Contran  and its  subsidiaries  held  approximately  93% of Valhi's  outstanding
common stock, and Tremont Group, Inc. ("Tremont  Group"),  which is 80% owned by
Valhi and 20%  owned by NL,  held  approximately  80% of  Tremont's  outstanding
common stock. Substantially all of Contran's outstanding voting stock is held by
trusts  established  for the benefit of certain  children and  grandchildren  of
Harold C.  Simmons,  of which Mr.  Simmons is sole  trustee.  Mr.  Simmons,  the
Chairman  of the  Board  of each of  Contran,  Valhi  and NL and a  director  of
Tremont,  may be deemed to control each of such  companies  and KII. In February
2003 Valhi completed a series of merger  transactions  pursuant to which,  among
other things, Tremont Group and Tremont both became wholly owned subsidiaries of
Valhi. Under these merger  transactions,  (i) Valhi issued 3.5 million shares of
its common  stock to NL in return  for NL's 20%  ownership  interest  in Tremont
Group and (ii) Valhi issued 3.4 shares of its common stock (plus cash in lieu of
fractional  shares) to all  Tremont  stockholders  (other than Valhi and Tremont
Group)  in  exchange  for  each  share  of  Tremont  common  stock  held by such
stockholders.  NL received  approximately 27,770 shares of Valhi common stock in
the second transaction.  The number of shares of Valhi common stock issued to NL
in exchange for NL's 20%  ownership  interest in Tremont Group was equal to NL's
20%  pro-rata  interest  in the shares of Tremont  common  stock held by Tremont
Group, adjusted for the same 3.4 exchange ratio. The Valhi common stock owned by
NL is restricted under SEC Rule 144.

        KII's current  operations  are conducted  primarily  through its German,
Belgian and Norwegian  subsidiaries with three TiO2 plants in Germany,  one TiO2
plant in Belgium  and one TiO2 plant and an  ilmenite  ore mining  operation  in
Norway.  KII also  operates TiO2 sales and  distribution  facilities in England,
France, Denmark and the Netherlands. Prior to April 30, 2002, KII also conducted
operations  in Canada  through  Kronos  Canada,  Inc.  ("KC"),  its wholly owned
subsidiary.  Effective  April 30,  2002,  in  anticipation  of a  proposed  debt
securities  offering,  KII sold 100% of KC's capital stock to Kronos in exchange
for a promissory note receivable in the amount of $217 million bearing  interest
of 7.87% per annum with a maturity date of April 30, 2012. KII has accounted for
the  disposition  of KC as a change in  accounting  entity.  Accordingly,  KII's
consolidated  financial  statements have been retroactively  restated to exclude
the  assets,  liabilities,  results of  operations  and cash flows of KC for all
periods  presented.  KII's  cash  dividends  received  from KC and cash  capital
contributions  to KC prior to April  30,  2002 are  reflected  as part of "other
capital  transactions  with affiliates,  net" in the  accompanying  consolidated
statement  of cash  flows.  The effect of the change in  accounting  entity as a
result  of the sale of KC to  Kronos  was to  reduce  KII's  net  income by $2.9
million,  $10.1 million and $14.2 million for the years ended December 31, 2002,
2001 and 2000, respectively.

                                      F-10


Note 2 - Summary of significant accounting policies:

Principles of consolidation and management's estimates

        The accompanying  consolidated financial statements include the accounts
of KII and its majority-owned  subsidiaries  (collectively,  the "Company"). All
material  intercompany  accounts  and  balances  have been  eliminated.  Certain
prior-year  amounts  have been  reclassified  to  conform  to the  current  year
presentation.  The  preparation  of  financial  statements  in  conformity  with
generally  accepted   accounting   principles  in  the  U.S.  ("GAAP")  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial  statements,  and the reported  amount of revenues and
expenses during the reporting period.  Actual results may differ from previously
estimated amounts under different assumptions or conditions.  The Company has no
involvement  with any  variable  interest  entity  covered  by the scope of FASB
Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities."

Translation of foreign currencies

        The functional currencies of the Company include the euro, the Norwegian
kroner,  the Danish  kroner and the United  Kingdom pound  sterling.  Assets and
liabilities  of the Company are  translated  at year-end  rates of exchange  and
revenues  and  expenses  are  translated  at  weighted  average  exchange  rates
prevailing during the year.  Resulting  translation  adjustments are included in
other  comprehensive  income  (loss),  net of  related  income  taxes.  Currency
transaction  gains and losses are  recognized  in income  currently  and include
amounts related to KII's U.S. dollar-denominated note payable to Kronos that was
remeasured into the non-U.S. dollar functional currency of KII. See Note 9.

Cash equivalents

        Cash equivalents include bank deposits with original maturities of three
months or less.

Restricted marketable debt securities

        Restricted   marketable  debt  securities  are  primarily   invested  in
corporate   debt   securities.   Restricted   marketable   debt   securities  of
approximately  $2.5 million and  approximately  $.6 million,  as of December 31,
2002 and 2001, respectively, represented certain noncurrent debt securities used
to support  certain  capital  requirements  regarding  the  Company's  Norwegian
operating  subsidiaries'  defined  benefit  pension  plans  in  accordance  with
applicable  Norwegian law.  Restricted  marketable debt securities are generally
classified as either  current or noncurrent  assets  depending upon the maturity
date  of  each  marketable  debt  security  and  are  carried  at  market  which
approximates cost. See Note 6.

Inventories

        Inventories are stated at the lower of cost  (principally  average cost)
or market. Amounts are removed from inventories at average cost.

                                      F-11


Property, equipment, depreciation and depletion

        Property and  equipment  are stated at cost.  Interest  costs related to
major, long-term capital projects are capitalized as a component of construction
costs.  Expenditures for  maintenance,  repairs and minor renewals are expensed;
expenditures for major improvements are capitalized.

        Depreciation is computed  principally by the  straight-line  method over
the  estimated  useful  lives of ten to forty years for  buildings  and three to
twenty years for  machinery  and  equipment.  Depletion of mining  properties is
computed by the unit-of-production and straight-line methods.

        When  events or changes in  circumstances  indicate  that  assets may be
impaired,  an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances  include, among other things, (i) significant
current  and prior  periods or current  and  projected  periods  with  operating
losses,  (ii) a significant  decrease in the market value of an asset or (iii) a
significant  change  in the  extent  or  manner  in which an asset is used.  All
relevant  factors  are  considered.  The test for  impairment  is  performed  by
comparing the estimated  future  undiscounted  cash flows (exclusive of interest
expense)  associated  with  the  asset  to the  asset's  net  carrying  value to
determine  if a  write-down  to market  value or  discounted  cash flow value is
required.  Effective  January 1, 2002,  the  Company  commenced  accounting  for
impairment of other long-lived assets (such as property and equipment and mining
properties)  in  accordance  with  Statement of Financial  Accounting  Standards
("SFAS") No. 144 as discussed under "Accounting principles adopted in 2002."

Long-term debt

        Where applicable,  long-term debt is stated net of unamortized  original
issue  discount  ("OID").  OID is  amortized  over the period  during which cash
interest  payments are not required and deferred  financing  costs are amortized
over the term of the applicable issue, both by the interest method.

Employee benefit plans

        Accounting and funding  policies for  retirement  plans are described in
Note 11.

        While the  Company has not issued any stock  options to  purchase  KII's
common stock,  certain  employees of the Company have been granted options by NL
to purchase NL common stock. The Company has elected the disclosure  alternative
prescribed  by SFAS No.  123,  "Accounting  for  Stock-Based  Compensation,"  as
amended by SFAS No. 148,  "Accounting for Stock-Based  Compensation - Transition
and  Disclosure,"  and to  account  for its  stock-based  employee  compensation
related to these NL stock options in accordance with Accounting Principles Board
Opinion  ("APBO") No. 25,  "Accounting  for Stock Issued to Employees,"  and its
various  interpretations.  Under APBO No. 25, no compensation  cost is generally
recognized  for fixed stock options in which the exercise price is not less than
the market  price on the grant  date.  During the  fourth  quarter of 2002,  NL,
including  the Company,  commenced  accounting  for its stock  options using the
variable  accounting  method,  which  requires the intrinsic  value of the stock
option to be accrued as an expense.  Compensation cost recognized by the Company
in  accordance  with APBO No. 25 was $.4 million in 2002 and nil in each of 2001
and 2000.  The  Company is also  charged by NL for stock  options  exercised  by
employees  of the  Company to the extent the  exercise  price  exceeds an amount
previously accrued as an expense under the intrinsic value method and the amount
of expense  recognized  by the  Company was nil in each of 2002 and 2001 and $.2
million in 2000. See Note 12.

                                      F-12


        The  following  table  illustrates  the  effect  on  net  (loss)  income
available to common stock if the Company had applied the fair value  recognition
provisions of SFAS No. 123 to stock-based employee compensation.


                                                         Years ended December 31,
                                                    --------------------------------
                                                      2002        2001        2000
                                                    --------    --------    --------
                                                             (In thousands)

                                                                   
Net (loss) income available to common stock - as
  reported ......................................   $(26,309)   $  1,262    $ 64,282
Add back:  Stock-based compensation cost, net of
  tax, included in reported net income ..........        296        --          --
Deduct:  Stock-based compensation cost, net of
  tax, determined under fair value based method
  for all awards ................................       (309)       (257)       (217)
                                                    --------    --------    --------

Net (loss) income available to common stock - pro
  forma .........................................   $(26,322)   $  1,005    $ 64,065
                                                    ========    ========    ========


Environmental remediation costs

        Environmental  remediation  costs  are  accrued  when  estimated  future
expenditures  are  probable  and  reasonably  estimable.  The  estimated  future
expenditures  generally  are not  discounted  to present  value.  Recoveries  of
remediation  costs from other parties,  if any, are reported as receivables when
their receipt is deemed probable.  At December 31, 2002 and 2001, no receivables
for recoveries have been recognized.

Net sales

        The Company  adopted the  Securities and Exchange  Commission's  ("SEC")
Staff  Accounting  Bulletin ("SAB") No. 101,  "Revenue  Recognition in Financial
Statements," as amended,  in 2000.  Revenue  generally is realized or realizable
and earned when all of the  requirements of SAB No. 101 are met,  including when
title and the risks and rewards of ownership  passes to the customer  (generally
at the time the product is shipped to the customer).  The impact of adopting SAB
No. 101 was not material. Amounts charged to customers for shipping and handling
are included in net sales.

Repair and maintenance costs

        The Company performs  planned major  maintenance  activities  during the
year.  Repair and maintenance  costs estimated to be incurred in connection with
planned major maintenance  activities are accrued in advance and are included in
cost of goods sold.

Shipping and handling costs

        Shipping  and  handling  costs are  included  in  selling,  general  and
administrative  expense and were approximately $33 million in each of 2002, 2001
and 2000.

                                      F-13


Income taxes

        KII is a member of NL's  consolidated U.S. federal income tax group (the
"NL Tax Group").  KII is a party to a U.S. federal income tax sharing  agreement
(the  "Kronos  Tax  Agreement").  Effective  January 1, 2001,  the NL Tax Group,
including KII, is included in the consolidated  U.S. federal income tax group of
Contran (the "Contran Tax Group"). As a member of the Contran Tax Group, NL is a
party to a separate tax sharing  agreement  (the "Contran Tax  Agreement").  The
Contran Tax Agreement  provides that NL calculate its liability for U.S.  income
taxes on a  separate-company  basis  using the tax  elections  made by  Contran.
During  2002 the Kronos Tax  Agreement  was  amended  (the  "Amended  Kronos Tax
Agreement").  The Amended  Kronos Tax Agreement  provides that Kronos  calculate
KII's  liability  for U.S.  income taxes on a  separate-company  basis using tax
elections consistent with Kronos' tax elections.  Pursuant to the Amended Kronos
Tax Agreement,  KII is to make  distributions to or receive  contributions  from
Kronos in the amounts it would have paid to or received  from the U.S.  Internal
Revenue  Service  had it not been a member  of the NL Tax  Group,  but  rather a
separate  taxpayer.  Contributions  under the Amended  Kronos Tax  Agreement are
limited to amounts previously distributed under the agreement.  No distributions
have yet been made or  contributions  received  under  the  Amended  Kronos  Tax
Agreement. KII would not have reported a different provision for income taxes in
2001  and 2000 if the  provision  for  income  taxes  in such  periods  had been
computed in accordance with the tax allocation  policy  contained in the Amended
Kronos Tax Agreement.

        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  subsidiaries  not  included  in the NL Tax Group.  The  Company
periodically   evaluates   its  deferred  tax  assets  in  the  various   taxing
jurisdictions in which it operates and adjusts any related valuation  allowance.
The Company's  valuation allowance is equal to the amount of deferred tax assets
which the Company  believes do not meet the  "more-likely-than-not"  recognition
criteria.

Derivatives and hedging activities

        The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging  Activities,"  as amended,  effective  January 1, 2001. SFAS No. 133
establishes accounting standards for derivative  instruments,  including certain
derivative instruments embedded in other contracts,  and for hedging activities.
Under  SFAS No.  133,  all  derivatives  are  recognized  as  either  assets  or
liabilities and measured at fair value. The accounting for changes in fair value
of  derivatives  is  dependent  upon  the  intended  use of the  derivative.  As
permitted  by the  transition  requirements  of SFAS No. 133,  as  amended,  the
Company  exempted from the scope of SFAS No. 133 all host  contracts  containing
embedded  derivatives which were issued or acquired prior to January 1, 1999. At
December  31,  2002 and 2001,  the  Company  was not a party to any  significant
derivative or hedging instrument covered by SFAS No. 133. There was no impact on
the Company's financial statements from adopting SFAS No. 133.

        The Company  periodically  uses 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.  The Company has not entered into
these  contracts for trading or  speculative  purposes in the past,  nor does it
currently  anticipate doing so in the future. The Company was not a party to any
such contracts during 2002, 2001 and 2000.

                                      F-14


Accounting principles adopted in 2002

        The Company  adopted SFAS No. 144,  "Accounting  for the  Impairment  or
Disposal of Long-Lived  Assets," effective January 1, 2002. SFAS No. 144 retains
the fundamental  provisions of existing GAAP with respect to the recognition and
measurement  of  long-lived  asset   impairment   contained  in  SFAS  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." However, SFAS No. 144 provides new guidance intended to address
certain  significant   implementation  issues  associated  with  SFAS  No.  121,
including expanded guidance with respect to appropriate cash flows to be used to
determine  whether  recognition of any long-lived  asset impairment is required,
and if required how to measure the amount of the  impairment.  SFAS No. 144 also
requires  that any net assets to be  disposed  of by sale to be  reported at the
lower of  carrying  value or fair  value  less  cost to sell,  and  expands  the
reporting of discontinued  operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity.  The adoption of SFAS No. 144  effective  January 1, 2002 did not have a
material effect on the Company's  consolidated  financial  position,  results of
operations or liquidity.

        The Company adopted SFAS No. 145,  "Rescission of FASB Statements No. 4,
44 and 64,  Amendment  of  FASB  Statement  No.  13 and  Technical  Corrections"
effective April 1, 2002. SFAS No. 145, among other things,  eliminated the prior
requirement that all gains and losses from the early extinguishment of debt were
to be classified as an extraordinary  item. Upon adoption of SFAS No. 145, gains
and  losses  from the  early  extinguishment  of debt are now  classified  as an
extraordinary  item  only if they meet the  "unusual  and  infrequent"  criteria
contained in Accounting  Principles  Board Opinion ("APBO") No. 30. In addition,
upon   adoption  of  SFAS  No.  145,   all  gains  and  losses  from  the  early
extinguishment  of debt that had previously been classified as an  extraordinary
item are to be  reassessed  to determine if they would have met the "unusual and
infrequent"  criteria  of APBO No. 30; any such gain or loss that would not have
met the APBO No. 30 criteria are  retroactively  reclassified  and reported as a
component  of income  before  extraordinary  item.  The adoption of SFAS No. 145
effective  January  1,  2002 did not have a  material  effect  on the  Company's
consolidated financial position, results of operations or liquidity.

        In November  2002, the FASB issued FIN No. 45,  "Guarantor's  Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness  of  Others."  FIN No. 45  requires  a  guarantor  to  recognize  a
liability at the  inception  of a guarantee  covered by the scope of FIN No. 45,
equal to the fair value of the  obligation  undertaken in issuing the guarantee.
FIN No. 45 also  expands the  disclosures  requirements  with respect to certain
guarantees. The initial recognition and measurement provisions of FIN No. 45 are
applicable on a prospective  basis for any  guarantees  issued or modified after
December  31,  2002,  while the  disclosure  requirements  were  effective  upon
issuance.  The Company is not a party to any guarantees  covered by the scope of
FIN No. 45 as of December 31, 2002.

Accounting principles not yet adopted

        The Company will adopt SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations," effective January 1, 2003. Under SFAS No. 143, the fair value of a
liability for an asset retirement obligation covered under the scope of SFAS No.
143 would be recognized  in the period in which the liability is incurred,  with
an offsetting  increase in the carrying amount of the related  long-lived asset.
Over time,  the  liability  would be  accreted  to its  present  value,  and the
capitalized cost would be depreciated over the useful life of the related asset.
Upon  settlement of the liability,  an entity would either settle the obligation
for its recorded amount or incur a gain or loss upon settlement.

                                      F-15


        Under the transition provisions of SFAS No. 143, at the date of adoption
on January 1, 2003 the  Company  will  recognize  (i) an asset  retirement  cost
capitalized  as an increase to the  carrying  value of its  property,  plant and
equipment,  (ii)  accumulated  depreciation on such capitalized cost and (iii) a
liability  for the  asset  retirement  obligation.  Amounts  resulting  from the
initial application of SFAS No. 143 are measured using information,  assumptions
and interest rates all as of January 1, 2003. The amount recognized as the asset
retirement cost is measured as of the date the asset  retirement  obligation was
incurred.   Cumulative  accretion  on  the  asset  retirement  obligation,   and
accumulated  depreciation  on the asset  retirement  cost, is recognized for the
time period from the date the asset  retirement  cost and  liability  would have
been  recognized  had the  provisions of SFAS No. 143 been in effect at the date
the liability was incurred,  through  January 1, 2003. The  difference,  if any,
between the  amounts to be  recognized  as  described  above and any  associated
amounts  recognized in the Company's balance sheet as of December 31, 2002 would
be recognized as a cumulative effect of a change in accounting  principles as of
the date of adoption.  The effect of adopting SFAS No. 143 as of January 1, 2003
as  summarized  in the table below is not expected to have a material  effect on
the  Company's  consolidated  financial  position,   results  of  operations  or
liquidity:


                                                                             Amount
                                                                         -------------
                                                                         (In millions)

                                                                         
Increase in carrying value of net property, plant and equipment:
    Cost ................................................................   $  .4
    Accumulated depreciation ............................................     (.1)
Decrease in liabilities previously accrued for closure and post
  closure activities ....................................................      .2
Asset retirement obligation recognized ..................................     (.5)
                                                                            -----

        Net impact ......................................................   $--
                                                                            =====


        The Company will adopt SFAS No. 146,  "Accounting  for Costs  Associated
with  Exit or  Disposal  Activities,"  effective  January  1,  2003  for exit or
disposal activities  initiated on or after the date of adoption.  Under SFAS No.
146, costs associated with exit activities,  as defined, that are covered by the
scope of SFAS No. 146 will be recognized  and measured  initially at fair value,
generally in the period in which the liability is incurred. Costs covered by the
scope of SFAS No. 146 include termination benefits provided to employees,  costs
to  consolidate  facilities  or  relocate  employees,  and  costs  to  terminate
contracts  (other than a capital  lease).  Under  existing GAAP, a liability for
such an exit cost is recognized  at the date an exit plan is adopted,  which may
or may not be the date at which the  liability  has been  incurred.  The Company
believes  the  adoption  of SFAS No. 146 will not have a material  effect on the
Company's consolidated financial position, results of operations or liquidity.

Note 3 - Business and geographic segments:

        The Company's operations are conducted in one operating business segment
- - activities  associated with the production and sale of 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 the
Company's  net assets are  located  in Europe and are  attributable  to the TiO2
reportable operating segment.

        The Company  evaluates its TiO2 segment  performance  based on operating
income.  Operating  income is defined as income before  income  taxes,  minority
interest, interest expense, interest expense to affiliates, certain nonrecurring
items and  certain  general  corporate  items.  Corporate  items  excluded  from
operating  income include  corporate  expense,  interest income from affiliates,
gains and losses from the  disposal of  long-lived  assets  outside the ordinary

                                      F-16


course of business and currency  transaction  gains and losses  related to KII's
U.S.  dollar-denominated  note  payable  to  Kronos  discussed  in Note  9.  The
accounting  policies of the TiO2 segment are the same as those described in Note
2. Interest  income  included in the  calculation  of TiO2  operating  income is
disclosed in Note 14 as "Trade interest income."


                                                        Years ended December 31,
                                                  -----------------------------------
                                                    2002         2001         2000
                                                  ---------    ---------    ---------
                                                            (In thousands)

                                                                   
Business segment - TiO2

    Net sales .................................   $ 579,665    $ 554,637    $ 620,525
    Other income, excluding corporate .........       6,449       15,556       11,756
                                                  ---------    ---------    ---------
                                                    586,114      570,193      632,281

    Cost of sales .............................     454,154      379,558      413,475
    Selling, general and administrative,
      excluding corporate .....................      72,008       66,789       72,534
                                                  ---------    ---------    ---------

        Operating income ......................      59,952      123,846      146,272

    Insurance recoveries, net .................        --         17,468         --
                                                  ---------    ---------    ---------

        Income before corporate items, income
          taxes and minority interest .........      59,952      141,314      146,272

    General corporate income (expense):
        Currency transaction gain (loss), net .      15,839       (9,355)     (15,591)
        Expense, net ..........................        --         (1,488)        --
        Interest expense ......................     (16,696)      (4,305)      (1,942)
        Interest expense to affiliates ........     (18,698)     (34,145)     (28,724)
        Interest income from affiliates .......      22,754       36,220       23,069
                                                  ---------    ---------    ---------

        Income before income taxes and minority
          interest ............................   $  63,151    $ 128,241    $ 123,084
                                                  =========    =========    =========

                                      F-17



                                                  Years ended December 31,
                                            -----------------------------------
                                              2002         2001         2000
                                            ---------    ---------    ---------
                                                       (In thousands)

                                                             
Geographic areas

    Net sales - point of origin:
        Germany .........................   $ 404,299    $ 398,470    $ 444,050
        Belgium .........................     123,760      126,782      137,829
        Norway ..........................     111,811      102,843       98,300
        Other ...........................      89,559       82,320       92,691
        Eliminations ....................    (149,764)    (155,778)    (152,345)
                                            ---------    ---------    ---------

                                            $ 579,665    $ 554,637    $ 620,525
                                            =========    =========    =========

    Net sales - point of destination:
        Europe ..........................   $ 456,299    $ 424,888    $ 479,637
        United States ...................      39,104       32,052       41,375
        Latin America ...................      12,808       16,039       14,064
        Asia ............................      39,832       42,686       41,470
        Other ...........................      31,622       38,972       43,979
                                            ---------    ---------    ---------

                                            $ 579,665    $ 554,637    $ 620,525
                                            =========    =========    =========


Note 4 - Accounts and notes receivable:


                                                             December 31,
                                                       ------------------------
                                                         2002            2001
                                                       --------        --------
                                                             (In thousands)

                                                                 
Trade receivables ..............................       $ 83,929        $ 65,417
Insurance claims receivable ....................            312          11,505
Recoverable VAT and other receivables ..........         10,159          12,126
Allowance for doubtful accounts ................         (1,907)         (1,626)
                                                       --------        --------

                                                       $ 92,493        $ 87,422
                                                       ========        ========


Note 5 - Inventories:


                                                             December 31,
                                                     ---------------------------
                                                       2002               2001
                                                     --------           --------
                                                            (In thousands)

                                                                  
Raw materials ............................           $ 36,960           $ 33,911
Work in process ..........................             14,009              6,421
Finished products ........................             67,469             61,191
Supplies .................................             25,226             19,793
                                                     --------           --------

                                                     $143,664           $121,316
                                                     ========           ========

                                      F-18


Note 6 - Other noncurrent assets:


                                                                 December 31,
                                                             -------------------
                                                               2002        2001
                                                             -------     -------
                                                                (In thousands)

                                                                   
Deferred financing costs, net (see Note 8) .............     $ 9,879     $    12
Restricted marketable debt securities (see Note 2) .....       2,492         577
Unrecognized net pension obligations (see Note 11) .....         292         446
Other ..................................................       3,472       1,861
                                                             -------     -------

                                                             $16,135     $ 2,896
                                                             =======     =======


Note 7 - Accounts payable and accrued liabilities:


                                                              December 31,
                                                       -------------------------
                                                         2002              2001
                                                       -------           -------
                                                             (In thousands)

                                                                   
Accounts payable ...........................           $49,630           $36,974
                                                       -------           -------
Accrued liabilities:
    Employee benefits ......................            20,131            16,227
    Other ..................................            23,802            25,645
                                                       -------           -------

                                                        43,933            41,872
                                                       -------           -------

                                                       $93,563           $78,846
                                                       =======           =======


Note 8 - Notes payable and long-term debt:


                                                                 December 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
                                                                (In thousands)

                                                                   
Notes payable - Kronos International, Inc. and subsidiaries   $   --     $ 46,201
                                                              ========   ========

Long-term debt:
    8.875% Senior Secured Notes ...........................    296,942       --
    Revolving credit facility .............................     27,077       --
    Other .................................................      1,887      2,498
                                                              --------   --------
                                                               325,906      2,498
Less current maturities ...................................      1,298      1,033
                                                              --------   --------

                                                              $324,608   $  1,465
                                                              ========   ========


        Notes payable at December 31, 2001, consisted of (euro)27 million ($24.0
million) and NOK 200 million  ($22.2  million).  Notes  payable  totaling  $53.2
million were repaid on June 28, 2002 with  proceeds  from the  revolving  credit
facility and available cash and the agreements were terminated.  See description
of revolving credit facility below.

        In June 2002 KII issued (euro)285  million ($280 million when issued and
$297 million at December 31, 2002)  principal  amount of 8.875%  Senior  Secured
Notes (the "Notes") due 2009.  The Notes are  collateralized  by first  priority

                                      F-19


liens on 65% of the common stock or other  equity  interests of certain of KII's
first-tier  subsidiaries.  The Notes are issued  pursuant to an indenture  which
contains a number of  covenants  and  restrictions  which,  among other  things,
restrict  the ability of KII and its  subsidiaries  to incur debt,  incur liens,
merge or consolidate with, or sell or transfer all or substantially all of their
assets to another entity.  In addition,  the indenture  restricts the ability of
KII to pay  dividends  and  contains  customary  cross-default  provisions  with
respect to other debt and obligations of KII or its subsidiaries.  The Notes are
redeemable,  at KII's option, on or after December 30, 2005 at redemption prices
ranging from  104.437% of the  principal  amount,  declining to 100% on or after
December 30, 2008. In addition, on or before June 30, 2005, KII may redeem up to
35% of its Notes with the net proceeds of a qualified  public equity offering at
108.875% of the principal amount. In the event of a change of control of KII, as
defined, KII would be required to make an offer to purchase its Notes at 101% of
the principal amount.  KII would also be required to make an offer to purchase a
specified portion of its Notes at par value in the event KII generates a certain
amount of net proceeds  from the sale of assets  outside the ordinary  course of
business,  and such net proceeds are not otherwise  used for specified  purposes
within a specified time period. At December 31, 2002, KII was in compliance with
all the covenants and the quoted market price of the Notes was  (euro)1,010  per
(euro)1,000  principal amount.  The Notes require cash interest payments on June
30 and December 30,  commencing on December 30, 2002.  KII completed an exchange
offer on November 18, 2002 to exchange the Notes for registered  publicly traded
notes that have  substantially  identical  terms as the Notes.  At December  31,
2002,  the  Company  had  approximately  $36  million  available  for payment of
dividends and other restricted payments as defined in the Notes indenture.

        In June 2002 KII's operating subsidiaries in Germany, Belgium and Norway
(the "European  Borrowers"),  entered into a three-year (euro)80 million secured
revolving  credit facility  ("European  Credit  Facility").  The European Credit
Facility is available in multiple currencies,  including U.S. dollars, euros and
Norwegian  kroner.  In addition,  the European  Credit  Facility has a (euro)5.0
million sub limit  available  for issuance of letters of credit.  As of December
31, 2002,  (euro)15  million ($15.6  million) and NOK 80 million ($11.5 million)
were outstanding  under the European Credit Facility and (euro)1.8 million ($1.8
million) of letters of credit was also  outstanding  under the  European  Credit
Facility. At December 31, 2002,  approximately  (euro)52 million  (approximately
$54 million) was available for additional  borrowings.  Borrowings bear interest
at the applicable interbank market rate plus 1.75%. As of December 31, 2002, the
interest rate was 4.80% and 8.86% on the euro and Norwegian  kroner  borrowings,
respectively, and the weighted average interest rate was 6.51%.

        The European Credit Facility is  collateralized  by accounts  receivable
and inventory of the European Borrowers,  plus a limited pledge of certain other
assets of the Belgian  borrower.  The European Credit Facility  contains,  among
others,  various  restrictive  covenants,  including  restrictions  on incurring
liens, asset sales, additional financial indebtedness,  mergers, investments and
acquisitions,  transactions  with  affiliates  and dividends.  In addition,  the
European  Credit  Facility  contains  customary  cross-default  provisions  with
respect to other debt and  obligations  of the European  Borrowers,  KII and its
other  subsidiaries.  The European  Borrowers  were in  compliance  with all the
covenants as of December 31, 2002.

        Deferred financing costs of $10.0 million for the Notes and the European
Credit Facility are being  amortized over the life of the respective  agreements
and are included in other noncurrent assets as of December 31, 2002.

        Unused  lines of credit  available  for  borrowing  under the  Company's
non-U.S.  credit  facilities  approximated  $57  million at  December  31,  2002
(including approximately $54 million under the European Credit Facility of which
approximately $3.2 million is available for letters of credit).

                                      F-20


        The  aggregate  maturities  of  long-term  debt at December 31, 2002 are
shown in the table below.



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

                                                                     
2003 ....................................................               $  1,298
2004 ....................................................                    279
2005 ....................................................                 27,224
2006 ....................................................                    145
2007 ....................................................                     18
2008 and thereafter .....................................                296,942
                                                                        --------

                                                                        $325,906
                                                                        ========


Note 9 - Notes Payable to Kronos, Inc.:


                                                                December 31,
                                                         -----------------------
                                                           2002           2001
                                                         --------       --------
                                                             (In thousands)


                                                                  
11.75% Second Tier Senior Mirror Note ............       $   --         $194,000
Euro-denominated note ............................           --          286,363
                                                         --------       --------

                                                         $   --         $480,363
                                                         ========       ========


        NL had $194  million of 11.75%  Senior  Secured  Notes due 2003 (the "NL
Notes") at December 31, 2001. KII had a Second-Tier Senior Mirror Note (the "KII
Mirror Note") payable to Kronos,  which had a First-Tier Senior Mirror Note (the
"Kronos  Mirror  Note")  payable to NL. The terms of the KII Mirror Note and the
Kronos  Mirror Note were  identical to the terms of the NL Notes with respect to
the maturity dates and interest rates with interest paid  semi-annually.  The NL
Notes  were  collateralized  by a  first  priority  lien  on the  common  stock,
redeemable preferred stock and profit participation certificates of KII, the KII
Mirror  Note,  the Kronos  Mirror  Note and other  collateral  pledged by NL and
Kronos.  An acceleration with respect to the principal amount of the Notes would
have resulted in an automatic acceleration of the KII Mirror Note and the Kronos
Mirror Note.

        On March 22, 2002,  NL redeemed $25 million  principal  amount of the NL
Notes at the current call price of 100%,  and as a result $25 million  principal
amount of the KII Mirror Note was repaid. In addition, immediately following the
closing  of the  Notes  offering  (see  Note 8),  KII  effectively  loaned to NL
sufficient  funds for NL to redeem in full the remaining $169 million  principal
amount of the NL Notes. In accordance with the terms of the indenture  governing
the NL Notes,  on June 28,  2002,  NL  irrevocably  placed on  deposit  with the
trustee funds in an amount  sufficient to pay in full the redemption  price plus
all  accrued  and unpaid  interest  due on the July 28,  2002  redemption  date.
Immediately  thereafter,  NL  was  released  from  its  obligations  under  such
indenture,  the indenture was  discharged and all collateral was released to NL.
Because NL had been released as being the primary obligor under the indenture as
of June 30, 2002, the NL Notes were  derecognized as of that date along with the
funds placed on deposit with the trustee to effect the July 28, 2002 redemption.
KII recognized a loss on the early  extinguishment of debt of approximately $1.5
million in the second quarter of 2002,  consisting  primarily of the interest on
the KII Mirror Note for the period from July 1 to July 28,  2002.  Such loss was
recognized  as a component of interest  expense.  The Kronos Mirror Note and the
KII Mirror Note were deemed repaid in accordance  with the terms and  conditions
of such agreements, and the agreements were canceled.

                                      F-21


        The  euro-denominated  note  payable to Kronos  ((euro)323.9  million at
December 31, 2001) was  originally  due in 2010 and bore  interest at 6% payable
monthly.  The euro note payable to Kronos was established in 2001 as a result of
a series of noncash  transactions  between KII, NL and Kronos.  A portion of the
note payable ((euro)217.6 million,  including interest of (euro)6.3 million) was
prepaid in April 2002,  using as  consideration  an  equivalent  amount of KII's
euro-denominated  note receivable from NL. See Note 12. The remaining balance of
(euro)113.8  million  (including  interest)  was repaid as of June 28, 2002 with
proceeds from the (euro)285  million Notes offering  described in Note 8 and the
note agreement was canceled.

Note 10 - Other noncurrent liabilities:


                                                              December 31,
                                                       -------------------------
                                                         2002              2001
                                                       -------           -------
                                                             (In thousands)

                                                                   
Environmental costs ........................           $ 5,921           $ 5,662
Employee benefits ..........................             4,025             3,476
Insurance claims expense ...................               889               821
Other ......................................             2,098             1,887
                                                       -------           -------

                                                       $12,933           $11,846
                                                       =======           =======


Note 11 - Employee benefit plans:

Company-sponsored pension plans

        The Company maintains  various defined benefit and defined  contribution
pension plans covering  substantially  all  employees.  Personnel are covered by
plans in their  respective  countries.  The Company  amended its defined benefit
pension  plans in Belgium  and Norway in 2002 to exclude  the  admission  of new
employees to the plans. New employees of these particular locations are eligible
to participate in Company-sponsored defined contribution plans.

        Certain  actuarial  assumptions  used in measuring  the defined  benefit
pension assets, liabilities and expenses are presented below.


                                                             December 31,
                                                 ------------------------------------
                                                    2002         2001         2000
                                                 ----------   ----------   ----------
                                                             (Percentages)

                                                                  
Discount rate ................................   5.5 to 6.0   5.8 to 7.3   6.0 to 6.5
Rate of increase in future compensation levels   2.5 to 3.0   2.8 to 3.0   3.0 to 4.0
Long-term rate of return on plan assets ......   6.8 to 7.3   6.8 to 7.8   7.0 to 8.0


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

        SFAS No. 87, "Employers'  Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit  obligation  exceeds the unfunded accrued pension  liability.  Variances
from  actuarially  assumed rates will change the actuarial  valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.

                                      F-22


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


                                                        Years ended December 31,
                                                    --------------------------------
                                                      2002        2001        2000
                                                    --------    --------    --------
                                                             (In thousands)

                                                                   
Net periodic pension cost:
    Service cost benefits .......................   $  3,395    $  3,087    $  3,114
    Interest cost on projected benefit obligation
      ("PBO") ...................................     10,965      10,268       9,793
    Expected return on plan assets ..............    (10,294)     (9,676)     (9,746)
    Amortization of prior service cost ..........        223         201         238
    Amortization of net transition obligation ...        332         320         331
    Recognized actuarial losses .................      1,029         415         196
                                                    --------    --------    --------

                                                    $  5,650    $  4,615    $  3,926
                                                    ========    ========    ========


        The funded status of the Company's  defined benefit pension plans is set
forth below.


                                                             December 31,
                                                       ------------------------
                                                         2002           2001
                                                       ---------      ---------
                                                            (In thousands)

                                                                
Change in PBO:
    Beginning of year ............................     $ 180,586      $ 172,762
    Service cost .................................         3,395          3,087
    Interest .....................................        10,965         10,268
    Participant contributions ....................         1,016            958
    Amendments ...................................          --              106
    Actuarial (gain) loss ........................        (7,118)         6,241
    Benefits paid ................................       (11,715)       (11,274)
    Change in currency exchange rates ............        36,054         (1,562)
                                                       ---------      ---------

        End of year ..............................       213,183        180,586
                                                       ---------      ---------

Change in fair value of plan assets:
    Beginning of year ............................       137,158        138,564
    Actual return on plan assets .................          (717)         6,603
    Employer contributions .......................         7,768          6,957
    Participant contributions ....................         1,016            958
    Benefits paid ................................       (11,715)       (11,274)
    Change in currency exchange rates ............        27,350         (4,650)
                                                       ---------      ---------

        End of year ..............................       160,860        137,158
                                                       ---------      ---------

Funded status at year end:
    Plan assets less than PBO ....................       (52,323)       (43,428)
    Unrecognized actuarial loss ..................        45,809         35,882
    Unrecognized prior service cost ..............         3,221          2,713
    Unrecognized net transition obligation .......         1,638            739
                                                       ---------      ---------

                                                       $  (1,655)     $  (4,094)
                                                       =========      =========
Amounts recognized in the balance sheet:
    Prepaid pension cost .........................     $  17,572      $  14,696
    Accrued pension cost:
        Current ..................................        (6,568)        (5,573)
        Noncurrent ...............................       (21,486)       (18,696)
    Unrecognized net pension obligations .........           292            446
    Accumulated other comprehensive loss .........         8,535          5,033
                                                       ---------      ---------

                                                       $  (1,655)     $  (4,094)
                                                       =========      =========

                                      F-23


        Selected  information  related to the Company's  defined benefit pension
plans that have accumulated  benefit obligations in excess of fair value of plan
assets is presented below. At December 31, 2002 and 2001, 100%, of the projected
benefit obligations of such plans relate to non-U.S. plans.


                                                             December 31,
                                                       -------------------------
                                                         2002             2001
                                                       --------         --------
                                                            (In thousands)

                                                                  
Projected benefit obligation .................         $163,122         $141,269
Accumulated benefit obligation ...............          143,530          129,884
Fair value of plan assets ....................          113,536           99,339


Incentive bonus programs

        Certain  employees are eligible to participate in the Company's  various
incentive bonus programs. The programs provide for annual payments, which may be
in the form of cash or NL common stock. The amount of the annual payment paid to
an employee,  if any, is based on formulas involving the profitability of Kronos
in relation to the annual operating plan and, for certain employees,  individual
performance.

Note 12 - Common stock and notes receivable from affiliates:

Common stock

        Common  stock - $100 par value:  (voting) -- 100,000  shares  authorized
(2,968 shares and 3,196 shares were issued and  outstanding at December 31, 2002
and 2001, respectively).

        In July 2002 KII and Kronos agreed to a recapitalization  of the Company
as  contemplated  in the  (euro)285  million  Notes  offering.  See  Note  8. In
connection with the recapitalization  agreement, KII converted the Series A (738
shares)  and  Series  B  (647  shares)  redeemable  preferred  stock  (including
liquidation and redemption preferences and accrued and unpaid dividends) held by
Kronos totaling $411.7 million into 1,385 shares of KII, $100 par value,  common
stock.  As a result of the conversion,  the Series A and B redeemable  preferred
stock certificates were canceled. Further, KII redeemed its profit participation
certificates  held by Kronos  totaling  $284.3  million in exchange  for various
notes   receivable  from  NL.  As  a  result  of  the  redemption,   the  profit
participation certificates were canceled.  Finally, KII redeemed 1,613 shares of
KII common stock held by Kronos in exchange for its remaining  notes  receivable
from NL and Kronos totaling $479.4 million. As a result of the  recapitalization
in July 2002, KII's common stockholder's equity increased a net $696.0 million.

                                      F-24


Common stock options

        The NL Industries, Inc. 1998 Long-Term Incentive Plan ("NL Option Plan")
provides for the discretionary  grant of restricted common stock, stock options,
stock appreciation rights ("SARs") and other incentive  compensation to officers
and other key employees of the Company.  Although  certain stock options granted
pursuant  to a similar  plan which  preceded  the NL Option  Plan  ("Predecessor
Option Plan") remain outstanding at December 31, 2002, no additional options may
be granted under the Predecessor Option Plan.

        Up to five million  shares of NL common stock may be issued  pursuant to
the NL Option Plan and, at December 31, 2002,  3,651,000  shares were  available
for future  grants.  The NL Option Plan  provides  for the grant of options that
qualify  as  incentive  options  and for  options  which  are not so  qualified.
Generally,  stock options and SARs  (collectively,  "options")  are granted at a
price  equal to or greater  than 100% of the market  price at the date of grant,
vest over a five  year  period  and  expire  ten  years  from the date of grant.
Restricted  stock,   forfeitable   unless  certain  periods  of  employment  are
completed,  is held in escrow in the name of the grantee  until the  restriction
period expires. No SARs have been granted under the NL Option Plan.

        Changes in  outstanding  options  granted to  certain  employees  of the
Company  pursuant  to the NL Option  Plan and the  Predecessor  Option  Plan are
summarized in the table below.


                                                                                      Weighted
                                                                                      average
                                               Exercise price    Amount    Weighted    fair
                                                 per share       payable    average    value
                                              ----------------    upon     exercise   at grant
                                      Shares    Low      High   exercise     price      date
                                     -------  -------  -------  --------   --------  ---------
                                             (In thousands, except per share amounts)

                                                                    
Outstanding at December 31, 1999        53    $  8.69  $ 17.97  $   699    $ 13.09

    Granted ....................        46      14.25    14.25      656      14.25    $ 4.83
    Exercised ..................       (13)      8.69    17.97     (173)     12.90
                                       ---    -------  -------  -------    -------

Outstanding at December 31, 2000        86      11.28    17.97    1,182      13.74

    Granted ....................        60      20.11    20.11    1,207      20.11    $ 7.52
    Exercised ..................        (4)     11.28    14.25      (49)     12.69
                                       ---    -------  -------  -------    -------

Outstanding at December 31, 2001       142      11.28    20.11    2,340      16.46

    Exercised ..................        (1)     14.25    14.25       (8)     14.25
                                       ---    -------  -------  -------    -------

Outstanding at December 31, 2002       141    $ 11.28  $ 20.11  $ 2,332    $ 16.46
                                       ===    =======  =======  =======    =======


        At December 31, 2002, 2001 and 2000 options to purchase  43,300,  17,500
and 7,200 shares, respectively,  were exercisable and options to purchase 39,600
shares  become  exercisable  in 2003.  Of the  exercisable  options,  options to
purchase  36,100 shares at December 31, 2002 had exercise  prices less than NL's
December 31, 2002 quoted market price of $17.00 per share.  Outstanding  options
at December 31, 2002 expire at various dates through 2011.

                                      F-25


        The  following  table  summarizes  NL's stock  options  outstanding  and
exercisable  that were held by certain  employees  of the Company as of December
31, 2002 by price range.



                          Options outstanding                                   Options exercisable
- --------------------------------------------------------------------------    -----------------------
                                                    Weighted-
                                                     average     Weighted-                  Weighted-
                                     Outstanding    remaining     average     Exercisable    average
             Range of                     at       contractual    exercise         at        exercise
         exercise prices               12/31/02       life         price        12/31/02      price
- ----------------------------------   -----------   -----------   ---------    -----------  ----------

                                                                      
$      9.68      --    $     12.09     25,700           5.9      $ 11.42        17,100     $   11.50
      12.09      --          14.51     46,600           7.0        14.25        19,000         14.25
      16.93      --          19.35      9,300           5.1        17.97         7,200         17.97
      19.35      --          21.77     60,000           8.1        20.11          --            --
                                      -------       -------      -------        ------     ---------

                                      141,600           7.1      $ 16.46        43,300     $   13.78
                                      =======       =======      =======        ======     =========


        The pro forma  information  required  by SFAS No. 123,  "Accounting  for
Stock-Based  Compensation,"  is based  on an  estimation  of the  fair  value of
options  issued  subsequent  to  January 1,  1995.  See Note 2. No options  were
granted in 2002. The fair values of employee stock options were calculated using
the  Black-Scholes  stock option  valuation  model with the  following  weighted
average  assumptions for grants in 2001 and 2000:  stock price volatility of 46%
and 48% in 2001 and 2000,  respectively;  risk-free rate of return of 5% in 2001
and 2000;  dividend yield of 4.0% in 2001 and 4.9% in 2000; and an expected term
of 9 years  in 2001  and  2000.  For  purposes  of pro  forma  disclosures,  the
estimated  fair value of the options is  amortized  to expense over the options'
vesting period.

  Notes receivable from affiliates

        Long-term notes  receivable from affiliates were included as a component
of  equity  in  accordance  with  GAAP  as  settlement  of the  affiliate  notes
receivable  balances  was not  currently  contemplated  within  the  foreseeable
future. The notes are summarized in the following table.


                                                               December 31,
                                                         -----------------------
                                                           2002           2001
                                                         --------       --------
                                                              (In thousands)
                                                                  
Notes receivable from:
    NL:
        8.7% Fixed rate ..........................       $   --         $106,783
        6.0% Fixed rate euro-denominated .........           --          286,363
        Variable rate ............................           --          262,772

    Kronos - variable rate .......................           --           44,925
                                                         --------       --------

                                                         $   --         $700,843
                                                         ========       ========


        The Company  periodically  converted interest receivable from affiliates
to notes  receivable from  affiliates.  For the years ended 2002, 2001 and 2000,
the interest  transferred  to notes  receivable  from  affiliates  totaled $12.6
million, $25.0 million and $24.8 million, respectively.

        See  Common  stock  above  for a  discussion  of the  exchange  of notes
receivable  from  affiliates as part of the  recapitalization  of the Company in
July 2002.

                                      F-26



Note 13 - Income taxes:

        The components of (i) income from  continuing  operations  before income
taxes and minority interest ("pretax  income"),  (ii) the difference between the
provision  for income taxes  attributable  to pretax income and the amounts that
would be expected using the U.S. federal statutory income tax rate of 35%, (iii)
the  provision  for income taxes and (iv) the  comprehensive  tax  provision are
presented below.


                                                           Years ended December 31,
                                                     -----------------------------------
                                                       2002         2001         2000
                                                     ---------    ---------    ---------
                                                               (In thousands)

                                                                      
Pretax income:
    Germany ......................................   $  46,785    $  88,359    $  63,051
    Other non-U.S ................................      16,366       39,882       60,033
                                                     ---------    ---------    ---------

                                                     $  63,151    $ 128,241    $ 123,084
                                                     =========    =========    =========

Expected tax expense .............................   $  22,103    $  44,884    $  43,079
Non-U.S. tax rates ...............................      (1,728)      (8,365)      (6,253)
Resolution of German income tax audits ...........        --           --         (5,500)
Change in valuation allowance:
    Corporate restructuring in Germany and other .        --        (23,247)        --
    Recognition of certain deductible tax
      attributes which previously did not meet the
      "more-likely-than-not" recognition criteria       (2,839)        --           (375)
Currency transaction gains and losses for which no
  income taxes are provided ......................      (4,592)       3,274        5,457
Rate change adjustment of deferred taxes .........      (2,332)        --          5,695
Tax contingency reserve adjustments, other, net ..         193       (1,725)         252
Other, net .......................................        --           (324)         533
                                                     ---------    ---------    ---------

    Income tax expense ...........................   $  10,805    $  14,497    $  42,888
                                                     =========    =========    =========

Provision for income taxes:
    Current income tax expense (benefit):
        Germany ..................................   $  (1,214)   $  10,245    $  20,814
        Other non-U.S ............................       6,505       10,817       16,848
                                                     ---------    ---------    ---------

                                                         5,291       21,062       37,662
                                                     ---------    ---------    ---------
    Deferred income tax expense (benefit):
        Germany ..................................       7,920       (6,183)       6,099
        Other non-U.S ............................      (2,406)        (382)        (873)
                                                     ---------    ---------    ---------

                                                         5,514       (6,565)       5,226
                                                     ---------    ---------    ---------

                                                     $  10,805    $  14,497    $  42,888
                                                     =========    =========    =========

Comprehensive provision (benefit) for income taxes
  allocable to:
    Pretax income ................................   $  10,805    $  14,497    $  42,888
    Other comprehensive loss - pension liabilities        (721)      (1,064)        --
                                                     ---------    ---------    ---------

                                                     $  10,084    $  13,433    $  42,888
                                                     =========    =========    =========


                                      F-27




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


                                                                 December 31,
                                              -------------------------------------------------
                                                       2002                      2001
                                              ----------------------    -----------------------
                                                   Deferred tax              Deferred tax
                                              ----------------------    -----------------------
                                               Assets    Liabilities     Assets     Liabilities
                                              ---------  -----------    ---------   -----------
                                                             (In thousands)

                                                                         
Tax effect of temporary differences
  relating to:
    Inventories ...........................   $     672    $  (3,302)   $     477    $  (2,849)
    Property and equipment ................      43,868      (17,146)      42,721      (15,980)
    Accrued (prepaid) pension cost ........         225      (24,785)         258      (21,665)
    Accrued liabilities and deductible
      differences .........................       1,754         --          3,553         --
    Other taxable differences .............        --        (32,204)        --        (23,673)
Tax loss and tax credit carryforwards .....     134,318         --        100,709         --
Valuation allowance .......................    (153,678)        --       (121,681)        --
                                              ---------    ---------    ---------    ---------

    Gross deferred tax assets (liabilities)      27,159      (77,437)      26,037      (64,167)

Reclassification, principally netting by
  tax jurisdiction ........................     (24,530)      24,530      (24,854)      24,854
                                              ---------    ---------    ---------    ---------

    Net total deferred tax assets
      (liabilities) .......................       2,629      (52,907)       1,183      (39,313)
    Net current deferred tax assets
      (liabilities) .......................         695       (3,219)         497       (1,530)
                                              ---------    ---------    ---------    ---------

    Net noncurrent deferred tax assets
      (liabilities) .......................   $   1,934    $ (49,688)   $     686    $ (37,783)
                                              =========    =========    =========    =========


                                      F-28



        Changes in the Company's  deferred  income tax  valuation  allowance are
summarized below.


                                                               Years ended December 31,
                                                         -----------------------------------
                                                            2002         2001         2000
                                                         ---------    ---------    ---------
                                                                   (In thousands)

                                                                          
Balance at the beginning of year .....................   $ 121,681    $ 155,572    $ 196,627

    Recognition of certain deductible tax attributes
      which previously did not meet the "more-likely-
      than-not" recognition criteria .................      (2,839)     (23,247)        (375)
    Change in gross deferred income tax assets
      due principally to redeterminations of certain
      tax attributes and implementation of certain tax
      planning strategies ............................      13,218       (3,157)     (24,955)
    Foreign currency translation .....................      21,618       (7,487)     (15,725)
                                                         ---------    ---------    ---------

Balance at the end of year ...........................   $ 153,678    $ 121,681    $ 155,572
                                                         =========    =========    =========


        A  reduction  in the  German  "base"  income  tax rate  from 30% to 25%,
enacted in October 2000,  became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of  additional  deferred  income
tax expense in the fourth  quarter of 2000 due to a reduction  of the  Company's
deferred income tax asset related to certain German tax attributes.

        A  reduction  in the  Belgian  income  tax rate from  40.17% to  33.99%,
enacted in December 2002, became effective January 1, 2003. The reduction in the
Belgian income tax rate resulted in a $2.3 million  decrease in deferred  income
tax expense in the fourth  quarter of 2002 due to a reduction  of the  Company's
deferred   income  tax  liabilities   related  to  certain   Belgian   temporary
differences.

        Certain  of the  Company's  tax  returns in various  U.S.  and  non-U.S.
jurisdictions  are being  examined  and tax  authorities  have  proposed  or may
propose tax deficiencies, including penalties and interest.

        The  Company  has  received  a  notification   from  the  Norwegian  tax
authorities of their intent to assess tax deficiencies of approximately NOK 12.2
million ($1.7 million at December 31, 2002)  relating to 1998 through 2000.  The
Company has objected to this proposed  assessment  in a written  response to the
Norwegian tax authorities.

        The Company has received  preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities  proposing tax deficiencies,  including
related interest, of approximately (euro)10.4 million ($10.8 million at December
31, 2002).  The Company has filed protests to the assessments for the years 1991
to 1997.  The Company is in  discussions  with the Belgian tax  authorities  and
believes that a significant portion of the assessments is without merit.

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

                                      F-29


        In 2002 and  2001,  the  Company  recognized  a $2.8  million  and $23.2
million  income tax  benefit,  respectively,  attributable  to  decreases in the
valuation  allowance  due to a change in  estimate of the  Company's  ability to
utilize  certain German income tax attributes  that did not previously  meet the
"more-likely-than-not" recognition criteria.

        At December 31, 2002,  the Company had the  equivalent of  approximately
$414  million of income tax loss  carryforwards  in Germany  with no  expiration
date.  However,  the Company has  provided a deferred  tax  valuation  allowance
against  substantially  all of these income tax loss  carryforwards  because the
Company  currently   believes  they  do  not  meet  the   "more-likely-than-not"
recognition criteria. The German federal government has proposed certain changes
to its income tax law,  including certain changes that would impose  limitations
on the annual  utilization of income tax loss  carryforwards  that, as proposed,
would become  effective  retroactively to January 1, 2003. Since the Company has
provided a deferred income tax asset valuation  allowance against  substantially
all of the  German  tax loss  carryforwards,  any  limitation  on the  Company's
ability to utilize such  carryforwards  resulting from enactment of any of these
proposals  would not have a material impact on the Company's net deferred income
tax liability.  However, if enacted,  the proposed changes could have a material
impact on the Company's ability to make full annual use of its German income tax
loss carryforwards, which would significantly affect the Company's future income
tax expense and future income tax payments.

Note 14 - Other income (expense), net:


                                                   Years ended December 31,
                                               --------------------------------
                                                 2002        2001        2000
                                               --------    --------    --------
                                                        (In thousands)

                                                              
Currency transaction gains (losses), net ...   $ 15,157    $ (9,098)   $(10,598)
Royalty income .............................      5,779       5,421       5,801
Trade interest income ......................      1,597       2,148       1,544
Disposition of property and equipment ......       (534)       (548)     (1,404)
Insurance recoveries, net (See Note 15) ....       --         7,222        --
Other, net .................................        289       1,056         822
                                               --------    --------    --------

                                               $ 22,288    $  6,201    $ (3,835)
                                               ========    ========    ========


        Included in currency  transaction gains (losses),  net are noncash gains
(losses) associated with the Company's notes payable to affiliates.  See Note 9.
Noncash  currency  transaction  gains  totaled  $13.1  million in 2002.  Noncash
currency  transaction  losses totaled $9.4 million and $15.6 million in 2001 and
2000, respectively.

        The Company  receives  royalty  income from KC for use of certain of the
Company's intellectual property.

                                      F-30



Note 15 - Leverkusen fire and insurance claim:

        A fire on March 20, 2001 damaged a section of the Company's  Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result,  production of TiO2 at the Leverkusen  facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process  TiO2 plant
("Chloride  Plant"),  but did damage  certain  support  equipment  necessary  to
operate that plant. The damage to the support equipment  resulted in a temporary
shutdown of the Chloride Plant.

        On  April  8,  2001,  repairs  to the  damaged  support  equipment  were
substantially  completed and full production  resumed at the Chloride Plant. The
Sulfate Plant became  approximately 50% operational in September 2001 and became
fully operational in late October 2001. The damages to property and the business
interruption losses caused by the fire were covered by insurance as noted below,
but the effect on the financial  results of the Company on a  quarter-to-quarter
basis was impacted by the timing and amount of insurance recoveries.

        The  Company  reached  an  agreement  and  settled  the  coverage  claim
involving the  Leverkusen  fire for $56.4 million  during the fourth  quarter of
2001 ($46.9  million  received as of December 31, 2001,  with the remaining $9.5
million  received in January 2002),  of which $27.3 million  related to business
interruption  and $29.1 million related to property  damage,  clean-up costs and
other extra  expenses.  The Company  recognized a $17.5 million  pre-tax gain in
2001 related to the property  damage  recovery after  deducting $11.6 million of
clean-up  costs and other extra  expenses  incurred  and the  carrying  value of
assets  destroyed in the fire. The gain was excluded from the  determination  of
operating income. The $27.3 million of business interruption proceeds recognized
in 2001 were allocated between other income, excluding corporate, which reflects
recovery of lost margin  ($7.2  million)  and as a reduction of cost of sales to
offset  unallocated  period  costs ($20.1  million).  No  additional  recoveries
related to the Leverkusen fire are expected to be received.

Note 16 - Other items:

        Advertising  costs are  expensed as incurred and were  approximately  $1
million in each of 2002, 2001 and 2000.

        Research,  development  and certain  sales  technical  support costs are
expensed as incurred and were  approximately  $6 million in 2002,  $5 million in
2001 and $6 million in 2000.

        Interest  capitalized in connection with long-term  capital projects was
nil in each of 2002, 2001 and 2000.

Note 17 - Related party transactions:

        The  Company  may be deemed  to be  controlled  by  Harold  C.  Simmons.
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

                                      F-31



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 the  Company  other than as set forth in this  Annual  Report on Form
10-K, the Company continuously considers, reviews and evaluates, and understands
that  Contran,  Valhi,  NL,  Kronos and related  entities  consider,  review and
evaluate,  such  transactions.  Depending  upon  the  business,  tax  and  other
objectives  then  relevant,  and  restrictions  under the  indentures  and other
agreements, it is possible that the Company might be a party to one or more such
transactions in the future.

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

        The Company is a party to a cost sharing  agreement  with Kronos whereby
Kronos provides  certain  management,  financial,  insurance and  administrative
services to the Company on a fee basis.  The Company's  expense was $1.1 million
in 2002 and $.2 million in each of 2001 and 2000.

        Sales of TiO2 to Kronos (US),  Inc.  ("KUS"),  an affiliate,  were $38.5
million in 2002,  $32.0 million in 2001 and $41.1 million in 2000. Sales of TiO2
to KC were $7.7 million in 2002, $7.2 million in 2001 and $12.4 million in 2000.

        KUS  purchases the rutile and slag  feedstock  used as a raw material in
all of the Company's  chloride  process TiO2 facilities.  The Company  purchases
such  feedstock  from KUS for use in its  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 $102.5 million in 2002, $91.5 million in 2001 and
$89.4 million in 2000.

        Purchases  of TiO2 from KUS were $2.6  million in 2002,  $1.2 million in
2001 and $3.9  million in 2000.  Purchases  of TiO2 from KC were $.5  million in
2002, $.1 million in 2001 and $3.4 million in 2000.

        Royalty  income  received  from KC for use of certain  of the  Company's
intellectual  property was $5.8  million in 2002,  $5.4 million in 2001 and $5.8
million in 2000.

        Interest  income  from  affiliates  related  to  notes  receivable  from
affiliates was $22.8 million in 2002, $36.2 million in 2001 and $23.1 million in
2000.

        The Company is party to master  global NL  insurance  coverage  policies
with regard to property,  business  interruption,  excess  liability,  and other
coverages.  The costs  associated  with these policies  aggregated $7.0 million,
$7.1 million and $3.1 million in 2002, 2001 and 2000, respectively.

                                      F-32



        Amounts  receivable from and payable to affiliates are summarized in the
following table.


                                                               December 31,
                                                          ----------------------
                                                            2002           2001
                                                          -------        -------
                                                              (In thousands)
                                                                   
Current receivable from affiliates:

    NL ...........................................        $    98        $  --
    KC ...........................................            815          1,084
    Other ........................................             59             50
                                                          -------        -------

                                                          $   972        $ 1,134
                                                          =======        =======
Current payable to affiliates:
    Kronos .......................................        $  --          $ 6,487
    KUS ..........................................         21,430          1,400
    NL ...........................................           --               42
                                                          -------        -------

                                                          $21,430        $ 7,929
                                                          =======        =======


        Net  amounts  between  the  Company  and KUS were  generally  related to
product sales and raw material purchases. Net amounts between the Company and KC
were generally related to product sales and royalties.  Affiliate  balances with
NL and Kronos were related primarily to accrued interest on affiliate loans. See
Note 12 for discussion of notes receivable from affiliates.

        See Common  stock for a discussion  of the exchange of notes  receivable
from affiliates as part of the recapitalization of the Company in July 2002.

Note 18 - Redeemable Preferred Stock and Profit Participation Certificates:

        The  Company's  redeemable  preferred  stock  and  profit  participation
certificates structure at December 31, 2002 and 2001 is summarized below:

        Preferred Stock - $100 par value; 2,000 Shares Authorized:

        Series A - 1,000 shares  authorized,  738 shares issued and outstanding,
designated  nonvoting  cumulative  preferred  stock,  Series  A,  with an annual
dividend  rate of $11,354 per share  (cumulative  and unpaid  dividends of $24.3
million at December 31, 2001), and with  liquidation and redemption  preferences
of $257,361  per share plus  accrued and unpaid  dividends.  The Series A shares
($189.9 million) were issued to Kronos in February 1999 as a result of a capital
contribution  to the Company via the reduction of affiliate  notes payable to NL
and Kronos. See Note 12.

        Series B - 1,000 shares  authorized,  647 shares issued and outstanding,
designated  nonvoting  cumulative  preferred  stock,  Series  B,  with an annual
dividend  rate of $11,347 per share  (cumulative  and unpaid  dividends of $22.0
million at December 31, 2001) and with liquidation and redemption preferences of
$257,193 per share plus accrued and unpaid  dividends.  The Series B shares were
issued to Kronos in February  1999 in exchange for Kronos'  contribution  to the
Company of its  intellectual  property and the shares were recorded at carryover
basis in  accordance  with GAAP due to the  common  control of the  Company  and
Kronos. The intellectual property was transferred to the Company and recorded at
Kronos' carryover basis of zero. Thus, the original basis of the Series B shares

                                      F-33


was zero and the shares  have been  accreted to the  redemption  value of $166.4
million at June 30, 2002 using the interest method. See Note 12.

        In July 2002 all  outstanding  Series A shares and Series B shares (with
aggregate values of $219.0 million and $192.7 million, respectively, at the time
of conversion)  were converted into 1,385 shares of KII, $100 par value,  common
stock. As a result of the  conversion,  the Series A and B shares were canceled.
See Note 12.

        Profit Participation  Certificates ("PPCs") - DM100 par value: 5,500,000
shares  authorized,  issued and  outstanding,  designated  nonvoting  cumulative
preferred PPCs, with an annual dividend of 4% per share based on earnings of the
Company and before any common stock dividends to Kronos. Kronos waived its right
to dividend  distributions  for all periods presented and through December 2002.
The PPCs were issued to Kronos  ($284.3  million) in December  1999 as part of a
recapitalization  of the  Company.  In July 2002 all  outstanding  PPCs (with an
aggregate  value of $284.3 million at the time of  redemption)  were redeemed in
exchange for various notes  receivable  from NL. As a result of the  redemption,
the PPCs were canceled. See Note 12.

Note 19 - Commitments and contingencies:

Leases

        The Company leases,  pursuant to operating leases, various manufacturing
and  office  space and  transportation  equipment.  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.

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


                                      F-34


        Net rent expense aggregated $7 million in 2002 and $6 million in each of
2001 and 2000. At December 31, 2002,  minimum rental commitments under the terms
of noncancellable operating leases were as follows:


                                                       Real Estate     Equipment
                                                       -----------     ---------
                                                             (In thousands)
                                                                   
Years ending December 31,
- -------------------------

        2003 .................................          $ 1,312          $ 1,398
        2004 .................................            1,316              943
        2005 .................................            1,270              563
        2006 .................................              995              136
        2007 .................................              999               14
        2008 and thereafter ..................           17,545               11
                                                        -------          -------

                                                        $23,437          $ 3,065
                                                        =======          =======


        Approximately  $16.5  million of the $23.4  million real estate  minimum
rental  commitment is  attributable  to the Leverkusen,  Germany  facility.  The
minimum  commitment is  determined  by taking the current  annual rental rate in
effect at December 31, 2002 and extending out the annual rate to the year 2050.

Capital expenditures

        At December 31, 2002, the estimated cost to complete capital projects in
process approximated $5 million.

Purchase commitments

        KUS has long-term supply contracts that provide for certain  affiliates'
chloride  feedstock  requirements  through 2003.  The Company and certain of its
affiliates  purchase  chloride  feedstock   underlying  these  long-term  supply
contracts from KUS. See Note 17. The agreements  require KUS to purchase certain
minimum quantities of feedstock with average minimum annual purchase commitments
aggregating approximately $156 million.

Environmental, Product Liability and Litigation Matters

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

                                      F-35



        The Company's  production  facilities  operate  within an  environmental
regulatory  framework in which  governmental  authorities  typically are granted
broad  discretionary  powers which allow them to issue  operating  permits under
which the plants must  operate.  The Company  believes  all of its plants are in
substantial compliance with applicable environmental laws.

        While the laws regulating  operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU").  Germany and Belgium are members of the EU and follow
its  initiatives.   Norway,  although  not  a  member,  generally  patterns  its
environmental  regulatory actions after the EU. The Company believes that Kronos
has  obtained  all  required  permits  and  is in  substantial  compliance  with
applicable  EU  requirements,   including  EU  Directive   92/112/EEC  regarding
establishment of procedures for reduction and eventual  elimination of pollution
caused by waste from the TiO2 industry.

        At all of the Company's sulfate plant facilities other than Fredrikstad,
Norway,  the Company  recycles  spent acid either  through  contracts with third
parties or using the Company's own facilities. At its Fredrikstad, Norway plant,
the Company ships its spent acid to a third party  location  where it is treated
and  disposed.  The Company has a contract  with a third party to treat  certain
by-products of its German sulfate-process plants. Either party may terminate the
contract  after giving four years advance  notice with regard to its  Nordenham,
Germany plant.  Under certain  circumstances,  Kronos may terminate the contract
after giving six months notice with respect to treatment of by-products from the
Leverkusen, Germany plant.

        The Company  landfills  waste  generated at its  Nordenham,  Germany and
Langerbrugge,  Belgium  plants and mine tailings  waste  generated at its mining
facility in Norway. The Company maintains  reserves,  as required under GAAP, to
cover  the  anticipated  cost  of  closure  of  these   landfills,   which  were
approximately  $.5 million  and $.1  million as of  December  31, 2002 and 2001,
respectively.

        The Company is responsible  for certain  closure costs at landfills used
and formerly  used by its  Leverkusen,  Germany  TiO2 plants.  The Company has a
reserve of  approximately $6 million and $5 million related to such landfills as
of December 31, 2002 and 2001, respectively.

        The Company's  Belgian  subsidiary and various of its Belgian  employees
are the  subject of an  investigation  by  Belgian  authorities  relating  to an
accident resulting in two fatalities that occurred in its Langerbrugge,  Belgium
facility in October 2000. The investigation stage, which could ultimately result
in civil and criminal  sanctions against the Company,  was completed in 2002. In
April 2003 the Belgian  authorities  are  expected to announce if the Company or
any of its employees will be prosecuted.

        The   Company  is  also   involved  in  various   other   environmental,
contractual,  product liability and other claims and disputes  incidental to its
business.

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

Concentrations of Credit Risk

        Sales of TiO2 accounted for  approximately 90% of net sales during 2002,
2001 and 2000.  The remaining  sales result from the mining and sale of ilmenite
ore (a raw material used in the sulfate  pigment  production  process),  and the

                                      F-36


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.  TiO2 is sold to over 4,000 customers,  with
the top ten customers  approximating  21% of net sales in 2002, 23% of net sales
in 2001, and 24% of net sales in 2000.  Approximately  75% of the Company's TiO2
sales by  volume  were to Europe in 2002,  2001 and 2000.  Approximately  10% of
sales by volume were to North America in 2002, 2001 and 2000.

Note 20 - Financial instruments:

        Summarized  below is the  estimated  fair value and related net carrying
value of the Company's financial instruments.


                                                          December 31,         December 31,
                                                             2002                 2001
                                                     -------------------   ------------------
                                                     Carrying     Fair     Carrying     Fair
                                                      Amount      Value     Amount      Value
                                                     --------     ------   --------     -----
                                                                   (In millions)
                                                                           
Cash, cash equivalents and noncurrent restricted
  marketable debt securities ...................      $ 17.5      $ 17.5      $ 30.9   $ 30.9

Notes payable and long-term debt:
    8.875% Senior Secured Notes ................      $296.9      $299.9      $ --     $ --
    Notes payable to Kronos - KII  Mirror Note .        --          --         194.0    194.9
    Subordinated debt payable to Kronos ........        --          --         286.4    286.4
    Variable rate debt .........................        29.0        29.0        48.7     48.7


        Fair value of the Company's Notes are based upon quoted market prices at
December  31,  2002.  Fair  value of the KII Mirror  Note was based upon  quoted
market prices of the NL Notes at December 31, 2001.  See Note 8 for repayment of
the KII Mirror Note.  The Company held no derivative  financial  instruments  at
December 31, 2002 or 2001.

Note 21 - Capital Contribution:

        On January 31, 2000, NL contributed  its investment of $291.9 million in
NL Capital  Corporation  ("NLCC"),  a wholly owned  subsidiary of NL, to Kronos,
which  immediately  contributed  it to KII.  NLCC then merged with KII (with KII
being the surviving  corporation in the merger.) The net assets  acquired in the
merger were recorded at predecessor  carryover basis in accordance with GAAP due
to the common  control of KII and NLCC by NL.  NLCC  previously  conducted  NL's
rheological additives business which was sold in 1998.  Substantially all of the
net proceeds from the sale of the operational  assets related to the rheological
additives  business were loaned to NL and Kronos.  Subsequent to the sale,  NLCC
did not  conduct  any  operations  and its major  assets  held  were such  notes
receivable from affiliates.  Of the $291.9 million,  $278.9 million  represented
noncurrent  notes  receivable  from NL and Kronos,  which were  classified  as a
reduction of stockholder's equity at the time of the merger.

                                      F-37


Note 22 - Quarterly financial data (unaudited):


                                                Quarter ended
                                -----------------------------------------------
                                March 31   June 30       Sept. 30       Dec. 31
                                --------   -------       --------       -------
                                                 (In thousands)

                                                           
Year ended December 31, 2002:

    Net sales ...............   $139,569   $146,145      $154,319      $139,632
    Cost of sales ...........    110,723    113,945       120,089       109,397
    Operating income ........     14,261     16,475        17,415        11,801
    Net income ..............      7,982     29,595(a)     11,250         3,464

Year ended December 31, 2001:

    Net sales ...............   $159,030   $140,380      $134,675      $120,552
    Cost of sales ...........    105,283     93,917        95,737        84,621
    Operating income ........     38,401     33,280        22,747        29,418(b)
    Net income ..............     19,727     21,411        31,409(a)     41,181(b)


(a)     Included  in net income was $15.4  million in 2002 and $12.1  million in
        2001,  respectively,  of noncash currency  transaction  gains related to
        certain notes payable to affiliates.

(b)     Operating income in the fourth quarter of 2001 included $16.6 million of
        pretax insurance  recoveries for business  interruption related to prior
        quarters due to the Leverkusen fire. Net income in the fourth quarter of
        2001 also included $11.6 million net of pretax insurance  recoveries for
        property  damage related to the Leverkusen  fire and a $17.6 million net
        income tax benefit  related to a restructuring  of the Company's  German
        subsidiaries.

                                      F-38


                        REPORT OF INDEPENDENT ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULES


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

        Our audits of the consolidated  financial  statements referred to in our
report dated  February 12, 2003  appearing on page F-2 in the 2002 Annual Report
to Stockholder on Form 10-K of Kronos International, Inc. also included an audit
of the financial  statement  schedules listed in Item 15(a) and (d) of this Form
10-K. In our opinion, these financial statement schedules present fairly, in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated financial statements.



                                                      PricewaterhouseCoopers LLP


Houston, Texas
February 12, 2003

                                      S-1


                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
            SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            Condensed Balance Sheets
                           December 31, 2002 and 2001
                                 (In thousands)


                                                            2002        2001
                                                          ---------   ---------
                            ASSETS
                                                                
Current assets:
    Cash and cash equivalents .........................   $   2,445   $  21,678
    Accounts and notes receivable .....................       6,349      42,890
    Receivable from subsidiaries ......................      31,840      13,811
    Other .............................................         194         156
                                                          ---------   ---------

        Total current assets ..........................      40,828      78,535
                                                          ---------   ---------

Other assets:
    Notes receivable from subsidiary ..................      74,799      74,964
    Investment in subsidiaries ........................     249,644     202,613
    Deferred income taxes .............................       1,875       5,380
    Other .............................................       8,956         372
                                                          ---------   ---------

        Total other assets ............................     335,274     283,329
                                                          ---------   ---------

Property and equipment, net ...........................       4,929       3,457
                                                          ---------   ---------

                                                          $ 381,031   $ 365,321
                                                          =========   =========
          LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
    Notes payable .....................................   $    --     $  24,021
    Accounts payable and accrued liabilities ..........       5,362       5,130
    Payable to affiliates .............................         164      14,537
    Deferred income taxes .............................         900         669
                                                          ---------   ---------

        Total current liabilities .....................       6,426      44,357
                                                          ---------   ---------

Noncurrent liabilities:
    Long-term debt ....................................   $ 296,942   $    --
    Notes payable to affiliates .......................        --       480,363
    Other .............................................         815         657
                                                          ---------   ---------

        Total noncurrent liabilities ..................     297,757     481,020

Redeemable preferred stock and profit participation
  certificates ........................................        --       617,409
                                                          ---------   ---------

Stockholder's equity ..................................      76,848    (777,465)
                                                          ---------   ---------

                                                          $ 381,031   $ 365,321
                                                          =========   =========


Contingencies (Note 5)

                                      S-2



                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

      SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                         Condensed Statements of Income

                  Years ended December 31, 2002, 2001 and 2000

                                 (In thousands)



                                                        2002         2001         2000
                                                      ---------    ---------    ---------

                                                                       
Revenues and other income:
    Net sales .....................................   $  28,326    $  26,179    $  28,214
    Equity in income from continuing operations of
      subsidiaries ................................      34,308      114,170      106,378
    Interest income from affiliates ...............      28,405       43,901       36,746
    Royalty income ................................      14,370       13,603       14,766
    Currency transaction gains (losses), net ......      14,656       (9,084)     (11,992)
    Other income, net .............................         753        1,838          795
                                                      ---------    ---------    ---------

                                                        120,818      190,607      174,907
                                                      ---------    ---------    ---------
Costs and expenses:
    Cost of sales .................................      13,903       12,454       13,725
    General and administrative ....................      16,814       18,891       19,830
    Interest ......................................      13,948        1,063            2
    Interest expense to affiliates ................      20,530       42,245       48,161
                                                      ---------    ---------    ---------

                                                         65,195       74,653       81,718
                                                      ---------    ---------    ---------

        Income before income taxes ................      55,623      115,954       93,189

Income tax expense ................................       3,332        2,226       13,040
                                                      ---------    ---------    ---------

        Net income ................................      52,291      113,728       80,149

Dividends and accretion applicable to redeemable
  preferred stock and profit participation
  certificates ....................................     (78,600)    (112,466)     (15,867)
                                                      ---------    ---------    ---------

        Net (loss) income available to common stock   $ (26,309)   $   1,262    $  64,282
                                                      =========    =========    =========


                                      S-3



                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

      SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                       Condensed Statements of Cash Flows

                  Years ended December 31, 2002, 2001 and 2000

                                 (In thousands)




                                                       2002         2001         2000
                                                    ---------    ---------    ---------

                                                                     
Cash flows from operating activities:
    Net income ..................................   $  52,291    $ 113,728    $  80,149
    Equity in income of subsidiaries ............     (34,308)    (114,170)    (106,378)
    Distributions from subsidiaries .............      26,249       44,990       20,485
    Noncash currency transaction (gain) loss ....     (13,121)       9,355       15,591
    Noncash interest income, net ................     (15,675)     (25,044)     (23,069)
    Deferred income taxes .......................       5,037         (449)       5,656
    Other, net ..................................         451          292          248
                                                    ---------    ---------    ---------

                                                       20,924       28,702       (7,318)

    Change in assets and liabilities, net .......       1,220       25,510       57,192
                                                    ---------    ---------    ---------

        Net cash provided by operating activities      22,144       54,212       49,874
                                                    ---------    ---------    ---------

Cash flows from investing activities:
    Capital expenditures ........................      (1,730)        (883)        (713)
    Collections of loans to affiliates ..........      12,090       21,406       90,743
    Investments in subsidiaries .................        --        (27,237)         (33)
    Other, net ..................................          13         --             13
                                                    ---------    ---------    ---------

        Net cash provided (used) by investing
          activities ............................      10,373       (6,714)      90,010
                                                    ---------    ---------    ---------


                                      S-4



                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

      SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                 Condensed Statements of Cash Flows (Continued)

                  Years ended December 31, 2002, 2001 and 2000

                                 (In thousands)



                                                           2002         2001         2000
                                                         ---------    ---------    ---------

                                                                          
Cash flows from financing activities:
    Indebtedness:
        Borrowings ...................................   $ 280,041    $    --      $    --
        Principal payments ...........................     (26,697)     (21,397)        --
        Deferred financing fees ......................      (8,600)        --           --
    Repayments of loans from affiliates ..............    (301,432)        --        (93,000)
    Capital contribution .............................        --          3,807         --
    Other capital transactions with affiliates, net ..       2,925      (35,631)     (18,831)
                                                         ---------    ---------    ---------

        Net cash used by financing activities ........     (53,763)     (53,221)    (111,831)
                                                         ---------    ---------    ---------

    Net change from operating, investing and financing
      activities .....................................     (21,246)      (5,723)      28,053
    Currency translation .............................       2,013         (421)        (415)
    Balance at beginning of year .....................      21,678       27,822          184
                                                         ---------    ---------    ---------

    Balance at end of year ...........................   $   2,445    $  21,678    $  27,822
                                                         =========    =========    =========


                                      S-5




                   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  KII's  investment  in its  majority-owned  subsidiaries  on the  equity
method. The Consolidated Financial Statements of Kronos International,  Inc. and
its  majority-owned  subsidiaries  (the  "Company")  and the  related  Notes  to
Consolidated Financial Statements are incorporated herein by reference.

Note 2 - Net receivable from (payable to) subsidiaries and affiliates:


                                                             December 31,
                                                       ------------------------
                                                         2002           2001
                                                       ---------      ---------
                                                             (In thousands)

                                                                
Current:
    Receivable from:
        Kronos Titan GmbH & Co. OHG ("TG") .......     $  27,914      $   1,033
        Kronos Titan A/S .........................         1,525          2,181
        Kronos Europe S.A./N.V ...................         1,052          5,409
        KC .......................................            91            885
        Kronos B.V ...............................          --            3,081
        Kronos Denmark ApS ("KDK") ...............           514            707
        KUS ......................................          --              366
        Titania A/S ("TIA") ......................           360           --
        Other ....................................           384            149
                                                       ---------      ---------

                                                       $  31,840      $  13,811
                                                       =========      =========

    Payable to:
        Kronos ...................................     $    --        $  (4,812)
        KUS ......................................          (130)          --
        TIA ......................................          --           (7,775)
        Kronos Limited ...........................          --           (1,413)
        Other ....................................           (34)          (537)
                                                       ---------      ---------

                                                       $    (164)     $ (14,537)
                                                       =========      =========

Noncurrent:
    Notes receivable from TG .....................     $  74,799      $  74,964
                                                       =========      =========

    Notes payable to Kronos ......................     $    --        $(480,363)
                                                       =========      =========


                                      S-6




Note 3 - Investment in subsidiaries:



                                                            December 31,
                                                    ----------------------------
                                                      2002                2001
                                                    --------            --------
                                                           (In thousands)

                                                                  
Investment in:
    TG .................................            $150,575            $120,874
    KDK ................................              81,579              66,514
    Other ..............................              17,490              15,225
                                                    --------            --------

                                                    $249,644            $202,613
                                                    ========            ========





                                                     Years ended December 31,
                                                  ------------------------------
                                                    2002       2001       2000
                                                  --------   --------   --------
                                                          (In thousands)

                                                               
Equity in income from continuing operations
  of subsidiaries:
    TG ........................................   $ 22,430   $ 85,807   $ 62,193
    KDK .......................................     11,344     18,439     27,501
    Other .....................................        534      9,924     16,684
                                                  --------   --------   --------

                                                  $ 34,308   $114,170   $106,378
                                                  ========   ========   ========


Note 4 - Long-term debt:

        See Note 8 of the Consolidated Financial Statements for a description of
the Notes.  The  Company's  $194 million  11.75%  Second Tier Senior Mirror Note
payable to Kronos at December 31, 2001 was deemed repaid in accordance  with the
terms and conditions of the agreement and the agreement was canceled. See Note 9
of the Consolidated Financial Statements.

Note 5 - Contingencies:

        See  Environmental,  Product Liability and Litigation Matters in Note 19
to the Consolidated Financial Statements.

                                      S-7

                   KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                 (In thousands)




                                                        Charges
                                      Balance at        (credits)                             Currency
                                      beginning       to costs and                           translation    Balance at
           Description                 of year          expenses          Deductions         adjustments    end of year
                                    -------------     -------------     -------------       -------------   -----------

                                                                                               
Year ended December 31, 2002:
  Allowance for doubtful accounts
    and notes receivable ........   $       1,626     $         381     $        (397)(a)   $         297     $1,907
                                    =============     =============     =============       =============     ======

    Amortization of intangibles     $        --       $        --       $        --         $        --       $ --
                                    =============     =============     =============       =============     ======

Year ended December 31, 2001:
  Allowance for doubtful accounts
    and notes receivable ........   $       1,662     $         255     $        (195)(a)   $         (96)    $1,626
                                    =============     =============     =============       =============     ======

    Amortization of intangibles     $        --       $        --       $        --         $        --       $ --
                                    =============     =============     =============       =============     ======

Year ended December 31, 2000:
  Allowance for doubtful accounts
    and notes receivable ........   $       1,672     $         198     $         (86)(a)   $        (122)    $1,662
                                    =============     =============     =============       =============     ======

    Amortization of intangibles     $      22,095     $         113     $     (20,429)      $      (1,779)    $ --
                                    =============     =============     =============       =============     ======



(a) Amounts written off, less recoveries.

Certain prior-year amounts have been reclassified to conform to the current year
presentation. Certain information has been omitted because it is included in the
Notes to the Consolidated Financial Statements.

                                      S-8



                   KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY

                   Index of Consolidated Financial Statements


Financial Statements                                               Pages
- --------------------                                               -----

Report of Independent Accountants                                  FA-2

Consolidated Balance Sheets - December 31, 2002 and 2001           FA-3 / FA-4

Consolidated Statements of Income - Years ended
December 31, 2002, 2001 and 2000                                   FA-5

Consolidated Statements of Comprehensive Income - Years ended
December 31, 2002, 2001 and 2000                                   FA-6

Consolidated Statements of Partners' Capital  - Years ended
December 31, 2002, 2001 and 2000                                   FA-7

Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2001 and 2000                                   FA-8 / FA-9

Notes to Consolidated Financial Statements                         FA-10 / FA30


                                      FA-1







                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Partners of Kronos Titan GmbH & Co. OHG:

        In our opinion,  the  accompanying  consolidated  balance sheets and the
related  consolidated  statements  of income,  comprehensive  income,  partners'
capital and cash flows present fairly, in all material  respects,  the financial
position of Kronos Titan GmbH & Co. OHG and  Subsidiary at December 31, 2002 and
2001,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 2002 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
auditing  standards  generally  accepted in the United States of America,  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.




PricewaterhouseCoopers GmbH
Wirtschaftsprufungsgesellschaft

February 11, 2003



/s/ Hans-Peter Kreibich                            /s/ Rainer Mertes
(Wirtschaftsprufer)                                (Wirtschaftsprufer)


                                      FA-2




                   KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                                 (In thousands)



                                                                December 31,
                                                           ---------------------
        ASSETS                                               2002         2001
                                                           --------     --------


                                                                  
Current assets:
    Cash and cash equivalents ........................     $  7,825     $  1,677
    Accounts and notes receivable ....................       53,318       20,420
    Note receivable from Kronos Europe S.A./N.V ......         --         17,204
    Receivable from affiliates .......................       18,823        3,137
    Refundable income taxes ..........................          215         --
    Inventories ......................................       85,542       72,215
    Prepaid expenses .................................        3,004        2,719
                                                           --------     --------

        Total current assets .........................      168,727      117,372
                                                           --------     --------

Other assets .........................................        1,882        1,290
                                                           --------     --------

Property and equipment:
    Land .............................................       11,103        9,487
    Buildings ........................................       83,012       69,568
    Machinery and equipment ..........................      363,321      299,959
    Construction in progress .........................        6,714        2,457
                                                           --------     --------
                                                            464,150      381,471
    Less accumulated depreciation and depletion ......      259,913      206,475
                                                           --------     --------

        Net property and equipment ...................      204,237      174,996
                                                           --------     --------

                                                           $374,846     $293,658
                                                           ========     ========

                                      FA-3




                   KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                                 (In thousands)



                                                              December 31,
                                                         -----------------------
        LIABILITIES AND PARTNERS' CAPITAL                  2002         2001
                                                         ---------    ---------

                                                                
Current liabilities:
    Accounts payable and accrued liabilities .........   $  52,688    $  49,186
    Payable to affiliates ............................      44,082        3,451
    Income taxes .....................................        --            947
    Deferred income taxes ............................         765          671
                                                         ---------    ---------

        Total current liabilities ....................      97,535       54,255
                                                         ---------    ---------

Noncurrent liabilities:
    Note payable to Kronos International, Inc. .......      74,799       74,964
    Deferred income taxes ............................      19,994       15,126
    Accrued pension cost .............................      20,709       18,000
    Other ............................................      11,234       10,439
                                                         ---------    ---------

        Total noncurrent liabilities .................     126,736      118,529
                                                         ---------    ---------

Partners' capital:
    Partners' capital ................................     118,589      108,865
    Accumulated other comprehensive income (loss):
        Currency translation .........................      37,850       14,958
        Pension liabilities ..........................      (5,864)      (2,949)
                                                         ---------    ---------

        Total partners' capital ......................     150,575      120,874
                                                         ---------    ---------

                                                         $ 374,846    $ 293,658
                                                         =========    =========


Commitments and contingencies (Notes 7, 12 and 16)


          See accompanying notes to consolidated financial statements.
                                      FA-4

                   KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

                                 (In thousands)



                                                    Years ended December 31,
                                                ---------------------------------
                                                  2002        2001        2000
                                                ---------   ---------   ---------


                                                               
Revenues and other income:
    Net sales ...............................   $ 384,361   $ 379,360   $ 423,950
    Interest and other income from affiliates       3,694       2,135       1,648
    Insurance recoveries, net ...............        --        17,468        --
    Other income (expense), net .............         311       7,717      (1,226)
                                                ---------   ---------   ---------

                                                  388,366     406,680     424,372
                                                ---------   ---------   ---------

Costs and expenses:
    Cost of sales ...........................     323,306     280,084     306,751
    Selling, general and administrative .....      34,633      31,166      31,251
    Interest ................................         198          22          24
    Interest and other expense to affiliates        4,493       8,856      10,381
                                                ---------   ---------   ---------

                                                  362,630     320,128     348,407
                                                ---------   ---------   ---------

    Income before income taxes ..............      25,736      86,552      75,965

Income tax expense ..........................       3,306         745      13,772
                                                ---------   ---------   ---------

    Net  income .............................   $  22,430   $  85,807   $  62,193
                                                =========   =========   =========


          See accompanying notes to consolidated financial statements.
                                      FA-5




                   KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                 (In thousands)



                                                      Years ended December 31,
                                                  --------------------------------
                                                    2002        2001        2000
                                                  --------    --------    --------


                                                                 
Net income ....................................   $ 22,430    $ 85,807    $ 62,193

Other comprehensive income (loss), net of tax:
    Minimum pension liabilities adjustment ....     (2,915)     (2,949)       --
    Currency translation adjustment ...........     22,892      (2,079)      3,670
                                                  --------    --------    --------

        Total other comprehensive income (loss)     19,977      (5,028)      3,670
                                                  --------    --------    --------

                                                  $ 42,407    $ 80,779    $ 65,863
                                                  ========    ========    ========


          See accompanying notes to consolidated financial statements.
                                      FA-6




                   KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
                  Years ended December 31, 2002, 2001 and 2000
                                 (In thousands)





                                                     Accumulated other
                                                      comprehensive
                                                       income (loss)
                                       Partners'  ------------------------
                                        capital    Currency      Pension
                                       (deficit)  translation   liabilities     Total
                                       ---------  -----------   -----------   ---------

                                                                  
Balance at December 31, 1999 .......   $ (44,021)   $  13,367    $    --      $ (30,654)

Net income .........................      62,193         --           --         62,193
Other comprehensive income .........        --          3,670         --          3,670
Cash distribution ..................        (683)        --           --           (683)
                                       ---------    ---------    ---------    ---------


Balance at December 31, 2000 .......      17,489       17,037         --         34,526

Net income .........................      85,807         --           --         85,807
Other comprehensive loss, net of tax        --         (2,079)      (2,949)      (5,028)
Cash distribution ..................     (11,097)        --           --        (11,097)
Cash contribution ..................      16,666         --           --         16,666
                                       ---------    ---------    ---------    ---------


Balance at December 31, 2001 .......     108,865       14,958       (2,949)     120,874

Net income .........................      22,430         --           --         22,430
Other comprehensive income (loss),
  net of tax .......................        --         22,892       (2,915)      19,977
Cash distribution ..................     (12,706)        --           --        (12,706)
                                       ---------    ---------    ---------    ---------


Balance at December 31, 2002 .......   $ 118,589    $  37,850    $  (5,864)   $ 150,575
                                       =========    =========    =========    =========



          See accompanying notes to consolidated financial statements.
                                      FA-7




                   KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)



                                                        Years ended December 31,
                                                    --------------------------------
                                                      2002        2001        2000
                                                    --------    --------    --------

                                                                   
Cash flows from operating activities:
    Net income ..................................   $ 22,430    $ 85,807    $ 62,193
    Depreciation, depletion and amortization ....     16,387      14,056      14,256
    Noncash interest expense ....................         57        --          --
    Deferred income taxes .......................      2,875      (6,273)        677
    Net loss from disposition of property and
      equipment .................................        300         512       1,350
    Pension, net ................................     (2,745)     (2,846)     (2,759)
    Insurance recoveries, net ...................       --       (17,468)       --
                                                    --------    --------    --------

                                                      39,304      73,788      75,717
    Change in assets and liabilities:
        Accounts and notes receivable ...........    (27,322)     (7,147)     (1,398)
        Inventories .............................     (2,678)     (4,730)     (9,268)
        Prepaid expenses ........................         25      (1,382)       (519)
        Accounts payable and accrued liabilities      (4,652)      8,239       1,012
        Income taxes ............................     (1,164)        162         860
        Accounts with affiliates ................     25,616     (22,752)     (1,166)
        Accrued environmental costs .............        259        --          --
        Other noncurrent assets .................       (222)        190         115
        Other noncurrent liabilities ............     (1,018)       (827)     (2,426)
                                                    --------    --------    --------

            Net cash provided by operating
              activities ........................     28,148      45,541      62,927
                                                    --------    --------    --------

Cash flows from investing activities:
    Capital expenditures ........................    (15,818)    (35,298)    (13,497)
    Loans to affiliates:
        Loans ...................................       --       (16,677)       --
        Collections .............................     18,097        --          --
    Property damaged by fire:
        Insurance proceeds ......................       --        23,361        --
        Other, net ..............................       --        (3,205)       --
    Proceeds from disposition of property and
      equipment .................................          3         262          30
                                                    --------    --------    --------

            Net cash provided (used) by investing
              activities ........................      2,282     (31,557)    (13,467)
                                                    --------    --------    --------



                                      FA-8



                   KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                 (In thousands)



                                                    Years ended December 31,
                                                --------------------------------
                                                  2002        2001        2000
                                                --------    --------    --------

                                                               
Cash flows from financing activities:
    Repayment of loans from affiliates ......   $(12,090)   $(21,406)   $(90,743)
    Cash contributions ......................       --        16,666        --
    Cash distributions ......................    (12,706)    (11,097)       (683)
    Deferred financing fees .................       (410)       --          --
                                                --------    --------    --------

        Net cash used by financing activities    (25,206)    (15,837)    (91,426)
                                                --------    --------    --------

Cash and cash equivalents:
    Net change during the year from:
        Operating, investing and financing
          activities ........................      5,224      (1,853)    (41,966)
        Currency translation ................        924        (286)        458
    Balance at beginning of  period .........      1,677       3,816      45,324
                                                --------    --------    --------

    Balance at end of period ................   $  7,825    $  1,677    $  3,816
                                                ========    ========    ========

Supplemental disclosures:
    Cash paid for:
        Interest ............................   $  4,463    $  8,689    $ 10,402
        Income taxes ........................        938       6,855      12,234


                 See accompanying notes to consolidated financial statements.
                                      FA-9




                   KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Organization and basis of presentation:

        Kronos  Titan  GmbH & Co.  OHG  ("TG") is a German  partnership  that is
majority owned (99.95%) by Kronos  International,  Inc. ("KII"). KII is a wholly
owned  subsidiary of Kronos,  Inc.  ("Kronos"),  a wholly owned subsidiary of NL
Industries,  Inc.  ("NL").  NL  Industries  Chemie  GmbH,  another  wholly owned
subsidiary  of NL,  holds  the  remaining  0.05%  ownership  interest  in TG. NL
conducts its titanium dioxide pigments  ("TiO2")  operations  through Kronos. At
December  31, 2002,  Valhi,  Inc.  ("Valhi")  and a  subsidiary  of Valhi,  each
affiliates of Contran  Corporation  ("Contran"),  held approximately 84% of NL's
outstanding  common stock.  At December 31, 2002,  Contran and its  subsidiaries
held approximately 93% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is the sole trustee.  Mr. Simmons, the Chairman of the Board of each of Contran,
Valhi and NL, may be deemed to control each of such companies and TG.

        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.  TG also
prepares financial statements on other bases, as required in Germany.

        As part of the restructuring of KII's German operations, KII implemented
certain  restructuring  transactions in 1999 and 2001 (the "TG  Restructuring").
The  principle  elements  of the TG  Restructuring  are that  prior to June 1999
Kronos Titan ("TGI") and NL Industries  (Deutschland)  GmbH ("NLD"),  a majority
owned subsidiary of KII, operated in corporate form under German law and in June
1999 TGI and NLD were  converted  to  partnerships.  In  October  2001,  through
various legal  transactions,  TGI  partnership  was dissolved and TGI was merged
into NLD with NLD surviving the merger.  NLD was  immediately  renamed TG. There
was no  impact  on TG's  consolidated  financial  statements  as a result of the
merger of TGI into NLD since both companies were under common control.

        TG is not a registrant with the U.S.  Securities and Exchange Commission
("SEC") and is 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:

Principles of consolidation and management's estimates

        The accompanying  consolidated financial statements include the accounts
of TG and  its  wholly  owned  subsidiary  (collectively,  the  "Company").  All
material  intercompany  accounts  and  balances  have been  eliminated.  Certain
prior-year  amounts  have been  reclassified  to  conform  to the  current  year
presentation.  The  preparation of financial  statements in conformity with GAAP
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial statements,  and the reported amount of
revenues and expenses  during the reporting  period.  Actual  results may differ
from previously estimated amounts under different assumptions or conditions. The

                                      FA-10



Company has no  involvement  with any variable  interest  entity  covered by the
scope of FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities."

Translation of foreign currencies

        The  functional  currency  of  the  Company  is  the  euro.  Assets  and
liabilities of the Company are  translated to U.S.  dollars at year-end rates of
exchange and revenues and expenses are translated 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.

Cash equivalents

        Cash equivalents include bank deposits with original maturities of three
months or less.

Inventories

        Inventories are stated at the lower of cost  (principally  average cost)
or market. Amounts are removed from inventories at average cost.

Property, equipment, depreciation and depletion

        Property and  equipment  are stated at cost.  Interest  costs related to
major, long-term capital projects are capitalized as a component of construction
costs.  Expenditures for  maintenance,  repairs and minor renewals are expensed;
expenditures for major improvements are capitalized.

        Depreciation is computed  principally by the  straight-line  method over
the  estimated  useful  lives of ten to forty years for  buildings  and three to
twenty years for machinery and equipment.

        When  events or changes in  circumstances  indicate  that  assets may be
impaired,  an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances  include, among other things, (i) significant
current  and prior  periods or current  and  projected  periods  with  operating
losses,  (ii) a significant  decrease in the market value of an asset or (iii) a
significant  change  in the  extent  or  manner  in which an asset is used.  All
relevant  factors  are  considered.  The test for  impairment  is  performed  by
comparing the estimated  future  undiscounted  cash flows (exclusive of interest
expense)  associated  with  the  asset  to the  asset's  net  carrying  value to
determine  if a  write-down  to market  value or  discounted  cash flow value is
required.  Effective January 1, 2002, the Company  commenced  accounting for the
impairment  of other  long-lived  assets  (such as property  and  equipment)  in
accordance with Statement of Financial  Accounting Standards ("SFAS") No. 144 as
discussed under "Accounting principles adopted in 2002" below.

Long-term debt and notes payable to affiliates

        Where  applicable,  long-term  debt and notes payable to affiliates  are
stated net of unamortized original issue discount ("OID"). OID is amortized over
the period  during  which cash  interest  payments are not required and deferred
financing costs are amortized over the term of the applicable issue, both by the
interest method.

                                      FA-11


Employee benefit plans

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

        The Company has elected the  disclosure  alternative  prescribed by SFAS
No. 123, "Accounting for Stock-Based  Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based  Compensation - Transition and  Disclosure,"  and to
account for its stock-based  employee  compensation  related to stock options in
accordance with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting
for Stock Issued to Employees," and its various interpretations.  Under APBO No.
25, no  compensation  cost is generally  recognized  for fixed stock  options in
which the  exercise  price is not less than the market  price on the grant date.
During the fourth  quarter of 2002,  the Company  commenced  accounting  for its
stock options using the variable accounting method, which requires the intrinsic
value of the stock  option to be  accrued  as an  expense.  The  Company is also
charged  by NL  for  stock  options  exercised  by  employees  of  the  Company.
Compensation  cost  recognized by the Company in accordance with APBO No. 25 and
the amount  charged to the Company by NL for stock option  exercises was $25,000
in 2002 and nil in each of 2001 and 2000.

        The following table  illustrates the effect on net income if the Company
had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.


                                                    Years ended December 31,
                                                --------------------------------
                                                  2002        2001        2000
                                                --------    --------    --------
                                                        (In thousands)

                                                               
Net income - as reported ....................   $ 22,430    $ 85,807    $ 62,193
Add back:  Stock-based compensation cost,
  net of tax, included in reported net income         21        --          --
Deduct:  Stock-based compensation cost, net
  of tax, determined under fair value based
  method for all awards .....................        (21)        (25)        (21)
                                                --------    --------    --------

Net income - pro forma ......................   $ 22,430    $ 85,782    $ 62,172
                                                ========    ========    ========


Environmental remediation costs

        Environmental  remediation  costs  are  accrued  when  estimated  future
expenditures  are  probable  and  reasonably  estimable.  The  estimated  future
expenditures  are  generally  not  discounted  to present  value.  Recoveries of
remediation  costs from other parties,  if any, are reported as receivables when
their receipt is deemed probable.  At December 31, 2002 and 2001, no receivables
for recoveries have been recognized.

Net sales

        The Company adopted the SEC's Staff Accounting Bulletin ("SAB") No. 101,
"Revenue  Recognition in Financial  Statements,"  as amended,  in 2000.  Revenue
generally is realized or realizable and earned when all of the  requirements  of
SAB No. 101 are met, including when title and the risks and rewards of ownership
passes to the  customer  (generally  at the time the  product  is shipped to the
customer). The impact of adopting SAB No. 101 was not material.  Amounts charged
to customers for shipping and handling are included in net sales.

                                     FA-12


Repair and maintenance costs

        The Company performs planned major maintenance activities throughout the
year.  Repair and maintenance  costs estimated to be incurred in connection with
planned major maintenance  activities are accrued in advance and are included in
cost of goods sold.

Shipping and handling costs

        Shipping  and  handling  costs are  included  in  selling,  general  and
administrative expense and were $15.1 million in 2002, $14.3 million in 2001 and
$13.9 million in 2000.

Income taxes

        As a partnership under German law, TG is not subject to corporate income
taxes,  but remains  subject to trade income  taxes.  Deferred  trade income tax
assets and liabilities  are recognized for the expected future tax  consequences
of temporary  differences  between the trade income tax and financial  reporting
carrying amounts of assets and liabilities.  The Company periodically  evaluates
its  deferred  trade  income  tax  assets  and  adjusts  any  related  valuation
allowance.  The Company's valuation allowance is equal to the amount of deferred
trade   income  tax  assets   which  the  Company   believes  do  not  meet  the
"more-likely-than-not" recognition criteria.

Derivatives and hedging activities

     The Company adopted SFAS No. 133,  "Accounting  for Derivative  Instruments
and Hedging  Activities,"  as amended,  effective  January 1, 2001. SFAS No. 133
establishes accounting standards for derivative  instruments,  including certain
derivative instruments embedded in other contracts,  and for hedging activities.
Under  SFAS No.  133,  all  derivatives  are  recognized  as  either  assets  or
liabilities and measured at fair value. The accounting for changes in fair value
of  derivatives  is  dependent  upon  the  intended  use of the  derivative.  As
permitted  by the  transition  requirements  of SFAS No. 133,  as  amended,  the
Company  exempted from the scope of SFAS No. 133 all host  contracts  containing
embedded  derivatives which were issued or acquired prior to January 1, 1999. At
December  31,  2002 and 2001,  the  Company  was not a party to any  significant
derivative or hedging instrument covered by SFAS No. 133. There was no impact on
the Company's financial statements from adopting SFAS No. 133.

        The Company  periodically  uses 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.  The Company has not entered into
these  contracts for trading or  speculative  purposes in the past,  nor does it
currently  anticipate doing so in the future. The Company was not a party to any
such contracts during 2002, 2001 and 2000.

Accounting principles adopted in 2002

        The Company  adopted SFAS No. 144,  "Accounting  for the  Impairment  or
Disposal of Long-Lived  Assets," effective January 1, 2002. SFAS No. 144 retains
the fundamental  provisions of existing GAAP with respect to the recognition and
measurement  of  long-lived  asset   impairment   contained  in  SFAS  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." However, SFAS No. 144 provides new guidance intended to address
certain  significant   implementation  issues  associated  with  SFAS  No.  121,

                                     FA-13



including expanded guidance with respect to appropriate cash flows to be used to
determine  whether  recognition of any long-lived  asset impairment is required,
and if required how to measure the amount of the  impairment.  SFAS No. 144 also
requires  that any net assets to be  disposed  of by sale to be  reported at the
lower of  carrying  value or fair  value  less  cost to sell,  and  expands  the
reporting of discontinued  operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity.  The adoption of SFAS No. 144  effective  January 1, 2002 did not have a
material effect on the Company's  consolidated  financial  position,  results of
operations or liquidity.

        In November  2002, the FASB issued FIN No. 45,  "Guarantor's  Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness  of  Others."  FIN No. 45  requires  a  guarantor  to  recognize  a
liability at the  inception  of a guarantee  covered by the scope of FIN No. 45,
equal to the fair value of the  obligation  undertaken in issuing the guarantee.
FIN No. 45 also  expands the  disclosures  requirements  with respect to certain
guarantees. The initial recognition and measurement provisions of FIN No. 45 are
applicable on a prospective  basis for any  guarantees  issued or modified after
December  31,  2002,  while the  disclosure  requirements  were  effective  upon
issuance.  The Company is not a party to any guarantees  covered by the scope of
FIN No. 45 as of December 31, 2002.

Accounting principles not yet adopted

        The Company will adopt SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations," effective January 1, 2003. Under SFAS No. 143, the fair value of a
liability for an asset retirement obligation covered under the scope of SFAS No.
143 would be recognized  in the period in which the liability is incurred,  with
an offsetting  increase in the carrying amount of the related  long-lived asset.
Over time,  the  liability  would be  accreted  to its  present  value,  and the
capitalized cost would be depreciated over the useful life of the related asset.
Upon  settlement of the liability,  an entity would either settle the obligation
for its  recorded  amount or incur a gain or loss upon  settlement.  The Company
believes  the  adoption  of SFAS No. 143 will not have a material  effect on the
Company's consolidated financial position, results of operations or liquidity.

        The Company will adopt SFAS No. 146,  "Accounting  for Costs  Associated
with  Exit or  Disposal  Activities,"  effective  January  1,  2003  for exit or
disposal activities  initiated on or after the date of adoption.  Under SFAS No.
146, costs associated with exit activities,  as defined, that are covered by the
scope of SFAS No. 146 will be recognized  and measured  initially at fair value,
generally in the period in which the liability is incurred. Costs covered by the
scope of SFAS No. 146 include termination benefits provided to employees,  costs
to  consolidate  facilities  or  relocate  employees,  and  costs  to  terminate
contracts  (other than a capital  lease).  Under  existing GAAP, a liability for
such an exit cost is recognized  at the date an exit plan is adopted,  which may
or may not be the date at which the  liability  has been  incurred.  The Company
believes the adoption of SFAS No. 146 will not have a material adverse effect on
the  Company's  consolidated  financial  position,   results  of  operations  or
liquidity.

                                     FA-14



Note 3 - Accounts and notes receivable:


                                                             December 31,
                                                        -----------------------
                                                          2002           2001
                                                        --------       --------
                                                            (In thousands)

                                                                 
Trade receivables ................................      $ 47,152       $  2,287
Insurance claims receivable (see Note 13) ........           147         11,060
Recoverable VAT and other receivables ............         7,008          7,752
Allowance for doubtful accounts ..................          (989)          (679)
                                                        --------       --------

                                                        $ 53,318       $ 20,420
                                                        ========       ========


        During 2000 the Company  was party to an accounts  receivable  factoring
agreement (the "Factoring Agreement") with its affiliate,  Kronos World Services
S.A./N.V. ("KWS"). Beginning in February 2000 KII assumed the contract from KWS.
KWS and KII  (collectively the "Factoring  Agent"),  contracted with the Company
whereby the Company factored its export accounts receivable without recourse for
a fee of  0.85%.  The  Factoring  Agent,  upon  non-recourse  transfer  from the
Company, 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.

        Effective  June 2002,  the KII  Factoring  Agreement was assigned to the
Company regarding prospective export receivables,  with the Company assuming all
contractual  rights  and  obligations  of the  agreement  among KII and  certain
operating subsidiaries of KII.

        Export  receivables sold pursuant to the Factoring  Agreement during the
first five  months of 2002 by the Company  totaled  $59.1  million.  Such export
receivables  sold during 2001 and 2000 by the Company totaled $151.4 million and
$166.3  million,  respectively.  Export  receivables  purchased  pursuant to the
Factoring  Agreement by the Company for the seven months ended December 31, 2002
totaled $60.0 million.

Note 4 - Note receivable from Kronos Europe S.A./N.V. ("KEU"):

        The short-term  euro-denominated  note  receivable  from KEU ((euro)19.5
million or $17.2  million at December 31, 2001) was due within one year and bore
interest  at  EURIBOR  plus 0.5%  (3.84% at  December  31,  2001).  The note was
established on June 13, 2001 for general corporate purposes. The note was repaid
in full in June 2002 with proceeds from the revolving credit facility  described
in Note 7 below and the agreement was canceled.

                                     FA-15


Note 5 - Inventories:


                                                             December 31,
                                                      --------------------------
                                                       2002               2001
                                                      -------            -------
                                                           (In thousands)

                                                                   
Raw materials ............................            $20,426            $19,410
Work in process ..........................             11,489              4,737
Finished products ........................             41,471             38,229
Supplies .................................             12,156              9,839
                                                      -------            -------

                                                      $85,542            $72,215
                                                      =======            =======


Note 6 - Accounts payable and accrued liabilities:


                                                              December 31,
                                                       -------------------------
                                                         2002              2001
                                                       -------           -------
                                                            (In thousands)

                                                                   
Accounts payable ...........................           $28,118           $23,671
                                                       -------           -------
Accrued liabilities:
    Employee benefits ......................            10,152             8,098
    Waste acid recovery ....................             6,296             6,596
    Other ..................................             8,122            10,821
                                                       -------           -------

                                                        24,570            25,515
                                                       -------           -------

                                                       $52,688           $49,186
                                                       =======           =======


Note 7 - Note payable to Kronos International, Inc. and long-term debt:

        The  noncurrent  note  payable to KII was  established  in 1998 during a
recapitalization  of the  Company.  The  euro-denominated  note  payable  to KII
((euro)71.8  million and (euro)84.8 million, or $74.8 million and $75.0 million,
at December 31, 2002 and 2001,  respectively)  is due in 2008 and bears interest
at  EURIBOR   plus  1%  (4.30%  and  5.75%  at  December   31,  2002  and  2001,
respectively), with interest payable annually.

        In June 2002 the Company and KII's operating subsidiaries in Belgium and
Norway (KEU,  Kronos Titan A/S - "TAS" and Titania A/S - "TIA"),  referred to as
the "Borrowers",  entered into a three-year  (euro)80 million secured  revolving
credit  facility  ("Credit  Facility").  The Credit  Facility  is  available  in
multiple currencies,  including U.S. dollars,  euros and Norwegian kroner. As of
December  31,  2002,  (euro)15  million  ($16  million)  and NOK 80 million ($11
million) were outstanding under the Credit Facility at the Belgian and Norwegian
operating  subsidiaries,  respectively.  At December 31, 2002,  (euro)52 million
($54 million) was available for future working capital  requirements and general
corporate purposes of the Borrowers.  Borrowings bear interest at the applicable
interbank market rate plus 1.75%. As of December 31, 2002, the interest rate was
4.80% and 8.86% on the euro and Norwegian kroner borrowings,  respectively,  and
the weighted average interest rate was 6.51%.

        The  Credit  Facility  is  collateralized  by  accounts  receivable  and
inventory of the Borrowers, plus a limited pledge of certain other assets of the
Belgian  operating  subsidiary.  The Credit  Facility  contains,  among  others,
various restrictive covenants,  including restrictions on incurring liens, asset
sales, additional financial indebtedness, mergers, investments and acquisitions,
transactions   with   affiliates  and   dividends.   The  Company  and  KEU  are

                                     FA-16



unconditionally  jointly  and  severally  liable  for any  and  all  outstanding
borrowings under the Credit Facility.  The parent company of TAS and TIA, Kronos
Norge  A/S,  is  jointly  and  severally  liable  for any  and  all  outstanding
borrowings  under the Credit Facility to the extent  permitted by Norwegian law.
The Borrowers  have a (euro)5  million  sub-limit for issuing  letters of credit
with $1.8 million  letters of credit issued at December 31, 2002.  The Borrowers
were in compliance with all the covenants as of December 31, 2002.

        Deferred  financing  costs of $1.4 million for the Credit  Facility ($.4
million paid by the Company, with the remaining $1.0 million paid by the Belgian
and Norwegian  operating  subsidiaries) are being amortized over the life of the
Credit Facility and are included in other  noncurrent  assets as of December 31,
2002.

        Unused lines of credit available for borrowing under the Credit Facility
approximated $54 million at December 31, 2002.

        In June 2002 KII issued (euro)285  million ($280 million when issued and
$297 million at December 31, 2002)  principal  amount of 8.875%  Senior  Secured
Notes (the "Notes") due 2009.  The Notes are  collateralized  by first  priority
liens on 65% of the common stock or other  equity  interests of certain of KII's
first-tier subsidiaries, including the Company. The Notes are issued pursuant to
an indenture which contains a number of covenants and restrictions  which, among
other things,  restricts the ability of KII and its subsidiaries,  including the
Company,  to incur debt,  incur liens, or merge or consolidate  with, or sell or
transfer all or substantially all of their assets to, another entity

Note 8 - Other noncurrent liabilities:


                                                               December 31,
                                                           ---------------------
                                                             2002          2001
                                                           -------       -------
                                                              (In thousands)

                                                                   
Environmental costs ................................       $ 5,921       $ 5,662
Employee benefits ..................................         3,286         2,878
Insurance claims expense ...........................           813           763
Other ..............................................         1,214         1,136
                                                           -------       -------

                                                           $11,234       $10,439
                                                           =======       =======


                                     FA-17



Note 9 - Employee benefit plans:

Company-sponsored pension plans

        The Company  maintains a defined  benefit pension plan and certain other
benefits covering substantially all employees.

        Certain  actuarial  assumptions  used in measuring  the defined  benefit
pension assets, liabilities and expenses are presented below.


                                                            Years ended December 31,
                                                            ------------------------
                                                              2002    2001     2000
                                                              ----    ----     ----
                                                                  (Percentages)

                                                                      
Discount rate ..........................................       5.5     5.8     6.0
Rate of increase in future compensation  levels ........       2.5     2.8     3.0
Long-term rate of return on plan assets ................       6.8     7.3     7.5


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

        SFAS No. 87, "Employers'  Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit  obligation  exceeds the unfunded accrued pension  liability.  Variances
from  actuarially  assumed rates will change the actuarial  valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.

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


                                                       Years ended December 31,
                                                    -----------------------------
                                                     2002       2001       2000
                                                    -------    -------    -------
                                                          (In thousands)

                                                                 
Net periodic pension cost:
    Service cost benefits .......................   $ 2,120    $ 1,924    $ 2,079
    Interest cost on projected benefit obligation
      ("PBO") ...................................     8,353      7,877      7,619
    Expected return on plan assets ..............    (8,210)    (7,396)    (7,166)
    Amortization of net transition obligation ...       210        201        208
    Recognized actuarial losses .................       329       --         --
                                                    -------    -------    -------

                                                    $ 2,802    $ 2,606    $ 2,740
                                                    =======    =======    =======


                                     FA-18

        The funded status of the Company's  defined  benefit pension plan is set
forth below.


                                                             December 31,
                                                       ------------------------
                                                         2002           2001
                                                       ---------      ---------
                                                            (In thousands)

                                                                
Change in PBO:
    Beginning of year ............................     $ 139,472      $ 137,684
    Service cost .................................         2,120          1,924
    Interest .....................................         8,353          7,877
    Participant contributions ....................           904            852
    Actuarial loss (gain) ........................        (5,885)         6,592
    Benefits paid ................................        (9,115)        (8,707)
    Change in currency exchange rates ............        25,022         (6,750)
                                                       ---------      ---------

        End of year ..............................       160,871        139,472
                                                       ---------      ---------

Change in fair value of plan assets:
    Beginning of year ............................        98,704        100,458
    Actual return on plan assets .................        (1,274)         5,422
    Employer contributions .......................         5,547          5,452
    Participant contributions ....................           904            852
    Benefits paid ................................        (9,115)        (8,707)
    Change in currency exchange rates ............        17,908         (4,773)
                                                       ---------      ---------

        End of year ..............................       112,674         98,704
                                                       ---------      ---------

Funded status at year end:
    Plan assets less than PBO ....................       (48,197)       (40,768)
    Unrecognized actuarial loss ..................        28,522         21,732
    Unrecognized net transition obligation .......           292            446
                                                       ---------      ---------

                                                       $ (19,383)     $ (18,590)
                                                       =========      =========

Amounts recognized in the balance sheet:
    Accrued pension cost:

        Current ..................................     $  (6,189)     $  (4,612)
        Noncurrent ...............................       (20,709)       (18,000)
    Unrecognized net pension obligations .........           292            446
    Accumulated other comprehensive loss .........         7,223          3,576
                                                       ---------      ---------

                                                       $ (19,383)     $ (18,590)
                                                       =========      ==========


        Selected  information  related to the Company's  defined benefit pension
plan which has accumulated  benefit  obligations in excess of fair value of plan
assets is presented below.


                                                             December 31,
                                                       -------------------------
                                                         2002             2001
                                                       --------         --------
                                                            (In thousands)

                                                                  
Projected benefit obligation .................         $160,871         $139,472
Accumulated benefit obligation ...............          141,441          122,859
Fair value of plan assets ....................          112,674           98,704


                                     FA-19


Incentive bonus programs

        Certain  employees are eligible to participate in the Company's  various
incentive bonus programs. The programs provide for annual payments, which may be
in the form of cash or NL common stock. The amount of the annual payment paid to
an employee,  if any, is based on formulas involving the profitability of Kronos
in relation to the annual operating plan and, for certain employees,  individual
performance.

Note 10 - Other income (expense), net:


                                                     Years ended December 31,
                                                  -----------------------------
                                                   2002       2001       2000
                                                  -------    -------    -------
                                                         (In thousands)

                                                               
Currency transaction gains (losses), net ......   $    93    $   631    $  (132)
Trade interest income .........................       518        376        256
Disposition of property and equipment .........      (300)      (512)    (1,350)
Insurance recoveries, net (see Note 13) .......      --        7,222       --
                                                  -------    -------    -------

                                                  $   311    $ 7,717    $(1,226)
                                                  =======    =======    =======


Note 11 - Other items:

        Advertising  costs are expensed as incurred and were $.3 million in each
of 2002 and 2001 and $.2 million in 2000.

        Interest  capitalized in connection with long-term  capital projects was
nil in each of 2002, 2001 and 2000.


                                     FA-20


Note 12 - Income taxes:

        The  components of (i) the  difference  between the provision for income
taxes attributable to pretax income and the amounts that would be expected using
the  German  statutory  corporation  tax  rate of 25%  (30% in  2000),  (ii) the
provision  for  income  taxes and  (iii) the  comprehensive  tax  provision  are
presented below.


                                                             Years ended December 31,
                                                        --------------------------------
                                                          2002        2001        2000
                                                        --------    --------    --------
                                                                   (In thousands)

                                                                       
Pretax income .......................................   $ 25,736    $ 86,552    $ 75,965
                                                        ========    ========    ========

Expected tax expense ................................   $  6,434    $ 21,638    $ 22,790
Trade income tax ....................................      2,561      12,825       7,205
Change in valuation allowance:
    (Decrease) increase in certain deductible
      temporary differences that the Company
      believes do not meet the "more-likely-
      than-not" recognition criteria ................       --        (1,808)      6,906
    Recognition of certain deductible tax attributes
      which previously did not meet the "more-likely-
      than-not" recognition criteria ................       --       (11,535)       --
No corporation tax provision due to partnership
  structure .........................................     (6,434)    (21,638)    (23,247)
Other, net ..........................................        745       1,263         118
                                                        --------    --------    --------

        Income tax expense ..........................   $  3,306    $    745    $ 13,772
                                                        ========    ========    ========

Provision for income taxes:
    Current income tax expense ......................   $    431    $  7,018    $ 13,095
    Deferred income tax expense (benefit) ...........      2,875      (6,273)        677
                                                        --------    --------    --------

                                                        $  3,306    $    745    $ 13,772
                                                        ========    ========    ========

Comprehensive provision (benefit) for income taxes
  allocable to:
    Pretax income ...................................   $  3,306    $    745    $ 13,772
    Other comprehensive loss - pension liabilities ..       (732)       (627)       --
                                                        --------    --------    --------

                                                        $  2,574    $    118    $ 13,772
                                                        ========    ========    ========


                                     FA-21


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



                                                                       December 31,
                                                    ---------------------------------------------
                                                            2002                    2001
                                                    ---------------------   ---------------------
                                                        Deferred tax            Deferred tax
                                                    ---------------------   ---------------------
                                                    Assets    Liabilities   Assets    Liabilities
                                                    ------    -----------   ------    -----------
                                                                    (In thousands)

                                                                           
Tax effect of temporary differences relating to:
    Inventories ................................   $   --      $   (765)   $   --      $   (568)
    Property and equipment .....................        680     (22,829)        541     (20,120)
    Prepaid pension cost .......................       --        (6,189)       --        (5,680)
    Other taxable differences ..................       --        (1,840)       --        (1,505)
Tax loss and tax credit carryforwards ..........     10,184        --        11,535        --
                                                   --------    --------    --------    --------

        Gross deferred tax assets (liabilities)      10,864     (31,623)     12,076     (27,873)

Reclassification, principally netting by tax
  jurisdiction .................................    (10,864)     10,864     (12,076)     12,076
                                                   --------    --------    --------    --------

        Net total deferred tax liabilities .....       --       (20,759)       --       (15,797)
        Net current deferred tax liabilities ...       --          (765)       --          (671)
                                                   --------    --------    --------    --------

        Net noncurrent deferred tax liabilities    $   --      $(19,994)   $   --      $(15,126)
                                                   ========    ========    ========    ========


        Changes in the Company's  deferred  income tax  valuation  allowance are
summarized below.


                                                   Years ended December 31,
                                               --------------------------------
                                                 2002        2001        2000
                                               ---------   --------    --------
                                                        (In thousands)

                                                              
Balance at beginning of year ...............   $    --     $ 14,018    $  7,733

Increase (decrease) in certain deductible
  tax attributes which the Company believes
  do not meet the "more-likely-than-not"
  recognition criteria .....................        --       (1,808)      6,906
Recognition of certain deductible tax
  attributes which previously did not meet
  the "more-likely-than-not" recognition
  criteria .................................        --      (11,535)       --
Foreign currency translation ...............        --         (675)       (621)
                                               ---------   --------    --------

Balance at end of year .....................   $    --     $   --      $ 14,018
                                               =========   ========    ========


        Certain of the Company's  tax returns are being  examined and the German
tax authorities may propose tax deficiencies, including penalties and interest.

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

                                     FA-22


        A  reduction  in the  German  "base"  income  tax rate  from 30% to 25%,
enacted in October 2000,  became effective January 1, 2001. The reduction in the
German income tax rate did not impact  income tax expense in the fourth  quarter
of 2000 due to the Company's tax structure.

        On June 28, 1999, the Company  changed its legal form from a corporation
to a partnership and is no longer subject to corporation tax. The net difference
between  the  corporation  tax bases and the  reported  amount of the  Company's
assets and liabilities is $181.2 million at December 31, 2002. See Note 1.

        During  the fourth  quarter  of 2001,  the  Company  recognized  a $11.5
million  trade income tax benefit  attributable  to a decrease in the  valuation
allowance  due to a change in  estimate  of the  Company's  ability  to  utilize
certain  German trade income tax  attributes  that did not  previously  meet the
"more-likely-than-not" recognition criteria.

        At December 31, 2002,  the Company had the  equivalent of  approximately
$58.1  million  of  trade  income  tax loss  carryforwards  in  Germany  with no
expiration  date. The German federal  government has proposed certain changes to
its income tax law,  including certain changes that would impose  limitations on
the annual utilization of income tax loss carryforwards that, as proposed, would
become  effective  retroactively  to  January  1, 2003.  Any  limitation  on the
Company's ability to utilize such carryforwards  resulting from enactment of any
of these  proposals  would not have a material impact on the Company's total tax
expense.  However, if enacted, the proposed changes could have a material impact
on the  Company's  ability to make full annual use of its German income tax loss
carryforwards,  which would significantly affect the Company's future income tax
payments.

Note 13 - Leverkusen fire and insurance claim:

        A fire on March 20, 2001 damaged a section of the Company's  Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result,  production of TiO2 at the Leverkusen  facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process  TiO2 plant
("Chloride  Plant"),  but did damage  certain  support  equipment  necessary  to
operate that plant. The damage to the support equipment  resulted in a temporary
shutdown of the Chloride Plant.

        On  April  8,  2001,  repairs  to the  damaged  support  equipment  were
substantially  completed and full production  resumed at the Chloride Plant. The
Sulfate Plant became  approximately 50% operational in September 2001 and became
fully operational in late October 2001. The damages to property and the business
interruption losses caused by the fire were covered by insurance as noted below,
but the effect on the financial  results of the Company on a  quarter-to-quarter
basis was impacted by the timing and amount of insurance recoveries.

        The  Company  reached an  agreement  and  settled  its  insurance  claim
involving the  Leverkusen  fire for $56.4 million  during the fourth  quarter of
2001 ($46.9  million  received as of December 31, 2001,  with the remaining $9.5
million  received in January 2002),  of which $27.3 million  related to business
interruption  and $29.1 million related to property  damage,  clean-up costs and
other extra  expenses.  The Company  recognized a $17.5 million  pre-tax gain in
2001 related to the property  damage  recovery after  deducting $11.6 million of
clean-up  costs and other extra  expenses  incurred  and the  carrying  value of
assets  destroyed in the fire. The gain was excluded from the  determination  of
operating income. The $27.3 million of business interruption proceeds recognized

                                     FA-23


in 2001 were allocated between other income, excluding corporate, which reflects
recovery of lost margin  ($7.2  million)  and as a reduction of cost of sales to
offset unallocated period costs ($20.1 million).

Note 14 - Related party transactions:

        The  Company  may be deemed  to be  controlled  by  Harold  C.  Simmons.
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 the Company  other than as set forth in these  financial  statements,
the Company from time to time considers, reviews and evaluates such transactions
and  understands  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,  and  restrictions  under  the  KII
indenture,  the Credit  Facility and other  agreements,  it is possible that the
Company might be a party to one or more such transactions in the future.

        The Company is a party to a cost sharing agreement with Kronos,  KII and
KEU,  whereby  Kronos,  KII  and  KEU  provide  certain  management,  financial,
insurance  and  administrative  services  to the  Company  on a fee  basis.  The
Company's expense was  approximately  $5.7 million in 2002, $3.6 million in 2001
and $3.8 million in 2000.

        The Company charges affiliates for certain  administrative  costs, which
totaled  approximately $3.4 million, $5.3 million and $5.7 million in 2002, 2001
and 2000, respectively.  These charges to affiliates were reflected primarily as
a reduction of selling, general and administrative expense.

        The Company is also party to master global insurance  coverage  policies
with NL with regard to property,  business interruption,  excess liability,  and
other  coverages.  The costs  associated  with these  policies  aggregated  $5.6
million, $6.0 million and $2.3 million in 2002, 2001 and 2000, respectively.


                                     FA-24

        Intercompany sales to (purchases from) affiliates of TiO2 are summarized
in the following table.


                                                         Years ended December 31,
                                                   -----------------------------------
                                                     2002          2001        2000
                                                   ---------    ---------    ---------
                                                              (In thousands)

                                                                    
Sales to:
    Kronos (US), Inc. ("KUS") ..................   $  24,511    $  19,821    $  27,253
    Societe Industrielle du Titane, S.A. ("SIT")      23,681       26,202       29,521
    KEU ........................................      19,141       22,345       17,406
    Kronos Limited ("KUK") .....................      16,864       14,887       13,607
    Kronos Canada, Inc. ("KC") .................       4,494        4,638        7,467
    Other affiliates ...........................      10,564        9,274        7,090
                                                   ---------    ---------    ---------

                                                   $  99,255    $  97,167    $ 102,344
                                                   =========    =========    =========

Purchases from:
    KEU ........................................   $ (26,868)   $ (34,346)   $ (32,512)
    TAS ........................................      (3,209)      (8,497)      (2,053)
    KC .........................................        --            (85)      (3,377)
                                                   ---------    ---------    ---------

                                                   $ (30,077)   $ (42,928)   $ (37,942)
                                                   =========    =========    =========


        KUS  purchases the rutile and slag  feedstock  used as a raw material in
the  Company's  chloride  process  TiO2  facility.  The Company  purchases  such
feedstock  from KUS for use in its  facility  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 $64.3 million in 2002, $59.5 million in 2001 and $61.0
million in 2000.

        The Company sells water treatment chemicals (derived from co-products of
the TiO2 production  processes) to KII. Such water treatment chemical sales were
$8.4 million in 2002, $7.1 million in 2001 and $8.1 million in 2000.

        The Company was party to a long-term  ilmenite supply contract with TIA,
an affiliate,  that provided for the Company's  sulfate  feedstock  requirements
through December 31, 2001. Such feedstock  purchases were $13.4 million in 2002,
$7.3 million in 2001 and $9.9 million in 2000. The Company continues to purchase
ilmenite from TIA on a year-by-year basis.

        Interest  expense to  affiliates  related to the note payable to KII was
$3.7  million in 2002,  $7.2  million in 2001 and $8.5 million in 2000 (see Note
7). Interest income from affiliates  related to the note receivable from KEU was
$.6  million in 2002,  $.5  million in 2001 and nil in 2000.  Included  in other
affiliate  income  and other  affiliate  expense  was other  affiliate  interest
income/expense, factoring fees and service fees.

                                     FA-25


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


                                                           December 31,
                                                  -----------------------------
                                                    2002                2001
                                                  --------            --------
                                                         (In thousands)

                                                                 
Receivable from:
    KUK ................................           $     91            $  1,328
    TAS ................................              5,932                --
    SIT ................................                987                 714
    KEU ................................              8,934                 245
    Kronos B.V .........................              1,546                 210
    Other affiliates ...................              1,333                 640
                                                   --------            --------

                                                   $ 18,823            $  3,137
                                                   ========            ========

Payable to:
    KII ................................           $(27,914)           $ (1,033)
    TAS ................................               --                  (203)
    KUS ................................            (13,857)             (1,670)
    TIA ................................             (2,311)               (545)
                                                   --------            --------

                                                   $(44,082)           $ (3,451)
                                                   ========            ========


        Amounts  receivable  from  affiliates,  net were  generally  related  to
product  sales  (including  water  treatment  chemical  sales to KII),  accounts
receivable  factoring (through May 2002) and services rendered.  Amounts payable
to affiliates,  net were related primarily to raw material  purchases,  accounts
receivable factoring (beginning June 2002) and services received. See Notes 3, 4
and 7 for discussion of accounts receivable  factoring and notes receivable from
(payable to) affiliates.

Note 15 - Common stock options:

Common stock options

        The NL Industries, Inc. 1998 Long-Term Incentive Plan ("NL Option Plan")
provides for the discretionary  grant of restricted common stock, stock options,
stock appreciation rights ("SARs") and other incentive  compensation to officers
and other key employees of the Company.  Although  certain stock options granted
pursuant  to a similar  plan which  preceded  the NL Option  Plan  ("Predecessor
Option Plan") remain outstanding at December 31, 2002, no additional options may
be granted under the Predecessor Option Plan.

        Up to five million  shares of NL common stock may be issued  pursuant to
the NL Option Plan and, at December 31, 2002,  3,651,000  shares were  available
for future  grants.  The NL Option Plan  provides  for the grant of options that
qualify  as  incentive  options  and for  options  which  are not so  qualified.
Generally,  stock options and SARs  (collectively,  "options")  are granted at a
price  equal to or greater  than 100% of the market  price at the date of grant,
vest over a five  year  period  and  expire  ten  years  from the date of grant.
Restricted  stock,   forfeitable   unless  certain  periods  of  employment  are
completed,  is held in escrow in the name of the grantee  until the  restriction
period expires. No SARs have been granted under the NL Option Plan.

                                     FA-26

        Changes in  outstanding  options  granted to  employees  of the  Company
pursuant to the NL Option Plan and the Predecessor Option Plan are summarized in
the table below.


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

                                                                          
Outstanding at December 31, 1999 ...........          2       $14.25      $14.25      $  21

    Granted ................................          4        14.25       14.25         64
    Exercised ..............................         (1)       14.25       14.25        (17)
                                                     --       ------      ------      -----

Outstanding at December 31, 2000 ...........          5        14.25       14.25         68

    Granted in 2001 ........................          6        20.11       20.11        121
                                                     --       ------      ------      -----

Outstanding at December 31, 2001 and 2002 ..         11       $14.25      $20.11      $ 189
                                                     ==       ======      ======      =====


        At December 31, 2002, 2001 and 2000 options to purchase  2,100,  300 and
nil shares, respectively,  were exercisable and options to purchase 3,300 shares
become  exercisable  in 2003. Of the  exercisable  options,  options to purchase
2,100 shares at December 31, 2002 had  exercise  prices less than NL's  December
31,  2002  quoted  market  price of $17.00  per  share.  Outstanding  options at
December 31, 2002 expire at various dates through 2011, with a  weighted-average
remaining life of nine years.

        The pro  forma  information  required  by SFAS  No.  123 is  based on an
estimation  of the fair value of options  issued  subsequent to January 1, 1995.
See Note 2. No options were granted in 2002. The weighted-average fair values of
options   granted  during  2001  and  2000  were  $7.52  and  $4.83  per  share,
respectively.  The fair values of employee stock options were  calculated  using
the  Black-Scholes  stock option  valuation  model with the  following  weighted
average  assumptions for grants in 2001 and 2000:  stock price volatility of 46%
and 48% in 2001 and 2000,  respectively;  risk-free rate of return of 5% in 2000
and 2001;  dividend yield of 4.0% in 2001 and 4.9% in 2000; and an expected term
of 9 years  in 2001  and  2000.  For  purposes  of pro  forma  disclosures,  the
estimated  fair value of the options is  amortized  to expense over the options'
vesting period.

Note 16 - Commitments and contingencies:

Leases

        The Company leases,  pursuant to operating leases, various manufacturing
and  office  space and  transportation  equipment.  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.

        The  Company  leases  the land  under  its  Leverkusen  TiO2  production
facility  pursuant to a lease expiring in 2050. The  Leverkusen  facility,  with
approximately  two-thirds of the Company's current TiO2 production capacity,  is
located  within  the  lessor's  extensive  manufacturing  complex.  Rent for the
Leverkusen facility is periodically established by agreement with the lessor for
periods of at least two years at a time. Under a separate  supplies and services
agreement  expiring  2011,  the lessor  provides some raw  materials,  including

                                     FA-27

chlorine and certain amounts of sulfuric acid, auxiliary and operating materials
and  utilities  services  necessary to operate the  Leverkusen  facility  with a
minimum  annual  cost of  approximately  $10.9  million.  Both the lease and the
supplies and services  agreements  restrict  the  Company's  ability to transfer
ownership or use of the Leverkusen facility.

        Net rent expense  aggregated $4 million in each of 2002,  2001 and 2000.
At  December  31,  2002,   minimum  rental   commitments   under  the  terms  of
noncancellable operating leases were as follows:


                                                       Real Estate     Equipment
                                                       -----------     ---------
                                                             (In thousands)
                                                                   
Years ending December 31,
    2003 .....................................          $   801          $   909
    2004 .....................................              801              547
    2005 .....................................              801              346
    2006 .....................................              801               35
    2007 .....................................              801                5
    2008 and thereafter ......................           17,289               11
                                                        -------          -------

                                                        $21,294          $ 1,853
                                                        =======          =======


Capital expenditures

        At December 31, 2002 the estimated cost to complete  capital projects in
process approximated $2.2 million.

Purchase commitments

        KUS has long-term supply contracts that provide for certain  affiliates'
chloride  feedstock  requirements  through 2003. The Company purchases  chloride
feedstock underlying these long-term supply contracts from KUS. See Note 14. The
agreements  require KUS to purchase certain minimum quantities of feedstock with
average  minimum annual  purchase  commitments  aggregating  approximately  $156
million.

Environmental, product liability and litigation matters

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

        The  Company's   production   facilities  operate  in  an  environmental
regulatory  framework in which  governmental  authorities  typically are granted
broad discretionary  powers which allow them to issue operating permits required

                                     FA-28

for the  plants to  operate.  The  Company  believes  all of its  plants  are in
substantial compliance with applicable environmental laws.

        Germany is a member of the  European  Union (the "EU") and  follows  its
initiatives.  The Company  believes  that it has all required  permits and is in
substantial  compliance with applicable EU requirements,  including EU Directive
92/112/EEC  regarding  establishment  of  procedures  for reduction and eventual
elimination of pollution caused by waste from the TiO2 industry.

        The Company  has a contract  with a third party to treat spent acid from
its  sulfate-process  plants.  With regard to the Company's  Nordenham,  Germany
plant,  either party may terminate the contract  after giving four years advance
notice.  Under  certain  circumstances,  the Company may  terminate the contract
after giving six months notice,  with respect to treatment of  by-products  from
the  Leverkusen,  Germany  plant.  The estimated  minimum  annual cost under the
agreement is approximately $12.8 million.

        The Company is responsible  for certain  closure costs at landfills used
and formerly  used by its  Leverkusen,  Germany  TiO2 plants.  The Company has a
reserve of approximately $6 million related to such landfills as of December 31,
2002.

        The   Company  is  also   involved  in  various   other   environmental,
contractual,  product liability and other claims and disputes  incidental to its
business.

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

Concentrations of credit risk

        Sales of TiO2 accounted for  approximately  98% of net sales during each
of 2002, 2001 and 2000. 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.  TiO2 is  sold  to over  1,000  customers,  with  the top ten  external
customers  approximating  20% of net sales in 2002, 18% of net sales in 2001 and
16% of net  sales in 2000.  Approximately  75% of the  Company's  TiO2  sales by
volume were to Europe in each of 2002, 2001 and 2000.  Approximately 8% in 2002,
6% in 2001 and 8% in 2000 of sales by volume were to North America.

                                     FA-29


Note 17 - Financial instruments:

        Summarized  below is the  estimated  fair value and related net carrying
value of the Company's financial instruments.


                                                     December 31,
                                     -------------------------------------------
                                              2002                    2001
                                     -------------------    --------------------
                                     Carrying      Fair      Carrying      Fair
                                      Amount       Value      Amount       Value
                                     --------      -----    ---------      -----
                                                     (In millions)

                                                               
Cash and cash equivalents ......       $ 7.8       $ 7.8       $ 1.7       $ 1.7
Note receivable from KEU .......        --          --          17.2        17.2

Note payable to KII ............        74.8        74.8        75.0        75.0


        The Company held no  derivative  financial  instruments  at December 31,
2002 and 2001.

Note 18 - Quarterly financial data (unaudited):


                                                    Quarters ended
                                       -----------------------------------------
                                       March 31    June 30   Sept. 30    Dec. 31
                                       --------    -------   --------    -------
                                                    (In thousands)

                                                            
Year ended December 31, 2002:
    Net sales ......................   $ 96,699   $ 96,083   $101,362   $ 90,217
    Cost of sales ..................     81,778     84,133     81,000     76,395
    Operating income ...............      7,005      4,817     12,049      2,862
    Income before income taxes .....      5,995      4,516     12,434      2,791
    Net income .....................      7,192      2,577     10,039      2,622

Year ended December 31, 2001:
    Net sales ......................   $106,912   $ 96,692   $ 93,155   $ 82,601
    Cost of sales ..................     76,920     72,549     71,126     59,489
    Operating income ...............     22,271     16,467     14,705     23,872
    Income before income taxes .....     20,111     16,580     17,325     32,536
    Net income .....................     16,102     14,797     13,760     41,148



                                     FA-30








                       KRONOS DENMARK APS AND SUBSIDIARIES

                   Index of Consolidated Financial Statements


Financial Statements                                               Pages
- --------------------                                               -----

Report of Independent Accountants                                  FB-2

Consolidated Balance Sheets - December 31, 2002 and 2001           FB-3 / FB-4

Consolidated Statements of Income - Years ended
  December 31, 2002, 2001 and 2000                                 FB-5

Consolidated Statements of Comprehensive Income - Years ended
  December 31, 2002, 2001 and 2000                                 FB-6

Consolidated Statements of Stockholder's Equity - Years ended
  December 31, 2002, 2001 and 2000                                 FB-7

Consolidated Statements of Cash Flows - Years ended
  December 31, 2002, 2001 and 2000                                 FB-8 / FB-9

Notes to Consolidated Financial Statements                         FB-10 / FB-30



                                      FB-1










                        REPORT OF INDEPENDENT ACCOUNTANTS



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  Subsidiaries  at December 31, 2002 and 2001,
and the results of their  operations  and their cash flows for each of the three
years in the period  ended  December  31,  2002 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
auditing  standards  generally  accepted in the United States of America,  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.





PricewaterhouseCoopers
Copenhagen, Denmark

February 12, 2003

/s/ Carsten Gerner                            /s/ Soren Skov Larsen
State Authorized Public Accountant            State Authorized Public Accountant


                                      FB-2





                       KRONOS DENMARK APS AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                        (In thousands, except share data)




                                                               December 31,
                                                           ---------------------
        ASSETS                                               2002         2001
                                                           --------     --------

                                                                  
Current assets:
    Cash and cash equivalents ........................     $  2,913     $  5,430
    Accounts and notes receivable ....................       14,075       10,142
    Receivable from affiliates .......................        2,327          977
    Refundable income taxes ..........................        1,310        1,116
    Inventories ......................................       56,232       48,320
    Prepaid expenses .................................        2,142        1,474
    Deferred income taxes ............................           16           33
                                                           --------     --------

        Total current assets .........................       79,015       67,492
                                                           --------     --------


Other assets:
    Prepaid pension cost .............................       17,572       14,696
    Other ............................................        3,362          642
                                                           --------     --------

        Total other assets ...........................       20,934       15,338
                                                           --------     --------


Property and equipment:
    Land .............................................       14,385       11,508
    Buildings ........................................       32,151       26,758
    Machinery and equipment ..........................      145,354      115,946
    Mining properties ................................       65,296       48,167
    Construction in progress .........................          595          410
                                                           --------     --------
                                                            257,781      202,789
    Less accumulated depreciation and depletion ......      153,376      117,348
                                                           --------     --------

        Net property and equipment ...................      104,405       85,441
                                                           --------     --------

                                                           $204,354     $168,271
                                                           ========     ========


                                      FB-3





                       KRONOS DENMARK APS AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                        (In thousands, except share data)



                                                               December 31,
                                                         ----------------------
        LIABILITIES AND STOCKHOLDER'S EQUITY                2002        2001
                                                         ---------    ---------

                                                                
Current liabilities:
    Notes payable ....................................   $    --      $  22,180
    Current maturities of long-term debt .............       1,298        1,033
    Accounts payable and accrued liabilities .........      31,500       20,996
    Note payable to Kronos Titan GmbH and Co. OHG ....        --         17,204
    Payable to affiliates ............................      25,393        5,435
    Income taxes .....................................       4,842        5,261
    Deferred income taxes ............................       1,498        1,480
                                                         ---------    ---------

        Total current liabilities ....................      64,531       73,589
                                                         ---------    ---------

Noncurrent liabilities:
    Long-term debt ...................................      27,666        1,465
    Deferred income taxes ............................      29,694       25,953
    Other ............................................         884          750
                                                         ---------    ---------

        Total noncurrent liabilities .................      58,244       28,168
                                                         ---------    ---------

Stockholder's equity:
    Common stock - 100 Danish kroner par value; 10,000
      shares authorized; 10,000 shares issued ........         136          136
    Additional paid-in capital .......................     216,996      216,996
    Accumulated deficit ..............................    (120,351)    (118,335)
    Accumulated other comprehensive loss - currency
      translation adjustment .........................     (15,202)     (32,283)
                                                         ---------    ---------

        Total stockholder's equity ...................      81,579       66,514
                                                         ---------    ---------

                                                         $ 204,354    $ 168,271
                                                         =========    =========


Commitments and contingencies (Notes 7, 12 and 15)

          See accompanying notes to consolidated financial statements.
                                      FB-4



                       KRONOS DENMARK APS AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                                 (In thousands)



                                                    Years ended December 31,
                                                  ------------------------------
                                                    2002       2001       2000
                                                  --------   --------   --------

                                                               
Revenues and other income:
    Net sales .................................   $243,412   $233,932   $239,830
    Interest and other income from affiliates .        325        813      3,749
    Other income, net .........................        567        490        528
                                                  --------   --------   --------

                                                   244,304    235,235    244,107
                                                  --------   --------   --------

Costs and expenses:
    Cost of sales .............................    206,690    185,299    178,437
    Selling, general and administrative .......     17,406     15,617     18,373
    Interest ..................................      2,548      2,256        299
    Interest and other expense to affiliates ..      2,938      3,250      4,351
                                                  --------   --------   --------

                                                   229,582    206,422    201,460
                                                  --------   --------   --------

    Income before income taxes ................     14,722     28,813     42,647

Income tax expense ............................      3,378     10,374     15,146
                                                  --------   --------   --------

    Net  income ...............................   $ 11,344   $ 18,439   $ 27,501
                                                  ========   ========   ========

          See accompanying notes to consolidated financial statements.
                                      FB-5




                       KRONOS DENMARK APS AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                 (In thousands)



                                                    Years ended December 31,
                                                -------------------------------
                                                  2002       2001        2000
                                                --------   --------    --------


                                                              
Net income ..................................   $ 11,344   $ 18,439    $ 27,501
                                                --------   --------    --------

Other comprehensive income (loss) - currency
  translation adjustment ....................     17,081     (3,402)    (19,052)
                                                --------   --------    --------

        Total other comprehensive income
          (loss) ............................     17,081     (3,402)    (19,052)
                                                --------   --------    --------

                                                $ 28,425   $ 15,037    $  8,449
                                                ========   ========    ========





          See accompanying notes to consolidated financial statements.
                                      FB-6




                       KRONOS DENMARK APS AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                  Years ended December 31, 2002, 2001 and 2000
                                 (In thousands)


                                                                                               Accumulated
                                                                                                  other
                                                                                              comprehensive
                                                                                  Notes           loss-
                                                 Additional      Retained      receivable        currency
                                     Common       paid-in        earnings         from         translation
                                     stock        capital       (deficit)      affiliates      adjustments        Total
                                   --------     -----------    ------------    -----------    -------------     ---------


                                                                                              
Balance at December 31, 1999      $     136      $ 206,425      $  31,112       $(142,265)      $  (9,829)      $  85,579

Net income .................           --             --           27,501            --              --            27,501
Other comprehensive loss ...           --             --             --              --           (19,052)        (19,052)
Common dividends declared:
    Cash ...................           --             --          (19,715)           --              --           (19,715)
    Noncash ................           --             --         (142,265)        142,265            --              --
                                  ---------      ---------      ---------       ---------       ---------       ---------

Balance at December 31, 2000            136        206,425       (103,367)           --           (28,881)         74,313

Net income .................           --             --           18,439            --              --            18,439
Other comprehensive loss ...           --             --             --              --            (3,402)         (3,402)
Capital contribution .......           --           10,571           --              --              --            10,571
Common dividends declared ..           --             --          (33,407)           --              --           (33,407)
                                  ---------      ---------      ---------       ---------       ---------       ---------

Balance at December 31, 2001            136        216,996       (118,335)           --           (32,283)         66,514

Net income .................           --             --           11,344            --              --            11,344
Other comprehensive income .           --             --             --              --            17,081          17,081
Common dividends declared ..           --             --          (13,360)           --              --           (13,360)
                                  ---------      ---------      ---------       ---------       ---------       ---------


Balance at December 31, 2002      $     136      $ 216,996      $(120,351)      $    --         $ (15,202)      $  81,579
                                  =========      =========      =========       =========       =========       =========

          See accompanying notes to consolidated financial statements.
                                      FB-7




                       KRONOS DENMARK APS AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)



                                                   Years ended December 31,
                                               --------------------------------
                                                 2002        2001        2000
                                               --------    --------    --------

                                                              
Cash flows from operating activities:
    Net income .............................   $ 11,344    $ 18,439    $ 27,501
    Depreciation, depletion and amortization      9,408       8,774       8,442
    Noncash interest expense ...............        150        --          --
    Deferred income taxes ..................     (2,011)       (125)       (676)
    Net loss (gain) from disposition of
      property and equipment ...............        239         (12)         (7)
    Pension, net ...........................      1,132       1,073         255
                                               --------    --------    --------

                                                 20,262      28,149      35,515
    Change in assets and liabilities:
        Accounts and notes receivable ......     (1,307)     (2,280)     (1,687)
        Inventories ........................      1,377      (1,619)      1,184
        Prepaid expenses ...................       (317)       (156)       (205)
        Accounts payable and accrued
          liabilities ......................      5,098      (4,321)      3,750
        Income taxes .......................     (1,542)     (1,817)      3,414
        Accounts with affiliates ...........     19,152       2,903     (28,018)
        Other noncurrent assets ............        263         153        (104)
        Other noncurrent liabilities .......        (73)        (65)        (69)
                                               --------    --------    --------

            Net cash provided by operating
              activities ...................     42,913      20,947      13,780
                                               --------    --------    --------

Cash flows from investing activities:
    Capital expenditures ...................    (10,329)    (11,799)    (12,325)
    Change in restricted cash equivalents
      and restricted marketable debt
      securities, net ......................     (1,665)       (577)       --
    Proceeds from disposition of property
      and equipment ........................        823          59          62
                                               --------    --------    --------

            Net cash used by investing
              activities ...................    (11,171)    (12,317)    (12,263)
                                               --------    --------    --------


                                      FB-8



                       KRONOS DENMARK APS AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                 (In thousands)




                                                    Years ended December 31,
                                                --------------------------------
                                                  2002        2001        2000
                                                --------    --------    --------

                                                               
Cash flows from financing activities:
    Indebtedness:
        Borrowings ..........................   $ 55,727    $  1,437    $ 23,115
        Principal payments ..................    (58,117)     (1,031)     (5,417)
        Deferred financing fees .............       (953)       --          --
    Loans from affiliates:
        Loans ...............................       --        16,677        --
        Repayments ..........................    (18,097)       --          --
    Capital contribution ....................       --        10,571        --
    Dividends paid ..........................    (13,360)    (33,407)    (19,715)
                                                --------    --------    --------

        Net cash used by financing activities    (34,800)     (5,753)     (2,017)
                                                --------    --------    --------

Cash and cash equivalents:
    Net change during the year from:
        Operating, investing and financing
          activities ........................     (3,058)      2,877        (500)
        Currency translation ................        541         (75)        (74)
    Balance at beginning of  period .........      5,430       2,628       3,202
                                                --------    --------    --------

    Balance at end of period ................   $  2,913    $  5,430    $  2,628
                                                ========    ========    ========

Supplemental disclosures:
    Cash paid for:
        Interest ............................   $  5,461    $  5,459    $  4,609
        Income taxes ........................      6,931      12,316      12,405


          See accompanying notes to consolidated financial statements.
                                      FB-9



                       KRONOS DENMARK APS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Organization and basis of presentation:

        Kronos Denmark ApS ("KDK") 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, Inc. ("Kronos"), a wholly owned subsidiary of
NL  Industries,  Inc.  ("NL").  NL is  primarily  a holding  company  and Kronos
conducts its titanium  dioxide  pigments  ("TiO2")  operations.  At December 31,
2002,  Valhi,  Inc.  ("Valhi")  and a subsidiary  of Valhi,  each  affiliates of
Contran  Corporation  ("Contran"),  held  approximately  84% of NL's outstanding
common  stock.  At  December  31,  2002,   Contran  and  its  subsidiaries  held
approximately  93% of Valhi's  outstanding  common stock.  Substantially  all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is the sole trustee.  Mr. Simmons, the Chairman of the Board of each of Contran,
Valhi and NL, may be deemed to control each of such companies and KDK.

        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.  KDK and its
subsidiaries  also prepare  financial  statements on other bases, as required in
countries in which such entities are resident.

        KDK's current operations are conducted primarily through its Belgian and
Norwegian  subsidiaries  with a TiO2  plant in  Belgium  and a TiO2 plant and an
ilmenite  ore mining  operation  in  Norway.  KDK also  operates  TiO2 sales and
distribution facilities in Denmark and the Netherlands.

        KDK is not a registrant with the U.S. Securities and Exchange Commission
("SEC") and is 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:

Principles of consolidation and management's estimates

        The accompanying  consolidated financial statements include the accounts
of KDK and its wholly owned  subsidiaries  (collectively,  the  "Company").  All
material  intercompany  accounts  and  balances  have been  eliminated.  Certain
prior-year  amounts  have been  reclassified  to  conform  to the  current  year
presentation.  The  preparation of financial  statements in conformity with GAAP
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial statements,  and the reported amount of
revenues and expenses  during the reporting  period.  Actual  results may differ
from previously estimated amounts under different assumptions or conditions. The
Company has no  involvement  with any variable  interest  entity  covered by the
scope of FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities."

                                      FB-10


Translation of foreign currencies

        The functional  currencies of the Company include the Danish kroner, the
euro and the  Norwegian  kroner.  Assets  and  liabilities  of the  Company  are
translated  to U.S.  dollars at year-end  rates of  exchange  and  revenues  and
expenses are translated 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.

Cash equivalents

        Cash equivalents include bank deposits with original maturities of three
months or less.

Inventories

        Inventories are stated at the lower of cost  (principally  average cost)
or market. Amounts are removed from inventories at average cost.

Property, equipment, depreciation and depletion

        Property and  equipment  are stated at cost.  Interest  costs related to
major, long-term capital projects are capitalized as a component of construction
costs.  Expenditures for  maintenance,  repairs and minor renewals are expensed;
expenditures for major improvements are capitalized.

        Depreciation is computed  principally by the  straight-line  method over
the  estimated  useful  lives of ten to forty years for  buildings  and three to
twenty years for  machinery  and  equipment.  Depletion of mining  properties is
computed by the unit-of-production and straight-line methods.

        When  events or changes in  circumstances  indicate  that  assets may be
impaired,  an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances  include, among other things, (i) significant
current  and prior  periods or current  and  projected  periods  with  operating
losses,  (ii) a significant  decrease in the market value of an asset or (iii) a
significant  change  in the  extent  or  manner  in which an asset is used.  All
relevant  factors  are  considered.  The test for  impairment  is  performed  by
comparing the estimated  future  undiscounted  cash flows (exclusive of interest
expense)  associated  with  the  asset  to the  asset's  net  carrying  value to
determine  if a  write-down  to market  value or  discounted  cash flow value is
required.  Effective January 1, 2002, the Company  commenced  accounting for the
impairment of other long-lived assets (such as property and equipment and mining
properties)  in  accordance  with  Statement of Financial  Accounting  Standards
("SFAS")  No. 144 as discussed  under  "Accounting  principles  adopted in 2002"
below.

Long-term debt and notes payable to affiliates

        Where  applicable,  long-term  debt and notes payable to affiliates  are
stated net of unamortized original issue discount ("OID"). OID is amortized over
the period  during  which cash  interest  payments are not required and deferred
financing costs are amortized over the term of the applicable issue, both by the
interest method.

                                      FB-11


Employee benefit plans

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

        The Company has elected the  disclosure  alternative  prescribed by SFAS
No. 123, "Accounting for Stock-Based  Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based  Compensation - Transition and  Disclosure,"  and to
account for its stock-based  employee  compensation  related to stock options in
accordance with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting
for Stock Issued to Employees," and its various interpretations.  Under APBO No.
25, no  compensation  cost is generally  recognized  for fixed stock  options in
which the  exercise  price is not less than the market  price on the grant date.
During the fourth  quarter of 2002,  the Company  commenced  accounting  for its
stock options using the variable accounting method, which requires the intrinsic
value of the stock  option to be  accrued  as an  expense.  The  Company is also
charged  by NL  for  stock  options  exercised  by  employees  of  the  Company.
Compensation  cost  recognized by the Company in accordance with APBO No. 25 and
the amount charged to the Company by NL for stock option  exercises was $126,000
in 2002 and nil in each of 2001 and 2000.

        The following table  illustrates the effect on net income if the Company
had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.


                                                     Years ended December 31,
                                                --------------------------------
                                                  2002        2001        2000
                                                --------    --------    --------
                                                        (In thousands)

                                                               
Net income - as reported ....................   $ 11,344    $ 18,439    $ 27,501
Add back: Stock-based compensation cost,
  net of tax, included in reported net income         75        --          --
Deduct:  Stock-based compensation cost,
  net of tax, determined under fair value
  based method for all awards ...............        (79)        (60)        (51)
                                                --------    --------    --------

Net income - pro forma ......................   $ 11,340    $ 18,379    $ 27,450
                                                ========    ========    ========


Environmental remediation costs

        Environmental  remediation  costs  are  accrued  when  estimated  future
expenditures  are  probable  and  reasonably  estimable.  The  estimated  future
expenditures  are  generally  not  discounted  to present  value.  Recoveries of
remediation  costs from other parties,  if any, are reported as receivables when
their receipt is deemed probable.  At December 31, 2002 and 2001, no receivables
for recoveries have been recognized.

Net sales

        The Company adopted the SEC's Staff Accounting Bulletin ("SAB") No. 101,
"Revenue  Recognition in Financial  Statements,"  as amended,  in 2000.  Revenue
generally is realized or realizable and earned when all of the  requirements  of
SAB No. 101 are met, including when title and the risks and rewards of ownership
passes to the  customer  (generally  at the time the  product  is shipped to the
customer). The impact of adopting SAB No. 101 was not material.  Amounts charged
to customers for shipping and handling are included in net sales.

                                      FB-12


Repair and maintenance costs

        The Company performs planned major maintenance activities throughout the
year.  Repair and maintenance  costs estimated to be incurred in connection with
planned major maintenance  activities are accrued in advance and are included in
cost of goods sold.

Shipping and handling costs

        Shipping  and  handling  costs are  included  in  selling,  general  and
administrative expense and were $9.2 million in 2002, $8.5 million in 2001, $8.8
million in 2000.

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.  The Company
periodically   evaluates   its  deferred  tax  assets  in  the  various   taxing
jurisdictions in which it operates and adjusts any related valuation  allowance.
The Company's  valuation allowance is equal to the amount of deferred tax assets
which the Company  believes do not meet the  "more-likely-than-not"  recognition
criteria.

Derivatives and hedging activities

     The Company adopted SFAS No. 133,  "Accounting  for Derivative  Instruments
and Hedging  Activities,"  as amended,  effective  January 1, 2001. SFAS No. 133
establishes accounting standards for derivative  instruments,  including certain
derivative instruments embedded in other contracts,  and for hedging activities.
Under  SFAS No.  133,  all  derivatives  are  recognized  as  either  assets  or
liabilities and measured at fair value. The accounting for changes in fair value
of  derivatives  is  dependent  upon  the  intended  use of the  derivative.  As
permitted  by the  transition  requirements  of SFAS No. 133,  as  amended,  the
Company  exempted from the scope of SFAS No. 133 all host  contracts  containing
embedded  derivatives which were issued or acquired prior to January 1, 1999. At
December  31,  2002 and 2001,  the  Company  was not a party to any  significant
derivative or hedging instrument covered by SFAS No. 133. There was no impact on
the Company's financial statements from adopting SFAS No. 133.

        The Company  periodically  uses 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.  The Company has not entered into
these  contracts for trading or  speculative  purposes in the past,  nor does it
currently  anticipate doing so in the future. The Company was not a party to any
such contracts during 2002, 2001 and 2000 except as disclosed in Note 16.

Accounting principles adopted in 2002

        The Company  adopted SFAS No. 144,  "Accounting  for the  Impairment  or
Disposal of Long-Lived  Assets," effective January 1, 2002. SFAS No. 144 retains
the fundamental  provisions of existing GAAP with respect to the recognition and
measurement  of  long-lived  asset   impairment   contained  in  SFAS  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." However, SFAS No. 144 provides new guidance intended to address
certain  significant   implementation  issues  associated  with  SFAS  No.  121,
including expanded guidance with respect to appropriate cash flows to be used to

                                      FB-13


determine  whether  recognition of any long-lived  asset impairment is required,
and if required how to measure the amount of the  impairment.  SFAS No. 144 also
requires  that any net assets to be  disposed  of by sale to be  reported at the
lower of  carrying  value or fair  value  less  cost to sell,  and  expands  the
reporting of discontinued  operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity.  The adoption of SFAS No. 144  effective  January 1, 2002 did not have a
material effect on the Company's  consolidated  financial  position,  results of
operations or liquidity.

        In November  2002, the FASB issued FIN No. 45,  "Guarantor's  Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness  of  Others."  FIN No. 45  requires  a  guarantor  to  recognize  a
liability at the  inception  of a guarantee  covered by the scope of FIN No. 45,
equal to the fair value of the  obligation  undertaken in issuing the guarantee.
FIN No. 45 also  expands the  disclosures  requirements  with respect to certain
guarantees. The initial recognition and measurement provisions of FIN No. 45 are
applicable on a prospective  basis for any  guarantees  issued or modified after
December  31,  2002,  while the  disclosure  requirements  were  effective  upon
issuance.  The Company is not a party to any guarantees  covered by the scope of
FIN No. 45 as of December 31, 2002.

Accounting principles not yet adopted

        The Company will adopt SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations," effective January 1, 2003. Under SFAS No. 143, the fair value of a
liability for an asset retirement obligation covered under the scope of SFAS No.
143 would be recognized  in the period in which the liability is incurred,  with
an offsetting  increase in the carrying amount of the related  long-lived asset.
Over time,  the  liability  would be  accreted  to its  present  value,  and the
capitalized cost would be depreciated over the useful life of the related asset.
Upon  settlement of the liability,  an entity would either settle the obligation
for its recorded amount or incur a gain or loss upon settlement.

        Under the transition provisions of SFAS No. 143, at the date of adoption
on January 1, 2003 the  Company  will  recognize  (i) an asset  retirement  cost
capitalized  as an increase to the  carrying  value of its  property,  plant and
equipment,  (ii)  accumulated  depreciation on such capitalized cost and (iii) a
liability  for the  asset  retirement  obligation.  Amounts  resulting  from the
initial application of SFAS No. 143 are measured using information,  assumptions
and interest rates all as of January 1, 2003. The amount recognized as the asset
retirement cost is measured as of the date the asset  retirement  obligation was
incurred.   Cumulative  accretion  on  the  asset  retirement  obligation,   and
accumulated  depreciation  on the asset  retirement  cost, is recognized for the
time period from the date the asset  retirement  cost and  liability  would have
been  recognized  had the  provisions of SFAS No. 143 been in effect at the date
the liability was incurred,  through  January 1, 2003. The  difference,  if any,
between the  amounts to be  recognized  as  described  above and any  associated
amounts  recognized in the Company's balance sheet as of December 31, 2002 would
be recognized as a cumulative effect of a change in accounting  principles as of
the date of adoption.  The effect of adopting SFAS No. 143 as of January 1, 2003
as  summarized  in the table below is not expected to have a material  effect on
the  Company's  consolidated  financial  position,   results  of  operations  or
liquidity:

                                      FB-14




                                                                      Amount
                                                                  -------------
                                                                  (in millions)

                                                                    
Increase in carrying value of net property,
  plant and equipment:
    Cost ...........................................................   $ .4
    Accumulated depreciation .......................................    (.1)
Decrease  in  liabilities  previously  accrued
  for  closure  and  post  closure activities ......................     .2
                                                                       ----
Asset retirement obligation recognized .............................    (.5)
                                                                       ----

        Net impact .................................................   $ --
                                                                       ====


        The Company will adopt SFAS No. 146,  "Accounting  for Costs  Associated
with  Exit or  Disposal  Activities,"  effective  January  1,  2003  for exit or
disposal activities  initiated on or after the date of adoption.  Under SFAS No.
146, costs associated with exit activities,  as defined, that are covered by the
scope of SFAS No. 146 will be recognized  and measured  initially at fair value,
generally in the period in which the liability is incurred. Costs covered by the
scope of SFAS No. 146 include termination benefits provided to employees,  costs
to  consolidate  facilities  or  relocate  employees,  and  costs  to  terminate
contracts  (other than a capital  lease).  Under  existing GAAP, a liability for
such an exit cost is recognized  at the date an exit plan is adopted,  which may
or may not be the date at which the  liability  has been  incurred.  The Company
believes the adoption of SFAS No. 146 will not have a material adverse effect on
the  Company's  consolidated  financial  position,   results  of  operations  or
liquidity.

Note 3 - Accounts and notes receivable:


                                                             December 31,
                                                       -------------------------
                                                         2002            2001
                                                       --------        --------
                                                            (In thousands)

                                                                 
Trade receivables ..............................       $ 11,598        $  7,558
Recoverable VAT and other receivables ..........          2,721           2,793
Allowance for doubtful accounts ................           (244)           (209)
                                                       --------        --------

                                                       $ 14,075        $ 10,142
                                                       ========        ========


        During 2000 the Company  was party to an accounts  receivable  factoring
agreement (the "Factoring Agreement") with its affiliate,  Kronos World Services
S.A./N.V.  ("KWS").  Beginning  in  February  2000  KII  assumed  the  Factoring
Agreement  from KWS.  Effective  June  2002,  the KII  Factoring  Agreement  was
assigned to Kronos Titan GmbH and Co. OHG ("TG"),  a 99.95%-owned  subsidiary of
KII. KWS, KII and TG (collectively  the "Factoring  Agent")  contracted with the
Company  whereby the Company  factored its export  accounts  receivable  without
recourse  for a fee of 0.85% for the  Company's  export  receivables  related to
Kronos Europe S.A./N.V.  ("KEU") and 1.2% for export receivables  related to its
Norwegian  operating  subsidiaries,  Kronos  Titan A/S  ("TAS")  and Titania A/S
("TIA").  The  Factoring  Agent,  upon  non-recourse  transfer from the Company,
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.

        Export  receivables  sold  by the  Company  pursuant  to  the  Factoring
Agreement during 2002, 2001 and 2000 aggregated $92.0 million, $82.9 million and
$83.5 million, respectively.

                                     FB-15



Note 4 - Inventories:


                                                              December 31,
                                                      --------------------------
                                                        2002               2001
                                                      -------            -------
                                                            (In thousands)

                                                                   
Raw materials ............................            $16,527            $14,503
Work in process ..........................              2,520              1,685
Finished products ........................             24,115             22,178
Supplies .................................             13,070              9,954
                                                      -------            -------

                                                      $56,232            $48,320
                                                      =======            =======


Note 5 - Other noncurrent assets:


                                                                December 31,
                                                             -------------------
                                                              2002         2001
                                                             ------       ------
                                                               (In thousands)

                                                                    
Restricted marketable debt securities ................       $2,492       $  577
Deferred financing costs, net (see Note 7) ...........          795         --
Other ................................................           75           65
                                                             ------       ------

                                                             $3,362       $  642
                                                             ======       ======


        Restricted  marketable  debt securities as of December 31, 2002 and 2001
represented  certain  noncurrent debt securities used to support certain capital
requirements  regarding the Company's Norwegian operating  subsidiaries' defined
benefit pension plans in accordance with applicable Norwegian law.

Note 6 - Accounts payable and accrued liabilities:


                                                              December 31,
                                                       -------------------------
                                                        2000              2001
                                                       -------           -------
                                                            (In thousands)

                                                                   
Accounts payable ...........................           $17,547           $10,795
                                                       -------           -------
Accrued liabilities:
    Employee benefits ......................             8,174             6,238
    Other ..................................             5,779             3,963
                                                       -------           -------

                                                        13,953            10,201
                                                       -------           -------

                                                       $31,500           $20,996
                                                       =======           =======

                                     FB-16


Note 7 - Notes payable and long-term debt:


                                                               December 31,
                                                         -----------------------
                                                          2002            2001
                                                         -------         -------

                                                                   
Notes payable (NOK 200 million) ................         $  --           $22,180
                                                         -------         -------

Long-term debt:
    Revolving credit facility ..................         $27,077         $  --
    Other ......................................           1,887           2,498
                                                         -------         -------
                                                          28,964           2,498

Less current maturities ........................           1,298           1,033
                                                         -------         -------

                                                         $27,666         $ 1,465
                                                         =======         =======


        Notes payable as of December 31, 2001 consisted of short-term borrowings
denominated  in  Norwegian  kroner  due  within  one year from  non-U.S.  banks.
Weighted  average  interest rates on the note payable were 7.27% at December 31,
2001.  Notes  payable  totaling  $26.5 million were repaid on June 28, 2002 with
proceeds from the revolving credit facility, and the agreements were terminated.
See description of revolving credit facility below.

        In June 2002 the  Company's  operating  subsidiaries  in  Belgium  (KEU)
Norway (TAS and TIA), and KII's operating  subsidiary in Germany (TG),  referred
to as  the  "Borrowers"  entered  into a  three-year  (euro)80  million  secured
revolving credit facility ("Credit Facility").  The Credit Facility is available
in multiple currencies,  including U.S. dollars,  euros and Norwegian kroner. As
of December 31, 2002, (euro)15 million ($15.6 million) and NOK 80 million ($11.5
million) were outstanding under the Credit Facility at the Belgian and Norwegian
operating subsidiaries (nil by the German operating subsidiary). At December 31,
2002,  (euro)52  million ($54 million) was available for future working  capital
requirements and general  corporate  purposes of the Borrowers.  Borrowings bear
interest at the applicable  interbank market rate plus 1.75%. As of December 31,
2002,  the interest  rate was 4.80% and 8.86% on the euro and  Norwegian  kroner
borrowings, respectively, and the weighted average interest rate was 6.51%.

        The  Credit  Facility  is  collateralized  by  accounts  receivable  and
inventory of the Borrowers, plus a limited pledge of certain other assets of the
Company.  The  Credit  Facility  contains,  among  others,  various  restrictive
covenants,  including  restrictions on incurring liens, asset sales,  additional
financial indebtedness, mergers, investments and acquisitions, transactions with
affiliates and dividends.  KEU and TG are unconditionally  jointly and severally
liable for any and all outstanding  borrowings  under the Credit  Facility.  The
parent company of TAS and TIA, Kronos Norge A/S, is jointly and severally liable
for any and all outstanding  borrowings  under the Credit Facility to the extent
permitted by  Norwegian  law. The Company has a (euro)5  million  sub-limit  for
issuing  letters of credit with  (euro)1.8  million  ($1.8  million)  letters of
credit issued at December 31, 2002.  The Borrowers  were in compliance  with all
the covenants as of December 31, 2002.

                                     FB-17


        Deferred  financing  costs of $1.4 million for the Credit Facility ($1.0
million paid by the Company,  with the  remaining $.4 million paid by the German
operating  subsidiary)  are being amortized over the life of the Credit Facility
and are included in other noncurrent assets as of December 31, 2002.

        Unused  lines of credit  available  for  borrowing  under the  Company's
non-U.S.  credit  facilities  approximated  $56  million at December  31,  2002,
including $54 million under the Credit Facility.

        In June 2002 KII issued (euro)285  million ($280 million when issued and
$297 million at December 31, 2002)  principal  amount of 8.875%  Senior  Secured
Notes (the "Notes") due 2009.  The Notes are  collateralized  by first  priority
liens on 65% of the common stock or other  equity  interests of certain of KII's
first-tier subsidiaries, including the Company. The Notes are issued pursuant to
an indenture which contains a number of covenants and restrictions  which, among
other things,  restricts the ability of KII and its subsidiaries,  including the
Company,  to incur debt,  incur liens or merge or  consolidate  with, or sell or
transfer all or substantially all of their assets to, another entity.

        The  aggregate  maturities  of  long-term  debt at December 31, 2002 are
shown in the table below.


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

    2003 ..................................................           $ 1,298
    2004 ..................................................               279
    2005 ..................................................            27,224
    2006 ..................................................               145
    2007 ..................................................                18
                                                                      -------

                                                                      $28,964
                                                                      =======


Note 8 - Note payable to TG:

        The short-term  euro-denominated  note payable to TG ((euro)19.5 million
or $17.2 million at December 31, 2001) was due within one year and bore interest
at EURIBOR plus 0.5% (3.84% at December 31, 2001).  The note was  established on
June 13, 2001 for  general  corporate  purposes.  The note was repaid in full in
June 2002 with proceeds from the Credit Facility and the agreement was canceled.

Note 9 - Employee benefit plans:

Company-sponsored pension plans

        The Company  maintains  various  defined  benefit pension plans covering
substantially all employees.  Personnel are covered by plans in their respective
countries.  In 2002 the Company  amended its 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  Company-sponsored
defined   contribution   plans.   The   Company's   expense   related   to   the
Company-sponsored defined contribution plans was not material in 2002.

                                     FB-18


        Certain  actuarial  assumptions  used in measuring  the defined  benefit
pension assets, liabilities and expenses are presented below.


                                                        Years ended December 31,
                                                  ------------------------------------
                                                     2002         2001         2000
                                                  ----------   ----------   ----------
                                                             (Percentages)

                                                                   
Discount rate .................................   5.5 to 6.0   5.8 to 6.0   6.0 to 6.0
Rate of increase in future compensation  levels   2.8 to 3.0   2.8 to 3.0   3.0 to 3.0
Long-term rate of return on plan assets .......   6.8 to 7.0   6.8 to 7.0   7.0 to 7.0


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

        SFAS No. 87, "Employers'  Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit  obligation  exceeds the unfunded accrued pension  liability.  Variances
from  actuarially  assumed rates will change the actuarial  valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.

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


                                                      Years ended December 31,
                                                    -----------------------------
                                                      2002       2001       2000
                                                    -------    -------    -------
                                                           (In thousands)

                                                                 
Net periodic pension cost:
    Service cost benefits .......................   $ 1,264    $ 1,154    $ 1,028
    Interest cost on projected benefit obligation
      ("PBO") ...................................     2,508      2,293      2,083
    Expected return on plan assets ..............    (2,660)    (2,613)    (2,919)
    Amortization of prior service cost ..........       223        201        238
    Amortization of net transition obligation ...       140        137        142
    Recognized actuarial losses .................       668        400        186
                                                    -------    -------    -------

                                                    $ 2,143    $ 1,572    $   758
                                                    =======    =======    =======


                                     FB-19



        The funded status of the Company's  defined benefit pension plans is set
forth below.


                                                               December 31,
                                                         ----------------------
                                                           2002          2001
                                                         --------      --------
                                                             (In thousands)

                                                                 
Change in PBO:
    Beginning of year ..............................     $ 39,317      $ 33,500
    Service cost ...................................        1,264         1,154
    Interest .......................................        2,508         2,293
    Participant contributions ......................          112           106
    Amendments .....................................         --             106
    Actuarial gain .................................       (1,371)         (596)
    Benefits paid ..................................       (2,495)       (2,475)
    Change in currency exchange rates ..............       10,726         5,229
                                                         --------      --------

        End of year ................................       50,061        39,317
                                                         --------      --------

Change in fair value of plan assets:
    Beginning of year ..............................       37,819        37,587
    Actual return on plan assets ...................          759         1,508
    Employer contributions .........................        1,011           499
    Participant contributions ......................          112           106
    Benefits paid ..................................       (2,495)       (2,475)
    Change in currency exchange rates ..............       10,118           594
                                                         --------      --------

        End of year ................................       47,324        37,819
                                                         --------      --------

Funded status at year end:
    Plan assets less than PBO ......................       (2,737)       (1,498)
    Unrecognized actuarial loss ....................       15,663        13,099
    Unrecognized prior service cost ................        3,221         2,713
    Unrecognized net transition obligation .........        1,425           382
                                                         --------      --------

                                                         $ 17,572      $ 14,696
                                                         ========      ========

Amounts recognized in the balance sheet -
  prepaid pension cost .............................     $ 17,572      $ 14,696
                                                         ========      ========


        At December 31, 2002 and 2001,  none of the  Company's  defined  benefit
pension plans have  accumulated  benefit  obligations in excess of fair value of
plan assets.

Incentive bonus programs

        Certain  employees are eligible to participate in the Company's  various
incentive bonus programs. The programs provide for annual payments, which may be
in the form of cash or NL common stock. The amount of the annual payment paid to
an employee,  if any, is based on formulas involving the profitability of Kronos
in relation to the annual operating plan and, for certain employees,  individual
performance.

                                     FB-20


Note 10 - Other income, net:


                                                       Years ended December 31,
                                                     ---------------------------
                                                      2002       2001       2000
                                                     -----      -----      -----
                                                           (In thousands)

                                                                  
Currency transaction gains (losses), net .......     $ 399      $(191)     $   3
Trade interest income ..........................       231        249        131
Disposition of property and equipment ..........      (239)        12          7
Other, net .....................................       176        420        387
                                                     -----      -----      -----

                                                     $ 567      $ 490      $ 528
                                                     =====      =====      =====


Note 11 - Other items:

        Advertising  costs are expensed as incurred and were $.1 million in each
of 2002 and 2001 and nil in 2000.

        Research,  development  and certain  sales  technical  support costs are
expensed as incurred and  approximated  $.3 million in each of 2002 and 2001 and
$.1 million in 2000.

        Interest  capitalized in connection with long-term  capital projects was
nil in each of 2002, 2001 and 2000.

                                     FB-21


Note 12 - Income taxes:

        The components of (i) income from  continuing  operations  before income
taxes ("pretax  income"),  (ii) the difference  between the provision for income
taxes attributable to pretax income and the amounts that would be expected using
the Danish statutory income tax rate of 30% in 2002, 2001 and 32% in 2000, (iii)
the  provision  for income taxes and (iv) the  comprehensive  tax  provision are
presented below.


..                                                   Years ended December 31,
                                              --------------------------------
                                                2002        2001        2000
                                              --------    --------    --------
                                                      (In thousands)
                                                              
Pretax income (loss):
    Denmark ................................   $    207    $    (71)   $     82
    Non-Denmark ............................     14,515      28,884      42,565
                                               --------    --------    --------

                                               $ 14,722    $ 28,813    $ 42,647
                                               ========    ========    ========

Expected tax expense .......................   $  4,417    $  8,644    $ 13,647
Non-Denmark tax rates ......................        650       1,170       1,694
Valuation allowance ........................        658        --          --
Rate change adjustment of deferred taxes ...     (2,332)       --          --
Other, net .................................        (15)        560        (195)
                                               --------    --------    --------

        Income tax expense .................   $  3,378    $ 10,374    $ 15,146
                                               ========    ========    ========

Provision for income taxes:
    Current income tax expense:
        Denmark ............................   $     48    $   --      $     58
        Non-Denmark ........................      5,341      10,499      15,764
                                               --------    --------    --------

                                                  5,389      10,499      15,822
                                               --------    --------    --------

    Deferred income tax expense (benefit):
        Denmark ............................         (1)        540        (227)
        Non-Denmark ........................     (2,010)       (665)       (449)
                                               --------    --------    --------

                                                 (2,011)       (125)       (676)
                                               --------    --------    --------

                                               $  3,378    $ 10,374    $ 15,146
                                               ========    ========    ========

Comprehensive provision for income
  taxes allocable to:
    Pretax income ..........................   $  3,378    $ 10,374    $ 15,146
    Other comprehensive loss - currency
      translation adjustment ...............       --          --          --
                                               --------    --------    --------

                                               $  3,378    $ 10,374    $ 15,146
                                               ========    ========    ========

                                     FB-22


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


                                                                  December 31,
                                                   --------------------------------------------
                                                           2002                   2001
                                                   ---------------------    -------------------
                                                       Deferred tax            Deferred tax
                                                   ---------------------    -------------------
                                                    Assets    Liabilities   Assets  Liabilities
                                                   --------   -----------   ------  -----------
                                                                 (In thousands)

                                                                           
Tax effect of temporary differences relating to:
    Inventories ................................   $     16    $ (1,581)   $     33    $ (1,562)
    Property and equipment .....................        105     (17,146)         67     (15,979)
    Prepaid pension cost .......................       --        (5,040)       --        (4,204)
    Accrued liabilities and other deductible
      differences ..............................        771        --           635        --
    Other taxable differences ..................       --        (7,643)       --        (6,390)
Valuation allowance ............................       (658)       --          --          --
                                                   --------    --------    --------    --------

        Gross deferred tax assets (liabilities)         234     (31,410)        735     (28,135)

Reclassification, principally netting by tax
  jurisdiction .................................       (218)        218        (702)        702
                                                   --------    --------    --------    --------

        Net total deferred tax assets
          (liabilities) ........................         16     (31,192)         33     (27,433)
        Net current deferred tax assets
          (liabilities) ........................         16      (1,498)         33      (1,480)
                                                   --------    --------    --------    --------

        Net noncurrent deferred tax liabilities    $   --      $(29,694)   $   --      $(25,953)
                                                   ========    ========    ========    ========


        Changes in the Company's  deferred  income tax  valuation  allowance are
summarized below:


                                                     Years ended December 31,
                                                  ------------------------------
                                                    2002      2001       2000
                                                  --------  --------   --------
                                                          (In thousands)


                                                              
Balance at beginning of year ...................    $--     $    --    $    --
Increase in certain deductible temporary
  differences which the Company believes
  do not meet the "more-likely-than-not"
  recognition criteria .........................     658         --         --
                                                    ----    ---------  ---------

Balance at end of year .........................    $658    $    --    $    --
                                                    ====    =========  =========


        The Company's  tax returns in Belgium and Norway are being  examined and
tax  authorities  have  proposed  or may  propose  tax  deficiencies,  including
penalties and interest.

        A  reduction  in the  Belgian  income  tax rate from  40.17% to  33.99%,
enacted in December 2002, became effective January 1, 2003. The reduction in the
Belgian income tax rate resulted in a $2.3 million  decrease in deferred  income
tax expense in the fourth  quarter of 2002 due to a reduction  of the  Company's
deferred   income  tax  liabilities   related  to  certain   Belgian   temporary
differences.

        The  Company  has  received  a  notification   from  the  Norwegian  tax
authorities of their intent to assess tax deficiencies of approximately NOK 12.2
million ($1.7 million at December 31, 2002)  relating to 1998 through 2000.  The
Company has objected to this proposed  assessment  in a written  response to the
Norwegian tax authorities.

                                     FB-23


        The Company has received  preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities  proposing tax deficiencies,  including
related interest, of approximately (euro)10.4 million ($10.8 million at December
31, 2002).  The Company has filed protests to the assessments for the years 1991
to 1997.  The Company is in  discussions  with the Belgian tax  authorities  and
believes that a significant portion of the assessments is without merit.

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

Note 13 - Related party transactions:

        The  Company  may be deemed  to be  controlled  by  Harold  C.  Simmons.
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 the Company  other than as set forth in these  financial  statements,
the Company from time to time considers, reviews and evaluates such transactions
and  understands  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,  and  restrictions  under  the  KII
indenture,  the Credit Facility,  and other agreements,  it is possible that the
Company might be a party to one or more such transactions in the future.

        The Company is a party to a cost sharing  agreement  with Kronos and KII
whereby  Kronos and KII provide  certain  management,  financial,  insurance and
administrative services to the Company on a fee basis. The Company's expense was
approximately $1.9 million in 2002, and $1.4 million in both 2001 and 2000.

        The Company is also party to master global insurance  coverage  policies
with NL with regard to property,  business interruption,  excess liability,  and
other  coverages.  The costs  associated  with these  policies  aggregated  $1.3
million, $1.1 million and $.7 million in 2002, 2001 and 2000, respectively.

                                     FB-24


        Intercompany sales to (purchases from) affiliates of TiO2 are summarized
in the following table.


                                                        Years ended December 31,
                                                   --------------------------------
                                                     2002        2001        2000
                                                   --------    --------    --------
                                                            (In thousands)

                                                                  
Sales to:
    TG .........................................   $ 30,077    $ 42,843    $ 34,565
    Kronos Limited ("KUK") .....................     17,148      14,962      17,988
    Kronos (US), Inc. ("KUS") ..................     13,189      10,883      12,316
    Societe Industrielle du Titane, S.A. ("SIT")      8,924       7,158       8,700
    Kronos Canada, Inc. ("KC") .................      3,231       2,587       4,885
                                                   --------    --------    --------

                                                   $ 72,569    $ 78,433    $ 78,454
                                                   ========    ========    ========

Purchases from:
    TG .........................................   $(29,706)   $(31,619)   $(24,496)
    KUS ........................................     (2,553)     (1,177)     (3,827)
    KC .........................................       (170)       --           (11)
                                                   --------    --------    --------

                                                   $(32,429)   $(32,796)   $(28,334)
                                                   ========    ========    ========


        Sales of ilmenite to TG were $13.4 million in 2002, $7.3 million in 2001
and $9.9 million in 2000.

        KUS  purchases the rutile and slag  feedstock  used as a raw material in
all of the Company's  chloride  process TiO2 facilities.  The Company  purchases
such  feedstock  from KUS for use in its  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 $32.9 million in 2002,  $31.6 million in 2001 and
$28.5 million in 2000.

        Interest income from affiliates  related to the note receivable from KII
was nil in 2002  and  2001  and  $2.2  million  in  2000.  Interest  expense  to
affiliates  related  to the note  payable  to TG was $.3  million  in 2002,  $.5
million in 2001 and nil in 2000.  Included in other  affiliate  income and other
affiliate expense was other affiliate  interest  income/expense,  factoring fees
and service fees.

        Royalties paid to KII for use of certain of KII's intellectual  property
totaled $8.6 million in 2002, $8.2 million in 2001 and $9.0 million in 2000, and
was included as a component of cost of sales.

                                     FB-25


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


                                                            December 31,
                                                   -----------------------------
                                                     2002                2001
                                                   --------            --------
                                                           (In thousands)

                                                                 
Receivable from:
    TG .................................           $   --              $    228
    SIT ................................                684                 387
    KUK ................................              1,348                 328
    KC .................................                295                  34
                                                   --------            --------

                                                   $  2,327            $    977
                                                   ========            ========

Payable to:
    KII ................................           $ (3,450)           $ (3,592)
    KUS ................................             (7,437)             (1,762)
    TG .................................            (14,489)               --
    Other affiliates ...................                (17)                (81)
                                                   --------            --------

                                                   $(25,393)           $ (5,435)
                                                   ========            ========


        Net amounts between the Company, KUS, TG, SIT, KUK and KC were generally
related to product  purchases and sales,  and with respect to the payable to TG,
primarily accounts receivable  factoring fees. See Notes 3 and 14 for discussion
of accounts receivable factoring and notes receivable from affiliates.

Note 14 - Capital stock and notes receivable from affiliates:

Common stock options

        The NL Industries, Inc. 1998 Long-Term Incentive Plan ("NL Option Plan")
provides for the discretionary  grant of restricted common stock, stock options,
stock appreciation rights ("SARs") and other incentive  compensation to officers
and other key employees of the Company.  Although  certain stock options granted
pursuant  to a similar  plan which  preceded  the NL Option  Plan  ("Predecessor
Option Plan") remain outstanding at December 31, 2002, no additional options may
be granted under the Predecessor Option Plan.

        Up to five million  shares of NL common stock may be issued  pursuant to
the NL Option Plan and, at December 31, 2002,  3,651,000  shares were  available
for future  grants.  The NL Option Plan  provides  for the grant of options that
qualify  as  incentive  options  and for  options  which  are not so  qualified.
Generally,  stock options and SARs  (collectively,  "options")  are granted at a
price  equal to or greater  than 100% of the market  price at the date of grant,
vest over a five  year  period  and  expire  ten  years  from the date of grant.
Restricted  stock,   forfeitable   unless  certain  periods  of  employment  are
completed,  is held in escrow in the name of the grantee  until the  restriction
period expires. No SARs have been granted under the NL Option Plan.

                                     FB-26


        Changes in  outstanding  options  granted to  employees  of the  Company
pursuant to the NL Option Plan and the Predecessor Option Plan are summarized in
the table below.


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

                                                              
Outstanding at December 31, 1999 .......       24     $ 8.69    $17.97    $ 329

    Granted ............................       16      14.25     14.25      221
    Exercised ..........................       (4)      8.69     14.25      (46)
                                               --     ------    ------    -----

Outstanding at December 31, 2000 .......       36      11.28     17.97      504

    Granted ............................       20      20.11     20.11      402
                                               --     ------    ------    -----

Outstanding at December 31, 2001 .......       56      11.28     20.11      906

    Exercised ..........................       (1)     14.25     14.25       (8)
                                               --     ------    ------    -----

Outstanding at December 31, 2002 .......       55     $11.28    $20.11    $ 898
                                               ==     ======    ======    =====


        At December 31, 2002, 2001 and 2000 options to purchase  21,400,  11,800
and 6,000 shares, respectively,  were exercisable and options to purchase 14,100
shares  become  exercisable  in 2003.  Of the  exercisable  options,  options to
purchase  15,400 shares at December 31, 2002 had exercise  prices less than NL's
December 31, 2002 quoted market price of $17.00 per share.  Outstanding  options
at  December  31,  2002  expire  at  various   dates   through   2011,   with  a
weighted-average remaining life of eight years.

        The pro  forma  information  required  by SFAS  No.  123 is  based on an
estimation  of the fair value of options  issued  subsequent to January 1, 1995.
See Note 2. No options were granted in 2002. The weighted-average fair values of
options   granted  during  2001  and  2000  were  $7.52  and  $4.83  per  share,
respectively.  The fair values of employee stock options were  calculated  using
the  Black-Scholes  stock option  valuation  model with the  following  weighted
average  assumptions for grants in 2001 and 2000:  stock price volatility of 46%
and 48% in 2001 and 2000,  respectively;  risk-free rate of return of 5% in 2001
and 2000;  dividend yield of 4.0% in 2001 and 4.9% in 2000; and an expected term
of 9 years  in 2001  and  2000.  For  purposes  of pro  forma  disclosures,  the
estimated  fair value of the options is  amortized  to expense over the options'
vesting period.

Notes receivable from affiliates

        The Company  exchanged its 52.66% investment in KWS for a $142.3 million
((euro)140.9  million) note  receivable  from KII in December  1999. In 2000 the
note receivable from KII was distributed to KII in a noncash transaction and was
subsequently  canceled.  This note  receivable  from affiliate was included as a
component of equity in accordance with GAAP as settlement of this affiliate note
receivable balance was not currently contemplated within the foreseeable future.

                                     FB-27


Note 15 - Commitments and contingencies:

Leases

        The Company leases,  pursuant to operating leases, various manufacturing
and  office  space and  transportation  equipment.  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 $2 million in 2002 and $1 million in each of
2001 and 2000. At December 31, 2002,  minimum rental commitments under the terms
of noncancellable operating leases were as follows:


                                                      Real Estate        Equipment
                                                      -----------        ---------
                                                             (In thousands)

                                                                    
Years ending December 31,
    2003 .....................................           $  261           $  302
    2004 .....................................              265              278
    2005 .....................................              219              172
    2006 .....................................              194              102
    2007 .....................................              199                8
    2008 and thereafter ......................              256             --
                                                         ------           ------

                                                         $1,394           $  862
                                                         ======           ======


Purchase commitments

        KUS has long-term supply contracts that provide for certain  affiliates'
chloride  feedstock  requirements  through 2003.  The Company and certain of its
affiliates  purchase  chloride  feedstock   underlying  these  long-term  supply
contracts from KUS. See Note 13. The agreements  require KUS to purchase certain
minimum quantities of feedstock with average minimum annual purchase commitments
aggregating approximately $156 million.

Environmental, product liability and litigation matters

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

                                     FB-28


        The  Company's   production   facilities  operate  in  an  environmental
regulatory  framework in which  governmental  authorities  typically are granted
broad discretionary  powers which allow them to issue operating permits required
for the  plants to  operate.  The  Company  believes  all of its  plants  are in
substantial compliance with applicable environmental laws.

        Although the laws  regulating  operations  of  industrial  facilities in
Europe vary from country to country, a common regulatory base is provided by the
European  Union  (the  "EU").  Belgium  is a member  of the EU and  follows  its
initiatives. Norway, although not a member, generally patterns its environmental
regulatory  actions after the EU. The Company  believes that it has all required
permits  and is in  substantial  compliance  with  applicable  EU  requirements,
including EU Directive  92/112/EEC  regarding  establishment  of procedures  for
reduction and eventual  elimination  of pollution  caused by waste from the TiO2
industry.

        The Company landfills waste generated at the Langerbrugge, Belgium plant
and mine  tailings  waste  generated  at the  facility  in Norway.  The  Company
maintains  reserves,  as required under GAAP, to cover the  anticipated  cost of
closure of these landfills,  which were approximately $.5 million as of December
31, 2002. The  requirements for landfills are expected to increase in the future
in view of recently adopted EU requirements.

        The Company's  Belgian  subsidiary and various of its Belgian  employees
are the  subject of an  investigation  by  Belgian  authorities  relating  to an
accident resulting in two fatalities that occurred in its Langerbrugge,  Belgium
facility in October 2000. The investigation stage, which could ultimately result
in civil and criminal  sanctions against the Company,  was completed in 2002. In
April 2003 the Belgian  authorities  are  expected to announce if the Company or
any of its employees will be prosecuted.

        The   Company  is  also   involved  in  various   other   environmental,
contractual,  product liability and other claims and disputes  incidental to its
business.

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

Concentrations of credit risk

        Sales of TiO2 accounted for approximately 77% , 80% and 85% of net sales
during 2002,  2001 and 2000,  respectively.  The remaining sales result from the
mining and sale of ilmenite  ore (a raw  material  used in the  sulfate  pigment
production process). 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.  TiO2 is  sold  to over  1,000  customers,  with  the top ten  external
customers  approximating  28% of net sales in 2002, 30% of net sales in 2001 and
25% of net  sales in 2000.  Approximately  80% of the  Company's  TiO2  sales by
volume were to Europe in each of 2002, 2001 and 2000. Approximately 10% of sales
by volume were to North America in each of 2002, 2001 and 2000.

                                     FB-29


Note 16 - Financial instruments:

        Summarized  below is the  estimated  fair value and related net carrying
value of the Company's financial instruments.


                                                          December 31,
                                          ------------------------------------------
                                                   2002                   2001
                                          -------------------     ------------------
                                          Carrying      Fair      Carrying     Fair
                                           Amount       Value      Amount      Value
                                          --------      -----     --------     -----
                                                            (In millions)

                                                                  
Cash, cash equivalents and noncurrent
  restricted marketable debt securities      $ 5.4      $ 5.4      $ 6.0      $ 6.0

Notes payable and long-term debt:
    Variable rate debt ................      $29.0      $29.0      $24.7      $24.7
    Note payable to TG ................       --         --         17.2       17.2



        The Company held no  derivative  financial  instruments  at December 31,
2002. At December 31, 2001, the Company had unsecured  foreign  currency forward
contracts with KII with a notional  value of  approximately  $1.9 million.  Fair
value  approximated  notional  value as these  contracts  were generally of very
short duration,  with these specific  contracts  having matured in January 2002.
The  notional  amount of these  contracts  represented  the  amount  of  foreign
currencies  to be  purchased  or sold at  maturity  and  did not  represent  the
exposure on these  contracts.  The Company marked the contracts to market,  with
gains and losses recognized in income currently. The gains and losses associated
with these contracts were not material.

Note 17 - Quarterly financial data (unaudited):


                                                       Quarters ended
                                     ----------------------------------------------------
                                     March 31      June 30       Sept. 30        Dec. 31
                                     --------     --------      ---------      ----------
                                                          (In thousands)

                                                                   
Year ended December 31, 2002:
    Net sales ................      $ 56,444      $ 64,248      $ 62,841       $ 59,879
    Cost of sales ............        47,941        51,797        55,897         51,055
    Operating income .........         4,928         8,958         2,421          3,578
    Income before income taxes         3,842         7,787           918          2,175
    Net income (loss) ........         2,630         5,758          (140)         3,096

Year ended December 31, 2001:
    Net sales ................      $ 65,989      $ 62,742      $ 55,567       $ 49,634
    Cost of sales ............        49,609        47,562        44,265         43,863
    Operating income .........        12,358        11,318         7,436          2,394
    Income before income taxes        11,178        10,270         6,192          1,173
    Net income ...............         7,988         6,122         3,992            337



                                     FB-30