Back to GetFilings.com



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