KRONOS INTERNATIONAL INC
Kronos International, Inc., ("KII" or "the Company") 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 Worldwide,  Inc. ("Kronos") (NYSE: KRO). KII conducts Kronos' European value-added titanium dioxide pigments ("TiO2") operations.       At December 31, 2005, (i) Valhi, Inc. (NYSE: VHI) held approximately 57% of Kronos' common stock and NL Industries,  Inc. (NYSE:  NL) held an additional 36% of Kronos' common stock,  (ii) Valhi held 83% of NL's  outstanding  common stock and (iii) Contran  Corporation and its subsidiaries  held  approximately  92% of Valhi's  outstanding  common stock.  Substantially all of Contran's  outstanding voting stock is held by trusts  established for the benefit of certain  children and grandchildren of Harold C. Simmons of which Mr. Simmons is sole trustee,  or is held by Mr.  Simmons  or persons or other  entities  related to Mr.  Simmons. Consequently, Mr. Simmons may be deemed to control such companies.       As  provided  by the  safe  harbor  provisions  of the  Private  Securities Litigation  Reform Act of 1995, the Company cautions that the statements in this Annual  Report on Form 10-K relating to matters that are not  historical  facts, including,  but not limited to,  statements  found in this Item 1 -  "Business," Item 1A - "Risk Factors," Item 3 - "Legal  Proceedings,"  Item 7 - "Management's Discussion and Analysis of Financial  Condition and Results of  Operations"  and Item 7A -  "Quantitative  and  Qualitative  Disclosures  About Market Risk," are forward-looking  statements that represent  management's beliefs and assumptions based on currently  available  information.  Forward-looking  statements  can be identified by the use of words such as "believes,"  "intends,"  "may," "should," "could," "anticipates," "expected" or comparable terminology,  or by discussions of strategies  or trends.  Although the Company  believes that the  expectations reflected in such forward-looking  statements are reasonable, it cannot give any assurances that these expectations will prove to be correct.  Such statements by their  nature   involve   substantial   risks  and   uncertainties   that  could significantly  impact expected  results,  and actual future results could differ materially from those described in such forward-looking statements.  While it is not possible to identify all factors,  the Company  continues to face many risks and  uncertainties.  Among the factors that could cause actual future results to differ  materially from those described  herein are the risks and  uncertainties discussed  in this Annual  Report and those  described  from time to time in the Company's  other  filings  with  the SEC  including,  but not  limited  to,  the following:  o    Future supply and demand for the Company's products, o    The extent of the  dependence  of certain of the  Company's  businesses  on      certain market sectors, o    The cyclicality of the Company's businesses, o    Customer  inventory  levels  (such as the  extent  to which  the  Company's      customers may, from time to time,  accelerate  purchases of TiO2 in advance      of  anticipated  price  increases or defer  purchases of TiO2 in advance of      anticipated price decreases), o    Changes in raw material and other operating costs (such as energy costs), o    The possibility of labor disruptions, o    General global  economic and political  conditions  (such as changes in the      level of gross  domestic  product in  various  regions of the world and the      impact of such changes on demand for TiO2), o    Competitive products and substitute products, o    Customer and competitor strategies, o    The impact of pricing and production decisions, o    Competitive technology positions, o    The introduction of trade barriers, o    Fluctuations  in currency  exchange  rates (such as changes in the exchange      rate  between  the U.S.  dollar  and  each of the  euro  and the  Norwegian      kroner), o    Operating  interruptions  (including,  but not limited to, labor  disputes,      leaks,   fires,   explosions,   unscheduled   or  unplanned   downtime  and      transportation interruptions), o    The ability of the Company to renew or refinance credit facilities, o    The ultimate  outcome of income tax audits,  tax settlement  initiatives or      other tax matters, o    The  ultimate  ability to utilize  income tax  attributes,  the benefits of      which have been  recognized  under the  "more-likely-than-not"  recognition      criteria, o    Environmental matters (such as those requiring compliance with emission and      discharge standards for existing and new facilities), o    Government laws and regulations and possible changes therein, o    The ultimate resolution of pending litigation, and o    Possible future litigation.       Should one or more of these risks  materialize (or the consequences of such a development  worsen),  or should the underlying  assumptions  prove incorrect, actual  results  could differ  materially  from those  currently  forecasted  or expected.  The Company disclaims any intention or obligation to update or revise any  forward-looking  statement  whether as a result of changes in  information, future events or otherwise.       Industry.  Titanium dioxide pigments are inorganic  chemical  products used for imparting  whiteness,  brightness and opacity to a diverse range of customer applications and end-use markets, including coatings,  plastics, paper and other industrial  and  consumer  "quality-of-life"  products.  TiO2  is  considered  a "quality-of-life"  product  with demand  affected by gross  domestic  product in various  regions of the world.  TiO2,  the largest  commercially  used whitening pigment  by  volume,  derives  its  value  from  its  whitening  properties  and opacifying ability (commonly referred to as hiding power). As a result of TiO2's high  refractive  index rating,  it can provide more hiding power than any other commercially  produced white pigment. In addition,  TiO2 demonstrates  excellent resistance  to  chemical  attack,  good  thermal  stability  and  resistance  to ultraviolet  degradation.  TiO2 is supplied to  customers  in either a powder or slurry form.       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 as the economies in these regions develop to the point that  quality-of-life  products, including TiO2, experience greater demand.  Geographic  information is contained in Note 2 to the Consolidated Financial Statements.       Products and operations.  TiO2 is produced in two crystalline forms: rutile and  anatase.  Both the  chloride and sulfate  production  processes  (discussed below)  produce  rutile  TiO2.  Chloride  process  rutile is  preferred  for the majority of customer applications. From a technical standpoint, chloride process rutile has a bluer  undertone and higher  durability than sulfate process rutile TiO2.  Although many end-use  applications can use either form of TiO2, chloride process rutile TiO2 is the preferred form for use in coatings and plastics,  the two largest end-use  markets.  Anatase TiO2,  which is produced only through the sulfate  production  process,  represents  a much smaller  percentage  of annual global TiO2  production  and is preferred for use in selected  paper,  ceramics, rubber tires, man-made fibers, food and cosmetics.       The Company  believes  that there are no  effective  substitutes  for TiO2. Extenders, such as kaolin clays, calcium carbonate and polymeric opacifiers, are used in a number of end-used  markets as white pigments,  however the opacity in these products is not able to duplicate the performance characteristics of TiO2, and the Company believes these products are unlikely to replace TiO2.       The Company  currently  produces 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 domestic and international paint, plastics and paper manufacturers.       The Company  and its  distributors  and agents  sell and provide  technical services for its products to over 3,000 customers in over 100 countries with the majority of sales in Europe. TiO2 is distributed by rail and truck in either dry or slurry  form and by ocean  carrier in dry form.  Kronos,  the Company and its predecessors  have  produced and marketed  TiO2 in North  America and Europe for over 80 years. The Company believes that it has developed considerable expertise and efficiency in the manufacture, sale, shipment and service of its products.       Sales of TiO2  represented  about 87% of the Company's total sales in 2005. Sales of other products,  complementary to the Company's TiO2 business, comprise the following:  o    The Company  owns an  ilmenite  mine in Norway and  operated  pursuant to a      governmental  concession with an unlimited term. Ilmenite is a raw material      used directly as a feedstock by some sulfate-process TiO2 plants, including      all  of  the  Company's  European  sulfate-process  plants.  The  mine  has      estimated  reserves  that are expected to last at least 50 years.  Ilmenite      sales  to  third-parties  represented  approximately  6% of  the  Company's      consolidated net sales in 2005. o    The  Company  manufactures  and  sells  iron-based  chemicals,   which  are      by-products  and  processed  by-products  of the  TiO2  pigment  production      process.  These  co-product  chemicals  are marketed  through the Company's      Ecochem  division,  and are used  primarily as treatment  and  conditioning      agents for industrial  effluents and municipal wastewater as well as in the      manufacture of ore pigments,  cement and  agricultural  products.  Sales of      iron-based chemical products were about 6% of sales in 2005. o    The Company  manufactures  and sells  certain  titanium  chemical  products      (titanium oxychloride and titanyl sulfate),  which are side-stream products      from the  production  of TiO2.  Titanium  oxychloride  is used in specialty      applications  in the  formulation  of pearlescent  pigments,  production of      electroceramic  capacitors  for cell phones and other  electronic  devices.      Titanyl sulfate products are used primarily in pearlescent pigments.  Sales      of these products were about 1% of sales in 2005.       Manufacturing  process  and  raw  materials.  TiO2 is  manufactured  by the Company using both the chloride process and the sulfate  process.  Approximately 65% of the  Company's  current  production  capacity  is based  on the  chloride process.  The chloride process is a continuous process in which chlorine is used to extract rutile TiO2. The chloride process  typically has lower  manufacturing costs than the sulfate  process due to higher yield and production of less waste and lower energy  requirements and labor costs.  Because much of the chlorine is recycled and feedstock  bearing a higher titanium  content is used, the chloride process produces less waste than the sulfate  process.  The sulfate process is a batch  chemical  process  that  uses  sulfuric  acid to  extract  TiO2.  Sulfate technology can produce either anatase or rutile  pigment.  Once an  intermediate TiO2 pigment has been produced by either the chloride or sulfate process,  it is "finished"  into  products  with  specific   performance   characteristics   for particular end-use applications through proprietary  processes involving various chemical  surface  treatments  and  intensive  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 2005,  chloride-process production facilities represented approximately 64% of industry capacity.       The Company  produced a Company record 335,000 metric tons of TiO2 in 2005, compared  to 328,000  metric tons  produced  in 2004 and 320,000  metric tons in 2003.  The  Company's  average  production  capacity  utilization  rate was near capacity  in both  2005 and  2004.  The  production  rates in 2004 and 2005 were higher than 2003 due in part to debottlenecking  activities,  with only moderate capital  expenditures.  The  Company  believes  its  current  annual  attainable production  capacity for 2006 is  approximately  345,000 metric tons,  with some slight  additional   capacity  available  in  2007  through  Kronos'  continuing debottlenecking efforts.       The primary raw materials used in the TiO2 chloride  production process are titanium-containing   feedstock,  chlorine  and  coke.  Chlorine  and  coke  are available from a number of suppliers. Titanium-containing feedstock suitable for use in the chloride process is available from a limited but increasing number of suppliers  around the world,  principally  in Australia,  South Africa,  Canada, India and the United States. The Company purchased  approximately 260,000 metric tons of chloride feedstock in 2005, of which the vast majority was slag.       Through Kronos (US), Inc. ("KUS"), a wholly-owned subsidiary of Kronos, the Company  purchased  chloride process grade slag in 2005 from a subsidiary of Rio Tinto plc UK - Richards  Bay Iron and  Titanium  Limited  South  Africa  under a long-term supply contract that expires at the end of 2007. Natural rutile ore is purchased primarily from Iluka Resources, Limited (Australia), under a long-term supply  contract  that  expires at the end of 2009.  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.       The primary raw materials used in the TiO2 sulfate  production  process are titanium-containing  feedstock derived primarily from rock and 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 owns and operates a rock ilmenite mine in Norway,  which provided all of the Company's  feedstock for its  sulfate-process pigment plants in 2005. The Company produced  approximately  816,000 metric tons of  ilmenite  in 2005 of which  approximately  317,000  metric  tons  were  used internally, with the remainder sold to third parties.       The number of sources of, and  availability  of,  certain raw  materials is specific to the particular  geographic region in which a facility is located. As noted above,  through KUS the Company  purchases  titanium-bearing  ore from two different  suppliers  in  different  countries  under  multiple-year  contracts. 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 consolidated  financial position,  results of operations or liquidity.       The following table summarizes our raw materials procured or mined in 2005.                                                        Quantities of Raw Materials Procured or                                                                       Mined                                                    --------------------------------------------- Production Process/Raw Material                           (In thousands of metric tons)  Chloride process plants -     purchased slag or natural rutile ore                                 259  Sulfate process plants:   Raw ilmenite ore mined internally                                    317        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 the Company's  production are considered commodity pigments with price generally being the most significant  competitive factor. The Company believes that it is the leading seller of TiO2 in Germany,  is among the leading marketers in the Benelux and Scandinavian  markets and had an estimated 8% share of worldwide TiO2 sales volume in 2005. Overall,  the Company is Europe's second largest producer of TiO2.       The  Company's  (along  with KUS and Kronos  Canada  Inc.,  a  wholly-owned subsidiary of Kronos),  principal  competitors are E.I. du Pont de Nemours & Co. ("DuPont");   Millennium   Chemicals,   Inc.;  Tronox   Incorporated;   Huntsman International  Holdings LLC; and Ishihara Sangyo Kaisha, Ltd. The Company's five largest competitors have estimated individual shares of TiO2 production capacity ranging from 24% to 4%, and an estimated  aggregate 70% share of worldwide  TiO2 production volume.       Worldwide capacity additions in the TiO2 market resulting from construction of greenfield plants require  significant  capital  expenditures and substantial lead time  (typically  three to five  years in the  Company's  experience).  The Company is not aware of any greenfield  plant under  construction  in the United States,  Europe  or any other  part of the  world.  However,  a  competitor  has announced its intention to build a greenfield  facility in China,  but it is not clear when  construction  will begin and it is not likely that any product would be available  until 2010,  at the  earliest.  During 2004,  certain  competitors either  idled or shut down  facilities.  However,  the Company  does expect that industry  capacity will increase as the Company and its competitors  continue to debottleneck  their existing  facilities.  Based on the factors described 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 during the next three to five years.  However,  no assurance can be given that future  increases  in the TiO2  industry  production  capacity and future average annual demand growth rates for TiO2 will conform to the Company's expectations. If actual developments differ from the Company's expectations, the Company and the TiO2 industry's performances could be unfavorably affected.       Research  and  development.  The  Company's  expenditures  for research and development and certain technical support programs were approximately $7 million in 2003,  $8 million in 2004 and $9 million in 2005.  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.       The Company continually seeks to improve the quality of its grades, and has been  successful at developing new grades for existing and new  applications  to meet the needs of  customers  and  increase  product  life  cycle.  Since  1999, thirteen  new grades  have been added for  plastics,  coatings,  fiber and paper laminate 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 seeks patent protection for its technical developments, principally  in the  United  States,  Canada and  Europe,  and from time to time enters into licensing  arrangements with third parties.  The Company's  existing patents  generally  have a term of 20 years  from the date of  filing,  and have remaining  terms ranging from one to 20 years.  The Company seeks to protect its intellectual property rights, including its patent rights, and from time to time the  Company  is engaged  in  disputes  relating  to the  protection  and use of intellectual property relating to its products.       The  Company's  major  trademarks,   including  Kronos,  are  protected  by registration  in the United States and elsewhere  with respect to those products it  manufactures  and sells.  The Company also relies on unpatented  proprietary know-how and  continuing  technological  innovation  and other trade  secrets to develop  and  maintain  its  competitive  position.  The  Company's  proprietary chloride  production  process is an important part of the Company's  technology, and the  Company's  business  could be  harmed  if the  Company  should  fail to maintain confidentiality of its trade secrets used in this technology.       Foreign operations.  The Company's chemical businesses have operated in the European markets since the 1920s. The Company's current  production  capacity is located in Europe with its net property and equipment aggregating  approximately $349 million at December 31, 2005. 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 $690 million of the  Company's  2005   consolidated   sales  were  to  European   customers  and approximately  $161  million  were to  customers  in areas  other  than  Europe, including  approximately  $52 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."       Customer base and annual 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 ten largest TiO2 pigment customers,  excluding sales to Kronos and  affiliates,  accounted  for  approximately  20% of sales in 2005. 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,  2005,  the Company  employed  approximately 1,945  persons.   Hourly  employees  in  European   production   facilities  are represented by a variety of labor unions,  with labor agreements  having various expiration dates. The Company's union employees are covered by master collective bargaining  agreements in the chemicals industry that are renewed annually.  The Company believes its labor relations are good.       Regulatory and environmental matters. The Company's operations are governed by  various  environmental  laws  and  regulations.  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  various  policies and programs in an effort to minimize these risks. The Company's  policy is to maintain  compliance with applicable  environmental laws and regulations at all its facilities and to strive to improve its  environmental  performance.  It is  possible  that future developments such as stricter requirements in 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.       While the laws  regulating  operations of  industrial  facilities in Europe vary from country to country,  a common regulatory  framework is provided by the European Union (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 it has obtained all required  permits and is in substantial  compliance with applicable EU requirements.       At its sulfate plant facilities in Leverkusen and Nordenham,  Germany,  the Company recycles weak sulfuric acid either through  contracts with third parties or using its own facilities.  At the Company's  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 sulfate-process  effluents  at its German  sulfate  plants.  With  regard to the German  plants,  either party may terminate  the contract  after giving three or four years advance notice, depending on the contract.       From time to time, the Company's facilities may be subject to environmental regulatory  enforcement  under  various  non-U.S.  statutes.  Resolution of such matters   typically   involves  the   establishment   of  compliance   programs. Occasionally,  resolution  may result in the payment of  penalties,  but to date such penalties have not involved amounts having a material adverse effect on the Company's consolidated  financial position,  results of operations or liquidity. The Company  believes that all of its plants are in substantial  compliance with applicable environmental laws.       The Company's  capital  expenditures  related to its ongoing  environmental protection and improvement  programs in 2005 were approximately $4 million,  and are currently expected to be approximately $6 million in 2006.       Website  and other  available  information.  The Company  reports  periodic information  with the SEC.  The  Company  does not  maintain  a  website  on the Internet.  However,  Kronos maintains a website on the Internet with the address of  www.kronostio2.com.  Copies of this Annual  Report on Form 10-K for the year ended December 31, 2005, copies of the Company's  Quarterly Reports on Form 10-Q for 2004 and 2005 and any Current Reports on Form 8-K for 2004 and 2005, and any amendments  thereto,  are or will be available free of charge at such website as soon as  reasonably  practical  after they are filed  with the SEC.  Information contained on Kronos'  website is not part of this report.  The Company will also provide to anyone without  charge copies of such documents upon written  request to the  Company.  Such  requests  should be  directed  to the  attention  of the Corporate  Secretary  at the  Company's  address  on the cover page of this Form 10-K.       The general  public may read and copy any  materials the Company files with the  SEC  at  the  SEC's  Public  Reference  Room  at 450  Fifth  Street,  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.
Listed below are certain risk factors  associated  with the Company and its businesses.  In addition to the potential effect of these risk factors discussed below,  any risk factor  which  could  result in reduced  earnings or  operating losses,  or reduced  liquidity,  could in turn  adversely  affect our ability to service our liabilities or pay dividends on our common stock or adversely affect the quoted market prices for our securities.       Demand for, and prices of,  certain of our products are cyclical and we may experience  prolonged  depressed market  conditions for our products,  which may result  in  reduced  earnings  or  operating  losses.  Approximately  87% of our revenues  is  attributable  to sales of TiO2.  Pricing  within the  global  TiO2 industry  over the long term is  cyclical,  and  changes  in  industry  economic conditions,  especially in Western  industrialized  nations,  can  significantly impact  our  earnings  and  operating  cash  flows.  This may  result in reduced earnings or operating losses.       Historically,  the  markets  for  many  of our  products  have  experienced alternating  periods of tight  supply,  causing  prices  and  profit  margins to increase,  followed  by periods of  capacity  additions,  and demand  reductions resulting in oversupply and declining prices and profit margins.  Selling prices (in billing  currencies)  for TiO2 were generally:  increasing  during the first quarter of 2003, flat during the second quarter of 2003,  decreasing  during the last half of 2003 and the first quarter of 2004,  flat during the second quarter of 2004,  increasing  in the last half of 2004 and the first six  months of 2005 and decreasing during the second half of 2005.       Our overall average TiO2 selling prices in billing currencies:       o    were nominally higher in 2003 as compared to 2002;       o    were 3% lower in 2004 as compared to 2003; and       o    were 5% higher in 2005 as compared to 2004.       Future  growth in demand for TiO2 may not be  sufficient  to alleviate  any future  conditions of excess industry  capacity,  and such conditions may not be sustained or may be further aggravated by anticipated or unanticipated  capacity additions  or other  events.  The  demand  for TiO2  during a given year is also subject to annual seasonal fluctuations.  TiO2 sales are generally higher in the first  half of the year than in the  second  half of the year due in part to the increase  in paint  production  in the  spring  to meet the  spring  and  summer painting season demand.       As a global  business,  we are exposed to local business risks in different countries,  which  could  result in  operating  losses.  We  conduct  all of our businesses in several jurisdictions outside of the United States and are subject to risks normally associated with international operations,  which include trade barriers,  tariffs,  exchange  controls,  national and regional  labor  strikes, social and political risks, general economic risks, seizures,  nationalizations, compliance  with a  variety  of  foreign  laws,  including  tax  laws,  and  the difficulty in enforcing  agreements and collecting  receivables  through foreign legal systems. For example, we have substantial net operating loss carryforwards in Germany,  and any change in German tax law that adversely impacts our ability to fully utilize such carryforwards could adversely affect us.       We may incur  losses from  fluctuations  in  currency  exchange  rates.  We operate our  businesses in several  different  countries,  and sell our products worldwide.  Therefore,  we are  exposed to risks  related to the prices  that we receive for our products and the need to convert  currencies that we may receive for some of our products into the  currencies  required to pay some of our debt, or into  currencies  in which we may purchase  certain raw  materials or pay for certain  services,  all of which  could  result in future  losses  depending  on fluctuations in foreign currency exchange rates.       We sell several of our products in mature and highly competitive industries and face price pressures in the markets in which we operate, which may result in reduced earnings or operating losses. The global markets in which we operate our business are highly  competitive.  Competition  is based on a number of factors, such as price, product quality and service.  Some of our competitors may be able to drive down  prices for our  products  because  their costs are lower than our costs. In addition, some of our competitors' financial,  technological and other resources may be greater than our resources,  and such competitors may be better able to withstand changes in market  conditions.  Our competitors may be able to respond more quickly than we can to new or emerging  technologies and changes in customer  requirements.  Further,  consolidation of our competitors or customers may result in reduced  demand for our  products.  In addition,  new  competitors could emerge by modifying  their  existing  production  facilities so they could manufacture  products that compete with our products.  The  occurrence of any of these events could result in reduced earnings or operating losses.       Higher costs or limited  availability of our raw materials may decrease our liquidity. The number of sources for, and availability of, certain raw materials is  specific  to the  particular  geographical  region  in which a  facility  is located.  For example,  titanium-containing  feedstocks  suitable for use in our TiO2  facilities  are available  from a limited  number of suppliers  around the world.  Political  and  economic  instability  in the  countries  from  which we purchase our raw material  supplies could adversely  affect their  availability. Should our vendors not be able to meet their  contractual  obligations or should we be otherwise  unable to obtain  necessary raw materials,  we may incur higher costs for raw materials or may be required to reduce production  levels,  either of which may  decrease  our  liquidity as we may be unable to offset such higher costs with increased selling prices for our products.       We are subject to many environmental and safety regulations with respect to our operating  facilities that may result in unanticipated costs or liabilities. Our facilities are subject to extensive laws, regulations,  rules and ordinances relating to the protection of the  environment,  including  those  governing the discharge of pollutants in the air and water and the generation,  management and disposal of hazardous  substances  and wastes or other  materials.  We may incur substantial  costs,  including  fines,  damages and criminal  penalties or civil sanctions,  or experience  interruptions in our operations for actual or alleged violations or compliance  requirements  arising under  environmental  laws.  Our operations could result in violations under environmental laws, including spills or other  releases  of  hazardous  substances  to the  environment.  Some of our operating facilities are in densely populated urban areas or in industrial areas adjacent to other operating facilities. In the event of an accidental release or catastrophic  incident,  we could incur material costs as a result of addressing such an event and in implementing measures to prevent such incidents.  Given the nature  of  our  business,  violations  of  environmental  laws  may  result  in restrictions   imposed  on  our  operating   activities  or  substantial  fines, penalties, damages or other costs, including as a result of private litigation.       Our  production  facilities  have  been  used  for a  number  of  years  to manufacture products or conduct mining operations. We may incur additional costs related  to  compliance  with  environmental  laws  applicable  to our  historic operations  and  these  facilities.   In  addition,  we  may  incur  significant expenditures  to comply  with  existing  or  future  environmental  laws.  Costs relating  to  environmental  matters  will be  subject  to  evolving  regulatory requirements  and will depend on the timing of  promulgation  and enforcement of specific  standards that impose  requirements  on our  operations.  Costs beyond those   currently   anticipated  may  be  required  under  existing  and  future environmental laws.       If our patents are declared  invalid or our trade  secrets  become known to competitors, our ability to compete may be adversely affected. Protection of our proprietary  processes  and other  technology  is important  to our  competitive position.  Consequently,  we rely on judicial  enforcement for protection of our patents,  and  our  patents  may be  challenged,  invalidated,  circumvented  or rendered unenforceable.  Furthermore, if any pending patent application filed by us does not result in an issued patent,  or if patents are issued to us but such patents do not provide meaningful protection of our intellectual property,  then the use of any such  intellectual  property by our  competitors  could result in decreasing our cash flows. Additionally,  our competitors or other third parties may obtain patents that restrict or preclude our ability to lawfully  produce or sell our products in a competitive manner, which could have the same effects.       We also rely on certain  unpatented  proprietary  know-how  and  continuing technological  innovation  and other trade  secrets to develop and  maintain our competitive position.  Although it is our practice to enter into confidentiality agreements to protect our intellectual  property,  because these confidentiality agreements  may  be  breached,   such  agreements  may  not  provide  sufficient protection for our trade secrets or proprietary  know-how,  or adequate remedies may not be available in the event of an  unauthorized  use or disclosure of such trade secrets and know-how.  In addition,  others could obtain knowledge of such trade secrets through independent development or other access by legal means.       Loss of key  personnel  or our ability to attract and retain new  qualified personnel  could hurt our businesses and inhibit our ability to operate and grow successfully.  Our success in the highly competitive markets in which we operate will continue to depend to a significant  extent on the leadership  teams of our businesses and other key management personnel.  We generally do not have binding employment agreements with any of these managers.  This increases the risks that we may not be able to retain our current management  personnel and we may not be able to recruit  qualified  individuals to join our management  team,  including recruiting  qualified  individuals to replace any of our current  personnel that may leave in the future.       Our relationships with our union employees could  deteriorate.  At December 31,  2005,  we employed  approximately  1,945  persons  worldwide in our various businesses.  A  significant  number of our  employees  are subject to collective bargaining  or  similar  arrangements.  We may not be able  to  negotiate  labor agreements with respect to these  employees on satisfactory  terms or at all. If our employees were to engage in a strike,  work stoppage or other  slowdown,  we could  experience a significant  disruption of our  operations or higher ongoing labor costs.       Our  leverage  may impair our  financial  condition or limit our ability to operate our  businesses.  We currently have a significant  amount of debt. As of December 31, 2005, our total  consolidated debt was approximately  $454 million, substantially  all of which relates to our Senior  Secured  Notes.  Our level of debt  could have  important  consequences  to our  stockholders  and  creditors, including:       o    making  it more  difficult  for us to  satisfy  our  obligations  with           respect to our liabilities;       o    increasing our  vulnerability to adverse general economic and industry           conditions;       o    requiring that a portion of our cash flow from  operations be used for           the payment of interest on our debt, therefore reducing our ability to           use our  cash  flow to fund  working  capital,  capital  expenditures,           dividends  on our common  stock,  acquisitions  and general  corporate           requirements;       o    limiting  our ability to obtain  additional  financing  to fund future           working  capital,  capital  expenditures,   acquisitions  and  general           corporate requirements;       o    limiting our  flexibility  in planning for, or reacting to, changes in           our business and the industry in which we operate; and       o    placing  us at a  competitive  disadvantage  relative  to  other  less           leveraged competitors.       In addition to our  indebtedness,  we are party to various  lease and other agreements  pursuant to which, along with our indebtedness,  we are committed to pay  approximately  $71.3  million in 2006.  Our ability to make payments on and refinance our debt,  and to fund planned  capital  expenditures,  depends on our future ability to generate cash flow. To some extent, this is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our  control.  In  addition,  our  ability to borrow  funds under our subsidiaries'  credit  facilities in the future will in some instances depend in part on these  subsidiaries'  ability to maintain specified financial ratios and satisfy  certain  financial   covenants   contained  in  the  applicable  credit agreement.  Our business may not generate cash flows from  operating  activities sufficient  to enable us to pay our debts  when they  become due and to fund our other liquidity needs. As a result, we may need to refinance all or a portion of our debt before  maturity.  We may not be able to  refinance  any of our debt on favorable  terms, if at all. Any inability to generate  sufficient cash flows or to refinance our debt on favorable terms could have a material adverse effect on our financial condition.
Not applicable.
During  2005,  the Company  operated  four TiO2 plants (one in  Leverkusen, Germany;  one in Nordenham,  Germany;  one in Langerbrugge,  Belgium; and one in Fredrikstad,  Norway).  TiO2 is  produced  using  the  chloride  process  at the Leverkusen and  Langerbrugge  facilities and is  manufactured  using the sulfate process in  Nordenham,  Leverkusen  and  Fredrikstad.  The Company  also owns an ilmenite  ore mine in Hauge i Dalane,  Norway  and  operates  it  pursuant  to a governmental  concession with an unlimited  term. The Company's  co-products are produced at its Norwegian and Belgian  facilities and its titanium chemicals are produced at its Belgian facility.       The  Company  owns all of its  principal  production  facilities  described above, except for the land under the Leverkusen and Fredrikstad facilities.  The Norwegian  plant is located on public  land and is leased  until  2013,  with an option to extend the lease for an additional 50 years.  The Company's  principal German operating subsidiary leases the land under its Leverkusen TiO2 production facility  pursuant to a lease with Bayer AG that expires in 2050. The Leverkusen facility,  which is owned by the Company and which represents  approximately 50% of the Company's  current TiO2  production  capacity,  is located within Bayer's extensive  manufacturing  complex.  Rent for such land lease associated with the Leverkusen  facility is periodically  established by agreement with Bayer AG for periods of at least two years at a time. Under a separate  supplies and services agreement  expiring  in  2011,  Bayer  provides  some raw  materials,  including chlorine, auxiliary and operating materials and utilities and services necessary to operate the Leverkusen facility.       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 the United Kingdom.       The Company believes the transportation access to its facilities, which are generally  maintained by the applicable local  government,  are adequate for the Company's purposes.
The  Company is  involved in various  environmental,  contractual,  product liability  and other claims and disputes  incidental  to its  business.  Certain information  called for by this Item is included in Note 13 to the  Consolidated Financial Statements, which information is incorporated herein by reference.
Omitted pursuant to the General Instruction I of Form 10-K.                                        PART II
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  or  make  other  restricted  payments  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 6 to the Consolidated Financial Statements.  At December 31, 2005, $92 million was available for dividends or other restricted  payments,  as defined.       The Company paid $60 million in  dividends  to Kronos in 2004.  The Company did not pay any  dividends  to Kronos in 2005.  The  declaration  and payment of future  dividends is  discretionary,  and the amount,  if any, will be dependent upon the  Company's  results of  operations,  financial  condition,  contractual restrictions  and  other  factors  deemed  relevant  by the  Company's  Board of Directors.
The following  selected  financial data should be read in conjunction  with the  Company's  Consolidated  Financial  Statements  and Item 7 -  "Management's Discussion  and  Analysis of  Financial  Condition  and Results of  Operations." Certain  amounts  have been  reclassified  to conform  with the  current  year's Consolidated Financial Statements.                                                                          Years ended December 31,                                                     ------------------------------------------------------------                                                     2001         2002          2003           2004          2005                                                     ----         ----          ----           ----          ----                                                                      (In millions, except ratios)   STATEMENTS OF OPERATIONS DATA:           Net sales                                    $ 554.6      $ 579.7      $ 715.9        $ 808.0        $ 850.9     Net income                                     113.7         52.3         81.8          326.0           59.8   BALANCE SHEET DATA (at year end):     Total assets                                 $ 532.5      $ 611.3      $ 750.5        $ 985.2        $ 955.3     Long-term debt including current maturities    482.9        325.9        356.7          533.2          453.8     Redeemable preferred stock and profit       participation certificates                   617.4           -           -              -               -     Stockholder's equity (deficit)                (777.5)        76.8        111.6          206.5          181.8   STATEMENTS OF CASH FLOW DATA:     Net cash provided (used) by:        Operating activities                      $  76.0      $  68.2     $  104.8       $  142.3       $   92.7        Investing activities                        (28.5)       (29.7)       (31.7)         (34.2)         (35.8)        Financing activities                        (52.8)       (57.5)       (54.9)        (129.9)          (8.5)   TiO2 OPERATING STATISTICS:     Sales volume*                                  265          297          310            336             326     Production volume*                             269          293          320            328             335     Production rate as a percentage of capacity     87%          93%        Full           Full            Full   OTHER FINANCIAL DATA:     Ratio of earnings to combined      fixed charges and preferred       dividends(unaudited)(1)                        1.8          1.5          3.3            2.7            3.6     Ratio of earnings to       fixed charges (unaudited) (2)                  4.2          2.7          3.3            2.7            3.6   __________________________________  *        Metric tons in thousands  (1)  Fixed charges  represents,  as  applicable,  the sum of (i) total  interest      expense and (ii) the  interest  component of rent  expense  (calculated  as      one-third of rent expense).  Earnings represents, as applicable, the sum of      (i) fixed  charges,  (ii) income before income taxes and minority  interest      and (iii) amortization of capitalized interest.  (2)  Combined fixed charges and preferred dividends  represents,  as applicable,      the sum of (i) total interest  expense,  (ii) preferred stock dividends and      accretion and (iii) the interest  component of rent expense  (calculated as      one-third of rent expense).  Earnings represents, as applicable, the sum of      (i) combined  fixed  charges,  (ii) income before income taxes and minority      interest and (iii) amortization of capitalized interest.
Critical accounting policies and estimates       The  accompanying   "Management's  Discussion  and  Analysis  of  Financial Condition and Results of Operations"  are based upon the Company's  consolidated financial  statements,  which have been prepared in accordance  with  accounting principles  generally  accepted in the United  States of America  ("GAAP").  The preparation of these financial statements requires the Company to make estimates and judgments  that affect the reported  amounts of assets and  liabilities  and disclosure of  contingent  assets and  liabilities  at the date of the financial statements, and the reported amount of revenues and expenses during the reported period.  On an on-going basis,  the Company  evaluates its estimates,  including those related to bad debts,  inventory  reserves,  impairments of investments in marketable  securities and investments  accounted for by the equity method,  the recoverability  of  other  long-lived  assets  (including   goodwill  and  other intangible  assets),  pension benefit  obligations and the underlying  actuarial assumptions  related thereto,  the realization of deferred income tax assets and accruals for, litigation, income tax and other contingencies.  The Company bases its estimates on historical  experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making  judgments about the reported  amounts of assets,  liabilities, revenues  and  expenses.  Actual  results may differ  from  previously-estimated amounts under different assumptions or conditions.       The Company believes the following critical  accounting policies affect its more  significant  judgments  and  estimates  used  in  the  preparation  of its consolidated financial statements:  o    The Company maintains allowances for doubtful accounts for estimated losses      resulting from the inability of its customers to make required payments and      other factors.  The Company takes into  consideration the current financial      condition  of its  customers,  the age of the  outstanding  balance and the      current economic  environment when assessing the adequacy of the allowance.      If the financial  condition of the Company's customers were to deteriorate,      resulting in an impairment of their  ability to make  payments,  additional      allowances  may be  required.  During 2003,  2004 and 2005,  the net amount      written off against the allowance for doubtful  accounts as a percentage of      the balance of the allowance  for doubtful  accounts as of the beginning of      the year ranged from 15% to 24%.  o    The Company  provides  reserves for estimated  obsolescence or unmarketable      inventories  equal to the difference  between the cost of inventory and the      estimated net realizable  value using  assumptions  about future demand for      its products and market  conditions.  If actual market  conditions are less      favorable than those projected by management, additional inventory reserves      may be required.  The Company also provides reserves for tools and supplies      inventory  based  generally on both  historical  and expected  future usage      requirements.  o    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 the applicable GAAP  requirements  associated with      the long-lived  asset, and is based upon, among other things,  estimates of      the amount of future net cash flows to be generated by the long-lived asset      and  estimates of the current fair value of the asset.  Adverse  changes in      such  estimates  of future net cash flows or  estimates of fair value could      result in an  inability  to recover the  carrying  value of the  long-lived      asset,  thereby possibly requiring an impairment charge to be recognized in      the future.       Under  applicable  GAAP (SFAS No. 144,  "Accounting  for the  Impairment or      Disposal of Long-Lived Assets"), property and equipment is not assessed for      impairment unless certain impairment  indicators,  as defined, are present.      During 2005, no such impairment indicators, as defined, were present.  o    The Company  maintains  various defined benefit pension plans.  The amounts      recognized as defined benefit pension expenses, and the reported amounts of      prepaid and accrued  pension costs,  are  actuarially  determined  based on      several assumptions, including discount rates, expected rates of returns on      plan assets and  expected  health care trend  rates.  Variances  from these      actuarially  assumed  rates  will  result in  increases  or  decreases,  as      applicable,  in the recognized  pension  obligations,  pension expenses and      funding  requirements.  These  assumptions  are more fully  described below      under "Assumptions on defined benefit pension plans."  o    The Company records a valuation allowance to reduce its deferred income tax      assets  to  the  amount  that  is   believed  to  be  realized   under  the      "more-likely-than-not"   recognition   criteria.   While  the  Company  has      considered  future  taxable  income and ongoing  prudent and  feasible  tax      planning strategies in assessing the need for a valuation allowance,  it is      possible  that in the future the  Company  may change its  estimate  of the      amount of the deferred income tax assets that would  "more-likely-than-not"      be realized in the  future,  resulting  in an  adjustment  to the  deferred      income  tax  asset  valuation  allowance  that  would  either  increase  or      decrease,  as applicable,  reported net income in the period such change in      estimate was made. For example,  the Company has  substantial net operating      loss  carryforwards  in Germany (the  equivalent of $593 million for German      corporate  purposes  and $104  million  for German  trade tax  purposes  at      December  31,  2005).   During  2004,   the  Company   concluded  that  the      more-likely-than-not  recognition criteria had been met with respect to the      income  tax  benefit  associated  with the  Company's  net  operating  loss      carryforwards  in  Germany.  Prior  to the  complete  utilization  of  such      carryforwards, it is possible that the Company might conclude in the future      that  the  benefit  of  such   carryforwards   would  no  longer  meet  the      more-likely-than-not recognition criteria, at which point the Company would      be required to recognize a valuation  allowance against the  then-remaining      tax benefit associated with the carryforwards.       In addition,  the Company makes an evaluation at the end of each  reporting      period as to whether or not some or all of the  undistributed  earnings  of      its  foreign  subsidiaries  are  permanently  reinvested  (as that  term is      defined in GAAP).  While the  Company may have  concluded  in the past that      some of such undistributed earnings are permanently  reinvested,  facts and      circumstances can change in the future, and it is possible that a change in      facts and circumstances,  such as a change in the expectation regarding the      capital  needs of its foreign  subsidiaries,  could  result in a conclusion      that some or all of such  undistributed  earnings are no longer permanently      reinvested.  In such an event, the Company would be required to recognize a      deferred  income  tax  liability  in  an  amount  equal  to  the  estimated      incremental  U.S.  income tax and  withholding  tax liability that would be      generated  if  all of  such  previously-considered  permanently  reinvested      undistributed earnings were distributed to the U.S.  o    The Company records accruals for legal,  income tax and other contingencies      and commitments  when estimated  future  expenditures  associated with such      contingencies become probable, and the amounts can be reasonably estimated.      However,  new information may become available,  or circumstances  (such as      applicable  laws and  regulations)  may  change,  thereby  resulting  in an      increase or decrease in the amount  required to be accrued for such matters      (and  therefore a decrease or increase in reported net income in the period      of such change).       Income  from  operations  are  impacted  by  certain  of these  significant judgments and estimates,  such as allowance for doubtful accounts,  reserves for obsolete or  unmarketable  inventories,  impairment of equity method  investees, goodwill and other  long-lived  assets,  defined  benefit pension plans and loss accruals.  In addition,  other income  (expense) is impacted by the  significant judgments and estimates for deferred income tax asset  valuation  allowances and loss accruals.  Executive summary       The Company reported net income of $59.8 million in 2005 compared to $326.0 million in 2004 and $81.8 million in 2003.  The  Company's net income  increased from 2003 to 2004 as the unfavorable  effect of lower income from operations and higher interest  expense in 2004 was more than offset by the favorable effect of a non-cash  income tax benefit in 2004. The Company's net income  decreased from 2004 to 2005 as the favorable  effect of higher income from operations and lower interest  expense in 2005 was more than  offset by the  favorable  effect of the non-cash income tax benefit recognized in 2004.       Net income in 2005  includes (i) a third  quarter net  non-cash  income tax charge of $9.8  million  for  recent  developments  with  respect  to income tax audits,  primarily in Germany and Belgium and (ii) a second  quarter  securities transaction  gain of $3.5 million  related to the sale of the Company's  passive interest in a Norwegian smelting operation. Net income in 2004 includes a second quarter  income tax benefit  related to the reversal of the  Company's  deferred income tax asset valuation allowance in Germany of $277.3 million. Net income in 2003 includes an income tax benefit  relating to the refund of prior year German income taxes of $24.6 million. Each of these items is more fully discussed below and/or in the notes to the Consolidated Financial Statements.       The Company  currently expects income from operations will be lower in 2006 compared to 2005, as the favorable effect of anticipated modest  improvements in sales  volumes  and average  TiO2  selling  prices are  expected to be more than offset by the effect of higher production  costs,  particularly raw material and energy costs.       Relative  changes in the Company's  TiO2 sales and operating  income during the past three years are primarily due to (i) relative changes in TiO2 sales and production  volumes,  (ii) relative  changes in TiO2 average  selling prices and (iii) relative changes in foreign currency exchange rates.       Selling prices (in billing  currencies)  for TiO2, the Company's  principal product,  were  generally:  increasing  during the first  quarter of 2003,  flat during the second quarter of 2003, decreasing during the second half of 2003 and the first half of 2004, increasing during the second half of 2004 and first half of 2005 and  decreasing  during the last half of 2005.  Changes in the Company's selling  prices  are  largely  driven by  relative  industry  demand  and supply conditions and other economic factors.  Results of operations                                                         Years ended December 31,                    % Change                                              -------------------------------------        -----------------------                                               2003            2004            2005         2003-04       2004-05                                               ----            ----            ----         -------       -------                                             (In millions, except selling price data)         Net sales                                  $ 715.9         $ 808.0        $  850.9          +13%          + 5%  Cost of sales                                516.9           609.6           613.2          +18%          + 1%                                            --------        --------        --------   Gross margin                                 199.0           198.4           237.7           **           +20%  Selling, general and administrative                                         (110.2)      expense                                  (87.0)         (104.1)                         +20%          + 6%  Currency transaction gains (losses), net      (3.7)           (2.2)            4.1  Royalty income                                 6.1             6.0             6.8  Other operating income (expense), net           -              (.5)            (.9)                                            --------        --------        --------   Income from operations                    $  114.4        $   97.6        $  137.5          -15%          +41%                                            ========        ========        ========   TiO2 operating statistics:   Percent change in average selling      prices:         Using actual foreign currency            exchange rates                                                                    + 4%          + 7%         Impact of changes in foreign            currency exchange rates                                                           - 7%          - 2%                                                                                              ----          ----          In billing currencies                                                                - 3%          + 5%                                                                                              ====          ====   Sales volumes*                               310             336             326            + 8%          - 3%  Production volumes*                          320             328             335            + 3%          + 2%  Production rate as      percent of capacity                     Full            Full            Full ____________________________  * Thousands of metric tons ** less than 1%        Year ended December 31, 2005 compared to year ended December 31, 2004       The  Company's  sales  increased  $42.9 million (5%) in 2005 as compared to 2004 due  primarily to the net effects of higher  average  TiO2 selling  prices, lower TiO2 sales volumes and the  favorable  effect of  fluctuations  in foreign currency  exchange rates,  which increased sales by approximately $13 million as further  discussed  below.  Excluding the effect of fluctuations in the value of the U.S. dollar relative to other currencies, the Company's average TiO2 selling prices in billing  currencies  were 5% higher in 2005 as compared to 2004.  When translated  from billing  currencies  into U.S.  dollars  using  actual  foreign currency exchange rates prevailing during the respective periods,  The Company's average TiO2 selling  prices in 2005  increased 7% as compared to 2004.  See " - Effects of foreign currency exchange rates" below for a discussion of the impact of relative changes in currency exchange rates on the Company's operations.       The Company's TiO2 sales volumes in 2005 decreased 3% compared to 2004 with volumes lower in all regions of the world.  Approximately  three-fourths  of the Company's 2005 TiO2 sales volumes were  attributable to markets in Europe,  with 10%  attributable  to North America and the balance to export  markets.  Overall worldwide demand for TiO2 in 2005 is estimated to have declined by approximately 5% from the exceptionally  strong demand levels in 2004. The Company  attributes the decline in overall sales and its own sales to slower overall economic growth in 2005 and inventory  destocking  by its  customers.  The  Company's  operating income comparisons were favorably  impacted by higher production  levels,  which increased  2%. The  Company's  operating  rates were near full  capacity in both periods,  and the Company's  production volumes in 2005 set a new record for the Company,  which was the fourth  consecutive year record production  volumes were achieved.       The Company's cost of sales increased $3.6 million (1%) in 2005 compared to 2004 as the effect of lower sales  volumes was offset by higher raw material and maintenance costs.  However, the Company's cost of sales, as a percentage of net sales, decreased from 75% in 2004 to 72% in 2005 due primarily to the effects of higher average selling prices which more than offset higher costs.       The Company's gross margins increased $39.3 million (20%) from 2004 to 2005 due to the net effects of the aforementioned  changes in sales and cost of sales during such periods.       As a percentage of net sales, selling,  general and administrative expenses were relatively consistent at 13% for both 2004 and 2005.       The Company's income from operations  increased $39.9 million (41%) in 2005 as compared to 2004,  as the effect of higher  average TiO2  selling  prices and higher  production  volumes more than offset the impact of lower sales  volumes, higher  raw  material  and  maintenance  costs.  See also " - Effects of foreign currency  exchange  rates"  below for a  discussion  of the  impact of  relative changes in currency exchange rates on the Company's operations.       Year ended December 31, 2004 compared to year ended December 31, 2003       The Company's  sales  increased  $92.1 million (13%) in 2004 as compared to 2003 as higher sales volumes and the favorable effect of fluctuations in foreign currency  exchange rates,  which increased sales by approximately $56 million as further  discussed  below,  more than  offset the impact of lower  average  TiO2 selling  prices.  Excluding the effect of  fluctuations in the value of the U.S. dollar relative to other  currencies,  the Company's average TiO2 selling prices in billing currencies were 3% lower in 2004 as compared to 2003. When translated from billing currencies into U.S. dollars using actual foreign currency exchange rates  prevailing  during the  respective  periods,  the Company's  average TiO2 selling  prices in 2004  increased  4% as compared  to 2003.  See " - Effects of foreign  currency  exchange  rates"  below  for a  discussion  of the  impact of relative changes in currency exchange rates on the Company's operations.       The Company's TiO2 sales volumes in 2004 increased 8% compared to 2003, due to higher sales volumes in Europe and export markets.  By volume,  approximately 77% of the  Company's  2004 TiO2 sales were  attributable  to markets in Europe, with 14% attributable to export markets and the balance to North America. Demand for TiO2 has remained  strong  throughout  2004, and while the Company  believes that the strong  demand is largely  attributable  to the  end-use  demand of its customers,  it is possible that some portion of the strong demand  resulted from customers increasing their inventory levels of TiO2 in advance of implementation of announced or anticipated  price  increases.  The Company's  operating  income comparisons  were also favorably  impacted by higher  production  levels,  which increased  3%. The  Company's  operating  rates were near full  capacity in both periods,  and the Company's  sales and production  volumes in 2004 were both new records for the Company.       The Company's cost of sales  increased $92.7 million (18%) in 2004 compared to 2003 due to higher raw material and maintenance costs as well as higher sales volumes and related  effects of  translating  foreign  currencies  into the U.S. dollar.  The Company's  cost of sales,  as a percentage of net sales,  increased from 72% in 2003 to 75% in 2004 due  primarily  to the effects of lower  average selling prices and higher costs.       The Company's gross margins  decreased $.6 million (less than 1%) from 2003 to 2004 due to the net effects of the  aforementioned  changes in sales and cost of sales during such periods.       As a percentage of net sales, selling,  general and administrative expenses were relatively  consistent from 2003 to 2004, increasing marginally from 12% to 13%, and  increasing  proportionately  with the increased  sales and  production volume.       The Company's income from operations  decreased $16.8 million (15%) in 2004 as compared to 2003,  as the effect of lower  average  TiO2  selling  prices and higher raw material and maintenance  costs more than offset the impact of higher sales and production volumes.  See also " - Effects of foreign currency exchange rates"  below for a  discussion  of the impact of  relative  changes in currency exchange rates on the Company's operations.       Effects of foreign currency exchange rates       The Company's  sales are denominated in various  currencies,  including the the euro and other major European  currencies.  The disclosure of the percentage change in the Company's average TiO2 selling prices in billing currencies (which excludes the effects of fluctuations in the value of the U.S. dollar relative to other currencies) is considered a "non-GAAP" financial measure under regulations of the SEC. The  disclosure of the  percentage  change in the Company's  average TiO2 selling prices using actual  foreign  currency  exchange  rates  prevailing during  the  respective  periods  is  considered  the most  directly  comparable financial  measure  presented  in  accordance  with GAAP ("GAAP  measure").  The Company  discloses  percentage  changes in its  average  TiO2  prices in billing currencies  because  the  Company  believes  such  disclosure   provides  useful information  to  investors  to allow them to analyze  such  changes  without the impact of changes in  foreign  currency  exchange  rates,  thereby  facilitating period-to-period  comparisons of the relative  changes in average selling prices in the actual various billing currencies. Generally, when the U.S. dollar either strengthens  or weakens  against  other  currencies,  the  percentage  change in average  selling  prices  in  billing   currencies  will  be  higher  or  lower, respectively,  than such percentage changes would be using actual exchange rates prevailing during the respective  periods.  The difference between the 4% and 7% increases in the  Company's  average TiO2 selling  prices  during 2004 and 2005, respectively,  as compared to the  respective  prior year using  actual  foreign currency  exchange  rates  prevailing  during the  respective  periods (the GAAP measure),  and the 3% decrease  and 5% increase in the  Company's  average  TiO2 selling prices in billing  currencies (the non-GAAP measure) during such periods is due to the effect of changes in foreign  currency  exchange rates.  The above table presents (i) the percentage  change in the Company's  average TiO2 selling prices  using actual  foreign  currency  exchange  rates  prevailing  during the respective  periods  (the  GAAP  measure),  (ii) the  percentage  change  in the Company's  average  TiO2  selling  prices in billing  currencies  (the  non-GAAP measure)  and (iii) the  percentage  change due to  changes in foreign  currency exchange  rates (or the  reconciling  item between the non-GAAP  measure and the GAAP measure).       The Company's  operations and assets are located  outside the United States (primarily  in  Germany,  Belgium  and  Norway).  A  significant  amount  of the Company's  sales  generated from its  operations  are  denominated in currencies other  than the U.S.  dollar,  principally  the euro and  other  major  European currencies.  A portion of the Company's  sales generated from its operations are denominated   in   the   U.S.   dollar.   Certain   raw   materials,   primarily titanium-containing  feedstocks,  are purchased in U.S. dollars, while labor and other   production  costs  are  denominated   primarily  in  local   currencies. Consequently,  the translated U.S.  dollar value of the Company's  foreign sales and operating results are subject to currency  exchange rate fluctuations  which may  favorably  or  adversely  impact  reported  earnings  and  may  affect  the comparability of period-to-period  operating results.  Overall,  fluctuations in the value of the U.S. dollar relative to other  currencies,  primarily the euro, increased  TiO2 sales by a net $13  million  in 2005 as  compared  to 2004,  and increased  sales by a net $56 million in 2004 as compared to 2003.  Fluctuations in the value of the U.S. dollar relative to other currencies  similarly impacted the Company's foreign  currency-denominated  operating  expenses.  The Company's operating  costs that are not  denominated in the U.S.  dollar,  when translated into U.S. dollars,  were higher in 2005 and 2004 compared to the same periods of the  respective  prior  years.  Overall,  currency  exchange  rate  fluctuations resulted in a net $10 million increase in the Company's operating income in 2005 as compared to 2004,  and resulted in a net increase in the Company's  operating income in 2004 of approximately $9 million as compared to 2003.       Outlook       The Company  expects its income  from  operations  in 2006 will be somewhat lower than 2005, as the favorable effect of anticipated  modest  improvements in sales  volumes  and average  TiO2  selling  prices are  expected to be more than offset by the effect of higher production  costs,  particularly raw material and energy  costs.  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  marketplace,  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.  Such  debottlenecking  efforts included,  among other things,  the addition of finishing capacity in the German facility and equipment  upgrades and enhancements in several  locations to allow for reduced  downtime  for  maintenance  activities.  The  Company's  production capacity  has  increased  by  approximately  25% over the past ten  years due to debottlenecking  programs, with only moderate capital expenditures.  The Company believes its annual  attainable  production  capacity for 2006 is  approximately 345,000  metric  tons,  with some  slight  additional  capacity  expected  to be available in 2007 through its continued debottlenecking efforts.  Other income (expense)       The following table sets forth certain  information  regarding other income and expense items.                                                       Years ended December 31,                     Change                                              -----------------------------------       -----------------------                                               2003          2004           2005         2003-04       2004-05                                               ----          ----           ----         -------       -------                                                                           (In millions)  (In millions)Interest income from            affiliates                            $   -         $  2.8         $ 18.9        $  2.8         $ 16.1  Trade interest income                         .7           1.1            1.0            .4            (.1)  Securities transaction gain                   -             -             5.4            -             5.4  Interest expense to affiliates               (.1)           -              -             .1             -  Interest expense                           (32.5)        (36.7)         (43.9)         (4.2)          (7.2)                                            ------        ------         ------        ------         ------                                             $(31.9)       $(32.8)        $(18.6)       $  (.9)        $ 14.2                                            ======        ======         ======        ======         ======        Interest income  fluctuates in part based upon the amount of funds invested and yields thereon.  Aggregate  interest income  increased $16.0 million in 2005 compared to 2004 due primarily to interest on KII's notes receivable from Kronos entered  into  during the  fourth  quarter of 2004.  Aggregate  interest  income increased  $3.2 million in 2004  compared to 2003  primarily  due to interest on KII's notes  receivable  from Kronos  entered into during the fourth  quarter of 2004. The Company  expects  interest income will be slightly higher in 2006 than 2005 due to higher average yields expected on invested funds.       Securities  transaction  gain in 2005 relates to the sale of the  Company's passive interest in a Norwegian smelting operation, which had a nominal carrying value  for  financial  reporting  purposes,   for  aggregate   consideration  of approximately $5.4 million consisting of cash of $3.5 million and inventory with a value of $1.9 million. See Note 9 to the Consolidated Financial Statements.       The Company has a significant  amount of  indebtedness  denominated  in the euro,   including  the  Company's   euro-denominated   Senior   Secured   Notes. Accordingly,  the reported  amount of interest  expense  will vary  depending on relative  changes in foreign currency  exchange rates.  Interest expense in 2005 was higher than 2004 due primarily to higher levels of outstanding  indebtedness resulting from the issuance of an additional euro 90 million principal amount of KII Senior Secured Notes in November 2004. In addition, the increase in interest expense was due to relative  changes in foreign currency  exchange rates,  which increased the U.S. dollar equivalent of interest expense on the euro 285 million principal  amount of KII Senior  Secured Notes  outstanding  during all of 2003, 2004 and 2005 by  approximately  $3 million in 2004 as  compared  to 2003 and by approximately $1 million in 2005 as compared to 2004.       Assuming interest rates and foreign currency exchange rates do not increase significantly  from current levels,  interest  expense in 2006 is expected to be comparable to 2005.       At  December  31,  2005,   approximately  $453.8  million  of  consolidated indebtedness,  principally  KII's Senior Secured Notes,  bears interest at fixed interest rates  averaging  8.9% (2004 - $519.4  million with a weighted  average interest  rate of  8.9%;  2003 - $356  million  with a  weighted  average  fixed interest  rate of 8.9%).  The weighted  average  interest rate on $14 million of outstanding  variable  rate  borrowings  at December 31, 2004 was 3.9% (2003 and 2005 - none outstanding). See Note 6 to the Consolidated Financial Statements.       As noted above,  KII has a certain  amount of  indebtedness  denominated in currencies  other  than  the  U.S.  dollar.  See  Item  7A,   "Quantitative  and Qualitative Disclosures About Market Risk."       Provision  for income  taxes.  The  principal  reasons  for the  difference between the Company's  effective income tax rates and the U.S. federal statutory income  tax  rates  are  explained  in  Note  10 to the  Consolidated  Financial Statements.       The Company's  income tax expense in 2005 includes the net non-cash effects of (i) the aggregate  favorable  effects of recent  developments with respect to certain non-U.S.  income tax audits of Kronos,  principally in Belgium,  of $7.7 million  and (ii) the  unfavorable  effect  with  respect to the loss of certain income tax attributes of Kronos in Germany of $17.5 million.       At December 31, 2005,  the Company had the  equivalent  of $593 million and $104 million of income tax loss carryforwards for German corporate and trade tax purposes,  respectively,  all of which have no  expiration  date.  As more fully described in Note 10 to the Consolidated  Financial Statements,  the Company had previously  provided a deferred  income tax asset  valuation  allowance  against substantially all of these tax loss carryforwards and other deductible temporary differences  in  Germany  because  the  Company  did not  believe  they  met the "more-likely-than-not"  recognition  criteria.  During  the first six  months of 2004, the Company reduced its deferred  income tax asset valuation  allowance by approximately $8.7 million, primarily as a result of utilization of these German net operating loss  carryforwards,  the benefit of which had not previously been recognized.  At June 30, 2004,  after  considering all available  evidence,  the Company concluded that these German tax loss  carryforwards and other deductible temporary differences now met the  "more-likely-than-not"  recognition criteria. Under applicable GAAP related to accounting for income taxes at interim periods, a change in  estimate  at an  interim  period  resulting  in a  decrease  in the valuation  allowance is segregated into two  components,  the portion related to the remaining interim periods of the current year and the portion related to all future years.  The portion of the valuation  allowance  reversal  related to the former is recognized over the remaining interim periods of the current year, and the portion of the  valuation  allowance  related to the latter is recognized at the time the change in estimate is made.  Accordingly,  as of June 30, 2004, the Company reversed $268.6 million of the valuation  allowance (the portion related to future  years),  and KII reversed the remaining  $3.4 million during the last six months of 2004. Prior to the complete utilization of such carryforwards,  it is possible  that the Company  might  conclude in the future that the benefit of such carryforwards would no longer meet the  "more-likely-than-not"  recognition criteria,  at which point the Company would be required to recognize a valuation allowance   against  the   then-remaining   tax  benefit   associated  with  the carryforwards.       In  January  2004,  the  German  federal  government  enacted  new  tax law amendments  that limit the annual  utilization of income tax loss  carryforwards effective  January  1, 2004 to 60% of  taxable  income  after  the first  euro 1 million of taxable  income.  The new law will have a  significant  effect on the Company's cash tax payments in Germany going  forward,  the extent of which will be dependent upon the level of taxable income earned in Germany.       During 2003, the Company  reduced its deferred  income tax asset  valuation allowance by an aggregate of approximately  $6.7 million,  primarily as a result of  utilization  of certain  income tax attributes for which the benefit had not previously been recognized.  In addition, the Company recognized a $38.0 million income tax benefit related to the net refund of certain prior year German income taxes.       In October  2004,  the American  Jobs Creation Act of 2004 was enacted into law.  The new law  provided for a special 85%  deduction  for certain  dividends received from a controlled foreign  corporation in 2005. In the third quarter of 2005, the Company  completed its evaluation of this new provision and determined that it would not benefit from such special dividends received deduction.       Related party transactions.  The Company is a party to certain transactions with related parties. See Note 12 to the Consolidated  Financial Statements.  It is the policy of the Company to engage in  transactions  with related parties on terms,  in the opinion of the  Company,  no less  favorable  to the Company than could be obtained from unrelated parties.       Accounting  principles  newly adopted in 2003 and 2004.  See Note 15 to the Consolidated Financial Statements.       Accounting  principles  not  yet  adopted:  See  Note  16  to  Consolidated Financial Statements.       Defined  benefit  pension  plans.  The Company  maintains  various  defined benefit  pension  plans in  Europe.  See Note 11 to the  Consolidated  Financial Statements.       The Company  accounts for its defined  benefit pension plans using SFAS No. 87,  "Employer's  Accounting for Pensions."  Under SFAS No. 87, defined  benefit pension plan expense and prepaid and accrued  pension costs are each  recognized based on certain actuarial  assumptions,  principally the assumed discount rate, the assumed  long-term rate of return on plan assets and the assumed increase in future compensation levels. The Company recognized  consolidated defined benefit pension plan expense of $5.8  million in 2003,  $10.4  million in 2004 and $11.5 million in 2005. The amount of funding  requirements  for these defined  benefit pension plans is generally based upon applicable  regulations  (such as ERISA in the U.S.), and will generally differ from pension expense  recognized under SFAS No. 87 for financial  reporting  purposes.  Contributions made by the Company to all of its plans  aggregated  $10.2  million in 2003,  $11.7 million in 2004 and $13.3 million in 2005.       The discount rates the Company  utilizes for  determining  defined  benefit pension  expense  and the  related  pension  obligations  are  based on  current interest  rates  earned on  long-term  bonds that receive one of the two highest ratings given by recognized rating agencies in the applicable  country where the defined  benefit  pension  benefits  are being paid.  In  addition,  the Company receives advice about appropriate discount rates from the Company's  third-party actuaries,  who may in some cases utilize their own market indices. The discount rates  are  adjusted  as of each  valuation  date  (September  30th) 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, 2005,  approximately  79% and 17% of the projected  benefit obligation  related to Company  plans in Germany and Norway,  respectively.  The Company uses several  different  discount rate  assumptions in  determining  its consolidated  defined benefit  pension plan  obligations and expense because the Company maintains  defined benefit pension plans in several different  countries in Europe and the interest rate environment differs from country to country.       The Company  used the  following  discount  rates for its  defined  benefit pension plans:                                                 Discount rates used for:                     -------------------------------------------------------------------------                          Obligations at          Obligations at            Obligations at                      December 31, 2003 and     December 31, 2004 and     December 31, 2005 and                         expense in 2004          expense in 2005           expense in 2006                     -----------------------    ---------------------    ---------------------        Germany                    5.3%                      5.0%                       4.0%   Norway                     5.5%                      5.0%                       4.5%        The  assumed  long-term  rate of  return  on  plan  assets  represents  the estimated  average rate of earnings  expected to be earned on the funds invested or to be invested  in the plans'  assets  provided to fund the benefit  payments inherent in the projected benefit  obligations.  Unlike the discount rate, which is adjusted each year based on changes in current long-term  interest rates, the assumed  long-term  rate of return on plan  assets will not  necessarily  change based upon the actual,  short-term  performance  of the plan assets in any given year.  Defined  benefit  pension  expense  each year is based  upon the  assumed long-term  rate of return on plan assets for each plan and the actual fair value of the plan  assets as of the  beginning  of the year.  Differences  between the expected  return on plan  assets  for a given  year and the  actual  return  are deferred  and  amortized  over future  periods  based  either upon the  expected average  remaining  service life of the active plan  participants (for plans for which  benefits  are still  being  earned by active  employees)  or the  average remaining  life  expectancy  of the inactive  participants  (for plans for which benefits are not still being earned by active employees).       At December 31, 2005,  approximately 69% and 26% of the plan assets related to the  Company's  plans in Germany and Norway,  respectively.  The Company uses several  different  long-term  rates of  return  on plan  asset  assumptions  in determining  its  consolidated  defined benefit pension plan expense because the Company maintains  defined benefit pension plans in several different  countries in Europe,  the plan assets in different  countries  are invested in a different mix of investments and the long-term  rates of return for different  investments differ from country to country.       In  determining  the  expected  long-term  rate of  return  on  plan  asset assumptions,  the Company  considers  the long-term  asset mix (e.g.  equity vs. fixed  income) for the assets for each of its plans and the  expected  long-term rates of return for such asset  components.  In addition,  the Company  receives advice  about   appropriate   long-term  rates  of  return  from  the  Company's third-party actuaries. Such assumed asset mixes are summarized below:  o    In Germany,  the composition of the Company's plan assets is established to      satisfy the requirements of the German insurance commissioner.  The current      plan asset allocation at December 31, 2005 was 23% to equity managers,  48%      to fixed  income  managers and 29% to real estate (2004 - 23%, 48% and 29%,      respectively).  o    In Norway,  the Company currently has a plan asset target allocation of 14%      to  equity  managers,  64% to  fixed  income  managers  and  the  remainder      primarily to cash and liquid  investments.  The expected  long-term rate of      return  for such  investments  is  approximately  8%,  4.5% to 6% and 2.5%,      respectively.  The plan asset  allocation  at December  31, 2005 was 16% to      equity managers,  62% to fixed income managers and the remainder  primarily      to cash and liquid investments (2004 - 16%, 64% and nil, respectively).       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 2003, 2004 and 2005 were as follows:                                     2003           2004           2005                                   ----           ----           ----        Germany                         6.5%           6.0%           5.5%   Norway                          6.0%           6.0%           5.5%        The Company  currently expects to utilize the same long-term rate of return on plan asset assumptions in 2006 as it used in 2005 for purposes of determining the 2006 defined benefit pension plan expense.       To the extent that a plan's particular  pension benefit formula  calculates the pension benefit in whole or in part based upon future  compensation  levels, the projected benefit  obligations and the pension expense will be based in part upon expected increases in future compensation  levels. For all of the Company's plans for which the benefit  formula is so  calculated,  the  Company  generally bases the assumed expected increase in future  compensation  levels upon average long-term inflation rates for the applicable country.       In addition  to the  actuarial  assumptions  discussed  above,  because the Company maintains its defined benefit pension plans outside the U.S., the amount of  recognized  defined  benefit  pension  expense and the amount of prepaid and accrued pension costs will vary based upon relative  changes in foreign currency exchange rates.       As  discussed  above,  assumed  discount  rates  and rate of return on plan assets are  re-evaluated  annually.  A reduction  in the assumed  discount  rate generally  results in an actuarial loss, as the  actuarially-determined  present value of  estimated  future  benefit  payments  will  increase.  Conversely,  an increase in the assumed discount rate generally results in an actuarial gain. In addition,  an actual return on plan assets for a given year that is greater than the assumed return on plan assets results in an actuarial gain,  while an actual return  on plan  assets  that is less  than the  assumed  return  results  in an actuarial  loss.  Other actual  outcomes that differ from previous  assumptions, such as  individuals  living longer or shorter than assumed in mortality  tables which are also used to determine  the  actuarially-determined  present  value of estimated future benefit payments, changes in such mortality table themselves or plan amendments,  will also result in actuarial losses or gains. Under GAAP, all of such actuarial gains and losses are not recognized in earnings currently, but instead  are  deferred  and  amortized  into income in the future as part of net periodic defined benefit pension cost. However, any actuarial gains generated in future periods would reduce the negative  amortization  effect of any cumulative unrecognized  actuarial  losses,  while any actuarial losses generated in future periods  would  reduce  the  favorable  amortization  effect  of any  cumulative unrecognized actuarial gains.       During 2005, all of the Company's defined benefit pension plans generated a net actuarial loss of $84.4 million. This actuarial loss resulted primarily from the  general  overall  reduction  in the assumed  discount  rates as well as the unfavorable  effect of using updated  mortality tables (which generally  reflect individuals living longer than prior mortality tables used), partially offset by an actual return on plan assets in excess of the assumed return.       While  actuarial gains and losses are deferred and amortized into income in future periods,  as discussed above, GAAP also requires that a minimum amount of accrued pension cost be recognized in a statement of financial  position for any plans for which the accumulated  benefit  obligation is less than the fair value of plan  assets.  To the extent GAAP  accounting  would  otherwise  result in an accrued pension cost balance for such plans that was less than the excess of the aggregate  accumulated  benefit  obligation  over the value of the related  plan assets,  GAAP then requires that such excess be recognized as a component of the consolidated  accrued pension cost,  with the offset to such additional  accrued pension  cost  (commonly  referred  to as  an  "additional  minimum  liability") recognized (i) first as an intangible asset up to specified amounts (referred to as  "unrecognized  net pension  obligations" in the Company's  balance sheet and then (ii) second as part of accumulated  other  comprehensive  income (loss). At December 31, 2005,  and  primarily as a result of the  aggregate  $84.4  million actuarial  loss  generated  during 2005 as  discussed  above,  the amount of the additional  minimum liability required to be recognized by the Company increased by  approximately  $81 million at December  31, 2005 as compared to December 31, 2004,  resulting  in the Company  recognizing  aggregate  accrued  pension  cost (current and  noncurrent)  of $136.1 million at December 31, 2005 as compared to $57.0 million at December 31, 2004.       Based  on the  actuarial  assumptions  described  above  and the  Company's current expectation for what actual average foreign currency exchange rates will be during 2006, the Company  expects its defined  benefit  pension  expense will approximate  $17  million in 2006.  In  comparison,  the  Company  expects to be required to make approximately $12 million of contributions to such plans during 2006.       As noted above,  defined benefit pension expense and the amounts recognized as prepaid and accrued  pension costs are based upon the  actuarial  assumptions discussed above. The Company believes all of the actuarial  assumptions used are reasonable and appropriate. If the Company had lowered the assumed discount rate by 25 basis points for all of its plans as of December 31, 2005,  the  Company's aggregate  projected  benefit  obligations would have increased by approximately $12.7 million at that date, and the Company's  defined  benefit  pension expense would be expected  to  increase  by  approximately  $1.6  million  during  2006. 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  $500,000 during 2006.  Foreign operations       The  Company's  operations  are  located  in Europe  where  the  functional currency  is not the U.S.  dollar.  As a  result,  the  reported  amount  of the Company's assets and liabilities,  and therefore the Company's  consolidated net assets,  will  fluctuate  based upon  changes in  currency  exchange  rates.  At December 31, 2005,  the Company had  substantial  net assets  denominated in the euro, Norwegian kroner and United Kingdom pound sterling.  LIQUIDITY AND CAPITAL RESOURCES  Consolidated cash flows       The Company's  consolidated cash flows for each of the past three years are presented below:                                                              Years ended December 31,                                                   ------------------------------------------                                                    2003              2004             2005                                                    ----              ----             ----                                                                  (in millions)       Operating activities                            $ 104.8           $ 142.2          $  92.7  Investing activities                              (31.7)            (34.2)           (35.8)  Financing activities                              (54.9)           (129.9)            (8.5)                                                  -------           -------          -------   Net cash provided (used) by operating,      investing and financing activities          $  18.2           $ (21.9)         $  48.4                                                  =======           =======          =======        Operating  activities.  Trends  in cash  flows  from  operating  activities (excluding the impact of significant asset  dispositions and relative changes in assets  and  liabilities)  are  generally  similar  to trends  in the  Company's earnings. However, certain items included in the determination of net income are non-cash,  and therefore  such items have no impact on cash flows from operating activities.  Non-cash items included in the  determination of net income include depreciation and  amortization  expense,  non-cash  interest  expense,  deferred income taxes and asset impairment charges.  Non-cash interest expense relates to amortization of original issue discount or premium on certain  indebtedness  and amortization of deferred financing costs.       Certain other items included in the determination of net income may have an impact on cash flows from operating activities,  but the impact of such items on cash  flows from  operating  activities  will  differ  from their  impact on net income. For example, the amount of periodic defined benefit pension plan expense depends upon a number of factors,  including certain actuarial assumptions,  and changes in such  actuarial  assumptions  will result in a change in the reported expense. In addition, the amount of such periodic expense generally differs from the outflows of cash required to be currently paid for such benefits.       Certain  other items  included in the  determination  of net income have no impact on cash flows from  operating  activities,  but such items do impact cash flows  from  investing  activities  (although  their  impact on such cash  flows differs from their impact on net income). For example, realized gains and losses from the disposal of long-lived  assets are included in the determination of net income,  although the proceeds  from any such disposal are shown as part of cash flows from investing activities.       Changes in product pricing,  production volumes and customer demand,  among other things,  can significantly  affect the liquidity of the Company.  Relative changes  in  assets  and  liabilities   generally  result  from  the  timing  of production,  sales, purchases and income tax payments. Such relative changes can significantly  impact the comparability of cash flow from operations from period to period, as the income statement impact of such items may occur in a different period from when the  underlying  cash  transaction  occurs.  For  example,  raw materials may be purchased in one period, but the payment for such raw materials may  occur  in a  subsequent  period.  Similarly,  inventory  may be sold in one period,  but the cash  collection  of the  receivable  may occur in a subsequent period.  Relative  changes in accounts  receivable  are affected by, among other things,  the timing of sales and the  collection  of the  resulting  receivable. Relative changes in inventories,  accounts  payable and accrued  liabilities are affected by, among other  things,  the timing of raw material  purchases and the payment  for such  purchases  and the  relative  difference  between  production volumes and sales volumes.  The Company's average days sales outstanding ("DSO") decreased from 58 days at December 31, 2004 to 52 days at December 31, 2005, due to the timing of  collections.  At December 31, 2005, the average number of days in inventory ("DII") increased to 105 days from 99 days at December 31, 2004 due to the effects of higher production volume and lower sales volume.       Cash flows provided from operating activities decreased from $142.2 million in 2004 to $92.7 million in 2005. This $49.5 million  decrease was due primarily to the net  effect of (i)  lower net  income  of  $266.2  million,  (ii)  higher deferred  income  taxes of  $304.8  million,  (iii) a lower  amount  of net cash provided  from  changes in the  Company's  inventories,  receivables,  payables, accruals and accounts with affiliates of $60.3 million and (iv) higher cash paid for income taxes of $43.8  million,  due primarily to refunds of income taxes of $23.8 million received in 2004.       Cash flows provided from operating activities increased from $104.8 million in 2003 to $142.2 million in 2004. This $37.4 million increase was due primarily to the net  effect of (i) higher  net  income of $244.2  million,  (ii) a larger deferred income tax benefit of $312.7  million,  (iii) higher  depreciation  and amortization expense of $4.1 million,  (iv) a higher amount of net cash provided from changes in the Company's inventories,  receivables,  payables, accruals and accounts  with  affiliates  of $34.8  million and (v) higher cash  received  for income taxes of $12.3 million,  which included  refunds of income taxes of $11.5 million  received in 2003 and $23.8 million of refunds of income taxes  received in 2004.       Investing  cash  flows.  The  Company's  capital  expenditures  were  $31.5 million,  $33.7 million and $39.5 million in 2003, 2004 and 2005,  respectively. In  addition,  the Company  purchased  additional  shares of its  majority-owned French  subsidiary for $575,000 in 2004 and the Company received $3.5 million in 2005 from the sale of its passive interest in a Norwegian smelting operation.       The Company's capital  expenditures  during the past three years include an aggregate of  approximately  $14 million ($4 million in 2005) for the  Company's ongoing  environmental   protection  and  compliance  programs.   The  Company's estimated 2006 capital expenditures are $37 million and include approximately $6 million in the area of environmental protection and compliance.       Financing  cash flows.  During 2005,  KII (i) repaid euro 10 million ($12.9 million when repaid)  under its  three-year  euro 80 million  secured  revolving credit facility  ("European  Credit  Facility") and (ii) entered into additional capital lease  agreements  for certain  mining  equipment for the  equivalent of approximately $4.4 million.       During 2004, (i) KII issued an additional euro 90 million  principal amount of its Senior  Secured  Notes at 107% of par  (equivalent  to $130  million when issued) and (ii) KII's  operating  subsidiaries  in Germany,  Belgium and Norway borrowed  an  aggregate  of euro 90 million  ($112  million  when  borrowed)  of borrowings  under its European Credit  Facility,  of which euro 80 million ($100 million) were  subsequently  repaid.  See Note 6 to the  Consolidated  Financial Statements.       In the fourth  quarter of 2004,  KII  transferred  an aggregate  euro 163.1 million ($209.5 million) to Kronos in return for two promissory notes.  Interest on both notes is payable to KII on a quarterly basis at an annual rate of 9.25%. Due to the  long-term  investment  nature  of  these  notes,  settlement  of the intercompany notes receivable is not contemplated  within the foreseeable future and as such  have  been  presented  as a  separate  component  of the  Company's stockholder's equity.       In March 2003, the Company's operating subsidiaries in Germany, Belgium and Norway  borrowed euro 15 million ($16.1 million when  borrowed),  in April 2003, repaid NOK 80 million  ($11.0  million when repaid) and in the third  quarter of 2003,  repaid euro 30.0 million  ($33.9  million when repaid) under the European Credit Facility.       Deferred financing costs of $2.0 million paid in 2004 for the Notes and the European  Credit  Facility are being  amortized over the lives of the respective agreements and are included in other noncurrent assets as of December 31, 2005.       Cash  dividends  paid during 2003 and 2004 totaled  $25.0 million and $60.0 million,  respectively.  (No dividends were paid in 2005).  The  declaration and payment of future dividends is  discretionary,  and the amount,  if any, will be dependent  upon  the  Company's  results  of  operations,  financial  condition, contractual  restrictions  and other  factors  deemed  relevant by the Company's Board of Directors.       Provisions  contained in certain of our credit  agreements  could result in the  acceleration of the applicable  indebtedness  prior to its stated maturity. For  example,  certain  credit  agreements  allow the lender to  accelerate  the maturity  of the  indebtedness  upon a change of  control  (as  defined)  of the borrower.   In  addition,   certain  credit   agreements  could  result  in  the acceleration of all or a portion of the indebtedness  following a sale of assets outside the ordinary course of business.  Other than operating lease commitments disclosed in Note 13 to the Consolidated  Financial  Statements,  the Company is not party to any material off-balance sheet financing arrangements.       KII's  assets   consist   primarily  of   investments   in  its   operating subsidiaries, and its ability to service its parent level obligations, including the  Senior  Secured  Notes,  depends  in large  part upon the  distribution  of earnings  of its  subsidiaries,  whether in the form of  dividends,  advances or payments  on account  of  intercompany  obligation,  or  otherwise.  None of its subsidiaries have guaranteed the Senior Secured Notes,  although KII has pledged 65% of the common stock or other ownership interest of certain of its first-tier operating subsidiaries as collateral of such Senior Secured Notes.       Off-balance  sheet  financing.   Other  than  operating  lease  commitments disclosed in Note 13 to the Consolidated  Financial  Statements,  the Company is not party to any material off-balance sheet financing arrangements.       Cash,  cash  equivalents,  restricted  cash and restricted  marketable debt securities  and borrowing  availability.  At December 31, 2005,  the Company had current  cash  and cash  equivalents  aggregating  $63.3  million,  had  current restricted cash equivalents of $1.4 million and noncurrent restricted marketable debt securities of $2.6 million.  At December 31, 2005, certain of the Company's subsidiaries  had  approximately  $92 million  available for borrowing under the European Credit Facility (based on borrowing availability).  The European Credit Facility   matures  in  June  2008.  At  December  31,  2005,  the  Company  had approximately   $92  million  available  for  payment  of  dividends  and  other restricted payments as defined in the Notes indenture.       Based upon the Company's expectations for the TiO2 industry and anticipated demands on the Company's cash  resources as discussed  herein,  (including  debt refinancing  expectations)  the Company expects to have sufficient  liquidity to meet its  short-term  obligations  (defined as the  twelve-month  period  ending December  31,  2006) and its  long-term  obligations  (defined as the  five-year period ending December 31, 2010, the time period for which the Company generally does long-term  budgeting),  including operations,  capital  expenditures,  debt service  and current  dividend  policy.  To the extent that actual  developments differ  from  the  Company's  expectations,  the  Company's  liquidity  could be adversely affected.       Legal   proceedings  and  environmental   matters.   See  Note  13  to  the Consolidated   Financial   Statements   for  certain   legal   proceedings   and environmental matters with respect to the Company.       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 operations,  and therefore the Company's consolidated net assets,  will fluctuate  based upon changes in currency  exchange  rates. At December 31, 2005,  the Company had  substantial  net assets  denominated in the euro, Norwegian kroner and United Kingdom pound sterling.       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;  restructure ownership interests;  modify its dividend policy;  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 related  companies.  In the event of any such  acquisition or joint venture  transaction,  the 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 6 to the Consolidated Financial Statements.       Non-GAAP  financial  measures.  In an  effort  to  provide  investors  with additional  information  regarding the Company's  results as determined by GAAP, the  Company  has  disclosed  certain  non-GAAP  information  which the  Company believes provides useful information to financial  statement users. As discussed above, the Company  discloses  percentage  changes in its average TiO2 prices in billing currencies,  which excludes the effects of foreign currency translation. Such disclosure of the percentage  change in the Company's  average TiO2 selling price in billing  currencies is considered a "non-GAAP"  financial measure under regulations of the SEC. The disclosure of the percentage change in the Company's average  TiO2  selling  prices  using actual  foreign  currency  exchange  rates prevailing  during  the  respective  periods  is  considered  the most  directly comparable GAAP measure. The Company discloses percentage changes in its average TiO2 prices in billing  currencies  because the Company believes such disclosure provides  useful  information  to  financial  statement  users to allow  them to analyze such changes without the impact of changes in foreign currency  exchange rates, thereby facilitating period-to-period comparisons of the relative changes in average selling prices in the actual various billing  currencies.  Generally, when the U.S. dollar either strengthens or weakens against other currencies, the percentage change in average selling prices in billing currencies will be higher or lower, respectively, than such percentage changes using actual exchange rates prevailing during the respective periods.  Summary of debt and other contractual commitments       As  more  fully  described  in  the  notes  to the  Consolidated  Financial Statements,  the Company is a party to various debt,  lease and other agreements which  contractually  and  unconditionally  commit the  Company  to pay  certain amounts  in  the  future.  See  Notes  6 and 13 to  the  Consolidated  Financial Statements.  The following table summarizes such contractual  commitments of the Company and its  consolidated  subsidiaries  as of December 31, 2005 by the type and date of payment.                                                                      Payment due date                                             --------------------------------------------------------------                                                                                     2011 and  Contractual commitment                      2006      2007/2008     2009/2010        after         Total  ----------------------                      ----      ---------     ---------      ---------      ------                                                                    (In millions)        Third-party indebtedness                   $   1.0      $   1.7       $ 451.1       $    -         $ 453.8  Interest payments on third-party  indebtedness                                 39.1         77.8          38.8            -           155.7  Operating leases                               3.3          4.6           2.7          21.0           31.6  Fixed asset acquisitions                       6.1           -             -             -             6.1  Estimated tax obligations                     21.8           -             -             -            21.8                                            -------      -------       -------       -------        -------                                             $  71.3      $  84.1       $ 492.6       $  21.0        $ 669.0                                            =======      =======       =======       =======        =======        The  timing  and  amount  shown for the  Company's  commitments  related to indebtedness  (principal  and  interest),   operating  leases  and  fixed  asset acquisitions  are based upon the contractual  payment amount and the contractual payment date for such commitments.  With respect to revolving credit facilities, the amount shown for indebtedness is based upon the actual amount outstanding at December  31,  2005,  and the  amount  shown for  interest  for any  outstanding variable-rate indebtedness is based upon the December 31, 2005 interest rate and assumes  that such  variable-rate  indebtedness  remains  outstanding  until the maturity of the facility.  The amount shown for income taxes is the consolidated amount of income taxes payable at December 31, 2005, which is assumed to be paid during 2006. A significant portion of the amount shown for indebtedness  relates to KII's  Senior  Secured  Notes  ($449.3  million at December 31,  2005).  Such indebtedness  is denominated in euro. See Item 7A - "Quantative  and Qualitative Disclosures  About  Market  Risk"  and  Note  6 to  the  Consolidated  Financial Statements.       The above table does not reflect any amounts that the Company  might pay to fund its defined  benefit  pension  plans,  as the timing and amount of any such future  fundings are unknown and dependent  on, among other  things,  the future performance of defined  benefit pension plan assets,  interest rate  assumptions and actual future retiree medical costs.  Such defined benefit pension plans are discussed  above in greater  detail.  The above  table also does not reflect any amounts that the Company might pay related to its asset retirement  obligations, as the terms and amounts of such future  fundings are unknown.  See Notes 11 and 15 to the Consolidated Financial Statements.
General.  The  Company is exposed  to market  risk from  changes in foreign currency exchange rates, interest rates and equity security prices. In the past, the Company has periodically  entered into currency forward contracts,  interest rate  swaps or other  types of  contracts  in order to manage a  portion  of its interest rate market risk. Otherwise,  the Company does not generally enter into forward or option  contracts to manage such market  risks,  nor does the Company enter into any such contract or other type of derivative  instrument for trading or speculative  purposes.  Other than as described  below, the Company was not a party to any material  forward or derivative  option contract related to foreign exchange  rates,  interest rates or equity  security prices at December 31, 2004 and 2005. See Notes 1 and 14 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, 2004 and 2005, substantially all of the Company's aggregate indebtedness was comprised of fixed-rate  instruments.  The large  percentage of fixed-rate  debt  instruments minimizes earnings  volatility that would result from changes in interest rates. The following table presents  principal  amounts and weighted  average  interest rates for the Company's aggregate outstanding indebtedness at December 31, 2005. At December  31, 2004 and 2005,  all  outstanding  fixed-rate  indebtedness  was denominated  in  euros,  and  the  outstanding  variable  rate  borrowings  were denominated  in  euros.  Information  shown  below  for  such  foreign  currency denominated  indebtedness is presented in its U.S. dollar equivalent at December 31, 2005 using exchange rates of 1.18 U.S. dollars per euro.  Certain  Norwegian kroner  denominated  capital  leases  totaling  $4.5  million  in 2005 have been excluded from the table below.                                             Amount                                    -------------------                                    Carrying      Fair       Interest     Maturity         Indebtedness                 value      value         rate         date        --------------              --------    -------     ---------    ----------                                       (In millions)  Fixed-rate indebtedness -   euro-denominated         Senior Secured Notes            $ 449.3     $ 463.6        8.9%         2009                                    =======     =======        At December 31, 2004,  euro-denominated fixed rate indebtedness  aggregated $519.2 million (fair value - $549.1  million) with a  weighted-average  interest rate of 8.9%.  Variable rate indebtedness at December 31, 2004 was $13.6 million with a weighted average interest rate of 3.9%.       Foreign  currency  exchange  rates.  The  Company is exposed to market risk arising  from  changes  in  foreign  currency  exchange  rates  as a  result  of manufacturing  and  selling  its  products  worldwide.  Earnings  are  primarily affected by  fluctuations  in the value of the U.S. dollar relative to the euro, the Norwegian kroner and the United Kingdom pound sterling.       As described above, at December 31, 2005, the Company had the equivalent of $449.3  million  of  outstanding  euro-denominated   indebtedness  (2004  -  the equivalent of $532.8 million of  euro-denominated  indebtedness).  The potential increase in the U.S.  dollar  equivalent  of the  principal  amount  outstanding resulting from a hypothetical  10% adverse change in exchange rates at such date would  be  approximately  $44.4  million  at  December  31,  2005  (2004 - $52.4 million).       Other. The Company believes there may be a certain amount of incompleteness in the sensitivity  analysis  presented  above.  For example,  the  hypothetical effect of changes in exchange rates discussed above ignores the potential effect on other  variables  which affect 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.  Accordingly, the amounts presented above are not necessarily  an accurate  reflection of the  potential  losses the Company would incur  assuming  the  hypothetical  changes in exchange  rates were  actually to occur.       The above  discussion and estimated  sensitivity  analysis  amounts include forward-looking  statements of market risk which assume hypothetical  changes in currency  exchange  rates.  Actual future market  conditions  will likely differ materially from such assumptions.  Accordingly,  such forward-looking statements should not be  considered  to be  projections  by the Company of future  events, gains or losses.
The information  called for by this Item is contained in a separate section of this Annual Report.  See "Index of Financial  Statements and Schedules" (page F-1).  ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND FINANCIAL DISCLOSURE       None.
Evaluation of Disclosure  Controls and Procedures.  The Company maintains a system of disclosure controls and procedures.  The term "disclosure controls and procedures,"  as defined by  regulations  of the SEC,  means  controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized and  reported  within the time  periods  specified in the SEC's rules and forms. Disclosure  controls and procedures include,  without  limitation,  controls and procedures  designed to ensure that information  required to be disclosed by the Company  in the  reports  that it files or  submits  to the SEC under the Act is accumulated  and  communicated  to  the  Company's  management,   including  its principal  executive  officer and its principal  financial  officer,  or persons performing  similar  functions,  as appropriate to allow timely  decisions to be made regarding  required  disclosure.  Each of Harold C. Simmons,  the Company's Chief Executive Officer, and Gregory M. Swalwell,  the Company's Vice President, Finance and Chief  Financial  Officer,  have evaluated the Company's  disclosure controls and  procedures as of December 31, 2005.  Based upon their  evaluation, these executive officers have concluded that the Company's  disclosure  controls and procedures are effective as of the date of such evaluation.       Internal  Control Over  Financial  Reporting.  The Company also maintains a system of internal controls over financial reporting. The term "internal control over financial reporting," as defined by regulations of the SEC, means a process designed by, or under the supervision of, the Company's  principal executive and principal  financial  officers,  or persons performing  similar  functions,  and effected by the Company's board of directors, management and other personnel, to provide reasonable  assurance  regarding the reliability of financial  reporting and the preparation of financial  statements for external purposes in accordance with GAAP, and includes those policies and procedures that:  o    Pertain to the maintenance of records that in reasonable  detail accurately      and fairly reflect the  transactions  and dispositions of the assets of the      Company, o    Provide reasonable assurance that transactions are recorded as necessary to      permit  preparation  of financial  statements in accordance  with GAAP, and      that  receipts  and  expenditures  of the  Company  are being  made only in      accordance with  authorizations of management and directors of the Company,      and o    Provide reasonable  assurance  regarding  prevention or timely detection of      unauthorized  acquisition,  use or disposition of the Company's assets that      could  have a  material  effect  on the  Company's  Consolidated  Financial      Statements.       The Company currently expects that Section 404 of the Sarbanes-Oxley Act of 2002 will  require  the  Company  to  annually  include a  management  report on internal  control over financial  reporting  starting with the Company's  Annual Report  on Form  10-K  for the year  ended  December  31,  2007.  The  Company's independent  registered public accounting firm will also be required to annually audit the  Company's  internal  control over  financial  reporting.  In order to achieve  compliance with Section 404, the Company has been documenting,  testing and evaluating its internal control over financial reporting since 2004, using a combination  of internal and  external  resources.  The process of  documenting, testing and evaluating the Company's  internal control over financial  reporting under the  applicable  guidelines is complex and time  consuming,  and available internal  and  external  resources  necessary  to  assist  the  Company  in  the documentation and testing required to comply with Section 404 are limited. While the Company currently believes it has dedicated the appropriate resources,  that it will be able to fully  comply with  Section 404 in its Annual  Report on Form 10-K for the year ended  December 31, 2007 and be in a position to conclude that the  Company's  internal  control  over  financial  reporting is effective as of December  31, 2007,  because the  applicable  requirements  are complex and time consuming,  and because currently  unforeseen events or circumstances beyond the Company's  control could arise,  there can be no assurance that the Company will ultimately be able to fully comply with Section 404 in its Annual Report on Form 10-K for the year ended December 31, 2007 or whether it will be able to conclude that the Company's internal control over financial  reporting is effective as of December 31, 2007.       Changes in Internal  Control Over  Financial  Reporting.  There has been no change to the Company's  internal  control over financial  reporting  during the quarter ended December 31, 2005 that has materially  affected,  or is reasonably likely to materially  affect,  the  Company's  internal  control over  financial reporting.                                       PART III
Omitted pursuant to the General Instruction I of Form 10-K.
Omitted pursuant to the General Instruction I of Form 10-K.
Omitted pursuant to the General Instruction I of Form 10-K.
Omitted pursuant to the General Instruction I of Form 10-K.
The following  table shows the aggregate fees  PricewaterhouseCoopers  LLP, the Company's independent  registered public accounting firm ("PwC"), has billed or is expected to bill to the Company and its subsidiaries for services rendered for 2004 and 2005.  No fees were  billed or  expected to be billed by PwC to the Company  for  services  performed  in 2004 and 2005  for  financial  information systems design and implementation.                                                                     December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)               Audit(1)                                         $   1,149          $   1,523          Audit related(2)                                         8                 19          Tax(3)                                                  12                 21                                                           ---------          ---------           Total                                            $   1,169          $   1,563                                                           =========          =========   1)   Fees for the following services:       a)   audits of the Company's  consolidated  year-end financials  statements           for each year;       b)   reviews of the unaudited quarterly financial  statements  appearing in           the Company's  Forms 10-Q for each of the first three quarters of each           year;       c)   consents and assistance with  registration  statements  filed with the           Commission;       d)   normally provided  statutory or regulatory  filings or engagements for           each year; and       e)   the  estimated  out-of-pocket  costs PwC incurred in providing  all of           such services for which the Company reimburses PwC.  2)   Fees for assurance and related services  reasonably related to the audit or      review of the Company's financial  statements for each year. These services      include employee benefit plan audits,  accounting  consultations and attest      services concerning financial accounting and reporting standards and advice      concerning internal controls.  3)   Fees for tax compliance, tax advice and tax planning services.       See  Appendix A to Kronos'  proxy  statement  dated  April 18, 2005 for the Kronos' audit committee's Preapproval Policy.                                        PART IV
(a) and (c) Financial Statements and Schedules            The Registrant            The consolidated  financial statements and schedules of the Registrant           listed on the accompanying Index of Financial Statements and Schedules           (see page F-1) are filed as part of this Annual Report.            Financial Statements of Guarantors            The consolidated  financial statements of Kronos Titan GmbH and Kronos           Denmark ApS listed on the accompanying  Index of Financial  Statements           and  Schedules  (see page F-1) are filed as part of this Annual Report           pursuant  to Rule  3-16  of  Regulation  S-X.  The  Registrant  is not           required to provide any other  financial  statements  pursuant to Rule           3-16 of Regulation S-X.       (b)  Exhibits            Included as exhibits  are the items listed in the Exhibit  Index.  the           Company will  furnish a copy of any of the exhibits  listed below upon           payment  of $4.00 per  exhibit  to cover the costs to the  Company  of           furnishing the exhibits. Pursuant to Item 601(b)(4)(iii) of Regulation           S-K, any  instrument  defining the rights of holders of long-term debt           issues  and other  agreements  related  to  indebtedness  which do not           exceed 10% of  consolidated  total assets as of December 31, 2005 will           be furnished to the Commission upon request.  Item No.                              Exhibit Index  3.1       Certificate  of  Incorporation  of the  Registrant -  incorporated  by           reference to Exhibit 3.1 to the Registrant's Registration Statement on           Form S-4 (File No. 333-100047).  3.2       Certificate  of  Amendment  to  Certificate  of  Incorporation  of the           Registrant,  dated  March 15,  1989 -  incorporated  by  reference  to           Exhibit 3.2 to the  Registrant's  Registration  Statement  on Form S-4           (File No. 333-100047).  3.3       Certificate  of  Amendment  to  Certificate  of  Incorporation  of the           Registrant,  dated  January 1, 1999 -  incorporated  by  reference  to           Exhibit 3.3 to the  Registrant's  Registration  Statement  on Form S-4           (File No. 333-100047).  3.4       Certificate  of  Amendment  to  Certificate  of  Incorporation  of the           Registrant,  dated  February 8, 1999 -  incorporated  by  reference to           Exhibit 3.4 to the  Registrant's  Registration  Statement  on Form S-4           (File No. 333-100047).  3.5       Certificate  of  Amendment  to  Certificate  of  Incorporation  of the           Registrant,  dated  December 15, 1999 -  incorporated  by reference to           Exhibit 3.5 to the  Registrant's  Registration  Statement  on Form S-4           (File No. 333-100047).  3.6       Amended  and  Restated  Bylaws of the  Registrant  -  incorporated  by           reference to Exhibit 3.6 to the Registrant's Registration Statement on           Form S-4 (File No. 333-100047).  4.1       Indenture governing the 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.  4.5       Purchase   Agreement   dated   November   18,  2004   between   Kronos           International,  Inc. and  Deutsche  Bank AG London -  incorporated  by           reference  to  Exhibit  4.4 to the  Current  Report on Form 8-K of the           Registrant dated November 24, 2004.  4.6       Form of Registration  Rights Agreement as of November 26, 2004 between           Kronos International,  Inc. and Deutsche Bank AG London - incorporated           by reference  to Exhibit 4.5 to the Current  Report on Form 8-K of the           Registrant dated November 24, 2004.  4.7       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.  4.8       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.  4.9       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.  4.10      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.  4.11      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.  4.12      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).  4.13      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).  4.14      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).  10.1      Euro 80,000,000 Facility Agreement,  dated June 25, 2002, among Kronos           Titan GmbH & Co. OHG,  Kronos Europe  S.A./N.V.,  Kronos Titan A/S and           Titania A/S, as borrowers,  Kronos Titan GmbH & Co. OHG, Kronos Europe           S.A./N.V.  and Kronos Norge AS, as guarantors,  Kronos Denmark ApS, as           security  provider,  Deutsche  Bank AG,  as  mandated  lead  arranger,           Deutsche Bank Luxembourg  S.A., as agent and security  agent,  and KBC           Bank NV, as fronting  bank, and the financial  institutions  listed in           Schedule 1 thereto,  as lenders - incorporated by reference to Exhibit           10.1 to the Quarterly  Report on Form 10-Q of NL Industries,  Inc. for           the quarter ended June 30, 2002.  10.2      First  Amendment  Agreement,  dated  September 3, 2004,  Relating to a           Facility Agreement dated June 25, 2002 among Kronos Titan GmbH, Kronos           Europe  S.A./N.V.,  Kronos  Titan AS and Titania  A/S,  as  borrowers,           Kronos Titan GmbH,  Kronos  Europe  S.A./N.V.  and Kronos Norge AS, as           guarantors,  Kronos Denmark ApS, as security  provider,  with Deutsche           Bank Luxembourg  S.A.,  acting as agent - incorporated by reference to           Exhibit  10.8 to the  Registration  Statement  on Form  S-1 of  Kronos           Worldwide, Inc. (File No. 333-119639).  10.3      Second Amendment Agreement Relating to a Facility Agreement dated June           25, 2002  executed as of June 14, 2005 by and among  Deutsche Bank AG,           as mandated lead arranger, Deutsche Bank Luxembourg S.A. as agent, the           participating  lenders,  Kronos Titan GmbH,  Kronos  Europe  S.A./N.V,           Kronos Titan AS, Kronos Norge AS,  Titania AS and Kronos Denmark ApS -           incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K           dated June 14, 2005. Certain schedules,  exhibits, annexes and similar           attachments  to this Exhibit 10.3 have not been filed;  upon  request,           the Reporting Persons will furnish  supplementally to the Commission a           copy of any omitted exhibit, annex or attachment.  10.4      Lease  Contract,  dated June 21, 1952,  between  Farbenfabriken  Bayer           Aktiengesellschaft  and  Titangesellschaft  mit  beschrankter  Haftung           (German   language   version  and  English   translation   thereof)  -           incorporated  by  reference to Exhibit  10.14 to the Annual  Report on           Form 10-K of NL Industries, Inc. for the year ended December 31, 1985.  10.5      Contract on Supplies and  Services,  dated as of June 30, 1995,  among           Bayer AG,  Kronos  Titan-GmbH  & Co. OHG and the  Registrant  (English           translation from German language document) - incorporated by reference           to Exhibit  10.1 to  Quarterly  Report on Form 10-Q of NL  Industries,           Inc. for the quarter ended September 30, 1995.  10.6      Amendment  dated  August 11,  2003 to the  Contract  on  Supplies  and           Services  among  Bayer AG,  Kronos  Titan-GmbH  & Co.  OHG and  Kronos           International  (English  translation  of German  language  document) -           incorporated  by  reference  to  Exhibit  10.32  of  the  Registration           statement on Form 10 of the Registrant (File No. 001-31763).  10.7      Master Technology  Exchange  Agreement,  dated as of October 18, 1993,           among Kronos,  Inc., Kronos Louisiana,  Inc., the Registrant,  Tioxide           Group Limited and Tioxide Group  Services  Limited -  incorporated  by           reference to Exhibit 10.8 to the  Quarterly  Report on Form 10-Q of NL           Industries, Inc. for the quarter ended September 30, 1993.  10.8      Intercorporate Services Agreement,  dated as of January 1, 2005, among           Kronos Worldwide, Inc., Kronos (US), Inc., Kronos International,  Inc.           and Kronos Canada, Inc.  10.9      Tax Agreement,  dated as of May 28, 2002, between Kronos, Inc. and the           Registrant  -  incorporated  by  reference  to  Exhibit  10.7  to  the           Registrant's Registration Statement on Form S-4 (File No. 333-100047).  10.10     Services  Agreement,  dated  as of  January  1,  2004,  among  Kronos           International,  Inc.,  Kronos  Europe  S.A./N.V.,  Kronos (US),  Inc.,           Kronos Titan GmbH,  Kronos Denmark ApS,  Kronos Canada,  Inc.,  Kronos           Limited,  Societe  Industrielle Du Titane,  S.A.,  Kronos B.V., Kronos           Titan AS and Titania AS.  10.11     Form of Assignment and Assumption  Agreement,  dated as of January 1,           1999, between Kronos,  Inc. (formerly known as Kronos (USA), Inc.) and           the  Registrant  -  incorporated  by  reference to Exhibit 10.9 to the           Registrant's Registration Statement on Form S-4 (File No. 333-100047).  10.12     Form of Cross  License  Agreement,  effective  as of January 1, 1999,           between  Kronos Inc.  (formerly  known as Kronos (USA),  Inc.) and the           Registrant  -  incorporated  by  reference  to  Exhibit  10.10  to the           Registrant's Registration Statement on Form S-4 (File No. 333-100047).  10.13**   NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated by           reference  to Appendix A to the Proxy  Statement on Schedule 14A of NL           Industries, Inc. for the annual meeting of shareholders held on May 6,           1998.  10.14**   Form  of  Kronos  Worldwide,   Inc.  Long-Term  Incentive  Plan  -           incorporated by reference to Exhibit 10.4 of Kronos Worldwide,  Inc.'s           Registration Statement on Form 10 (File No. 001-31763).  10.15**   Form of Indemnity Agreement between the Registrant and the officers           and directors of the Registrant - incorporated by reference to Exhibit           10.12 to the Registrant's Registration Statement on Form S-4 (File No.           333-100047).  10.16*    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.  10.17*    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.  10.18*    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.  10.19*    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.  10.20*    Amendment to Richards  Bay Slag Sales  Agreement  dated  October 31,           2003 between Richards Bay Iron and Titanium  (Proprietary) Limited and           Kronos,  Inc -  incorporated  by reference to Exhibit  10.17 to Kronos           Worldwide,  Inc.'s  Annual  Report  on Form  10-K for the  year  ended           December 31, 2003.  10.21     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.  10.22     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.  10.23     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.  10.24**   Summary of  Consulting  Arrangement,  beginning  on August 1, 2003,           between Lawrence A. Wigdor and Kronos  Worldwide,  Inc. - incorporated           by reference to Exhibit 10.50 to NL  Industries,  Inc.'s Annual Report           on Form 10-K for the year ended December 31, 2004.  10.25     Agency  Agreement,   dated  as  of  January  1,  2004,  among  Kronos           International,  Inc.,  Kronos  Titan GmbH,  Kronos  Europe  S.A./N.V.,           Kronos  Canada,  Inc.,  Kronos  Titan AS and  Societe  Indutrielle  Du           Titane, S.A.  10.26     Titanium  Dioxide  Products  and  Titanium   Chemicals   Distribution           Agreement,  dated as of January  1, 2005,  among  Kronos  Titan  GmbH,           Kronos Europe S.A./N.V.,  Kronos Canada, Inc., Kronos Titan AS, Kronos           (US),  Inc.,  Kronos Denmark ApS,  Kronos Titan GmbH,  Kronos Limited,           Societe Industrielle Du Titane, S.A. and Kronos B.V.  10.27     Raw  Material  Purchase  and Sale  Agreement,  dated as of January 1,           2004,  among  Kronos (US),  Inc.,  Kronos  Titan GmbH,  Kronos  Europe           S.A./N.V. and Kronos Canada, Inc.  10.28     Promissory note in the amount of euro 65,000,000, dated as of October           12, 2004 between the Registrant and Kronos Worldwide, Inc.  10.29     Promissory  note  in the  amount  of  euro  98,094,875,  dated  as of           November 26, 2004 between the Registrant and Kronos Worldwide, Inc.  12.1      Statements  of  Computation  of Ratio of Earnings  to  Combined  Fixed           Charges and Preferred Dividends  12.2      Statements of Computation of Ratio of Earnings to Fixed Charges   31.1      Certification.  31.2      Certification.  32.1      Certification.  ___________________________________  *    Portions  of the  exhibit  have been  omitted  pursuant  to a  request  for      confidential treatment.  **   Management contract, compensatory plan or arrangement                                      SIGNATURES        Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                                              Kronos International, Inc.                                             (Registrant)                                               By:/s/ Harold C. Simmons                                                -------------------------                                                Harold C. Simmons                                                March 28, 2006                                               (Chief Executive Officer)        Pursuant to the  requirements of the Securities  Exchange Act of 1934, this report  has  been  signed  below  by the  following  persons  on  behalf  of the Registrant and in the capacities and on the dates indicated:    /s/ Dr. Henry Basson                        /s/ Gregory M. Swalwell - --------------------------------            ----------------------------------- Dr. Henry Basson, March 28, 2006            Gregory M. Swalwell, March 28, 2006 (Director)                                  (Vice President, Finance;                                              Principal Financial Officer)  /s/ Andrew Kasprowiak                       /s/ Volker Roth - --------------------------------            ----------------------------------- Andrew Kasprowiak, March 28, 2006           Volker Roth, March 28, 2006 (Director)                                 (Director)  /s/ Dr. Ulfert Fiand                        /s/ James W. Brown - --------------------------------            ----------------------------------- Dr. Ulfert Fiand, March 28, 2006            James W. Brown, March 28, 2006 (Director)                                 (Vice President, Controller,                                             Principal Accounting Officer)                                       KRONOS INTERNATIONAL, INC.                             Annual Report on Form 10-K                              Items 8, 15(a) and 15(d)                     Index of Financial Statements and Schedules   Financial Statements                                                       Page    Report of Independent Registered Public Accounting Firm                  F-2    Consolidated Balance Sheets - December 31, 2004 and 2005                 F-3    Consolidated Statements of Income -    Years ended December 31, 2003, 2004 and 2005                            F-5    Consolidated Statements of Comprehensive Income (Loss) -    Years ended December 31, 2003, 2004 and 2005                            F-6    Consolidated Statements of Stockholder's Equity -    Years ended December 31, 2003, 2004 and 2005                            F-7    Consolidated Statements of Cash Flows -    Years ended December 31, 2003, 2004 and 2005                            F-8    Notes to Consolidated Financial Statements                              F-10   Financial Statement Schedules     Schedule I - Condensed Financial Information of Registrant               S-1    Schedule II - Valuation and Qualifying Accounts                          S-5    Schedules III and IV are omitted because they are not applicable.   Other Financial Statements filed pursuant to Rule 3-16 of Regulation S-X     Financial Statements of Kronos Titan GmbH                               FA-1    Financial Statements of Kronos Denmark ApS                              FB-1                  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    To the Stockholder and Board of Directors of Kronos International, Inc.:       In  our  opinion,  the  consolidated  financial  statements  listed  in the accompanying  index  present  fairly,  in all material  respects,  the financial position of Kronos International, Inc. and Subsidiaries at December 31, 2004 and 2005,  and the results of their  operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity  with accounting principles  generally accepted in the United States of America. In addition,  in our opinion,  the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated  financial  statements.  These financial statements and financial statement schedules are the responsibility of the Company's  management.  Our responsibility is to express an opinion on these financial  statements and financial  statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company  Accounting  Oversight  Board (United  States).  Those  standards require that we plan and perform the audit to obtain reasonable  assurance about whether the financial  statements  are free of material  misstatement.  An audit 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 LLP     Dallas, Texas March 28, 2006                       KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES                             CONSOLIDATED BALANCE SHEETS                             December 31, 2004 and 2005                          (In thousands, except share data)                   ASSETS                                                               2004               2005                                                               ----               ----   Current assets:       Cash and cash equivalents                              $   17,505         $   63,284    Restricted cash                                             1,529              1,355    Accounts and other receivables                            130,729            120,182    Receivables from affiliates                                 2,517              1,952    Refundable income taxes                                     2,586              1,053    Inventories                                               170,261            185,348    Prepaid expenses                                            3,141              2,680                                                           ----------         ----------         Total current assets                                  328,268            375,854                                                           ----------         ----------   Other assets:     Deferred financing costs, net                             10,404              7,722     Restricted marketable debt securities                      2,877              2,572     Unrecognized net pension obligation                        7,524              6,108     Deferred income taxes                                    238,284            213,275     Other                                                      1,591                960                                                           ----------         ----------         Total other assets                                    260,680            230,637                                                           ----------         ----------   Property and equipment:    Land                                                       34,164             30,288    Buildings                                                 153,442            138,925    Equipment                                                 724,904            644,271    Mining properties                                          71,980             68,163    Construction in progress                                   13,560             12,112                                                           ----------         ----------                                                               998,050            893,759    Less accumulated depreciation and amortization            601,815            544,984                                                           ----------         ----------         Net property and equipment                            396,235            348,775                                                           ----------         ----------                                                            $  985,183         $  955,266                                                           ==========         ==========              See accompanying notes to consolidated financial statements.                           KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES                       CONSOLIDATED BALANCE SHEETS (CONTINUED)                             December 31, 2004 and 2005                          (In thousands, except share data)         LIABILITIES AND STOCKHOLDER'S EQUITY                                                               2004               2005                                                               ----               ----    Current liabilities:       Current maturities of long-term debt                   $   13,792         $      958    Accounts payable and accrued liabilities                  126,949            118,285    Payable to affiliates                                      11,042             14,882    Income taxes                                               17,080             21,799    Deferred income taxes                                       2,722              4,136                                                           ----------         ----------         Total current liabilities                             171,585            160,060                                                           ----------         ----------   Noncurrent liabilities:    Long-term debt                                            519,403            452,865    Deferred income taxes                                      22,358             19,265    Accrued pension cost                                       48,441            125,766    Other                                                      16,840             15,434                                                           ----------         ----------         Total noncurrent liabilities                          607,042            613,330                                                           ----------         ----------   Minority interest                                                76                 75                                                           ----------         ----------   Stockholder's equity:    Common stock, $100 par value; 100,000 shares     authorized; 2,968 shares issued                              297                297    Additional paid-in capital                              1,944,185          1,944,185    Retained deficit                                       (1,399,118)        (1,339,332)    Notes receivable from affiliate                          (209,526)          (209,526)    Accumulated other comprehensive loss:      Currency translation                                    (99,764)          (130,178)      Pension liabilities                                     (29,594)           (83,645)                                                           ----------         ----------         Total stockholder's equity                            206,480            181,801                                                           ----------         ----------                                                            $  985,183         $  955,266                                                           ==========         ==========            See accompanying notes to consolidated financial statements.  Commitments and contingencies (Notes 10 and 13)                       KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES                          CONSOLIDATED STATEMENTS OF INCOME                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                2003                2004              2005                                                              ----                ----              ----       Net sales                                                 $  715,906         $  807,970        $  850,873 Cost of sales                                                516,864            609,559           613,178                                                           ----------         ----------        ----------      Gross margin                                             199,042            198,411           237,695  Selling, general and administrative expense                   86,965            104,110           110,185 Other operating income (expense):   Currency transaction gains (losses), net                    (3,721)            (2,243)            4,090   Disposition of property and equipment                         (394)              (895)           (1,395)   Royalty income                                               6,122              6,034             6,827   Other income                                                   489                426               576   Other expense                                                 (130)               (72)              (86)                                                           ----------         ----------        ----------      Income from operations                                   114,443             97,551           137,522  Other income (expense):   Interest income from affiliates                                 30              2,767            18,943   Trade interest income                                          700              1,147               951   Securities transaction gain                                   -                  -                5,439   Interest expense to affiliates                                 (81)                (4)             -   Other interest expense                                     (32,529)           (36,688)          (43,950)                                                           ----------         ----------        ----------      Income before income taxes and minority interest          82,563             64,773           118,905  Provision (benefit) for income taxes                             730           (261,260)           59,107  Minority interest                                                 72                 53                12                                                           ----------         ----------        ----------      Net income                                            $   81,761         $  325,980        $   59,786                                                           ==========         ==========        ==========              See accompanying notes to consolidated financial statements.                        KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES               CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                  2003                2004              2005                                                              ----                ----              ----      Net income                                                $   81,761         $  325,980        $   59,786                                                           ----------         ----------        ----------  Other comprehensive (loss) income, net of tax:    Minimum pension liabilities adjustment                     (27,647)             4,803           (54,051)    Currency translation adjustment                              5,600             33,661           (30,414)                                                           ----------         ----------        ----------        Total other comprehensive income (loss)                (22,047)            38,464           (84,465)                                                           ----------         ----------        ----------            Comprehensive income (loss)                     $   59,714         $  364,444        $  (24,679)                                                           ==========         ==========        ==========               See accompanying notes to consolidated financial statements.                        KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES                   CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY                    Years ended December 31, 2003, 2004 and 2005                                  (In thousands)                                                                                                   Accumulated other                                                                                                   comprehensive                                                                                  Notes            income (loss)           Total                                                   Additional     Retained      receivable   ------------------------      common                                        Common      paid-in       earnings         from       Currency      Pension     stockholder's                                        stock       capital       (deficit)     affiliates   translation  liabilities      equity                                       -------    -----------    ----------    ------------  -----------  -----------   -------------            Balance at December 31, 2002           $ 297     $1,944,185    $(1,721,859)    $    -       $(139,025)    $ (6,750)     $  76,848  Net income                                -            -            81,761          -            -            -            81,761 Other comprehensive income (loss),   net of tax                              -            -              -                         5,600      (27,647)       (22,047) Cash dividends                            -            -           (25,000)         -            -            -           (25,000)                                        -----     ----------    -----------     ---------    ---------     --------      ---------  Balance at December 31, 2003             297      1,944,185     (1,665,098)         -        (133,425)     (34,397)       111,562  Net income                                -            -           325,980          -            -            -           325,980 Other comprehensive income (loss),   net of tax                              -            -              -             -          33,661        4,803         38,464 Change in notes receivable   from affiliates                         -            -              -         (209,526)        -            -          (209,526) Cash dividends                            -            -           (60,000)         -            -            -           (60,000)                                        -----     ----------    -----------     ---------    ---------     --------      ---------  Balance at December 31, 2004             297      1,944,185     (1,399,118)     (209,526)     (99,764)     (29,594)       206,480  Net income                                -            -            59,786          -            -            -            59,786 Other comprehensive loss,   net of tax                              -            -              -             -         (30,414)     (54,051)       (84,465)                                        -----     ----------    -----------     ---------    ---------     --------      ---------  Balance at December 31, 2005           $ 297     $1,944,185    $(1,339,332)    $(209,526)   $(130,178)    $(83,645)     $ 181,801                                        =====     ==========    ===========     =========    =========     ========      =========              See accompanying notes to consolidated financial statements.                      KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES                        CONSOLIDATED STATEMENTS OF CASH FLOWS                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                 2003                2004              2005                                                              ----                ----              ----  Cash flows from operating activities:       Net income                                              $   81,761         $  325,980        $   59,786   Depreciation and amortization                               33,634             37,726            36,504   Noncash interest expense                                     1,944              2,044             2,566   Deferred income taxes                                       38,690           (273,985)           30,815   Minority interest                                               72                 53                12   Net loss from disposition of property and equipment            394                895             1,395   Securities transaction gain                                   -                  -               (5,439)   Defined benefit pension plan expense greater      (less) than cash funding                                 (3,805)              (800)           (2,335)   Other, net                                                     250                987            (1,839)   Change in assets and liabilities:     Accounts and other receivables                             1,104             (6,227)           (9,641)     Inventories                                                  232             11,582           (38,938)     Prepaid expenses                                           1,345               (233)             (228)     Accounts payable and accrued liabilities                   5,495             27,922            10,781     Income taxes                                             (37,231)            25,557             7,917     Accounts with affiliates                                 (14,424)            (6,103)            4,674     Other noncurrent assets                                   (3,779)             1,981              (690)     Other noncurrent liabilities                                (894)            (5,124)           (2,636)                                                           ----------         ----------        ----------      Net cash provided by operating activities                104,788            142,255            92,704                                                           ----------         ----------        ----------  Cash flows from investing activities:   Capital expenditures                                       (31,518)           (33,679)          (39,522)   Purchase of interest in subsidiary                            -                  (575)             -   Proceeds from disposal of interest in Norwegian      smelting operation                                         -                  -                3,542   Change in restricted cash equivalents and restricted      marketable debt securities, net                            (554)               (70)              129     Proceeds from disposition of property and equipment          383                 99                37                                                           ----------         ----------        ----------          Net cash used by investing activities                (31,689)           (34,225)          (35,814)                                                           ----------         ----------        ----------              See accompanying notes to consolidated financial statements.                         KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES                  CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                 2003                2004              2005                                                              ----                ----              ---- Cash flows from financing activities:   Indebtedness:         Borrowings                                            $   16,106         $  241,648        $    4,620     Principal payments                                       (46,006)          (100,073)          (13,159)     Deferred financing fees                                     -                (1,989)             -   Loans to affiliates                                           -              (209,524)             -   Dividends paid                                             (25,000)           (60,000)             -   Distributions to minority interests                            (14)              -                 -                                                           ----------         ----------        ----------            Net cash used by financing activities              (54,914)          (129,938)           (8,539)                                                           ----------         ----------        ----------  Cash and cash equivalents - net change from:   Operating, investing and financing activities               18,185            (21,908)           48,351   Currency translation                                         3,913              2,292            (2,572)                                                           ----------         ----------        ----------                                                                22,098            (19,616)           45,779     Balance at beginning of year                               15,023             37,121            17,505                                                           ----------         ----------        ----------     Balance at end of year                                 $   37,121         $   17,505        $   63,284                                                           ==========         ==========        ==========  Supplemental disclosures - cash paid  (received) for:    Interest                                               $   28,147         $   33,425        $   40,912    Income taxes                                              (11,480)           (23,776)           20,033        Inventories received as partial         consideration for disposal of interest          in Norwegian smelting operations                 $     -            $     -           $    1,897              See accompanying notes to consolidated financial statements.                       KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1 - Summary of significant accounting policies:       Organization and basis of presentation.  Kronos International, Inc. ("KII") is incorporated in the state of Delaware, U.S.A., with its seat of management in Leverkusen,  Germany. KII or the Company is a wholly-owned  subsidiary of Kronos Worldwide,  Inc.  ("Kronos")  (NYSE:KRO).  At December 31, 2005, (i) Valhi, Inc. (NYSE:VHI) held  approximately  57% of Kronos'  outstanding  common stock and NL Industries,  Inc. (NYSE:NL) held an additional 36% of Kronos' common stock, (ii) Valhi owned approximately 83% of NL's outstanding common stock and (iii) Contran Corporation and its subsidiaries held  approximately 92% of Valhi's  outstanding common stock. Substantially all of Contran's outstanding voting stock is held by trusts  established  for the benefit of certain  children and  grandchildren  of Harold C.  Simmons,  of which Mr.  Simmons  is sole  trustee,  or is held by Mr. Simmons or persons or other entities related to Mr. Simmons.  Consequently,  Mr. Simmons may be deemed to control each of such companies.       Management's   estimates.   The  preparation  of  financial  statements  in conformity with accounting principles generally accepted in the United States of America  ("GAAP")  requires  management to make estimates and  assumptions  that affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of contingent assets and liabilities at the date of the financial  statements,  and the reported amount of revenues and expenses during the reporting period. Actual results  may  differ  significantly  from  previously-estimated   amounts  under different assumptions or conditions.       Principles of consolidation.  The consolidated financial statements include the accounts of KII and its wholly-owned and  majority-owned  subsidiaries.  All material  intercompany  accounts and  balances  have been  eliminated.  Minority interest  relates to the Company's  majority-owned  subsidiary in France,  which conducts the Company's  marketing and sales  activities in that country.  During 2004, the Company increased its ownership interest by approximately 5% to 99% in such  subsidiary  by acquiring  shares  previously  held by certain of its other stockholders for an aggregate of $575,000.       Translation of foreign  currencies.  Assets and liabilities of subsidiaries whose  functional  currency  is other  than the U.S.  dollar are  translated  at year-end  rates of exchange and revenues and expenses are  translated at average exchange rates prevailing during the year. Resulting translation adjustments are accumulated in stockholder's  equity as part of accumulated other  comprehensive income  (loss),  net of related  deferred  income taxes and  minority  interest. Currency transaction gains and losses are recognized in income currently.       Derivatives  and hedging  activities.  Derivatives are recognized as either assets or  liabilities  and measured at fair value in  accordance  with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The  accounting  for  changes  in fair  value of  derivatives  depends  upon the intended use of the  derivative,  and such changes are recognized  either in net income  or  other   comprehensive   income.   As  permitted  by  the  transition requirements  of SFAS No. 133, the Company has  exempted  from the scope of SFAS No. 133 all host contracts  containing embedded  derivatives that were issued or acquired prior to January 1, 1999.       Cash and 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  and include amounts restricted in accordance with applicable Norwegian law regarding certain requirements  of the Company's  Norwegian  defined  benefit  pension plans ($2.9 million and $2.6  million at  December  31,  2004 and 2005,  respectively).  The restricted  marketable  debt  securities  are  generally  classified as either a current or noncurrent  asset  depending upon the maturity date of each such debt security and are carried at market which approximates cost.       Accounts  receivable.  The  Company  provides  an  allowance  for  doubtful accounts  for  known  and  estimated  potential  losses  arising  from  sales to customers based on a periodic review of these accounts.       Property and equipment and depreciation.  Property and equipment are stated at cost.  The Company has a  governmental  concession  with an unlimited term to operate an ilmenite mine in Norway.  Mining properties  consist of buildings and equipment used in the Company's Norwegian ilmenite mining operations.  While the Company owns the land and ilmenite reserves  associated with the mine, such land and reserves  were  acquired  for nominal  value and the Company has no material asset  recognized for the land and reserves  related to such mining  operations. Depreciation  of  property  and  equipment  for  financial   reporting  purposes (including  mining  properties)  is computed  principally  by the  straight-line method over the  estimated  useful  lives of ten to 40 years for  buildings  and three to 20 years for equipment.  Accelerated  depreciation methods are used for income tax  purposes,  as permitted.  Upon sale or  retirement of an asset,  the related cost and accumulated  depreciation are removed from the accounts and any gain or loss is recognized in income currently.       Expenditures  for  maintenance,  repairs and minor  renewals are  expensed; expenditures  for major  improvements  are  capitalized.  The  Company  performs 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 sales.  Accrued repair  and  maintenance  costs,  included  in  other  current  liabilities  and consisting  primarily  of  materials  and  supplies,  was $3.9  million and $3.4 million at December 31, 2004 and 2005, respectively.       Interest costs related to major long-term capital projects and renewals are capitalized as a component of  construction  costs.  Interest costs  capitalized were not significant in 2003, 2004 or 2005.       When  events or  changes  in  circumstances  indicate  that  assets  may be impaired,  an evaluation is performed to determine if an impairment exists. Such events or changes in circumstances  include, among other things, (i) significant current  and prior  periods or current  and  projected  periods  with  operating losses,  (ii) a significant  decrease in the market value of an asset or (iii) a significant  change  in the  extent  or  manner  in which an asset is used.  All relevant  factors  are  considered.  The test for  impairment  is  performed  by comparing the estimated  future  undiscounted  cash flows (exclusive of interest expense)  associated  with  the  asset  to the  asset's  net  carrying  value to determine  if a  write-down  to market  value or  discounted  cash flow value is required.   The  Company  assesses  impairment  of  property  and  equipment  in accordance  with SFAS No. 144,  "Accounting  for the  Impairment  or Disposal of Long-Lived Assets."       Long-term debt.  Long-term debt is stated net of any  unamortized  original issue  premium or discount.  Amortization  of deferred  financing  costs and any premium or discount  associated with the issuance of indebtedness,  all included in interest  expense,  is computed by the  interest  method over the term of the applicable issue.       Employee  benefit  plans.  Accounting  and funding  policies for retirement plans are  described in Note 11.       Income  taxes.  Prior to  December  2003,  KII,  Kronos and its  qualifying subsidiaries  were members of NL's  consolidated  U.S.  federal income tax group (the "NL Tax Group").  As a member of the NL Tax Group,  the Company was a party to a tax sharing agreement (the "NL Tax Agreement"). The NL Tax Group, including KII, is included in the  consolidated  U.S.  federal tax return 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 and its  qualifying  subsidiaries,  including  KII, compute provisions for U.S. income taxes on a  separate-company  basis using the tax elections made by Contran.  Pursuant to the Kronos Tax Sharing Agreement and using the tax  elections  made by  Contran,  KII made  payments  to or  received payments  from Kronos in amounts it would have paid to or received from the U.S. Internal Revenue Service had it not been a member of NL's consolidated tax group but instead was a separate  taxpayer.  Refunds are limited to amounts previously paid under the NL Tax Sharing Agreement.       Effective  December  2003,  following  NL's  distribution  of  48.8% of the outstanding  shares of Kronos  common stock to NL  stockholders,  Kronos and its qualifying  subsidiaries,  including  KII,  ceased  being  members of the NL Tax Group,  but remained as members of the Contran Tax Group.  Kronos entered into a new tax sharing  agreement with Valhi and Contran,  which contains similar terms to the NL Tax  Agreement.  As a member of the Contran Tax Group,  KII is jointly and  severally  liable for the federal  income tax  liability of Contran and the other  companies  included in the Contran Tax Group for all periods in which the Company  is  included  in the  Contran  Tax Group.  See Note 10.  Kronos and its consolidating  subsidiaries,  including  KII,  are also  included  in  Contran's consolidated  unitary  state  income  tax  returns in  certain  qualifying  U.S. jurisdictions.  The  terms of the  Contran  Tax  Agreement  also  apply to state provisions  in these  jurisdictions.  The Company made no payments to Kronos for income taxes in 2003, 2004 or 2005.       Deferred  income tax assets and liabilities are recognized for the expected future tax  consequences  of  temporary  differences  between the income tax and financial  reporting  carrying  amounts  of assets  and  liabilities,  including investments in the Company's  subsidiaries and affiliates who are not members of the Contran Tax Group and undistributed  earnings of foreign  subsidiaries which are not deemed to be permanently  reinvested.  Earnings of foreign  subsidiaries deemed to be permanently reinvested aggregated $527 million at December 31, 2004 and $707  million  at  December  31,  2005.  Determination  of the amount of the unrecognized  deferred  income tax  liability  related to such  earnings  is not practicable  due to the  complexities  associated  with  the  U.S.  taxation  on earnings  of  foreign   subsidiaries   repatriated   to  the  U.S.  The  Company periodically   evaluates   its  deferred  tax  assets  in  the  various   taxing jurisdictions in which it operates and adjusts any related  valuation  allowance based on the estimate of the amount of such deferred tax assets that the Company believes does not meet the "more-likely-than-not" recognition criteria.       Net sales. Sales are recorded when products are shipped and title and other risks and rewards of ownership have passed to the customer, or when services are performed.  Shipping terms of products shipped are generally FOB shipping point, although in some instances  shipping terms are FOB destination  point (for which sales are not recognized until the product is received by the customer). Amounts charged to customers for shipping and handling are included in net sales.  Sales are stated net of price,  early  payment and  distributor  discounts  and volume rebates.       Inventories and cost of sales.  Inventories are stated at the lower of cost (principally   average  cost)  or  market,  net  of  allowance  for  slow-moving inventories  ($7.3  million  and $6.5  million at  December  31,  2004 and 2005, respectively).  Amounts are removed from  inventories  at average cost.  Cost of sales includes costs for materials, packing and finishing, utilities, salary and benefits, maintenance and depreciation.       Selling, general and administrative expenses;  shipping and handling costs. Selling, general and administrative expenses include costs related to marketing, sales, distribution,  shipping and handling, research and development, legal and administrative functions such as accounting,  treasury and finance, and includes costs for salaries and benefits, travel and entertainment, promotional materials and  professional  fees.  Shipping and  handling  costs are included in selling, general and administrative  expense and were $43 million in 2003, $49 million in 2004 and $52 million in 2005.  Advertising  costs are  expensed as incurred  and were $1  million  in each of 2003,  2004 and  2005.  Research,  development  and certain sales technical  support costs are expensed as incurred and approximated $7 million in 2003, $8 million in 2004 and $9 million in 2005.       Stock  options.  The  Company  has not issued any stock  options.  However, 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,  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. Prior to 2003,  and  following  NL's cash  settlement  of options to purchase NL common  stock  held  by  certain  individuals,  NL  and  the  Company  commenced accounting for its stock options using the variable accounting method because NL could not overcome the  presumption  that it would not similarly cash settle its remaining stock options.  Under the variable  accounting  method,  the intrinsic value of all unexercised  stock options  (including those with an exercise price at least  equal to the  market  price on the date of grant)  are  accrued  as an expense over their vesting period, with subsequent increases (decreases) in NL's market  price  resulting  in  additional  compensation  expense  (income).  Upon exercise of such  options to purchase NL common  stock held by  employees of the Company,  the  Company  pays NL an amount  equal to the  difference  between the market price of NL's common stock on the date of exercise and the exercise price of such stock option. Aggregate compensation expense related to NL stock options held by  employees of the Company was $300,000 in 2003 and $1.0 million in 2004, and  compensation  income was  $600,000  in 2005.  The total  income tax benefit related to such  compensation  cost recognized by the Company was  approximately $100,000  in 2003 and  $400,000  in 2004,  and the total  income  tax  provision related to the  compensation  income was $200,000 in 2005. No compensation  cost was capitalized as part of assets  (inventory or fixed assets) during 2003, 2004 and 2005.       The following  table presents what the Company's  consolidated  net income, and related  per share  amounts,  would have been in 2003,  2004 and 2005 if the Company had applied the fair value-based recognition provisions of SFAS No. 123, for all awards granted subsequent to January 1, 1995.                                                              Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In millions)      Net income (loss) as reported                    $  81.8           $ 326.0          $  59.8  Adjustments, net of applicable income  tax effects and minority interest:   Stock-based employee compensation expense    (income) determined under APBO No. 25              .1                .6              (.3)   Stock-based employee compensation expense    determined under SFAS No. 123                     (.1)               -                -                                                  -------           -------          -------  Pro forma net income (loss)                      $  81.8           $ 326.6          $  59.5                                                  =======           =======          =======     Note 2 - Geographic information:       The Company's  operations  are  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.       For  geographic  information,  net  sales  are  attributed  to the place of manufacture  (point  of  origin)  and the  location  of the  customer  (point of destination); property and equipment are attributed to their physical location.                                                              Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In thousands)        Geographic areas  Net sales - point of origin:         Germany                                    $  510,105        $  576,138       $  613,081     Belgium                                       150,728           186,445          186,951     Norway                                        131,457           144,492          160,529     Eliminations                                  (76,384)          (99,105)        (109,688)                                                ----------        ----------       ----------                                                 $  715,906        $  807,970       $  850,873                                                ==========        ==========       ==========                                                               Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In thousands) Net sales - point of destination:          Europe                                     $  567,630        $  666,271       $  689,516     North America                                  58,293            42,015           51,922     Other                                          89,983            99,684          109,435                                                ----------        ----------       ----------                                                 $  715,906        $  807,970       $  850,873                                                ==========        ==========       ==========                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)  Identifiable assets -   net property and equipment:           Germany                                            $  269,922         $  235,932       Belgium                                                68,314             57,943       Norway                                                 57,808             54,759       Other                                                     191                141                                                          ----------         ----------                                                           $  396,235         $  348,775                                                          ==========         ==========   Note 3 -       Accounts and other receivables:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)     Trade receivables                                        $  120,969         $  110,268 Insurance claims                                                 32                 26 Recoverable VAT and other receivables                        11,388             11,317 Allowance for doubtful accounts                              (1,660)            (1,429)                                                          ----------         ----------                                                           $  130,729         $  120,182                                                          ==========         ==========   Note 4 -       Inventories                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)      Raw materials                                           $   34,303         $   42,807  Work in process                                             13,044             13,654  Finished products                                           90,083             98,004  Supplies                                                    32,831             30,883                                                          ----------         ----------                                                           $  170,261         $  185,348                                                          ==========         ==========   Note 5 -       Accounts payable and accrued liabilities:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)      Accounts payable                                        $   67,463         $   63,382  Employee benefits                                           27,863             27,147  Other                                                       31,623             27,756                                                          ----------         ----------                                                           $  126,949         $  118,285                                                          ==========         ==========   Note 6 - Long-term debt:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)   Long-term debt:       8.875% Senior Secured Notes                           $  519,225         $  449,298    Bank credit facility                                      13,622               -    Other                                                        348              4,525                                                          ----------         ----------                                                              533,195            453,823    Less current maturities                                   13,792                958                                                          ----------         ----------                                                           $  519,403         $  452,865                                                          ==========         ==========        In June 2002,  KII issued at par value euro 285  million  principal  amount ($280 million when issued) of its 8.875% Senior  Secured Notes due 2009,  and in November 2004 KII issued at 107% of par an additional euro 90 million  principal amount ($130 million when issued) of the KII Senior Secured Notes (collectively, the  "Notes").  The Notes are  collateralized  by a pledge of 65% of the  common stock or other  ownership  interests  of certain of KII's  first-tier  operating subsidiaries.  Such operating subsidiaries are Kronos Titan GmbH, Kronos Denmark ApS,  Kronos  Limited and Societe  Industrielle  Du Titane,  S.A.  The Notes are issued  pursuant  to an  indenture  which  contains  a number of  covenants  and restrictions  which,  among other  things,  restricts the ability of KII and its subsidiaries to incur debt,  incur liens,  pay dividends or merge or consolidate with, or sell or transfer all or  substantially  all of their assets to, another entity. The Notes are redeemable,  at KII's option, at redemption prices ranging from 104.437% of the principal  amount,  declining to 100% on or after  December 30, 2008.  In the event of a change of control of KII, as defined,  KII would be required to make an offer to purchase its 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, 2005, KII was in compliance with all the covenants, and the quoted market price of the Notes was approximately euro 1,045 per euro 1,000  principal  amount  (2004 - euro  1,075 per euro 1,000  principal amount).  At December 31, 2005,  the carrying  amount of the Notes includes euro 4.8 million ($5.7 million) of unamortized  premium  associated with the November 2004 issuance (2004 - euro 6.2 million, or $8.4 million).       KII's operating subsidiaries in Germany,  Belgium and Norway (collectively, the "Borrowers")  have a euro 80 million secured  revolving bank credit facility that  matures  in June 2008  ("European  Credit  Facility").  Borrowings  may be denominated in euros,  Norwegian kroners or U.S.  dollars,  and bear interest at the applicable interbank market rate plus 1.125%. The facility also provides for the  issuance  of letters of credit up to euro 5 million.  The  European  Credit Facility is  collateralized  by the accounts  receivable and  inventories of the borrowers,  plus a  limited  pledge of all of the  other  assets of the  Belgian borrower.  The European Credit Facility contains certain  restrictive  covenants which, among other things, restricts the ability of the borrowers to incur debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer all or  substantially  all of their assets to,  another  entity.  In  addition,  the European  Credit  Facility  contains  customary  cross-default  provisions  with respect  to  other  debt  and  obligations  of  Borrowers,  KII  and  its  other subsidiaries.  At December  31,  2005,  no amounts  were  outstanding  under the European  Credit  Facility and the equivalent of $92.3 million was available for additional borrowing by the subsidiaries.       Under  the  cross-default  provisions  of  the  Notes,  the  Notes  may  be accelerated  prior to their stated maturity if KII or any of KII's  subsidiaries default under any other  indebtedness  in excess of $20 million due to a failure to pay such  other  indebtedness  at its due date  (including  any due date that arises  prior to the stated  maturity as a result of a default  under such other indebtedness).  Under  the  cross-default  provisions  of  the  European  Credit Facility,  any outstanding  borrowings under the European Credit Facility may be accelerated prior to their stated maturity if the Borrowers or KII default under any other  indebtedness in excess of euro 5 million due to a failure to pay such other  indebtedness at its due date (including any due date that arises prior to the stated maturity as a result of a default under such other indebtedness). The European Credit Facility contains provisions that allow the lender to accelerate the maturity of the applicable  facility in the event of a change of control, as defined, of the applicable borrower.  In the event the cross-default  provisions of either the Notes or the European Credit Facility become applicable,  and such indebtedness  is  accelerated,  the  Company  would be  required  to repay  such indebtedness prior to their stated maturity.       Aggregate  maturities  of long-term  debt at December 31, 2005 are shown in the table below.    Years ending December 31,                                           Amount - --------------------------                                       --------------                                                                  (In thousands)       2006                                                            $    958    2007                                                                 861    2008                                                                 872    2009                                                             450,200    2010                                                                 932    2011 and thereafter                                                 -                                                                    --------                                                                     $453,823                                                                    ========        Restrictions.  Certain of the credit facilities described above require the respective   borrower  to  maintain  minimum  levels  of  equity,   require  the maintenance  of  certain  financial  ratios,   limit  dividends  and  additional indebtedness and contain other provisions and restrictive covenants customary in lending  transactions  of this type. At December 31, 2005,  the  restricted  net assets of consolidated  subsidiaries  approximated  $90 million.  Note 7 - Other noncurrent liabilities:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)      Insurance claims and expenses                           $    1,505         $    1,255  Employee benefits                                            5,107              4,735  Asset retirement obligations                                   958                934  Other                                                        9,270              8,510                                                          ----------         ----------                                                           $   16,840         $   15,434                                                          ==========         ==========        The asset retirement obligations are discussed in Note 15.  Note 8 - Common stock and notes receivable from affiliates:       NL common stock  options held by employees of the Company.  At December 31, 2005,  employees of the company held  options to purchase  approximately  68,000 shares of NL common stock,  which are  exercisable at various dates through 2010 (approximately 33,000) at exercise prices ranging from $2.66 to $9.34 per share, and  exercisable  at various  dates  through 2011  (approximately  35,000) at an exercise price of $11.49 per share. Such options generally vest over five years, and vesting  ceases at the date the  employee  separates  from  service from the Company (including retirement).       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 1. No options were granted in 2003,  2004 or 2005.  For purposes of pro forma  disclosures,  the  estimated  fair value of the options is  amortized  to expense over the options' vesting periods.       Common stock dividends.  KII paid $25.0 million in cash dividends to Kronos during 2003, $60.0 million during 2004 and nil in 2005.       Notes receivable from affiliates - contra equity.  In the fourth quarter of 2004, KII loaned an aggregate euro 163.1 million  ($209.5  million) to Kronos in return for two promissory  notes.  Interest on both notes is payable to KII on a quarterly basis at an annual rate of 9.25%, such interest was and is expected to be paid  quarterly  to the Company by Kronos.  The notes  mature on December 31, 2010,  with all principal due at that date. The notes are unsecured,  contain no financial covenants and provide for default only upon Kronos' failure to pay any amount  when  due  (subject  to a  short  grace  period).  Due to the  long-term investment  nature of these notes,  settlement of the  principal  balance of the notes is not contemplated  within the foreseeable  future. The Company currently expects that settlement of the principal  amount of the notes will occur through a  capital  transaction  (i.e.  a  non-cash  dividend  to  Kronos in the form of distributing  such  notes  receivable  to  Kronos).  Accordingly,   these  notes receivable  have  been  classified  as a  separate  component  of the  Company's stockholder's  equity in accordance  with GAAP.  Interest  income on such notes, which is expected to be paid  quarterly,  is  recognized  in income when earned. Rather than make a distribution  to Kronos in the form of a cash  dividend,  the Company  loaned the euro 163.1 million to Kronos  pursuant to the two promissory notes.  Until such time as the notes are  settled  (which,  as noted  above,  is expected  to be  through  a  capital  transaction  in  the  form  of a  non-cash dividend),  the  Company  benefits  from  the  interest  income  earned  on  the promissory notes.       Cash flows  related to principal  amounts on such loans made to  affiliates included  in  contra  equity  are  reflected  in  financing  activities  in  the accompanying Consolidated Statements of Cash Flows.   Note 9 - Securities transaction gain:       A securities  transaction gain in 2005,  classified as nonoperating income, relates to the sale of the Company's  passive  interest in a Norwegian  smelting operation,  which had a nominal carrying value for financial reporting purposes, for aggregate  consideration of approximately $5.4 million consisting of cash of $3.5 million and inventory with a value of $1.9 million.  Note 10 - Income taxes:                                                              Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                  (In millions)  Pre-tax income (loss):        Germany                                       $   45.8          $   30.2         $   64.3    Other non-U.S.                                    36.8              34.6             54.6                                                  --------          --------         --------                                                   $   82.6          $   64.8         $  118.9                                                  ========          ========         ========   Expected tax expense (benefit), at U.S.   federal statutory income tax rate of 35%       $   28.9          $   22.7         $   41.6  Non-U.S. tax rates                                   (.9)               .3               .5  Loss of German tax attribute                          -                 -              17.5  Nondeductible expenses                               2.7               4.2              4.6  Change in deferred income tax valuation   allowance, net                                     (6.7)           (280.7)              -  Tax contingency reserve adjustment, net             13.4              (4.6)            (7.7)  Assessment (refund) of prior year income taxes     (38.0)             (2.6)             2.1  Other, net                                           1.3               (.6)              .5                                                  --------          --------         --------                                                   $     .7          $ (261.3)        $   59.1                                                  ========          ========         ========  Components of income tax expense (benefit):    Currently payable (refundable):      Germany                                     $  (56.9)         $    (.2)        $   10.8      Other non - U.S.                                18.9              12.9             17.5                                                  --------          --------         --------                                                      (38.0)             12.7             28.3                                                  --------          --------         --------    Deferred income taxes (benefit):      Germany                                         44.4            (270.5)            31.2      Other non - U.S.                                (5.7)             (3.5)             (.4)                                                  --------          --------         --------                                                       38.7            (274.0)            30.8                                                  --------          --------         --------                                                   $     .7          $ (261.3)        $   59.1                                                  ========          ========         ========  Comprehensive provision for   income taxes (benefit) allocable to:    Net income                                    $     .7          $ (261.3)        $   59.1     Other comprehensive income -      pension liabilities                             (9.5)             (8.1)           (32.4)                                                  --------          --------         --------                                                   $   (8.8)         $ (269.4)        $   26.7                                                  ========          ========         ========        The  components  of the net deferred tax liability at December 31, 2004 and 2005, and changes in the deferred income tax valuation allowance during the past three years, are summarized in the following tables.                                                                                     December 31,                                                              --------------------------------------------------                                                                        2004                       2005                                                              -----------------------    -----------------------                                                              Assets      Liabilities    Assets      Liabilities                                                              ------      -----------    ------      -----------                                                                                 (In millions)   Tax effect of temporary differences   related to:         Inventories                                              $  1.5       $  (4.4)       $  1.6       $  (4.5)    Property and equipment                                     37.8         (22.9)         25.5         (20.5)    Accrued (prepaid) pension cost                             19.4         (40.4)         51.9         (35.6)    Other accrued liabilities and     deductible differences                                    46.1            -           25.6            -    Other taxable differences                                    -          (43.5)           -          (28.6)      Investment in subsidiaries/affiliates       not in tax group                                         1.9            -             -             -  Tax loss and tax credit carryforwards                       217.8            -          174.5            -                                                             ------       -------        ------       -------    Adjusted gross deferred tax assets      (liabilities)                                           324.5        (111.2)        279.1         (89.2)  Netting of items by tax jurisdiction                        (86.2)         86.2         (65.8)         65.8                                                             ------       -------        ------       -------                                                               238.3         (25.0)        213.3         (23.4)  Less net current deferred tax   asset (liability)                                             -           (2.7)           -           (4.1)                                                             ------       -------        ------       -------       Net noncurrent deferred tax asset       (liability)                                           $238.3       $ (22.3)       $213.3       $ (19.3)                                                             ======       =======        ======       =======                                                               Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                  (In millions)  Increase (decrease) in valuation allowance:   Recognition of certain deductible tax    attributes for which the benefit had not    previously been recognized under the        "more-likely-than-not" recognition criteria    $   (6.7)         $ (280.7)        $   -   Foreign currency translation                        28.2              (3.0)            -   Offset to the change in gross deferred    income tax assets due principally to    redeterminations of certain tax attributes    and implementation of certain tax    planning strategies                               (12.5)            121.0             -                                                   --------          --------         --------                                                     $    9.0          $ (162.7)        $   -                                                   ========          ========         ========        Certain of the Company's  non-U.S.  tax returns are being  examined and tax authorities have or may propose tax deficiencies,  including  non-income related items and interest. For example:  o    The Company received a preliminary tax assessment  related to 1993 from the      Belgian tax  authorities  proposing  tax  deficiencies,  including  related      interest,  of  approximately  euro 6 million ($7  million at  December  31,      2005). The Company filed a protest to this assessment,  and believes that a      significant  portion of the assessment  was without merit.  The Belgian tax      authorities have filed a lien on the fixed assets of the Company's  Belgian      TiO2 operations in connection with this assessment.  In April 2003,  Kronos      received a notification from the Belgian tax authorities of their intent to      assess a tax deficiency  related to 1999 that,  including  interest,  would      have aggregated approximately euro 9 million ($11 million).  Kronos filed a      written  response to the assessment,  and in September 2005 the Belgian tax      authorities withdrew the assessment.  o    The Norwegian tax authorities  have notified the Company of their intent to      assess tax  deficiencies  of  approximately  kroner 12 million ($2 million)      relating to the years 1998 through  2000.  The Company has objected to this      proposed assessment.       During the third  quarter of 2005,  the  Company  reached an  agreement  in principle  with the  German  tax  authorities  regarding  such tax  authorities' objection to the value assigned to certain intellectual  property rights held by the Company's operating subsidiary in Germany. Under the agreement in principle, the value assigned to such intellectual  property for German income tax purposes will be reduced  retroactively,  resulting  in a reduction  in the amount of the Company's  net  operating  loss  carryforward  in  Germany  as well as a  future reduction  in  the  amount  of   amortization   expense   attributable  to  such intellectual  property.  As a result,  the Company  recognized  a $17.5  million non-cash  deferred  income tax expense in the third  quarter of 2005  related to such agreement.  The $7.7 million tax contingency  adjustment income tax benefit in the year ended  December 31, 2005 relates  primarily to the withdrawal of the Belgium tax authorities' assessment related to 1999, as discussed above.       No  assurance  can be given that these tax matters  will be resolved in the Company's  favor in view of the inherent  uncertainties  involved in  settlement initiatives  and court and tax  proceedings.  The Company  believes  that it has provided  adequate  accruals for additional  taxes and related  interest expense which may  ultimately  result from all such  examinations  and believes that the ultimate  disposition of such  examinations  should not have a material  adverse effect  on  its  consolidated  financial  position,  results  of  operations  or liquidity.       At December 31, 2003, the Company had a significant amount of net operating loss  carryforwards  for German  corporate and trade tax purposes,  all of which have no expiration date. These net operating loss  carryforwards  were generated by KII principally  during the 1990's when KII had a significantly  higher level of  outstanding  indebtedness  than  is  currently  outstanding.  For  financial reporting   purposes,   however,   the  benefit  of  such  net  operating   loss carryforwards had not previously been recognized  because Kronos did not believe they met the  "more-likely-than-not"  recognition criteria,  and accordingly the Company  had a deferred  income tax asset  valuation  allowance  offsetting  the benefit of such net operating  loss  carryforwards  and the Company's  other tax attributes in Germany.  At the end of the second  quarter of 2004,  and based on all  available  evidence,  the  Company  concluded  that the  benefit of the net operating  loss  carryforwards  and  other  German  tax  attributes  now met the "more-likely-than-not"  recognition criteria,  and that reversal of the deferred income tax asset valuation  allowance related to Germany was appropriate.  Given the magnitude of the German net operating loss  carryforwards  and the fact that current  provisions of German law limit the annual  utilization of net operating loss  carryforwards  to 60% of taxable  income after the first euro 1 million of taxable  income,  KII believes it will take several  years to fully  utilize the benefit  of such  loss  carryforwards.  However,  given  that  the  Company  had generated positive taxable income in Germany in recent years,  combined with the fact that the net operating  loss  carryforwards  have no expiration  date,  the Company concluded,  among other reasons,  that it was now appropriate to reverse all of the valuation  allowance related to the net operating loss  carryforwards because  the  benefit  of  such  operating  loss   carryforwards  now  meet  the "more-likely-than-not"  recognition  criteria.  Of the $280.7 million  valuation allowance  related to Germany which was reversed  during 2004, and in accordance with the  applicable  GAAP  related to  accounting  for income  taxes at interim periods,  (i) $8.7 million was reversed during the first six months of 2004 that related   primarily  to  the  utilization  of  the  German  net  operating  loss carryforwards  during such period,  (ii) $268.6  million was reversed as of June 30, 2004 and (iii) $3.4 million was reversed during the last six months of 2004.       In the first quarter of 2003, KII was notified by the German Federal Fiscal Court that the Court had ruled in KII's favor concerning a claim for refund suit in which KII sought  refunds of prior taxes paid during the periods 1990 through 1997. KII and KII's German  operating  subsidiary  were required to file amended tax returns with the German tax  authorities to receive  refunds for such years, and all of such amended  returns were filed  during 2003.  Such amended  returns reflected an aggregate  net refund of taxes and related  interest to KII and its German  operating  subsidiary  of euro 26.9  million  ($32.1  million),  and the Company  recognized  the  benefit of these net  refunds  in its 2003  results of operations.  For the year ended December 31, 2004, the Company  recognized a net refund of euro 2.5 million ($3.1  million)  related to  additional  net interest which has accrued on the outstanding  refund amount. In 2004, KII and its German operating  subsidiary  had  received  net  refunds of euro 35.6  million  ($44.7 million when  received).  All refunds  relating to the periods 1990 to 1997 were received by December 31,  2004.  In addition to the refunds for the 1990 to 1997 periods,  the court  ruling also  resulted in a refund of 1999 income  taxes and interest, and the Company recognized euro 21.5 million ($24.6 million) in 2003.       At December 31,  2005,  the net  operating  loss  carryforwards  for German corporate and trade tax purposes  aggregated  the equivalent of $593 million and $104 million, respectively, all of which have no expiration date.       In October  2004,  the American  Jobs Creation Act of 2004 was enacted into law.  The new law  provided for a special 85%  deduction  for certain  dividends received from a controlled foreign  corporation in 2005. In the third quarter of 2005, the Company  completed its evaluation of this new provision and determined that it would not benefit from such special dividends received deduction.  Note 11 - Employee benefit plans:       The Company maintains various defined benefit pension plans.  Employees are covered  by plans in their  respective  countries.  Variances  from  actuarially assumed  rates will result in  increases or  decreases  in  accumulated  pension obligations, pension expense and funding requirements in future periods. 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 2004 or 2005. At December 31, 2005,  the Company  currently  expects to contribute  the equivalent of  approximately  $12 million to all of its defined benefit pension plans during 2006.       The funded status of the  Company's  defined  benefit  pension  plans,  the components of net periodic defined benefit pension cost related to the Company's consolidated  business  segments and charged to  continuing  operations  and the rates used in determining the actuarial present value of benefit obligations are presented in the tables  below.  The Company uses a September  30th  measurement date for their defined benefit pension plans.                                                                 Years ended December 31,                                                             -------------------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)  Change in projected benefit obligations ("PBO"):       Benefit obligations at beginning of the year          $  272,204         $  307,582    Service cost                                               5,398              5,885    Interest cost                                             14,132             14,038    Participant contributions                                  1,362              1,469    Actuarial losses                                           3,134             84,365    Change in foreign currency exchange rates                 26,588            (43,954)    Benefits paid                                            (15,236)           (16,808)                                                          ----------         ----------         Benefit obligations at end of the year            $  307,582         $  352,577                                                          ==========         ==========   Change in plan assets:    Fair value of plan assets at beginning of the year    $  167,302         $  196,573    Actual return on plan assets                              14,175              7,132    Employer contributions                                    11,726             13,323    Participant contributions                                  1,362              1,469    Change in foreign currency exchange rates                 17,244            (24,793)    Benefits paid                                            (15,236)           (16,808)                                                          ----------         ----------         Fair value of plan assets at end of year          $  196,573         $  176,896                                                          ==========         ==========   Funded status at end of the year:    Plan assets less than PBO                             $ (111,009)        $ (175,681)    Unrecognized actuarial losses                            107,581            175,482    Unrecognized prior service cost                            6,829              5,550    Unrecognized net transition obligations                      952                749                                                          ----------         ----------                                                           $    4,353         $    6,100                                                          ==========         ==========   Amounts recognized in the balance sheet:    Unrecognized net pension obligations                  $    7,524         $    6,108    Accrued pension costs:      Current                                                 (8,587)           (10,314)      Noncurrent                                             (48,441)          (125,766)    Accumulated other comprehensive loss                      53,857            136,072                                                          ----------         ----------                                                           $    4,353         $    6,100                                                          ==========         ==========                                                               Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In thousands)   Net periodic pension cost:        Service cost benefits                          $  4,060          $  5,398         $  5,885    Interest cost on PBO                             12,378            14,132           14,038    Expected return on plan assets                  (12,264)          (12,318)         (12,051)    Amortization of prior service cost                  255               463              482    Amortization of net transition obligations          527               368              107    Recognized actuarial losses                         827             2,335            3,035                                                   --------          --------         --------                                                    $  5,783          $ 10,378         $ 11,496                                                   ========          ========         ========        In  determining  the  expected  long-term  rate of  return  on  plan  asset assumptions,  the Company  considers  the long-term  asset mix (e.g.  equity vs. fixed  income) for the assets for each of its plans and the  expected  long-term rates of return for such asset  components.  In addition,  the Company  receives advice  about   appropriate   long-term  rates  of  return  from  the  Company's third-party actuaries. Such assumed asset mixes are summarized below:  o    In Germany,  the composition of the Company's plan assets is established to      satisfy the  requirements of the German  insurance  commissioner.  The plan      asset  allocation at December 31, 2005 was 23% to equity  managers,  48% to      fixed  income  managers  and 29% to real estate  (2004 - 23%,  48% and 29%,      respectively). o    In Norway,  the Company currently has a plan asset target allocation of 14%      to  equity  managers,  64% to  fixed  income  managers  and  the  remainder      primarily to liquid  investments  and cash. The expected  long-term rate of      return for such  investments is  approximately  8% and 4.5% to 6% and 2.5%,      respectively.  The plan asset  allocation  at December  31, 2005 was 16% to      equity  managers,  62% to fixed income managers and the remainder  invested      primarily  to  cash  and  liquid  investments  (2004 - 16%,  64%  and  20%,      respectively).       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  weighted-average  rate  assumptions  used in determining the actuarial present  value of  benefit  obligations  as of  December  31,  2004 and 2005 are presented in the table below. Such weighted-average  rates were determined using the projected benefit obligations at each date.                 Rate                                                 December 31,               ----                                               --------------                                                              2004               2005                                                              ----               ----     Discount rate                                                5.0%               4.1% Increase in future compensation levels                       2.8%               2.8%        The weighted-average  rate assumptions used in determining the net periodic pension  cost for 2003,  2004 and 2005 are  presented  in the table  below.  The weighted-average  discount  rate and the  weighted-average  increase  in  future compensation  levels were determined using the projected benefit  obligations as of the beginning of each year, and the weighted-average long-term return on plan assets was determined using the fair value of plan assets as of the beginning of each year.                 Rate                                                    December 31,               ----                                  --------------------------------------------                                                       2003              2004              2005                                                       ----              ----              ----      Discount rate                                         5.8%              5.3%              5.0% Increase in future compensation levels                2.6%              2.8%              2.8% Long-term return on plan assets                       6.9%              6.4%              6.0%        At December 31, 2005, the  accumulated  benefit  obligation  related to the Company's  defined  benefit  pension plans  aggregated $316 million (2004 - $257 million).  At December 31, 2004 and 2005, all of the Company's  defined  benefit pension plans have  accumulated  benefit  obligations in excess of fair value of plan assets.       The Company  expects future  benefits paid from all defined benefit pension plans to be as follows:                                                            Amount  Years ending December 31,                            (In thousands) - --------------------------                            --------------      2006                                                 $ 17,287     2007                                                   16,277     2008                                                   18,033     2009                                                   16,764     2010                                                   16,937     2011 to 2012                                           90,812  Note 12 - Related party transactions:       The Company may be deemed to be controlled  by Harold C. Simmons.  See Note 1.  Corporations  that may be deemed to be controlled by or affiliated  with Mr. Simmons sometimes engage in (a) intercorporate  transactions such as guarantees, management and expense  sharing  arrangements,  shared fee  arrangements,  joint ventures,  partnerships,  loans, options, advances of funds on open account, and sales,  leases and  exchanges  of assets,  including  securities  issued by both related  and  unrelated  parties  and  (b)  common  investment  and  acquisition strategies,   business   combinations,    reorganizations,    recapitalizations, securities  repurchases,  and  purchases and sales (and other  acquisitions  and dispositions)  of  subsidiaries,   divisions  or  other  business  units,  which transactions  have involved both related and unrelated parties and have included transactions  which  resulted  in the  acquisition  by one  related  party  of a publicly-held  minority  equity  interest  in another  related  party.  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 continuously considers,  reviews and evaluates, and understands that Contran and related entities consider, review and evaluate such transactions. Depending upon the business,  tax and other  objectives then relevant,  it is possible that the Company might be a party to one or more such transactions in the future.       Under the terms of  various  intercorporate  services  agreements  ("ISAs") entered into between the Company and various related parties, including Contran, employees  of  one  company  will  provide  certain  management,  tax  planning, financial and administrative  services to the other company on a fee basis. Such charges are based upon  estimates  of the time  devoted by the  employees of the provider of the services to the affairs of the recipient,  and the  compensation and  associated  expenses  of such  persons.  Because  of the  large  number  of companies  affiliated  with  Contran,  Kronos and NL, the  Company  believes  it benefits from cost savings and  economies of scale gained by not having  certain management,  financial and administrative staffs duplicated at each entity, thus allowing certain  individuals to provide services to multiple companies but only be compensated by one entity.  These ISA agreements are reviewed and approved by the  applicable  independent  directors of the companies that are parties to the agreements.  The net ISA fee  charged to the  Company  and  included in selling, general and  administrative  expense was $1.5  million in 2003,  $2.8 million in 2004 and $2.9 million in 2005.       Sales of TiO2 to Kronos (US), Inc. ("KUS") and Kronos Canada,  Inc. ("KC"), affiliates of the Company,  aggregated  $68.7 million in 2003,  $50.8 million in 2004 and $63.6 million in 2005.       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  $93.3  million in 2003,  $106.2  million in 2004 and $120.1 million in 2005.       Purchases of TiO2 from KUS were $100,000 in 2003,  $3.5 million in 2004 and nil in 2005.  Purchases of TiO2 from KC were $500,000 in 2003,  $700,000 in 2004 and $600,000 in 2005.       Royalty  income  received  from  KC for  use of  certain  of the  Company's intellectual  property was $6.1  million in 2003,  $6.0 million in 2004 and $6.8 million in 2005.       Tall  Pines  Insurance  Company,  and EWI RE,  Inc.  provide  for or broker certain  insurance  policies  for Contran and  certain of its  subsidiaries  and affiliates, including the Company. Tall Pines is wholly-owned by a subsidiary of Valhi,  and EWI is a wholly-owned  subsidiary of NL.  Consistent  with insurance industry  practices,  Tall Pines and EWI receive  commissions from insurance and reinsurance  underwriters  and/or assess fees for the policies that they provide or broker.  The aggregate premiums paid to Tall Pines (including amounts paid to Valmont Insurance Company, another subsidiary of Valhi that was merged into Tall Pines in 2004) and EWI by the Company and its joint venture were $5.2 million in 2003, $5.3 million in 2004 and $5.5 million in 2005.  These amounts  principally included payments for insurance and reinsurance  premiums paid to third parties, but also included  commissions  paid to Tall Pines and EWI. Tall Pines purchases reinsurance  for  substantially  all of the risks it  underwrites.  The  Company expects that these relationships with Tall Pines and EWI will continue in 2006.       Contran and  certain of its  subsidiaries  and  affiliates,  including  the Company, purchase certain of their insurance policies as a group, with the costs of  the  jointly-owned   policies  being  apportioned  among  the  participating companies.  With  respect to  certain  of such  policies,  it is  possible  that unusually  large losses  incurred by one or more insureds  during a given policy period could leave the other  participating  companies without adequate coverage under that policy for the balance of the policy period. As a result, Contran and certain of its  subsidiaries  and its  affiliates,  including the Company,  have entered into a loss sharing  agreement  under which any uninsured loss is shared by those  entities who have  submitted  claims under the  relevant  policy.  The Company  believes  the  benefits  in the form of reduced  premiums  and  broader coverage associated with the group coverage for such policies justifies the risk associated with the potential for uninsured loss.       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.  See Note 8 for discussion of notes receivable from affiliates.       Current  receivables  from and payables to affiliates are summarized in the table below.                                                                      December 31,                                                             -------------------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)   Current receivables from affiliates:       KC                                                      $ 2,516           $ 1,948    Other                                                         1                 4                                                            -------           -------                                                             $ 2,517           $ 1,952                                                            =======           =======   Current payables to affiliates:     KUS                                                    $11,033           $14,882     NL                                                           9              -                                                            -------           -------                                                             $11,042           $14,882                                                            =======           =======        Interest  income on all loans to related  parties was less than  $50,000 in 2003,  $2.8 million in 2004 and $18.9 million in 2005.  Interest  expense on all loans from  related  parties  was less than  $100,000 in 2003 and nil in each of 2004 and 2005.  Note 13 - Commitments and contingencies:       Environmental  matters.  The Company's  operations  are governed by various environmental laws and regulations.  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  various  policies  and  programs  in an effort to minimize  these  risks.  The  Company's  policy is to maintain  compliance  with applicable  environmental  laws and  regulations  at all its  facilities  and to strive to improve its environmental performance.  From time to time, the Company may be subject to environmental  regulatory  enforcement under various statutes, resolution of which typically involves the establishment of compliance programs. It is  possible  that future  developments,  such as  stricter  requirements  of environmental laws and enforcement policies  thereunder,  could adversely affect the  Company's  production,  handling,  use,  storage,  transportation,  sale or disposal  of  such  substances.  The  Company  believes  all its  plants  are in substantial compliance with applicable environmental laws.       Litigation  matters.  The Company's  Belgian  subsidiary and certain of its employees  are the  subject of civil and  criminal  proceedings  relating  to an accident that resulted in two  fatalities at the Company's  Belgian  facility in 2000. In May 2004,  the court ruled and,  among other things,  imposed a fine of euro  200,000  against the Company and fines  aggregating  less than euro 40,000 against various Company employees. The Company and the individual employees have appealed the ruling.       In  addition  to the  litigation  described  above,  the  Company  and  its affiliates  are also  involved  in  various  other  environmental,  contractual, product  liability,  patent (or  intellectual  property),  employment  and other claims and disputes incidental to its present and former businesses.       The Company currently  believes the disposition of all claims and disputes, individually or in the aggregate,  should not have a material  adverse effect on its consolidated financial condition, results of operations or liquidity.       Concentrations of credit risk. Sales of TiO2 accounted for about 90% of net sales during each of the past three years.  The remaining  sales result from the mining and sale of ilmenite  ore (a raw  material  used in the  sulfate  pigment production process),  and the manufacture and sale of iron-based water treatment chemicals (derived from co-products of the TiO2 production  processes).  TiO2 is generally  sold to the paint,  plastics and paper  industries.  Such markets are generally  considered   "quality-of-life"  markets  whose  demand  for  TiO2  is influenced  by  the  relative  economic  well-being  of the  various  geographic regions.  TiO2 is  sold to over  3,000  customers,  with  the top ten  customers approximating  20%,  21%, and 20%  respectively  of net sales in 2003,  2004 and 2005.  Approximately 73% of the Company's TiO2 sales by volume were to Europe in 2003,  approximately  77% were to Europe in 2004 and  approximately  76% were to Europe in 2005.  Approximately 13% of sales by volume were attributable to North America in 2003, 9% attributable  to North America in 2004 and 10%  attributable to North America in 2005.       Long-term  contracts.  KUS has long-term  supply contracts that provide for certain of its affiliates', including the Company's, TiO2 feedstock requirements through 2010. The agreements  require KUS to purchase certain minimum quantities of feedstock with minimum annual purchase commitments aggregating  approximately $681 million at December 31, 2005. The  agreements  require that the Company and certain of its affiliates purchase chloride feedstock underlying these long-term supply contracts from KUS.       Operating  leases.  The Company's  principal  German  operating  subsidiary leases the land under its  Leverkusen  TiO2  production  facility  pursuant to a lease with Bayer AG that expires in 2050. The Leverkusen facility itself,  which is owned by the  Company  and which  represents  approximately  one-half  of the Company's current TiO2 production capacity,  is located within Bayer's extensive manufacturing  complex.  Rent for the land lease  associated with the Leverkusen facility is  periodically  established by agreement with Bayer for periods of at least two years at a time. The lease agreement provides for no formula, index or other  mechanism to determine  changes in the rent for such land lease;  rather, any change in the rent is subject solely to periodic  negotiation  between Bayer and the Company. Any change in the rent based on such negotiations is recognized as part of lease  expense  starting  from the time such change is agreed upon by both  parties,  as any such  change in the rent is deemed  "contingent  rentals" under GAAP. Under a separate supplies and services  agreement  expiring in 2011, the lessor  provides  some raw  materials,  including  chlorine,  auxiliary  and operating materials,  utilities and services necessary to operate the Leverkusen facility.       The  Company  also  leases  various  other  manufacturing   facilities  and equipment.  Some of the leases  contain  purchase  and/or  various  term renewal options at fair market and fair rental values,  respectively.  In most cases the Company  expects  that,  in the normal  course of business,  such leases will be renewed or replaced by other leases. Net rent expense approximated $9 million in 2003 and $8 million  in each of 2004 and 2005.  At  December  31,  2005,  future minimum  payments  under  noncancellable  operating  leases having an initial or remaining term of more than one year were as follows:                                                            Amount  Years ending December 31,                            (In thousands) - --------------------------                            --------------     2006                                                 $ 3,328    2007                                                   2,411    2008                                                   2,150    2009                                                   1,562    2010                                                   1,126    2011 and thereafter                                   21,029                                                         -------                                                          $31,606                                                         =======       Approximately  $20.1 million of the $31.6 million  aggregate future minimum rental  commitments  at December  31, 2005 relates to the  Company's  Leverkusen facility lease discussed  above. The minimum  commitment  amounts for such lease included in the table above for each year  through  the 2050  expiration  of the lease are based upon the current  annual rental rate as of December 31, 2005. As discussed above, any change in the rent is based solely on negotiations  between Bayer and the  Company,  and any such  change in the rent is deemed  "contingent rentals"  under GAAP which is excluded from the future  minimum  lease  payments disclosed above.       Income taxes.  Contran and Valhi have agreed to a policy  providing for the allocation  of tax  liabilities  and tax  payments as described in Note 1. Under applicable  law, the  Company,  as well as every other member of the Contran Tax Group,  are each jointly and severally  liable for the aggregate  federal income tax  liability  of Contran and the other  companies  included in the Contran Tax Group for all periods in which the Company is included in the Contran Tax Group. Contran has agreed,  however,  to indemnify  the Company for any  liability  for income taxes of the Contran Tax Group in excess of the  Company's  tax liability previously  computed  and paid by Valhi in  accordance  with the tax  allocation policy.  Note 14 - Financial instruments:       Summarized below is the estimated fair value and related net carrying value of the Company's financial instruments.                                                                December 31,                December 31,                                                                  2004                        2005                                                       ---------------------------  -------------------------                                                         Carrying        Fair         Carrying      Fair                                                          Amount        Value          Amount       Value                                                       ------------- -------------  -------------------------                                                                           (In millions) Cash, cash equivalents, restricted cash    and current and noncurrent restricted          marketable debt securities                           $ 21.9       $  21.9        $ 67.2       $  67.2  Long-term debt:   Fixed rate with market quotes -     8.875% Senior Secured Notes                          $519.2       $ 549.1        $449.3       $ 463.6   Variable rate debt                                       13.6          13.6            -             -        Fair  value  of  the  Company's  noncurrent   restricted   marketable  debt securities  and 8.875% Senior  Secured Notes are based upon quoted market prices at each balance sheet date.  Note 15 - Accounting principles newly adopted in 2003 and 2004:       Asset retirement obligations. The Company adopted SFAS No. 143, "Accounting for Asset  Retirement  Obligations," on 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 is  recognized  in the period in which the  liability  is incurred,  with an  offsetting  increase in the  carrying  amount of the related long-lived  asset.  Over time,  the  liability  would be accreted to its present value,  and the  capitalized  cost is  depreciated  over the useful  life of the related asset.  Upon  settlement of the liability,  an entity either settles the obligation for its recorded amount or incurs 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  recognized (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 is  recognized as a cumulative effect of a change in  accounting  principles  as of the date of  adoption.  The effect of  adopting  SFAS No.  143 as of January  1, 2003 was not  material,  as summarized  in  the  table  below,  and  is  not  separately  recognized  in the accompanying Statement of Income.                                                                                       Amount                                                                                  (in millions)                                                                                  --------------  Increase in carrying value of net property, plant and equipment:     Cost                                                                               $ .4   Accumulated depreciation                                                            (.1) Decrease in carrying value of previously-accrued closure and  post-closure activities                                                               .3 Asset retirement obligation recognized                                                (.6)                                                                                      ----     Net impact                                                                         $ -                                                                                      ====       The  change  in the  asset  retirement  obligations  from  January  1, 2003 ($600,000)  to December 31, 2003  ($800,000),  to December 31, 2004 ($1 million) and to December 31, 2005  ($900,000) is primarily  due to accretion  expense and the effects of currency translation.  Accretion expense,  which is reported as a component of cost of goods sold in the  accompanying  Consolidated  Statement of Operations, approximated $100,000 for each of the years ended December 31, 2003, 2004 and 2005.       Estimates of the ultimate cost to be incurred to settle the Company's asset retirement obligations require a number of assumptions, are inherently difficult to develop  and the  ultimate  outcome  may differ from  current  estimates.  As additional  information  becomes  available,  cost estimates will be adjusted as necessary.  It  is  possible  that  technological,   regulatory  or  enforcement developments,  the results of studies or other  factors  could  necessitate  the recording of additional liabilities.       Costs associated with exit or disposal activities. The Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal  Activities," on January 1, 2003 for exit or disposal activities initiated on or after that date. Under SFAS No. 146, costs associated with exit activities,  as defined, that are covered by the scope of SFAS No. 146 will be recognized  and measured  initially at fair value, generally in the period in which the liability is incurred. Costs covered by the scope of SFAS No. 146 include  termination  benefits  provided to employees,  costs to consolidate facilities or relocate employees,  and costs to terminate contracts (other than a capital lease).  Under prior GAAP, a liability for such an exit cost is recognized  at the date an exit plan is adopted,  which may or may not be the date at which the liability has been incurred.  The effect of adopting  SFAS No. 146 as of January 1, 2003 was not  material as the Company was not involved in any exit or disposal  activities covered by the scope of the new standard as of such date.       Variable  interest  entities.  The Company complied with the  consolidation requirements of FASB Interpretation ("FIN") No. 46R,  "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," as amended, as of March 31, 2004.  The Company  does not have any  involvement  with any  variable  interest entity (as that term is defined in FIN No. 46R)  covered by the scope of FIN No. 46R that would require the Company to consolidate  such entity under FIN No. 46R which had not  already  been  consolidated  under  prior  applicable  GAAP,  and therefore the impact to the Company of adopting the  consolidation  requirements of FIN No. 46R was not material.  Note 16 - Accounting principles not yet adopted:       Stock options. The Company will adopt SFAS No. 123R, "Share-Based Payment," as of January  1, 2006.  SFAS No.  123R,  among  other  things,  eliminated  the alternative  in previously  existing  GAAP to use the intrinsic  value method of accounting  for  stock-based  employee  compensation  under  APBO No.  25.  Upon adoption of SFAS No. 123R,  the Company will  generally be required to recognize the cost of  employee  services  received  in  exchange  for an award of  equity instruments  based on the  grant-date  fair  value of the  award,  with the cost recognized  over the period  during  which an  employee  is  required to provide services in exchange for the award (generally, the vesting period of the award). No compensation cost will be recognized in the aggregate for equity  instruments for which the employee does not render the  requisite  service  (generally,  the instrument is forfeited before it has vested). The grant-date fair value will be estimated using option-pricing  models (e.g.  Black-Scholes or a lattice model). Under the  transition  alternatives  permitted  under SFAS No. 123R, the Company will apply the new  standard  to all new awards  granted on or after  January 1, 2006, and to all awards existing as of December 31, 2005 which are  subsequently modified,  repurchased  or cancelled.  Additionally,  as of January 1, 2006, the Company  will be required to recognize  compensation  cost  previously  measured under  SFAS No. 123 for the  portion  of any  non-vested  award  existing  as of December 31, 2005 over the remaining vesting period. Because the Company has not granted any options to purchase  its common  stock and did not grant any options prior to  January 1, 2006 and  because  the  number of  non-vested  awards as of December  31, 2005 with  respect to options  granted by NL to  employees  of the Company is not expected to be material,  the effect of adopting SFAS No. 123R is not expected to be  significant  in so far as it relates to the  recognition  of compensation  cost  in the  Company's  consolidated  statements  of  income  for existing stock options. Should the Company,  however, grant a significant number of options in the  future,  the  Company  could  recognize  material  amounts of compensation  cost  related  to  such  options  in  its  consolidated  financial statements.       Also upon adoption of SFAS No. 123R, any cash income tax benefit  resulting from the  exercise  of stock  options  in excess of the  cumulative  income  tax benefit  related  to such  options  previously  recognized  for  GAAP  financial reporting purposes in the Company's  consolidated  statements of income, if any, will be reflected as a cash inflow from  financing  activities  in the Company's consolidated  statements  of cash  flows,  and the  Company's  cash  flows  from operating  activities  will  reflect  the effect of cash paid for  income  taxes exclusive of such cash income tax benefit.       SFAS No. 123R also  requires  certain  expanded  disclosures  regarding the Company's  stock options,  and such expanded  disclosures  have been provided in Note 8.       Inventory costs. The Company will adopt SFAS No. 151,  "Inventory Costs, an amendment of ARB No. 43,  Chapter 4," for inventory  costs  incurred on or after January 1, 2006.  SFAS No. 151 requires that the allocation of fixed  production overhead costs to inventory shall be based on normal  capacity.  Normal capacity is not defined as a fixed amount;  rather,  normal capacity refers to a range of production  levels expected to be achieved over a number of periods under normal circumstances,  taking into account the loss of capacity  resulting from planned maintenance  shutdowns.  The amount of fixed overhead  allocated to each unit of production is not increased as a consequence of idle plant or production  levels below the low end of normal  capacity,  but instead a portion of fixed  overhead costs  are  charged  to  expense  as  incurred.  Alternatively,  in  periods  of production above the high end of normal  capacity,  the amount of fixed overhead costs allocated to each unit of production is decreased so that  inventories are not measured above cost.  SFAS No. 151 also  clarifies  existing GAAP to require that  abnormal  freight and wasted  materials  (spoilage)  are to be expensed as incurred.  The Company believes its production cost accounting  already complies with the  requirements of SFAS No. 151, and the Company does not expect adoption of SFAS No.  151 will  have a  material  effect  on its  consolidated  financial statements.  Note 17 - Quarterly results of operations (unaudited):                                                                              Quarter ended                                                     ----------------------------------------------------------                                                      March 31         June 30        Sept. 30         Dec. 31                                                     ---------        ---------      ---------        ---------                                                                            (In millions)   Year ended December 31, 2004         Net sales                                         $ 192.2          $ 208.1        $ 203.4          $ 204.3    Gross margin                                      $  49.6          $  51.8        $  47.3          $  49.7    Net income                                        $  13.2          $ 290.5        $   9.1          $  13.2   Year ended December 31, 2005    Net sales                                         $  209.5         $ 227.6        $ 206.0          $ 207.8    Gross margin                                      $   62.4         $  70.5        $  55.2          $  49.6    Net income                                        $   18.2         $  28.5        $   6.4          $   6.7                          KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES             SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT                              Condensed Balance Sheets                             December 31, 2004 and 2005                                   (In thousands)                                                                 2004               2005                                                               ----               ----   Current assets:       Cash and cash equivalents                              $    6,283         $    9,622    Accounts and notes receivable                               8,838              9,013    Receivable from affiliates                                 20,214             36,210    Deferred income taxes                                         206                 68    Other                                                          48                 56                                                           ----------         ----------         Total current assets                                   35,589             54,969                                                           ----------         ----------   Other assets:    Investment in subsidiaries                                493,532            463,377    Deferred income taxes                                     222,643            168,642    Other                                                      10,508              7,399    Property and equipment, net                                 6,917              5,814                                                           ----------         ----------         Total other assets                                    733,600            645,232                                                           ----------         ----------                                                            $  769,189         $  700,201                                                           ==========         ==========   Current liabilities:    Payable to affiliates                                  $   25,621         $   34,715    Accounts payable and accrued liabilities                    6,072              3,865    Income taxes                                               10,638             29,483    Deferred income taxes                                          15                 14                                                           ----------         ----------         Total current liabilities                              42,346             68,077                                                           ----------         ----------   Noncurrent liabilities:    Long-term debt                                            519,225            449,298    Other                                                       1,138              1,025                                                           ----------         ----------         Total noncurrent liabilities                          520,363            450,323                                                           ----------         ----------   Stockholder's equity                                        206,480            181,801                                                           ----------         ----------                                                            $  769,189         $  700,201                                                           ==========         ==========                          KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES       SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)                           Condensed Statements of Income                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                 2003                2004              2005                                                              ----                ----              ----   Revenues and other income:          Net sales                                            $   35,601         $   40,038        $   47,682      Equity in earnings of subsidiaries                      293,623             66,049            90,702    Interest income from affiliates                                50              2,782            18,947    Royalty income                                             16,568             18,508            19,187    Currency translation gains (losses), net                     (599)              (575)              248    Other income, net                                             (38)                71                 1                                                           ----------         ----------        ----------                                                               345,205            126,873           176,767                                                           ----------         ----------        ----------   Costs and expenses:    Cost of sales                                              18,306             21,371            26,995    General and administrative                                 21,209             28,351            30,929    Interest                                                   29,847             33,772            42,212    Interest expense to affiliates                               -                 5,754            10,302                                                           ----------         ----------        ----------                                                                69,362             89,248           110,438                                                           ----------         ----------        ----------     Income before income taxes                                275,843             37,625            66,329   Provision (benefit) for income taxes                        194,082           (288,355)            6,543                                                           ----------         ----------        ----------     Net income                                             $   81,761         $  325,980        $   59,786                                                           ==========         ==========        ==========                          KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES       SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)                         Condensed Statements of Cash Flows                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                2003                2004              2005                                                              ----                ----              ----    Cash flows from operating activities:          Net income                                           $   81,761         $  325,980        $   59,786      Cash distributions from subsidiaries                        402             50,902              -      Noncash interest expense                                  1,472              1,487             2,124      Deferred income taxes                                   238,814           (276,806)           21,827      Equity in earnings of subsidiaries                     (293,623)           (66,049)          (90,702)      Other, net                                               (3,570)              (637)             (719)      Net change in assets and liabilities                        115             25,963            11,901                                                           ----------         ----------        ----------           Net cash provided by operating activities            25,371             60,840             4,217                                                           ----------         ----------        ----------   Cash flows from investing activities:    Capital expenditures                                       (2,406)            (1,544)           (1,493)    Collection of loans to affiliates                            -                88,656              -    Purchase of interest in subsidiaries                         -                  (575)             -    Other, net                                                      9               -                 -                                                           ----------         ----------        ----------          Net cash provided (used) by          investing activities                                 (2,397)            86,537            (1,493)                                                           ----------         ----------        ----------   Cash flows from financing activities:    Indebtedness:      Borrowings                                                 -               129,524              -      Deferred financing fees                                    -                (1,989)             -    Loans to affiliates                                          -              (209,524)             -    Dividends paid                                            (25,000)           (60,000)             -                                                           ----------         ----------        ----------          Net cash used by financing activities                (25,000)          (141,989)             -                                                           ----------         ----------        ----------   Net change during the year from operating      investing and financing activities                       (2,026)             5,388             2,724  Currency translation                                            129                347               615  Balance at beginning of year                                  2,445                548             6,283                                                           ----------         ----------        ----------   Balance at end of year                                   $      548         $    6,283        $    9,622                                                           ==========         ==========        ==========                         KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES       SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)                      Notes to Condensed Financial Information   Note 1 - Basis of presentation:       The Consolidated Financial Statements of Kronos International, Inc. and the related Notes to Consolidated  Financial  Statements are incorporated  herein by reference.  Note 2 - Investment in and advances to subsidiaries:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)  Current:      Receivable from:                    Kronos Titan GmbH ("TG") - income taxes           $   14,386         $   30,172         Kronos Chemie GmbH ("KCH") - income taxes                 76                582         Kronos Titan A/S                                       1,667              1,575         Kronos Europe S.A./N.V                                 2,168              1,721         Kronos Canada                                          1,482              1,716         Titania A/S                                              432                431         Other                                                      3                 13                                                           ----------         ----------                                                            $   20,214         $   36,210                                                           ==========         ==========      Payable to:         TG                                                    25,032             32,833         Kronos (US), Inc.                                        145               -         KCH                                                      255              1,826         Other                                                    189                 56                                                           ----------         ----------                                                            $   25,621         $   34,715                                                           ==========         ==========                                                                       December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)  Investment in:        TG                                                    $  322,434         $  278,117     Kronos Denmark ApS ("KDK")                               147,904            162,418     Other                                                     23,194             22,842                                                           ----------         ----------                                                            $  493,532         $  463,377                                                           ==========         ==========                                                               Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In thousands)  Equity in income from continuing   operations of subsidiaries:              TG                                         $  270,541        $   40,951       $   52,233     KDK                                            26,892            23,816           35,427     Other                                          (3,810)            1,282            3,042                                                ----------        ----------       ----------                                                 $  293,623        $   66,049       $   90,702                                                ==========        ==========       ==========                          KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES                   SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS                                   (In thousands)                                                                    Additions                                                Balance at       charged to                                               Balance                                                 beginning       costs and          Net         Currency                  at end             Description                          of year         expenses       deductions    translation     Other      of year - ---------------------------------------       -----------       ----------      ----------    -----------     ------    ---------   Year ended December 31, 2003:           Allowance for doubtful accounts              $ 1,907          $   233         $  (281)       $   363       $   -      $ 2,222                                                 =======          =======         =======        =======       ======     =======    Allowance for slow-moving inventory          $ 6,521          $   116         $  -           $  (189)      $   -      $ 6,448                                                 =======          =======         =======        =======       ======     =======    Accrual for planned major maintenance     activities                                  $ 3,259          $ 1,432         $  (915)       $   684       $   -      $ 4,460                                                 =======          =======         =======        =======       ======     =======   Year ended December 31, 2004:    Allowance for doubtful accounts              $ 2,222          $  (169)        $  (540)       $   147       $   -      $ 1,660                                                 =======          =======         =======        =======       ======     =======    Allowance for slow-moving inventory          $ 6,448          $   372         $  (142)       $   637       $   -      $ 7,315                                                 =======          =======         =======        =======       ======     =======    Accrual for planned major maintenance     activities                                  $ 4,460          $ 3,563         $(4,479)       $   310       $   -      $ 3,854                                                 =======          =======         =======        =======       ======     =======   Year ended December 31, 2005:    Allowance for doubtful accounts              $ 1,660          $   313         $  (333)       $  (211)      $   -      $ 1,429                                                 =======          =======         =======        =======       ======     =======    Allowance for slow-moving inventory          $ 7,315          $   135         $   (14)       $  (926)      $   -      $ 6,510                                                 =======          =======         =======        =======       ======     =======    Accrual for planned major maintenance     activities                                  $ 3,854          $ 4,731         $(4,644)       $  (510)      $   -      $ 3,431                                                 =======          =======         =======        =======       ======     =======     Note -    Certain  information has been omitted from this Schedule  because it           is disclosed in the notes to the Consolidated Financial Statements.                             KRONOS TITAN GMBH AND SUBSIDIARY                     Index of Consolidated Financial Statements   Financial Statements                                                      Pages  Report of Independent Registered Public Accounting Firm                   FA-2  Consolidated Balance Sheets - December 31, 2004 and 2005                  FA-3  Consolidated Statements of Income - Years ended  December 31, 2003, 2004 and 2005                                         FA-5  Consolidated Statements of Comprehensive Income (Loss) - Years ended  December 31, 2003, 2004 and 2005                                         FA-6  Consolidated Statements of Partners' Capital/Owners'  Equity - Years ended December 31, 2003, 2004 and 2005                    FA-7  Consolidated Statements of Cash Flows - Years ended  December 31, 2003, 2004 and 2005                                         FA-8  Notes to Consolidated Financial Statements                               FA-10                   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    To the Owner of Kronos Titan GmbH:       In our  opinion,  the  accompanying  consolidated  balance  sheets  and the related  consolidated   statements  of  income,   comprehensive  income  (loss), partners'  capital/owners' equity and cash flows present fairly, in all material respects, the financial position of Kronos Titan GmbH and Subsidiary at December 31, 2004 and 2005, and the results of their  operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.  These financial  statements are the  responsibility of the Company's  management.  Our responsibility  is to express an opinion on these financial  statements based on our audits.  We conducted our audits of these  statements in accordance with the standards of the Public  Company  Accounting  Oversight  Board (United  States). Those standards  require that we plan and perform the audit to obtain reasonable assurance   about  whether  the  financial   statements  are  free  of  material misstatement.  An audit includes examining, on a test basis, evidence supporting the  amounts  and  disclosures  in  the  financial  statements,   assessing  the accounting  principles  used and significant  estimates made by management,  and evaluating the overall  financial  statement  presentation.  We believe that our audits provide a reasonable basis for our opinion.      PricewaterhouseCoopers LLP     Dallas, Texas March 28, 2006                                KRONOS TITAN GMBH AND SUBSIDIARY                             CONSOLIDATED BALANCE SHEETS                             December 31, 2004 and 2005                                   (In thousands)                    ASSETS                                                               2004               2005                                                               ----               ----  Current assets:      Cash and cash equivalents                               $    6,444         $   50,765   Accounts and notes receivable                               76,732             73,059   Receivable from affiliates                                  32,355             43,021   Refundable income taxes                                         59             14,695   Inventories                                                101,850            113,677   Prepaid expenses                                             2,078              1,629                                                           ----------         ----------      Total current assets                                     219,518            296,846                                                           ----------         ----------  Other assets:   Note receivable from Kronos Titan A/S                        5,449               -   Unrecognized net pension obligations                         3,672              3,000   Deferred income taxes                                       18,077             47,044   Other                                                        1,201                808                                                           ----------         ----------      Total other assets                                        28,399             50,852                                                           ----------         ----------  Property and equipment:   Land                                                        14,929             13,460   Buildings                                                  111,349            101,151   Machinery and equipment                                    496,428            434,895   Construction in progress                                    10,022              9,853                                                           ----------         ----------                                                               632,728            559,359    Less accumulated depreciation and depletion                373,938            332,840                                                           ----------         ----------      Net property and equipment                               258,790            226,519                                                           ----------         ----------                                                            $  506,707         $  574,217                                                           ==========         ==========                                  KRONOS TITAN GMBH AND SUBSIDIARY                       CONSOLIDATED BALANCE SHEETS (CONTINUED)                             December 31, 2004 and 2005                                   (In thousands)    LIABILITIES AND OWNERS' EQUITY                                                               2004               2005                                                               ----               ----   Current liabilities:      Accounts payable and accrued liabilities                $   76,952         $   71,987   Payables to affiliates                                      35,260             75,447   Deferred income taxes                                        1,912              3,508                                                           ----------         ----------      Total current liabilities                                114,124            150,942                                                           ----------         ----------  Noncurrent liabilities:   Note payable to affiliate                                   12,941             11,239   Accrued pension cost                                        45,015            120,872   Other                                                       12,193             13,047                                                           ----------         ----------      Total noncurrent liabilities                              70,149            145,158                                                           ----------         ----------  Owners' equity:   Subscribed capital                                          12,496             12,496   Paid in capital                                            227,037            227,037   Retained earnings (deficit)                                 (9,685)            42,548   Accumulated other comprehensive income (loss):     Currency translation                                     111,996             68,897     Pension liabilities                                      (19,410)           (72,861)                                                           ----------         ----------        Total owners' equity                                   322,434            278,117                                                           ----------         ----------                                                            $  506,707         $  574,217                                                           ==========         ==========   Commitments and contingencies (Notes 6, 9 and 12)            See accompanying notes to consolidated financial statements                             KRONOS TITAN GMBH AND SUBSIDIARY                          CONSOLIDATED STATEMENTS OF INCOME                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                2003                2004              2005                                                              ----                ----              ----       Net sales                                                 $  487,337         $  552,216        $  584,219 Cost of sales                                                379,187            451,888           462,558                                                           ----------         ----------        ----------      Gross margin                                             108,150            100,328           121,661  Selling, general and administrative expense                   42,925             47,824            50,140 Other operating income (expense):   Currency transaction gains (losses), net                    (3,519)            (2,533)            3,906   Disposition of property and equipment                         (390)              (293)           (1,080)                                                           ----------         ----------        ----------      Income from operations                                    61,316             49,678            74,347  Other income (expense):   Trade interest income                                          447                949               733   Interest and other income from affiliates                    3,918              8,813            13,224   Interest and other expense to affiliates                      (442)              (304)             (791)   Interest expense                                              (368)              (651)             (595)                                                           ----------         ----------        ----------      Income before income taxes                                64,871             58,485            86,918  Income tax provision (benefit)                              (205,670)            17,507            34,685                                                           ----------         ----------        ----------      Net income                                            $  270,541         $   40,978        $   52,233                                                           ==========         ==========        ==========             See accompanying notes to consolidated financial statements.                            KRONOS TITAN GMBH AND SUBSIDIARY               CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                 2003                2004              2005                                                              ----                ----              ----       Net income                                                $  270,541         $   40,978        $   52,233                                                           ----------         ----------        ----------  Other comprehensive income (loss), net of tax:    Minimum pension liabilities adjustment                    (17,946)             4,400           (53,451)    Currency translation adjustment                            37,674             36,472           (43,099)                                                           ----------         ----------        ----------       Total other comprehensive income                         19,728             40,872           (96,550)                                                           ----------         ----------        ----------  Comprehensive income (loss)                               $  290,269         $   81,850        $  (44,317)                                                           ==========         ==========        ==========              See accompanying notes to consolidated financial statements.                            KRONOS TITAN GMBH AND SUBSIDIARY            CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL / OWNERS' EQUITY                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                                                     Accumulated other                                                                                                     comprehensive                                                           Owners' Equity                            income (loss)                                            Partners'  -----------------------     Retained   ----------------------------                                            capital    Subscribed      Paid-in     earnings     Currency      Pension                                            (deficit)   capital        capital    (deficit)   translation   liabilities    Total                                            --------   ----------      -------    ---------   -----------   -----------    ------          Balance at December 31, 2002               $118,589    $   -          $   -       $   -        $ 37,850     $ (5,864)    $150,575  Net income                                  270,541        -              -           -            -            -         270,541 Other comprehensive income (loss),   net of tax                                   -           -              -           -          37,674      (17,946)      19,728 Partnership conversion                     (389,130)     12,496        376,634        -            -            -            -                                            --------    --------       --------    --------     --------     --------     --------  Balance at December 31, 2003                   -         12,496        376,634        -          75,524      (23,810)     440,844  Net income                                     -           -              -         40,978         -            -          40,978 Dividends declared                             -           -              -        (50,663)        -            -         (50,663) Other comprehensive income, net of tax         -           -              -           -          36,472        4,400       40,872 Noncash capital transaction                    -           -          (149,597)       -            -            -        (149,597)                                            --------    --------       --------    --------     --------     --------     --------  Balance at December 31, 2004                   -         12,496        227,037      (9,685)     111,996      (19,410)     322,434  Net income                                     -           -              -         52,233         -            -          52,233 Other comprehensive income, net of tax         -           -              -           -         (43,099)     (53,451)     (96,550)                                            --------    --------       --------    --------     --------     --------     --------  Balance at December 31, 2005               $   -       $ 12,496       $227,037    $ 42,548     $ 68,897     $(72,861)    $278,117                                            ========    ========       ========    ========     ========     ========     ========             See accompanying notes to consolidated financial statements.                           KRONOS TITAN GMBH AND SUBSIDIARY                       CONSOLIDATED STATEMENTS OF CASH FLOWS                   Years ended December 31, 2003, 2004 and 2005                                  (In thousands)                                                                2003                2004              2005                                                              ----                ----              ----  Cash flows from operating activities:       Net income                                              $  270,541         $   40,978        $   52,233   Depreciation, depletion and amortization                    20,452             23,583            20,980   Noncash interest expense                                       140                200               141   Deferred income taxes                                      (39,770)             6,178             9,427   Net loss from disposition of property and equipment            390                293             1,080   Pension, net                                                (5,021)            (4,540)           (3,328)   Other, net                                                      12                167               155   Change in assets and liabilities:     Accounts and notes receivable                              1,827             (3,205)           (9,294)     Inventories                                                1,830              5,837           (26,334)     Prepaid expenses                                           1,107                559              (144)     Accounts payable and accrued liabilities                   2,637             13,683             5,412     Income taxes                                            (130,136)           126,599           (13,859)     Accounts with affiliates                                 (85,431)           (82,855)           29,420     Other noncurrent assets                                      481               (146)              109     Other noncurrent liabilities                                (555)            (5,334)             (713)                                                           ----------         ----------        ----------        Net cash provided by operating activities               38,504            121,997            65,285                                                           ----------         ----------        ----------  Cash flows from investing activities:   Capital expenditures                                       (18,715)           (20,396)          (22,896)   Proceeds from disposition of property and equipment              4               -                 -                                                           ----------         ----------        ----------        Net cash provided (used) by investing activities       (18,711)           (20,396)          (22,896)                                                           ----------         ----------        ----------                               KRONOS TITAN GMBH AND SUBSIDIARY                  CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)                          December 31, 2003, 2004 and 2005                                   (In thousands)                                                                2003                2004              2005                                                              ----                ----              ----  Cash flows from financing activities:   Indebtedness:         Borrowings                                            $    -             $   49,984        $     -     Principal payments                                         -                (49,984)             -   Loans from affiliates:     Loans                                                      -                 11,597             4,860     Repayments                                                 -                (88,656)             -   Cash distributions                                           -                (50,663)             -                                                           ----------         ----------        ----------      Net cash used by financing activities                      -               (127,722)            4,860                                                           ----------         ----------        ----------  Cash and cash equivalents - net change from:     Operating, investing and financing      activities                                               19,793            (26,121)           47,249     Currency translation                                       3,241              1,706            (2,928)   Balance at beginning of year                                 7,825             30,859             6,444                                                           ----------         ----------        ----------    Balance at end of year                                  $   30,859         $    6,444        $   50,765                                                           ==========         ==========        ==========  Supplemental disclosures:   Cash paid (received) for:     Interest                                              $      674         $      626        $      516     Income taxes                                                (166)          (132,629)            6,517              See accompanying notes to consolidated financial statements.                            KRONOS TITAN GMBH AND SUBSIDIARY                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1 - Organization and basis of presentation:       Kronos  Titan  GmbH  ("TG")  is  a   wholly-owned   subsidiary   of  Kronos International,  Inc.  ("KII").  KII  is  a  wholly-owned  subsidiary  of  Kronos Worldwide,  Inc.  (NYSE:KRO)  ("Kronos").  At December 31, 2005, (i) Valhi, Inc. (NYSE:  VHI) held  approximately  57% of Kronos' common stock and NL Industries, Inc.  (NYSE:  NL) held an  additional  36% of the  outstanding  common  stock of Kronos,  (ii) Valhi owned 83% of NL's outstanding common stock and (iii) Contran Corporation and its subsidiaries held  approximately 92% of Valhi's  outstanding common stock. Substantially all of Contran's outstanding voting stock is held by trusts  established  for the benefit of certain  children and  grandchildren  of Harold C.  Simmons,  of which Mr.  Simmons  is sole  trustee,  or is held by Mr. Simmons or persons or other entities related to Mr. Simmons.  Consequently,  Mr. Simmons may be deemed to control each of such companies.       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.       Effective December 31, 2003, Kronos Titan GmbH & Co. OHG was converted from a partnership into a limited liability company under German law, and was renamed TG.  The  conversion   resulted  in  a  reclassification  of  partner's  capital aggregating  $389 million at the date of conversion into other capital  accounts (subscribed  capital and  paid-in  capital)  and had no material  effect on TG's consolidated  financial  statements,  other than with respect to deferred income taxes. In 2004, the Company forgave a $150 million  receivable from KII which is reflected as a noncash  capital  transaction  in the  accompanying  Consolidated Statement of Partners' Capital/Owners' Equity.       TG is not a registrant  with the U.S.  Securities  and Exchange  Commission ("SEC")  and  therefore  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:       Management's   estimates.   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.       Principles of consolidation.  The 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.  The Company has no involvement  with any variable  interest  entity covered by the scope of FASB Interpretation  ("FIN") No. 46R,  "Consolidation of Variable Interest  Entities,  an interpretation of ARB No. 51," as amended as of March 31, 2004.       Translation of foreign  currencies.  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.       Derivatives and hedging activities.  Derivative  instruments are recognized as either assets or  liabilities  and measured at fair value in accordance  with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended.  The  accounting  for changes in fair value of derivatives is dependent upon the intended use of the derivative,  and such changes are recognized either in net income or other  comprehensive  income.  As permitted  by the  transition requirements of SFAS No. 133, 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.       Cash  equivalents.  Cash  equivalents  include bank  deposits with original maturities of three months or less.       Accounts  receivable.  The  Company  provides  an  allowance  for  doubtful accounts  for  known  and  estimated  potential  losses  arising  from  sales to customers based on a periodic review of the accounts.       Property and equipment and depreciation.  Property and equipment are stated at cost. Depreciation of property and equipment for financial reporting purposes is computed  principally by the  straight-line  method over the estimated useful lives of ten to 40 years for  buildings  and  three to 20 years  for  equipment. Accelerated depreciation methods are used for income tax purposes, as permitted. Upon  sale  or  retirement  of  an  asset,  the  related  cost  and  accumulated depreciation are removed from the accounts and any gain or loss is recognized in income currently.       Expenditures  for  maintenance,  repairs and minor  renewals are  expensed; expenditures  for major  improvements  are  capitalized.  The  Company  performs 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 sales.  Accrued repair  and  maintenance  costs,  included  in  other  current  liabilities  and consisting  primarily  of  materials  and  supplies,  was $3.2  million and $2.2 million at December 31, 2004 and 2005, respectively.       Interest costs related to major long-term capital projects and renewals are capitalized as a component of  construction  costs.  Interest costs  capitalized were not significant in 2003, 2004 or 2005.       When  events or  changes  in  circumstances  indicate  that  assets  may be impaired,  an evaluation is performed to determine if an impairment exists. Such events or changes in circumstances  include, among other things, (i) significant current  and prior  periods or current  and  projected  periods  with  operating losses,  (ii) a significant  decrease in the market value of an asset or (iii) a significant  change  in the  extent  or  manner  in which an asset is used.  All relevant  factors  are  considered.  The test for  impairment  is  performed  by comparing the estimated  future  undiscounted  cash flows (exclusive of interest expense)  associated  with  the  asset  to the  asset's  net  carrying  value to determine  if a  write-down  to market  value or  discounted  cash flow value is required.  The Company assesses  impairment of other long-lived  assets (such as property and equipment and mining  properties) in accordance  with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."       Long-term debt.  Long-term debt is stated net of any  unamortized  original issue premium or discount. Amortization of deferred financing costs, included in interest  expense,  is  computed  by the  interest  method  over the term of the applicable issue.       Employee  benefit  plans.  Accounting  and funding  policies for retirement plans are described in Note 8.       Income  taxes.  As a  partnership  under German law during 2003, TG was not subject to  corporate  income  taxes,  but was  subject to trade  income  taxes. Deferred  trade  income tax  assets  and  liabilities  were  recognized  for the expected  future tax  consequences  of temporary  differences  between the trade income tax and financial  reporting  carrying amounts of assets and liabilities. Effective  December 31, 2003,  the Company was converted from a partnership to a limited  liability  company.  Subsequent to that date, the Company is subject to the German  corporation  tax,  with a  statutory  rate of 25%,  in  addition  to solidarity-surcharge of 5.5% of corporate income tax and trade income taxes. The Company  periodically  evaluates  its deferred tax assets in the various  taxing jurisdictions in which it operates and adjusts any related  valuation  allowance based on the estimate of the amount of such deferred tax assets that the Company believes does not meet the "more-likely-than-not" recognition criteria. See Note 9.       Net sales. Sales are recorded when products are shipped and title and other risks and rewards of ownership have passed to the customer, or when services are performed.  Shipping terms of products shipped are generally FOB shipping point. Amounts  charged to  customers  for  shipping  and  handling are included in net sales.  Sales are stated net of price,  early payment and distributor  discounts and volume rebates.       Inventories and cost of sales.  Inventories are stated at the lower of cost (principally  average  cost)  or  market,  net  of  allowance  for  obsolete  or slow-moving  inventories.  Amounts are removed from inventories at average cost. Cost of sales includes costs for materials, packaging and finishing,  utilities, salary and benefits, maintenance and depreciation.       Selling, general and administrative expenses;  shipping and handling costs. Selling, general and administrative expenses include costs related to marketing, sales, distribution,  shipping and handling, research and development, legal and administrative functions, such as accounting, treasury and finance, and includes costs for salary and benefits,  travel and entertainment,  promotional materials and  professional  fees.  Shipping and  handling  costs are included in selling, general and administrative expense and were $19.8 million in 2003, $22.3 million in 2004 and $23.1  million in 2005.  Advertising  costs are expensed as incurred and were approximately $300,000 in each of 2003, 2004 and 2005.       Stock  options.  The  Company  has not issued any stock  options.  However, 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,  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. Prior to 2003,  and  following  NL's cash  settlement  of options to purchase NL common  stock  held  by  certain  individuals,  NL and  the  Company,  commenced accounting for its stock options using the variable accounting method because NL could not overcome the  presumption  that it would not similarly cash settle its remaining stock options.  Under the variable  accounting  method,  the intrinsic value of all unexercised  stock options  (including those with an exercise price at least  equal to the  market  price on the date of grant)  are  accrued  as an expense over their vesting period, with subsequent increases (decreases) in NL's market  price  resulting  in  additional  compensation  expense  (income).  Upon exercise of such  options to purchase NL common  stock held by  employees of the Company,  the  Company  pays NL an amount  equal to the  difference  between the market price of NL's common stock on the date of exercise and the exercise price of such stock option. Aggregate compensation expense related to NL stock options held by  employees  of the Company was $12,000 in 2003 and  $167,000 in 2004 and compensation income was $74,000 in 2005. The total income tax benefit related to such  compensation  cost recognized by the Company was  approximately  $4,000 in 2003 and  $66,000  in 2004 and the total  income  tax  provision  related to the compensation income was $29,000 in 2005. No compensation cost was capitalized as part of assets (inventory or fixed assets) during 2003, 2004 and 2005.       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,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In thousands)      Net income - as reported                        $270,541           $ 40,978           $ 52,233 Adjustments, net of applicable income  tax effects:   Stock-based employee compensation   (income) expense determined under     APBO No. 25                                       10                102                (45)   Stock-based employee compensation    expense determined under SFAS No. 123              (9)                (4)                (1)                                                 --------           --------           --------  Pro forma net income                            $270,542           $ 41,076           $ 52,187                                                 ========           ========           ========   Note 3 - Accounts and notes receivable:                                                                       December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)     Trade receivables                                        $   71,914         $   69,019 Recoverable VAT and other receivables                         6,058              5,189 Allowance for doubtful accounts                              (1,240)            (1,149)                                                          ----------         ----------                                                           $   76,732         $   73,059                                                          ==========         ==========   Note 4 - Inventories:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)     Raw materials                                            $   20,379         $   21,386 Work in process                                              10,173             11,884 Finished products                                            55,349             65,242 Supplies                                                     15,949             15,165                                                          ----------         ----------                                                           $  101,850         $  113,677                                                          ==========         ==========   Note 5 - Accounts payable and accrued liabilities:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)     Accounts payable                                         $   39,732         $   39,206 Accrued liabilities:   Employee benefits                                          15,957             16,632   Waste acid recovery                                         9,598              9,149   Other                                                      11,665              7,000                                                          ----------         ----------                                                           $   76,952         $   71,987                                                          ==========         ==========   Note 6 - Long-term debt:       The Company and certain of KII's subsidiaries in Belgium and Norway (Kronos Europe S.A./N.V.-"KEU", Kronos Titan A/S - "TAS" and Titania A/S - "TIA," Kronos Norge A/S, the parent company of TAS and TIA, and Kronos Denmark ApS, the parent company of Kronos Norge and KEU), referred to as the "Borrowers", have a euro 80 million secured revolving credit facility that matures in June 2008.  Borrowings may be denominated in euros, Norwegian kroner or U.S. dollars, and bear interest at the applicable  interbank market rate plus 1.125%. The facility also provides for the issuance of letters of credit up to euro 5 million.  The credit facility is collateralized  by the accounts  receivable and inventories of the borrowers, plus a limited  pledge of all of the other assets of the Belgian  borrower.  The credit  facility  contains  certain  restrictive  covenants  which,  among other things,  restrict the ability of the borrowers to incur debt,  incur liens,  pay dividends or merge or consolidate with, or sell or transfer all or substantially all of their  assets to,  another  entity.  In  addition,  the  credit  facility contains  customary  cross-default  provisions  with  respect  to other debt and obligations of Borrowers, KII and its other subsidiaries.  At December 31, 2005, no  amounts  were  outstanding  under  the  European  Credit  Facility  and  the equivalent  of $92.3  million was  available  for  additional  borrowing  by the Borrowers.  The Company, KEU and Kronos Denmark are unconditionally  jointly and severally  liable  for any and  all  outstanding  borrowings  under  the  credit facility. TAS, TIA and Kronos Norge A/S are jointly and severally liable for any and all outstanding borrowings under the credit facility to the extent permitted by Norwegian law.       In June 2002,  KII issued at par value euro 285  million  principal  amount ($280  million when issued) of its 8.875%  Senior  Secured Notes due 2009 and in November 2004 KII issued at 107% of par an additional euro 90 million  principal amount ($130 million when issued) of the KII senior secured notes  (collectively the  "Notes").  The Notes are  collateralized  by a pledge of 65% of the  common stock or other  ownership  interests  of certain of KII's  first-tier  operating subsidiaries.  Such operating subsidiaries are the Company,  Kronos Denmark ApS, Kronos  Limited and Societe  Industrielle  Du Titane,  S.A. 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, 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  Notes  are redeemable,  at KII's option,  at redemption prices ranging from 104.437% of the principal amount,  declining to 100% on or after December 30, 2008. In the event of a change of control of KII,  as  defined,  KII would be  required  to make an offer to purchase its 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.       Under  the  cross-default  provisions  of  the  Notes,  the  Notes  may  be accelerated  prior to their stated maturity if KII or any of KII's  subsidiaries default under any other  indebtedness  in excess of $20 million due to a failure to pay such  other  indebtedness  at its due date  (including  any due date that arises  prior to the stated  maturity as a result of a default  under such other indebtedness).  Under the cross-default  provisions of the Credit Facility,  any outstanding  borrowings  under the Credit  Facility may be accelerated  prior to their  stated  maturity  if  the  Borrowers  or  KII  default  under  any  other indebtedness  in  excess of euro 5 million  due to a failure  to pay such  other indebtedness  at its due date  (including  any due date that arises prior to the stated  maturity as a result of a default  under such other  indebtedness).  The Credit  Facility  contains  provisions  that allow the lender to accelerate  the maturity of the Credit Facility in the event of a change of control, as defined, of  the  applicable  borrower.  In  the  event  any of  these  cross-default  or change-of-control   provisions  become  applicable,  and  such  indebtedness  is accelerated,  KII would be  required to repay such  indebtedness  prior to their stated maturity.  Note 7 - Other noncurrent liabilities:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)     Employee benefits                                        $    4,111         $    3,842 Insurance claims expense                                      1,362              1,124 Other                                                         6,720              8,081                                                          ----------         ----------                                                           $   12,193         $   13,047                                                          ==========         ==========   Note 8 - Employee benefit plans:       The Company  maintains a defined  benefit  pension  plan and certain  other benefits  covering  substantially  all  employees.  Variances  from  actuarially assumed  rates will result in  increases or  decreases  in  accumulated  pension obligations,  pension expense and funding  requirements  in future  periods.  At December  31,  2005,  the  Company  expects  to  contribute  the  equivalent  of approximately $11 million to its defined benefit pension plans during 2006.       Certain actuarial assumptions used in measuring the defined benefit pension assets,  liabilities  and  expenses  are  presented  below.  The Company  uses a September 30th measurement date for their defined benefit pension plans.       The  weighted-average  rate  assumptions  used in determining the actuarial present  value of  benefit  obligations  as of  December  31,  2004 and 2005 are presented in the table below. Such weighted-average  rates were determined using the projected benefit obligations at each date.                                                                                   December 31,                                                                             ------------------                               Rate                                          2004          2005                               ----                                          ----          ----     Discount rate                                                               5.0%          4.0% Increase in future compensation levels                                      2.8%          2.8%        The weighted-average  rate assumptions used in determining the net periodic pension  cost for 2003,  2004 and 2005 are  presented  in the table  below.  The weighted-average  discount  rate and the  weighted-average  increase  in  future compensation  levels were determined using the projected benefit  obligations at the beginning of each year, and the  weighted-average  long-term  return on plan assets was  determined  using the fair value of plan assets at the  beginning of each year.                                                                             Years ended December 31,                                                                        ------------------------------                               Rate                                     2003         2004         2005                               ----                                     ----         ----         ----         Discount rate                                                       5.3%         5.3%         5.0%    Increase in future compensation levels                              2.8%         2.8%         2.8%    Long-term return on plan assets                                     6.5%         6.5%         6.0%        Plan assets are comprised  primarily of investments in corporate equity and debt  securities,   short-term  investments,  mutual  funds  and  group  annuity contracts.       The  components of the net periodic  defined  benefit  pension cost are set forth below.                                                               Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In thousands)  Net periodic pension cost:       Service cost benefits                         $  2,621           $  3,289           $  3,742   Interest cost on projected benefit    obligation ("PBO")                              9,354             10,558             10,540   Expected return on plan assets                  (8,831)            (9,448)            (8,841)   Amortization of prior service cost                   -                196                200   Amortization of net transition obligation          251                 69               -   Recognized actuarial losses                         20                782              1,644                                                 --------           --------           --------                                                  $  3,415           $  5,446           $  7,285                                                 ========           ========           ========        The funded  status of the  Company's  defined  benefit  pension plan is set forth below.                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands) Change in projected benefit obligations ("PBO"):      Benefit obligations at beginning of year               $  205,440         $  232,308   Service cost                                                3,289              3,742   Interest cost                                              10,558             10,540   Participant contributions                                   1,206              1,316   Actuarial losses                                            4,968             81,199   Benefits paid                                             (12,442)           (35,385)   Change in currency exchange rates                          19,289            (13,780)                                                          ----------         ----------      Benefit obligations at end of year                   $  232,308         $  279,940                                                          ----------         ----------  Change in fair value of plan assets:   Fair value of plan assets at beginning of year         $  116,275         $  136,919   Actual return on plan assets                               10,026              4,596   Employer contributions                                     10,432             11,182   Participant contributions                                   1,206              1,316   Change in currency exchange rates                          11,422            (18,204)   Benefits paid                                             (12,442)           (13,780)                                                          ----------         ----------        Fair value of plan assets at end of year           $  136,919         $  122,029                                                          ----------         ----------  Funded status at year end:   Plan assets less than PBO                              $  (95,389)        $ (157,911)   Unrecognized actuarial loss                                79,381            147,873   Unrecognized prior service cost                             3,672              3,000                                                          ----------         ----------                                                           $  (12,336)        $   (7,038)                                                          ==========         ==========  Amounts recognized in the balance sheet:   Unrecognized net pension obligations                   $    3,672         $    3,000   Accrued pension cost:     Current                                                  (8,587)          (120,872)     Noncurrent                                              (45,015)            (9,858)   Accumulated other comprehensive loss                       37,594            120,692                                                          ----------         ----------                                                           $  (12,336)        $   (7,038)                                                          ==========         ==========        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.   The accumulated benefit obligation of the Company's defined benefit pension plan was $255.4  million at December  31, 2005 (2004 - $193.6  million).  Variances  from actuarially assumed rates will change the actuarial valuation of accrued pension liabilities, pension expense and funding requirements in future periods.       In  determining  the  expected  long-term  rate of  return  on  plan  asset assumptions,  the Company  considers  the long-term  asset mix (e.g.  equity vs. fixed  income) for the assets for each of its plans and the  expected  long-term rates of return for such asset  components.  In addition,  the Company  receives advice  about   appropriate   long-term  rates  of  return  from  the  Company's third-party  actuaries.   The  composition  of  the  Company's  plan  assets  is established to satisfy the  requirements of the German  insurance  commissioner. The plan asset allocation at December 31, 2005 was 23% to equity  managers,  48% to  fixed  income  managers  and 29% to real  estate  (2004 - 23%,  48% and 29%, respectively).  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  expects  total  defined  benefit  pension  plan  expense to be approximately $12 million in 2006. The Company expects future benefits paid from all defined benefit pension plans to be as follows:                                                                     Amount  Years ending December 31,                                    (In thousands) - --------------------------                                    --------------         2006                                                        $13,274     2007                                                         13,392     2008                                                         13,510     2009                                                         13,628     2010                                                         13,746     2011 to 2015                                                 69,319   Note 9 - 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% in 2003 and 26.4% in 2004 and 2005, (ii) the  provision for income taxes and (iii) the  comprehensive  tax provision are presented below.                                                               Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In thousands)      Pretax income                                   $  64,871         $  58,485        $  86,918                                                 =========         =========        =========  Expected tax expense                            $  16,218         $  15,440        $  22,946 Trade income tax                                   11,365             7,773           11,212 German tax refund                                (123,033)           (2,508)            - Change in deferred income tax   valuation allowance, net                           -               (3,146)            - Tax contingency reserve adjustment                   -                 -               1,387 Organschaft adjustment                            (94,079)             -                - No corporation tax provision due   to partnership structure                        (16,218)             -                - Other, net                                             77               (52)            (860)                                                 ---------         ---------        ---------      Income tax expense (benefit)                $(205,670)        $  17,507        $  34,685                                                 =========         =========        =========  Provision for income taxes:   Current income tax expense (benefit)          $(165,900)        $  11,329        $  25,258   Deferred income tax expense (benefit)           (39,770)            6,178            9,427                                                 ---------         ---------        ---------                                                  $(205,670)        $  17,507        $  34,685                                                 =========         =========        =========  Comprehensive provision (benefit) for income  taxes allocable to:   Pretax income                                 $(205,670)        $  17,507        $  34,685   Other comprehensive loss - pension    liabilities                                     (5,331)           (8,081)         (32,649)                                                 ---------         ---------        ---------                                                  $(211,001)        $   9,426        $   2,036                                                 =========         =========        =========        The components of the net deferred tax liability are summarized below.                                                                                    December 31,                                                              ---------------------------------------------------                                                                        2004                        2005                                                              -----------------------     -----------------------                                                              Assets      Liabilities     Assets      Liabilities                                                              ------      -----------     ------      ----------- Tax effect of temporary differences  relating to:        Inventories                                               $  -          $ (1,816)    $   -          $ (2,375)   Property and equipment                                     38,327           -          26,362           -   Accrued (prepaid) pension cost                             14,770        (27,598)      47,420        (24,398)   Other taxable differences                                    -            (7,518)        -            (3,473) Tax loss and tax credit carryforwards                          -              -            -              -                                                             -------       --------     --------       --------    Gross deferred tax assets (liabilities)                    53,097        (36,932)      73,782        (30,246)  Reclassification, principally netting by  tax jurisdiction                                           (35,020)        35,020      (26,738)        26,738                                                             -------       --------     --------       --------    Net total deferred tax liabilities                         18,077         (1,912)      47,044         (3,508)   Net current deferred tax liabilities                         -            (1,912)        -            (3,508)                                                             -------       --------     --------       --------    Net noncurrent deferred tax liabilities                   $18,077       $   -        $ 47,044       $   -                                                             =======       ========     ========       ========        The Company's has no deferred income tax valuation allowance as of December 31, 2004 and 2005.       During  2003,  the  Company's  legal  form  was  as  a  partnership.  As  a partnership,  the Company  was not  subject to  corporation  tax,  although  the Company was subject to trade  income  tax.  Effective  December  31,  2003,  the Company was converted to a limited liability company and was also subject to the German corporation tax in years following 2003. As a result of the conversion of the Company from a partnership,  the Company  recognized net deferred income tax assets  of  approximately  $52  million  related  to  the  expected  future  tax consequences  of  temporary  differences  between the  corporate  income tax and financial reporting carrying amounts of its assets and liabilities.       In the first  quarter  of 2003,  the  Company  was  notified  by the German Federal  Fiscal Court (the  "Court")  that the Court had ruled in the  Company's favor  concerning a claim for refund suit in which the Company sought refunds of prior taxes paid during the periods 1990 through 1997.  The Company was required to file amended tax returns with the German tax  authorities in order to receive its refunds for such years,  and all of such  amended  returns were filed during 2003.  Such amended returns  reflected an aggregate  refund of taxes and related interest to the Company of euro 103.2 million  ($123.0  million) and the Company recognized  the benefit for these net funds in its 2003  results of  operations. For the year ended  December 31, 2004,  the Company  recognized a refund of euro 4.0 million ($5.3 million)  related to additional net interest which has accrued on the outstanding  refund amount.  In 2004, TG had received net refunds of euro 107.2 million  ($135.4  million when  received).  All refunds  relating from the periods  1990 to 1997 were  received by December  31,  2004.  In addition to the refunds for the 1990 to 1997 periods, the court ruling also resulted in a refund of 1999 income taxes and  interest,  and the Company  received euro 21.5 million ($24.6 million) in 2003.       Pursuant  to  the  Company's  conversion  to a  limited  liability  company effective  December  31,  2003,  the Company is  included  in KII's  Organschaft effective January 1, 2004.       No  assurance  can be given that these tax matters  will be resolved in the Company's  favor in view of the inherent  uncertainties  involved in  settlement initiatives  and court and tax  proceedings.  The Company  believes  that it has provided  adequate  accruals for additional  taxes and related  interest expense which may  ultimately  result from all such  examinations  and believes that the ultimate  disposition of such  examinations  should not have a material  adverse effect  on  its  consolidated  financial  position,  results  of  operations  or liquidity.  Note 10 - Related party transactions:       The Company may be deemed to be controlled  by Harold C. Simmons.  See Note 1.  Corporations  that may be deemed to be controlled by or affiliated  with Mr. Simmons sometimes engage in (a) intercorporate  transactions such as guarantees, management  and  expense  sharing  arrangements,  shared fee  arrangements,  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  services  and cost  sharing  agreements  among several affiliates of the Company whereby Kronos,  KII, KEU and other affiliates provide certain management,  financial, insurance and administrative services to the Company on a fee basis. The Company's expense was approximately $7.1 million in 2003, $7.8 million in 2004 and $7.9 million in 2005 related to these services and costs.       The Company  charges  affiliates  for  certain  management,  financial  and administrative  services costs, which totaled  approximately $4.3 million,  $4.4 million and $4.8 million in 2003, 2004 and 2005, respectively.  These charges to affiliates  were  reflected  primarily  as a reduction  of selling,  general and administrative expense.       Tall Pines Insurance Company and EWI RE, Inc. ("EWI") provide for or broker certain  insurance  policies  for Contran and  certain of its  subsidiaries  and affiliates, including KII, Kronos and the Company. Tall Pines is wholly owned by a subsidiary of Valhi,  and EWI is a wholly-owned  subsidiary of NL.  Consistent with insurance industry  practices,  Tall Pines and EWI receive commissions from insurance and reinsurance  underwriters and/or assess fees for the policies that they provide or broker.  The aggregated  premiums paid to Tall Pines  (including amounts paid to Valmont Insurance Company,  another subsidiary of Valhi that was merged into Tall Pines in 2004) and EWI by the Company were $4.1  million,  $4.0 million and $3.5 million in 2003,  2004 and 2005,  respectively.  These  amounts principally included payments for insurance,  but also included commissions paid to Tall Pines and EWI. Tall Pines purchases reinsurance for substantially all of the risks it underwrites. The Company expects that these relationships with Tall Pines and EWI will continue in 2006.       Contran and  certain of its  subsidiaries  and  affiliates,  including  the Company, purchase certain of their insurance policies as a group, with the costs of  the  jointly-owned   policies  being  apportioned  among  the  participating companies.  With  respect to  certain  of such  policies,  it is  possible  that unusually  large losses  incurred by one or more insureds  during a given policy period could leave the other  participating  companies without adequate coverage under that policy for the balance of the policy period. As a result, Contran and certain of its subsidiaries and its affiliates,  including Kronos,  have entered into a loss sharing  agreement under which any uninsured loss is shared by those entities  who have  submitted  claims  under the  relevant  policy.  The Company believes  the  benefits in the form of reduced  premiums  and  broader  coverage associated  with  the  group  coverage  for  such  policies  justifies  the risk associated with the potential for uninsured loss.       The Company purchases from and sells to its affiliates a significant amount of titanium dioxide pigments  ("TiO2").  Intercompany  sales to (purchases from) affiliates of TiO2 are summarized in the following table.                                                               Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In thousands)     Sales to:           Kronos (US), Inc. ("KUS")                  $  37,550         $  21,448        $  25,977      Societe Industrielle du Titane,       S.A. ("SIT")                                 32,969            39,091           40,116      KEU                                           22,417            23,872           26,943      Kronos Limited ("KUK")                        22,151            18,677           21,162      Kronos Canada, Inc. ("KC")                     5,026             5,414            8,623      Other affiliates                              16,368            24,936           31,178                                                 ---------         ---------        ---------                                                  $ 136,481         $ 133,438        $ 153,999                                                 =========         =========        =========     Purchases from:      KEU                                        $  33,061         $  42,836        $  43,914      TAS                                            5,722            10,796           11,296      KC                                              -                  271               41                                                 ---------         ---------        ---------                                                  $  38,783         $  53,903        $  55,251                                                 =========         =========        =========        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 $56.2 million in 2003, $66.7 million in 2004 and $72.3 million in 2005.       The Company sells water treatment  chemicals  (derived from  co-products of the TiO2 production  processes) to KII. Such water treatment chemical sales were $12.8 million in 2003, $16.1 million in 2004 and $18.8 million in 2005.       The  Company  purchases   ilmenite  (sulfate   feedstock)  from  TIA  on  a year-to-year  basis. Such feedstock  purchases were $15.5 million in 2003, $17.4 million in 2004 and $21.4 million in 2005.       At  January  1,  2002,  the  Company  is  party to an  accounts  receivable factoring  agreement with certain European affiliates of the Company pursuant to which  these  affiliates  factored  their  export  accounts  receivable  without recourse to the  Company for a fee of 0.85%.  Upon  non-recourse  transfer  from these  affiliates,  the Company  assumes  all risk  pertaining  to the  factored receivables,  including,  but not  limited to,  exchange  control  risks,  risks pertaining to the  bankruptcy of a customer and risks related to late  payments. Export  receivables  purchased  by  the  Company  during  2003,  2004  and  2005 aggregated $101 million, $120 million and $124 million, respectively.       Net  amounts   currently   receivable  from  (payable  to)  affiliates  are summarized in the following table.                                                                         December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)  Receivable from:      KUK                                                    $      862         $     -   SIT                                                         1,632               -   KEU                                                             -              9,068   Kronos B.V.                                                 2,055               -   KII                                                        25,032             32,833   KC                                                          1,496                227   Other affiliates                                            1,278                893                                                          ----------         ----------                                                           $   32,355         $   43,021                                                          ==========         ==========  Current payable to:   KII - income taxes                                     $   14,386         $   30,173   KUS                                                         5,390              9,553   TIA                                                         8,817             25,090   Kronos B.V.                                                  -                 8,596   KEU                                                         4,456               -   TAS                                                         2,139                521   Other affiliates                                               72              1,514                                                          ----------         ----------                                                           $   35,260         $   75,447                                                          ==========         ==========  Noncurrent receivable from TAS                           $    5,449         $     -                                                          ==========         ==========  Noncurrent payables to KDK                               $   12,941         $   11,239                                                          ==========         ==========        Such amounts  receivable from affiliates were generally  related to product sales (including water treatment  chemical sales to KII) and services  rendered. Amounts  payable to  affiliates,  net were  related  primarily  to raw  material purchases, accounts receivable factoring and services received.       The  Company  borrowed  euro 9.5  million  from KDK in October  2004 ($11.2 million at December 31, 2005). This note bears an interest rate of 2.675% and is due on March 31, 2006, with an option to renew.       The Company loaned TAS euro 4 million ($5.4 million) during 2004. This note receivable bore interest at 3.1% and was repaid in 2005.       Included in other affiliate  income and other  affiliate  expense was other affiliate interest income/expense, factoring fees and service fees.  Note 11 - NL common stock options held by employees of the Company:       At December  31,  2005,  employees  of the Company held options to purchase approximately  9,000 shares of NL common stock, which are exercisable at various dates through 2010 (approximately  4,000) at an exercise of $5.63 per share, and exercisable at various dates through 2011  (approximately  5,000) at an exercise price of $11.49 per share.       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 Notes 2 and 15. No options  were  granted  during  2003,  2004 or 2005.  For purposes of pro forma  disclosures,  the estimated  fair value of the options is amortized to expense over the options' vesting period.  Note 12 - Commitments and contingencies:       Operating leases. The Company leases, pursuant to operating leases, various manufacturing  facilities  and 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 with Bayer AG that expires in 2050. The Leverkusen  facility itself,  which  is owned  by the  Company  and  which  represents  approximately two-thirds of the Company's current TiO2 production capacity,  is located within the lessor's extensive manufacturing complex. Rent for the land lease associated with the Leverkusen facility is periodically established by agreement with Bayer for periods of at least two years at a time. The lease agreement provides for no formula, index or other mechanism to determine changes in the rent for such land lease;  rather, any change in the rent is subject solely to periodic negotiation between Bayer and the Company. Any change in the rent based on such negotiations is  recognized  as part of lease  expense  starting from the time such change is agreed  upon  by  both  parties,  as any  such  change  in the  rent  is  deemed "contingent  rentals"  under  GAAP.  Under  a  separate  supplies  and  services agreement  expiring in 2011, the lessor  provides some raw materials,  including chlorine, auxiliary and operating materials, utilities and services necessary to operate the Leverkusen facility.       Net rent  expense  aggregated  $5 million in 2003 and $4 million in each of 2004 and 2005. At December 31, 2005,  minimum rental commitments under the terms of noncancellable operating leases were as follows:                                                                              Amount                                                                        --------------                                                                        (in thousands) Years ending December 31, - --------------------------        2006                                                                   $ 2,248     2007                                                                     1,522     2008                                                                     1,370     2009                                                                     1,294     2010                                                                     1,034     2011 and thereafter                                                     20,931                                                                            -------                                                                             $28,399                                                                            =======        Approximately  $20.1 million of the $28.4 million  aggregate future minimum rental  commitments  at December  31, 2005 relates to the  Company's  Leverkusen facility lease discussed  above. The minimum  commitment  amounts for such lease included in the table above for each year  through  the 2050  expiration  of the lease are based upon the current  annual rental rate as of December 31, 2005. As discussed above, any change in the rent is based solely on negotiations  between Bayer and the  Company,  and any such  change in the rent is deemed  "contingent rentals"  under GAAP which is excluded from the future  minimum  lease  payments disclosed above.       Purchase  commitments.  KUS has long-term supply contracts that provide for certain affiliates'  chloride feedstock  requirements  through 2010. The Company purchases  chloride  feedstock  underlying these long-term supply contracts from KUS.  The  agreements  require KUS to purchase  certain  minimum  quantities  of feedstock  with minimum  purchase  commitments  aggregating  approximately  $618 million at December 31, 2005.       Environmental,  product  liability and  litigation  matters.  The Company's operations are governed by various  environmental laws and regulations.  Certain of the  Company's  operations  are  and  have  been  engaged  in  the  handling, manufacture  or use of substances or compounds  that may be considered  toxic or hazardous  within the meaning of  applicable  environmental  laws. As with other companies engaged in similar businesses, certain past and current operations and products of the  Company  have the  potential  to cause  environmental  or other damage.  The Company has implemented and continues to implement various policies and programs in an effort to minimize  these risks.  The Company's  policy is to maintain compliance with applicable environmental laws and regulations at all of its 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.  The  Company  believes  all of its plants are in substantial compliance with applicable environmental laws.       Concentrations of credit risk. Sales of TiO2 accounted for more than 97% of net sales during each of 2003,  2004 and 2005.  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 2003, 22% of net  sales  in 2004  and 21% of net  sales  in  2005.  Approximately  74% of the Company's  TiO2  sales by volume  were to Europe in 2003 and 78% in each of 2004 and 2005.  Approximately 11% in 2003 and 7% in each of 2004 and 2005 of sales by volume were to North America.  Note 13 - Financial instruments:       Summarized below is the estimated fair value and related net carrying value of the Company's financial instruments.                                                December 31,                December 31,                                                  2004                        2005                                       ---------------------------  -------------------------                                         Carrying        Fair         Carrying      Fair                                          Amount        Value          Amount       Value                                       ------------- -------------  -------------------------                                                           (In millions)       Cash and cash equivalents                $ 6.4         $ 6.4          $ 50.8      $ 50.8  Note payable to affiliate                 12.9          12.9            11.2        11.2        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 2003, 2004 and 2005.       Other than as described  above, the Company was not a party to any material derivative financial  instruments during 2003, 2004 or 2005. There was no impact on the Company's financial statements from adopting SFAS No. 133.  Note 14- Accounting principles newly adopted in 2003 and 2004:       Costs associated with exit or disposal activities. The Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal  Activities," on January 1, 2003 for exit or disposal activities initiated on or after that date. Under SFAS No. 146, costs associated with exit activities,  as defined, that are covered by the scope of SFAS No. 146 will be recognized  and measured  initially at fair value, generally in the period in which the liability is incurred. Costs covered by the scope of SFAS No. 146 include  termination  benefits  provided to employees,  costs to consolidate facilities or relocate employees,  and costs to terminate contracts (other than a capital lease).  Under prior GAAP, a liability for such an exit cost is recognized  at the date an exit plan is adopted,  which may or may not be the date at which the liability has been incurred.  The effect of adopting  SFAS No. 146 as of January 1, 2003 was not  material as the Company was not involved in any exit or disposal  activities covered by the scope of the new standard as of such date.       Variable  interest  entities.  The Company complied with the  consolidation requirements of FASB Interpretation ("FIN") No. 46R,  "Consolidation of Variable Interest Entities,  an interpretation of ARB No. 51," as amended as of March 31, 2004.  The Company  does not have any  involvement  with any  variable  interest entity (as that term is defined in FIN No. 46R)  covered by the scope of FIN No. 46R that would require the Company to consolidate such entity under FIN No. 46R, which had not  already  been  consolidated  under  prior  applicable  GAAP,  and therefore the impact to the Company of adopting the  consolidation  requirements of FIN No. 46R was not material.  Note 15- Accounting principles not yet adopted:       Stock options. The Company will adopt SFAS No. 123R, "Share-Based Payment", as of January  1, 2006.  SFAS No.  123R,  among  other  things,  eliminated  the alternative  in previously  existing  GAAP to use the intrinsic  value method of accounting  for  stock-based  employee  compensation  under  APBO No.  25.  Upon adoption of SFAS No. 123R,  the Company will  generally be required to recognize the cost of  employee  services  received  in  exchange  for an award of  equity instruments  based on the  grant-date  fair  value of the  award,  with the cost recognized  over the period  during  which an  employee  is  required to provide services in exchange for the award (generally, the vesting period of the award). No compensation cost will be recognized in the aggregate for equity  instruments for which the employee does not render the  requisite  service  (generally,  the instrument is forfeited before it has vested). The grant-date fair value will be estimated using option-pricing  models (e.g.  Black-Scholes or a lattice model). Under the  transition  alternatives  permitted  under SFAS No. 123R, the Company will apply the new  standard  to all new awards  granted on or after  January 1, 2006, and to all awards existing as of December 31, 2005 which are  subsequently modified,  repurchased  or cancelled.  Additionally,  as of January 1, 2006, the Company  will be required to recognize  compensation  cost  previously  measured under  SFAS No. 123 for the  portion  of any  non-vested  award  existing  as of December 31, 2005 over the remaining vesting period. Because the Company has not granted any options to purchase  its common  stock and did not grant any options prior to January 1, 2006,  and  because  the number of  non-vested  awards as of December  31, 2005 with  respect to options  granted by NL to  employees  of the Company is not expected to be material,  the effect of adopting SFAS No. 123R is not expected to be  significant  in so far as it relates to the  recognition  of compensation  cost  in the  Company's  consolidated  statements  of  income  for existing stock options.  Should the Company or one of its  affiliates,  however, grant a significant number of options in the future to employees of the Company, the Company could recognize  material  amounts of  compensation  cost related to such options in its consolidated financial statements.       Also upon adoption of SFAS No. 123R, any cash income tax benefit  resulting from the  exercise  of stock  options  in excess of the  cumulative  income  tax benefit  related  to such  options  previously  recognized  for  GAAP  financial reporting purposes in the Company's  consolidated  statements of income, if any, will be reflected as a cash inflow from  financing  activities  in the Company's consolidated  statements  of cash  flows,  and the  Company's  cash  flows  from operating  activities  will  reflect  the effect of cash paid for  income  taxes exclusive of such cash income tax benefit.       SFAS No. 123R also  requires  certain  expanded  disclosures  regarding the Company's  stock options,  and such expanded  disclosures  have been provided in Note 2.       Inventory costs. The Company will adopt SFAS No. 151,  "Inventory Costs, an amendment of ARB No. 43,  Chapter 4," for inventory  costs  incurred on or after January 1, 2006.  SFAS No. 151 requires that the allocation of fixed  production overhead costs to inventory shall be based on normal  capacity.  Normal capacity is not defined as a fixed amount;  rather,  normal capacity refers to a range of production  levels expected to be achieved over a number of periods under normal circumstances,  taking into account the loss of capacity  resulting from planned maintenance  shutdowns.  The amount of fixed overhead  allocated to each unit of production is not increased as a consequence of idle plant or production  levels below the low end of normal  capacity,  but instead a portion of fixed  overhead costs  are  charged  to  expense  as  incurred.  Alternatively,  in  periods  of production above the high end of normal  capacity,  the amount of fixed overhead costs allocated to each unit of production is decreased so that  inventories are not measured above cost.  SFAS No. 151 also  clarifies  existing GAAP to require that  abnormal  freight and wasted  materials  (spoilage)  are to be expensed as incurred.  The Company believes its production cost accounting  already complies with the  requirements of SFAS No. 151, and the Company does not expect adoption of SFAS No.  151 will  have a  material  effect  on its  consolidated  financial statements.                          KRONOS DENMARK APS AND SUBSIDIARIES                     Index of Consolidated Financial Statements   Financial Statements                                                     Pages  Report of Independent Registered Public Accounting Firm                  FB-2  Consolidated Balance Sheets - December 31, 2004 and 2005                 FB-3  Consolidated Statements of Income - Years ended   December 31, 2003, 2004 and 2005                                       FB-5  Consolidated Statements of Comprehensive Income - Years ended   December 31, 2003, 2004 and 2005                                       FB-6  Consolidated Statements of Stockholder's Equity - Years ended   December 31, 2003, 2004 and 2005                                       FB-7  Consolidated Statements of Cash Flows - Years ended   December 31, 2003, 2004 and 2005                                       FB-8  Notes to Consolidated Financial Statements                              FB-10                         REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     To the Board of Directors and Stockholder of Kronos Denmark ApS:       In our  opinion,  the  accompanying  consolidated  balance  sheets  and the related consolidated statements of income,  comprehensive income,  stockholder's equity and cash flows present fairly,  in all material  respects,  the financial position of Kronos Denmark ApS and  Subsidiaries  at December 31, 2004 and 2005, and the results of their  operations  and their cash flows for each of the three years in the period  ended  December  31,  2005 in  conformity  with  accounting principles  generally accepted in the United States of America.  These financial statements   are  the   responsibility   of  the   Company's   management.   Our responsibility  is to express an opinion on these financial  statements based on our audits.  We conducted our audits of these  statements in accordance with the standards of the Public  Company  Accounting  Oversight  Board (United  States). Those standards  require that we plan and perform the audit to obtain reasonable assurance   about  whether  the  financial   statements  are  free  of  material misstatement.  An audit includes examining, on a test basis, evidence supporting the  amounts  and  disclosures  in  the  financial  statements,   assessing  the accounting  principles  used and significant  estimates made by management,  and evaluating the overall  financial  statement  presentation.  We believe that our audits provide a reasonable basis for our opinion.      PricewaterhouseCoopers LLP     Dallas, Texas March 28, 2006                             KRONOS DENMARK APS AND SUBSIDIARIES                             CONSOLIDATED BALANCE SHEETS                             December 31, 2004 and 2005                          (In thousands, except share data)                  ASSETS                                                               2004               2005                                                               ----               ----  Current assets:        Cash and cash equivalents                             $    3,566         $    1,042     Restricted cash                                            1,529              1,355     Accounts and notes receivable                             18,422             17,319     Receivable from affiliates                                16,029             27,493     Refundable income taxes                                    1,542                205     Inventories                                               65,282             69,506     Prepaid expenses                                             908                900                                                           ----------         ----------          Total current assets                                 107,278            117,820                                                           ----------         ----------   Other assets:     Note receivable from affiliate                            12,941             11,239     Other                                                      7,013              6,153                                                           ----------         ----------          Total other assets                                    19,954             17,392                                                           ----------         ----------   Property and equipment:     Land                                                      19,236             16,829     Buildings                                                 41,196             36,995     Machinery and equipment                                  190,748            176,849     Mining properties                                         72,384             68,163     Construction in progress                                   3,443              1,964                                                           ----------         ----------                                                               327,007            300,800     Less accumulated depreciation and amortization           200,873            188,090                                                           ----------         ----------          Net property and equipment                           126,134            112,710                                                           ----------         ----------                                                            $  253,366         $  247,922                                                           ==========         ==========                              KRONOS DENMARK APS AND SUBSIDIARIES                       CONSOLIDATED BALANCE SHEETS (CONTINUED)                             December 31, 2004 and 2005                          (In thousands, except share data)             LIABILITIES AND STOCKHOLDER'S EQUITY                                                               2004               2005                                                               ----               ----   Current liabilities:        Current maturities of long-term debt                  $   13,792         $      958     Accounts payable and accrued liabilities                  38,776             38,406     Payable to affiliates                                     10,142              9,058     Income taxes                                               6,427              6,564     Deferred income taxes                                      2,363              2,194                                                           ----------         ----------          Total current liabilities                             71,500             57,180                                                           ----------         ----------  Noncurrent liabilities:     Long-term debt                                               178              3,567     Note payable to affiliate                                  5,449               -     Deferred income taxes                                     22,358             19,266     Accrued pension costs                                      2,493              4,129     Other                                                      3,484              1,362                                                           ----------         ----------          Total noncurrent liabilities                          33,962             28,324                                                           ----------         ----------  Stockholder's equity:       Common stock - 100 Danish kroner par value;         10,000 shares authorized; 10,000 shares          issued and outstanding                                  136                136       Additional paid-in capital                             216,996            216,996       Accumulated deficit                                    (69,643)           (34,216)       Accumulated other comprehensive loss:         Currency translation adjustment                        9,686            (10,584)         Minimum pension liability                             (9,271)            (9,914)                                                           ----------         ----------               Total stockholder's equity                      147,904            162,418                                                           ----------         ----------                                                            $  253,366         $  247,922                                                           ==========         ==========   Commitments and contingencies (Notes 7, 10 and 13)            See accompanying notes to consolidated financial statements.                         KRONOS DENMARK APS AND SUBSIDIARIES                          CONSOLIDATED STATEMENTS OF INCOME                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                 2003                2004              2005                                                              ----                ----              ----      Net sales                                                 $  292,611         $  345,962        $  364,865 Cost of sales                                                234,881            284,902           291,075                                                           ----------         ----------        ----------      Gross margin                                              57,730             61,060            73,790  Selling, general and administrative expense                   19,596             23,874            24,868 Other operating income (expense):   Currency transaction gains (losses), net                       355                980               173   Disposition of property and equipment                           37               (596)             (220)   Other, net                                                     350                286               489                                                           ----------         ----------        ----------      Income from operations                                    38,876             37,856            49,364  Other income (expense):   Trade interest income                                          163                 73                88   Securities transaction gain                                   -                  -                5,439   Other income from affiliates                                   198                202               387   Interest and other expense to affiliates                    (2,608)            (2,943)           (2,572)   Interest expense                                            (2,309)            (1,529)           (1,142)                                                           ----------         ----------        ----------      Income before income taxes                                34,320             33,659            51,564  Provision for income taxes                                     7,428              9,843            16,137                                                           ----------         ----------        ----------     Net income                                             $   26,892         $   23,816        $   35,427                                                           ==========         ==========        ==========             See accompanying notes to consolidated financial statements.                          KRONOS DENMARK APS AND SUBSIDIARIES                   CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                 2003                2004              2005                                                              ----                ----              ----       Net income                                                $   26,892         $   23,816        $   35,427                                                           ----------         ----------        ----------  Other comprehensive income (loss), net of tax:       Currency translation adjustment                         10,998             13,890           (20,270)       Minimum pension liability                              (10,459)             1,188              (643)                                                           ----------         ----------        ----------        Total other comprehensive income                           539             15,078           (20,913)                                                           ----------         ----------        ----------  Comprehensive income                                      $   27,431         $   38,894        $   14,514                                                           ==========         ==========        ==========              See accompanying notes to consolidated financial statements.                            KRONOS DENMARK APS AND SUBSIDIARIES                   CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                                               Accumulated other                                                                                      comprehensive income (loss)                                                                                      ---------------------------                                                         Additional                     Currency          Minimum                                           Common         paid-in     Accumulated      translation        pension                                            stock          capital      deficit         adjustment       liability        Total                                          --------      -----------   -----------     -------------      ---------        -----           Balance at December 31, 2002             $    136        $ 216,996    $(120,351)      $ (15,202)        $    -        $  81,579  Net income                                   -                -          26,892            -                 -           26,892 Other comprehensive income (loss),   net of tax                                 -                -            -             10,998           (10,459)          539                                          --------        ---------    ---------       ---------         ---------     ---------  Balance at December 31, 2003                  136          216,996      (93,459)         (4,204)          (10,459)      109,010  Net income                                   -                -          23,816            -                 -           23,816 Other comprehensive income, net of tax       -                -            -             13,890             1,188        15,078                                          --------        ---------    ---------       ---------         ---------     ---------  Balance at December 31, 2004                  136          216,996      (69,643)          9,686            (9,271)      147,904  Net income                                   -                -          35,427            -                 -           35,427 Other comprehensive income, net of tax       -                -            -            (20,270)             (643)      (20,913)                                          --------        ---------    ---------       ---------         ---------     ---------  Balance at December 31, 2005             $    136        $ 216,996    $ (34,216)      $ (10,584)        $  (9,914)    $ 162,418                                          ========        =========    =========       =========         =========     =========             See accompanying notes to consolidated financial statements.                          KRONOS DENMARK APS AND SUBSIDIARIES                        CONSOLIDATED STATEMENTS OF CASH FLOWS                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                 2003                2004              2005                                                              ----                ----              ----   Cash flows from operating activities:       Net income                                              $   26,892         $   23,816        $   35,427   Depreciation and amortization                               11,446             12,041            13,379   Noncash interest expense                                       332                358               302   Deferred income taxes                                       (5,405)            (2,983)             (265)   Securities transaction gain                                   -                  -               (5,439)   Net loss (gain) from disposition of    property and equipment                                        (37)               596               220   Pension, net                                                 2,278              4,372             1,469   Change in assets and liabilities:     Accounts and notes receivable                                437               (967)           (1,727)     Inventories                                               (2,250)             6,500           (12,685)     Prepaid expenses                                             143                 17              (104)     Accounts payable and accrued liabilities                   4,107              3,130             5,324     Income taxes                                              (2,902)              (453)            2,379     Accounts with affiliates                                  10,403            (37,220)          (13,683)     Other noncurrent assets                                   (4,181)             2,257              (552)     Other noncurrent liabilities                                 547             (1,420)           (1,936)                                                           ----------         ----------        ----------        Net cash provided by operating activities               41,810             10,044            22,109                                                           ----------         ----------        ----------  Cash flows from investing activities:   Capital expenditures                                       (10,274)           (11,725)          (15,044)   Loans to affiliates                                           -               (11,597)             -   Proceeds from disposal of interest in        Norwegian smelting operation                             -                  -                3,542   Change in restricted cash equivalents and restricted                                                129        marketable debt securities, net                          (554)               (70)   Proceeds from disposition of property and equipment            350                100                29                                                           ----------         ----------        ----------          Net cash used by investing activities                (10,478)           (23,292)          (11,344)                                                           ----------         ----------        ----------                             KRONOS DENMARK APS AND SUBSIDIARIES                  CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)                    Years ended December 31, 2003, 2004 and 2005                                   (In thousands)                                                                 2003                2004              2005                                                              ----                ----              ----   Cash flows from financing activities:   Indebtedness:         Borrowings                                            $   16,106         $   62,140        $    4,620     Principal payments                                       (46,006)           (50,089)          (13,159)   Loans from affiliates - repayments                            -                  -               (4,648)                                                           ----------         ----------        ----------  Net cash provided (used) by financing activities             (29,900)            12,051           (13,187)                                                           ----------         ----------        ----------  Cash and cash equivalents:   Net change during the year from:     Operating, investing and financing      activities                                                1,432             (1,197)           (2,422)     Currency translation                                         336                 82              (102)   Balance at beginning of  period                              2,913              4,681             3,566                                                           ----------         ----------        ----------    Balance at end of period                                $    4,681         $    3,566        $    1,042                                                           ==========         ==========        ==========   Supplemental disclosures:   Cash paid for:     Interest                                              $    4,638         $    4,198        $      446     Income taxes                                              11,525             13,331            13,885  Inventories received as partial consideration     for disposal of interest in Norwegian      smelting operation                                   $     -            $     -           $    1,897             See accompanying notes to consolidated financial statements.                          KRONOS DENMARK APS AND SUBSIDIARIES                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Note 1 - Organization and basis of presentation:       Kronos Denmark ApS ("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 Worldwide,  Inc. (NYSE:KRO).  At December 31, 2005, (i) Valhi, Inc (NYSE: VHI) owned approximately 57% of Kronos' common stock and NL Industries,  Inc.  (NYSE:  NL) held an additional 36% of the  outstanding common stock of Kronos,  (ii) Valhi owned 83% of NL's  outstanding  common stock and (iii) Contran  Corporation and its subsidiaries  held  approximately  92% of Valhi's  outstanding  common stock.  Substantially all of Contran's  outstanding voting stock is held by trusts  established for the benefit of certain  children and grandchildren of Harold C. Simmons of which Mr. Simmons is sole trustee,  or is held by Mr.  Simmons  or persons or other  entities  related to Mr.  Simmons. Consequently, Mr. Simmons may be deemed to control each of such companies.       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  titanium  dioxide  pigments  ("TiO2")  plant in Belgium and a TiO2 plant and 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:       Management's   estimates.   The  preparation  of  financial  statements  in conformity with accounting principles generally accepted in the United States of America  ("GAAP")  requires  management to make estimates and  assumptions  that affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of contingent assets and liabilities at the date of the financial  statements,  and the reported amount of revenues and expenses during the reporting period. Actual results may differ from previously-estimated amounts under different assumptions or conditions.       Principles of consolidation.  The 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.       Translation of foreign currencies. The functional currencies of the Company include  the  Danish  kroner,  the euro and the  Norwegian  kroner.  Assets  and liabilities of  subsidiaries  whose  functional  currency is other than the U.S. dollar are  translated  at year-end  rates of exchange and revenues and expenses are translated at average exchange rates prevailing  during the year.  Resulting translation  adjustments  are  accumulated  in  stockholder's  equity as part of accumulated other  comprehensive  income,  net of related deferred income taxes. Currency transaction gains and losses are recognized in income currently.       Derivatives  and hedging  activities.  Derivatives are recognized as either assets or  liabilities  and measured at fair value in  accordance  with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The  accounting  for  changes  in fair  value of  derivatives  depends  upon the intended use of the  derivative,  and such changes are recognized  either in net income  or  other   comprehensive   income.   As  permitted  by  the  transition requirements  of SFAS No.  133, as amended,  the Company has  exempted  from the scope of SFAS No. 133 all host contracts  containing  embedded  derivatives that were issued or acquired prior to January 1, 1999.       Cash and 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  and include amounts restricted in accordance with applicable Norwegian law regarding certain requirements  of the Company's  Norwegian  defined  benefit  pension plans ($2.9 million and $2.6  million at  December  31,  2004 and 2005,  respectively).  The restricted  marketable  debt  securities  are  generally  classified as either a current or noncurrent  asset  depending upon the maturity date of each such debt security and are carried at market, which approximates cost.       Accounts  receivable.  The  Company  provides  an  allowance  for  doubtful accounts  for  known  and  estimated  potential  losses  arising  from  sales to customers based on a periodic review of these accounts.       Property and equipment and depreciation.  Property and equipment are stated at cost.  The Company has a  governmental  concession  with an unlimited term to operate an ilmenite mine in Norway.  Mining properties  consist of buildings and equipment used in the Company's Norwegian ilmenite mining operations.  While the Company owns the land and ilmenite reserves  associated with the mine, such land and reserves  were  acquired  for nominal  value and the Company has no material asset  recognized for the land and reserves  related to such mining  operations. Depreciation  of  property  and  equipment  for  financial   reporting  purposes (including  mining  properties)  is computed  principally  by the  straight-line method over the  estimated  useful  lives of ten to 40 years for  buildings  and three to 20 years for equipment.  Accelerated  depreciation methods are used for income tax  purposes,  as permitted.  Upon sale or  retirement of an asset,  the related cost and accumulated  depreciation are removed from the accounts and any gain or loss is recognized in income currently.       Expenditures  for  maintenance,  repairs and minor  renewals are  expensed; expenditures  for major  improvements  are  capitalized.  The  Company  performs 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 sales.  Accrued repair  and  maintenance  costs,  included  in  other  current  liabilities  and consisting primarily of materials and supplies, was $600,000 and $1.2 million at December 31, 2004 and 2005, respectively.       Interest costs related to major long-term capital projects and renewals are capitalized as a component of  construction  costs.  Interest costs  capitalized were not significant in 2003, 2004 or 2005.       When  events or  changes  in  circumstances  indicate  that  assets  may be impaired,  an evaluation is performed to determine if an impairment exists. Such events or changes in circumstances  include, among other things, (i) significant current  and prior  periods or current  and  projected  periods  with  operating losses,  (ii) a significant  decrease in the market value of an asset or (iii) a significant  change  in the  extent  or  manner  in which an asset is used.  All relevant  factors  are  considered.  The test for  impairment  is  performed  by comparing the estimated  future  undiscounted  cash flows (exclusive of interest expense)  associated  with  the  asset  to the  asset's  net  carrying  value to determine  if a  write-down  to market  value or  discounted  cash flow value is required.  The Company assesses  impairment of other long-lived  assets (such as property and equipment and mining  properties) in accordance  with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."       Long-term debt.  Long-term debt is stated net of any  unamortized  original issue premium or discount. Amortization of deferred financing costs, included in interest  expense,  is  computed  by the  interest  method  over the term of the applicable issue.       Employee  benefit  plans.  Accounting  and funding  policies for retirement plans are described in Note 9.       Income taxes. Deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the income tax  and  financial  reporting  carrying  amounts  of  assets  and  liabilities, including  investments in the Company's  subsidiaries and affiliates who are not members  of  the  Contran  Tax  Group  and  undistributed  earnings  of  foreign subsidiaries  which are not deemed to be  permanently  reinvested.  The  Company periodically   evaluates   its  deferred  tax  assets  in  the  various   taxing jurisdictions in which it operates and adjusts any related  valuation  allowance based on the estimate of the amount of such deferred tax assets that the Company believes does not meet the "more-likely-than-not" recognition criteria.       Net sales. Sales are recorded when products are shipped and title and other risks and rewards of ownership have passed to the customer, or when services are performed.  Shipping terms of products shipped are generally FOB shipping point; although in some instances  shipping terms are FOB destination  point (for which sales are not recognized until the product is received by the customer). Amounts charged to customers for shipping and handling are included in net sales.  Sales are stated net of price,  early  payment and  distributor  discounts  and volume rebates.       Inventories and cost of sales.  Inventories are stated at the lower of cost (principally   average  cost)  or  market,  net  of  allowance  for  slow-moving inventories. Amounts are removed from inventories at average cost. Cost of sales includes costs for materials,  packaging and  finishing,  utilities,  salary and benefits, maintenance and depreciation.       Selling, general and administrative expenses;  shipping and handling costs. Selling, general and administrative expenses include costs related to marketing, sales, distribution,  shipping and handling, research and development, legal and administrative functions, such as accounting, treasury and finance, and includes costs for salaries and benefits, travel and entertainment, promotional materials and  professional  fees.  Shipping and  handling  costs are included in selling, general and administrative expense and were $11.2 million in 2003, $13.1 million in 2004 and $13.2  million in 2005.  Advertising  costs are expensed as incurred and were  approximately  $100,000  in each of 2003,  2004  and  2005.  Research, development and certain sales  technical  support costs are expensed as incurred and approximated $300,000 in 2003, $200,000 in 2004 and $300,000 in 2005.       Stock  options.  The  Company  has not issued any stock  options.  However, 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,  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. Prior to 2003,  and  following  NL's cash  settlement  of options to purchase NL common  stock  held  by  certain  individuals,  NL and  the  Company,  commenced accounting for its stock options using the variable accounting method because NL could not overcome the  presumption  that it would not similarly cash settle its remaining stock options.  Under the variable  accounting  method,  the intrinsic value of all unexercised  stock options  (including those with an exercise price at least  equal to the  market  price on the date of grant)  are  accrued  as an expense over their vesting period, with subsequent increases (decreases) in NL's market  price  resulting  in  additional  compensation  expense  (income).  Upon exercise of such  options to purchase NL common  stock held by  employees of the Company,  the  Company  pays NL an amount  equal to the  difference  between the market price of NL's common stock on the date of exercise and the exercise price of such stock option.  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 $117,000 in 2003 and $319,000 in 2004, and compensation income was $185,000 in 2005. The total income tax benefit related to such compensation cost recognized by the Company was approximately $41,000 in 2003 and $96,000 in 2004, and the total  income  tax  provision  related  to the  compensation  income was $52,000  in  2005.  No  compensation  cost  was  capitalized  as part of  assets (inventory or fixed assets) during 2003, 2004 and 2005.       The following  table  illustrates the effect on net income and earnings per share if the Company had applied the fair value  recognition  provisions of SFAS No. 123 to stock-based employee compensation.                                                              Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                    (In millions, except per share amounts)      Net income - as reported                        $ 26,892          $ 23,816         $ 35,427  Adjustments, net of applicable income tax  effects:   Stock-based employee compensation      (income) expense determined under       APBO No. 25                                     77               223             (133)   Stock-based employee compensation    expense determined under SFAS No. 123             (38)               (8)              (3)                                                 --------          --------         --------  Pro forma net income                            $ 26,931          $ 24,031         $ 35,291                                                 ========          ========         ========   Note 3 - Accounts and notes receivable:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)     Trade receivables                                        $   15,487         $   13,992 Recoverable VAT and other receivables                         2,960              3,349 Allowance for doubtful accounts                                 (25)               (22)                                                          ----------         ----------                                                           $   18,422         $   17,319                                                          ==========         ==========      Note 4 - Inventories:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)     Raw materials                                            $   13,804         $   21,359 Work in process                                               2,871              1,771 Finished products                                            31,725             30,659 Supplies                                                     16,882             15,717                                                          ----------         ----------                                                           $   65,282         $   69,506                                                          ==========         ==========   Note 5 - Other noncurrent assets:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)     Unrecognized net pension obligations                     $    3,852         $    3,108 Restricted marketable debt securities                         2,877              2,572 Deferred financing costs, net                                   198                400 Other                                                            86                 73                                                          ----------         ----------                                                           $    7,013         $    6,153                                                          ==========         ==========   Note 6 - Accounts payable and accrued liabilities:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)     Accounts payable                                         $   21,695         $   20,048                                                          ----------         ---------- Accrued liabilities:   Employee benefits                                          10,462              9,664   Other                                                       6,619              8,694                                                          ----------         ----------                                                               17,081             18,358                                                          ----------         ----------                                                           $   38,776         $   38,406                                                          ==========         ==========   Note 7 - Notes payable and long-term debt:                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)  Long-term debt:      Bank credit facility                                   $   13,622         $     -   Other                                                         348              4,525                                                          ----------         ----------                                                               13,970              4,525 Less current maturities                                      13,792                958                                                          ----------         ----------                                                           $      178         $    3,567                                                          ==========         ==========        The Company and certain of KII's subsidiaries in Belgium and Norway (Kronos Europe S.A./N.V.-"KEU", Kronos Titan A/S - "TAS" and Titania A/S - "TIA," Kronos Norge A/S,  the  parent  company of TAS and TIA,  and Kronos  Titan GmbH  "TG"), referred to as the "Borrowers",  have a euro 80 million secured revolving credit facility  that matures in June 2008.  Borrowings  may be  denominated  in euros, Norwegian kroner or U.S. dollars,  and bear interest at the applicable interbank market rate plus 1.125%.  The facility also provides for the issuance of letters of credit up to euro 5 million.  The Credit  Facility is  collateralized  by the accounts  receivable and inventories of the borrowers,  plus a limited pledge of all of the other assets of the Belgian  borrower.  The credit facility  contains certain restrictive covenants which, among other things, restrict the ability of the borrowers to incur debt,  incur liens, pay dividends or merge or consolidate with, or sell or transfer all or  substantially  all of their assets to, another entity.  In  addition,  the Credit  Facility  contains  customary  cross-default provisions with respect to other debt and obligations of Borrowers,  KII and its other subsidiaries.  At December 31, 2005, no amounts were outstanding under the European  Credit  Facility and the equivalent of $92.3 million was available for additional   borrowing  by  the   Borrowers.   The  Company,   KEU  and  TG  are unconditionally  jointly  and  severally  liable  for any  and  all  outstanding borrowings under the credit facility.  TAS, TIA and Kronos Norge A/S are jointly and severally  liable for any and all  outstanding  borrowings  under the credit facility to the extent permitted by Norwegian law.       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, 2005.       In June 2002,  KII issued at par value euro 285  million  principal  amount ($280 million when issued) of its 8.875% Senior  Secured Notes due 2009,  and in November 2004 KII issued at 107% of par an additional euro 90 million  principal amount ($130 million when issued) of the KII Senior Secured Notes  (collectively the  "Notes").  The Notes are  collateralized  by a pledge of 65% of the  common stock or other  ownership  interests  of certain of KII's  first-tier  operating subsidiaries.  Such operating  subsidiaries are the Company,  Kronos Titan GmbH, Kronos  Limited and Societe  Industrielle  Du Titane,  S.A. 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 to incur debt, incur liens, pay dividends or merge or consolidate  with, or sell or transfer all or substantially all of their assets to, another entity.  The Notes are redeemable,  at KII's option,  at redemption prices ranging from 104.437% of the principal  amount,  declining to 100% on or after  December 30, 2008. In the event of a change of control of KII, as  defined,  KII would be required to make an offer to purchase its 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.       Under  the  cross-default  provisions  of  the  Notes,  the  Notes  may  be accelerated  prior to their stated maturity if KII or any of KII's  subsidiaries default under any other  indebtedness  in excess of $20 million due to a failure to pay such  other  indebtedness  at its due date  (including  any due date that arises  prior to the stated  maturity as a result of a default  under such other indebtedness).  Under the cross-default  provisions of the Credit Facility,  any outstanding  borrowings  under the Credit  Facility may be accelerated  prior to their  stated  maturity  if  the  Borrowers  or  KII  default  under  any  other indebtedness  in  excess of euro 5 million  due to a failure  to pay such  other indebtedness  at its due date  (including  any due date that arises prior to the stated  maturity as a result of a default  under such other  indebtedness).  The Credit  Facility  contains  provisions  that allow the lender to accelerate  the maturity of the Credit Facility in the event of a change of control, as defined, of  the  applicable  borrower.  In  the  event  any of  these  cross-default  or change-of-control   provisions  become  applicable,  and  such  indebtedness  is accelerated,  KII would be  required to repay such  indebtedness  prior to their stated maturity.       Other long-term debt relates  primarily to certain capital lease agreements which expire at various dates through 2011.       The aggregate  maturities of long-term  debt at December 31, 2005 are shown in the table below.                                                    Amount                                              --------------                                              (In thousands) Years ending December 31, - --------------------------            2006                                        $  958     2007                                           861     2008                                           872     2009                                           902     2010                                           932                                                 ------                                                  $4,525                                                 ======   Note 8 - Securities transaction gain:        A securities  transaction gain in 2005,  classified as nonoperating income, relates to the sale of the Company's  passive  interest in a Norwegian  smelting operation,  which had a nominal carrying value for financial reporting purposes, for aggregate  consideration of approximately $5.4 million consisting of cash of $3.5 million and inventory with a value of $1.9 million.  Note 9 - Employee benefit plans:       The Company maintains various defined benefit pension plans.  Personnel are covered  by plans in their  respective  countries.  Variances  from  actuarially assumed  rates will result in  increases or  decreases  in  accumulated  pension obligations, pension expense and funding requirements in future periods. 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 2004 or 2005. At December 31, 2005,  the Company  expects to contribute the equivalent of  approximately  $1.6 million to its defined benefit pension plans during 2006.       Certain actuarial assumptions used in measuring the defined benefit pension assets,  liabilities  and  expenses  are  presented  below.  The Company  uses a September 30th measurement date for their defined benefit pension plans.       The  weighted-average  rate  assumptions  used in determining the actuarial present  value of  benefit  obligations  as of  December  31,  2004 and 2005 are presented in the table below. Such weighted-average  rates were determined using the projected benefit obligations at each date.                 Rate                                                 December 31,               ----                                               --------------                                                              2004               2005                                                              ----               ----     Discount rate                                                5.0%               4.4% Increase in future compensation levels                       3.0%               3.0%        The weighted-average  rate assumptions used in determining the net periodic pension  cost for 2003,  2004 and 2005 are  presented  in the table  below.  The weighted-average  discount  rate and the  weighted-average  increase  in  future compensation  levels were determined using the projected benefit  obligations as of the beginning of each year, and the weighted-average long-term return on plan assets was determined using the fair value of plan assets as of the beginning of each year.                   Rate                                                    December 31,               ----                                    ----------------------------------------                                                       2003              2004              2005                                                       ----              ----              ----      Discount rate                                         5.9%              5.5%              5.0% Increase in future compensation levels                3.0%              3.0%              3.0% Long-term return on plan assets                       7.0%              6.0%              6.0%        Plan assets are comprised  primarily of investments in corporate equity and debt  securities,   short-term  investments,  mutual  funds  and  group  annuity contracts.       The  components of the net periodic  defined  benefit  pension cost are set forth below.                                                              Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In thousands)  Net periodic pension cost:       Service cost benefits                         $  1,430          $  2,096         $  2,133   Interest cost on projected benefit    obligation ("PBO")                              2,907             3,436            3,345   Expected return on plan assets                  (3,335)           (2,815)          (3,142)   Amortization of prior service cost                 255               267              282   Amortization of net transition obligation          296               321              129   Recognized actuarial losses                        732             1,428            1,276                                                 --------          --------         --------                                                  $  2,285          $  4,733         $  4,023                                                 ========          ========         ========        The funded status of the  Company's  defined  benefit  pension plans is set forth below.                                                                         December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)  Change in projected benefit obligations ("PBO"):      Benefit obligations at beginning of year               $   64,161         $   72,361   Service cost                                                2,096              2,133   Interest cost                                               3,436              3,345   Participant contributions                                     152                149   Actuarial gains (losses)                                   (1,891)             2,933   Change in currency exchange rates                           7,081             (8,259)   Benefits paid                                              (2,674)            (2,886)                                                          ----------         ----------        Benefit obligations at end of year                 $   72,361         $   69,776                                                          ----------         ----------  Change in fair value of plan assets:   Fair value of plan assets at beginning of year         $   49,540         $   57,754   Actual return on plan assets                                3,881              2,203   Employer contributions                                      1,170              1,977   Participant contributions                                     152                149   Change in currency exchange rates                           5,685             (6,375)   Benefits paid                                              (2,674)            (2,886)                                                          ----------         ----------        Fair value of plan assets at end of year           $   57,754         $   52,822                                                          ----------         ----------  Funded status at year end:   Plan assets less than PBO                              $  (14,607)        $  (16,954)   Unrecognized actuarial loss                                26,344             26,024   Unrecognized prior service cost                             3,157              2,550   Unrecognized net transition obligation                        999                770                                                          ----------         ----------                                                           $   15,893         $   12,390                                                          ==========         ==========  Amounts recognized in the balance sheet:    Accrued pension cost:     Current                                              $     -            $     (456)     Non current                                              (2,469)            (4,129)   Unrecognized net pension obligations                        3,852              3,108   Accumulated other comprehensive loss                       14,510             13,867                                                          ----------         ----------                                                           $   15,893         $   12,390                                                          ==========         ==========        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  accumulated  benefit  obligation of the Company's  defined  benefit pension plans was $58.0 million at December 31, 2005 (2004 - $60.8 million).       In  determining  the  expected  long-term  rate of  return  on  plan  asset assumptions,  the Company  considers  the long-term  asset mix (e.g.  equity vs. fixed  income) for the assets for each of its plans and the  expected  long-term rates of return for such asset  components.  In addition,  the Company  receives advice  about   appropriate   long-term  rates  of  return  from  the  Company's third-party actuaries.  The Company currently has a plan asset target allocation of 14% to  equity  managers,  64% to fixed  income  managers  and the  remainder primarily to cash and liquid investments.  The expected long-term rate of return for such investments is approximately 8%, 4.5% to 6% and 2.5%, respectively. The plan asset  allocation at December 31, 2005 was 16% to equity  managers,  62% to fixed  income  managers and the  remainder  invested  primarily  cash and liquid investments  (2004 - 16%,  64% and 20%,  respectively).  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  expects future benefits paid from its defined benefit plans to be as follows:                                                                       Amount  Years ending December 31,                                      (In thousands) - --------------------------                                      -------------         2006                                                           $3,921     2007                                                            2,790     2008                                                            4,425     2009                                                            3,036     2010                                                            3,087     2011 to 2015                                                   20,926   Note 10 - 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 2003 and 2004 and 28% in 2005, (iii) the  provision  for income taxes and (iv) the  comprehensive  tax  provision are presented below.                                                               Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In thousands) Pretax income (loss):       Denmark                                       $    170          $   (101)        $    526   Non-Denmark                                     34,150            33,760           51,038                                                 --------          --------         --------                                                  $ 34,320          $ 33,659         $ 51,564                                                 ========          ========         ========  Expected tax expense                            $ 10,296          $ 10,099         $ 14,438 Non-Denmark tax rates                                428               527            1,360 Non deductible expenses                             -                 -                 281 Tax contingency reserve adjustment                (5,100)             (125)            (653) Refund of prior year taxes                          -                 (595)             (45) Tax on partnership income                          1,245              (358)            - Other, net                                           559               295              756                                                 --------          --------         --------          Income tax expense                      $  7,428          $  9,843         $ 16,137                                                 ========          ========         ========   Provision for income taxes:   Current income tax expense:     Denmark                                     $     63          $      2         $    224     Non-Denmark                                   12,770            12,824           16,178                                                 --------          --------         --------                                                    12,833            12,826           16,402                                                 --------          --------         --------    Deferred income tax expense (benefit):     Denmark                                       (5,104)             (139)            (644)     Non-Denmark                                     (301)           (2,844)             379                                                 --------          --------         --------                                                    (5,405)           (2,983)            (265)                                                 --------          --------         --------                                                  $  7,428          $  9,843         $ 16,137                                                 ========          ========         ========  Comprehensive provision for income taxes  allocable to:   Pretax income                                 $  7,428          $  9,843         $ 16,137   Other comprehensive loss -    pension liabilities                            (4,068)                5              180                                                 --------          --------         --------                                                  $  3,360          $  9,848         $ 16,317                                                 ========          ========         ========           The components of the net deferred tax liability are summarized below.                                                                                    December 31,                                                              ---------------------------------------------------                                                                        2004                        2005                                                              -----------------------     -----------------------                                                              Assets      Liabilities     Assets      Liabilities                                                              ------      -----------     ------      -----------                                                                                (In thousands)  Tax effect of temporary differences relating to:        Inventories                                               $   61        $ (2,546)      $   72      $ (2,067)   Property and equipment                                       181         (20,214)        -          (18,199)   Accrued (prepaid) pension cost                             4,063          (4,624)       3,883        (3,659)   Accrued liabilities and other deductible differences         199            -           1,420          -   Other taxable differences                                   -             (3,746)        -           (2,910)     Incremental tax and rate differences on equity in       earnings of non-tax group companies                    1,905            -            -             -                                                             ------        --------       ------      --------      Gross deferred tax assets (liabilities)                  6,409         (31,130)       5,375       (26,835)  Reclassification, principally netting by tax    jurisdiction                                             (6,409)          6,409       (5,375)        5,375                                                             ------        --------       ------      --------      Net total deferred tax assets (liabilities)               -            (24,721)        -          (21,460)     Net current deferred tax assets (liabilities)             -             (2,363)        -           (2,194)                                                             ------        --------       ------      --------      Net noncurrent deferred tax liabilities                 $ -           $(22,358)      $ -         $(19,266)                                                             ======        ========       ======      ========         Changes in the  Company's  deferred  income  tax  valuation  allowance  are summarized below:                                                                    December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In millions)       Balance at beginning of year                     $ 658             $ 683            $ -  Increase in certain deductible    temporary differences which the Company   believes do not meet the   "more-likely-than-not" recognition criteria       -                 -                -  Foreign currency translation                        25               -                -    Offset to the change in gross deferred     income tax assets due principally      to redeterminations of certain tax      attributes and implementation of      certain planning strategies                    -                (683)             -                                                   -----             -----            -----   Balance at end of year                           $ 683             $ -              $ -                                                   =====             =====            =====        Certain of the Company's  U.S. and non-U.S.  tax returns are being examined and tax authorities have or may propose tax  deficiencies,  including  penalties and interest. For example:  o    The Company received a preliminary tax assessment  related to 1993 from the      Belgian tax  authorities  proposing  tax  deficiencies,  including  related      interest,  of  approximately  euro 6 million ($7  million at  December  31,      2005). The Company filed a protest to this assessment,  and believes that a      significant  portion of the assessment  was without merit.  The Belgian tax      authorities have filed a lien on the fixed assets of The Company's  Belgian      TiO2  operations in connection  with this  assessment.  In April 2003,  the      Company  received a notification  from the Belgian tax authorities of their      intent to assess a tax deficiency related to 1999 that, including interest,      would have  aggregated  approximately  euro 9 million  ($11  million).  The      Company filed a written  response to the assessment,  and in September 2005      the Belgian tax authorities withdrew the assessment.  o    The Norwegian tax authorities  have notified the Company of their intent to      assess tax  deficiencies  of  approximately  kroner 12 million ($2 million)      relating to the years 1998 through  2000.  The Company has objected to this      proposed assessment.       No  assurance  can be given that these tax matters  will be resolved in the Company's  favor in view of the inherent  uncertainties  involved in  settlement initiatives  and court and tax  proceedings.  The Company  believes  that it has provided  adequate  accruals for additional  taxes and related  interest expense which may  ultimately  result from all such  examinations  and believes that the ultimate  disposition of such  examinations  should not have a material  adverse effect  on  its  consolidated  financial  position,  results  of  operations  or liquidity.  Note 11 - Related party transactions:       The Company may be deemed to be controlled  by Harold C. Simmons.  See Note 1.  Corporations  that may be deemed to be controlled by or affiliated  with Mr. Simmons sometimes engage in (a) intercorporate  transactions such as guarantees, management  and  expense  sharing  arrangements,  shared fee  arrangements,  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, 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  services  and cost  sharing  agreements  among several  affiliates  of the Company  whereby  Kronos,  KII and other  affiliates 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 2003, $2.1 million in 2004 and $2.5 million in 2005 related to these services and costs.       Tall Pines Insurance Company and EWI RE, Inc. provide for or broker certain insurance  policies for Contran and certain of its  subsidiaries and affiliates, including the Company.  Tall Pines is wholly-owned by a subsidiary of Valhi, and EWI is a  wholly-owned  subsidiary of NL.  Consistent  with  insurance  industry practices, Tall Pines and EWI receive commissions from insurance and reinsurance underwriters  and/or  assess fees for the policies  that they provide or broker. The  aggregate  premiums paid to Tall Pines  (including  amounts paid to Valmont Insurance  Company,  another subsidiary of Valhi that was merged into Tall Pines in 2004) and EWI by the Company were $900,000 in 2003,  $1.1 million in 2004 and $2.0 million in 2005. These amounts principally  included payments for insurance and reinsurance  premiums paid to third parties,  but also included  commissions paid to Tall Pines and EWI. Tall Pines purchases  reinsurance for  substantially all of the risks it underwrites.  The Company  expects that these  relationships with Tall Pines and EWI will continue in 2006.       Contran and  certain of its  subsidiaries  and  affiliates,  including  the Company, purchase certain of their insurance policies as a group, with the costs of  the  jointly-owned   policies  being  apportioned  among  the  participating companies.  With  respect to  certain  of such  policies,  it is  possible  that unusually  large losses  incurred by one or more insureds  during a given policy period could leave the other  participating  companies without adequate coverage under that policy for the balance of the policy period. As a result, Contran and certain of its subsidiaries and its affiliates,  including NL, have entered into a loss  sharing  agreement  under  which any  uninsured  loss is shared by those entities  who have  submitted  claims  under the  relevant  policy.  The Company believes  the  benefits in the form of reduced  premiums  and  broader  coverage associated  with  the  group  coverage  for  such  policies  justifies  the risk associated with the potential for uninsured loss.       Intercompany sales to (purchases from) affiliates of TiO2 are summarized in the following table.                                                              Years ended December 31,                                                   -----------------------------------------                                                    2003              2004            2005                                                    ----              ----            ----                                                                 (In thousands)  Sales to:       TG                                            $ 38,783          $ 53,631         $ 55,210   Kronos Limited ("KUK")                          18,856            25,285           20,408   Kronos (US), Inc. ("KUS")                       18,792            19,180           25,445   Societe Industrielle du Titane, S.A. ("SIT")     8,138             8,868            9,054   Kronos Canada, Inc. ("KC")                       4,308             2,596            3,009                                                 --------          --------         --------                                                  $ 88,877          $109,560         $113,126                                                 ========          ========         ========  Purchases from:   TG                                            $ 38,785          $ 48,808         $ 58,121   KUS                                                101             3,489             -   KC                                                 223                22              103                                                 --------          --------         --------                                                  $ 39,109          $ 52,319         $ 58,224                                                 ========          ========         ========        Sales of ilmenite to TG were $15.5  million in 2003,  $17.4 million in 2004 and $21.4 million in 2005.       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 $39.5 million in 2003, $40.5 million in 2004 and $47.8 million in 2005.       Royalties  paid to KII for use of  certain of KII's  intellectual  property totaled $10.4 million in 2003,  $12.5 million in 2004 and $12.4 million in 2005, and was included as a component of cost of sales.       During 2003, 2004 and 2005, the Company was party to an accounts receivable factoring  agreement  (the  "Factoring  Agreement")  with  one  or  more  of its affiliates  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").  Upon non-recourse transfer from the Company, the affiliate assumed all risk  pertaining  to the factored  receivables,  including,  but not limited to, exchange  control  risks,  risks  pertaining to the bankruptcy of a customer and risks related to late payments.  Export receivables sold by the Company pursuant to the Factoring Agreement during 2003, 2004 and 2005 aggregated $101.4 million, and $119.9 million and $124.5 million, respectively.       Net  amounts   currently   receivable  from  (payable  to)  affiliates  are summarized in the following table.                                                                      December 31,                                                                  --------------                                                              2004               2005                                                              ----               ----                                                                   (In thousands)  Receivable from:      SIT                                                    $      814         $      864   KUK                                                         1,766              1,638   TG                                                         13,342             24,967   Other                                                         107                 24                                                          ----------         ----------                                                           $   16,029         $   27,493                                                          ==========         ==========  Noncurrent receivable from TG                            $   12,941         $   11,239                                                          ==========         ==========  Payable to:   KII                                                    $    4,266         $    3,740   KUS                                                         5,486              5,317   KC                                                            390               -                                                          ----------         ----------                                                           $   10,142         $    9,057                                                          ==========         ==========  Noncurrent payable to TG                                 $    5,449         $     -                                                          ==========         ==========        Net amounts  between the Company,  KUS, TG, SIT, KUK and KC were  generally related to  product  purchases  and  sales.  Net  amounts  with TG also  include accounts receivable factoring fees.  Note 12 - NL common stock options held by employees of the Company:       At December  31,  2005,  employees  of the Company held options to purchase approximately  23,000 shares of NL common stock, of which 13,000 are exercisable at various dates  through 2010 at an exercise  price ranging from $2.66 to $5.63 per share and  10,000  are  exercisable  at  various  dates  through  2011 at an exercise price of $11.49 per share.       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 during 2003,  2004, or 2005. For purposes of pro forma  disclosures,  the estimated fair value of the options is amortized to expense over the options' vesting period.  Note 13 - Commitments and contingencies:       Operating 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 $3 million in each of 2003,  2004 and 2005. At December 31, 2005,  minimum rental commitments under the terms of noncancellable operating leases were as follows:                                                                             Equipment                                                                         --------------                                                                         (in thousands) Years ending December 31, - --------------------------        2006                                                                   $  603     2007                                                                      520     2008                                                                      516     2009                                                                      253     2010                                                                       92     2011 and thereafter                                                        99                                                                            ------                                                                             $2,083                                                                            ======        Long-term  contracts.  KUS has long-term  supply contracts that provide for certain of its affiliates',  including KDK's,  chloride  feedstock  requirements through  2010.  The  Company  and certain of its  affiliates  purchase  chloride feedstock  underlying  these long-term supply contracts from KUS. The agreements require KUS to purchase  certain  minimum  quantities of feedstock  with minimum purchase  commitments  aggregating  approximately  $681  million at December 31, 2005.       Environmental  matters.  The Company's  operations  are governed by various environmental laws and regulations.  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 and regulations.  As with other companies engaged in similar businesses, certain past and current operations and products of the Company have the  potential  to  cause   environmental  or  other  damage.  The  Company  has implemented  and  continues  to  implement  various  policies and programs in an effort to minimize these risks. The Company's  policy is to maintain  compliance with applicable  environmental laws and regulations at all its facilities and to strive to improve its environmental performance.  From time to time, the Company may be subject to environmental  regulatory  enforcement under various statutes, resolution of which typically involves the establishment of compliance programs. It is  possible  that future  developments,  such as  stricter  requirements  of environmental laws and enforcement policies  thereunder,  could adversely affect the  Company's  production,  handling,  use,  storage,  transportation,  sale or disposal  of such  substances.  The  Company  believes  all of its plants are in substantial compliance with applicable environmental laws.       Litigation  matters.  The Company's  Belgian  subsidiary and certain of its employees  are the  subject of civil and  criminal  proceedings  relating  to an accident that resulted in two  fatalities at the Company's  Belgian  facility in 2000. In May 2004,  the court ruled and,  among other things,  imposed a fine of euro  200,000  against the Company and fines  aggregating  less than euro 40,000 against various Company employees. The Company and the individual employees have appealed the ruling.       In  addition  to the  litigation  described  above,  the  Company  and  its affiliates  are also  involved  in  various  other  environmental,  contractual, product  liability,  patent (or  intellectual  property),  employment  and other claims and disputes incidental to its present and former businesses.       The Company currently  believes the disposition of all claims and disputes, individually or in the aggregate,  should not have a material  adverse effect on its consolidated financial condition, results of operations or liquidity.       Concentrations  of credit risk.  Sales of TiO2 accounted for  approximately 78%,  79% and 78% of net sales  during 2003,  2004 and 2005,  respectively.  The remaining  sales result from the mining and sale of ilmenite ore (a raw material used in the sulfate pigment production  process) and the manufacture and sale of certain  titanium  chemical  products  (derived  from  co-products  of the  TiO2 production  process).  TiO2 is generally  sold to the paint,  plastics and paper industries.  Such markets are  generally  considered  "quality-of-life"  markets whose demand for TiO2 is influenced by the relative  economic  well-being of the various geographic regions.  TiO2 is sold to over 1,000 customers,  with the top ten external customers  approximating 26% of net sales in 2003, 24% of net sales in 2004 and 17% of net sales in 2005.  Approximately  80% of the Company's  TiO2 sales by volume were to Europe in each of 2003, 2004 and 2005. Approximately 10% of sales by volume were to North America in each of 2003, 2004 and 2005.  Note 14 - Financial instruments:       Summarized below is the estimated fair value and related net carrying value of the Company's financial instruments.                                                                December 31,                December 31,                                                                  2004                        2005                                                       ---------------------------  -------------------------                                                         Carrying        Fair         Carrying      Fair                                                          Amount        Value          Amount       Value                                                       ------------- -------------  -------------------------                                                                           (In millions)  Cash, cash equivalents, restricted cash     equivalents and noncurrent restricted          marketable debt securities                          $   8.0       $   8.0        $   5.0       $   5.0  Notes payable and long-term debt -  variable rate debt                                     $  13.6       $  13.6        $    -        $    -        The Company held no derivative  financial  instruments during 2003, 2004 or 2005.  Note 15 - Accounting principles recently adopted in 2003 and 2004:       Asset retirement obligations. The Company adopted 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 is recognized as a cumulative effect of a change in accounting  principle as of the date of adoption.  The effect of adopting SFAS No. 143 as of January 1, 2003 was not material,  as summarized in the table below and is not separately recognized in the accompanying Statement of Income.                                                                                     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                                                                                      .3 Asset retirement obligation recognized                                              (.6)                                                                                    ----          Net impact                                                                 $ -                                                                                    ====        The  change  in the  asset  retirement  obligations  from  January  1, 2003 ($600,000)  to December 31, 2003  ($800,000),  to December 31, 2004 ($1 million) and to December 31, 2005  ($900,000) is primarily  due to accretion  expense and the effects of currency translation.  Accretion expense,  which is reported as a component  of cost of  sales  in the  accompanying  Consolidated  Statements  of Income,  approximated  $100,000  for each of the years ended  December 31, 2003, 2004 and 2005.       Estimates of the ultimate cost to be incurred to settle the Company's asset retirement obligations require a number of assumptions, are inherently difficult to develop  and the  ultimate  outcome  may differ from  current  estimates.  As additional  information  becomes  available,  cost estimates will be adjusted as necessary.  It  is  possible  that  technological,   regulatory  or  enforcement developments,  the results of studies or other  factors  could  necessitate  the recording of additional liabilities.       Costs associated with exit or disposal activities. The Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal  Activities," on January 1, 2003 for exit or disposal activities initiated on or after that date. Under SFAS No. 146, costs associated with exit activities,  as defined, that are covered by the scope of SFAS No. 146 will be recognized  and measured  initially at fair value, generally in the period in which the liability is incurred. Costs covered by the scope of SFAS No. 146 include  termination  benefits  provided to employees,  costs to consolidate facilities or relocate employees,  and costs to terminate contracts (other than a capital lease).  Under prior GAAP, a liability for such an exit cost is recognized  at the date an exit plan is adopted,  which may or may not be the date at which the liability has been incurred.  The effect of adopting  SFAS No. 146 as of January 1, 2003 was not  material as the Company was not involved in any exit or disposal  activities covered by the scope of the new standard as of such date.       Variable  interest  entities.  The Company complied with the  consolidation requirements of FASB Interpretation ("FIN") No. 46R,  "Consolidation of Variable Interest Entities,  an interpretation of ARB No. 51," as amended as of March 31, 2004.  The Company  does not have any  involvement  with any  variable  interest entity (as that term is defined in FIN No. 46R)  covered by the scope of FIN No. 46R that would require the Company to consolidate such entity under FIN No. 46R, which had not  already  been  consolidated  under  prior  applicable  GAAP,  and therefore the impact to the Company of adopting the  consolidation  requirements of FIN No.  46R was  not  material.  Note 16 - Accounting principles not yet adopted:       Stock options. The Company will adopt SFAS No. 123R, "Share-Based Payment," as of January  1, 2006.  SFAS No.  123R,  among  other  things,  eliminated  the alternative  in previously  existing  GAAP to use the intrinsic  value method of accounting  for  stock-based  employee  compensation  under  APBO No.  25.  Upon adoption of SFAS No. 123R,  the Company will  generally be required to recognize the cost of  employee  services  received  in  exchange  for an award of  equity instruments  based on the  grant-date  fair  value of the  award,  with the cost recognized  over the period  during  which an  employee  is  required to provide services in exchange for the award (generally, the vesting period of the award). No compensation cost will be recognized in the aggregate for equity  instruments for which the employee does not render the  requisite  service  (generally,  the instrument is forfeited before it has vested). The grant-date fair value will be estimated using option-pricing  models (e.g.  Black-Scholes or a lattice model). Under the  transition  alternatives  permitted  under SFAS No. 123R, the Company will apply the new  standard  to all new awards  granted on or after  January 1, 2006,  and to all awards  existing  as of June 30,  2005 which are  subsequently modified,  repurchased  or cancelled.  Additionally,  as of January 1, 2006, the Company  will be required to recognize  compensation  cost  previously  measured under  SFAS No. 123 for the  portion  of any  non-vested  award  existing  as of December 31, 2005 over the remaining vesting period. Because the Company has not granted any options to purchase  its common  stock and did not grant any options prior to  January 1, 2006 and  because  the  number of  non-vested  awards as of December  31, 2005 with  respect to options  granted by NL to  employees  of the Company  was not  material,  the  effect  of  adopting  SFAS  No.  123R  was not significant in so far as it relates to the recognition of  compensation  cost in the  Company's  consolidated  statements of income for existing  stock  options. Should  the  Company,  however,  grant a  significant  number of  options in the future,  the Company  could  recognize  material  amounts of  compensation  cost related to such options in its consolidated financial statements.       Also upon adoption of SFAS No. 123R, any cash income tax benefit  resulting from the  exercise  of stock  options  in excess of the  cumulative  income  tax benefit  related  to such  options  previously  recognized  for  GAAP  financial reporting purposes in the Company's  consolidated  statements of income, if any, will be reflected as a cash inflow from  financing  activities  in the Company's consolidated  statements  of cash  flows,  and the  Company's  cash  flows  from operating  activities  will  reflect  the effect of cash paid for  income  taxes exclusive of such cash income tax benefit.       SFAS No. 123R also  requires  certain  expanded  disclosures  regarding the Company's  stock options,  and such expanded  disclosures  have been provided in Note 12.       Inventory costs. The Company will adopt SFAS No. 151,  "Inventory Costs, an amendment of ARB No. 43,  Chapter 4," for inventory  costs  incurred on or after January 1, 2006.  SFAS No. 151 requires that the allocation of fixed  production overhead costs to inventory shall be based on normal  capacity.  Normal capacity is not defined as a fixed amount;  rather,  normal capacity refers to a range of production  levels expected to be achieved over a number of periods under normal circumstances,  taking into account the loss of capacity  resulting from planned maintenance  shutdowns.  The amount of fixed overhead  allocated to each unit of production is not increased as a consequence of idle plant or production  levels below the low end of normal  capacity,  but instead a portion of fixed  overhead costs  are  charged  to  expense  as  incurred.  Alternatively,  in  periods  of production above the high end of normal  capacity,  the amount of fixed overhead costs allocated to each unit of production is decreased so that  inventories are not measured above cost.  SFAS No. 151 also  clarifies  existing GAAP to require that  abnormal  freight and wasted  materials  (spoilage)  are to be expensed as incurred.  The Company believes its production cost accounting  already complies with the  requirements of SFAS No. 151, and the Company does not expect adoption of SFAS No.  151 will  have a  material  effect  on its  consolidated  financial statements.    EX-12.1 2 kiiform_10k2005ex12-1.txt                                                                      EXHIBIT 12.1                     Kronos International, Inc. and Subsidiaries     Statements of Computation of Ratio of Earnings to Combined Fixed Charges                                   (Unaudited)                           (In millions, except ratios)                                                                           Years ended December 31,                                                        ----------------------------------------------------                                                         2001        2002       2003        2004       2005                                                        -----        ----       ----        ----       ----  Fixed charges:         Total interest expense                              $  38.4     $  35.4    $  32.6     $  36.7     $  43.9   Preferred stock dividends and    accretion(1)                                         112.5        78.6         -           -           -   Interest component of rent expense(2)                   2.1         2.4        3.0         2.7         2.8                                                       -------     -------    -------     -------     -------      Total fixed charges                                 153.0       116.4       35.6        39.4        46.7                                                       -------     -------    -------     -------     -------  Adjustments:   Income before income taxes and minority    interest                                             128.2        63.2       82.6        64.8       118.9   Amortization of capitalized interest                     .5          .5         .5          .5          .4                                                       -------     -------    -------     -------     -------      Total adjustments                                   128.7        63.7       83.1        65.3       119.3                                                       -------     -------    -------     -------     -------      Total earnings available for fixed      charges                                          $ 281.7     $ 180.1    $ 118.7     $ 104.7     $ 166.0                                                       =======     =======    =======     =======     =======  Ratio of earnings to combined fixed charges               1.8         1.5        3.3         2.7         3.6                                                       =======     =======    =======     =======     =======    (1)  There is no adjustment  to the amount shown on the  Company's  consolidated      statements of income for  dividends  and accretion on redeemable  preferred      stock to obtain an equivalent  pre-tax amount.  During the periods in which      the redeemable preferred stock was outstanding, Kronos International,  Inc.      had a significant  amount of net operating loss  carryforwards  in Germany,      the    benefit   of   which   had   not   been    recognized    under   the      "more-likely-than-not"   recognition  criteria  of  accounting   principles      generally  accepted  in the  United  States of  America.  Accordingly,  the      equivalent pre-tax amount for such dividends and accretion would not differ      from the amount of such dividends and accretion.  (2)  The interest expense component of rental expense is calculated as one-third      of the  aggregate  rent  expense  for  each  year,  which  is a  reasonable      approximation of the interest factor.     EX-12.2 3 kiiform_10k2005ex12-2.txt                                                                      EXHIBIT 12.2                     Kronos International, Inc. and Subsidiaries          Statements of Computation of Ratio of Earnings to Fixed Charges                                    (Unaudited)                           (In millions, except ratios)                                                                          Years ended December 31,                                                        ----------------------------------------------------                                                         2001        2002       2003        2004       2005                                                        -----        ----       ----        ----       ----  Fixed charges:         Total interest expense                              $  38.4     $  35.4    $  32.6     $  36.7     $  43.9   Interest component of rent expense(1)                   2.1         2.4        3.0         2.7         2.8                                                       -------     -------    -------     -------     -------      Total fixed charges                                  40.5        37.8       35.6        39.4        46.7                                                       -------     -------    -------     -------     -------  Adjustments:   Income before income taxes and minority    interest                                             128.2        63.2       82.6        64.8       118.9   Amortization of capitalized interest                     .5          .5         .5          .5          .4                                                       -------     -------    -------     -------     -------      Total adjustments                                   128.7        63.7       83.1        65.3       119.3                                                       -------     -------    -------     -------     -------      Total earnings available for fixed      charges                                          $ 169.2     $ 101.5    $ 118.7     $ 104.7     $ 166.0                                                       =======     =======    =======     =======     =======  Ratio of earnings to combined   fixed charges (2)                                       4.2         2.7        3.3         2.7         3.6                                                       =======     =======    =======     =======     =======    (1)  The interest expense component of rental expense is calculated as one-third      of the  aggregate  rent  expense  for  each  year,  which  is a  reasonable      approximation of the interest factor.  (2)  Computed as (y) total  earnings  available  for fixed  charges to (z) total      fixed charges.     EX-31.1 4 kiiform_10k2005ex31-1.txt                                                                      EXHIBIT 31.1                                     CERTIFICATION  I, Harold C. Simmons, 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 report does not contain any untrue statement of      a material  fact or omit to state a  material  fact  necessary  to make the      statements made, in light of the circumstances  under which such statements      were made,  not  misleading  with  respect  to the  period  covered by this      report;  3)   Based on my  knowledge,  the  financial  statements,  and  other  financial      information  included  in  this  report,  fairly  present  in all  material      respects the financial  condition,  results of operations and cash flows of      the registrant as of, and for, the periods presented in this report;  4)   The  registrant's  other  certifying  officer  and  I are  responsible  for      establishing and maintaining disclosure controls and procedures (as defined      in Exchange Act Rules  13a-15(e) and  15d-15(e))  for the registrant and we      have:       a)   Designed  such  disclosure  controls  and  procedures,  or caused such           disclosure   controls  and   procedures  to  be  designed   under  our           supervision,  to ensure  that  material  information  relating  to the           registrant,  including its consolidated subsidiaries, is made known to           us by others within those entities,  particularly during the period in           which this report is being prepared;       b)   Evaluated the  effectiveness of the registrant's  disclosure  controls           and procedures and presented in this report our conclusions  about the           effectiveness of the disclosure controls and procedures, as of the end           of the period covered by this report based on such evaluation; and       c)   Disclosed  in this  report  any  change in the  registrant's  internal           control over financial reporting that occurred during the registrant's           most recent fiscal quarter (the registrant's  fourth fiscal quarter in           the case of an annual  report)  that has  materially  affected,  or is           reasonably  likely to materially  affect,  the  registrant's  internal           control over financial reporting; and  5)   The registrant's  other certifying  officer and I have disclosed,  based on      our most recent evaluation of internal control over financial reporting, to      the registrant's  auditors and the audit committee of registrant's board of      directors (or persons performing the equivalent function):       a)   All significant  deficiencies and material weaknesses in the design or           operation  of internal  control  over  financial  reporting  which are           reasonably  likely to  adversely  affect the  registrant's  ability to           record, process, summarize and report financial information; and       b)   Any fraud, whether or not material,  that involves management or other           employees who have a  significant  role in the  registrant's  internal           control over financial reporting.  Date:  March 28, 2006  /s/  Harold C. Simmons - -------------------------------      Harold C. Simmons        Chief Executive Officer    EX-31.2 5 kiiform_10k2005ex31-2.txt                                                                      EXHIBIT 31.2                                     CERTIFICATION  I, Gregory M. Swalwell,  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 report does not contain any untrue statement of      a material  fact or omit to state a  material  fact  necessary  to make the      statements made, in light of the circumstances  under which such statements      were made,  not  misleading  with  respect  to the  period  covered by this      report;  3)   Based on my  knowledge,  the  financial  statements,  and  other  financial      information  included  in  this  report,  fairly  present  in all  material      respects the financial  condition,  results of operations and cash flows of      the registrant as of, and for, the periods presented in this report;  4)   The  registrant's  other  certifying  officer  and  I are  responsible  for      establishing and maintaining disclosure controls and procedures (as defined      in Exchange Act Rules  13a-15(e) and  15d-15(e))  for the registrant and we      have:       a)   Designed  such  disclosure  controls  and  procedures,  or caused such           disclosure   controls  and   procedures  to  be  designed   under  our           supervision,  to ensure  that  material  information  relating  to the           registrant,  including its consolidated subsidiaries, is made known to           us by others within those entities,  particularly during the period in           which this report is being prepared;       b)   Evaluated the  effectiveness of the registrant's  disclosure  controls           and procedures and presented in this report our conclusions  about the           effectiveness of the disclosure controls and procedures, as of the end           of the period covered by this report based on such evaluation; and       c)   Disclosed  in this  report  any  change in the  registrant's  internal           control over financial reporting that occurred during the registrant's           most recent fiscal quarter (the registrant's  fourth fiscal quarter in           the case of an annual  report)  that has  materially  affected,  or is           reasonably  likely to materially  affect,  the  registrant's  internal           control over financial reporting; and  5)   The registrant's  other certifying  officer and I have disclosed,  based on      our most recent evaluation of internal control over financial reporting, to      the registrant's  auditors and the audit committee of registrant's board of      directors (or persons performing the equivalent function):       a)   All significant  deficiencies and material weaknesses in the design or           operation  of internal  control  over  financial  reporting  which are           reasonably  likely to  adversely  affect the  registrant's  ability to           record, process, summarize and report financial information; and       b)   Any fraud, whether or not material,  that involves management or other           employees who have a  significant  role in the  registrant's  internal           control over financial reporting.  Date:  March 28, 2006  /s/  Gregory M. Swalwell - ---------------------------------      Gregory M. Swalwell          Chief Financial Officer    EX-32.1 6 kiiform_10k2005ex32-1.txt                                                                      Exhibit 32.1                               CERTIFICATION PURSUANT TO                              18 U.S.C. SECTION 1350,                              AS ADOPTED PURSUANT TO                   SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002   In connection with the Annual Report of Kronos International, Inc. (the Company) on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange  Commission on the date hereof (the Report),  I, Harold C. Simmons, Chief  Executive  Officer of the  Company,  and I,  Gregory M.  Swalwell,  Chief Financial Officer of the Company,  certify,  pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:  (1)  The Report fully complies with the  requirements  of section 13(a) or 15(d)      of the Securities Exchange Act of 1934; and  (2)  The information  contained in the Report fairly  presents,  in all material      respects, the financial condition and results of operations of the Company.     /s/ Harold C. Simmons - ------------------------------- Harold C. Simmons    Chief Executive Officer   /s/ Gregory M. Swalwell - ------------------------------- Gregory M. Swalwell    Chief Financial Officer   March 28, 2006   Note: The certification  the registrant  furnishes in this exhibit is not deemed "filed" for purposes of Section 18 of the  Securities  Exchange Act of 1934,  as amended,  or otherwise subject to the liabilities of that Section.  Registration Statements or other documents filed with the Securities and Exchange  Commission shall not incorporate this exhibit by reference,  except as otherwise  expressly stated in such filing.     -----END PRIVACY-ENHANCED MESSAGE-----