SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934





For the quarter ended   September 30, 2004         Commission file number 1-640
                      ---------------------                              -------




                               NL INDUSTRIES, INC.
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)




           New Jersey                                           13-5267260
-------------------------------                           ----------------------
(State or other jurisdiction of                               (IRS Employer
 incorporation or organization)                            Identification No.)


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



Registrant's telephone number, including area code:             (972) 233-1700
                                                                ---------------




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



Indicate  by check mark  whether  the  Registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X  No
                                                                  ---   ---



Number of shares of the  Registrant's  common stock  outstanding  on October 29,
2004: 48,435,484.




                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                                      INDEX




                                                                          Page
                                                                         number

Part I.          FINANCIAL INFORMATION

  Item 1.        Financial Statements

                 Consolidated Balance Sheets -
                  December 31, 2003 and September 30, 2004                   3

                 Consolidated Statements of Income -
                  Three months and nine months ended
                  September 30, 2003 and 2004                                5

                 Consolidated Statements of Comprehensive Income -
                  Nine months ended September 30, 2003 and 2004              6

                 Consolidated Statement of Stockholders' Equity -
                  Nine months ended September 30, 2004                       7

                 Consolidated Statements of Cash Flows -
                  Nine months ended September 30, 2003 and 2004              8

                 Notes to Consolidated Financial Statements                 10

  Item 2.        Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                       30

  Item 4.        Controls and Procedures                                    46

Part II.         OTHER INFORMATION

  Item 1.        Legal Proceedings                                          48

  Item 6.        Exhibits and Reports on Form 8-K                           48


                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                 (In thousands)


<TABLE>

               ASSETS                                             December 31,       September 30,
                                                                      2003               2004
                                                                  ------------       -------------
 Current assets:
<S>                                                               <C>                 <C>
   Cash and cash equivalents                                      $   89,525          $   51,542
   Restricted cash and cash equivalents                               19,029               7,426
   Restricted marketable debt securities                               6,147               9,231
   Accounts and other receivables                                    182,557              28,806
   Refundable income taxes                                            37,712                -
   Receivables from affiliates                                           361                 203
   Inventories                                                       292,337              26,594
   Prepaid expenses                                                    7,097               1,724
   Deferred income taxes                                              12,718               9,771
                                                                  ----------          ----------

       Total current assets                                          647,483             135,297
                                                                  ----------          ----------

 Other assets:
   Marketable equity securities                                       70,487              70,877
   Restricted marketable debt securities                               6,870               5,615
   Investment in Kronos Worldwide, Inc.                                 -                202,321
   Investment in TiO2 manufacturing joint venture                    129,011                -
   Receivable from affiliates                                         14,000              43,423
   Deferred income taxes                                               7,033                 540
   Goodwill                                                           52,715              52,371
   Other                                                              30,018               4,026
                                                                  ----------          ----------

       Total other assets                                            310,134             379,173
                                                                  ----------          ----------

 Property and equipment:
   Land                                                               37,727               5,206
   Buildings                                                         208,077              26,359
   Equipment                                                         886,846             121,965
   Mining properties                                                  83,183              19,482
   Construction in progress                                           10,302               1,559
                                                                  ----------          ----------
                                                                   1,226,135             174,571
   Less accumulated depreciation and amortization                    707,207             100,342
                                                                  ----------          ----------

       Net property and equipment                                    518,928              74,229
                                                                  ----------          ----------

                                                                  $1,476,545          $  588,699
                                                                  ==========          ==========
</TABLE>






                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                                 (In thousands)

<TABLE>

    LIABILITIES AND STOCKHOLDERS' EQUITY                          December 31,       September 30,
                                                                      2003               2004
                                                                  ------------       -------------

 Current liabilities:
<S>                                                               <C>                 <C>
   Current maturities of long-term debt                           $      288          $       38
   Accounts payable                                                  111,777              13,232
   Accrued liabilities                                                96,539              23,331
   Accrued environmental costs                                        19,627              17,283
   Payable to affiliates                                              19,537              10,135
   Income taxes                                                       12,726               2,518
   Deferred income taxes                                               3,941              24,600
                                                                  ----------          ----------

       Total current liabilities                                     264,435              91,137
                                                                  ----------          ----------

 Noncurrent liabilities:
   Long-term debt                                                    382,451                  91
   Accrued pension costs                                              81,180              12,816
   Accrued postretirement benefits costs                              23,411              10,974
   Accrued environmental costs                                        57,854              53,538
   Deferred income taxes                                             229,336              44,501
   Other                                                              19,474               5,713
                                                                  ----------          ----------

       Total noncurrent liabilities                                  793,706             127,633
                                                                  ----------          ----------

 Minority interest                                                   135,215              60,643
                                                                  ----------          ----------

 Stockholders' equity:
   Common stock                                                        8,355               6,052
   Additional paid-in capital                                        786,885             469,668
   Retained earnings                                                  87,900                -
   Accumulated other comprehensive income (loss):
     Marketable securities                                            23,323              23,518
     Currency translation                                           (152,623)           (153,743)
     Pension liabilities                                             (36,209)            (36,209)
   Treasury stock                                                   (434,442)              -
                                                                  ----------          ----------

       Total stockholders' equity                                    283,189             309,286
                                                                  ----------          ----------

                                                                  $1,476,545          $  588,699
                                                                  ==========          ==========
Commitments and contingencies (Notes 14 and 17)

</TABLE>


          See accompanying notes to consolidated financial statements.







                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                      (In thousands, except per share data)

<TABLE>

                                                          Three months ended               Nine months ended
                                                             September 30,                    September 30,
                                                         --------------------            ---------------------
                                                           2003         2004               2003          2004
                                                           ----         ----               ----          ----

<S>                                                     <C>          <C>               <C>            <C>
Net sales                                               $ 295,465    $  55,987         $ 915,795      $ 724,914
Cost of sales                                             220,303       43,490           690,366        559,758
                                                        ---------    ---------         ---------      ---------

    Gross margin                                           75,162       12,497           225,429        165,156

Selling, general and administrative expense                36,157        6,505           110,542         91,725
Other operating income (expense):
  Currency transaction gains (losses), net                   (525)        (117)           (4,990)           754
  Disposition of property and equipment                     7,205         -                8,260             (2)
  Restructuring expense                                    (3,528)        -               (3,528)          -
  Noncompete agreement income                                -            -                  333           -
  Legal settlement gains                                     -              10               650            505
  Other income                                                 71           89               332          6,541
  Corporate expense                                        (9,721)      (3,719)          (48,238)       (15,011)
                                                        ---------    ---------         ---------      ---------

    Income from operations                                 32,507        2,255            67,706         66,218

Equity in earnings of Kronos Worldwide, Inc.                 -           5,005              -             5,005

Other income (expense):
  Trade interest income                                       240           15               687            495
  Interest and dividend income from affiliates                456        4,662             1,408          5,518
  Other interest income                                       330          213             1,164            961
  Securities transactions, net                                (54)         (33)            2,398            (58)
  Interest expense                                         (8,638)         (86)          (25,653)       (18,253)
                                                        ---------    ---------         ---------      ---------

    Income before income taxes and minority interest       24,841       12,031            47,710         59,886

Income tax expense (benefit)                                8,612        2,231            (7,765)      (275,713)

Minority interest in after-tax earnings                      (105)       1,266               325        140,619
                                                        ---------    ---------         ---------      ---------

    Net income                                          $  16,334    $   8,534         $  55,150      $ 194,980
                                                        =========    =========         =========      =========

Basic and diluted net income per share                  $     .34    $     .18         $    1.15      $    4.03
                                                        =========    =========         =========      =========

Weighted-average shares used in the calculation of net
   income per share:
    Basic                                                  47,717       48,395            47,702         48,299
    Dilutive impact of stock options                           61           64                57             88
                                                        ---------    ---------         ---------      ---------

    Diluted                                                47,778       48,459            47,759         48,387
                                                        ---------    ---------         ---------      ---------
</TABLE>


          See accompanying notes to consolidated financial statements.






                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                  Nine months ended September 30, 2003 and 2004

                                 (In thousands)

<TABLE>

                                                                     2003            2004
                                                                     ----            ----

<S>                                                               <C>             <C>
Net income                                                        $  55,150       $ 194,980
                                                                  ---------       ---------
Other comprehensive income (loss), net of tax:
  Marketable securities adjustment:
    Unrealized holding gains arising
      during the period                                               8,217             195
    Reclassification for realized net loss
      included in net income                                         (1,474)           -
                                                                  ---------       ---------

                                                                      6,743             195

Currency translation adjustment                                      22,013          (1,120)
                                                                  ---------       ---------

    Total other comprehensive income (loss)                          28,756            (925)
                                                                  ---------       ---------

          Comprehensive income                                    $  83,906       $ 194,055
                                                                  =========       =========
</TABLE>



          See accompanying notes to consolidated financial statements.



                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                      Nine months ended September 30, 2004

                                 (In thousands)

<TABLE>


                                                                                                   Accumulated other
                                                                                               comprehensive income (loss)
                                               Additional                           ------------------------------------------------
                                     Common     paid-in     Retained   Marketable    Currency       Pension     Treasury
                                      stock     capital     earnings   securities   translation   liabilities     stock      Total
                                    --------   ----------  ----------  ----------   -----------   -----------  ----------  ---------

Balance at December 31, 2003,
<S>                                  <C>        <C>         <C>         <C>          <C>          <C>          <C>         <C>
  as originally reported             $8,355     $777,819    $ 16,023    $  23,323    $(153,955)   $ (36,209)   $(434,442)  $200,914

Adjustment to reflect
  consolidation of CompX
  International Inc.                   -           9,066      71,877         -           1,332         -            -        82,275
                                     ------     --------    --------    ---------    ---------    ---------    ---------   --------
Balance at December 31, 2003,
  as adjusted                         8,355      786,885      87,900       23,323     (152,623)     (36,209)    (434,442)   283,189

Net income                             -            -        194,980         -            -            -            -       194,980

Distribution of shares of
  Kronos Worldwide, Inc.
  common stock                         -            -         (6,340)        -            -            -            -        (6,340)

Income tax on distribution             -            -         (1,901)        -            -            -            -        (1,901)

Other comprehensive income
  (loss), net                          -            -           -             195       (1,120)        -            -          (925)

Issuance of common stock                 4           503        -            -            -            -            -           507

Acquisition of 10,374,000
  shares of CompX International
  Inc. common stock                    -        (102,963)    (65,615)        -            -            -            -      (168,578)

Treasury stock:
   Reissued                            -            -           -            -            -            -           8,354      8,354
   Retired                          (2,307)     (214,757)   (209,024)        -            -            -         426,088       -
                                    ------      --------    --------    ---------    ---------    ---------    ---------   --------

Balance at September 30, 2004       $6,052      $469,668    $   -       $  23,518    $(153,743)   $ (36,209)   $    -      $309,286
                                    ======      ========    ========    =========    =========    =========    =========   ========
</TABLE>


          See accompanying notes to consolidated financial statements.



                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Nine months ended September 30, 2003 and 2004

                                 (In thousands)


<TABLE>

                                                                     2003            2004
                                                                     ----            ----

 Cash flows from operating activities:
<S>                                                               <C>              <C>
   Net income                                                     $ 55,150         $194,980
   Depreciation and amortization                                    40,248           32,724
   Deferred income taxes                                              (590)        (287,609)
   Minority interest                                                   325          140,619
   Net (gains) losses from securities transactions                  (2,398)              58
   Disposition of property and equipment                            (8,260)               2
   Other, net                                                       (4,735)           1,547
   Equity in Kronos Worldwide, Inc.                                      -           (5,005)
   Distributions from Kronos Worldwide, Inc.                             -            6,095
   Distributions from TiO2 manufacturing joint venture, net          2,175            8,300
   Change in assets and liabilities:
     Accounts and other receivables                                (32,683)         (50,507)
     Insurance receivable                                            2,505                -
     Inventories                                                    25,045           51,113
     Prepaid expenses                                                 (340)           1,309
     Accrued environmental costs                                    28,193           (6,660)
     Accounts payable and accrued liabilities                      (29,172)         (34,338)
     Income taxes                                                    4,367           33,655
     Other, net                                                      2,003           (3,391)
                                                                  ---------       ---------

         Net cash provided by operating activities                   81,833          82,892
                                                                  ---------       ---------

 Cash flows from investing activities:
   Capital expenditures                                             (31,733)        (13,602)
   Collection of loans to affiliates                                  2,000           2,000
   Change in restricted cash equivalents and restricted
     marketable debt securities, net                                  1,053           5,995
   Proceeds from disposition of property and equipment               10,638           2,218
   Other, net                                                           695            -
                                                                  ---------       ---------

         Net cash used in investing activities                      (17,347)         (3,389)
                                                                  ---------       ---------

 Cash flows from financing activities:
   Indebtedness:
     Borrowings                                                      17,106         102,221
     Principal payments                                             (47,874)       (128,081)
     Deferred financing costs paid                                     (416)            (28)
   Cash dividends paid                                              (28,625)           -
   Distributions to minority interest                                  (592)        (12,036)
   Proceeds from issuance of stock:
     NL common stock                                                    701           8,793
     CompX common stock                                                -                499
   Capital transactions with affiliates                              (1,207)           -
   Other, net                                                           (14)           -
                                                                  ---------       ---------

         Net cash used in financing activities                      (60,921)        (28,632)
                                                                  ---------       ---------
</TABLE>






                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Nine months ended September 30, 2003 and 2004

                                 (In thousands)

<TABLE>

                                                                     2003            2004
                                                                     ----            ----

 Cash and cash equivalents - net change from:
<S>                                                               <C>             <C>
   Operating, investing and financing activities                  $   3,565       $  50,871
   Currency translation                                               3,351            (420)
   Kronos cash balance at June 30, 2004                                -            (88,434)
 Cash and cash equivalents at beginning of period                    70,498          89,525
                                                                  ---------       ---------

 Cash and cash equivalents at end of period                       $  77,414       $  51,542
                                                                  =========       =========


 Supplemental disclosures:

   Cash paid (received) for:
     Interest, net of amounts capitalized                          $ 16,203       $  17,062
     Income taxes, net                                              (10,224)        (17,807)

     Net assets of Kronos Worldwide, Inc.
       deconsolidated as of July 1, 2004:
         Cash and cash equivalents                                                $  88,434
         Accounts and other receivables                                             200,845
         Inventories                                                                209,816
         Other current assets                                                         9,344
         Investment in TiO2 manufacturing joint venture                             120,711
         Net property and equipment                                                 413,171
         Other assets                                                               209,105
         Current liabilities                                                       (156,701)
         Long-term debt                                                            (346,682)
         Note payable to affiliates                                                (200,000)
         Accrued pension costs                                                      (66,227)
         Accrued postretirement benefits costs                                      (10,677)
         Deferred income taxes                                                      (50,730)
         Other liabilities                                                          (13,408)
         Minority interest                                                         (201,842)
                                                                                  ---------

       Net assets                                                                 $ 205,159
                                                                                  =========

</TABLE>




          See accompanying notes to consolidated financial statements.


                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and basis of presentation:

     At  September  30,  2004,  NL  Industries,  Inc.  (NYSE:  NL)  conducts its
component   products   operations   through  its  68%  owned   subsidiary  CompX
International,  Inc.  (NYSE:  CIX).  NL  also  held  approximately  49%  of  the
outstanding common stock of Kronos Worldwide,  Inc. (NYSE: KRO) at September 30,
2004. At September 30, 2004,  (i) Valhi and a  wholly-owned  subsidiary of Valhi
held   approximately  83%  of  NL's  outstanding   common  stock,  (ii)  Contran
Corporation and its subsidiaries held  approximately 90% of Valhi's  outstanding
common  stock,  (iii)  Valhi  and a  wholly-owned  subsidiary  of Valhi  held an
additional  45% of Kronos'  outstanding  common stock and (iv)  Titanium  Metals
Corporation ("TIMET") (NYSE:TIE),  an affiliate of Valhi, held an additional 15%
of CompX'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.  Mr.
Simmons,  the Chairman of the Board of Valhi,  Contran and the  Company,  may be
deemed to control each of such companies.

     On September 24, 2004, the Company  completed the acquisition of 10,374,000
shares of CompX common stock, representing  approximately 68% of the outstanding
shares of CompX common stock.  The CompX common stock was  purchased  from Valhi
and Valcor,  a wholly-owned  subsidiary of Valhi,  at a purchase price of $16.25
per share, or an aggregate of approximately  $168.6 million.  The purchase price
was paid by NL's  transfer  to Valhi and  Valcor of $168.6  million of NL's $200
million long-term note receivable from Kronos. The acquisition was approved by a
special committee of NL's board of directors comprised of directors who were not
affiliated with Valhi, and such special  committee  retained their own financial
advisors  who  rendered an opinion to the special  committee  that the  purchase
price was fair,  from a financial  point of view,  to NL. NL's  acquisition  was
accounted  for under  accounting  principles  generally  accepted  in the United
States of America  ("GAAP") as a transfer  of net assets  among  entities  under
common control,  and accordingly  resulted in a change in reporting entity.  The
Company has  retroactively  restated its  consolidated  financial  statements to
reflect the consolidation of CompX for all periods presented.  Any excess of the
aggregate  $168.6  million  principal  amount  of NL's  note  receivable  Kronos
transferred  to Valhi and  Valcor  over the net  carrying  vlue of  Valhi's  and
Valcor's   investment  in  CompX  is  accounted  for  as  a  reduction  of  NL's
consolidated stockholders' equity.

     In March  2004,  the  Company  paid its $.20 per  share  regular  quarterly
dividend  in the form of shares of Kronos  common  stock in which  approximately
345,000  shares  (approximately  .7% of Kronos'  outstanding  common stock) were
distributed to NL stockholders in the form of a pro-rata  dividend.  The Company
paid its next  regular  quarterly  dividend  of $.20 per share in July 2004,  in
which  approximately   322,000  Kronos  shares  (approximately  .7%  of  Kronos'
outstanding  common  stock) were  distributed,  and the Company paid its regular
third  quarter   dividend  of  $.20  per  share  in  September   2004  in  which
approximately  299,000 Kronos shares  (approximately .6% of Kronos'  outstanding
common  stock)  were  distributed.  The  effect of the  second  and  third  2004
quarterly  distributions  were recognized by the Company in the third quarter of
2004.  The  Company's  distribution  of such  shares of Kronos  common  stock is
taxable to the Company,  and the Company is required to recognize a taxable gain
equal to the  difference  between the fair market  value of the shares of Kronos
distributed on the date of distribution and the Company's  adjusted tax basis in
such shares at the date of  distribution.  Pursuant to the Company's tax sharing
agreement  with  Valhi,  the  Company  is not  required  to pay taxes on the tax
liability  generated  for the  shares  of  Kronos  distributed  to Valhi and its
wholly-owned  subsidiary.  The Company is required to recognize a tax  liability
with respect to the Kronos  shares  distributed  to NL  stockholders  other than
Valhi and its wholly-owned subsidiary,  and such tax liability was approximately
$1.9  million  in the  aggregate  for  the  three  dividends  paid in  2004.  In
accordance  with  GAAP,  the  net  carrying  value  of  such  shares  of  Kronos
distributed ($6.3 million in the aggregate at the respective distribution dates)
and the $1.9 million aggregate tax liability have been recognized as a reduction
of the Company's stockholders' equity and charged directly to retained earnings.

     Following the Company's  July 2004 dividend in the form of shares of Kronos
common stock distributed to NL shareholders,  the Company's  ownership of Kronos
was reduced to less than 50%.  Consequently,  effective July 1, 2004 the Company
ceased to consolidate Kronos' financial position, results of operations and cash
flows and the Company  commenced  accounting  for its  interest in Kronos by the
equity  method.  The  Company  continues  to  report  Kronos  as a  consolidated
subsidiary through June 30, 2004, including the consolidation of Kronos' results
of operations and cash flows for the first two quarters of 2004.

     The  consolidated  balance  sheet  of NL at  December  31,  2003  has  been
condensed from the Company's audited  consolidated  financial statements at that
date, as adjusted for the effect of the CompX  acquisition  discussed above. The
consolidated   balance  sheet  at  September  30,  2004,  and  the  consolidated
statements of income,  comprehensive income, stockholders' equity and cash flows
for the interim periods ended September 30, 2003 and 2004, have been prepared by
the  Company,  without  audit,  in  accordance  with  GAAP.  In the  opinion  of
management,  all adjustments,  consisting only of normal recurring  adjustments,
necessary to present  fairly the  consolidated  financial  position,  results of
operations and cash flows have been made.

     The  results of  operations  for the interim  periods  are not  necessarily
indicative  of the  operating  results for a full year or of future  operations.
Certain  information  normally  included  in  financial  statements  prepared in
accordance  with GAAP has been  condensed  or omitted,  and  certain  prior year
amounts have been reclassified to conform to the current year presentation.  The
accompanying  consolidated  financial  statements  should be read in conjunction
with the Company's  Annual  Report on Form 10-K for the year ended  December 31,
2003 (the "2003 Annual  Report") and the Annual Report on Form 10-K of CompX for
the year ended December 31, 2003 (the "CompX Annual Report").

     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. See Note 18.

     As  disclosed  in  the  2003  Annual  Report,   the  Company  accounts  for
stock-based employee compensation in accordance with Accounting Principles Board
Opinion  ("APBO") No. 25,  "Accounting  for Stock Issued to Employees,"  and its
various  interpretations.  Under APBO No. 25, no compensation  cost is generally
recognized  for fixed stock options in which the exercise  price is greater than
or equal to the market  price on the grant  date.  Prior to 2003,  NL  commenced
accounting  for its stock options using the variable  accounting  method of APBO
No. 25, which  requires the  intrinsic  value of all  unexercised  stock options
(including  stock  options  with an exercise  price at least equal to the market
price on the  date of  grant)  to be  accrued  as an  expense,  with  subsequent
increases   (decreases)  in  NL's  market  price  resulting  in  recognition  of
additional  compensation expense (income). Net compensation income recognized by
the Company and its consolidated subsidiaries in accordance with APBO No. 25 was
approximately  $400,000  in each of the third  quarter  and first nine months of
2003 and net  compensation  cost recognized by the Company was $100,000 and $1.2
million in the third quarter and first nine months of 2004, respectively.

     The following  table presents what the Company's  consolidated  net income,
and related per share  amounts,  would have been in the third  quarter and first
nine months of 2003 and 2004 if the Company and its  subsidiaries and affiliates
had  each  elected  to  account  for  their  respective   stock-based   employee
compensation  related to stock options in accordance  with the fair  value-based
recognition  provisions of Statement of Financial  Accounting Standards ("SFAS")
No. 123,  "Accounting  for  Stock-Based  Compensation,"  for all awards  granted
subsequent to January 1, 1995.
<TABLE>

                                                          Three months ended               Nine months ended
                                                             September 30,                    September 30,
                                                         --------------------            ---------------------
                                                           2003         2004               2003          2004
                                                           ----         ----               ----          ----
                                                               (In millions, except per share amounts)

<S>                                                        <C>          <C>                <C>          <C>
Net income as reported                                     $16.3        $ 8.5              $55.2        $195.0

Adjustments,  net of applicable  income tax effects and
   minority   interest,    of   stock-based    employee
   compensation determined under:
    APBO No. 25                                              (.3)          .4                (.3)           .8
    SFAS No. 123                                             (.3)         (.1)              (1.0)          (.4)
                                                           -----        -----              -----        ------

Pro forma net income                                       $15.7        $ 8.8              $53.9        $195.4
                                                           =====        =====              =====        ======

Basic and diluted net income per share:
  As reported                                              $ .34        $ .18              $1.15        $ 4.03
  Pro forma                                                $ .33        $ .18              $1.13        $ 4.04
</TABLE>

Note 2 - Business segment information
                                                        % owned at
  Business segment             Entity               September 30, 2004
--------------------   ------------------------  ------------------------

  Chemicals             Kronos Worldwide, Inc.              49%
  Component products    CompX International Inc.            68%

     As  discussed  in Note 1, on  September  24,  2004,  the Company  purchased
10,374,000 shares of CompX common stock,  representing  approximately 68% of the
outstanding  shares  of  CompX  common  stock,  from  Valhi  and a  wholly-owned
subsidiary  of Valhi.  Because  Valhi,  NL and CompX are all entities  under the
common  control of Contran,  the  Company's  acquisition  of the shares of CompX
common  stock  results  in a change in  reporting  entity  and the  Company  has
retroactively  restated its  consolidated  financial  statements  to reflect the
consolidation of CompX for all periods presented.

     As a result of the  restatement  of the  Company's  consolidated  financial
statements to reflect the  consolidation  of CompX's results of operations,  the
Company has, for certain periods presented,  more than one operating segment (as
that  term is  defined  in SFAS  No.  131,  "Disclosures  about  Segments  of an
Enterprise and Related Information").  Accordingly, the following information is
presented to comply with the disclosure  requirements of SFAS No. 131, including
disclosures  with respect to each year in the  three-year  period ended December
31, 2003.

     The Company is organized based on its operating subsidiaries. The Company's
operating  segments are defined as  components  of our  consolidated  operations
about which  separate  financial  information  is  available  that is  regularly
evaluated by the chief  operating  decision maker in determining how to allocate
resources and in assessing  performance.  The Company's chief operating decision
maker is Mr. Harold C. Simmons.  Each operating  segment is separately  managed,
and each  operating  segment  represents  a  strategic  business  unit  offering
different products.

     The Company's  reportable operating segments are comprised of the component
products business conducted by CompX and, for all periods through June 30, 2004,
the chemicals  business  conducted by Kronos.  As discussed in Note 1, effective
July 1, 2004, the Company ceased to consolidate Kronos and commenced  accounting
for its interest in Kronos by the equity method.

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

     Kronos  manufactures and sells titanium dioxide pigments ("TiO2").  TiO2 is
used to impart whiteness,  brightness and opacity to a wide variety of products,
including paints,  plastics,  paper, fibers and ceramics.  Kronos has production
facilities  located in North  America  and  Europe.  Kronos also owns a one-half
interest in a TiO2 production facility located in Louisiana.

     The  Company  evaluates  segment  performance  based on  segment  operating
income.  Segment  profit is  defined as income  before  income  taxes,  minority
interest,  extraordinary items, interest expense, certain nonrecurring items and
certain general  corporate  items.  Corporate items excluded from segment profit
include corporate expense,  interest and dividend income not attributable to the
component products business and the chemicals  business,  litigation  settlement
gains,  securities  transaction gains and losses and losses from the disposal of
long-lived  assets  outside the  ordinary  course of  business.  The  accounting
policies of the respective  business segments are the same as those described in
the Company's  Consolidated  Financial  Statements in the Company's  2003 Annual
Report.

     Interest  income  included  in the  calculation  of  segment  profit is not
material.  Amortization  of  deferred  financing  costs is  included in interest
expense.  There  are  no  intersegment  sales  or any  significant  intersegment
transactions.

     Segment assets are comprised of all assets  attributable  to each reporting
operating  segment.  The Company's  investment in the TiO2  manufacturing  joint
venture is included in the chemicals  business segment assets.  Corporate assets
are not  attributable to any operating  segment and consist  principally of cash
and cash equivalents,  restricted cash  equivalents,  marketable debt and equity
securities  and loans to  affiliates.  Substantially  all  corporate  assets are
attributable to NL.

     For  geographic  information,  net  sales  are  attributed  to the place of
manufacture  (point  of  origin)  and the  location  of the  customer  (point of
destination);  property and equipment are attributed to their physical location.
At  December  31,  2003,  the net assets of  non-U.S.  subsidiaries  included in
consolidated net assets approximated $240 million (2002 - $203 million).



<TABLE>

                                                          Three months ended               Nine months ended
                                                             September 30,                    September 30,
                                                         --------------------            ---------------------
                                                           2003         2004               2003          2004
                                                           ----         ----               ----          ----
                                                                             (In millions)
 Net sales:
<S>                                                      <C>          <C>                <C>           <C>
   Chemicals                                             $ 242.9      $    -             $ 762.5       $ 559.1
   Component products                                       52.6         56.0              153.3         165.8
                                                         -------      -------            -------       -------

     Total net sales                                     $ 295.5      $  56.0            $ 915.8       $ 724.9

 Segment profit (loss):
   Chemicals                                             $  35.4      $  -               $ 105.2       $  66.4
   Component products                                        (.4)         5.8                1.8          14.7
                                                         -------      -------            -------       -------

     Total segment profit                                   35.0          5.8              107.0          81.1

 General corporate items:
   Interest and dividend income                               .8          4.9                2.6           6.5
   Securities transaction gains, net                         (.1)          -                 2.4           (.1)
   Gain on disposal of fixed assets                          7.2           -                 8.3            -
   Legal settlement gains, net                                -            -                  .7            .5
   Noncompete agreement income                                -            -                  .3            -
   Other income                                               .2           .1                 .3            .1
   General corporate expenses, net                          (9.7)        (3.7)             (48.2)        (15.0)
   Interest expense                                         (8.6)         (.1)             (25.7)        (18.2)
                                                         -------      -------            -------       -------

                                                            24.8          7.0               47.7          54.9
 Equity in Kronos                                            -            5.0                 -            5.0
                                                         -------      -------            -------       -------

     Income before income taxes and minority interest    $  24.8      $  12.0            $  47.7       $  59.9
                                                         =======      =======            =======       =======

</TABLE>


<TABLE>

                                                                    Years ended December 31,
                                                          ------------------------------------------
                                                             2001             2002             2003
                                                             ----             ----             ----
                                                                          (In millions)
 Net sales:
<S>                                                       <C>              <C>              <C>
   Chemicals                                              $  835.1         $  875.2         $1,008.2
   Component products                                        211.4            196.1            207.5
                                                          --------         --------         --------

     Total net sales                                      $1,046.5         $1,071.3         $1,215.7
                                                          ========         ========         ========

 Segment profit:
   Chemicals                                              $  169.2         $   96.5         $  137.4
   Component products                                         15.6              5.3              3.6
                                                          --------         --------         --------

     Total segment profit                                    184.8            101.8            141.0

 General corporate items:
   Interest and dividend income                                9.4              5.8              3.4
   Legal settlement gains, net                                11.7              5.2               .8
   Noncompete agreement income                                 4.0              4.0               .3
   Securities transactions, net                               (1.1)             (.1)             2.4
   Gain on disposal of fixed assets                            -                -               10.3
   Insurance recoveries, net                                  17.5              -                -
   Foreign currency transaction gain                           -                6.3              -
   General corporate expenses, net                           (25.9)           (37.9)           (57.4)
 Interest expense                                            (30.4)           (31.6)           (34.3)
                                                          --------         --------         --------

     Income before income taxes and
        minority interest                                 $  170.0         $   53.5         $   66.5
                                                          ========         ========         ========
</TABLE>




<TABLE>

                                                                    Years ended December 31,
                                                          ------------------------------------------
                                                             2001             2002             2003
                                                             ----             ----             ----
                                                                         (In millions)

 Net sales - point of origin:
<S>                                                       <C>              <C>              <C>
   United States                                          $  367.2         $  378.5         $  404.9
   Germany                                                   398.5            404.3            510.1
   Belgium                                                   126.8            123.8            150.7
   Norway                                                    102.8            111.8            131.5
   Netherlands                                                33.3             31.3             35.3
   Other Europe                                               82.3             89.6            110.4
   Canada                                                    231.4            229.2            249.6
   Taiwan                                                     11.7             14.7             13.4
   Eliminations                                             (307.5)          (311.9)          (390.2)
                                                          --------         --------         --------

                                                          $1,046.5         $1,071.3         $1,215.7
                                                          ========         ========         ========

 Net sales - point of destination:
   United States                                          $  388.8         $  398.1         $  423.6
   Europe                                                    462.4            489.9            605.0
   Canada                                                     82.5             83.0             85.5
   Asia and other                                            112.8            100.3            101.6
                                                          --------         --------         --------

                                                          $1,046.5         $1,071.3         $1,215.7
                                                          ========         ========         ========

</TABLE>


<TABLE>

                                                                    Years ended December 31,
                                                          ------------------------------------------
                                                             2001             2002             2003
                                                             ----             ----             ----
                                                                         (In millions)
 Depreciation and amortization:
<S>                                                       <C>              <C>              <C>
   Chemicals                                              $   28.9         $   32.2         $   39.4
   Component products                                         14.9             13.0             14.8
   Corporate                                                    .7              1.0               .7
                                                          --------         --------         --------

                                                          $   44.5         $   46.2         $   54.9
                                                          ========         ========         ========

 Capital expenditures:
   Chemicals                                              $   53.7         $   32.6         $   35.3
   Component products                                         13.3             12.7              8.9
   Corporate                                                    -                 -               .1
                                                          --------         --------         --------

                                                          $   67.0         $   45.3         $   44.3
                                                          ========         ========         ========

</TABLE>

<TABLE>

                                                                          December 31,
                                                          ------------------------------------------
                                                             2001             2002             2003
                                                             ----             ----             ----
                                                                         (In millions)
 Total assets:
   Operating segments:
<S>                                                       <C>              <C>              <C>
     Chemicals                                            $  910.1         $  988.5         $1,121.9
     Component products                                      225.9            203.1            212.4
   Corporate and eliminations                                241.0            123.0            142.2
                                                          --------         --------         --------

                                                          $1,377.0         $1,314.6         $1,476.5
                                                          ========         ========         ========

 Net property and equipment:
   United States                                          $   55.9         $   52.6         $   48.2
   Germany                                                   182.4            213.2            252.4
   Canada                                                     78.1             77.8             87.0
   Norway                                                     38.5             49.7             50.8
   Belgium                                                    46.8             54.6             64.9
   Netherlands                                                 7.3             10.0              9.6
   Taiwan                                                      5.4              5.9              5.7
   Other                                                        .4               .2               .3
                                                          --------         --------         --------

                                                          $  414.8         $  464.0         $  518.9
                                                          ========         ========         ========
</TABLE>

     Component  products  segment profit,  as presented  above,  may differ from
amounts separately  reported by CompX because the Company defines segment profit
differently than CompX.

Note 3 - Accounts and other receivables:
<TABLE>

                                                                  December 31,       September 30,
                                                                      2003               2004
                                                                  ------------       -------------
                                                                            (In thousands)

<S>                                                                <C>                 <C>
 Trade receivables                                                 $173,783            $ 29,149
 Recoverable VAT and other receivables                               12,768                 625
 Allowance for doubtful accounts                                     (3,994)               (968)
                                                                   --------            --------


                                                                   $182,557            $ 28,806
                                                                   ========            ========
</TABLE>



Note 4 - Inventories:
<TABLE>

                                                                  December 31,       September 30,
                                                                      2003               2004
                                                                  ------------       -------------
                                                                            (In thousands)

 Raw materials:
<S>                                                                <C>                 <C>
   Chemicals                                                       $ 61,959            $   -
   Component products                                                 6,170               7,180
                                                                   --------            --------
                                                                     68,129               7,180
                                                                   --------            --------
 In process products:
   Chemicals                                                         19,855                -
   Component products                                                10,852              10,757
                                                                   --------            --------
                                                                     30,707              10,757
                                                                   --------            --------
 Finished products:
   Chemicals                                                        147,270                -
   Component products                                                 9,166               8,578
                                                                   --------            --------
                                                                    156,436               8,578
                                                                   --------            --------

 Supplies                                                            37,065                  79
                                                                   --------            --------

                                                                   $292,337            $ 26,594
                                                                   ========            ========
</TABLE>

Note 5 - Marketable equity securities:

<TABLE>

                                                                  December 31,       September 30,
                                                                      2003               2004
                                                                  ------------       -------------
                                                                            (In thousands)

<S>                                                                <C>                 <C>
 Valhi common stock                                                $ 70,450            $ 70,779
 Other                                                                   37                  98
                                                                   --------            --------

                                                                   $ 70,487            $ 70,877
                                                                   ========            ========
</TABLE>

     At September 30, 2004, the Company owned  approximately  4.7 million shares
of Valhi common stock with a quoted  market price of $15.03 per share  (December
31, 2003 quoted market price - $14.96 per share).  The  aggregate  cost basis of
such Valhi shares is approximately $34.6 million.

Note 6 - Investment in Kronos Worldwide, Inc.:

     At September 30, 2004,  the Company held 24.1 million shares of Kronos with
a quoted market price of $39.70 per share, or an aggregate  market value of $956
million.

     At September  30, 2004,  Kronos  reported  total assets of $1.3 billion and
stockholders'  equity of $412.5  million.  Kronos' total assets at September 30,
2004 include  current  assets of $541 million,  property and equipment of $419.6
million  and an  investment  in a TiO2  manufacturing  joint  venture  of $119.9
million.  Kronos'  total  liabilities  at  September  30, 2004  include  current
liabilities of $184.4 million,  long-term debt of $350.4  million,  accrued OPEB
and pension costs  aggregating  $76.4  million,  deferred  income taxes of $51.8
million and long-term notes payable to NL, Valhi and Valcor  aggregating  $200.0
million, including $31.4 million payable to NL. See Note 16.

     During  the third  quarter  of 2004,  Kronos  reported  net sales of $286.1
million,  income  from  operations  of $28.9  million  and net  income  of $10.0
million. Kronos' results of operations for the first six months of 2004, and for
the third  quarter and first nine months of 2003,  are included in the Company's
consolidated results of operations.



Note 7 - Other noncurrent assets:
<TABLE>

                                                                  December 31,       September 30,
                                                                      2003               2004
                                                                  ------------       -------------
                                                                           (In thousands)

<S>                                                                <C>                 <C>
 Deferred financing costs, net                                     $ 10,417            $     47
 Unrecognized net pension obligations                                13,747                   -
 Intangible asset, net                                                3,804               3,341
 Other                                                                2,050                 638
                                                                   --------            --------

                                                                   $ 30,018            $  4,026
                                                                   ========            ========
</TABLE>

Note 8 - Accrued liabilities:

<TABLE>

                                                                  December 31,       September 30,
                                                                      2003               2004
                                                                  ------------       -------------
                                                                           (In thousands)

<S>                                                                <C>                  <C>
 Employee benefits                                                 $ 46,028             $13,768
 Interest                                                               206                  49
 Restructuring                                                        3,223                  -
 Other                                                               47,082               9,514
                                                                   --------            --------

                                                                   $ 96,539            $ 23,331
                                                                   ========            ========
</TABLE>

     In 2003, CompX recorded a $3.3 million charge related to the  restructuring
its Thomas  Regout  operations.  The charge  represents  severance to be paid to
approximately  100  terminated  employees.  At September  30, 2004 all severance
benefits had been paid by the Company.

Note 9 - Long-term debt:
<TABLE>

                                                                  December 31,       September 30,
                                                                      2003               2004
                                                                  ------------       -------------
                                                                          (In thousands)

 Kronos International, Inc. and subsidiaries:
<S>                                                                <C>                 <C>
   Senior Secured Notes                                            $356,136            $   -
   Other                                                                603                -
                                                                   --------            --------

                                                                    356,739                -
                                                                   --------            --------
 CompX International Inc. and subsidiaries:
   Revolving bank credit facility                                    26,000                -
   Capital lease obligations                                           -                    129
                                                                   --------            --------

                                                                     26,000                 129
                                                                   --------            --------

                                                                    382,739                 129
 Less current maturities                                                288                  38
                                                                   --------            --------

                                                                   $382,451            $     91
                                                                   ========            ========
</TABLE>

     During the first quarter of 2004, certain of Kronos  International,  Inc.'s
("KII")  operating  subsidiaries  in Europe  borrowed a net Euro 26 million ($32
million  when  borrowed)  under the  European  revolving  credit  facility at an
interest rate of 3.8%. Such amounts were repaid in the second quarter of 2004.

Note 10 - Other noncurrent liabilities:
<TABLE>

                                                                  December 31,       September 30,
                                                                      2003               2004
                                                                  ------------       -------------
                                                                           (In thousands)

<S>                                                                <C>                 <C>
 Employee benefits                                                 $  4,849            $   -
 Insurance                                                            4,331               2,679
 Other                                                               10,294               3,034
                                                                   --------            --------

                                                                   $ 19,474            $  5,713
                                                                   ========            ========
</TABLE>


Note 11 - Minority interest:
<TABLE>

                                                                  December 31,       September 30,
                                                                      2003               2004
                                                                  ------------       -------------
                                                                           (In thousands)

 Minority interest in net assets:
<S>                                                                <C>                 <C>
   Kronos Worldwide, Inc.                                          $ 77,763            $   -
   CompX International Inc.                                          48,424              51,566
   Other subsidiaries                                                 9,028               9,077
                                                                   --------            --------

                                                                   $135,215            $ 60,643
                                                                   ========            ========

</TABLE>


<TABLE>

                                                          Three months ended               Nine months ended
                                                             September 30,                    September 30,
                                                         --------------------            ---------------------
                                                           2003         2004               2003          2004
                                                           ----         ----               ----          ----
                                                                           (In thousands)

 Minority interest in net earnings:
<S>                                                      <C>          <C>                <C>           <C>
   Kronos Worldwide, Inc.                                $   -        $   -              $   -         $137,271
   CompX International Inc.                                 (123)       1,229                149          2,754
   Other subsidiaries                                         18           37                176            594
                                                         -------      -------            -------       --------

                                                         $  (105)     $ 1,266            $   325       $140,619
                                                         =======      =======            =======       ========
</TABLE>

     As  discussed  in Note 1,  effective  July 1, 2004,  the Company  ceased to
consolidate  Kronos and commenced  accounting  for its interest in Kronos by the
equity  method.  Accordingly,  commencing  July 1, 2004,  the Company  ceased to
report minority interest in Kronos' net assets and net earnings.

Note 12 - Treasury stock

     During the third quarter of 2004, the Company cancelled  approximately 18.5
million  shares of its common stock that  previously  had been held in treasury.
The  aggregate  $426.1  million cost of such  treasury  shares was  allocated to
common stock at par value,  additional paid in capital and retained  earnings in
accordance  with  GAAP.  Such  cancellation  had no  impact on the net NL shares
outstanding for financial reporting purposes.


Note 13 - Other income:
<TABLE>

                                                              Nine months ended
                                                                 September 30,
                                                          ------------------------
                                                           2003              2004
                                                           ----              ----
                                                               (In thousands)

<S>                                                      <C>               <C>
 Contract dispute settlement                             $  -              $ 6,289
 Other                                                      332                757
                                                         ------            -------

                                                         $  332            $ 7,046
                                                         ======            =======
</TABLE>

     The  contract  dispute  settlement  relates  to Kronos'  settlement  with a
customer.  As part of the  settlement,  the customer  agreed to make payments to
Kronos through 2007 aggregating  $7.3 million.  The $6.3 million gain recognized
represents  the present value of the future  payments to be paid by the customer
to Kronos.  Of such $7.3 million,  $1.5 million was paid to Kronos in the second
quarter of 2004,  $1.75 million is due in each of the second quarter of 2005 and
2006 and $2.25  million is due in the second  quarter of 2007.  At September 30,
2004,  the  present  value of the  remaining  amounts  due to be paid to  Kronos
aggregated  approximately  $5.0  million,  of which $1.7  million is included in
accounts receivable and $3.3 million is included in other noncurrent assets.

Note 14 - Income tax benefit:
<TABLE>

                                                              Nine months ended
                                                                 September 30,
                                                          ------------------------
                                                           2003              2004
                                                           ----              ----
                                                               (In millions)

<S>                                                      <C>               <C>
 Expected tax expense                                    $ 16.7            $  21.0
 Change in deferred income tax valuation                                    (285.4)
   allowance, net                                          (1.1)
 Tax contingency reserve adjustments, net                    -               (13.1)
 Refund of prior year income taxes                        (24.6)              (3.1)
 Incremental U.S. tax and rate differences on
  equity in earnings of non-tax group companies              .5                (.5)
 Non-U.S. tax rates                                          .1                (.1)
 U.S. state income taxes, net                                .4                 .3
 Nondeductible expenses                                     2.3                1.9
 Other, net                                                (2.1)               3.3
                                                         ------            -------

                                                         $ (7.8)           $(275.7)
                                                         ======            =======
</TABLE>

     Certain of the  Company's  and Kronos' U.S.  and  non-U.S.  tax returns are
being  examined  and tax  authorities  have  or may  propose  tax  deficiencies,
including penalties and interest. For example:

o    NL's and NL's  majority-owned  subsidiary's,  NL  Environmental  Management
     Services,  Inc.  ("EMS"),  1998 U.S.  federal  income tax returns are being
     examined  by  the  U.S.  tax  authorities,  and  NL and  EMS  have  granted
     extensions  of the  statute  of  limitations  for  assessments  of tax with
     respect to their 1998, 1999 and 2000 income tax returns until September 30,
     2005. During the course of the examination,  the IRS proposed a substantial
     tax deficiency, including interest, related to a restructuring transaction.
     In an effort to avoid  protracted  litigation  and  minimize the hazards of
     such  litigation,  NL applied to take part in an IRS settlement  initiative
     applicable to transactions similar to the restructuring transaction, and in
     April 2003 NL received  notification from the IRS that NL had been accepted
     into such settlement initiative.  Under the initiative,  a final settlement
     with  the IRS is to be  reached  through  expedited  negotiations  and,  if
     necessary,  through a specified  arbitration  procedure.  NL has reached an
     agreement with the IRS concerning the settlement of this matter pursuant to
     which,  among other things,  the Company  agreed to pay  approximately  $24
     million,  including  interest,  up  front  as  a  partial  payment  of  the
     settlement  amount  (which  amount  is  expected  to be paid in the next 12
     months and is classified as a current liability at September 30, 2004), and
     NL will be required to recognize  the  remaining  settlement  amount in its
     taxable  income  over the 15 year time  period  beginning  in 2004.  NL has
     signed the settlement  agreement that was prepared by the IRS. The IRS will
     sign  the  settlement   agreement  after  certain  procedural  matters  are
     concluded,  which procedural  matters both NL and its outside legal counsel
     believe are perfunctory.  NL had previously  provided accruals to cover its
     estimated  additional tax liability (and related interest)  concerning this
     matter.  As a result  of the  settlement,  NL has  decreased  its  previous
     estimate of the amount of  additional  income taxes and interest it will be
     required  to pay,  and NL  recognized  a $12.6  million  tax benefit in the
     second quarter of 2004 related to the revised estimate. In addition, during
     the second  quarter of 2004,  the Company  recognized  a $30.5  million tax
     benefit  related to the reversal of a deferred  income tax asset  valuation
     allowance  related to certain tax  attributes  of EMS which NL believes now
     meet the  "more-likely-than-not"  recognition  criteria.  A majority of the
     deferred income tax asset valuation allowance relates to net operating loss
     carryforwards  of EMS. As a result of the settlement  agreement,  NL (which
     previously was not allowed to utilize such net operating loss carryforwards
     of EMS) utilized such  carryforwards in its 2003 taxable year,  eliminating
     the need for a  valuation  allowance  related  to such  carryforwards.  The
     remainder of the deferred income tax asset valuation  allowance  relates to
     deductible  temporary  differences  associated  with accrued  environmental
     obligations  of EMS which NL now believes  meet the  "more-likely-than-not"
     recognition criteria since, as a result of the settlement  agreement,  such
     obligations and the related tax deductions will be included in NL's taxable
     income.
o    Kronos has received a preliminary  tax assessment  related to 1993 from the
     Belgian tax  authorities  proposing  tax  deficiencies,  including  related
     interest,  of  approximately  Euro 6 million ($7 million at  September  30,
     2004).  Kronos has filed a protest to this  assessment  and believes that a
     significant  portion of the  assessment is without  merit.  The Belgian tax
     authorities  have filed a lien on the fixed assets of Kronos'  Belgian TiO2
     operations  in  connection  with this  assessment.  In April  2003,  Kronos
     received a notification from the Belgian tax authorities of their intent to
     assess a tax  deficiency  related  to 1999  that,  including  interest,  is
     expected to be approximately Euro 13 million ($16 million). Kronos believes
     the proposed  assessment is  substantially  without  merit,  and Kronos has
     filed a written response.
o    The  Norwegian  tax  authorities  have  notified  Kronos of their intent to
     assess tax deficiencies of  approximately  kroner 12 million ($2 million at
     September 30, 2004) relating to the years 1998 to 2000. Kronos 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,  court  and  tax  proceedings.  The  Company  believes  that it has
provided  adequate  accruals for additional  taxes and related  interest expense
which may  ultimately  result from all such  examinations  and believes that the
ultimate  disposition of such  examinations  should not have a material  adverse
effect  on  its  consolidated  financial  position,  results  of  operations  or
liquidity.

     At December 31, 2003, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes,  all of which have no
expiration  date. These net operating loss  carryforwards  were generated by KII
principally  during  the 1990's  when KII had a  significantly  higher  level of
outstanding indebtedness than is currently outstanding.  For financial reporting
purposes,  however, the benefit of such net operating loss carryforwards had not
previously  been  recognized  because  Kronos  did  not  believe  they  met  the
"more-likely-than-not"  recognition  criteria,  and  accordingly  Kronos  had  a
deferred income tax asset valuation allowance offsetting the benefit of such net
operating loss  carryforwards  and Kronos' other tax attributes in Germany.  KII
had generated  taxable income in Germany for both German corporate and trade tax
purposes  since 2000,  and starting with the quarter ended December 31, 2002 and
for each quarter  thereafter,  KII had cumulative  taxable income in Germany for
the most recent twelve quarters.  However, offsetting this positive evidence was
the fact that prior to the end of 2003,  Kronos  believed there was  significant
uncertainty   regarding  its  ability  to  utilize  such  net   operating   loss
carryforwards  under German tax law and,  principally because of the uncertainty
caused by this  negative  evidence,  Kronos had concluded the benefit of the net
operating loss carryforwards did not meet the  "more-likely-than-not"  criteria.
By the end of 2003, and primarily as a result of a favorable German court ruling
in 2003 and the procedures  Kronos had completed during 2003 with respect to the
filing of certain  amended German tax returns (as discussed  below),  Kronos had
concluded that the significant uncertainty regarding its ability to utilize such
net  operating  loss  carryforwards  under  German tax law had been  eliminated.
However, at the end of 2003, Kronos believed at that time that it would generate
a taxable loss in Germany during 2004. Such expectation was based primarily upon
then  current  levels  of  prices  for  TiO2,  and  the  fact  that  Kronos  was
experiencing a downward trend in its TiO2 selling prices and Kronos did not have
any positive evidence to indicate that the downward trend would improve.  If the
price trend continued  downward  throughout all of 2004 (which was a possibility
given  Kronos'  prior  experience,  Kronos  would  likely have a taxable loss in
Germany for 2004. If the downward trend in prices had abated, ceased or reversed
at some point  during 2004,  then Kronos  would  likely have  taxable  income in
Germany  during 2004.  Accordingly,  Kronos  continued to conclude at the end of
2003 that the benefit of the German net  operating  loss  carryforwards  did not
meet the "more-likely-than-not" criteria and that it would not be appropriate to
reverse the deferred income tax asset valuation allowance,  given the likelihood
that  Kronos  would  generate  a  taxable  loss  in  Germany  during  2004.  The
expectation for a taxable loss in Germany continued through the end of the first
quarter of 2004. By the end of the second quarter of 2004, however, Kronos' TiO2
selling prices had started to increase,  and Kronos  believes its selling prices
will  continue to increase  during the second half of 2004 after  Kronos and its
major  competitors  announced an additional round of price  increases.  The fact
that Kronos'  selling  prices  started to increase  during the second quarter of
2004,  combined  with the fact that  Kronos and its  competitors  had  announced
additional price increases  (which based on past experience  indicated to Kronos
that some portion of the  additional  price  increases  would be realized in the
marketplace),  provided  additional  positive  evidence  that was not present at
December 31, 2003. Consequently, Kronos' revised projections now reflect taxable
income for Germany in 2004 as well as 2005.  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, Kronos believes
it will take several years to fully utilize the benefit of such  operating  loss
carryforwards.  However,  given the  number of years  for which  Kronos  has now
generated  positive  taxable income in Germany,  combined with the fact that the
net operating loss  carryforwards  were  generated  during a time when KII had a
significantly  higher level of outstanding,  and the fact that the net operating
loss  carryforwards have no expiration date, Kronos concluded it was appropriate
to reverse all of the  valuation  allowance  related to the net  operating  loss
carryforwards.  Accordingly, based on all available evidence, including the fact
that (i) Kronos had generated positive taxable income in Germany since 2000, and
starting  with  the  quarter  ended  December  31,  2002  and for  each  quarter
thereafter,  KII had  cumulative  taxable  income in Germany for the most recent
twelve  quarters,  (ii) Kronos was now  projecting  positive  taxable  income in
Germany for 2004 and 2005 and (iii) the German net operating loss  carryforwards
have no expiration date,  Kronos concluded that the benefit of the net operating
loss    carryforwards    and   other    German    tax    attributes    met   the
"more-likely-than-not"  recognition  criteria,  and Kronos reversed the deferred
income tax asset valuation allowance related to Germany.  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 operations loss carryforwards
to 60% of taxable  income  after the first  euro 1 million  of  taxable  income,
Kronos  believes it will take several years to fully utilize the benefit of such
operating  loss  carryforwards.  However,  given  the  number of years for which
Kronos has now generated  positive taxable income in Germany,  combined with the
fact that the net operating loss carryforwards were generated during a time when
KII  had a  significantly  higher  level  of  outstanding  indebtedness  than it
currently  has   outstanding,   and  the  fact  that  the  net  operating   loss
carryforwards  have no expiration  date,  Kronos concluded it was appropriate to
reverse  all of the  valuation  allowance  related  to the  net  operating  loss
carryforwards. Accordingly, in the first six months of 2004, Kronos recognized a
$254.3  million  income tax benefit  related to the  reversal  of such  deferred
income  tax  asset  valuation  allowance  attributable  to  Kronos'  income  tax
attributes in Germany  (principally  the net operating loss  carryforwards).  Of
such $254.3 million,  $8.7 million  relates  primarily to the utilization of the
German net operating loss carryforwards during the first six months of 2004, the
benefit of which had previously not met the  "more-likely-than-not"  recognition
criteria,  and $245.6 million  relates to the German  deferred  income tax asset
valuation  allowance  attributable  to the remaining  German net operating  loss
carryforwards and other tax attributes as of June 30, 2004, the benefit of which
Kronos has concluded now meet the  "more-likely-than-not"  recognition criteria.
At September 30, 2004, the net operating loss carryforwards for German corporate
and trade tax  purposes  aggregated  the  equivalent  of $602  million  and $244
million, respectively, all of which have no expiration date.


     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  for these net  refunds in its 2003  results of
operations.  During  the first six  months of 2004,  the  Company  recognized  a
benefit of Euro 2.5 million ($3.1  million)  related to additional  net interest
which has accrued on the  outstanding  refund  amounts.  Assessments and refunds
will be  processed  by year as the  respective  returns are  reviewed by the tax
authorities.  Certain interest components may also be refunded  separately.  The
German tax  authorities  have  reviewed and  accepted  the amended  returns with
respect to the 1990 through 1994 tax years. Through September 2004, KII's German
operating  subsidiary  had  received  net  refunds of Euro 27.2  million  ($33.6
million when  received).  KII believes it will receive the  remainder of the net
refunds of taxes and related  interest during the remainder of 2004. In addition
to the refunds for the 1990 to 1997 periods, the court ruling also resulted in a
refund of 1999  income  taxes and  interest  for  which KII  received  Euro 21.5
million ($24.6  million) in 2003, and the Company  recognized the benefit of the
refund in the second quarter of 2003.

     Effective  October 1, 2004, NL and TIMET each  contributed  their shares of
CompX common stock to newly-formed  CompX Group, Inc. in return for an 82.4% and
17.6% ownership  interest in CompX Group,  respectively,  and CompX Group became
the  owner of the 83% of CompX  that NL and TIMET  had  previously  owned in the
aggregate.  CompX Group  recorded the shares of CompX  received  from NL at NL's
predecessor carryover basis.  Effective with the formation of CompX Group, CompX
became a member of Contran's consolidated United States federal income tax group
(the "Contran Tax Group").  NL and Valhi were already members of the Contran Tax
Group.

Note 15 - Employee benefit plans:

     The components of net periodic  defined  benefit pension cost recognized by
the Company and its consolidated subsidiaries are presented in the table below.
<TABLE>

                                                          Three months ended               Nine months ended
                                                             September 30,                    September 30,
                                                         --------------------            ---------------------
                                                           2003         2004               2003          2004
                                                           ----         ----               ----          ----
                                                                            (In thousands)

<S>                                                       <C>         <C>                <C>           <C>
 Service cost benefits                                    $1,337      $  -               $ 3,970       $  3,128
 Interest cost on projected benefit obligations            4,560          760             13,511         10,780
 Expected return on plan assets                           (4,322)        (890)           (13,695)       (10,290)
 Amortization of prior service cost                           88          -                  263            281
 Amortization of net transition obligations                  187          (17)               542            273
 Recognized actuarial losses                                 444          220              1,339          2,148
                                                         -------      -------            -------       --------

                                                         $ 2,294      $    73            $ 5,930       $  6,320
                                                         =======      =======            =======       ========
</TABLE>

     The components of net periodic  postretirement benefits other than pensions
("OPEB") cost recognized by the Company and its  consolidated  subsidiaries  are
presented in the table below.
<TABLE>

                                                          Three months ended               Nine months ended
                                                             September 30,                    September 30,
                                                         --------------------            ---------------------
                                                           2003         2004               2003          2004
                                                           ----         ----               ----          ----
                                                                            (In thousands)

<S>                                                      <C>          <C>                <C>           <C>
 Service cost                                            $    39      $  -               $   112       $    113
 Interest cost                                               517          289              1,543          1,229
 Amortization of prior service credit                       (518)         (72)            (1,556)          (583)
 Recognized actuarial losses                                  47           32                141            173
                                                         -------      -------            -------       --------

                                                         $    85      $   249            $   240       $    932
                                                         =======      =======            =======       ========
</TABLE>


     The Medicare  Prescription Drug,  Improvement and Modernization Act of 2003
(the "Medicare 2003 Act") introduced a prescription  drug benefit under Medicare
(Medicare  Part D) as well as a federal  subsidy to sponsors  of retiree  health
care  benefit  plans  that  provide  a  benefit  that  is at  least  actuarially
equivalent  to Medicare  Part D. During the third  quarter of 2004,  the Company
determined that benefits provided by its plan are actuarially  equivalent to the
Medicare  Part D benefit and  therefore  the Company is eligible for the federal
subsidy provided for by the Medicare 2003 Act. The effect of such subsidy, which
is accounted  for  prospectively,  as permitted by and in  accordance  with FASB
Staff Position No. 106-2,  from the date actuarial  equivalence  was determined,
did  not  have a  material  impact  on the  accumulated  postretirement  benefit
obligation,  and will not have a material  impact on the net periodic  OPEB cost
going forward.

Note 16 - Accounts with affiliates:
<TABLE>

                                                                  December 31,       September 30,
                                                                      2003               2004
                                                                  ------------       -------------
                                                                           (In thousands)

 Current receivables from affiliates:
<S>                                                                <C>                 <C>
   TIMET                                                           $     50            $  -
   Kronos                                                                 -                 138
   Valhi - income taxes                                                 306                  65
   Other                                                                  5               -
                                                                   --------            --------

                                                                   $    361            $    203
                                                                   ========            ========

 Noncurrent receivables from affiliates:
   Loan to Contran family trust                                    $ 14,000            $ 12,000
   Note receivable from Kronos                                         -                 31,423
                                                                   --------            --------

                                                                   $ 14,000            $ 43,423
                                                                   ========            ========
 Current payables to affiliates:
   Louisiana Pigment Company                                       $  8,560            $  -
   Income taxes payable to Valhi                                     10,512               9,976
   Kronos                                                                 -                  37
   Other                                                                465                 122
                                                                   --------            --------

                                                                   $ 19,537            $ 10,135
                                                                   ========            ========
</TABLE>

     The note receivable from Kronos,  included in noncurrent  receivables  from
affiliates,  was eliminated in the Company's  consolidated  financial statements
prior to July 1, 2004. See Note 1.

     Capital  transactions with affiliates during the first nine months of 2003,
as reflected on the accompanying  Consolidated Statements of Cash Flows, relates
principally to CompX dividends paid to Valhi and Valcor.

Note 17 - Commitments and contingencies:

     Lead pigment  litigation.  The  Company's  former  operations  included the
manufacture of lead pigments for use in paint and lead-based paint.  Since 1987,
NL, other former manufacturers of lead pigments for use in paint, and lead-based
paint,  and  the  Lead  Industries   Association  (which  discontinued  business
operations in 2002) have been named as  defendants in various legal  proceedings
seeking  damages  for  personal   injury,   property  damage  and   governmental
expenditures  allegedly caused by the use of lead-based paints. Certain of these
actions  have been filed by or on behalf of states,  large U.S.  cities or their
public housing  authorities and school  districts,  and certain others have been
asserted as class  actions.  These  lawsuits  seek  recovery  under a variety of
theories,  including  public and private  nuisance,  negligent  product  design,
negligent   failure   to   warn,   strict   liability,   breach   of   warranty,
conspiracy/concert of action, aiding and abetting,  enterprise liability, market
share liability,  intentional tort, fraud and  misrepresentation,  violations of
state consumer protection statutes, supplier negligence and similar claims.

     The plaintiffs in these actions  generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns  associated
with the use of  lead-based  paints,  including  damages  for  personal  injury,
contribution  and/or  indemnification  for medical expenses,  medical monitoring
expenses  and costs for  educational  programs.  Several  former cases have been
dismissed or  withdrawn.  Most of the remaining  cases are in various  pre-trial
stages.  Some are on appeal  following  dismissal or summary judgment rulings in
favor of the defendants. In addition,  various other cases are pending (in which
the Company is not a defendant)  seeking recovery for injury allegedly caused by
lead pigment and  lead-based  paint.  Although the Company is not a defendant in
these cases,  the outcome of these cases may have an impact on additional  cases
being filed against the Company.

     NL believes  these actions are without  merit,  intends to continue to deny
all  allegations  of wrongdoing  and liability and to defend against all actions
vigorously.  NL has  neither  lost nor settled  any of these  cases.  NL has not
accrued  any  amounts  for  the  pending  lead  pigment  and  lead-based   paint
litigation.  Liability that may result,  if any, cannot reasonably be estimated.
There can be no assurance that NL will not incur future  liability in respect of
this pending litigation in view of the inherent  uncertainties involved in court
and jury rulings in pending and possible future cases.

     Environmental matters and litigation. The Company's operations are governed
by various federal, state, local and foreign environmental laws and regulations.
Certain of the Company's  businesses  are and have been engaged in the handling,
manufacture  or use of substances or compounds  that may be considered  toxic or
hazardous  within the meaning of  applicable  environmental  laws. As with other
companies engaged in similar businesses, certain past and current operations and
products of the  Company  have the  potential  to cause  environmental  or other
damage.  The Company has implemented and continues to implement various policies
and programs in an effort to minimize  these risks.  The Company's  policy is to
comply  with  environmental  laws and  regulations  at all of its  plants and to
continually  strive to improve  environmental  performance in  association  with
applicable industry initiatives. The Company believes that its operations are in
substantial compliance with applicable  requirements of environmental laws. 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's  production   facilities  operate  within  an  environmental
regulatory  framework in which  governmental  authorities  typically are granted
broad  discretionary  powers that allow them to issue  operating  permits  under
which the plants must  operate.  The Company  believes  all of its plants are in
substantial compliance with applicable environmental laws.

     Some of the Company's  current and former  facilities,  including  divested
primary and secondary lead smelters and former mining locations, are the subject
of civil litigation,  administrative proceedings or investigations arising under
federal and state  environmental  laws.  Additionally,  in connection  with past
disposal  practices,  the  Company  has been named as a  defendant,  potentially
responsible party ("PRP") or both,  pursuant to the Comprehensive  Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and  Reauthorization  Act ("CERCLA") and similar state laws in  approximately 60
governmental  and private actions  associated with waste disposal sites,  mining
locations, and facilities currently or previously owned, operated or used by the
Company or its subsidiaries, or their predecessors,  certain of which are on the
U.S. EPA's  Superfund  National  Priorities  List or similar state lists.  These
proceedings  seek cleanup costs,  damages for personal injury or property damage
and/or  damages for injury to natural  resources.  Certain of these  proceedings
involve claims for substantial amounts.  Although the Company may be jointly and
severally  liable  for such  costs,  in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.

     Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing  interpretations  of governmental
regulations,  the number of PRPs and the PRPs'  ability or  willingness  to fund
such  allocation of costs,  their financial  capabilities  and the allocation of
costs among PRPs,  the  solvency of other  PRPs,  the  multiplicity  of possible
solutions,  and the years of  investigatory,  remedial and  monitoring  activity
required.   In  addition,   the  imposition  of  more  stringent   standards  or
requirements  under  environmental  laws or  regulations,  new  developments  or
changes  respecting  site cleanup  costs or allocation of such costs among PRPs,
solvency of other PRPs,  the results of future  testing and analysis  undertaken
with respect to certain sites or a determination that the Company is potentially
responsible for the release of hazardous substances at other sites, could result
in  expenditures in excess of amounts  currently  estimated by the Company to be
required for such matters. In addition,  with respect to other PRPs and the fact
that the Company may be jointly and severally  liable for the total  remediation
cost at certain  sites,  the Company  could  ultimately be liable for amounts in
excess of its accruals due to, among other things,  reallocation  of costs among
PRPs or the  insolvency  of one or more  PRPs.  No  assurance  can be given that
actual costs will not exceed  accrued  amounts or the upper end of the range for
sites for which  estimates  have been made,  and no assurance  can be given that
costs  will not be  incurred  with  respect  to  sites  as to which no  estimate
presently  can be made.  Further,  there  can be no  assurance  that  additional
environmental matters will not arise in the future.

     A summary of the  activity in the  Company's  accrued  environmental  costs
during the first nine months of 2004 is presented in the table below. The amount
shown  in  the  table  below  for  payments   against  the   Company's   accrued
environmental  costs is net of a $1.5  million  recovery  of  remediation  costs
previously expended by NL that was paid to NL by other PRPs in the third quarter
of 2004 pursuant to an agreement entered into by NL and the other PRPs.



<TABLE>

                                                                Amount
                                                            --------------
                                                            (In thousands)

<S>                                                            <C>
 Balance at the beginning of the period                        $ 77,481
 Additions charged to expense                                     1,078
 Payments, net                                                   (7,738)
                                                               --------

 Balance at the end of the period                              $ 70,821
                                                               ========
 Amounts recognized in the balance sheet
    at September 30, 2004:
    Current liability                                          $ 17,283
    Noncurrent liability                                         53,538
                                                               --------

                                                               $ 70,821
                                                               ========
</TABLE>

     The  Company  records  liabilities  related  to  environmental  remediation
obligations  when  estimated  future  expenditures  are probable and  reasonably
estimable.  Such accruals are adjusted as further  information becomes available
or  circumstances  change.  Estimated  future  expenditures  are  generally  not
discounted to their present value.  Recoveries of  remediation  costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.

     On a quarterly  basis,  the Company  evaluates the  potential  range of its
liability  at sites  where it has been  named as a PRP or  defendant,  including
sites for which EMS has contractually assumed NL's obligation.  At September 30,
2004, the Company had accrued $71 million for those environmental  matters which
are reasonably  estimable.  The Company  believes it is not possible to estimate
the range of costs for certain  sites.  The upper end of the range of reasonably
possible  costs to the  Company  for sites for which  the  Company  believes  is
possible  to  estimate  costs  is  approximately  $101  million.  The  Company's
estimates of such liabilities have not been discounted to present value.

     The exact time frame over which the Company makes  payments with respect to
its accrued  environmental  costs is unknown and is dependent upon,  among other
things,  the timing of the actual  remediation  process which in part depends on
factors  outside the control of the  Company.  At each balance  sheet date,  the
Company makes an estimate of the amount of its accrued environmental costs which
will be paid out over the subsequent 12 months,  and the Company classifies such
amount as a current liability.  The remainder of the accrued environmental costs
is classified as a noncurrent liability.

     At  September  30,  2004,  there are  approximately  20 sites for which the
Company is unable to estimate a range of costs.  For these sites,  generally the
investigation is in the early stages,  and it is either unknown as to whether or
not the Company  actually had any  association  with the site, or if the Company
did have  association with the site, the nature of its  responsibility,  if any,
for the contamination at the site and the extent of contamination. The timing on
when  information  would become available to the Company to allow the Company to
estimate a range of loss is unknown and dependent on events  outside the control
of the Company,  such as when the party alleging liability provides  information
to the Company.

     At September  30,  2004,  the Company had $17 million in  restricted  cash,
restricted cash  equivalents  and restricted  marketable debt securities held by
special purpose trusts,  the assets of which can only be used to pay for certain
of the  Company's  future  environmental  remediation  and  other  environmental
expenditures  (December 31, 2003 - $24 million). Use of such restricted balances
does not affect the Company's net cash flows.

     Other  litigation.  The Company  has been named as a  defendant  in various
lawsuits in a variety of  jurisdictions,  alleging personal injuries as a result
of occupational  exposure  primarily to products  manufactured by formerly owned
operations containing asbestos,  silica and/or mixed dust.  Approximately 485 of
these types of cases involving a total of  approximately  25,500  plaintiffs and
their spouses  remain  pending.  Of these  plaintiffs,  approximately  9,200 are
represented by six cases pending in Mississippi  state court, and  approximately
5,500 are  represented  by four cases that have been removed to federal court in
Mississippi,  where they have been, or are in the process of being,  transferred
to the  multi-district  litigation  (MDL) pending in the United States  District
Court for the Eastern District of Pennsylvania.

     The  Company  has not  accrued  any  amounts  for this  litigation  because
liability  that  might  result to the  Company,  if any,  cannot  be  reasonably
estimated.  In addition,  from time to time,  the Company has  received  notices
regarding  asbestos or silica  claims  purporting to be brought  against  former
subsidiaries of the Company,  including  notices provided to insurers with which
the  Company  has  entered  into  settlements  extinguishing  certain  insurance
policies. These insurers may seek indemnification from the Company.

     In  addition  to the  litigation  described  above,  the  Company  and  its
subsidiaries  may be involved from time to time in various other  environmental,
contractual,   product  liability,  patent  (or  other  intellectual  property),
employment and other claims and disputes  incidental to their present and former
businesses. In certain cases, the Company has insurance coverage for such claims
and disputes.  The Company  currently  believes the  disposition of all of these
claims and disputes individually or in the aggregate, should not have a material
adverse effect on the Company's  consolidated  financial  condition,  results of
operations or liquidity.

Note 18 - Accounting principle newly adopted in 2004:

     The Company  complied with the  consolidation  requirements of 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 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.






ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------

RESULTS OF OPERATIONS:

Executive summary

     As  discussed  in  Note  1 to the  Consolidated  Financial  Statements,  on
September  24, 2004,  the Company  purchased  10,374,000  shares of CompX common
stock, representing  approximately 68% of the outstanding shares of CompX common
stock, from Valhi and a wholly-owned  subsidiary of Valhi. Because Valhi, NL and
CompX are all  entities  under the common  control  of  Contran,  the  Company's
acquisition of the shares of CompX common stock results in a change in reporting
entity and the Company has  retroactively  restated its  consolidated  financial
statements to reflect the consolidation of CompX for all periods presented.

     Also as  discussed  in  Note 1 to the  Consolidated  Financial  Statements,
following  the  Company's  July  2004  dividend  in the form of shares of Kronos
common stock distributed to NL shareholders,  the Company's  ownership of Kronos
was reduced to less than 50%.  Consequently,  effective July 1, 2004 the Company
ceased to consolidate Kronos' financial position, results of operations and cash
flows and the Company  commenced  accounting  for its  interest in Kronos by the
equity  method.  The  Company  continues  to  report  Kronos  as a  consolidated
subsidiary through June 30, 2004, including the consolidation of Kronos' results
of operations and cash flows for the first two quarters of 2004. As discussed in
Note 2 to the Consolidated  Financial  Statements,  the Company has, for certain
periods  presented,  more  than one  operating  segment  and  evaluates  segment
performance based on segment operating income, as defined therein.

     The Company reported net income of $8.5 million, or $.18 per diluted share,
in the third  quarter of 2004 compared to net income of $16.3  million,  or $.34
per diluted  share,  in the third quarter of 2003.  For the first nine months of
2004, the Company  reported net income of $195.0  million,  or $4.03 per diluted
share,  compared to net income of $55.2 million,  or $1.15 per diluted share, in
the first nine months of 2003.

     The  increase in the  Company's  diluted  earnings per share from the first
nine  months  of 2003 to the same  period  in 2004 is due  primarily  to the net
effects of (i)  significantly  higher tax benefit generated from the reversal of
Kronos' German deferred  income tax asset  valuation  allowance and tax benefits
related to EMS during the first six months of 2004,  (ii)  changes in  chemicals
operating  income due in part to lower  gross  margins at Kronos,  (iii)  higher
component  products  operating  income from  CompX,  (iv) income from a contract
dispute   settlement  with  a  Kronos  customer  and  (v)  lower   environmental
remediation  and legal  expenses of NL.  Overall,  the Company  believes its net
income in 2004 will be higher than 2003 as the impact of the reversal of Kronos'
and EMS' deferred  income tax asset  valuation  allowances  are expected to more
than offset the effect of Kronos'  expected  lower income from  operations.  Net
income in the first nine months of 2003  includes  certain  income tax  benefits
relating to Germany  aggregating $.52 per diluted share. Net income in the first
nine months of 2004 includes (a) certain income tax benefits  related to Germany
aggregating  $2.57 per diluted  share,  (b) reversal of the deferred  income tax
asset valuation allowance related to NL Environmental  Management Services, Inc.
("EMS") and  adjustment of estimated tax due upon IRS  settlement and (c) income
related to contract dispute settlement at Kronos of $.04 per diluted share, each
of which were  recognized  in the second  quarter of 2004.  These items are more
fully described below.


Forward-looking information

     As  provided  by the  safe  harbor  provisions  of the  Private  Securities
Litigation  Reform Act of 1995, the Company cautions that the statements in this
Quarterly  Report on Form 10-Q relating to matters that are not historical facts
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,"  "expects" 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 are the risks and  uncertainties  discussed in this
Quarterly  Report and those  described from time to time in the Company's  other
filings with the Securities and Exchange  Commission ("SEC") including,  but not
limited to, the following:

o    Future supply and demand for the Company's products,
o    The cyclicality of the Company's businesses,
o    Customer  inventory  levels (such as the extent to which Kronos'  customers
     may,  from  time to  time,  accelerate  purchases  of TiO2  in  advance  of
     anticipated  price  increases  or defer  purchases  of TiO2 in  advance  of
     anticipated price decreases),
o    Changes in raw material and other operating costs (such as energy and steel
     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    Demand for office furniture,
o    Competitive   products  and  substitute   products,   including   increased
     competition from low-cost manufacturing sources (such as China),
o    Customer and competitor strategies,
o    The impact of pricing and production decisions,
o    Competitive technology positions,
o    The introduction of trade barriers,
o    Service industry employment levels,
o    Fluctuations  in currency  exchange  rates (such as changes in the exchange
     rate between the U.S.  dollar and each of the euro,  the Norwegian  kroner,
     the New Taiwan dollar and the Canadian dollar),
o    Operating  interruptions  (including,  but not limited to, labor  disputes,
     leaks,   fires,   explosions,   unscheduled   or  unplanned   downtime  and
     transportation interruptions),
o    The ability of the Company to renew or refinance credit facilities,
o    The ability to implement head count  reductions in a cost effective  manner
     within the constraints on non-U.S. governmental regulations, and the timing
     and amount of any cost savings
o    The ultimate  outcome of income tax audits,  tax settlement  initiatives or
     other tax matters,
o    The introduction of trade barriers,
o    Potential difficulties in integrating completed or future acquisitions,
o    Decisions to sell  operating  assets  other than in the ordinary  course of
     business,
o    Uncertainties associated with new product development,
o    The ultimate ability to utilize income tax attributes, the benefit of which
     has been recognized under the "more-likely-than-not" recognition criteria,
o    Environmental  matters  (such as those  requiring  emission  and  discharge
     standards for existing and new facilities),
o    Government  laws and  regulations  and possible  changes  therein  (such as
     changes in government regulations which might impose various obligations on
     present and former  manufacturers  of lead  pigment and  lead-based  paint,
     including NL, with respect to asserted health concerns  associated with the
     use of such products),
o    The ultimate  resolution of pending  litigation  (such as NL's lead pigment
     litigation and litigation surrounding environmental matters) and
o    Possible future litigation.

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

Component products



<TABLE>

                                                      Three months ended                     Nine months ended
                                                        September 30,                          September 30,
                                               ----------------------------------   ----------------------------------
                                                 2003         2004      % Change      2003         2004      % Change
                                                 ----         ----      --------      ----         ----      --------
                                                          (In millions, except percentages and volumes)

<S>                                            <C>           <C>              <C>    <C>          <C>             <C>
          Net sales                            $ 52.6        $ 56.0          +7%     $153.3       $165.8         +8%
          Segment profit (loss)                   (.4)          5.8      +1,550%        1.8         14.7       +717%
</TABLE>


     Component  products  sales were higher in the third  quarter and first nine
months  of 2004 as  compared  to the  same  periods  in 2003  due in part to the
favorable   effect  of   fluctuations  in  foreign   currency   exchange  rates.
Fluctuations  in the  value  of the U.S.  dollar  relative  to other  currencies
increased  component products sales by $1.1 million in the third quarter of 2004
as compared to the third quarter of 2003, and increased sales by $4.5 million in
the first nine months of the year.  Component  products sales  comparisons  were
also impacted by higher sales volumes of security  products and precision  slide
products and the effect of price increases for certain products.

     During the third  quarter of 2004,  sales of slide,  security  products and
ergonomic  products  increased 11%, 2% and 8%  respectively,  as compared to the
third quarter of 2003 (year-to-date increases for slide and security products of
15% and 3%,  respectively,  with no  significant  change  in sales of  ergonomic
products on a  year-to-date  basis).  The  percentage  changes in both slide and
ergonomic products include the impact resulting from changes in foreign currency
exchange  rates.  Sales of security  products are generally  denominated in U.S.
dollars.

     Component  products segment profit  comparisons were favorably  impacted by
the effect of certain cost  reduction  initiatives  undertaken in 2002 and 2003,
including retooling of CompX's facility in Michigan,  consolidating  CompX's two
Canadian  facilities into one facility and restructuring  CompX's  operations in
the Netherlands.  In addition,  operating income comparisons were also favorably
impacted by relative  changes in product  mix of  security  products,  the price
increases for certain products and expenses of approximately  $900,000  incurred
during  the first  nine  months of 2003  (mostly  in the first half of the year)
associated  with  the  consolidation  of the two  Canadian  facilities  into one
facility.  In  addition,  the  component  products  operating  loss in the third
quarter of 2003 includes a $3.5 million restructuring charge associated with the
implementation   of  certain   headcount   reductions  at  CompX's   Netherlands
operations.

     CompX has  substantial  operations  and assets  located  outside the United
States in Canada,  the  Netherlands  and  Taiwan.  A portion  of  CompX's  sales
generated from its non-U.S.  operations are denominated in currencies other than
the U.S. dollar,  principally the Canadian  dollar,  the euro and the New Taiwan
dollar.  In addition,  a portion of CompX's  sales  generated  from its non-U.S.
operations  (principally in Canada) are denominated in the U.S. dollar. Most raw
materials,  labor and other  production  costs for such non-U.S.  operations are
denominated  primarily in local  currencies.  Consequently,  the translated U.S.
dollar  values of CompX's  foreign  sales and  operating  results are subject to
currency  exchange rate fluctuations  which may favorably or unfavorably  impact
reported  earnings and may affect  comparability of  period-to-period  operating
results.  During  the third  quarter  and first  nine  months of 2004,  currency
exchange  rate  fluctuations   positively   impacted  component  products  sales
comparisons with the same period in 2003.  Currency  exchange rate  fluctuations
negatively  impacted  component products segment profit comparisons for the same
periods.

     While demand has improved across most of CompX's product segments,  certain
customers  are  seeking  lower cost Asian  sources  as  alternatives  to CompX's
products.  Although CompX believes the impact of this will be mitigated  through
its  ongoing   initiatives   to  expand  both  new   products   and  new  market
opportunities,  the recent  increase  in its order rates may be  moderated  to a
certain extent in the near term. Asian-sourced competitive pricing pressures are
expected  to continue to be a  challenge  as those  manufacturers,  particularly
those  located  in  China,  gain  market  share.  CompX  has  responded  to  the
competitive pricing pressure in part by reducing production cost through product
reengineering or improvement in manufacturing  processes,  moving  production to
lower-cost  facilities and providing  value-added customer support services that
foreign  manufacturers  are  generally  unable to provide.  The  combination  of
CompX's cost  control  initiatives  together  with its  value-added  approach to
development  and  marketing of products are believed to help mitigate the impact
of competitive pricing pressures.

     Additionally,  CompX's cost for steel continues to rise dramatically due to
the continued high demand and shortages worldwide. While CompX has thus far been
able to pass a majority  of its higher raw  material  costs on to its  customers
through price increases and  surcharges,  there is no assurance that it would be
able to continue to pass along any additional higher costs to its customers. The
price  increases and  surcharges  may  accelerate the efforts of some of CompX's
customers to find less expensive products from foreign manufacturers. CompX will
continue to focus on cost improvement initiatives,  utilizing lean manufacturing
techniques and prudent balance sheet  management in order to minimize the impact
of lower sales,  particularly to the office furniture  industry,  and to develop
value-added  customer  relationships  with additional  focus on sales of CompX's
higher-margin ergonomic computer support systems to improve operating results.

     CompX expects the operating  results of its  operations in the  Netherlands
will continue to improve, CompX is evaluating the overall strategic role of such
operations for CompX as a whole,  and  additional  actions could be taken in the
future,  including  the  possible  sale of some or all of such  operations,  and
additional actions could be taken in the future that could result in significant
charges  for asset  impairment,  including  goodwill,  and other costs in future
periods.  These  actions,  along  with  other  activities  to  eliminate  excess
capacity,  are  designed to  position  CompX to more  effectively  expand on new
product and new market opportunities to improve CompX's profitability.

Chemicals - Kronos

     Relative  changes in Kronos' TiO2 sales and income from  operations  during
the third  quarter and the first nine months of 2003 and 2004 are  primarily due
to (i) relative changes in average TiO2 selling prices, (ii) relative changes in
TiO2 sales  volumes  and (iii)  relative  changes in foreign  currency  exchange
rates.  Selling prices were  generally:  increasing  during the first quarter of
2003,  flat during the second quarter of 2003,  decreasing  during the third and
fourth  quarters of 2003 and the first  quarter of 2004,  flat during the second
quarter of 2004 and increasing during the third quarter of 2004.

     Effective July 1, 2004 the Company ceased to consolidate  Kronos' financial
position,  results  of  operations  and cash  flows  and the  Company  commenced
accounting  for its  interest  in  Kronos  by the  equity  method.  The  Company
continues to report Kronos as a consolidated  subsidiary  through June 30, 2004,
including the  consolidation of Kronos' results of operations and cash flows for
the first two quarters of 2004.  The  following  table shows  information  about
Kronos' sales and segment  profit for the 2003 and 2004  periods,  including the
third quarter of 2004 for which the Company did not consolidate  Kronos' results
of operations.
<TABLE>

                                               Three months ended               Nine months ended       Six months
                                                  September 30,                   September 30,            ended
                                         -----------------------------   -----------------------------    June 30,
                                          2003      2004     % Change     2003      2004      % Change      2004
                                          ----      ----     --------     ----      ----      --------      ----
                                                      (In millions, except percentages)

<S>                                      <C>      <C>           <C>      <C>       <C>           <C>      <C>
Net sales                                $242.9   $ 286.1       +18%     $762.5    $845.1        +11%     $ 559.1
Segment profit                             35.4      29.8       -16%      105.2      96.2         -9%        66.4


TiO2 data:

  Percent change in average TiO2
       selling prices:
         Using actual foreign
           currency exchange rates                               +3%                              +2%
         Impact of changes in
           foreign currency
           exchange rates                                        -4%                              -5%
                                                                ----                             ----

         In billing currencies                                   -1%                              -3%
                                                                ====                             ====

</TABLE>


     Kronos'  sales  increased  $43.2 million (18%) in the third quarter of 2004
compared to the third quarter of 2003 and  increased  $82.6 million (11%) in the
first nine months of 2004  compared to the same period in 2003, as the favorable
effect of fluctuations in foreign currency exchange rates, which increased sales
by  approximately  $11 million  and $46  million,  respectively,  (as more fully
discussed  below) and  increased  sales  volumes  more than offset the impact of
lower average TiO2 selling  prices.  Excluding the effect of fluctuations in the
value of the U.S. dollar  relative to other  currencies,  the Company's  average
TiO2 selling prices in billing  currencies were 1% lower in the third quarter of
2004 as  compared  to the third  quarter  of 2003 and 3% lower in the first nine
months of 2004 as  compared to the first nine  months of 2003.  When  translated
from billing currencies into U.S. dollars using actual foreign currency exchange
rates  prevailing  during the respective  periods,  Kronos' average TiO2 selling
prices in the third  quarter  of 2004 were 3% higher  than the third  quarter of
2003 and 2% higher for the first nine months of 2004  compared to the first nine
months of 2003.  Kronos' TiO2 sales  volumes in the third quarter and first nine
months of 2004 increased 16% and 9%, respectively,  compared to the same periods
of 2003, as higher volumes in Europe,  the United States and export markets more
than offset lower  volumes in Canada.  Kronos'  TiO2 sales  volumes in the first
nine months of 2004 were a new record for Kronos.

     Kronos' sales are  denominated  in various  currencies,  including the U.S.
dollar,  the euro, other major European  currencies and the Canadian dollar. The
disclosure of the  percentage  change in Kronos'  average TiO2 selling prices in
billing  currencies  (which excludes the effects of fluctuations in the value of
the U.S.  dollar  relative  to other  currencies)  is  considered  a  "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos'  average TiO2 selling  prices  using actual  foreign  currency
exchange rates prevailing  during the respective  periods is considered the most
directly  comparable  financial measure presented in accordance with GAAP ("GAAP
measure").  Kronos  discloses  percentage  changes in its average TiO2 prices in
billing  currencies  because Kronos  believes such  disclosure  provides  useful
information  to  investors  to allow them to analyze  such  changes  without the
impact of changes in  foreign  currency  exchange  rates,  thereby  facilitating
period-to-period  comparisons of the relative  changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens  or weakens  against  other  currencies,  the  percentage  change in
average  selling  prices  in  billing   currencies  will  be  higher  or  lower,
respectively,  than such percentage changes would be using actual exchange rates
prevailing during the respective  periods.  The difference between the 3% and 2%
increase in Kronos'  average TiO2 selling  prices  during the third  quarter and
first nine months of 2004, respectively, as compared to the same periods in 2003
using actual foreign currency  exchange rates  prevailing  during the respective
periods (the GAAP  measure) and the 1% and 3% decreases in Kronos'  average TiO2
selling  price in billing  currencies  (the non-GAAP  measure)  during the third
quarter  and first  nine  months  is due to the  effect of  changes  in  foreign
currency  exchange  rates.  The above table presents in a tabular format (i) the
percentage  change in Kronos'  average TiO2 selling  prices using actual foreign
currency  exchange  rates  prevailing  during the  respective  periods (the GAAP
measure),  (ii) the percentage  change in Kronos' average TiO2 selling prices in
billing currencies (the non-GAAP measure) and (iii) the percentage change due to
changes in foreign currency  exchange rates (or the reconciling item between the
non-GAAP measure and the GAAP measure).

     Kronos' cost of sales increased $42.0 million (24%) in the third quarter of
2004 compared to the third quarter of 2003, and increased $85.6 million (15%) in
the  year-to-date  period  largely  due to the  increased  sales and  production
volumes and the effects of translating  foreign currencies  (primarily the euro)
into U.S.  dollars.  As a result of the lower  average  TiO2  selling  prices in
billing  currencies,  Kronos'  cost  of  sales,  as a  percentage  of net  sales
increased from 73% and 74% in each of the third quarter and first nine months of
2003, respectively, to 77% in each of the third quarter and first nine months of
2004.  Kronos' TiO2 production volumes in the third quarter of 2004 increased 5%
compared to the third quarter of 2003, and increased 3% in the first nine months
of 2004 as compared to the same period in 2003,  with operating  rates near full
capacity in those  periods.  Kronos' TiO2  production  volumes in the first nine
months of 2004 were also a new record for Kronos.

     Kronos's gross margins for the third quarter of 2004 increased $1.2 million
(2%) from the  third  quarter  of 2003,  as the  higher  sales  volumes  and the
favorable  effect of relative  changes in foreign  currency  exchange rates more
than offset the effect of lower average selling prices.  However,  gross margins
decreased  $3.0  million  (2%) from the first nine months of 2003 as compared to
the first nine months of 2004, as the  unfavorable  effect of lower average TiO2
selling prices more than offset the favorable effect of higher sales volumes and
relative changes in foreign currency exchange rates.

     Kronos' selling, general and administrative expenses increased $6.1 million
(20%) and $15.9 million (18%), respectively, in the third quarter and first nine
months of 2004 as compared to the corresponding periods in 2003. These increases
are largely  attributable  to the higher sales  volumes as well as the impact of
translating foreign currencies (primarily the euro) into U.S. dollars.

     Kronos'  segment profit in the first nine months of 2004 also includes $6.3
million of income related to the settlement of a certain contract dispute with a
customer.  As part of the  settlement,  the customer  agreed to make payments to
Kronos through 2007 aggregating $7.3 million.  The $6.3 million  recognized gain
represents  the present value of the future  payments to be paid by the customer
to Kronos.  The dispute with the customer  concerned the customer's alleged past
failure to purchase the  required  amount of TiO2 from Kronos under the terms of
Kronos' contract with the customer. Under the settlement, the customer agreed to
pay an aggregate of $7.3 million to Kronos through 2007 to resolve such dispute.

     Kronos has  substantial  operations and assets  located  outside the United
States  (particularly  in Germany,  Belgium,  Norway and Canada).  A significant
amount of Kronos' sales  generated from its non-U.S.  operations are denominated
in  currencies  other than the U.S.  dollar,  primarily  the euro,  other  major
European  currencies and the Canadian dollar. In addition,  a portion of Kronos'
sales generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials,  primarily titanium-containing  feedstocks, are purchased
in U.S.  dollars,  while  labor  and  other  production  costs  are  denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos'  foreign  sales and operating  results are subject to currency  exchange
rate fluctuations  which may favorably or adversely impact reported earnings and
may affect the comparability of  period-to-period  operating  results.  Overall,
fluctuations  in the  value of the U.S.  dollar  relative  to other  currencies,
primarily the euro,  increased  TiO2 sales in the third quarter of 2004 by a net
amount of  approximately  $11  million  compared  to the same period in 2003 and
increased  TiO2  sales in the first  nine  months of 2004 by  approximately  $46
million  compared to the same period in 2003.  Fluctuations  in the value of the
U.S.  dollar relative to other  currencies  similarly  impacted  Kronos' foreign
currency-denominated  operating  expenses.  Kronos' operating costs that are not
denominated in the U.S. dollar,  when translated into U.S. dollars,  were higher
in the third quarter and first nine months of 2004 compared to the third quarter
and first nine months of 2003.  Overall,  currency  exchange  rate  fluctuations
resulted  in a net  increases  in Kronos'  segment  profit of  approximately  $7
million in the first nine months of 2004 as compared to the same period in 2003.
Currency  exchange rate  fluctuations  did not have a material effect on Kronos'
segment  profit in the third quarter of 2004 as compared to the third quarter of
2003.

     Reflecting  the impact of partial  implementation  of prior price  increase
announcements,  Kronos' average TiO2 selling prices in billing currencies in the
third quarter of 2004 were 3% higher than the second  quarter of 2004, the first
quarter with an upward trend in selling  prices since the third quarter of 2003.
In June 2004,  Kronos announced  additional price increases of 4 cents per pound
in the U.S., Canadian 6 cents per pound in Canada and Euro 120 per metric ton in
Europe,  all of which are targeted to be  implemented  in the fourth  quarter of
2004. In September 2004, Kronos announced  additional price increases of 3 cents
to 6 cents per pound in the U.S., Canadian 4 cents to Canadian 8 cents per pound
in Canada and Euro 110 per metric ton in Europe, all of which are in addition to
the  July/August  announced  increases  and are  targeted to be  implemented  in
January 2005. The Company is also targeting to achieve price increases in export
markets in the fourth quarter of the year. The extent to which all of such price
increases will be realized will depend on, among other things, economic factors.

     Kronos expects its TiO2 sales and production volumes in 2004 will be higher
than in 2003.  Kronos'  average TiO2 selling price,  which  declined  during the
second half of 2003 and first quarter of 2004, commenced to begin to rise during
the second quarter of 2004, and was higher by 3% in the third quarter of 2004 as
compared to the second quarter of 2004,  and should  continue to rise during the
remainder  of the year.  Nevertheless,  Kronos  expects its average TiO2 selling
prices,  in billing  currencies,  will be lower in calendar  2004 as compared to
2003 and  expects  its  gross  margin  in 2004 to be lower  than  2003.  Kronos'
expectations  as to the future  prospects  of Kronos and the TiO2  industry  are
based upon a number of factors beyond its 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 Kronos' expectations, Kronos' results of operations
could be unfavorably affected.

Equity in earnings of Kronos - third quarter 2004
<TABLE>

                                                           Three months ended
                                                             September 30,
                                                                  2004
                                                                  ----
                                                              (In millions)

 Kronos historical:
<S>                                                             <C>
   Net sales                                                    $ 286.1
                                                                =======

   Segment profit                                                  29.8
   Other general corporate, net                                     (.3)
   Interest expense                                               (13.3)
                                                                -------

                                                                   16.2
   Income tax expense                                               6.2
                                                                -------

     Net income                                                    10.0
                                                                =======

   Equity in Kronos Worldwide, Inc.                             $   5.0
                                                                =======
</TABLE>


     See the preceding  discussion  relating to Kronos'  segment  profit for the
third  quarter of 2004.  Kronos'  interest  expense in the third quarter of 2004
relates  principally  to Kronos  International,  Inc.'s Senior Secured Notes and
Kronos' $200 million of long-term notes payable to affiliates.



General corporate items
<TABLE>

                                                      Three months ended                     Nine months ended
                                                        September 30,                          September 30,
                                               ----------------------------------   ----------------------------------
                                                 2003         2004      Difference      2003         2004      Difference
                                                 ----         ----      ----------      ----         ----      ----------
                                                                      (In millions)

<S>                                             <C>         <C>          <C>          <C>         <C>         <C>
 Interest income on note receivable
    from Kronos                                 $   -        $   4.2      $   4.2     $    -       $   4.2      $   4.2
 Dividend income from Valhi                         .3            .3           -           .8           .8           -
 Other interest and dividend income                 .5            .4          (.1)        1.8          1.5          (.3)
 Other income                                       .2            .1          (.1)         .6           .1          (.5)
 Securities transactions, net                      (.1)           -            .1         2.4          (.1)        (2.5)
 Gain on disposal of fixed assets                  7.2            -          (7.2)        8.3           -          (8.3)
 Legal settlement gains                             -             -            -           .7           .5          (.2)
 General corporate expenses, net                  (9.7)         (3.7)         6.0       (48.2)       (15.0)        33.2
 Interest expense:
     Kronos                                       (8.3)           -           8.3       (24.7)       (17.8)         6.9
     CompX                                         (.3)          (.1)          .2        (1.0)         (.4)          .6
                                               -------       -------      -------     -------      -------      -------

                                               $ (10.2)      $   1.2      $  11.4     $ (59.3)     $ (26.2)     $  33.1
                                               =======       =======      =======     =======      =======      =======
</TABLE>

     Interest and dividend  income in the third quarter and first nine months of
2004 relates  primarily to interest  received on the  Company's  long-term  note
receivable  with Kronos ($4.2 million in the quarter and  year-to-date  period).
Prior to the  third  quarter  of 2004,  the  Company's  interest  income on such
long-term  note   receivable   from  Kronos  was  eliminated  in  the  Company's
consolidated financial statements.  Dividend income from the Company's ownership
of Valhi common stock totaled approximately  $800,000 for each of the nine month
periods ended  September 30, 2003 and 2004. The gain on disposal of fixed assets
relates primarily to the sale of certain real property of NL.

     Net general  corporate  expenses in the third quarter and first nine months
of 2004  were  lower  than  the same  periods  of 2003  due  primarily  to lower
environmental  remediation  and legal  expenses  of NL.  Net  general  corporate
expenses in 2004 are currently expected to continue to be lower than 2003 due to
lower expected  environmental  remediation expenses of NL. However,  obligations
for  environmental  remediation  are  difficult to assess and  estimate,  and no
assurance can be given that actual costs will not exceed accrued amounts or that
costs  will not be  incurred  with  respect  to sites for which no  estimate  of
liability  can  presently  be made.  See Note 17 to the  Consolidated  Financial
Statements.

     Kronos has a significant amount of outstanding  indebtedness denominated in
the euro,  including  KII's Euro 285 million Senior Secured Notes.  Accordingly,
the reported  amount of interest  expense  during 2003 and for the first half of
2004,  when Kronos' results of operations  were  consolidated  with those of the
Company,  varied  depending  on relative  changes in foreign  currency  exchange
rates.  Kronos'  interest  expense  in the  first  six  months of 2004 was $17.8
million and was $8.3  million and $24.7  million in the third  quarter and first
nine  months of 2003,  respectively.  The  decrease  in the  amount of  interest
expense  reported in the Company's  consolidated  financial  statements  was due
primarily  to  the  change  in  accounting  for  Kronos  to the  equity  method.
Consequently  Kronos' interest expense was not included in the Company's results
of operations beginning in the third quarter of 2004.

     Interest expense related to the Component  Products segment declined in the
interim  periods of 2004 compared to 2003 due primarily to lower average  levels
of outstanding  debt.  CompX expects  interest expense will continue to be lower
during the  remainder  of 2004 as  compared  to the last  quarter of 2003 due to
lower average levels of outstanding debt.

Provision for income taxes

     The principal  reasons for the difference  between the Company's  effective
income tax rate and the U.S. federal statutory income tax rates are explained in
Note 14 to the Consolidated Financial Statements.

     At September 30, 2004,  Kronos had the  equivalent of $602 million and $244
million,  respectively, of net operating loss carryforwards for German corporate
and trade tax  purposes,  all of which have no  expiration  date.  As more fully
described  in Note  14 to the  Consolidated  Financial  Statements,  Kronos  had
previously  provided a deferred  income tax asset  valuation  allowance  against
substantially all of these tax loss carryforwards and other deductible temporary
differences   in  Germany   because   Kronos  did  not  believe   they  met  the
"more-likely-than-not"  recognition  criteria.  During  the first six  months of
2004,  Kronos  reduced its  deferred  income tax asset  valuation  allowance  by
approximately $8.7 million, primarily as a result of utilization of these German
net operating loss  carryforwards,  the benefit of which had not previously been
recognized.  At June 30, 2004, after considering all available evidence,  Kronos
concluded  that  these  German  tax  loss  carryforwards  and  other  deductible
temporary  differences  met  the  "more-likely-than-not"  recognition  criteria.
Accordingly,  as of June 30, 2004,  Kronos reversed the remaining $245.6 million
valuation  allowance  related to such  items.  Because  the  benefit of such net
operating  loss  carryforwards  and other  deductible  temporary  differences in
Germany has now been recognized,  the Company's future effective income tax rate
will be higher than what it would have otherwise been,  although its future cash
income tax rate would not be affected.

     In  January  2004,  the  German  federal  government  enacted  new  tax law
amendments  that limit the annual  utilization of income tax loss  carryforwards
effective  January  1, 2004 to 60% of  taxable  income  after  the first  Euro 1
million of taxable income. The new law will have a significant effect on Kronos'
cash tax  payments  in  Germany  going  forward,  the  extent  of which  will be
dependent upon the level of taxable income earned in Germany.

     In October  2004,  the American  Jobs Creation Act of 2004 was enacted into
law.  The new law  contains  several  provisions  that could impact the Company.
These provisions  provide for, among other things, a special deduction from U.S.
taxable  income  equal to a  stipulated  percentage  of  qualified  income  from
domestic  activities (as defined) beginning in 2005, and a special 85% dividends
received  deduction  for certain  dividends  received  from  controlled  foreign
corporations,  which  deduction is subject to a number of  limitations.  Both of
these provisions are complex and subject to numerous  restrictions.  The Company
is still studying the new law, including the technical provisions related to the
two complex provisions noted above. The effect on the Company of the new law, if
any,  has not yet been  determined,  in part  because  the  Company  has not yet
determined  whether its operations  qualify for the special deduction or whether
it would benefit from the special dividends received deduction.

Minority interest

     The Company commenced recognizing minority interest in Kronos following the
Company's December 2003 distribution of a portion of the shares of Kronos common
stock  to the  Company's  shareholders,  and the  Company  ceased  to  recognize
minority  interest  in  Kronos,  effective  July  1,  2004.  See  Note 11 to the
Consolidated Financial Statements.

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

Recently adopted accounting principle

     See Note 18 to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES:

Consolidated cash flows

     The  Company's  consolidated  cash  flows  from  operating,  investing  and
financing  activities for the nine months ended  September 30, 2003 and 2004 are
presented below:


<TABLE>

                                                                Nine months ended
                                                                   September 30,
                                                             ------------------------
                                                              2003              2004
                                                              ----              ----
                                                                  (In millions)

 Net cash provided (used) by:
<S>                                                         <C>                <C>
   Operating activities                                     $ 81.8             $ 82.9
   Investing activities                                      (17.3)              (3.4)
   Financing activities                                      (60.9)             (28.6)
                                                            ------             ------

     Net cash provided by operating,
       investing and financing activities                   $  3.6             $ 50.9
                                                            ======             ======
</TABLE>

Summary

     The Company's  primary  source of liquidity on an ongoing basis is its cash
flows from  operating  activities,  which is generally  used to (i) fund capital
expenditures,  (ii) repay any  short-term  indebtedness  incurred  primarily for
working  capital  purposes  and  (iii)  provide  for the  payment  of  dividends
(including  dividends  paid to Valhi by its  subsidiaries).  In  addition,  from
time-to-time  the  Company  will  incur  indebtedness,  generally  to  (i)  fund
short-term working capital needs, (ii) refinance existing  indebtedness or (iii)
fund major capital  expenditures  or the acquisition of other assets outside the
ordinary  course of  business.  Also,  the Company will from  time-to-time  sell
assets  outside  the  ordinary  course of  business,  the  proceeds of which are
generally used to (i) repay existing indebtedness  (including indebtedness which
may have been  collateralized  by the assets  sold),  (ii) make  investments  in
marketable and other  securities,  (iii) fund major capital  expenditures or the
acquisition of other assets outside the ordinary  course of business or (iv) pay
dividends.

Operating Activities

     Cash flows from operating  activities increased from $81.8 million provided
by  operating  activities  in the first nine months of 2003 to $82.9  million of
cash  provided by operating  activities  in the first nine months of 2004.  This
$1.1  million  increase  was due  primarily to the net effects of (i) higher net
income of $139.8 million,  (ii) lower  depreciation and amortization  expense of
$7.5 million,  (iii) lower deferred income taxes of $287.0 million,  (iv) higher
minority  interest in earnings of $140.5 million,  (v) higher net  distributions
from the TiO2  manufacturing  joint  venture  of $8.3  million in the first nine
months of 2004 compared to a $2.2 million  distribution in the first nine months
of 2003, (vi) distributions from Kronos in the nine month period of 2004 of $6.1
million and equity in earnings of Kronos of $5.0 million  during the same period
as compared to nil in the 2003  period,  (vii) a higher  amount of net cash used
from relative changes in the Company's  inventories,  receivables,  payables and
accruals  of $34.3  million in the first nine  months of 2004 as compared to the
first nine  months of 2003 and (vii)  lower  cash paid for income  taxes of $7.6
million.  Relative  changes in accounts  receivable are affected by, among other
things,  the timing of sales and the  collection of the  resulting  receivables.
Relative changes in inventories and accounts payable and accrued liabilities are
affected by, among other  things,  the timing of raw material  purchases and the
payment  for such  purchases  and the  relative  difference  between  production
volumes and sales volumes.  Relative changes in accrued  environmental costs are
affected  by,  among  other  things,  the  period  in which  recognition  of the
environmental  accrual is  recognized  and the  period in which the  remediation
expenditure is actually made.

     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,  deferred  income  taxes and non-cash  interest  expense.
Non-cash  interest  expense  relates  principally  to  Kronos  and  consists  of
amortization of deferred financing costs.

     Certain other items included in the determination of net income may have an
impact on cash flows from operating activities,  but the impact of such items on
cash  flows from  operating  activities  will  differ  from their  impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates,  and equity in losses
of affiliates does not  necessarily  result in current cash outlays paid to such
affiliates.  The amount of periodic  defined  benefit  pension  plan expense and
periodic  OPEB  expense  depends  upon a number of  factors,  including  certain
actuarial assumptions,  and changes in such actuarial assumptions will result in
a change in the  reported  expense.  In  addition,  the amount of such  periodic
expense  generally  differs from the  outflows of cash  required to be currently
paid for such benefits.

     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.

     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.

     NL does not have complete access to the cash flows of its  subsidiaries and
affiliates, in part due to limitations contained in certain credit agreements as
well as the fact that certain of such  subsidiaries  and affiliates are not 100%
owned by NL. A detail of NL's consolidated cash flows from operating  activities
is presented in the table below.  Eliminations consist of intercompany dividends
(most of which are paid by Kronos to NL).
<TABLE>

                                                                Nine months ended
                                                                   September 30,
                                                             ------------------------
                                                              2003              2004
                                                              ----              ----
                                                                  (In millions)

Cash provided (used) by operating activities:
<S>                                                         <C>                <C>
  Kronos                                                    $ 83.4             $ 67.5
  CompX                                                       14.1               20.8
  NL Parent                                                  (13.3)               7.6
  Other                                                        4.6                (.6)
  Eliminations                                                (7.0)             (12.4)
                                                            ------             ------

                                                            $ 81.8             $ 82.9
                                                            ======             ======
</TABLE>


Investing and financing activities

     The Company's capital  expenditures were $31.7 million and $13.6 million in
the first nine  months of 2003 and 2004,  respectively,  the  majority  of which
relate to Kronos during the first six months of 2004.  Approximately  80% of the
Company's  consolidated  capital  expenditures  in the first nine months of 2004
relate to Kronos and 20% relate to CompX.

     In the first  quarter  of 2004 KII's  operating  subsidiaries  in  Germany,
Belgium and Norway  borrowed a net Euro 26 million ($32  million when  borrowed)
under the European  revolving  credit facility at an interest rate of 3.8%. Such
amounts were repaid in the second quarter of 2004.

     In each of the first two quarters of 2004,  Kronos paid a regular quarterly
cash dividend to its  stockholders of $.25 per share, of which $12.0 million was
paid to Kronos  shareholders other than NL and is reflected as a distribution to
minority interest on NL's Consolidated  Statements of Cash Flows.  Kronos' third
quarter 2004 dividend paid to NL was approximately $6.1 million and is reflected
as a distribution  from Kronos on the Company's  Consolidated  Statement of Cash
Flows.

Component Products - CompX

     CompX  believes that its cash on hand,  together with cash  generated  from
operations and borrowing  availability under its new bank credit facility,  will
be  sufficient  to meet CompX's  liquidity  needs for working  capital,  capital
expenditures and debt service  requirements for the foreseeable  future.  To the
extent that CompX's actual operating results or developments differ from CompX's
expectations, CompX's liquidity could be adversely affected. CompX suspended its
regular quarterly  dividend of $.125 per share in the second quarter of 2003. In
the fourth quarter of 2004, CompX resumed its regular quarterly  dividend at the
$.125 per share rate.

     Certain of the CompX's  sales  generated  by its  non-U.S.  operations  are
denominated in U.S. dollars.  CompX periodically uses currency forward contracts
to manage a portion of foreign exchange rate risk associated with receivables or
similar  exchange  rate risk  associated  with  future  sales  denominated  in a
currency other than the holder's functional currency. CompX has not entered into
these contracts for trading or speculative  purposes in the past, nor does CompX
currently  anticipate  entering into such  contracts for trading or  speculative
purposes  in the  future.  At each  balance  sheet  date,  any such  outstanding
currency  forward contract is  marked-to-market  with any resulting gain or loss
recognized in income currently as part of net currency  transactions.  To manage
such exchange rate risk, at September 30, 2004, CompX held a series of contracts
maturing through November 2004 to exchange an aggregate of U.S. $3.1 million for
an  equivalent  amount of Canadian  dollars at exchange  rates ranging from Cdn.
$1.29 to Cdn. $1.31 per U.S.  dollar.  At September 30, 2004 the actual exchange
rate was Cdn. $1.28 per U.S. dollar.

     CompX periodically evaluates its liquidity  requirements,  alternative uses
of  capital,  capital  needs and  available  resources  in view of,  among other
things,  its capital  expenditure  requirements,  dividend  policy and estimated
future operating cash flows. As a result of this process,  CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness,   issue  additional   securities,   modify  its  dividend  policy,
repurchase  shares of its common  stock or take a  combination  of such steps or
other steps to manage its liquidity and capital resources.  In the normal course
of business,  CompX may review  opportunities  for  acquisitions,  divestitures,
joint  ventures  or  other  business  combinations  in  the  component  products
industry.  In the event of any such  transaction,  CompX may consider  using its
then-available  cash,  issuing  additional  equity  securities or increasing the
indebtedness of CompX or its subsidiaries.

Chemicals - Kronos

     At September 30, 2004,  Kronos had cash,  cash  equivalents  and marketable
debt  securities  of  $122.0  million,  including  restricted  balances  of $3.5
million,  and Kronos had $144 million available for borrowing under its U.S. and
non-U.S. credit facilities.

     At September 30, 2004, Kronos' outstanding debt was comprised of (i) $350.2
million  related  to KII's  Senior  Secured  Notes  and (ii)  $348,000  of other
indebtedness.  In addition,  Kronos had a $200 million long-term note payable to
affiliates due in 2010,  including $31.4 million payable to NL. In October 2004,
Kronos prepaid $100 million (including interest) of such note receivable held by
Valhi.

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

     See Note 14 to the Consolidated Financial Statements for certain income tax
examinations  currently  underway with respect to certain of Kronos'  income tax
returns in various U.S. and non-U.S. jurisdictions.

     Kronos periodically evaluates its liquidity requirements,  alternative uses
of capital,  capital needs and availability of resources in view of, among other
things,  its  dividend  policy,   its  debt  service  and  capital   expenditure
requirements  and estimated  future  operating  cash flows.  As a result of this
process, Kronos has in the past and may in the future seek to reduce, refinance,
repurchase or restructure  indebtedness,  raise additional  capital,  repurchase
shares of its common stock,  modify its dividend policy,  restructure  ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital  resources.  In
the  normal  course  of  its  business,  Kronos  may  review  opportunities  for
acquisitions, divestitures, joint ventures or other business combinations in the
chemicals or other  industries,  as well as the acquisition of interests in, and
loans to, related  entities.  In the event of any such  transaction,  Kronos may
consider using its available cash,  issuing its equity  securities or increasing
its  indebtedness to the extent  permitted by the agreements  governing  Kronos'
existing debt.

     Kronos has  substantial  operations  located  outside the United States for
which the functional  currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and  liabilities  related to its non-U.S.  operations,
and therefore Kronos' and the Company's  consolidated net assets, will fluctuate
based upon changes in currency exchange rates.

     Provisions  contained in certain of Kronos' credit  agreements could result
in the acceleration of the applicable  indebtedness prior to its stated maturity
for reasons other than  defaults  from failing to comply with typical  financial
covenants. For example, certain credit agreements allow the lender to accelerate
the  maturity of the  indebtedness  upon a change of control (as defined) of the
borrower.   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  leases discussed
in the 2003 Annual Report,  neither NL nor any of its subsidiaries or affiliates
are parties to any off-balance sheet financing arrangements.

     In October 2004,  Kronos filed a registration  statement with the SEC for a
proposed  offering  of up to  8.25  million  shares  of its  common  stock.  The
registration statement has not yet been declared effective by the SEC. There can
be no assurance that the registration  statement will be declared effective,  or
if declared effective,  that the offering would be completed. The securities may
not be offered for sale or sold nor may offers to buy be  accepted  prior to the
time the registration statement becomes effective. If the offering is completed,
Kronos would use a portion of the net proceeds  from such  offering to repay the
remaining  balance of its long-term  note payable to affiliates  (including  the
$31.4  million owed to NL),  with the balance of the net proceeds  available for
Kronos' general corporate purposes, including possible acquisitions.

NL Industries

     At September  30, 2004,  NL (exclusive of CompX and Kronos) had (i) current
cash and cash equivalents  aggregating  $35.5 million,  (ii) current  restricted
cash  equivalents  of $7.4 million,  (iii) current  restricted  marketable  debt
securities  of $9.2  million  and (iv)  noncurrent  restricted  marketable  debt
securities of $5.6 million. Of such restricted balances, $17 million was held by
special purpose trusts,  the assets of which can only be used to pay for certain
of NL's future environmental  remediation and other environmental  expenditures.
NL also has a $31.4 million  long-term note  receivable from Kronos due in 2010.
As discussed above, Kronos has filed a registration statement with the SEC for a
proposed offering of up to 8.25 million shares of its common stock. Assuming the
offering is completed, Kronos has stated that it intends to use a portion of the
net  proceeds  from such  offering  to prepay  its  remaining  notes  payable to
affiliates, including the $31.4 million held by NL.

     See Note 14 to the Consolidated Financial Statements for certain income tax
examinations  currently  underway  with  respect to  certain of NL's  income tax
returns,  and see Note 17 to the Consolidated  Financial Statements and Part II,
Item 1,  "Legal  Proceedings"  with  respect to certain  legal  proceedings  and
environmental matters with respect to NL.

     In December 2003, NL completed the distribution of  approximately  48.8% of
Kronos' outstanding common stock to its shareholders under which NL shareholders
received  one share of  Kronos'  common  stock for every two shares of NL common
stock  held.  Approximately  23.9  million  shares of Kronos  common  stock were
distributed.  Immediately  prior to the  distribution of shares of Kronos common
stock, Kronos distributed a $200 million promissory note payable by Kronos to NL
(of which NL transferred  $168.6 million to Valhi and Valcor in connection  with
NL's  acquisition of the shares of CompX common stock  previously  held by Valhi
and Valcor,  as discussed in Note 1 to the Consolidated  Financial  Statements).
During the first nine months of 2004,  NL paid its three $.20 per share  regular
quarterly  dividend  in the form of shares of  Kronos  common  stock in which an
aggregate  of  approximately  966,000  shares,  or  approximately  2% of Kronos'
outstanding  common stock, were distributed to NL shareholders  (including Valhi
and an affiliate of Valhi) in the form of pro-rata  dividends.  Valhi and NL are
members of the Contran  Tax Group.  NL's  distribution  of such shares of Kronos
common  stock is taxable to NL, and NL is required to  recognize a taxable  gain
equal to the  difference  between the fair market  value of the shares of Kronos
common  stock  distributed  and NL's  adjusted  tax  basis in such  stock at the
applicable  date  of  distribution.   With  respect  to  the  shares  of  Kronos
distributed  to  Valhi  and  an  affiliate  of  Valhi  (806,000  shares  in  the
aggregate),  the terms of NL's tax sharing  agreement with Valhi,  as amended in
December 2003, do not require NL to pay up to Valhi the tax liability  generated
from the  distribution of such Kronos shares to Valhi and an affiliate of Valhi,
since the tax on that  portion of the gain is deferred at the Valhi level due to
Valhi and NL being members of the same tax group. NL was required to recognize a
tax liability with respect to the Kronos shares  distributed to NL  shareholders
other than Valhi and an affiliate of Valhi,  and such tax  liability  aggregated
approximately $1.9 million.

     Following  the second of such  quarterly  dividends  in 2004,  NL no longer
owned a majority of Kronos'  outstanding common stock, and accordingly NL ceased
to consolidate Kronos as of July 1, 2004.

     On  September  24,  2004,  NL completed  the  acquisition  the CompX shares
previously  held by Valhi and Valcor at a purchase price of $16.25 per share, or
an aggregate of  approximately  $168.6  million.  The purchase price was paid by
NL's  transfer  to Valhi  and  Valcor  of $168.6  million  of NL's $200  million
long-term note  receivable  from Kronos (which  long-term note was eliminated in
the preparation of the Company's consolidated financial statements).  See Note 1
to the  Consolidated  Financial  Statements.  NL's acquisition was accounted for
under GAAP as a transfer of net assets among entities under common control,  and
accordingly  resulted  in a change  in  reporting  entity  and the  Company  has
retroactively  restated its  consolidated  financial  statements  to reflect the
consolidation of CompX for all periods presented.

     NL periodically evaluates its liquidity  requirements,  alternative uses of
capital,  capital  needs and  availability  of resources in view of, among other
things,  its  dividend  policy,   its  debt  service  and  capital   expenditure
requirements  and estimated  future  operating  cash flows.  As a result of this
process,  NL has in the past and may in the future  seek to  reduce,  refinance,
repurchase or restructure  indebtedness,  raise additional  capital,  repurchase
shares of its common stock,  modify its dividend policy,  restructure  ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital  resources.  In
the normal course of its business, NL may review opportunities for acquisitions,
divestitures,  joint ventures or other business combinations in the chemicals or
other  industries,  as well as the  acquisition  of interests  in, and loans to,
related entities.  In the event of any such  transaction,  NL may consider using
its available cash, issuing its equity securities or increasing its indebtedness
to the extent permitted by the agreements governing NL's existing debt.

Non-GAAP financial measures

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

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

ITEM 4.  CONTROLS AND PROCEDURES

     The Company maintains a system of disclosure  controls and procedures.  The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the  Securities  Exchange  Act of 1934,  as amended  (the  "Act"),  is
recorded,  processed,  summarized and reported within the time periods specified
in the SEC's  rules and  forms.  Disclosure  controls  and  procedures  include,
without limitation,  controls and procedures designed to ensure that information
required to be  disclosed by the Company in the reports that it files or submits
to the SEC  under  the Act is  accumulated  and  communicated  to the  Company's
management,   including  its  principal  executive  officer  and  its  principal
financial officer, as appropriate to allow timely decisions to be made regarding
required  disclosure.  Each of 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  September  30,  2004.  Based  upon  their  evaluation,  these
executive  officers have  concluded that the Company's  disclosure  controls and
procedures are effective as of the date of such evaluation.

     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.

     There has been no change to the Company's system of internal  controls over
financial  reporting  during  the  quarter  ended  September  30,  2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.

     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  in the  Company's  Annual  Report on Form 10-K for the year
ended  December  31,  2004.  The  Company's  independent  auditors  will also be
required to annually  attest to 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 2003,  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 and 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, 2004 and
be in a position to conclude that the Company's  internal control over financial
reporting  is  effective  as  of  December  31,  2004,  because  the  applicable
requirements are complex and time consuming,  and because  currently  unforeseen
events or circumstances byond 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, 2004 or
whether  it will be  able  to  conclude  the  Company's  internal  control  over
financial reporting is effective as of December 31, 2004.



PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

     Reference is made to Note 17 to the Consolidated Financial Statements,  the
2003  Annual  Report and the  Company's  Quarterly  Reports on Form 10-Q for the
quarters  ended  March 31, 2004 and June 30,  2004 for  descriptions  of certain
previously reported legal proceedings.

     Thomas v. Lead Industries  Association,  et al. (Circuit Court,  Milwaukee,
Wisconsin, Case No. 99-CV-6411).  In September 2004, the Wisconsin Supreme Court
granted  plantiff's  petition  for  review of the  appellate  court's  June 2004
decision affirming the trial court's dismissal of all of the plaintiff's claims.

     Smith,  et al. v. Lead  Industries  Association,  et al. (Circuit Court for
Baltimore  City,  Maryland,  Case No.  24-C-99-004490).  In September  2004, the
Maryland  Court of  Appeals  granted  plaintiffs'  petition  for  review  of the
appellate court's dismissal of certain of the plaintiffs' claims.

     City of St. Louis v. Lead Industries Association,  et al. (Missouri Circuit
Court 22nd Judicial Circuit, St. Louis City, Cause No. 002-245,  Division 1). In
September 2004, the court amended the scheduling  order and reset the trial date
for January 2006.

     Spring Branch Independent  School District v. Lead Industries  Association,
et al. (District Court of Harris County,  Texas, No.  2000-31175).  The time for
plaintiff's  appeal  of  the  appellate  court's  June  2004  decision  granting
defendant's motion for summary judgment expired in August 2004.

     Jackson,  et al., v. Phillips  Building  Supply of Laurel,  et al. (Circuit
Court of Jones  County,  Mississippi,  Dkt.  Co.  2002-10-CV1).  In August 2004,
plaintiffs  voluntarily  agreed to sever one of the  plaintiffs,  and defendants
withdrew their motion to sever such plaintiff.

     The Quapaw Tribe of Oklahoma et al. v. ASARCO  Incorporated  et al. (United
States District Court,  Northern District of Oklahoma,  Case No. 03C-V846 H). In
September 2004, the court stayed the case pending an appeal by the tribe related
to sovereign immunity issues.

     In July 2004,  the U.S EPA and the Company  entered into an  administrative
order on  consent  to  perform a removal  action  with  respect to the site of a
formerly owned lead smelting facility in Collinsville, Illinois.

Item 6. Exhibits and Reports on Form 8-K

     (a)  Exhibits

          The Company has retained a signed original of any exhibit listed below
          that  contains  signatures,  and the  Company  will  provide  any such
          exhibit to the SEC or its staff upon  request.  The Company  will also
          furnish,  without charge,  a copy of its Code of Business  Conduct and
          Ethics,  its Audit  Committee  Charter  and its  Corporate  Governance
          Guidelines,  each as approved by the Company's  board of directors and
          each  of  which  are  also  available  at  the  Company's  website  at
          www.nl-ind.com,  upon request. Such requests should be directed to the
          attention  of the  Company's  corporate  secretary  at  the  Company's
          corporate  offices  located at 5430 LBJ Freeway,  Suite 1700,  Dallas,
          Texas 75240.

          10.1 - 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).

          10.2 - Stock  Purchase  Agreement  dated  September  24, 2004  between
               Valhi, Inc. and Valcor, Inc., as sellers, and NL Industries, Inc.
               as purchaser -  incorporated  by reference to Exhibit 10.1 to the
               Current Report on Form 8-K of the Registrant  dated September 24,
               2004.

          10.3 -  Promissory  Note  dated  September  24,  2004 in the  original
               principal  amount of  $31,422,500.00  payable  to the order of NL
               Industries,  Inc.  and  executed  by  Kronos  Worldwide,  Inc.  -
               incorporated  by reference to Exhibit 10.2 to the Current  Report
               on Form 8-K of the Registrant dated September 24, 2004.

          10.4 -  Promissory  Note  dated  September  24,  2004 in the  original
               principal  amount  of  $162,500,000.00  payable  to the  order of
               Valcor,   Inc.   and  executed  by  Kronos   Worldwide,   Inc.  -
               incorporated  by reference to Exhibit 99.1 to the Current  Report
               on Form 8-K of the Registrant dated September 24, 2004.

          10.5 -  Promissory  Note  dated  September  24,  2004 in the  original
               principal amount of $6,077,500.00  payable to the order of Valhi,
               Inc. and executed by Kronos  Worldwide,  Inc. -  incorporated  by
               reference  to Exhibit  99.2 to the Current  Report on Form 8-K of
               the Registrant dated September 24, 2004.

          10.6 -  Subscription   agreement  executed  on  October  5,  2004  but
               effective as of October 1, 2004 among NL Industries,  Inc., TIMET
               Finance  Management  Company and CompX Group, Inc. - incorporated
               by reference to Exhibit 99.1 to the Current Report on Form 8-K of
               the Registrant dated October 5, 2004.

          10.7 - Voting  agreement  executed on October 5, 2004 but effective as
               of October  1, 2004  among NL  Industries,  Inc.,  TIMET  Finance
               Management  Company  and CompX  Group,  Inc.  -  incorporated  by
               reference  to Exhibit  99.2 to the Current  Report on Form 8-K of
               the Registrant dated October 5, 2004.

          31.1 - Certification

          31.2 - Certification

          32.1 - Certification

     (b)  Reports  on Form  8-K  Reports  on Form  8-K  for  the  quarter  ended
          September 30, 2004.

          August 6, 2004 - Reported Item 9 and Item 12
          September 1, 2004 - Reported Item 7.01 and Item 9.01
          September 7, 2004 - Reported Item 1.01 and Item 2.03
          September 29, 2004 - Reported Item 1.01, Item 2.01, Item 7.01 and Item
                               9.01



                                   SIGNATURES


Pursuant  to the  requirements  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.



                                                        NL INDUSTRIES, INC.
                                               -------------------------------
                                                           (Registrant)



Date   November 8, 2004                        By /s/ Gregory M. Swalwell
      ------------------                          -----------------------------
                                                  Gregory M. Swalwell
                                                   Vice President, Finance
                                                   and Chief Financial Officer
                                                  (Principal Financial Officer)


Date   November 8, 2004                        By /s/ James W. Brown
      ------------------                          -----------------------------
                                                  James W. Brown
                                                  Vice President and Controller
                                                  (Principal Accounting Officer)