SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
             ACT OF 1934 For the fiscal year ended December 31, 2003

    Commission file number 1-640

                               NL INDUSTRIES, INC.
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             (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
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  (Address of principal executive offices)                     (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

                                                      Name of each exchange on
 Title of each class                                      which registered

     Common stock                                      New York Stock Exchange
   ($.125 par value)                                   Pacific Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

                  None.

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

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

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

The  aggregate  market  value of the 7.2 million  shares of voting stock held by
nonaffiliates of NL Industries,  Inc. as of June 30, 2003 (the last business day
of the Registrant's most recently-completed  second fiscal quarter) approximated
$122.5 million.

As of February 27, 2004, 48,262,284 shares of the Registrant's common stock were
outstanding.

                       Documents incorporated by reference

The  information  required by Part III is  incorporated  by  reference  from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to  Regulation  14A not later  than 120 days  after the end of the  fiscal  year
covered by this report.







                                     PART I


ITEM 1.  BUSINESS

     NL Industries,  Inc.,  (NYSE:NL)  organized as a New Jersey  corporation in
1891,  conducts its primary operations  through its  majority-owned  subsidiary,
Kronos Worldwide,  Inc.  (NYSE:KRO)(formerly  known as Kronos, Inc.). NL and its
consolidated  subsidiaries are sometimes referred to herein  collectively as the
"Company."  The  Company  held  approximately  51% of  Kronos'  common  stock at
December  31, 2003.  Kronos is the world's  fifth  largest  producer of titanium
dioxide  pigments  ("TiO2") with an estimated 12% share of worldwide  TiO2 sales
volume in 2003. Approximately one-half of the Company's 2003 sales volume was in
Europe,  where  the  Company  is the  second  largest  producer  of TiO2 with an
estimated 18% share of European TiO2 sales volumes. The Company has an estimated
15% share of North American TiO2 sales volume.  Kronos has production facilities
throughout Europe and North America.

     At  December  31,  2003,  Valhi,  Inc.  and  Tremont  LLC,  a  wholly-owned
subsidiary of Valhi,  held an aggregate of approximately 84% of NL's outstanding
common stock and  approximately  32% of Kronos'  outstanding  common  stock.  At
December 31, 2003,  Contran  Corporation and its subsidiaries held approximately
90%  of  Valhi's  outstanding  common  stock.  Substantially  all  of  Contran's
outstanding  voting  stock is held by  trusts  established  for the  benefit  of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
the sole  trustee.  Mr.  Simmons,  the Chairman of the Board of each of Contran,
Valhi, NL, Kronos and Tremont,  may be deemed to control each of such companies.
See Notes 1 and 16 to the Consolidated Financial Statements.

     As  provided  by the  safe  harbor  provisions  of the  Private  Securities
Litigation  Reform Act of 1995, the Company cautions that the statements in this
Annual  Report on Form 10-K relating to matters that are not  historical  facts,
including,  but not limited to,  statements  found in this Item 1 -  "Business,"
Item 3 - "Legal Proceedings," Item 7 - "Management's  Discussion and Analysis of
Financial  Condition and Results of Operations" and Item 7A - "Quantitative  and
Qualitative Disclosures About Market Risk," are forward-looking  statements that
represent  management's  beliefs and  assumptions  based on currently  available
information.  Forward-looking  statements  can be identified by the use of words
such  as  "believes,"   "intends,"  "may,"  "should,"  "could,"   "anticipates,"
"expected" or comparable terminology, or by discussions of strategies or trends.
Although  the  Company  believes  that  the   expectations   reflected  in  such
forward-looking  statements are  reasonable,  it cannot give any assurances that
these  expectations  will prove to be correct.  Such  statements by their nature
involve  substantial risks and  uncertainties  that could  significantly  impact
expected  results,  and actual future results could differ materially from those
described  in such  forward-looking  statements.  While  it is not  possible  to
identify   all   factors,   the  Company   continues  to  face  many  risks  and
uncertainties.  Among the factors  that could  cause  actual  future  results to
differ  materially  are the risks and  uncertainties  discussed  in this  Annual
Report and those described from time to time in the Company's other filings with
the SEC including, but not limited to, the following:

o    Future supply and demand for the Company's products,
o    The extent of the  dependence  of certain of the  Company's  businesses  on
     certain market sectors,
o    The cyclicality of the Company's businesses,
o    Customer  inventory  levels  (such as the  extent  to which  the  Company's
     customers may, from time to time,  accelerate  purchases of TiO2 in advance
     of  anticipated  price  increases or defer  purchases of TiO2 in advance of
     anticipated price decreases),
o    Changes in raw material and other operating costs (such as energy costs),
o    The possibility of labor disruptions,
o    General global  economic and political  conditions  (such as changes in the
     level of gross  domestic  product in  various  regions of the world and the
     impact of such changes on demand for TiO2),
o    Competitive products and substitute products,
o    Customer and competitor strategies,
o    The impact of pricing and production decisions,
o    Competitive technology positions,
o    The introduction of trade barriers,
o    Fluctuations  in currency  exchange  rates (such as changes in the exchange
     rate between the U.S. dollar and each of the euro, the Norwegian kroner 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 ultimate  outcome of income tax audits,  tax settlement  initiatives or
     other tax matters,
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 changes in information,  future
events or otherwise.

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

     Pricing within the global TiO2 industry over the long term is cyclical, and
changes in industry economic  conditions,  especially in Western  industrialized
nations,  can  significantly  impact the Company's  earnings and operating  cash
flows.  Kronos' average TiO2 selling prices were generally decreasing during all
of 2001 and the first  quarter of 2002,  were  generally  flat during the second
quarter of 2002, were generally  increasing during the third and fourth quarters
of 2002 and the first  quarter of 2003,  were  generally  flat during the second
quarter  of 2003 and were  generally  decreasing  during  the third  and  fourth
quarters of 2003.  Industry-wide  demand for TiO2 is estimated to have been flat
or declined  slightly  throughout 2003. This is believed to have been the result
of lower customer  inventory  levels  resulting from overall  declining  selling
prices.  Volume  demand in 2004 is  expected to  increase  moderately  over 2003
levels.

     Per capita  consumption of TiO2 in the United States and Western Europe far
exceeds  that in other  areas of the world and these  regions  are  expected  to
continue  to be the  largest  consumers  of TiO2.  Significant  regions for TiO2
consumption  could  emerge  in  Eastern  Europe,  the Far  East or  China as the
economies in these regions develop to the point that  quality-of-life  products,
including  TiO2, are in greater  demand.  The Company  believes that, due to its
strong  presence in Western  Europe,  it is well  positioned to  participate  in
growth in  consumption  of TiO2 in Eastern  Europe.  Geographic  information  is
contained in Note 3 to the Consolidated Financial Statements.

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

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

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

     The Company is one of the world's leading  producers and marketers of TiO2.
The Company and its distributors and agents sell and provide technical  services
for its  products to over 4,000  customers  with the majority of sales in Europe
and North  America.  TiO2 is  distributed  by rail,  truck and ocean  carrier in
either dry or slurry form. The Company's manufacturing facilities are located in
Germany, Canada, Belgium and Norway, and the Company owns a one-half interest in
a TiO2  manufacturing  joint venture  located in Louisiana,  U.S.A.  The Company
conducts  sales and marketing  activities in over 100 countries  worldwide.  The
Company and its  predecessors  have  produced and marketed TiO2 in North America
and Europe for over 80 years.  As a result,  the  Company  believes  that it has
developed  considerable  expertise  and  efficiency  in the  manufacture,  sale,
shipment and service of its products in domestic and international  markets.  By
volume,  approximately one-half of the Company's 2003 TiO2 sales were to Europe,
with approximately 40% to North America and the balance to export markets.

     The Company is also  engaged in the mining and sale of ilmenite  ore (a raw
material  used  directly as a feedstock  by some  sulfate-process  TiO2  plants)
pursuant to a  governmental  concession  with an unlimited  term that allows the
Company to  operate  an  ilmenite  mine in  Norway.  The ore body,  owned by the
Norwegian government,  has estimated ilmenite reserves that are expected to last
at least 20 years.  Approximately 5% of the Company's  consolidated net sales in
each  of  the  last  three  years  represented  ilmenite  sales  to  third-party
customers. The Company is also engaged in the manufacture and sale of iron-based
water  treatment  chemicals  (derived  co-products  of  the  pigment  production
processes).  The Company's  water treatment  chemicals  (marketed under the name
Ecochem) are used as treatment and conditioning agents for industrial  effluents
and municipal  wastewater,  and in the  manufacture of iron  pigments.  Sales of
water treatment  chemicals were  approximately  3% of the Company's  revenues in
each of 2001, 2002 and 2003.

     Manufacturing  process and raw  materials.  The Company  manufactures  TiO2
using both the chloride  process and the sulfate process.  Approximately  72% of
the Company's current production capacity is based on the chloride process.  The
chloride  process is a continuous  process in which  chlorine is used to extract
rutile TiO2. In general,  the chloride  process is also less  intensive than the
sulfate process in terms of capital investment,  labor and energy.  Because much
of the chlorine is recycled and feedstock  bearing a higher titanium  content is
used, the chloride  process  produces less waste than the sulfate  process.  The
sulfate  process is a batch chemical  process that uses sulfuric acid to extract
TiO2.  Sulfate  technology  normally  produces either anatase or rutile pigment.
Once an  intermediate  TiO2 pigment has been  produced by either the chloride or
sulfate  process,  it is `finished'  into  products  with  specific  performance
characteristics   for  particular  end-use   applications   through  proprietary
processes  involving  various chemical surface  treatments and intensive milling
and micronizing.

     Due to environmental factors and customer considerations, the proportion of
TiO2  industry  sales  represented  by  chloride-process  pigments has increased
relative to sulfate-process pigments and, in 2003,  chloride-process  production
facilities represented approximately 62% of industry capacity.

     The Company  produced a new Company  record  476,000 metric tons of TiO2 in
2003,  compared to the prior  record  442,000  metric tons  produced in 2002 and
412,000  metric  tons  in  2001.  The  Company's  average  production   capacity
utilization rate in 2003 was near full capacity,  up from 96% in 2002. The rates
in  2002  and  2003  were  higher  than  in  2001  due  in  part  to   continued
debottlenecking  activities.  The Company believes its current annual attainable
production capacity is approximately 480,000 metric tons, including its one-half
interest in the joint  venture-owned  Louisiana  plant (see "TiO2  manufacturing
joint venture").  The Company expects this production capacity will be increased
by approximately 10,000 metric tons, primarily at its chloride facilities,  with
moderate capital expenditures,  bringing the Company's capacity to approximately
490,000 metric tons during 2005.

     The primary raw materials used in the TiO2 chloride  production process are
titanium-containing  feedstock  derived from sand ilmenite,  natural rutile ore,
chlorine and coke.  Chlorine and coke are available  from a number of suppliers.
Titanium-containing  feedstock  suitable  for  use in the  chloride  process  is
available  from a limited but increasing  number of suppliers  around the world,
principally in Australia, South Africa, Canada, India and the United States. The
Company  purchased  approximately  390,000 metric tons of chloride  feedstock in
2003, of which the vast majority was slag.

     The Company  purchased slag in 2003 from two  subsidiaries of Rio Tinto plc
UK - Richards  Bay Iron and  Titanium  Limited  South  Africa and Q.I.T.  Fer et
Titane Inc. Canada  ("Q.I.T.")  under long-term  supply contracts that expire at
the end of 2007 and 2006 respectively. Natural rutile ore is purchased primarily
from Iluka Resources,  Limited (Australia),  a company formed through the merger
of Westralian  Sands Limited  (Australia) and RGC Mineral Sands,  Ltd.,  under a
long-term  supply contract that expires at the end of 2005. The Company does not
expect to encounter  difficulties  obtaining  long-term  extensions  to existing
supply  contracts  prior  to the  expiration  of the  contracts.  Raw  materials
purchased under these contracts and extensions  thereof are expected to meet the
Company's chloride feedstock requirements over the next several years.

     The primary raw materials used in the TiO2 sulfate  production  process are
titanium-containing  feedstock,  derived  primarily  from  rock and  beach  sand
ilmenite,  and  sulfuric  acid.  Sulfuric  acid is  available  from a number  of
suppliers. Titanium-containing feedstock suitable for use in the sulfate process
is available from a limited number of suppliers around the world. Currently, the
principal  active sources are located in Norway,  Canada,  Australia,  India and
South  Africa.   As  one  of  the  few   vertically   integrated   producers  of
sulfate-process  pigments,  the Company operates a rock ilmenite mine in Norway,
which provided all of the Company's  feedstock for its European  sulfate-process
pigment plants in 2003. The Company produced  approximately  850,000 metric tons
of  ilmenite  in 2003,  of which  approximately  300,000  metric  tons were used
internally  with  the  remainder  sold  to  third  parties.   For  its  Canadian
sulfate-process   plant,   the  Company  also   purchases   sulfate  grade  slag
(approximately  25,000  metric  tons in 2003)  primarily  from  Q.I.T.,  under a
long-term supply contract that expires at the end of 2006.

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

     TiO2 manufacturing joint venture.  Subsidiaries of the Company and Huntsman
International   Holdings  LLC   ("Huntsman")   each  own  a  50%-interest  in  a
manufacturing  joint venture,  Louisiana  Pigment Company ("LPC").  LPC owns and
operates a  chloride-process  TiO2 plant  located  in Lake  Charles,  Louisiana.
Production  from the plant is shared  equally by the Company and  Huntsman  (the
"Partners") pursuant to separate offtake agreements.

     A  supervisory  committee,  composed  of four  members,  two of  which  are
appointed by each  Partner,  directs the  business and affairs of LPC  including
production  and output  decisions.  Two  general  managers,  one  appointed  and
compensated  by each Partner,  manage the operations of the joint venture acting
under the direction of the supervisory committee.

     The  manufacturing  joint  venture  operates  on a  break-even  basis  and,
accordingly, the Company reports no equity in earnings of the joint venture. The
Company's  cost for its share of the TiO2  produced is equal to its share of the
joint venture's  costs.  The Company's share of net costs is reported as cost of
sales as the related TiO2 acquired from the joint venture is sold. See Note 7 to
the Consolidated Financial Statements.

     Competition.  The TiO2 industry is highly competitive. The Company competes
primarily on the basis of price,  product quality and technical service, and the
availability of high  performance  pigment grades.  Although certain TiO2 grades
are  considered  specialty  pigments,  the majority of the Company's  grades and
substantially all of the Company's  production are considered commodity pigments
with price generally being the most significant  competitive factor. During 2003
the Company had an estimated 12% share of worldwide  TiO2 sales volume,  and the
Company  believes  that it is the leading  seller of TiO2 in several  countries,
including Germany and Canada.

     The  Company's  principal  competitors  are E.I.  du Pont de  Nemours & Co.
("DuPont");  Millennium Chemicals, Inc.; Huntsman;  Kerr-McGee Corporation;  and
Ishihara  Sangyo  Kaisha,  Ltd.  The  Company's  five largest  competitors  have
estimated  individual shares of TiO2 production capacity ranging from 24% to 5%,
and an estimated aggregate 70% share of worldwide TiO2 production volume. DuPont
has about one-half of total U.S. TiO2  production  capacity and is the Company's
principal North American competitor.

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

     No  assurance  can be given  that  future  increases  in the TiO2  industry
production  capacity and future average annual demand growth rates for TiO2 will
conform to the Company's  expectations.  If actual  developments differ from the
Company's expectations, the Company and the TiO2 industry's performance could be
unfavorably affected.

     Research  and  development.  The  Company's  expenditures  for research and
development and certain technical support programs were approximately $6 million
in each of 2001 and 2002  and $7  million  in  2003.  Research  and  development
activities are conducted principally at the Leverkusen,  Germany facility.  Such
activities are directed primarily toward improving both the chloride and sulfate
production processes,  improving product quality and strengthening the Company's
competitive position by developing new pigment applications.

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

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

     Foreign  operations.  The Company's  chemical  businesses  have operated in
non-U.S.  markets  since the 1920s.  Most of the  Company's  current  production
capacity  is located  in Europe  and  Canada  with  non-U.S.  net  property  and
equipment  aggregating  approximately  $435 million at December  31,  2003.  Net
property and equipment in the U.S.,  including 50% of the property and equipment
of LPC, was  approximately  $116 million at December 31, 2003.  Kronos' European
operations  include  production  facilities  in  Germany,  Belgium  and  Norway.
Approximately  $711 million of the  Company's  2003  consolidated  sales were to
non-U.S.  customers,  including  $91  million to  customers  in areas other than
Europe and Canada.  Sales to  customers in the U.S.  aggregated  $297 million in
2003. Foreign  operations are subject to, among other things,  currency exchange
rate  fluctuations,  and the Company's  results of operations have, in the past,
been both  favorably  and  unfavorably  affected  by  fluctuations,  in currency
exchange  rates.  Effects of  fluctuations  in  currency  exchange  rates on the
Company's  results  of  operations  are  discussed  in  Item  7.   "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
Item 7A. "Quantitative and Qualitative Disclosures about Market Risk."

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

     Customer base and annual seasonality. The Company believes that neither its
aggregate  sales  nor  those  of  any  of  its  principal   product  groups  are
concentrated in or materially  dependent upon any single customer or small group
of customers.  The Company's  largest ten customers  accounted for approximately
25% of net sales in 2003.  Neither the Company's business as a whole nor that of
any of its principal product groups is seasonal to any significant  extent.  Due
in part to the increase in paint production in the spring to meet the spring and
summer painting season demand, TiO2 sales are generally higher in the first half
of the year than in the second half of the year.

     Employees.  As of December 31,  2003,  the Company  employed  approximately
2,450 persons,  excluding LPC employees,  with approximately 50 employees in the
United States and approximately 2,400 at sites outside the United States. Hourly
employees in production facilities worldwide,  including LPC, are represented by
a variety of labor  unions,  with labor  agreements  having  various  expiration
dates. The Company believes its labor relations are good.

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

     The  Company's  U.S.  manufacturing  operations  are  governed  by  federal
environmental and worker health and safety laws and regulations, principally the
Resource  Conservation and Recovery Act ("RCRA"),  the  Occupational  Safety and
Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substances Control Act and the Comprehensive  Environmental  Response,
Compensation  and  Liability  Act, as amended by the  Superfund  Amendments  and
Reauthorization  Act  ("CERCLA"),  as well as the  state  counterparts  of these
statutes. The Company believes the TiO2 plant owned by the LPC joint venture and
a TiO2 slurry  facility  owned by the Company in Lake Charles,  Louisiana are in
substantial compliance with applicable  requirements of these laws or compliance
orders issued  thereunder.  The Company has no other U.S.  plants.  From time to
time,  the  Company's  facilities  may be  subject to  environmental  regulatory
enforcement under such statutes.  Resolution of such matters typically  involves
the establishment of compliance programs. Occasionally, resolution may result in
the payment of penalties,  but to date such penalties have not involved  amounts
having  a  material  adverse  effect  on the  Company's  consolidated  financial
position, results of operations or liquidity.

     The Company's production facilities operate in an environmental  regulatory
framework  in  which  governmental   authorities  typically  are  granted  broad
discretionary powers that allow them to issue operating permits required for the
plants to operate. The Company believes that all current operating plants are in
substantial  compliance with applicable  environmental laws. With respect to the
Company's  current  operating  plants,  neither  the  Company  nor  any  of  its
subsidiaries have been notified of any environmental  claim in the United States
or any foreign  jurisdiction by the U.S. EPA or any applicable foreign authority
or any state, provincial or local authority.

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

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

     The Company's  capital  expenditures  related to its ongoing  environmental
protection and improvement  programs in 2003 were approximately $5 million,  and
are currently expected to be approximately $5 million in 2004.

     The Company has been named as a defendant,  potentially  responsible  party
("PRP"),  or both, pursuant to CERCLA and similar state laws in approximately 70
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.   Environmental   Protection   Agency's  ("U.S.  EPA")  Superfund  National
Priorities List or similar state lists. See Item 3. "Legal Proceedings."

     Website and other available information. The Company maintains a website on
the Internet with the address of www.nl-ind.com. Copies of this Annual Report on
Form 10-K for the year  ended  December  31,  2003 and  copies of the  Company's
Quarterly Reports on Form 10-Q for 2003 and 2004 and any Current Reports on Form
8-K for 2003 and 2004, and any amendments thereto, are or will be available free
of charge at such website as soon as reasonably  practical  after they are filed
with the SEC.  Additional  information  regarding  the  Company,  including  the
Company's Audit Committee charter and the Company's Code of Business Conduct and
Ethics, can also be found at this website as required.  Information contained on
the Company's website is not part of this report.

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

ITEM 2.  PROPERTIES

     The  Company  currently  operates  four  TiO2  plants  in  Europe  (one  in
Leverkusen,  Germany; one in Nordenham,  Germany; one in Langerbrugge,  Belgium;
and one in Fredrikstad,  Norway). In North America, the Company has a TiO2 plant
in  Varennes,  Quebec,  Canada and,  through  the  manufacturing  joint  venture
described above, a one-half interest in a TiO2 plant in Lake Charles, Louisiana.
The Company operates an ilmenite ore mine in Hauge i Dalane,  Norway pursuant to
a  governmental  concession  and also owns a TiO2 slurry plant in Lake  Charles,
Louisiana. See Note 7 to the Consolidated Financial Statements.

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

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

     The Company has under lease various  corporate and  administrative  offices
located in the U.S. and various sales offices located in the U.S.,  France,  the
Netherlands, Denmark and the U.K.

ITEM 3.  LEGAL PROCEEDINGS

     The  Company is  involved  in various  legal  proceedings.  In  addition to
information that is included below,  certain information called for by this Item
is  included  in  Note  18  to  the  Consolidated  Financial  Statements,  which
information is incorporated herein by reference.

     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 (together the
"former pigment  manufacturers"),  and lead-based paint, and the Lead Industries
Association (the "LIA") (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
the pending litigation in view of the inherent  uncertainties  involved in court
and jury rulings.

     In 1989  and 1990 the  Housing  Authority  of New  Orleans  ("HANO")  filed
third-party  complaints against the former pigment  manufacturers and the LIA in
14 actions  commenced  by  residents  of HANO  units  seeking  compensatory  and
punitive damages for injuries  allegedly caused by lead pigment.  All but two of
these actions, Hall v. HANO, et al. (No. 89-3552) and Allen v. HANO, et al. (No.
89-427) Civil District Court for the Parish of Orleans, State of Louisiana, have
been dismissed. These two cases have been inactive since 1992.

     In June 1989 a complaint was filed in the Supreme Court of the State of New
York, County of New York, against the former pigment  manufacturers and the LIA.
Plaintiffs  sought  damages in excess of $50 million for  monitoring and abating
alleged  lead  paint  hazards  in  public  and  private  residential  buildings,
diagnosing  and  treating  children  allegedly  exposed  to lead  paint  in city
buildings,  the costs of educating  city residents to the hazards of lead paint,
and liability in personal  injury actions against New York City and the New York
City Housing  Authority  based on alleged lead  poisoning of city residents (The
City of New York,  the New York  City  Housing  Authority  and the New York City
Health and Hospitals  Corp. v. Lead  Industries  Association,  Inc., et al., No.
89-4617).  As a result of pre-trial motions, the New York City Housing Authority
is the only remaining  plaintiff in the case and is pursuing  damage claims only
with respect to two housing projects. Discovery had been proceeding in 2001, but
no activity has occurred since September 2001.

     In August 1992 the Company was served with an amended complaint in Jackson,
et al. v. The  Glidden  Co., et al.,  Court of Common  Pleas,  Cuyahoga  County,
Cleveland,  Ohio (Case No. 236835).  Plaintiffs seek  compensatory  and punitive
damages  for  personal  injury  caused by the  ingestion  of lead,  and an order
directing defendants to abate lead-based paint in buildings.  Plaintiffs purport
to represent a class of similarly situated persons throughout the State of Ohio.
The trial court has denied plaintiffs' motion for class certification. Discovery
and  pre-trial  proceedings  are  continuing  with  respect  to  the  individual
plaintiffs.  Defendants have filed a motion for summary  judgment on all claims.
The court has not yet ruled on the motion.

     In December  1998 the Company was served with a complaint on behalf of four
children and their guardians in Sabater, et al. v. Lead Industries  Association,
et al.  (Supreme  Court of the  State of New York,  County  of Bronx,  Index No.
25533/98).  Plaintiffs  purport to represent a class of all children and mothers
similarly  situated in New York State.  The complaint seeks damages from the LIA
and other former pigment  manufacturers for establishment of property  abatement
and medical  monitoring funds and  compensatory  damages for alleged injuries to
plaintiffs.  In February  2004,  the trial court denied  plaintiffs'  motion for
class certification. The time for plaintiffs to appeal has not yet begun to run.

     In  September  1999 an  amended  complaint  was  filed in  Thomas  v.  Lead
Industries Association,  et al. (Circuit Court, Milwaukee,  Wisconsin,  Case No.
99-CV-6411),  adding as defendants  the former pigment  manufacturers  to a suit
originally filed against  plaintiff's  landlords.  Plaintiff,  a minor,  alleges
injuries  purportedly  caused by lead on the  surfaces  of  premises in homes in
which he resided.  Plaintiff seeks  compensatory and punitive  damages,  and the
Company  has  denied  liability.   In  January  2003  the  trial  court  granted
defendants' motion for summary judgment, dismissing all counts of the complaint.
In June 2003, plaintiff appealed the trial court's grant of summary judgment for
defendants.

     In October  1999 the Company was served with a complaint  in State of Rhode
Island v. Lead Industries  Association,  et al. (Superior Court of Rhode Island,
No. 99-5226).  The State seeks compensatory and punitive damages for medical and
educational  expenses,  and public and private building  abatement expenses that
the  State  alleges  were  caused by lead  paint,  and for  funding  of a public
education campaign and health screening  programs.  Plaintiff seeks judgments of
joint and several  liability  against the former pigment  manufacturers  and the
LIA.  Trial began in phase I of this case before a Rhode Island state court jury
on  September  4, 2002 on the question of whether lead pigment in paint on Rhode
Island  buildings  is a public  nuisance.  On October  29,  2002 the trial judge
declared a  mistrial  in the case when the jury was unable to reach a verdict on
the question,  with the jury reportedly deadlocked 4-2 in the defendants' favor.
Other  claims made by the  Attorney  General,  including  violation of the Rhode
Island Unfair Trade Practices and Consumer  Protection  Act,  strict  liability,
negligence,  negligent  and  fraudulent  misrepresentation,   civil  conspiracy,
indemnity,  and unjust enrichment remain pending and were not the subject of the
2002 trial.  Both plaintiff and defendants filed post trial motions for judgment
notwithstanding  the verdict,  which the court denied in March 2003.  In January
2004,  plaintiff  requested  the court to dismiss  its  claims  for  State-owned
buildings,  claiming all remaining  claims did not require a jury and asking the
court to  reconsider  the trial  schedule.  In  February  2004 the  trial  Court
dismissed the strict  liability,  negligence,  negligent  misrepresentation  and
fraud claims with prejudice. The time for plaintiffs to appeal has not yet begun
to run.  In March  2004,  the  trial  court  ruled  that the  defendants  have a
constitutional right to a trial by jury under the Rhode Island Constitution. The
plaintiffs  have announced  their  intention to appeal this decision.  The trial
court  also set April  2005 as the date for the  retrial  of all  phases of this
case.

     In October 1999 the Company was served with a complaint in Smith, et al. v.
Lead Industries Association, et al. (Circuit Court for Baltimore City, Maryland,
Case No. 24-C-99-004490). Plaintiffs, seven minors from four families, each seek
compensatory  damages of $5 million  and  punitive  damages of $10  million  for
alleged  injuries due to  lead-based  paint.  Plaintiffs  allege that the former
pigment  manufacturers and other companies  alleged to have  manufactured  paint
and/or  gasoline  additives,  the  LIA,  and the  National  Paint  and  Coatings
Association are jointly and severally liable.  The Company has denied liability,
and all defendants  filed motions to dismiss various of the claims.  In February
2002 the trial  court  dismissed  all claims  except  those  relating to product
liability for lead paint and the Maryland  Consumer  Protection Act. In November
2002 the trial court granted defendants' motion for summary judgment against the
first  plaintiffs  and  plaintiffs  have  appealed.  The appellate  court held a
hearing on the appeal in November 2003; however no decision has yet been issued.
Pre-trial proceedings and discovery against the other plaintiffs are continuing.
The court has set trial dates in 2004 for these  plaintiffs;  however the trials
are stayed pending the appeal.

     In February  2000 the  Company  was served with a complaint  in 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).  Plaintiff
seeks compensatory and punitive damages for its expenses discovering and abating
lead-based  paint,  detecting  lead  poisoning  and  providing  medical care and
educational  programs for City  residents,  and the costs of educating  children
suffering  injuries  due to lead  exposure.  Plaintiff  seeks  joint and several
liability against the former pigment manufacturers and the LIA. In November 2002
defendants'  motion to dismiss  was  denied.  In May 2003,  plaintiffs  filed an
amended complaint alleging only a nuisance claim.  Defendants' renewed motion to
dismiss and motion for summary judgment are pending. Discovery is proceeding.

     In April 2000 the Company  was served  with a complaint  in County of Santa
Clara v. Atlantic  Richfield  Company,  et al.  (Superior  Court of the State of
California,  County of Santa  Clara,  Case No.  CV788657),  brought  against the
former  pigment  manufacturers,  the LIA and certain  paint  manufacturers.  The
County of Santa Clara  seeks to  represent  a class of  California  governmental
entities (other than the state and its agencies) to recover compensatory damages
for funds the plaintiffs  have expended or will in the future expend for medical
treatment, educational expenses, abatement or other costs due to exposure to, or
potential exposure to, lead paint, disgorgement of profit, and punitive damages.
Santa Cruz, Solano, Alameda, San Francisco, and Kern counties, the cities of San
Francisco and Oakland,  the Oakland and San Francisco  unified school  districts
and housing  authorities  and the Oakland  Redevelopment  Agency have joined the
case as  plaintiffs.  In February  2003,  defendants  filed a motion for summary
judgment.  In July 2003, the trial court granted  defendants' motion for summary
judgment on all remaining claims. Plaintiffs have appealed.

     In June 2000 two complaints were filed in Texas state court,  Spring Branch
Independent  School District v. Lead Industries  Association,  et al.  (District
Court of Harris County,  Texas, No. 2000-31175),  and Houston Independent School
District  v.  Lead  Industries  Association,  et al.  (District  Court of Harris
County,  Texas,  No.  2000-33725).  The  School  Districts  seek past and future
damages and  exemplary  damages for costs they have  allegedly  incurred or will
incur due to the presence of lead-based paint in their buildings from the former
pigment manufacturers and the LIA. The Company has denied all liability. In June
2002, the trial court granted the Company's  motion for summary  judgment in the
Spring Branch  Independent School District case.  Plaintiffs have appealed.  The
Houston  Independent  School  District  case has been abated  pending  appellate
review of the trial court's  dismissal of the Spring Branch  Independent  School
District case or certain other events.

     In June 2000 a complaint was filed in Illinois state court,  Lewis,  et al.
v. Lead Industries Association,  et al. (Circuit Court of Cook County, Illinois,
County Department,  Chancery Division,  Case No. 00CH09800).  Plaintiffs seek to
represent two classes,  one of all minors  between ages six months and six years
who resided in housing in Illinois built before 1978, and one of all individuals
between  ages six and  twenty  years who lived  between  ages six months and six
years in  Illinois  housing  built  before  1978 and had blood lead levels of 10
micrograms/deciliter  or more. The complaint seeks damages jointly and severally
from  the  former  pigment  manufacturers  and the LIA to  establish  a  medical
screening  fund for the first class to determine  blood lead  levels,  a medical
monitoring fund for the second class to detect the onset of latent diseases, and
a fund for a public education campaign.  In March 2002 the trial court dismissed
all claims.  Plaintiffs appealed, and in June 2003, the appellate court affirmed
the dismissal of five of the six counts of plaintiffs'  complaint,  but reversed
the dismissal of the conspiracy count.

     In February  2001 the  Company was served with a complaint  in the case now
known as Barker, et al. v. The  Sherwin-Williams  Company, et al. (Circuit Court
of Jefferson  County,  Mississippi,  Civil Action No.  2000-587).  (The case was
formerly known as Borden, et al. v. The  Sherwin-Williams  Company,  et al.) The
complaint  seeks joint and  several  liability  for  compensatory  and  punitive
damages from more than 40  manufacturers  and  retailers of lead pigment  and/or
paint, including the Company, on behalf of 18 adult residents of Mississippi who
were  allegedly  exposed to lead during their  employment  in  construction  and
repair  activities.  One  plaintiff  has  dropped  his  claims and the court has
ordered  that the  claims of nine of the  plaintiffs  be  transferred  to Holmes
County,  Mississippi,  state court.  The defendants  petitioned the  Mississippi
Supreme  Court to reverse  the trial  court's  transfer of these  plaintiffs  to
Holmes County and have  requested  that the  plaintiffs be  transferred to their
appropriate  venues. The Mississippi  Supreme Court has stayed all activities in
Holmes  County  pending  its  decision.  With  respect  to the eight  plaintiffs
remaining in Jefferson  County,  pre-trial  proceedings are continuing,  and the
court has set a trial date of October 2004.

     In May 2001 the Company was served with a complaint in City of Milwaukee v.
NL Industries,  Inc. and Mautz Paint (Circuit Court,  Civil Division,  Milwaukee
County,   Wisconsin,   Case  No.  01CV003066).   The  City  of  Milwaukee  seeks
compensatory   and  equitable  relief  for  lead  hazards  in  Milwaukee  homes,
restitution  for amounts it has spent to abate lead, and punitive  damages.  The
Company  has  denied  all  liability.  In July  2003,  the trial  court  granted
defendants' motion for summary judgment. The plaintiff has appealed.

     In May 2001 the Company was served with a complaint in Harris County, Texas
v. Lead Industries Association,  et al. (District Court of Harris County, Texas,
No.  2001-21413).  The complaint  seeks actual and punitive  damages and asserts
claims jointly and severally  against the former pigment  manufacturers  and the
LIA  for  past  and  future  damages  due to  the  presence  of  lead  paint  in
County-owned buildings.  The Company has denied all liability. The case has been
stayed  pending  appellate  review of the trial court's  dismissal of the Spring
Branch Independent School District case or certain other events.

     In January and February  2002 the Company was served with  complaints by 25
New Jersey  municipalities  and counties which have been  consolidated as In re:
Lead Paint Litigation,  (Superior Court of New Jersey,  Middlesex  County,  Case
Code 702). Each complaint seeks abatement of lead paint from all housing and all
public buildings in each jurisdiction and punitive damages jointly and severally
from the former  pigment  manufacturers  and the LIA. In November 2002 the trial
court dismissed the cases with prejudice. Plaintiffs have appealed.

     In January 2002 the Company was served with a complaint in Jackson, et al.,
v. Phillips  Building  Supply of Laurel,  et al. (Circuit Court of Jones County,
Mississippi,  Dkt.  Co.  2002-10-CV1).  The  complaint  seeks  joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for  compensatory  and  punitive  damages  on behalf of three  adults  for
injuries alleged to have been caused by the use of lead paint.  After removal to
federal  court,  in  February  2003 the case was  remanded to state  court.  The
Company has denied all allegations of liability,  and pre-trial  proceedings are
continuing. In August 2003, the court set a trial date of June 2004. In February
2004 plaintiffs  agreed to dismiss one plaintiff  voluntarily  upon  defendants'
agreement to extend the statute of limitations  period for that plaintiff for 12
months.

     In  February  2002 the  Company  was  served  with a  complaint  in Liberty
Independent  School District v. Lead Industries  Association,  et al.  (District
Court  of  Liberty  County,  Texas,  No.  63,332).  The  school  district  seeks
compensatory  and punitive damages jointly and severally from the former pigment
manufacturers  and the LIA for property  damage to its buildings.  The complaint
was  amended  to add  Liberty  County,  the  City of  Liberty,  and  the  Dayton
Independent   School  District  as  plaintiffs  and  drop  the  Lead  Industries
Association as a defendant. The Company has denied all allegations of liability.
The case has been stayed pending appellate review of the trial court's dismissal
of the Spring Branch Independent School District case or certain other events.

     In May  2002  the  Company  was  served  with a  complaint  in  Brownsville
Independent  School District v. Lead Industries  Association,  et al.  (District
Court of Cameron County,  Texas,  No.  2002-052081 B), seeking  compensatory and
punitive damages jointly and severally from the Company, the former lead pigment
manufacturers  and the LIA for  property  damage.  The  Company  has  denied all
allegations of liability.  The case has been stayed pending  appellate review of
the trial court's  dismissal of the Spring Branch  Independent  School  District
case or certain other events.

     In  September  2002 the  Company  was served  with a  complaint  in City of
Chicago v. American  Cyanamid,  et al. (Circuit Court of Cook County,  Illinois,
No. 02CH16212),  seeking damages to abate lead paint in a single-count complaint
alleging   public   nuisance   against  the  Company  and  seven  other   former
manufacturers  of lead  pigment.  In  October  2003,  the  trial  court  granted
defendants' motion to dismiss. The plaintiff has appealed.

     In October  2002 the Company  was served with a complaint  in Walters v. NL
Industries,  et al. (Kings County Supreme Court, New York, No.  28087/2002),  in
which an adult seeks compensatory and punitive damages from the Company and five
other former lead pigment  manufacturers  for childhood  exposure to lead paint.
The complaint alleges negligence and strict product  liability,  and seeks joint
and  several  liability  with  claims of civil  conspiracy,  concert  of action,
enterprise liability,  and market share or alternative liability.  In March 2003
the court granted  defendants'  motion to dismiss the product defect allegations
in the negligence and strict liability counts. Discovery is proceeding.

     In April 2003 the  Company  was served  with a  complaint  in Russell v. NL
Industries,  Inc.,  et  al.  (Circuit  Court  of  LeFlore  County,  Mississippi,
No.2002-0235-CICI),  in which six painters  have sued NL, four paint  companies,
and  a  local  retailer,  alleging  strict  liability,  negligence,   fraudulent
concealment,  misrepresentation,  and conspiracy,  and seeking  compensatory and
punitive damages for alleged injuries caused by lead paint.  Defendants  removed
this case to federal court,  and plaintiffs have dropped their motion to remand.
Discovery is proceeding.

     In April  2003 the  Company  was  served  with a  complaint  in Jones v. NL
Industries,  Inc., et al. (Circuit Court of LeFlore County,  Mississippi,  Civil
Action No.  2002-0241-CICI),  in which fourteen children from five families have
sued NL and one  landlord  alleging  strict  liability,  negligence,  fraudulent
concealment,  and  misrepresentation,  and  seeking  compensatory  and  punitive
damages for alleged injuries caused by lead paint.  Defendants have removed this
case to  federal  court,  and  plaintiffs  have moved to remand the case back to
state court. Discovery is proceeding.

     In November  2003 the  Company  was served with a complaint  in Brown v. NL
Industries,  Inc.  et  al  (Circuit  Court  of  Cook  County,  Illinois,  County
Department,  Law Division,  Case No. 03L 012425).  The  complaint  seeks damages
against  the  Company  and two  local  property  owners on behalf of a minor for
injuries  alleged to be due to exposure to lead paint  contained  in the minor's
residence. The Company has denied all allegations of liability.

     In  addition  to  the  foregoing   litigation,   various   legislation  and
administrative  regulations  have, from time to time, been proposed that seek to
(a) impose  various  obligations  on present  and former  manufacturers  of lead
pigment and lead-based paint with respect to asserted health concerns associated
with the use of such products and (b)  effectively  overturn court  decisions in
which the Company and other pigment manufacturers have been successful. Examples
of such proposed  legislation  include bills which would permit civil  liability
for damages on the basis of market share,  rather than  requiring  plaintiffs to
prove that the defendant's  product caused the alleged  damage,  and bills which
would revive actions barred by the statute of limitations.  While no legislation
or  regulations  have been enacted to date which are expected to have a material
adverse  effect on the Company's  consolidated  financial  position,  results of
operations  or  liquidity,  the  imposition  of market share  liability or other
legislation could have such an effect.

     Environmental  matters  and  litigation.  The  Company  has been named as a
defendant,  PRP,  or  both,  pursuant  to  CERCLA  and  similar  state  laws  in
approximately 70 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.  In addition,
the  Company is a party to a number of lawsuits  filed in various  jurisdictions
alleging CERCLA or other  environmental  claims. See Note 18 to the Consolidated
Financial Statements.

     The extent of CERCLA  liability  cannot  accurately be determined until the
Remedial  Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA
issues a record of decision and costs are  allocated  among PRPs.  The extent of
liability under analogous state cleanup  statutes and for common law equivalents
are  subject to similar  uncertainties.  The Company  believes  it has  provided
adequate  accruals for reasonably  estimable  costs for CERCLA matters and other
environmental  liabilities.  At December 31,  2003,  the Company had accrued $77
million for those  environmental  matters  that are  reasonably  estimable.  The
Company  determines the amount of accrual on a quarterly  basis by analyzing and
estimating  the range of reasonably  possible  costs to the Company.  Such costs
include,   among  other  things,   expenditures  for  remedial   investigations,
monitoring,  managing,  studies,  cleanup,  removal and  remediation.  It is not
possible  to  estimate  the range of costs for  certain  sites.  The Company has
estimated  that the upper end of the range of reasonably  possible  costs to the
Company for sites for which it is possible  to estimate  costs is  approximately
$110 million.  The Company's  estimate of such liability has not been discounted
to present value, and the Company has not reduced its accruals for any potential
insurance  recoveries.  No  assurance  can be given that  actual  costs will not
exceed either 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.
The imposition of more stringent  standards or requirements under  environmental
laws or  regulations,  new  developments or changes with respect to site cleanup
costs or allocation of such costs among PRPs, the insolvency of other PRPs, 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.
Furthermore,  there can be no assurance that  additional  environmental  matters
will not arise in the  future.  More  detailed  descriptions  of  certain  legal
proceedings relating to environmental matters are set forth below.

     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
are classified as a noncurrent liability.

     At December 31, 2003 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
had 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.

     In July 1991 the United States filed an action in the U.S.  District  Court
for the  Southern  District of Illinois  against the Company and others  (United
States of America v. NL  Industries,  Inc.,  et al.,  Civ. No. 91-CV 00578) with
respect  to the  Granite  City,  Illinois  lead  smelter  formerly  owned by the
Company.  The  Company  and the U.S.  EPA have  entered  into a  consent  decree
settling the Company's  liability at the site for $31.5 million,  which includes
penalties  of $1 million.  In May 2003,  the court  entered the consent  decree.
Pursuant to the consent decree,  in June 2003, the Company paid $30.8 million to
the United States and will pay up to an additional  $.7 million upon  completion
of an EPA audit of certain response costs.

     The Company  reached an agreement in 1999 with the other PRPs at a formerly
owned lead  smelter  site in  Pedricktown,  New  Jersey to settle the  Company's
liability for $6 million, all of which had been. The settlement does not resolve
issues  regarding  the  Company's  potential  liability  in the event site costs
exceed $21 million.  The Company does not presently  expect site costs to exceed
such amount and has not provided accruals for such contingency.

     In 2000 the Company  reached an agreement with the other PRPs at the Baxter
Springs subsite in Cherokee County,  Kansas, to resolve the Company's liability.
The  Company  and others  formerly  mined  lead and zinc in the  Baxter  Springs
subsite. Under the agreement, the Company agreed to pay a portion of the cleanup
costs  associated  with the Baxter Springs  subsite.  The U.S. EPA estimated the
total  cleanup  costs in the  Baxter  Springs  subsite to be $5.4  million.  The
cleanup has been completed within the previously disclosed estimates.

     In 1996 the U.S.  EPA ordered the Company to perform a removal  action at a
formerly owned facility in Chicago,  Illinois. The Company has complied with the
order and has  completed  the  on-site  work at the  facility.  The  Company  is
conducting an investigation regarding potential offsite contamination.

     In 2000 the Company reached an agreement with the other PRPs at the Batavia
Landfill Superfund Site in Batavia, New York to resolve the Company's liability.
The Batavia  Landfill is a former  industrial  waste  disposal  site.  Under the
agreement,  the Company agreed to pay 40% of the future cleanup costs, which the
U.S.  EPA  estimated  to be  approximately  $11  million  in  total.  Under  the
settlement,  the  Company  is not  responsible  for  costs  associated  with the
operation  and  maintenance  of the remedy.  In addition,  the Company  received
approximately  $2 million from  settling  PRPs.  The cleanup has been  completed
within previously disclosed estimates.

     In January 2003,  the Company  received a General  Notice of Liability from
the U.S.  EPA  regarding  the site of a formerly  owned  primary  lead  smelting
facility  located in  Collinsville,  Illinois.  The U.S.  EPA  alleges  the site
contains  elevated  levels of lead. The Company and the U.S. EPA are negotiating
the terms of a proposed administrative order to remediate the site.

     In June 2003 the Company was served  with a  complaint  in Cole,  et al. v.
ASARCO  Incorporated  et al. (U.S.  District Court for the Northern  District of
Oklahoma,  Case No. 03C V327 EA (J)), a purported  class action on behalf of two
classes of persons  living in the  Picher/Cardin,  Oklahoma  area: (1) a medical
monitoring  class of persons  who have lived in the area since  1994;  and (2) a
property owner class of residential,  commercial and government property owners.
Plaintiffs are nine individuals and, in their official capacities,  the Mayor of
Picher and the Chairman of the  Picher/Cardin  School Board.  Plaintiffs  allege
causes of action in trespass and nuisance and seek a medical monitoring program,
a relocation  program,  property damages and punitive  damages.  The Company has
answered the complaint and has denied all of the plaintiffs' allegations.

     In July 2003 the Company was served with  complaints in six cases asserting
personal  injuries  due to  exposure  to lead from  mining  waste on behalf  of,
respectively,  two, four, two, three, four and two children in Crawford,  et al.
v. ASARCO  Incorporated,  et al. (Case No.  CJ-03-304);  Barr,  et al. v. ASARCO
Incorporated,   et  al.  (Case  No.   CJ-03-305);   Brewer,  et  al.  v.  ASARCO
Incorporated, et al. (Case No. CJ-03-306); Kloer, et al. v. ASARCO Incorporated,
et al. (Case No. CJ-03-307); Rhoten, et al. v. ASARCO Incorporated, et al. (Case
No.  CJ-03-308;  and Nowlin,  et al. v. ASARCO  Incorporated,  et al.  (Case No.
CJ-2003-342)(all  in the  District  Court  in and for  Ottawa  County,  State of
Oklahoma).  Each  complaint  alleges  causes  of action  in  negligence,  strict
liability,  nuisance,  and  attractive  nuisance;  and each seeks $20 million in
compensatory and $20 million in punitive damages.  The Company has answered each
complaint and has denied all of the plaintiffs' allegations.

     In December  2003 the  Company  was served  with a complaint  in The Quapaw
Tribe of Oklahoma et al. v. ASARCO  Incorporated  et al. (United States District
Court,  Northern District of Oklahoma,  Case No.  03-CV-846H(J)).  The complaint
alleges public nuisance, private nuisance,  trespass, unjust enrichment,  strict
liability and deceit by false  representation  against the Company and six other
mining  companies  with  respect to former  operations  in the Tar Creek  mining
district in Oklahoma.  The  complaint  seeks class action  status for former and
current  owners,  and  possessors  of real  property  located  within the Quapaw
Reservation. Among other things, the complaint seeks actual and punitive damages
from the defendants.  The Company has moved to dismiss the complaint and intends
to deny all  allegations.  The  plaintiff  has also notified the Company that it
intends  to  file a  separate  lawsuit  seeking  natural  resource  damages  and
injunctive relief under the Resource Conservation Recovery Act and CERCLA.

     In February 2004 the Company was served in Evans v. Asarco  (United  States
District  Court,  Northern  District of  Oklahoma,  Case No.  04-CV-94EA(M)),  a
purported class action on behalf of two classes of persons living in the town of
Quapaw,  Oklahoma:  (1) a medical  monitoring class of persons who have lived in
the area since 1994, and (2) a property owner class of  residential,  commercial
and government  property owners.  Plaintiffs are four individuals,  the mayor of
the  town of  Quapaw,  Oklahoma,  and the  School  Board  of  Quapaw,  Oklahoma.
Plaintiffs  allege  causes of action in nuisance  and seek a medical  monitoring
program,  a relocation  program,  property damages,  and punitive  damages.  The
Company intends to deny all of the plaintiffs' allegations.

     See Item 1. "Business - Regulatory and Environmental Matters and Note 18 to
the Consolidated Financial Statements."

     Insurance  coverage  claims.  NL  has  settled  insurance  coverage  claims
concerning   environmental   claims  with  certain  of  the  defendants  in  the
environmental coverage litigation, including NL's principal former carriers. See
Note 17 to the Consolidated Financial Statements. A portion of the proceeds from
these  settlements  were placed in special purpose trusts as discussed below. NL
also continues to negotiate with the remaining  insurance  carriers with respect
to  possible  settlement  of claims  that are being  asserted  in the New Jersey
environmental  litigation,  although there can be no assurance  that  settlement
agreements  can be  reached  with these  other  carriers.  No  further  material
settlements relating to litigation concerning environmental remediation coverage
are expected.

     At December  31,  2003,  the Company  had $24 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.  Such restricted  balances  declined by approximately  $35 million
during 2003 due primarily to a $30.8 million payment made by the Company related
to the final  settlement  of the  Company's  previously-reported  Granite  City,
Illinois lead smelter site.

     The issue of whether  insurance  coverage for defense costs or indemnity or
both will be found to exist for lead pigment  litigation  depends upon a variety
of factors,  and there can be no assurance that such insurance  coverage will be
available.  NL has not  considered any potential  insurance  recoveries for lead
pigment or environmental litigation in determining related accruals.

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

     No matters were submitted to a vote of security  holders during the quarter
ended December 31, 2003.







                                     PART II


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

     NL's common  stock is listed and traded on the New York and  Pacific  Stock
Exchanges (symbol:  NL). As of February 27, 2004, there were approximately 5,600
holders of record of NL common stock.  The  following  table sets forth the high
and low  closing  per share  sales  prices for NL common  stock for the  periods
indicated,  according to Bloomberg,  and dividends paid during such periods.  On
February  27, 2004 the closing  price of NL common  stock  according to the NYSE
Composite Tape was $15.03.

<TABLE>
<CAPTION>
                                                                                                      Cash
                                                                                                    dividends
                                                                          High           Low          paid

Year ended December 31, 2002

<S>                                                                        <C>         <C>             <C>
  First Quarter                                                            $17.47      $13.01          $ .20
  Second Quarter                                                            18.80       14.84            .20
  Third Quarter                                                             16.10       13.07            .20
  Fourth Quarter                                                            18.83       13.80           2.70

Year ended December 31, 2003

  First Quarter                                                            $18.23       14.51          $ .20
  Second Quarter                                                            17.85       15.80            .20
  Third Quarter                                                             18.25       16.14            .20
  Fourth Quarter (prior to Kronos distribution)                             18.22       16.35           -
  Fourth Quarter (after Kronos distribution)                                12.10       10.28            .20
</TABLE>

     On December 8, 2003, NL completed the  distribution to its  stockholders of
one share of common stock of Kronos, previously a wholly-owned subsidiary of NL,
for every two shares of NL common stock  outstanding as of the close of business
on November 17,  2003.  NL  distributed  approximately  23.9  million  shares of
Kronos' common stock, representing  approximately 48.8% of the outstanding stock
of Kronos.

     The Company paid four  quarterly  $.20 per share cash dividends in 2003. On
February 19, 2004, the Company's Board of Directors declared a regular quarterly
dividend of $.20 per share to  stockholders of record as of March 11, 2004 to be
paid in the form of  shares of common  stock of  Kronos on March 29,  2004.  The
declaration and payment of future dividends is discretionary, and the amount, if
any,  will be dependent  upon the  Company's  results of  operations,  financial
condition,  contractual  restrictions  and other factors deemed  relevant by the
Company's Board of Directors.

     Pursuant to its share repurchase programs,  the Company purchased 1,059,000
shares of its  common  stock in the open  market at an  aggregate  cost of $15.5
million in 2001 and  1,384,000  shares of its common stock in the open market at
an  aggregate  cost of $21.3  million  in 2002.  No common  stock was  purchased
pursuant  to this  share  repurchase  program  in 2003.  In  October  2002,  the
Company's  Board of  Directors  authorized  a 1,500,000  share  extension of the
repurchase  program.  The available  shares may be purchased over an unspecified
period of time,  and are to be held as  treasury  shares  available  for general
corporate purposes.  Approximately 1,323,000 additional shares are available for
purchase under the Company's share repurchase program.


ITEM 6.  SELECTED FINANCIAL DATA

     The following  selected  financial data should be read in conjunction  with
the  Company's  Consolidated  Financial  Statements  and Item 7 -  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                       Years ended December 31,
                                                    1999         2000          2001           2002          2003
                                                   ------       ------        ------         ------        ------
                                                                (In millions, except per share data)

STATEMENTS OF OPERATIONS DATA:
<S>                                              <C>          <C>          <C>            <C>           <C>
   Net sales                                     $  908.4     $ 922.3      $  835.1       $  875.2      $1,008.2
   Net income (1)                                   159.8       154.6         121.4           36.8          63.7

EARNINGS PER SHARE DATA:
  Basic                                          $   3.09     $  3.07      $   2.44       $    .76      $   1.33
  Diluted                                        $   3.08     $  3.05          2.44       $    .76      $   1.33

  Cash dividends per share                       $    .14     $   .65      $    .80       $   3.30      $    .80

BALANCE SHEET DATA (at year end):
   Cash, cash equivalents, current and
     noncurrent restricted cash equivalents and
     current and noncurrent restricted
     marketable debt securities                  $  151.8    $  207.6      $  199.0       $  130.4      $   99.8
   Current assets                                   506.4       554.9         561.8          486.3         567.3
   Total assets                                   1,056.2     1,120.8       1,151.1        1,111.5       1,264.1
   Current liabilities                              264.8       298.0         299.1          238.0         239.9
   Long-term debt including current maturities      244.5       196.1         196.5          325.9         356.7
   Stockholders' equity                             271.1       344.5         386.9          265.3         200.9

TiO2 OPERATING STATISTICS:
   Average selling price
     index (1983=100)                               153         161           156            142            146
   Sales volume*                                    427         436           402            455            462
   Production volume*                               411         441           412            442            476
   Production capacity at beginning of year*        440         440           450            455            470
   Production rate as a percentage of capacity       93%       Full            91%            96%          Full
</TABLE>


   * Metric tons in thousands

(1)  Net income in 1999 includes a $57.7 million  income tax benefit  related to
     (i) a favorable resolution of Kronos'  previously-reported  tax contingency
     in Germany  ($29.1  million) and (ii) a net  reduction in Kronos'  deferred
     income tax asset  valuation  allowance  due to a change in the  estimate of
     Kronos'  ability  to  utilize  certain  income  tax  attributes  under  the
     "more-likely-than-not" recognition criteria ($28.6 million). .

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

Critical accounting policies and estimates

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

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

o    The Company maintains allowances for doubtful accounts for estimated losses
     resulting from the inability of its customers to make required payments and
     other factors.  The Company takes into  consideration the current financial
     condition  of its  customers,  the age of the  outstanding  balance and the
     current economic  environment when assessing the adequacy of the allowance.
     If the financial  condition of the Company's customers were to deteriorate,
     resulting in an impairment of their  ability to make  payments,  additional
     allowances  may be  required.  During 2001,  2002 and 2003,  the net amount
     written off against the allowance for doubtful  accounts as a percentage of
     the balance of the allowance  for doubtful  accounts as of the beginning of
     the year ranged from 11% to 23%.

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

o    The Company owns  investments  in certain  companies that are accounted for
     either as  marketable  securities  carried at fair value or  accounted  for
     under the equity method.  For all of such investments,  the Company records
     an  impairment  charge when it believes an  investment  has  experienced  a
     decline in fair value below its cost basis (for  marketable  securities) or
     below its carrying value (for equity method  investees)  that is other than
     temporary.  Future adverse  changes in market  conditions or poor operating
     results of underlying investments could result in losses or an inability to
     recover the carrying value of the investments  that may not be reflected in
     an investment's  current  carrying  value,  thereby  possibly  requiring an
     impairment charge in the future.

     At December 31, 2003, the carrying value of all of the Company's marketable
     securities  exceeded  the  cost  basis  of each of such  investments.  With
     respect to the Company's investment in Valhi, which represented over 99% of
     the carrying value of all of the Company's  marketable equity securities at
     December 31, 2003,  the $70.5  million  carrying  value of such  investment
     exceeded its $34.6 million cost basis by about 104%.

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

     Under  applicable  GAAP (SFAS No. 144,  Accounting  for the  Impairment  or
     Disposal of Long-Lived Assets),  property and equipment is not assessed for
     impairment unless certain impairment  indicators,  as defined, are present.
     During 2003, no such impairment indicators, as defined, were present.

     Under applicable GAAP (SFAS No. 142, Goodwill and other Intangible Assets),
     goodwill is required to be reviewed  for  impairment  at least on an annual
     basis.  Goodwill will also be reviewed for impairment at other times during
     each  year  when  impairment  indicators,  as  defined,  are  present.  The
     Company's goodwill relates to an acquisition  completed in January 2002. No
     goodwill  impairments  were  deemed to exist as a result  of the  Company's
     annual impairment review completed during the third quarter of 2003.

o    The  Company   maintains   various   defined   benefit  pension  plans  and
     postretirement benefits other than pensions ("OPEB"). The amount recognized
     as defined  benefit  pension and OPEB expense,  and the reported  amount of
     prepaid and accrued  pension costs and accrued OPEB costs,  are actuarially
     determined based on several assumptions, including discount rates, expected
     rates of  returns on plan  assets and  expected  health  care trend  rates.
     Variances from these actuarially  assumed rates will result in increases or
     decreases,  as applicable,  in the recognized pension and OPEB obligations,
     pension and OPEB expense and funding  requirements.  These  assumptions are
     more fully described below under  "--Assumptions on defined benefit pension
     plans and OPEB plans."

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

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

Executive summary

     Relative  changes in the Company's  TiO2 sales and operating  income during
the past three years are primarily due to (i) relative changes in TiO2 sales and
production  volumes,  (ii) relative  changes in TiO2 average  selling prices and
(iii) relative changes in foreign currency  exchange rates. The relatively lower
levels of sales and production  volumes in 2001 as compared to 2002 and 2003 are
due  in  part  to the  effects  of a fire  at  one of the  Company's  production
facilities, as discussed below.

     Selling prices for TiO2, the Company's  principal  product,  were generally
decreasing during all of 2001 and the first quarter of 2002, were generally flat
during the second  quarter of 2002,  were generally  increasing  during the last
half of 2002 and the first  quarter  of 2003,  were  generally  flat  during the
second quarter of 2003 and were generally  declining during the third and fourth
quarters of 2003.

     As described in Item 3. "Legal Proceedings" and Note 18 to the Consolidated
Financial Statements, the Company is involved in various legal proceedings. Such
proceedings include lead pigment litigation  resulting from the Company's former
operations,  environmental  matters and litigation associated with the Company's
current and former operating  facilities along with various other environmental,
contractual,  product liability and other claims and disputes  incidental to its
present and former businesses.

Results of operations

     NL  conducts  operations  for TiO2,  its  principal  product,  through  its
subsidiary,  Kronos.  Average TiO2 selling prices in billing  currencies  (which
exclude the effects of foreign currency  translation) were generally  decreasing
during all of 2001 and the first quarter of 2002, were generally flat during the
second  quarter of 2002 and were  generally  increasing  during the last half of
2002 and the  first  quarter  of 2003.  Average  selling  prices  for TiO2  were
generally flat during the second  quarter of 2003 and were generally  decreasing
throughout the remainder of 2003.









<TABLE>
<CAPTION>


                                                    Years ended December 31,                     % Change
                                                 -----------------------------                -----------
                                              2001          2002            2003          2001-02        2002-03
                                              ----          ----            ----          -------        -------
                                          (In $ millions, except selling price data)
<S>                                         <C>           <C>           <C>                  <C>            <C>
Net sales                                   $835.1        $875.2        $ 1,008.2            + 5%          +15%
Cost of sales                                578.1         671.8            739.2            +16%          +10%
                                         ---------     ---------        ---------

Gross margin                                 257.0         203.4            269.0            -21%          +32%

Selling, general and administrative
    expense                                  (98.7)       (107.7)          (124.4)           + 9%          +16%
Insurance recoveries, net                      7.2            -                -
Currency transaction gains (losses), net       1.2           (.5)            (7.7)
Disposition of property and equipment          (.7)          (.6)             9.8
Litigation settlement gains, net              11.7           5.2               .8
Noncompete agreement income                    4.0           4.0               .3
Corporate expense                            (25.8)        (37.9)           (57.4)
Other                                          1.4            .3               .5
                                         ---------     ---------        ---------

Income from operations                   $  157.3      $   66.2         $    90.9            -58%          +37%
                                         ========      ========         =========

TiO2 operating statistics:

Percent change in average selling prices:
       Using actual foreign currency
          exchange rates                                                                     - 7%          +13%
       Impact of changes in foreign
          currency exchange rates                                                            - 2%          -10%
                                                                                             ----          ----

       In billing currencies                                                                 - 9%          + 3%
                                                                                             ====          ====

Sales volumes*                                 402           455            462              +13%          + 2%
Production volumes*                            412           442            476              + 7%          + 8%
Production rate as
  percent of capacity                           91%           96%          Full
</TABLE>


* Thousands of metric tons

     Year ended December 31, 2003 compared to year ended December 31, 2002

     The Company's net sales increased  $133.0 million (15%) in 2003 compared to
2002 due to higher  average  selling  prices along with higher sales  volumes in
2003 and the  positive  effects of currency  exchange  rates,  specifically  the
weaker U.S.  dollar as compared to the euro and Canadian  dollar.  Excluding the
effect  of  fluctuations  in the  value of the  U.S.  dollar  relative  to other
currencies,  the Company's average TiO2 selling price in 2003 was 3% higher than
2002,  primarily due to the European and export  markets.  When  translated from
billing  currencies to U.S. dollars using actual foreign currency exchange rates
prevailing  during the respective  periods,  the Company's  average TiO2 selling
prices in 2003  increased 13% compared to 2002. The Company's TiO2 sales volumes
in 2003 set a new record,  increasing  2% from the previous  record  achieved in
2002,  with higher  volumes in European  and North  American  markets  more than
offsetting  a decline  in volumes to export  markets.  By volume,  approximately
one-half of NL's 2002 and 2003 TiO2 sales volumes were  attributable  to markets
in Europe,  with 40%  attributable  to North  America  and the balance to export
markets.

     The Company's  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 the Company's  average TiO2 selling
price in billing  currencies  (which excludes the effects of fluctuations in the
value  of the  U.S.  dollar  relative  to  other  currencies)  is  considered  a
"non-GAAP" financial measure under regulations of the SEC. The disclosure of the
percentage  change in the  Company's  average TiO2  selling  prices using actual
foreign  currency  exchange rates  prevailing  during the respective  periods is
considered  the  most  directly   comparable   financial  measure  presented  in
accordance with accounting  principles  generally  accepted in the United States
("GAAP measure").  The Company discloses  percentage changes in its average TiO2
prices in billing  currencies  because  the  Company  believes  such  disclosure
provides  useful  information to investors to allow them to analyze such changes
without  the  impact of  changes in foreign  currency  exchange  rates,  thereby
facilitating  period-to-period  comparisons  of the relative  changes in average
selling prices in the actual various  billing  currencies.  Generally,  when the
U.S.  dollar  either  strengthens  or  weakens  against  other  currencies,  the
percentage change in average selling prices in billing currencies will be higher
or lower,  respectively,  than such  percentage  changes  would be using  actual
exchange rates prevailing during the respective periods.  The difference between
the 13% increase in the  Company's  average TiO2 selling  prices  during 2003 as
compared to 2002 using actual foreign currency  exchange rates prevailing during
the respective periods (the GAAP measure) and the 3% percentage  increase in the
Company's  average  TiO2  selling  price in  billing  currencies  (the  non-GAAP
measure) during such periods is due to the effect of changes in foreign currency
exchange  rates.  The table  above  presents  (i) the  percentage  change in the
Company's  average TiO2 selling  prices using actual foreign  currency  exchange
rates  prevailing  during the respective  periods (the GAAP  measure),  (ii) the
percentage  change in Kronos  average TiO2 selling  price in billing  currencies
(the non-GAAP measure) and (iii) the percentage change due to changes in foreign
currency  exchange rates (or the reconciling  item between the non-GAAP  measure
and the GAAP measure).

     The Company's cost of sales  increased $67.4 million (10%) in 2003 compared
to 2002 due to the higher  sales  volumes.  The  Company's  cost of sales,  as a
percentage of net sales, decreased from 77% in 2002 to 73% in 2003 due primarily
to the effects of continued cost reduction  efforts  combined with the impact of
higher  production  volumes and higher average selling  prices.  Operating rates
were near full capacity  during most of 2003,  setting a new Company  production
record.

     The Company's gross margins increased $65.6 million (32%) from 2002 to 2003
due to the net effects of the aforementioned  changes in sales and cost of sales
during such periods.

     As a percentage of net sales,  selling general and administrative  expenses
remained consistent at 12%, increasing  proportionately with the increased sales
and production volume.

     Certain of the sales  generated  by the  Company's  European  and  Canadian
operations are denominated in the U.S.  dollar,  and such  operations  routinely
hold U.S. dollar-denominated receivables. Primarily as a result of the weakening
of the U.S.  dollar as compared to the Canadian  dollar and the euro  throughout
the year, the Company's results in 2003 included net currency transaction losses
of $7.7 million. Due to a more stable dollar in 2002, the Company recognized net
currency transaction losses of approximately  $500,000.  The gain on disposal of
property and equipment in 2003 related primarily to the disposal of certain real
property not associated with the Company's TiO2 operations, and aggregated $10.3
million. The Company has certain other real property,  including some subject to
environmental  remediation,  which could be sold in the future for a profit. The
litigation  settlement  gains  relate to legal  settlements  with certain of the
Company's former insurance carriers.  The noncompete agreement income related to
a covenant not to compete involving a formerly owned business unit, which became
fully amortized in January 2003.

     Corporate  expenses for 2003  increased 51% to $57.4 million as compared to
2002  primarily  due  to  higher  environmental   remediation  expense  accruals
(principally  related  to one  formerly  owned  site for which  the  remediation
process is expected to occur over the next several years).

     Kronos has  substantial  operations and assets  located  outside the United
States (primarily 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,  principally  the  euro,  other  major
European  currencies  and the  Canadian  dollar.  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 2003 by a net $93 million  compared
to  2002.  Fluctuations  in the  value  of the  U.S.  dollar  relative  to other
currencies  similarly  impacted Kronos' foreign  currency-denominated  operating
expenses. NL's operating costs that are not denominated in the U.S. dollar, when
translated into U.S.  dollars,  were higher in 2003 compared to the same periods
of 2002. Overall, currency exchange rate fluctuations resulted in a net decrease
in Kronos'  operating  income in 2003 of approximately $6 million as compared to
2002.

     Year ended December 31, 2002 compared to year ended December 31, 2001

     The Company's  sales  increased $40.1 million (5%) in 2002 compared to 2001
due primarily to higher TiO2 sales volumes, offset by lower average TiO2 selling
prices. The Company's record TiO2 sales volumes in 2002 were 13% higher compared
to 2001 primarily due to higher  volumes in European and North American  markets
of 14% and 17%, respectively. By volume, approximately one-half of the Company's
2002 TiO2 sales  volumes  were  attributable  to  markets  in  Europe,  with 39%
attributable to North America and the balance to export markets.  The lower TiO2
sales  volumes in 2001 were due in part to the effect of a fire at the Company's
Leverkusen,  Germany facility in March 2001 that disrupted operations.  See Note
17  to  the  Consolidated   Financial   Statements.   Excluding  the  effect  of
fluctuations in the value of the U.S. dollar relative to other  currencies,  the
Company's average TiO2 selling price in 2002 was 9% lower than 2001, with prices
lower in all major  regions.  When  translated  from billing  currencies to U.S.
dollars using actual  foreign  currency  exchange  rates  prevailing  during the
respective periods,  the Company's average TiO2 selling prices in 2002 decreased
7% compared to 2001.

     The Company's cost of sales  increased $93.8 million (16%) in 2002 compared
to 2001 due to higher sales volume,  partially offset by lower unit costs, which
resulted  primarily from the higher production levels. The effects of lower TiO2
sales and  production  volumes in 2001 were  partially  offset by receipt of the
business  interruption proceeds discussed above. The Company's cost of sales, as
a percentage of net sales,  increased  from 69% in 2001 to 77% in 2002 primarily
due to the impact on net sales of the lower  average  selling  prices  partially
offset by lower unit costs.

     The Company's gross margin declined $53.6 million (21%) in 2002 compared to
2001 as the effect of lower  average  TiO2  selling  prices more than offset the
effect of higher  TiO2 sales and  production  volumes.  The effect of the higher
sales and production volumes was offset in part by the $27.3 million of business
interruption proceeds received in 2001, as discussed below.

     The  Company's  record  TiO2  production  volume in 2002 was 7% higher than
2001.  Kronos'  operating rates in 2001 were lower as compared to 2002 primarily
due to lost production resulting from the Leverkusen fire.

     The Company's  income from  operations  in 2001  includes  $27.3 million of
business  interruption  insurance  proceeds as payment  for losses  (unallocated
period costs and lost margin) caused by the Leverkusen  fire. The effects of the
lower TiO2 sales and  production  volumes  were  offset in part by the  business
interruption  insurance proceeds. Of such $27.3 million of business interruption
insurance  proceeds,  $20.1 million was recorded as a reduction of cost of sales
to offset unallocated  period costs that resulted from lost production,  and the
remaining  $7.2 million,  representing  recovery of lost margin,  is included in
income from operations (as shown on the table above). The business  interruption
insurance  proceeds  distorted the income from operations  margin  percentage in
2001 as there  are no sales  associated  with the $7.2  million  of lost  margin
recognized. See Note 17 to the Consolidated Financial Statements.

     The Company also recognized  insurance  recoveries of $29.1 million in 2001
for property damage and related cleanup and other extra expenses  related to the
Leverkusen  fire,  resulting  in an  insurance  gain of  $17.5  million,  as the
insurance  recoveries  exceeded the carrying value of the property destroyed and
the  cleanup and other  extra  expenses  incurred.  Such  insurance  gain is not
reported  as a  component  of income  from  operations  but is included in other
income and expense, as discussed below. The Company does not expect to recognize
any additional  insurance recoveries related to the Leverkusen fire. See Note 17
to the Consolidated Financial Statements.

     The  Company's  selling,   general  and   administrative   expenses  ("SG&A
expenses") increased $9.0 million (9%) in 2002 as compared to 2001 primarily due
to higher  distribution  expenses  ($600,000)  associated  with the higher sales
volume in 2002 and higher  administrative  expenses of $5.8 million,  as well as
the impact of  relative  changes  in  foreign  currency  exchange  rates,  which
increased  Kronos'  expenses  in 2002  compared  to  2001.  SG&A  expenses  were
approximately 12% of sales in both 2001 and 2002.

     As discussed  above,  Kronos has substantial  operations and assets located
outside the United States (primarily in Germany, Belgium, Norway and Canada) and
consequently,  the  translated  U.S.  dollar value of Kronos'  foreign sales and
operating  results are subject to currency  exchange rate  fluctuations that 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 2002 by a net $21 million  compared to 2001.  Fluctuations in the value
of the U.S.  dollar  relative to other  currencies  similarly  impacted  Kronos'
foreign  currency-denominated  operating expenses. NL's operating costs that are
not denominated in the U.S.  dollar,  when translated  into U.S.  dollars,  were
higher in 2003 compared to the same periods of 2002. Overall,  currency exchange
rate fluctuations on Kronos' operating income comparisons was not significant in
2002 as compared to 2001.



Outlook

     Kronos expects its TiO2  production  volumes in 2004 will  approximate  its
2003 production volumes, and sales volumes are expected to be slightly higher in
2004 as compared to 2003.  Kronos'  average Ti02 selling  price,  which declined
during the second half of 2003,  is  expected to continue to decline  during the
first quarter of 2004.  Kronos is hopeful that its average  selling  prices will
cease  to  decline  sometime  during  the  first  half of  2004  and  will  rise
thereafter.  Nevertheless,  Kronos expects its average TiO2 selling  prices,  in
billing currencies,  will be lower in 2004 as compared to 2003. Overall,  Kronos
expects  its  operating  income  in  2004  will  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  Kronos'  expectations,   the  Company's  results  of
operations could be unfavorably affected.

Other income (expense)

     The following table sets forth certain  information  regarding other income
and expense items.





<TABLE>
<CAPTION>

                                                   Years ended December 31,                     Change
                                                 ---------------------------              ------------
                                               2001          2002          2003        2001-02        2002-03
                                               ----          ----          ----        -------        -------
(In $ millions)
<S>                                         <C>           <C>           <C>           <C>           <C>
Currency transaction gains                  $    -        $   6.3       $    -        $   6.3       $  (6.3)
Insurance recoveries, net                      17.5            -             -          (17.5)           -
Trade interest income                           2.3           1.7            .8           (.6)          (.9)
Other interest and dividend income              8.9           5.7           3.2          (3.2)         (2.5)
Securities gains (losses), net                 (1.1)          (.1)          2.4           1.0           2.5
Interest expense                              (27.6)        (29.8)        (33.0)         (2.2)         (3.2)
                                            -------       -------       -------       -------       -------
                                            $   - _       $ (16.2)      $ (26.6)      $ (16.2)      $ (10.4)
                                            ========      =======       =======       =======       =======
</TABLE>

     Interest  income,  including  noncash  interest  income on restricted  cash
balances and restricted  marketable  debt  securities,  fluctuates in part based
upon the amount of funds  invested and yields  thereon.  Aggregate  interest and
dividend  income declined $3.4 million in 2003 compared to 2002 and $3.8 million
in 2002  compared with 2001  primarily  due to lower average  yields on invested
funds.  Average funds invested in 2001 were higher  compared with the subsequent
years  primarily  due to the  decrease  in the  balance of  restricted  cash and
marketable  debt securities over the past three years as such funds were used to
pay for certain environmental  remediation expenditures of the Company. See Note
18 to the Consolidated Financial Statements. The Company expects interest income
will be lower in 2004 than 2003 due to lower  average  yields and lower  average
levels of funds available for investment.

     Securities  gains  (losses),  net in 2003  included a $2.3 million  noncash
securities  gain  related to the exchange of the  Company's  holdings of Tremont
Corporation common stock for shares of Valhi, Inc. common stock as a result of a
series of merger  transactions  completed  in February  2003.  See Note 5 to the
Consolidated  Financial  Statements.  Securities  gains  (losses),  net in  2001
related   to  a  $1.1   million   noncash   securities   loss   related   to  an
other-than-temporary  decline in value of certain available-for-sale  securities
held by the Company.

     In June 2002 Kronos  International,  Inc. ("KII"), an indirect wholly-owned
subsidiary of the Company,  sold (euro)285  million of its 8.875% Senior Secured
Notes (the "Notes") due 2009. KII used the net proceeds of the Notes offering to
repay certain intercompany  indebtedness owed to the Company, a portion of which
the Company used to redeem at par all of its  outstanding  11.75% Senior Secured
Notes due 2003,  plus  accrued  interest.  As a result of the  refinancing,  the
Company  recognized a foreign currency  transaction gain of $6.3 million in 2002
related to the extinguishment of certain intercompany indebtedness.  See Note 11
to the Consolidated Financial Statements.

     The insurance recoveries, net of $17.5 million in 2001 related to insurance
proceeds  received from property damage  resulting from the Leverkusen fire. The
insurance  proceeds  received  exceeded  the  carrying  value  of  the  property
destroyed and cleanup costs incurred.  See Note 17 to the Consolidated Financial
Statements.

     Interest  expense in 2003 increased $3.2 million compared to 2002 primarily
due to higher  levels  of  outstanding  debt and  associated  currency  effects,
partially  offset by lower interest  rates.  Interest  expense in 2002 increased
$2.2 million  compared  with 2001  primarily  due to $2.0 million of  additional
second-quarter 2002 interest expense related to the early  extinguishment of the
Company's 11.75% Senior Secured Notes. See Note 11 to the Consolidated Financial
Statements.  Assuming no significant change in interest rates,  interest expense
in 2004 is expected to be higher compared with 2003 due to higher average levels
of outstanding indebtedness, partially offset by lower average interest rates.

     Provision  for income  taxes.  The  principal  reasons  for the  difference
between the Company's  effective income tax rates and the U.S. federal statutory
income  tax  rates  are  explained  in  Note  14 to the  Consolidated  Financial
Statements.  Income tax rates vary by jurisdiction  (country and/or state),  and
relative  changes in the  geographic mix of the Company's  pre-tax  earnings can
result in fluctuations in the effective income tax rate.

     During 2003, NL reduced its deferred income tax asset  valuation  allowance
by approximately  $7.2 million,  primarily as a result of utilization of certain
income tax attributes for which the benefit had not previously been  recognized.
In addition,  the Company  recognized a $38.0 million income tax benefit related
to the net refund of certain prior year German income taxes.

     During 2002, NL reduced its deferred income tax asset  valuation  allowance
by approximately  $3.4 million,  primarily as a result of utilization of certain
income tax attributes for which the benefit had not previously been  recognized.
The  provision  for income taxes in 2002 also  includes a $2.3 million  deferred
income tax benefit related to certain changes in the Belgian tax law.

     During 2001, NL reduced its deferred income tax asset  valuation  allowance
by $24.7  million.  Of such  reduction,  $23.2  million  related  to a change in
estimate  of NL's  ability  to utilize  certain  German  income  tax  attributes
following  the  completion  of a  restructuring  of its German  operations,  the
benefit   of   which   had   not   previously   been   recognized    under   the
"more-likely-than-not"  recognition  criteria.  In  addition,  NL also  utilized
certain tax attributes during 2001 for which the benefit had also not previously
been recognized.

     At December 31, 2003, the Company had the equivalent of approximately  $438
million  of  German  income  tax loss  carryforwards  with no  expiration  date.
However,   NL  has  provided  a  deferred  tax   valuation   allowance   against
substantially  all of these income tax loss  carryforwards  because NL currently
believes they do not meet the  "more-likely-than-not"  recognition criteria. The
Company periodically evaluates the  "more-likely-than-not"  recognition criteria
with  respect to such tax loss  carryforwards,  and it is  possible  that in the
future the Company  may  conclude  such  carryforwards  do meet the  recognition
criteria,  at which  time the  Company  would  reverse  all or a portion of such
deferred tax valuation allowance.

     In  January  2004,  the  German  federal  government  enacted  new  tax law
amendments  that limit the annual  utilization  of income tax loss  carryforward
effective January 1, 2004. The new law may  significantly  affect Kronos' future
income tax expense and cash tax payments.

     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 its stockholders. Because of such distribution,
the Company  expects to report a higher amount of minority  interest in earnings
in 2004 as compared to 2003. See Notes 12 and 13 to the  Consolidated  Financial
Statements.

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

     Related party transactions.  The Company is a party to certain transactions
with related parties. See Note 16 to the Consolidated Financial Statements.

     Accounting   principles   newly  adopted  in  2003.  See  Note  20  to  the
Consolidated Financial Statements.

     Accounting  principles  not yet  adopted.  See Note 22 to the  Consolidated
Financial Statements

Assumptions on defined benefit pension plans and OPEB plans

     Defined  benefit  pension  plans.  The Company  maintains  various  defined
benefit  pension  plans  in the  U.S.,  Europe  and  Canada.  See Note 15 to the
Consolidated Financial Statements.

     The Company  accounts for its defined  benefit pension plans using SFAS No.
87,  "Employer's  Accounting for Pensions."  Under SFAS No. 87, defined  benefit
pension plan expense and prepaid and accrued  pension costs are each  recognized
based on certain actuarial  assumptions,  principally the assumed discount rate,
the assumed  long-term rate of return on plan assets and the assumed increase in
future compensation levels. The Company recognized  consolidated defined benefit
pension  plan  expense of $4.6  million in 2001,  $7.0  million in 2002 and $8.9
million in 2003. The amount of funding  requirements  for these defined  benefit
pension plans is generally based upon applicable  regulations  (such as ERISA in
the U.S.), and will generally differ from pension expense  recognized under SFAS
No. 87 for financial reporting purposes.  Contributions made by NL to all of its
plans aggregated $7.6 million in 2001, $9.3 million in 2002 and $14.1 million in
2003.

     The discount rates the Company  utilizes for  determining  defined  benefit
pension  expense  and the  related  pension  obligations  are  based on  current
interest  rates  earned on  long-term  bonds that receive one of the two highest
ratings given by recognized rating agencies in the applicable  country where the
defined  benefit  pension  benefits  are being paid.  In  addition,  the Company
receives advice about appropriate discount rates from the Company's  third-party
actuaries,  who may in some cases utilize their own market indices. The discount
rates  are  adjusted  as of each  valuation  date  (September  30th) to  reflect
then-current  interest  rates on such long-term  bonds.  Such discount rates are
used to determine the actuarial  present value of the pension  obligations as of
December 31st of that year,  and such discount  rates are also used to determine
the interest  component of defined  benefit  pension  expense for the  following
year.

     At December 31, 2003,  approximately 15%, 54%, 11% and 15% of the projected
benefit obligation related to NL plans in the U.S., Germany,  Canada and Norway,
respectively.  The Company uses several  different  discount rate assumptions in
determining  its  consolidated  defined  benefit  pension plan  obligations  and
expense because the Company  maintains  defined benefit pension plans in several
different   countries  in  North  America  and  Europe  and  the  interest  rate
environment differs from country to country.

     The Company  used the  following  discount  rates for its  defined  benefit
pension plans:
<TABLE>
<CAPTION>

                                                     Discount rates used for:
                       ---------------------------------------------------------------------------------------------
                       ---------------------------------------------------------------------------------------------
                               Obligations at                 Obligations at                 Obligations at
                       December 31, 2001 and expense   December 31, 2002 and expense      December 31, 2003 and
                                 in 2002                         in 2003                    expense in 2004
                       ---------------------------------------------------------------------------------------------



<S>                                 <C>                         <C>                             <C>
  U.S.                              7.3%                        6.5%                            5.9%
  Germany                           5.8%                        5.5%                            5.3%
  Canada                            7.3%                        7.0%                            6.3%
  Norway                            6.0%                        6.0%                            5.5%
</TABLE>


     The  assumed  long-term  rate of  return  on  plan  assets  represents  the
estimated  average rate of earnings  expected to be earned on the funds invested
or to be invested  in the plans'  assets  provided to fund the benefit  payments
inherent in the projected benefit  obligations.  Unlike the discount rate, which
is adjusted each year based on changes in current long-term  interest rates, the
assumed  long-term  rate of return on plan  assets will not  necessarily  change
based upon the actual,  short-term  performance  of the plan assets in any given
year.  Defined  benefit  pension  expense  each year is based  upon the  assumed
long-term  rate of return on plan assets for each plan and the actual fair value
of the plan  assets as of the  beginning  of the year.  Differences  between the
expected  return on plan  assets  for a given  year and the  actual  return  are
deferred  and  amortized  over future  periods  based  either upon the  expected
average  remaining  service life of the active plan  participants (for plans for
which  benefits  are still  being  earned by active  employees)  or the  average
remaining  life  expectancy  of the inactive  participants  (for plans for which
benefits are not still being earned by active employees).

     At December  31,  2003,  approximately  18%,  48%,  10% and 18% of the plan
assets  related to plan assets for NL's plans in the U.S.,  Germany,  Canada and
Norway,  respectively.  The Company uses several  different  long-term  rates of
return on plan asset assumptions in determining its consolidated defined benefit
pension plan expense because the Company maintains defined benefit pension plans
in several different  countries in North America and Europe,  the plan assets in
different  countries  are  invested in a different  mix of  investments  and the
long-term  rates of return for  different  investments  differ  from  country to
country.

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

o    During  2003,  the  Company's  plan assets in the U.S.  are invested in the
     Combined Master  Retirement Trust ("CMRT"),  a collective  investment trust
     established by Valhi to permit the collective  investment by certain master
     trusts which fund certain employee  benefits plans sponsored by Contran and
     certain of its affiliates.  Harold Simmons is the sole trustee of the CMRT.
     The CMRT's  long-term  investment  objective is to provide a rate of return
     exceeding a  composite  of broad  market  equity and fixed  income  indices
     (including  the  S&P  500  and  certain  Russell  indices)  utilizing  both
     third-party  investment  managers  as well as  investments  directed by Mr.
     Simmons. During the 16-year history of the CMRT, through December 31, 2003,
     the  average  annual  rate of return  has been  12.4%.  Prior to 2003,  the
     Company's U.S. plan assets were invested with a combination  and equity and
     fixed income managers.

o    In Germany,  the  composition of NL's plan assets is established to satisfy
     the  requirements of the German  insurance  commissioner.  The current plan
     asset allocation at December 31, 2003 was 25% to equity managers and 75% to
     fixed income managers.

o    In Canada, NL currently has a plan asset target allocation of 65% to equity
     managers and 35% to fixed income managers,  with an expected long-term rate
     of return for such  investments to average  approximately  125 basis points
     above the applicable  equity or fixed income index.  The current plan asset
     allocation at December 31, 2003 was 57% to equity managers and 43% to fixed
     income  managers.

o    In Norway, NL currently has a plan asset target allocation of 14% to equity
     managers and 86% to fixed income managers,  with an expected long-term rate
     of return for such investments of  approximately  8% and 6%,  respectively.
     The current  plan asset  allocation  at December 31, 2003 was 15% to equity
     managers and 85% to fixed income managers.

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

     The Company's  assumed  long-term  rates of return on plan assets for 2001,
2002 and 2003 were as follows:
<TABLE>
<CAPTION>

                                                         2001                  2002                  2003
                                                       --------              --------               ------

<S>                                                      <C>                   <C>                   <C>
  U.S.                                                   8.5%                  8.5%                  10.0%
  Germany                                                7.3%                  6.8%                   6.5%
  Canada                                                 7.8%                  7.0%                   7.0%
  Norway                                                 7.0%                  7.0%                   6.0%
</TABLE>

     The Company  currently expects to utilize the same long-term rate of return
on plan asset assumptions in 2004 as it used in 2003 for purposes of determining
the 2004 defined benefit pension plan expense.

     To the extent that a plan's particular  pension benefit formula  calculates
the pension benefit in whole or in part based upon future  compensation  levels,
the projected benefit  obligations and the pension expense will be based in part
upon expected increases in future compensation  levels. For all of the Company's
plans for which the benefit  formula is so  calculated,  the  Company  generally
bases the assumed expected increase in future  compensation  levels upon average
long-term inflation rates for the applicable country.

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

     Based  on the  actuarial  assumptions  described  above  and  NL's  current
expectation  for what actual  average  foreign  currency  exchange rates will be
during 2004, NL expects its defined benefit pension expense will approximate $13
million in 2004. In comparison,  NL expects to be required to make approximately
$9 million of contributions to such plans during 2004.

     As noted above,  defined benefit pension expense and the amount  recognized
as prepaid and accrued  pension costs are based upon the  actuarial  assumptions
discussed above. The Company believes all of the actuarial  assumptions used are
reasonable and  appropriate.  If NL had lowered the assumed  discount rate by 25
basis  points  for all of its plans as of  December  31,  2003,  NL's  aggregate
projected  benefit  obligations  would have  increased  by  approximately  $12.8
million at that date, and NL's defined benefit pension expense would be expected
to increase by approximately $1.7 million during 2004. Similarly,  if NL lowered
the assumed  long-term  rate of return on plan assets by 25 basis points for all
of its plans, NL's defined benefit pension expense would be expected to increase
by approximately $700,000 during 2004.

     OPEB plans.  Certain  subsidiaries  of the  Company in the U.S.  and Canada
currently  provide certain health care and life insurance  benefits for eligible
retired employees.  See Note 15 to the Consolidated  Financial  Statements.  The
Company  accounts for such OPEB costs under SFAS No. 106,  Employers  Accounting
for  Postretirement  Benefits  other than  Pensions.  Under SFAS No.  106,  OPEB
expense  and  accrued  OPEB  costs are based on certain  actuarial  assumptions,
principally  the assumed  discount  rate and the assumed  rate of  increases  in
future  health care costs.  The Company  recognized  consolidated  OPEB  expense
(income) of ($191,000) in 2001, $80,000 in 2002 and $329,000 in 2003. Similar to
defined  benefit  pension  benefits,  the amount of funding will differ from the
expense recognized for financial  reporting  purposes,  and contributions to the
plans to cover benefit payments  aggregated $.5 million in 2001, $3.5 million in
2002 and $3.8 million in 2003.

     The  assumed  discount  rates the Company  utilizes  for  determining  OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company  utilizes for its U.S. and Canadian  defined  benefit
pension plans.

     In estimating  the health care cost trend rate,  the Company  considers its
actual health care cost experience,  future benefit structures,  industry trends
and advice from its third-party actuaries.  During each of the past three years,
the  Company has assumed  that the  relative  increase in health care costs will
generally  trend downward over the next several years,  reflecting,  among other
things,   assumed  increases  in  efficiency  in  the  health  care  system  and
industry-wide cost containment  initiatives.  For example, at December 31, 2003,
the  expected  rate of increase in future  health care costs  ranges from 10% in
2004, declining to 5.5% in 2009 and thereafter.

     Based  on the  actuarial  assumptions  described  above  and  NL's  current
expectation  for what actual  average  foreign  currency  exchange rates will be
during 2004, the Company expects its consolidated  OPEB expense will approximate
$1.4  million  in  2004.  In  comparison,   the  Company  expects  the  employer
contribution portion of costs to approximate $4.1 million during 2004.

     As noted  above,  OPEB  expense and the amount  recognized  as accrued OPEB
costs are based upon the  actuarial  assumptions  discussed  above.  The Company
believes all of the actuarial  assumptions  used are reasonable and appropriate.
If the Company had lowered the assumed  discount rate by 25 basis points for all
of its OPEB plans as of December 31, 2003,  the  Company's  aggregate  projected
benefit obligations would have increased by approximately $700,000 at that date,
and the  Company's  OPEB  expense  would be  expected  to  increase by less than
$50,000  during 2004.  Similarly,  if the assumed  future health care cost trend
rate had been  increased by 100 basis  points,  the Company's  accumulated  OPEB
obligations  would have increased by approximately  $2.1 million at December 31,
2003, and OPEB expense would have increased by $200,000 in 2003.

Foreign operations

     NL  has   substantial   operations   located   outside  the  United  States
(principally  Europe and  Canada) for which the  functional  currency is not the
U.S.  dollar.  As a result,  the reported  amount of NL's assets and liabilities
related to its non-U.S. operations, and therefore the Company's consolidated net
assets,  will fluctuate  based upon changes in currency  exchange  rates.  As of
January 1, 2001,  the  functional  currency of NL's German,  Belgian,  Dutch and
French operations had been converted to the euro from their respective  national
currencies.  At December 31, 2003, NL had substantial net assets  denominated in
the euro, Canadian dollar, Norwegian kroner and United Kingdom pound sterling.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated cash flows

     The Company's  consolidated cash flows for each of the past three years are
presented below:
<TABLE>
<CAPTION>

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

<S>                                                                    <C>          <C>          <C>
Operating activities                                                $ 129.7      $  98.3      $  90.5
Investing activities                                                  (57.2)       (27.2)       (19.2)
Financing activities                                                  (75.5)      (132.5)       (66.3)
                                                                    -------      -------        -----

Net cash provided (used) by operating, investing and financing
    activities                                                      $  (3.0)     $ (61.4)     $   5.0
                                                                    =======      =======      =======
</TABLE>

     Operating  activities.  Certain items included in the  determination of net
income do not  represent  current  inflows or  outflows  of cash.  For  example,
insurance  recoveries,  net of $17.5  million  in 2001,  are  excluded  from the
determination of operating cash flow. These insurance  proceeds are shown in the
statement of cash flows under investing  activities to partially offset the cash
outflow impact of capital  expenditures  related to the Leverkusen sulfate plant
reconstruction.  Certain other items included in the determination of net income
have an impact on cash flows from operating  activities,  but the impact of such
items on cash will differ  from their  impact on net income.  For  example,  the
amount of income or expense recorded for pension and OPEB assets and obligations
(which depend upon a number of factors,  including actuarial assumptions used to
value  obligations)  will  generally  differ from the  outflows of cash for such
benefits. See Note 15 to the Company's Consolidated Financial Statements.

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

     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.

     Cash flows from operating  activities  decreased from $98.3 million in 2002
to $90.5  million in 2003.  This $7.8 million  decrease was due primarily to the
effect of (i) higher  net  income of $26.9  million,  (ii)  higher  depreciation
expense of $6.9 million,  (iii) $10.5 million of higher gains on  disposition of
property and equipment in 2003 as compared to 2002, (iv) lower net distributions
from the TiO2  manufacturing  joint venture of $875,000 in 2003 compared to $8.0
million in 2002, (v) a lower amount of net cash generated from relative  changes
in the Company's  inventories,  receivables,  payables and accruals and accounts
with affiliates of $32.2 million in 2003 as compared to 2002 and (vi) lower cash
paid for income taxes of $14.2 million.  Relative changes in accounts receivable
are affected by, among other things,  the timing of sales and the  collection of
the resulting  receivable.  Relative changes in inventories 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  volume and sales  volume.  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.

     Cash flows from operating  activities decreased from $129.7 million in 2001
to $98.3 million in 2002.  This $31.4 million  decrease was due primarily to the
net effect of (i) lower net income of $84.6  million,  (ii) higher  depreciation
expense of $3.6 million,  (iii) litigation  settlement gains of $10.3 million in
2001 as compared to nil in 2002, (iv) insurance recoveries, net of $17.5 million
in  2001  as  compared  to  nil  in  2002,  (v)  lower  distributions  from  the
manufacturing  joint venture of $3.4 million in 2002 and (vi) a higher amount of
net  cash  generated  from  relative  changes  in  the  Company's   inventories,
receivables, payables and accruals and accounts with affiliates of $26.7 million
in 2002 as  compared  to 2001.  Relative  changes  in  accounts  receivable  are
affected by, among other things,  the timing of sales and the  collection of the
resulting receivable.

     Investing  activities.   The  Company's  capital  expenditures  were  $53.7
million,  $32.6 million and $35.4 million in 2001, 2002 and 2003,  respectively.
Capital expenditures in 2001 and 2002 included an aggregate of $22.3 million and
$3.1 million,  respectively,  for the  rebuilding  of the Company's  Leverkusen,
Germany sulfate plant.  In 2001 the Company  received $23.4 million of insurance
proceeds for property  damage  resulting from the Leverkusen  fire and paid $3.2
million of expenses related to repairs and clean-up costs.  Substantially all of
the Company's capital expenditures relate to Kronos' operations.

     The Company's capital  expenditures  during the past three years include an
aggregate  of  approximately  $15.4  million  ($5.4  million  in  2003)  for the
Company's  ongoing  environmental   protection  and  compliance  programs.   The
Company's  estimated  2004 capital  expenditures  are $38.0  million and include
approximately $5 million in the area of environmental protection and compliance.

     At  December  31, 2002 and 2003,  the Company had entered  into a revolving
credit  facility  with Tremont  pursuant to which Tremont could borrow up to $15
million from the Company through December 31, 2004. Such loan facility  replaced
a similar loan facility  entered into between EMS and Tremont.  During 2001, the
Company lent a net $12.65 million to Tremont,  which amount Tremont fully repaid
in 2002. At December 31, 2003,  Tremont had no borrowings from the Company under
the facility. See Note 16 to the Consolidated Financial Statements.

     In 2001, EMS extended a $25 million revolving credit facility to the Harold
C. Simmons Family Trust No. 2 (the "Family Trust"),  one of the trusts described
in  Notes  1 and 16 to the  Consolidated  Financial  Statements.  The  loan  was
approved by special  committees  of the  Company's and EMS' Boards of Directors.
During 2001, EMS lent $20 million to the Family Trust,  and during 2002 and 2003
the Family Trust repaid $2 million and $4 million, respectively. At December 31,
2003, $14 million was  outstanding  and $11 million was available for additional
borrowing by the Family Trust. The loan was classified as noncurrent at December
31, 2003, as the Company does not expect to demand repayment within one year.

     In November 2001 $7.9 million of restricted cash related to certain letters
of credit supporting certain insurance related contracts was released.

     In January 2002 the Company acquired all of the stock and limited liability
company  units  of  EWI  RE,  Inc.  and  EWI  RE,  Ltd.   (collectively  "EWI"),
respectively,  for an aggregate of $9.2 million in cash,  including  capitalized
acquisition  costs  of $.2  million.  See Note 2 to the  Consolidated  Financial
Statements.

     The  Company  disposed  of  certain  real  property  and other  assets  for
approximately $12.8 million during the year ended December 31, 2003.

     Financing  activities.  In March  2003,  KII's  operating  subsidiaries  in
Germany,  Belgium and Norway  borrowed  (euro)15  million  ($16.1  million  when
borrowed),  in April 2003, repaid NOK 80 million ($11.0 million when repaid) and
in the third quarter of 2003,  repaid  (euro)30.0  million  ($33.9  million when
repaid) under its three-year  (euro)80 million secured revolving credit facility
("European  Credit  Facility").  See  Note  11  to  the  Consolidated  Financial
Statements.

     In March 2002 the  Company  redeemed  $25 million  principal  amount of its
11.75% Senior  Secured Notes using  available cash on hand, and in June 2002 the
Company  redeemed the  remaining  $169 million  principal  amount of such 11.75%
Senior Secured Notes using a portion of the proceeds from the June 2002 issuance
of the (euro)285 million principal amount of the KII 8.875% Senior Secured Notes
($280 million when issued).  Also in June 2002, KII's operating  subsidiaries in
Germany,  Belgium and Norway borrowed (euro)13 million ($13 million) and NOK 200
million ($26 million)  which,  along with available  cash, was used to repay and
terminate  KII's short term notes payable ($53.2 million when repaid).  In 2002,
the Company  repaid a net  euro-equivalent  12.7  million  ($12.4  million  when
repaid)  and 1.7  million  ($1.6  million  when  repaid),  respectively,  of the
European Credit Facility.

     In September 2002 the Company's U.S. operating  subsidiaries entered into a
three-year $50 million  asset-based  revolving  credit  facility  ("U.S.  Credit
Facility").  As of December 31, 2003, no borrowings were  outstanding  under the
U.S. Credit Facility and borrowing  availability was  approximately $39 million.
See Note 11 to the Consolidated Financial Statements.

     Deferred  financing  costs of $10.7  million  for the Notes,  the  European
Credit  Facility and the U.S.  Credit Facility are being amortized over the life
of the respective  agreements and are included in other noncurrent  assets as of
December 31, 2003.

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

     Other  than  operating  lease  commitments  disclosed  in  Note  18 to  the
Consolidated  Financial  Statements,  the  Company is not party to any  material
off-balance sheet financing arrangements.

     Cash  dividends  paid during  2001,  2002 and 2003 totaled  $39.8  million,
$158.0  million  (including an additional  $2.50 per share cash dividend paid in
December 2002 aggregating  $119.2 million) and $38.2 million,  respectively.  On
February 19, 2004, the Company's Board of Directors declared a regular quarterly
dividend  of $.20 per share to be paid in the form of shares of common  stock of
Kronos to  stockholders  of record as of March 11,  2004 to be paid on March 29,
2004.

     Pursuant to its share repurchase  program,  the Company purchased 1,059,000
shares of its common  stock at an  aggregate  cost of $15.5  million in 2001 and
1,384,000  shares of its common stock in the open market at an aggregate cost of
$21.3 million in 2002.  The Company made no  repurchases  of common stock during
2003.  In October 2002 the Company's  Board of Directors  authorized a 1,500,000
share extension of the repurchase program. The available shares may be purchased
over an  unspecified  period  of  time,  and are to be held as  treasury  shares
available for general corporate  purposes.  Approximately  1,323,000  additional
shares are available for purchase under the Company's share  repurchase  program
at December 31, 2003.

     Cash,  cash  equivalents,  restricted  cash and restricted  marketable debt
securities  and  borrowing  availability.  At December 31, 2003,  Kronos and its
subsidiaries had (i) current cash and cash equivalents aggregating $55.9 million
($41  million held by non-U.S.  subsidiaries)  , (ii)  current  restricted  cash
equivalents  of $1.3 million and (iii)  noncurrent  restricted  marketable  debt
securities  of  $2.6  million.   At  December  31,  2003,  certain  of  Kronos's
subsidiaries  had  approximately  $139  million  available  for  borrowing  with
approximately $100 million available under non-U.S. credit facilities (including
approximately  $97 million under the European Credit Facility) and approximately
$39  million  available  under the U.S.  Credit  Facility  (based  on  Borrowing
Availability). At December 31, 2003, KII had approximately $70 million available
for payment of dividends and other  restricted  payments as defined in the Notes
indenture.  At December 31, 2003,  the Company had complied  with all  financial
covenants governing its debt agreements.

     At December 31, 2003, NL,  exclusive of Kronos and its subsidiaries had (i)
current  cash and cash  equivalents  aggregating  $11.9  million,  (ii)  current
restricted  cash  equivalents  of  $17.7  million,   (iii)  current   restricted
marketable  debt  securities  of $6.1  million  and (iv)  noncurrent  restricted
marketable debt securities of $4.3 million.

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

     Legal   proceedings  and  environmental   matters.   See  Note  18  to  the
Consolidated   Financial   Statements   for  certain   legal   proceedings   and
environmental matters with respect to the Company.

     Foreign  operations.  As  discussed  above,  the  Company  has  substantial
operations  located outside the United States for which the functional  currency
is not the U.S. dollar. As a result, the reported amount of the Company's assets
and liabilities related to its non-U.S.  operations, and therefore the Company's
consolidated net assets,  will fluctuate based upon changes in currency exchange
rates. As of January 1, 2001, the functional  currency of the Company's  German,
Belgian,  Dutch and French operations have been converted to the euro from their
respective  national   currencies.   At  December  31,  2003,  the  Company  had
substantial  net assets  denominated  in the euro,  Canadian  dollar,  Norwegian
kroner and United Kingdom pound sterling.

     Other.  The Company  periodically  evaluates  its  liquidity  requirements,
alternative uses of capital, capital needs and availability of resources in view
of,  among other  things,  its  dividend  policy,  its debt  service and capital
expenditure  requirements and estimated future operating cash flows. As a result
of this process, the Company in the past has sought, and in the future may seek,
to reduce, refinance,  repurchase or restructure indebtedness;  raise additional
capital;  issue additional  securities;  repurchase  shares of its common stock;
modify its dividend policy;  restructure ownership interests;  sell interests in
subsidiaries or other assets; or take a combination of such steps or other steps
to manage its  liquidity  and  capital  resources.  In the normal  course of its
business, the Company may review opportunities for the acquisition, divestiture,
joint  venture  or  other  business  combinations  in  the  chemicals  or  other
industries, as well as the acquisition of interests in related companies. In the
event of any acquisition or joint venture transaction,  the Company may consider
using available cash,  issuing equity  securities or increasing its indebtedness
to the extent permitted by the agreements governing the Company's existing debt.
See Note 11 to the Consolidated Financial Statements.

Summary of debt and other contractual commitments

     As  more  fully  described  in  the  notes  to the  Consolidated  Financial
Statements,  the Company is a party to various debt,  lease and other agreements
which  contractually  and  unconditionally  commit the  Company  to pay  certain
amounts in the  future.  See Notes 11, 18 and 20 to the  Consolidated  Financial
Statements.  The following table summarizes such contractual  commitments of the
Company and its consolidated  subsidiaries that are unconditional  both in terms
of timing and amount by the type and date of payment.
<TABLE>
<CAPTION>

                                                            Unconditional payment due date
                                                                                           2009 and
          Contractual commitment               2004      2005/2006       2007/2008           after         Total
          ----------------------               ----      ---------       ---------          -------        -----
                                                                          (In millions)

<S>                                             <C>           <C>             <C>             <C>            <C>
Third-party indebtedness                    $    .3       $    .3         $    -          $ 356.1        $ 356.7
Operating leases                                3.3           3.7             2.5            19.9           29.4
Fixed asset acquisitions                        9.6            -               -              -              9.6
Long-term supply contracts for the
    purchase of TiO2 feedstock                146.1         265.8           135.0             -            546.9
                    -
Asset retirement obligations and other           -             -               -              5.8            5.8
                                            -------       -------         -------         -------        -------
                                            $ 159.3       $ 269.8         $ 137.5         $ 381.8        $ 948.4
                                            =======       =======         =======         =======        =======
</TABLE>

     The above table does not reflect any amounts that the Company  might pay to
fund its defined  benefit pension plans and OPEB plans, as the timing and amount
of any such future  fundings are unknown and  dependent  on, among other things,
the future  performance of defined  benefit  pension plan assets,  interest rate
assumptions  and actual  future  retiree  medical  costs.  Such defined  benefit
pension plans and OPEB plans are discussed above in greater detail.



ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     General.  The  Company is exposed  to market  risk from  changes in foreign
currency exchange rates, interest rates and equity security prices. In the past,
the Company has periodically  entered into interest rate swaps or other types of
contracts  in order to  manage a  portion  of its  interest  rate  market  risk.
Otherwise, the Company does not generally enter into forward or option contracts
to manage such market  risks,  nor does the Company enter into any such contract
or other type of  derivative  instrument  for trading or  speculative  purposes.
Other than as  described  below,  the  Company  was not a party to any  material
forward  or  derivative  option  contract  related to  foreign  exchange  rates,
interest  rates or equity  security  prices at December  31, 2002 and 2003.  See
Notes 1 and 19 to the Consolidated Financial Statements.

     Interest  rates.  The  Company is exposed  to market  risk from  changes in
interest rates, primarily related to indebtedness.  At December 31, 2003, all of
the Company's  aggregate  indebtedness  was comprised of fixed-rate  instruments
(2002 - 92% of fixed-rate  instruments and 8% of variable rate borrowings).  The
large percentage of fixed-rate debt instruments  minimizes  earnings  volatility
which would result from changes in interest rates.  The following table presents
principal  amounts  and  weighted  average  interest  rates  for  the  Company's
aggregate  outstanding  indebtedness  at December 31, 2003. At December 31, 2002
and 2003,  all  outstanding  fixed-rate  indebtedness  was  denominated  in U.S.
dollars  or  the  euro,  and  the  outstanding  variable  rate  borrowings  were
denominated in U.S. dollars, the euro or the Norwegian kroner. Information shown
below for such foreign  currency  denominated  indebtedness  is presented in its
U.S.  dollar  equivalent at December 31, 2003 using  exchange rates of 1.25 U.S.
dollars per euro. Certain Norwegian kroner  denominated  capital leases totaling
$700,000 in 2003 have been excluded from the table below.





<TABLE>
<CAPTION>

                                                              Amount
                                                     Carrying          Fair           Interest          Maturity
        Indebtedness                                   value           value            rate              date
                                                           (In millions)

Fixed-rate indebtedness:
  Euro-denominated KII
<S>                                                  <C>              <C>               <C>               <C>
   Senior Secured Notes                              $ 356.1          $ 356.1           8.9%              2009
                                                     =======          =======
</TABLE>



     At December 31, 2002,  fixed rate  indebtedness  aggregated  $296.9 million
(fair value - $299.9 million) with a weighted-average interest rate of 8.9%; and
variable  rate  indebtedness  at  such  date  aggregated  $27.1  million,  which
approximates fair value, with a  weighted-average  interest rate of 6.5%. All of
such fixed rate  indebtedness  was  denominated  in euros.  Such  variable  rate
indebtedness  was  denominated  in the euro (58% of the total) or the  Norwegian
kroner (42%).

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

     As described  above,  at December 31, 2003, NL had the equivalent of $356.1
million of outstanding  euro-denominated  indebtedness (2002 - the equivalent of
$312.5 million of  euro-denominated  indebtedness and $11.5 million of Norwegian
kroner-denominated  indebtedness).  The  potential  increase in the U.S.  dollar
equivalent of the principal amount outstanding resulting from a hypothetical 10%
adverse  change in  exchange  rates at such date  would be  approximately  $35.6
million at December 31, 2003 (2002 - $32.4 million).

     At December  31, 2003,  the Company had entered into a short-term  currency
forward  contract  maturing  on  January 2, 2004 to  exchange  an  aggregate  of
(euro)40  million into U.S.  dollars at an exchange rate of U.S. $1.25 per euro.
Such contract was entered into in  conjunction  with the January 2004 payment of
an intercompany  dividend from one of the Company's  European  subsidiaries.  At
December  31,  2004,  the  actual  exchange  rate was U.S.  $1.25 per euro.  The
estimated fair value of such foreign  currency forward contract was not material
at December 31, 2003.

     Marketable  equity  and debt  security  prices.  The  Company is exposed to
market  risk due to changes in prices of the  marketable  securities,  which are
owned.  The fair value of such debt and equity  securities  at December 31, 2002
and 2003 was $40.9 million and $70.5 million, respectively. The potential change
in the  aggregate  fair  value of these  investments,  assuming  a 10% change in
prices,  would be $4.1 million at December 31, 2002 and $7.1 million at December
31, 2003. The fair value of restricted  marketable  debt  securities at December
31,  2002 and 2003 was  $18.9  million  and  $13.0  million,  respectively.  The
potential change in the aggregate fair value of these investments assuming a 10%
change in prices would be $1.9 million and $1.3 million, respectively.

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

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

     Non-GAAP  Financial  Measures.  In an  effort  to  provide  investors  with
additional  information  regarding the Company's  results as determined by GAAP,
Kronos has disclosed  certain  non-GAAP  information  which the Company believes
provides  useful  information  to  investors.  As discussed  above,  the Company
discloses  percentage changes in its average TiO2 prices in billing  currencies,
which excludes the effects of foreign currency  translation.  Such disclosure of
the  percentage  change  in  Kronos'  average  TiO2  selling  price  in  billing
currencies is considered a "non-GAAP" financial measure under regulations of the
SEC. The  disclosure  of the  percentage  change in the  Company's  average TiO2
selling prices using actual foreign currency  exchange rates  prevailing  during
the respective periods is considered the most directly  comparable GAAP measure.
The Company discloses  percentage  changes in its average TiO2 prices in billing
currencies  because  the  Company  believes  such  disclosure   provides  useful
information  to  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 that would be used actual exchange
rates prevailing during the respective periods.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

         None.

ITEM 9A. CONTROLS AND PROCEDURES

     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  President and
Chief Executive Officer, and Gregory M. Swalwell,  the Company's Vice President,
Chief Financial Officer and Treasurer,  have evaluated the Company's  disclosure
controls and  procedures as of December 31, 2003.  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  accounting
principles  generally  accepted in the United  States of America  ("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  December  31,  2003  that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  information  required by this Item is incorporated by reference to the
Company's  definitive  Proxy  Statement  to be filed  with the SEC  pursuant  to
Regulation  14A within 120 days after the end of the fiscal year covered by this
report (the "NL Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

     The  information  required by this Item is incorporated by reference to the
NL Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information  required by this Item is incorporated by reference to the
NL Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The  information  required by this Item is incorporated by reference to the
NL Proxy Statement. See also Note 16 to the Consolidated Financial Statements.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

     The Information required by the Item is incorporated by reference to the NL
Proxy Statement.

                                     PART IV

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

 (a) and (d) Financial Statements and Schedules

               The Registrant

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

       (b)     Reports on Form 8-K

               Reports on Form 8-K filed for the quarter ended December 31,
               2003.

               December 23, 2003 - Reported items 2 and 7.

       (c)     Exhibits

               Included as exhibits are the items  listed in the Exhibit  Index.
               NL will furnish a copy of any of the  exhibits  listed below upon
               payment  of  $4.00  per  exhibit  to  cover  the  costs  to NL of
               furnishing  the  exhibits.  Pursuant  to Item  601(b)(4)(iii)  of
               Regulation S-K, any instrument  defining the rights of holders of
               long-term   debt   issues   and  other   agreements   related  to
               indebtedness which do not exceed 10% of consolidated total assets
               as of December 31, 2003 will be furnished to the Commission  upon
               request.

               The Company will also furnish, without charge, a copy of its Code
               of  Business  Conduct  and  Ethics,  as  adopted  by the board of
               directors on February  19,  2004,  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.


Item No.                        Exhibit Index

2.1       Form of Distribution Agreement between NL Industries,  Inc. and Kronos
          Worldwide,  Inc. -  incorporated  by  reference  to Exhibit 2.1 to the
          Kronos  Worldwide,  Inc.  Registration  Statement on Form 10 (File No.
          001-31763).

3.1       By-Laws,  as amended on June 28, 1990 -  incorporated  by reference to
          Exhibit  3.1 to the  Registrant's  Annual  Report on Form 10-K for the
          year ended December 31, 1990.

3.2       Amendment  to the Amended and Restated  By-Laws,  as of June 28, 1990,
          executed December 8, 2003.

3.3       Certificate of Amended and Restated Certificate of Incorporation dated
          June  28,  1990  -  incorporated  by  reference  to  Exhibit  1 to the
          Registrant's  Proxy  Statement on Schedule 14A for the annual  meeting
          held on June 28, 1990.

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

4.2       Form of  certificate of 8.875% Senior Secured Notes due 2009 of Kronos
          International,   Inc.  (included  as  Exhibit  A  to  Exhibit  4.1)  -
          incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly
          Report on Form 10-Q for the quarter ended June 30, 2002.

4.3       Form of  certificate of 8.875% Senior Secured Notes due 2009 of Kronos
          International,   Inc.  (included  as  Exhibit  B  to  Exhibit  4.1)  -
          incorporated by reference to Exhibit 4.3 to the Registrant's Quarterly
          Report on Form 10-Q for the quarter ended June 30, 2002.

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

4.5       Collateral  Agency  Agreement,  dated June 28, 2002, among The Bank of
          New  York,   U.S.  Bank,  N.A.  and  Kronos   International,   Inc.  -
          incorporated by reference to Exhibit 4.6 to the Registrant's Quarterly
          Report on Form 10-Q for the quarter ended June 30, 2002.

4.6       Security Over Shares  Agreement,  dated June 28, 2002,  between Kronos
          International,  Inc.  and  The  Bank  of New  York -  incorporated  by
          reference to Exhibit 4.7 to the Registrant's  Quarterly Report on Form
          10-Q for the quarter ended June 30, 2002.

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

4.8       Pledge  Agreement  (shares in Societe  Industrielle  du Titane  S.A.),
          dated June 28, 2002, between Kronos International, Inc. and U.S. Bank,
          N.A. -  incorporated  by reference to Exhibit 4.9 to the  Registrant's
          Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

4.9       Partnership  Interest  Pledge  Agreement  (relating  to fixed  capital
          contribution in Kronos Titan GmbH & Co.), dated June 28, 2002, between
          Kronos  International,  Inc. and U.S.  Bank,  N.A. -  incorporated  by
          reference to Exhibit 4.10 to the Registrant's Quarterly Report on Form
          10-Q for the quarter ended June 30, 2002.

4.10      Deposit Agreement, dated June 28, 2002, among NL Industries,  Inc. and
          JP Morgan  Chase  Bank,  as trustee -  incorporated  by  reference  to
          Exhibit 4.11 to the Registrant's Quarterly Report on Form 10-Q for the
          quarter ended June 30, 2002.

4.11      Satisfaction  and  Discharge of  Indenture,  Release,  Assignment  and
          Transfer,  dated June 28, 2002,  made by JP Morgan Chase Bank pursuant
          to the  Indenture  for NL  Industries,  Inc.'s 11 3/4% Senior  Secured
          Notes due 2003 -  incorporated  by  reference  to Exhibit  4.12 to the
          Registrant's  Quarterly Report on Form 10-Q for the quarter ended June
          30, 2002.

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

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

10.3      Contract on Supplies and Services  among Bayer AG,  Kronos  Titan-GmbH
          and  Kronos   International,   Inc.   dated  June  30,  1995  (English
          translation from German language document) - incorporated by reference
          to Exhibit 10.1 to the Registrant's  Quarterly Report on Form 10-Q for
          the quarter ended September 30, 1995.

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

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

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

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

10.8*     Amendment to Richards Bay Slag Sales  Agreement dated October 31, 2003
          between  Richards  Bay Iron and  Titanium  (Proprietary)  Limited  and
          Kronos,  Inc. -  incorporated  by reference to Exhibit 10.17 to Kronos
          Worldwide,  Inc.'s  Annual  Report  on Form  10-K for the  year  ended
          December 31, 2003.

10.9      Agreement  between   Sachtleben  Chemie  GmbH  and  Kronos  Titan-GmbH
          effective  December  30, 1986 -  incorporated  by reference to Exhibit
          10.1 of KII's Quarterly Report on Form 10-Q (File No.  333-100047) for
          the quarter ended September 30, 2002.

10.10     Supplementary  Agreement to the Agreement of December 30, 1986 between
          Sachtleben  Chemie  GmbH and  Kronos  Titan-GmbH  dated  May 3, 1996 -
          incorporated by reference to Exhibit 10.2 of KII's Quarterly Report on
          Form 10-Q (File No.  333-100047)  for the quarter ended  September 30,
          2002.

10.11     Second Supplementary Agreement to the Contract dated December 30, 1986
          between  Sachtleben Chemie GmbH and Kronos Titan-GmbH dated January 8,
          2002 -  incorporated  by reference to Exhibit 10.3 of KII's  Quarterly
          Report  on Form 10-Q  (File  No.  333-100047)  for the  quarter  ended
          September 30, 2002.

10.12     Formation  Agreement  dated  as of  October  18,  1993  among  Tioxide
          Americas Inc., Kronos  Louisiana,  Inc. and Louisiana Pigment Company,
          L.P. - incorporated  by reference to Exhibit 10.2 to the  Registrant's
          Quarterly  Report on Form 10-Q for the  quarter  ended  September  30,
          1993.

10.13     Joint Venture  Agreement  dated as of October 18, 1993 between Tioxide
          Americas Inc. and Kronos  Louisiana,  Inc. - incorporated by reference
          to Exhibit 10.3 to the Registrant's  Quarterly Report on Form 10-Q for
          the quarter ended September 30, 1993.

10.14     Kronos Offtake  Agreement  dated as of October 18, 1993 between Kronos
          Louisiana,  Inc. and Louisiana Pigment Company, L.P. - incorporated by
          reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form
          10-Q for the quarter ended September 30, 1993.

10.15     Amendment No. 1 to Kronos Offtake  Agreement  dated as of December 20,
          1995 between Kronos  Louisiana,  Inc. and Louisiana  Pigment  Company,
          L.P. - incorporated by reference to Exhibit 10.22 to the  Registrant's
          Annual Report on Form 10-K for the year ended December 31, 1995.

10.16     Tioxide  Americas  Offtake  Agreement  dated as of  October  18,  1993
          between Tioxide Americas Inc. and Louisiana  Pigment  Company,  L.P. -
          incorporated  by  reference  to  Exhibit  10.5  to  the   Registrant's
          Quarterly  Report on Form 10-Q for the  quarter  ended  September  30,
          1993.

10.17     Amendment  No. 1 to Tioxide  Americas  Offtake  Agreement  dated as of
          December 20, 1995 between Tioxide Americas Inc. and Louisiana  Pigment
          Company,  L.P. -  incorporated  by reference  to Exhibit  10.24 to the
          Registrant's  Annual  Report on Form 10-K for the year ended  December
          31, 1995.

10.18     TCI/KCI Output Purchase Agreement dated as of October 18, 1993 between
          Tioxide  Canada  Inc.  and  Kronos  Canada,  Inc.  -  incorporated  by
          reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form
          10-Q for the quarter ended September 30, 1993.

10.19     TAI/KLA Output Purchase Agreement dated as of October 18, 1993 between
          Tioxide  Americas Inc. and Kronos  Louisiana,  Inc. - incorporated  by
          reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form
          10-Q for the quarter ended September 30, 1993.

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

10.21     Parents'  Undertaking  dated  as  of  October  18,  1993  between  ICI
          American Holdings Inc. and Kronos, Inc. - incorporated by reference to
          Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the
          quarter ended September 30, 1993.

10.22     Allocation  Agreement  dated as of October  18, 1993  between  Tioxide
          Americas Inc., ICI American Holdings,  Inc.,  Kronos,  Inc. and Kronos
          Louisiana,  Inc. -  incorporated  by reference to Exhibit 10.10 to the
          Registrant's  Quarterly  Report  on Form  10-Q for the  quarter  ended
          September 30, 1993.

10.23     Form of Director's  Indemnity Agreement between NL and the independent
          members of the Board of Directors of NL - incorporated by reference to
          Exhibit 10.20 to the  Registrant's  Annual Report on Form 10-K for the
          year ended December 31, 1987.

10.24*    1989 Long Term Performance  Incentive Plan of NL Industries,  Inc. -
          incorporated  by  reference  to  Exhibit B to the  Registrant's  Proxy
          Statement on Schedule 14A for the annual meeting of shareholders  held
          on May 8, 1996.

10.25*    NL Industries,  Inc.  Variable  Compensation  Plan - incorporated by
          reference to Exhibit B to the Registrant's Proxy Statement on Schedule
          14A for the annual meeting of shareholders held on May 9, 2001.

10.26*    NL Industries, Inc. 1992 Non-Employee Director Stock Option Plan, as
          adopted by the Board of Directors on February 13, 1992 -  incorporated
          by  reference  to Appendix A to the  Registrant's  Proxy  Statement on
          Schedule  14A for the annual  meeting of  shareholders  held April 30,
          1992.

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

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

10.29*    Amended and  Restated  Supplemental  Executive  Retirement  Plan for
          Executives and Officers of NL Industries,  Inc. effective as of May 1,
          2001 - incorporated by reference to Exhibit 10.30 to the  Registrant's
          Annual Report on Form 10-K for the year ended December 31, 2001.

10.30     Insurance Sharing Agreement, effective January 1, 1990, by and between
          the Registrant,  NL Insurance, Ltd. (an indirect subsidiary of Tremont
          Corporation)  and Baroid  Corporation -  incorporated  by reference to
          Exhibit 10.20 to the  Registrant's  Annual Report on Form 10-K for the
          year ended December 31, 1991.

10.31*    Agreement to Defer Bonus  Payment dated January 10, 2002 between the
          Registrant  and  Lawrence  A. Wigdor and related  trust  agreements  -
          incorporated by reference to Exhibit 10.32 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2001.

10.32*    Agreement to Defer Bonus Payment dated February 20, 1998 between the
          Registrant  and  J.  Landis  Martin  and  related  trust  agreement  -
          incorporated by reference to Exhibit 10.49 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 1997.

10.33     Amended Tax Agreement  between  Valhi,  Inc. and NL  Industries,  Inc.
          effective  as of  December  1, 2003 -  incorporated  by  reference  to
          Exhibit 10.1 to the Registrant's Form 8-K as of December 8, 2003.

10.34     Intercorporate  Services Agreement by and between Contran  Corporation
          and the Registrant  effective as of January 1, 2003 - incorporated  by
          reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
          10-Q for the quarter ended June 30, 2002.

10.35     Intercorporate  Services  Agreement  by and  between  Titanium  Metals
          Corporation  and the  Registrant  effective  as of  January  1, 2003 -
          incorporated  by  reference  to  Exhibit  10.2  to  the   Registrant's
          Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.

10.36     Revolving  Loan Note dated May 4, 2001 with Harold C.  Simmons  Family
          Trust No. 2 and EMS  Financial,  Inc. -  incorporated  by reference to
          Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the
          quarter ended September 30, 2001.

10.37     Security  Agreement dated May 4, 2001 by and between Harold C. Simmons
          Family Trust No. 2 and EMS Financial, Inc. - incorporated by reference
          to Exhibit 10.2 to the Registrant's  Quarterly Report on Form 10-Q for
          the quarter ended September 30, 2001.

10.38     Revolving  Loan Note  Agreement  dated  October 22, 2002 with  Tremont
          Corporation as Maker and NL  Industries,  Inc. as Payee - incorporated
          by reference to Exhibit 10.4 to the  Registrant's  Quarterly Report on
          Form 10-Q for the quarter ended September 30, 2002.

10.39     Security  Agreement  dated  October 22,  2002 by and  between  Tremont
          Corporation  and NL Industries,  Inc. -  incorporated  by reference to
          Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the
          quarter ended September 30, 2002.

10.40     Purchase Agreement dated January 4, 2002 by and among Kronos,  Inc. as
          the  Purchaser,  and  Big  Bend  Holdings  LLC and  Contran  Insurance
          Holdings,  Inc., as Sellers regarding the sale and purchase of EWI RE,
          Inc. and EWI RE, Ltd. - incorporated  by reference to Exhibit 10.40 to
          the  Registrant's  Annual  Report  on Form  10-K  for the  year  ended
          December 31, 2001.

10.41*    Stock Option Purchase  Agreement dated November 20, 2002 between the
          Registrant (Purchaser) and J. Landis Martin (Seller) - incorporated by
          reference to Exhibit 10.46 to the  Registrant's  Annual Report on Form
          10-K for the year ended December 31, 2002.

10.42*    Stock Option Purchase  Agreement dated November 20, 2002 between the
          Registrant   (Purchaser)   and  Dr.  Lawrence  A.  Wigdor  (Seller)  -
          incorporated by reference to Exhibit 10.47 to the Registrant's  Annual
          Report on Form 10-K for the year ended December 31, 2002.

10.43*    Stock Option Purchase  Agreement dated November 20, 2002 between the
          Registrant  (Purchaser) and David B. Garten (Seller) - incorporated by
          reference to Exhibit 10.48 to the  Registrant's  Annual Report on Form
          10-K for the year ended December 31, 2002.

10.44*    Stock Option Purchase  Agreement dated November 20, 2002 between the
          Registrant  (Purchaser) and Robert D. Hardy (Seller) - incorporated by
          reference to Exhibit 10.49 to the  Registrant's  Annual Report on Form
          10-K for the year ended December 31, 2002.

10.45     Form of Tax Agreement between Valhi, Inc. and Kronos Worldwide,  Inc -
          incorporated  by reference  to Exhibit  10.1 to the Kronos  Worldwide,
          Inc. Registration Statement on Form 10 (File No. 001-31763).

10.46     Form of Intercorporate  Services Agreement between Contran Corporation
          and Kronos Worldwide, Inc. - incorporated by reference to Exhibit 10.2
          to the Kronos Worldwide, Inc. Registration Statements on Form 10 (File
          No. 001-31763).

10.47     Amendment  dated  August 11,  2003 to the  Contract  on  Supplies  and
          Services  among  Bayer AG,  Kronos  Titan-GmbH  & Co.  OHG and  Kronos
          International  (English  translation  of German  language  document) -
          incorporated  by reference to Exhibit  10.32 to the Kronos  Worldwide,
          Inc. Registration Statement on Form 10 (File No. 001-31763).

10.48     Insurance  sharing agreement dated October 30, 2003 by and among CompX
          International  Inc.,  Contran   Corporation,   Keystone   Consolidated
          Industries,  Inc.,  Kronos  Worldwide,  Inc.,  Titanium  Metals Corp.,
          Valhi, Inc. and the Registrant.

10.49*    Consulting  Agreement  dated July 23, 2003 between J. Landis  Martin
          and NL Industries, Inc.

10.50*    Summary of Consulting  Arrangement  beginning August 1, 2003 between
          Lawrence A. Wigdor and Kronos Worldwide, Inc.

10.51*    Separation  Agreement dated  September 3, 2003, as amended,  between
          David B. Garten and NL Industries, Inc.

10.52*    Separation Agreement dated July 16, 2003 between NL Industries, Inc.
          and Robert D. Hardy


21.1      Subsidiaries of the Registrant.

23.1      Consent of Independent Accountants.

31.1      Certification

31.2      Certification

32.1      Certification

99.1      Annual Report of NL  Industries,  Inc.  Retirement  Savings Plan to be
          filed under Form 10-K/A to the Registrant's Annual Report on Form 10-K
          within 180 days after December 31, 2003.


All  documents  in the  Exhibit  Index  above  that  have been  incorporated  by
reference were previously filed by the Registrant under SEC File Number 1-640.

*       Management contract, compensatory plan or arrangement.

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



 SIGNATURES


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

                                        NL Industries, Inc.
                                        (Registrant)


                                        By:/s/ Harold C. Simmons
                                        ------------------------------
                                        Harold C. Simmons
                                        March 8, 2004
                                        (Chairman of the Board and
                                        Chief Executive Officer)


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated:



 /s/ Harold C. Simmons                      /s/ Steven L. Watson
-------------------------------------       -----------------------------------
Harold C. Simmons, March 8, 2004            Steven L. Watson, March 8, 2004
(Chairman of the Board and Chief            (Director)
  Executive Officer)


/s/ Thomas P. Stafford                      /s/ Glenn R. Simmons
-------------------------------------       -----------------------------------
Thomas P. Stafford, March 8, 2004           Glenn R. Simmons, March 8, 2004
(Director)                                  (Director)



/s/ C. H. Moore, Jr.                        /s/ Gregory M. Swalwell
-------------------------------------       -----------------------------------
C. H. Moore, Jr., March 8, 2004             Gregory M. Swalwell, March 8, 2004
(Director) (Vice President, Chief Financial Officer, Principal Financial
Officer)

/s/ Terry N. Worrell
------------------------------------
Terry N. Worrell, March 8, 2004
(Director)








                               NL Industries, Inc.

                           Annual Report on Form 10-K

                            Items 8, 14(a) and 14(d)

                   Index of Financial Statements and Schedules


Financial Statements                                                  Page

  Report of Independent Auditors                                      F-2

  Consolidated Balance Sheets - December 31, 2002 and 2003            F-3

  Consolidated Statements of Income -
   Years ended December 31, 2001, 2002 and 2003                       F-5

  Consolidated Statements of Comprehensive Income -
   Years ended December 31, 2001, 2002 and 2003                       F-6

  Consolidated Statements of Stockholders' Equity -
   Years ended December 31, 2001, 2002 and 2003                       F-7

  Consolidated Statements of Cash Flows -
   Years ended December 31, 2001, 2002 and 2003                       F-8

  Notes to Consolidated Financial Statements                          F-11


Financial Statement Schedules

  Report of Independent Auditors                                      S-1

  Schedule I - Condensed Financial Information of Registrant          S-2

  Schedule II - Valuation and Qualifying Accounts                     S-7

  Schedules III and IV are omitted because they are not applicable.













                         REPORT OF INDEPENDENT AUDITORS



To the Stockholders and Board of Directors of NL Industries, Inc.:

     In our  opinion,  the  accompanying  consolidated  balance  sheets  and the
related consolidated statements of income,  comprehensive income,  stockholders'
equity and cash flows present fairly,  in all material  respects,  the financial
position of NL  Industries,  Inc. and  Subsidiaries  as of December 31, 2002 and
2003,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles  generally accepted in the United States of America.  These financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits. We conducted our audits of these financial  statements in accordance
with  auditing  standards  generally  accepted in the United  States of America,
which require that we plan and perform the audit to obtain reasonable  assurance
about whether the financial  statements  are free of material  misstatement.  An
audit includes examining,  on a test basis,  evidence supporting the amounts and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.





                                              PricewaterhouseCoopers LLP

Dallas, Texas
March 5, 2004






                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2002 and 2003

                      (In thousands, except per share data)


<TABLE>
<CAPTION>
              ASSETS
                                                                            2002                  2003
                                                                            ----                  ----

Current assets:
<S>                                                                      <C>                     <C>
  Cash and cash equivalents                                              $   58,091              $ 67,799
  Restricted cash and cash equivalents                                       52,089                19,029
  Restricted marketable debt securities                                       9,670                 6,147
  Accounts and other receivables                                            136,858               156,820
  Refundable income taxes                                                     1,782                35,336
  Receivable from affiliates                                                    207                    55
  Inventories                                                               209,882               266,020
  Prepaid expenses                                                            7,207                 5,257
  Deferred income taxes                                                      10,511                10,798
                                                                         ----------            ----------

      Total current assets                                                  486,297               567,261
                                                                         ----------            ----------

Other assets:
    Marketable equity securities                                             40,901                70,487
    Restricted marketable debt securities                                     9,232                 6,870
    Investment in TiO2 manufacturing joint venture                          130,009               129,011
    Receivable from affiliate                                                18,000                14,000
    Prepaid pension costs                                                    17,572                     -
    Deferred income taxes                                                     1,934                 6,682
    Other assets                                                             28,737                34,057
                                                                         ----------            ----------

      Total other assets                                                    246,385               261,107
                                                                         ----------            ----------

Property and equipment:
  Land                                                                       29,072                32,981
  Buildings                                                                 150,406               179,472
  Equipment                                                                 640,297               765,704
  Mining properties                                                          84,778                83,183
  Construction in progress                                                    8,702                 9,666
                                                                         ----------            ----------
                                                                            913,255             1,071,006
  Less accumulated depreciation                                             534,436               635,267
                                                                         ----------            ----------

      Net property and equipment                                            378,819               435,739
                                                                         ----------            ----------

                                                                         $1,111,501            $1,264,107
                                                                         ==========            ==========
</TABLE>





                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                           December 31, 2002 and 2003

                      (In thousands, except per share data)



<TABLE>
<CAPTION>
   LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                              2002                2003
                                                                              ----                ----

Current liabilities:
<S>                                                                        <C>                <C>
  Current maturities of long-term debt                                     $    1,298         $      288
  Accounts payable                                                             97,140            103,180
  Accrued liabilities                                                          70,434             81,117
  Accrued environmental costs                                                  51,307             19,627
  Payable to affiliates                                                         8,027             19,537
  Income taxes                                                                  6,624             12,726
  Deferred income taxes                                                         3,219              3,436
                                                                           ----------         ----------

      Total current liabilities                                               238,049            239,911
                                                                           ----------         ----------

Noncurrent liabilities:
  Long-term debt                                                              324,608            356,451
  Accrued pension costs                                                        43,757             81,180
  Accrued postretirement benefits cost                                         26,477             23,411
  Accrued environmental costs                                                  40,199             57,854
  Deferred income taxes                                                       143,518            198,142
  Other                                                                        21,050             19,453
                                                                           ----------         ----------

      Total noncurrent liabilities                                            599,609            736,491
                                                                           ----------         ----------

Minority interest                                                               8,516             86,791
                                                                           ----------         ----------

Stockholders' equity:
  Preferred stock, $.01 par value; 5,000 shares
   authorized; none issued                                                          -                  -
  Common stock, $.125 par value; 150,000 shares
   authorized; 66,845 shares issued                                          8,355                 8,355
  Additional paid-in capital                                                  777,819            777,819
  Retained earnings                                                           101,554             16,023
  Accumulated other comprehensive income:
    Marketable securities                                                       5,896             23,323
    Currency translation                                                     (170,670)          (153,955)
    Pension liabilities                                                       (21,447)           (36,209)
    Treasury stock, at cost - 19,155 and 19,054 shares                       (436,180)          (434,442)
                                                                           ----------         ----------

      Total stockholders' equity                                              265,327            200,914
                                                                           ----------         ----------

                                                                           $1,111,501         $1,264,107
                                                                           ==========         ===========
</TABLE>


Commitments and contingencies (Notes 11, 14 and 18)

          See accompanying notes to consolidated financial statements.




                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                  Years ended December 31, 2001, 2002 and 2003

                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                      2001            2002              2003
                                                                      ----            ----              ----

<S>                                                                 <C>               <C>              <C>
Net sales                                                           $  835,099        $ 875,188        $1,008,177
Cost of sales                                                          578,060          671,830           739,237
                                                                      --------         --------        ----------

    Gross margin                                                       257,039          203,358           268,940

Selling, general and administrative expense                             98,667          107,675           124,446
Other operating income (expense):
  Currency transaction gains (losses), net                               1,188             (547)           (7,743)
  Disposition of property and equipment                                   (735)            (625)            9,845
  Insurance recoveries, net                                              7,222                -                 -
  Noncompete agreement income                                            4,000            4,000               333
  Litigation settlement gains, net                                      11,730            5,225               823
  Other income                                                           1,454              544               629
  Corporate expense                                                    (25,845)         (37,860)          (57,430)
  Other expense                                                            (78)            (172)             (130)
                                                                     ---------         ---------       ----------

    Income from operations                                             157,308           66,248            90,821

Other income (expense):
  Currency transaction gain                                                 -             6,271                 -
  Insurance recoveries, net                                             17,468                -                 -
  Trade interest income                                                  2,332            1,709               771
  Other interest income                                                  8,886            5,739             3,261
  Securities transactions, net                                          (1,133)            (105)            2,402
  Interest expense                                                     (27,569)         (29,752)          (33,004)
                                                                     ---------         ---------       ----------

    Income before income taxes and minority interest                  157,292            50,110            64,251

Provision for income taxes (benefit)                                   34,925            12,036            (1,455)
                                                                    ---------         ---------        ----------

    Income before minority interest                                   122,367            38,074            65,706

Minority interest                                                         960             1,264             2,044
                                                                    ---------         ---------        ----------

    Net income                                                       $ 121,407        $  36,810        $   63,662
                                                                     =========        =========        ==========

Net income per share:
  Basic                                                              $    2.44        $     .76        $     1.33
  Diluted                                                            $    2.44        $     .76        $     1.33

Weighted-average shares used in the calculation of net income per share:
  Basic                                                                49,732            48,530            47,721
  Dilutive impact of stock options                                        124                82                74
                                                                    ---------          --------        ----------

  Diluted                                                              49,856            48,612            47,795
                                                                    =========          ========        ==========
</TABLE>

          See accompanying notes to consolidated financial statements.




                                       NL INDUSTRIES, INC. AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                    Years ended December 31, 2001, 2002 and 2003

                                                   (In thousands)



<TABLE>
<CAPTION>
                                                                            2001             2002             2003
                                                                            ----             ----             ----

<S>                                                                      <C>               <C>             <C>
Net income                                                               $ 121,407         $  36,810       $  63,662
                                                                         ---------         ---------       ---------

Other comprehensive income (loss), net of tax:
  Marketable securities adjustment:
    Unrealized holding gains (losses) arising during the period              (1,275)          (2,454)         18,901
    Reclassification for realized net gain (loss) included in net
       income                                                                  740              -             (1,474)
                                                                         ---------         ---------       ---------

                                                                              (535)           (2,454)         17,427

Minimum pension liabilities adjustment                                      (6,352)          (15,095)        (14,762)

Currency translation adjustment                                            (17,592)           37,679          16,715
                                                                         ---------         ---------       ---------

      Total other comprehensive income (loss)                              (24,479)           20,130          19,380
                                                                         ---------         ---------       ---------

          Comprehensive income                                           $  96,928         $  56,940       $  83,042
                                                                         =========         =========       =========
</TABLE>

          See accompanying notes to consolidated financial statements.





                      NL INDUSTRIES , INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  Years ended December 31, 2001, 2002 and 2003

                      (In thousands, except per share data)

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

<S>                                           <C>      <C>        <C>         <C>        <C>         <C>      <C>        <C>
Balance at December 31, 2000                  $8,355   $ 777,528  $ 141,073   $   8,885  $ (190,757) $   -     $(400,596) $ 344,488

Net income                                       -          -       121,407        -           -         -         -        121,407
Other comprehensive loss, net of tax             -          -          -           (535)    (17,592)   (6,352)     -        (24,479)
Common dividends declared - $.80 per share       -          -       (39,758)       -           -         -         -        (39,758)
Tax benefit of stock options exercised           -            69       -           -           -         -         -             69
Treasury stock:
  Acquired                                       -          -          -           -           -         -       (15,502)   (15,502)
  Reissued                                       -          -          -           -           -         -           718        718
                                              ------   ---------  ---------   ---------  ----------   -------- --------   ---------

Balance at December 31, 2001                   8,355     777,597   222,722        8,350    (208,349)   (6,352)  (415,380)   386,943

Net income                                       -          -       36,810         -           -         -         -         36,810
Other comprehensive income (loss), net of tax    -          -         -          (2,454)     37,679   (15,095)     -         20,130
Common dividends declared - $3.30 per share      -          -     (157,978)        -           -         -         -       (157,978)
Tax benefit of stock options exercised           -           222      -            -           -         -         -            222
Treasury stock:
  Acquired                                       -          -         -            -           -         -       (21,254)   (21,254)
  Reissued                                       -          -         -            -           -         -           454        454
                                              ------   ---------  ---------   ---------  ----------   --------  --------- ---------

Balance at December 31, 2002                   8,355     777,819    101,554       5,896    (170,670)  (21,447)  (436,180)   265,327

Net income                                       -          -        63,662        -           -         -         -         63,662
Other comprehensive income (loss), net of tax    -          -          -         17,427      16,715   (14,762)     -         19,380
Distribution of 48.8% of Kronos Worldwide, Inc.  -          -       (88,532)       -           -         -         -        (88,532)
Income tax on distribution                       -          -       (22,478)       -           -         -         -        (22,478)
Common dividends declared -  $.80 per share      -          -       (38,183)       -           -         -         -        (38,183)
Treasury stock - reissued                        -          -          -           -           -         -         1,738      1,738
                                              ------   ---------  ---------   ---------  ----------  ---------  --------- ---------

Balance at December 31, 2003                  $8,355   $ 777,819  $  16,023   $  23,323  $ (153,955) $(36,209) $(434,442) $ 200,914
                                              ======   =========  =========   =========  ==========  =========  ========= =========
</TABLE>

          See accompanying notes to consolidated financial statements.




                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years ended December 31, 2001, 2002 and 2003

                                 (In thousands)


<TABLE>
<CAPTION>
                                                                   2001               2002               2003
                                                                   ----               ----               ----

Cash flows from operating activities:
<S>                                                              <C>                 <C>                 <C>
    Net income                                                   $ 121,407           $  36,810           $ 63,662
    Depreciation and amortization                                   29,599              33,221             40,095
    Noncash interest income on restricted cash and
       restricted marketable debt securities                        (3,580)             (1,762)              (869)
    Noncash interest expense                                           467               1,768              2,197
    Deferred income taxes                                            3,256               1,506             33,742
    Minority interest                                                  960               1,264              2,044
    Net losses (gains) from:
       Securities transactions                                       1,133                 105             (2,402)
       Disposition of property and equipment                           735                 625             (9,845)
    Pension cost, net                                               (2,967)             (2,316)            (5,478)
    Other postretirement benefits, net                                 531              (3,385)            (3,468)
    Distributions from TiO2 manufacturing joint venture, net        11,313               7,950                875
    Litigation settlement gains, net                               (10,307)                  -                  -
    Insurance recoveries, net                                      (17,468)                  -                  -
    Other, net                                                         261                   -                854
    Change in assets and liabilities:
      Accounts and other receivable                                    902               4,788              3,262
      Inventories                                                  (32,698)             42,249            (26,041)
      Prepaid expenses                                              (2,200)               (545)             3,186
      Accounts payable and accrued liabilities                      31,091             (32,310)           (10,606)
      Income taxes                                                   4,107              (2,036)           (26,394)
      Accounts with affiliates                                      (5,670)              3,800              4,466
      Accrued environmental costs                                    7,068               8,913             24,137
      Other noncurrent assets                                         (263)                150             (3,268)
      Other noncurrent liabilities                                  (7,944)             (2,544)               379
                                                                 ---------           ---------           --------

        Net cash provided by operating activities                  129,733              98,251             90,528
                                                                 ---------           ---------           --------
</TABLE>







                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Years ended December 31, 2001, 2002 and 2003

                                 (In thousands)


<TABLE>
<CAPTION>
                                                             2001          2002        2003
                                                             ----          ----        ----

Cash flows from investing activities:
<S>                                                        <C>         <C>          <C>
  Capital expenditures .................................   $(53,669)   $ (32,600)   $(35,354)
  Loans to affiliates:
    Loans ..............................................    (33,400)        --          --
    Collections ........................................        750       14,650       4,000
  Acquisition of business ..............................       --         (9,149)       --
  Property damaged by fire:
    Insurance proceeds .................................     23,361         --          --
    Other, net .........................................     (3,205)        --          --
    Change in restricted cash equivalents and restricted
       marketable debt securities, net .................      8,509         (960)       (654)
    Proceeds from disposition of property and equipment         419          873      12,801
    Other, net .........................................          4         --          --
                                                           --------    ---------    --------

      Net cash used by investing activities ............    (57,231)     (27,186)    (19,207)
                                                           --------    ---------    --------

Cash flows from financing activities:
  Indebtedness:
    Borrowings .........................................      1,437      335,768      16,106
    Principal payments .................................    (22,428)    (278,814)    (46,006)
    Deferred financing fees ............................       --        (10,706)       --
  Dividends paid .......................................    (39,758)    (157,978)    (38,183)
  Treasury stock:
    Purchased ..........................................    (15,502)     (21,254)       --
    Reissued ...........................................        718          454       1,738
  Distributions to minority interests ..................         (5)        (11)         (14)
                                                           --------    ---------    --------

      Net cash used by financing activities ............    (75,538)    (132,541)    (66,359)
                                                           --------    ---------    --------

Net increase (decrease) ................................   $ (3,036)   $ (61,476)   $  4,962
                                                           ========    =========    ========
</TABLE>








                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Years ended December 31, 2001, 2002 and 2003

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                      2001              2002              2003
                                                                      ----              ----              ----

Cash and cash equivalents-net change from:
<S>                                                              <C>                   <C>              <C>
  Operating, investing and financing activities                  $  (3,036)            $ (61,476)       $   4,962
  Currency translation                                              (1,305)                3,334            4,746
  Acquisition of business                                              -                     196             -
                                                                  ----------            --------        ---------

                                                                    (4,341)              (57,946)           9,708

   Balance at beginning of year                                    120,378               116,037           58,091
                                                                 ---------             ---------        ---------

   Balance at end of year                                        $ 116,037             $  58,091        $  67,799
                                                                 =========             =========        =========

Supplemental disclosures - cash paid (received) for:
    Interest                                                     $  27,143              $ 32,896        $  28,278
    Income taxes                                                    29,770                 9,715           (4,523)

     Acquisition of business - net assets consolidated
        Cash and cash equivalents                                $    -                 $    196        $    -
        Restricted cash                                               -                    2,685             -
        Goodwill                                                      -                    6,406             -
        Other intangible assets                                       -                    2,601             -
        Other noncash assets                                          -                    1,259             -
        Liabilities                                                   -                   (3,998)            -
                                                                 ---------             ---------        ----------

            Cash paid                                            $
                                                                 =========             =========        ==========
                                                                 $    -                 $  9,149        $    -
                                                                 =========             =========        ==========
</TABLE>

          See accompanying notes to consolidated financial statements.





                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 -       Summary of significant accounting policies:

     Organization  and basis of  presentation.  NL Industries,  Inc. (NYSE:  NL)
conducts  its  titanium  dioxide  pigments  ("TiO2")   operations   through  its
approximately  51%  -owned  subsidiary,  Kronos  Worldwide,  Inc.  (NYSE:  KRO),
formerly known as Kronos, Inc. ("Kronos"). At December 31, 2003, Valhi, Inc. and
a wholly-owned  subsidiary of Valhi held  approximately  84% of NL's outstanding
common stock, and Contran  Corporation and its subsidiaries  held  approximately
90% of Valhi's  outstanding  common  stock.  At December 31,  2003,  Valhi and a
wholly-owned  subsidiary  of Valhi also held an  additional  approximate  42% of
Kronos'  outstanding  common stock.  Substantially all of Contran's  outstanding
voting stock is held by trusts  established for the benefit of certain  children
and  grandchildren  of Harold C. Simmons,  of which Mr. Simmons is sole trustee.
Mr. Simmons, the Chairman of the Board of Valhi, Contran and the Company, may be
deemed to control each of such companies.

     Management's   estimates.   The  preparation  of  financial  statements  in
conformity with accounting principles generally accepted in the United States of
America  ("GAAP")  requires  management to make estimates and  assumptions  that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent assets and liabilities at the date of the financial  statements,  and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.

     Principles of consolidation.  The consolidated financial statements include
the accounts of NL and its wholly-owned  and  majority-owned  subsidiaries.  All
material intercompany accounts and balances have been eliminated.  Certain prior
year amounts have been reclassified to conform to the current year presentation.

     Translation of foreign  currencies.  Assets and liabilities of subsidiaries
whose  functional  currency  is other  than the U.S.  dollar are  translated  at
year-end  rates of exchange and revenues and expenses are  translated at average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholders'  equity as part of accumulated other  comprehensive
income,  net of related  deferred income taxes and minority  interest.  Currency
transaction  gains and losses are  recognized in income  currently,  and in 2002
included  a  $6.3  million  gain  related  to  the  extinguishments  of  certain
intercompany  indebtedness  that is  classified  as a component  of other income
(expense) in the accompanying consolidated statement of income.

     Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed.  Shipping terms of products shipped are generally FOB shipping point,
although in some instances  shipping terms are FOB destination  point (for which
sales are not recognized until the product is received by the customer). Amounts
charged to customers for shipping and handling are included in net sales.  Sales
are stated net of price,  early  payment and  distributor  discounts  and volume
rebates.

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

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

     Restricted  cash  equivalents and restricted  marketable  debt  securities.
Restricted cash equivalents and restricted marketable debt securities, primarily
invested  in U.S.  government  securities  and money  market  funds that  invest
primarily in U.S. government securities,  include amounts restricted pursuant to
outstanding  letters of credit ($10  million and $5 million at December 31, 2002
and 2003 respectively),  and at December 31, 2003 also includes $24 million held
by special purpose trusts (2002 - $59 million) formed by NL, the assets of which
can only be used to pay for certain of NL's future environmental remediation and
other  environmental   expenditures.   Such  restricted  amounts  are  generally
classified   as  either  a  current  or  noncurrent   asset   depending  on  the
classification  of  the  liability  to  which  the  restricted  amount  relates.
Additionally, the restricted marketable debt securities are generally classified
as either a current or noncurrent asset depending upon the maturity date of each
such  debt  security.  Use of such  restricted  balances  does  not  affect  the
Company's Consolidated Statements of Cash Flows. See Note 8.

     Marketable  securities and  securities  transactions.  Marketable  debt and
equity  securities  are carried at fair value based upon quoted  market  prices.
Unrealized gains and losses on available-for-sale  securities are accumulated in
stockholders'  equity as part of accumulated other comprehensive  income, net of
related deferred income taxes and minority  interest.  Realized gains and losses
are based upon the specific identification of the securities sold.

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

     Investment in TiO2 manufacturing  joint venture.  Investment in a 50%-owned
manufacturing joint venture is accounted for by the equity method.

     Property and equipment and depreciation.  Property and equipment are stated
at cost.  The Company has a  governmental  concession  with an unlimited term to
operate an ilmenite mine in Norway.  Mining properties  consist of buildings and
equipment  used in the  Company's  Norwegian  ilmenite  mining  operations.  The
Company  does  not  own  the  ilmenite   reserves   associated  with  the  mine.
Depreciation  of  property  and  equipment  for  financial   reporting  purposes
(including  mining  properties)  is computed  principally  by the  straight-line
method over the  estimated  useful  lives of ten to 40 years for  buildings  and
three to 20 years for equipment.  Accelerated  depreciation methods are used for
income tax  purposes,  as permitted.  Upon sale or  retirement of an asset,  the
related cost and accumulated  depreciation are removed from the accounts and any
gain or loss is recognized in income currently.

     The Company performs planned major maintenance  activities during the year.
Repair and maintenance costs estimated to be incurred in connection with planned
major maintenance  activities are accrued in advance and are included in cost of
sales.  Accrued  repair  and  maintenance  costs,   included  in  other  current
liabilities (see Note 9), was $4.0 million and $6.3 million at December 31, 2002
and 2003, respectively.

     Interest costs related to major long-term capital projects and renewals are
capitalized as a component of  construction  costs.  Interest costs  capitalized
were not significant in 2001, 2002 or 2003.

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

     Long-term  debt.  Amortization  of deferred  financing  costs,  included in
interest  expense,  is  computed  by the  interest  method  over the term of the
applicable issue.

     Derivatives  and hedging  activities.  Derivatives are recognized as either
assets or  liabilities  and measured at fair value in  accordance  with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended.
The  accounting  for  changes  in fair  value of  derivatives  depends  upon the
intended use of the  derivative,  and such changes are recognized  either in net
income  or  other   comprehensive   income.   As  permitted  by  the  transition
requirements  of SFAS No. 133, the Company has  exempted  from the scope of SFAS
No. 133 all host contracts  containing embedded  derivatives that were issued or
acquired prior to January 1, 1999. See Note 19.

     Income taxes.  The Company and its qualifying  subsidiaries are included in
the  consolidated  U.S. federal tax return of Contran (the "Contran Tax Group").
As a member of the  Contran  Tax Group,  the Company is a party to a tax sharing
agreement (the "Contran Tax Agreement"). The Contran Tax Agreement provides that
the Company  computes its provision for U.S. income taxes on a  separate-company
basis  using the tax  elections  made by  Contran.  Pursuant  to the Contran Tax
Agreement and using the tax  elections  made by Contran,  the Company  generally
makes payments to or receives  payments from Valhi in amounts it would have paid
to or received from the U.S.  Internal  Revenue Service had it not been a member
of the Contran Tax Group.  Refunds are limited to amounts  previously paid under
the Contran Tax  Agreement  unless the Company was entitled to a refund from the
U.S. Internal Revenue Service on a separate company basis. See Notes 13 and 14.

     Deferred  income tax assets and liabilities are recognized for the expected
future tax  consequences  of  temporary  differences  between the income tax and
financial  reporting  carrying  amounts  of assets  and  liabilities,  including
investments in the Company's  subsidiaries and affiliates who are not members of
the Contran Tax Group and undistributed  earnings of foreign  subsidiaries which
are not deemed to be permanently reinvested.  The Company periodically evaluates
its deferred tax assets in the various taxing jurisdictions in which it operates
and adjusts any related valuation  allowance based on the estimate of the amount
of such  deferred  tax  assets  that  the  Company  believes  does  not meet the
"more-likely-than-not"  recognition  criteria.  Earnings of foreign subsidiaries
deemed to be permanently reinvested aggregated $261 million at December 31, 2002
and $304 million at December 31, 2003.

     Earnings per share.  Basic earnings per share of common stock is based upon
the weighted  average number of common shares actually  outstanding  during each
period.  Diluted  earnings  per share of common  stock  includes  the  impact of
outstanding  dilutive stock options.  The weighted average number of outstanding
stock  options  excluded  from the  calculation  of diluted  earnings  per share
because  their  impact  would have been  antidilutive  aggregated  approximately
876,000 in 2001,  788,000 in 2002 and nil in 2003.  There were no adjustments to
net income in the computation of the diluted earnings per share amounts.

     Stock  options.   The  Company  has  elected  the  disclosure   alternative
prescribed  by SFAS No.  123,  "Accounting  for  Stock-Based  Compensation,"  as
amended by SFAS No. 148,  "Accounting for Stock-Based  Compensation - Transition
and  Disclosure,"  and to  account  for its  stock-based  employee  compensation
related to stock options in accordance with Accounting  Principles Board Opinion
("APBO") No. 25,  "Accounting  for Stock Issued to  Employees,"  and its various
interpretations. Under APBO No. 25, no compensation cost is generally recognized
for fixed stock options in which the exercise  price is not less than the market
price on the grant date.  During the fourth  quarter of 2002 and  following  the
Company's cash settlement of options to purchase NL common stock held by certain
individuals,  the Company  commenced  accounting for its stock options using the
variable   accounting   method  because  the  Company  could  not  overcome  the
presumption that it would not similarly cash settle its remaining stock options.
Under the variable  accounting  method,  the intrinsic  value of all unexercised
stock  options  (including  those with an  exercise  price at least equal to the
market price on the date of grant) are accrued as an expense over their  vesting
period, with subsequent increases  (decreases) in NL's market price resulting in
additional compensation expense (income). Aggregate compensation cost related to
NL stock options recognized by the Company was nil in 2001, $3.2 million in 2002
and $1.9 million in 2003.

     The following  table presents what the Company's  consolidated  net income,
and related  per share  amounts,  would have been in 2001,  2002 and 2003 if the
Company and its  subsidiaries  had each elected to account for their  respective
stock-based  employee  compensation  related to all stock  options in accordance
with the fair value-based recognition provisions of SFAS No. 123, for all awards
granted subsequent to January 1, 1995.

<TABLE>
<CAPTION>
                                                                              Years ended December 31,
                                                                         2001           2002            2003
                                                                         ----           ----            ----
                                                                                (In millions, except
                                                                                 per share amounts)

<S>                                                                  <C>            <C>            <C>
Net income as reported                                               $ 121.4        $  36.8        $  63.7

Adjustments, net of applicable income tax effects and minority interest:
  Stock-based employee compensation expense
   determined under APBO No. 25                                           -             2.1            1.1
  Stock-based employee compensation expense
   determined under SFAS No. 123                                        (1.6)          (1.0)           (.4)
                                                                     -------        -------        -------

Pro forma net income                                                 $ 119.8        $  37.9        $  64.4
                                                                     =======        =======        =======

Basic earnings per share:
  As reported                                                        $   2.44       $    .76       $  1.33
  Pro forma                                                          $   2.41       $    .78       $  1.35

Diluted earnings per share:
  As reported                                                        $   2.44       $    .76       $  1.33
  Pro forma                                                          $   2.40       $    .78       $  1.35
</TABLE>

     Environmental remediation costs. 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.  At December 31, 2002 and 2003, no receivables
for recoveries have been recognized.

     Selling, general and administrative expenses;  shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales,  distribution,  shipping and handling,  research and development,  legal,
environmental  remediation  and  administrative  functions  such as  accounting,
treasury and finance,  and includes costs for salaries and benefits,  travel and
entertainment,   promotional  materials  and  professional  fees.  Shipping  and
handling costs are included in selling,  general and administrative  expense and
were  $49  million  in  2001,  $51  million  in 2002  and $63  million  in 2003.
Advertising  costs are expensed as incurred and were $1 million in each of 2001,
2002, and 2003. Research,  development and certain sales technical support costs
are  expensed as incurred and  approximated  $6 million in each of 2001 and 2002
and approximated $7 million in 2003.

     Other.  Corporate  expenses  include  environmental,  legal and other costs
attributable to formerly owned business units.

     Accounting and funding policies for retirement and postretirement  benefits
other than pensions ("OPEB") plans are described in Note 15.

Note 2 - Business combinations:

     In  January  2002,  the  Company  acquired  all of the  stock  and  limited
liability company units of EWI RE, Inc. and EWI RE, Ltd.  (collectively  "EWI"),
respectively,  for an aggregate of $9.2 million in cash,  including  acquisition
costs  of $.2  million.  An  entity  controlled  by one of  Harold  C.  Simmons'
daughters  owned a majority of EWI,  and a  wholly-owned  subsidiary  of Contran
owned the  remainder  of EWI. EWI provides  reinsurance  brokerage  services for
insurance  policies of the Company,  its joint  venture and other  affiliates of
Contran as well as external third-party customers.  The purchase was approved by
a special committee of the Company's Board of Directors consisting of two of its
directors  unrelated to Contran,  and the purchase  price was  negotiated by the
special committee based upon its  consideration of relevant  factors,  including
but not limited to due diligence  performed by  independent  consultants  and an
appraisal of EWI conducted by an independent third party selected by the special
committee.

     EWI's  results of  operations  and cash flows are included in the Company's
consolidated  results of operations and cash flows  beginning  January 2002. The
pro forma effect on the  Company's  results of  operations at December 31, 2001,
assuming  the  acquisition  of EWI had  occurred  as of January 1, 2001,  is not
material.  The aggregate  cash purchase  price has been  allocated to the assets
acquired and liabilities assumed.

Note 3 - Geographic information:

     The Company's primary operations are conducted by Kronos and are associated
with the  production  and sale of TiO2.  Titanium  dioxide  pigments are used to
impart  whiteness,  brightness  and  opacity  to a  wide  variety  of  products,
including paints, plastics, paper, fibers and ceramics. At December 31, 2002 and
2003,  the net assets of  non-U.S.  subsidiaries  included in  consolidated  net
assets approximated $159 million and $193 million, respectively.

     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.






<TABLE>
<CAPTION>
                                                                           Years ended December 31,
                                                                   2001               2002               2003
                                                                   ----               ----               ----
                                                                                 (In thousands)
Geographic areas

    Net sales - point of origin:
<S>                                                               <C>                <C>               <C>
        Germany                                                   $ 398,470          $ 404,299         $  510,105
        United States                                               278,624            291,823            310,694
        Canada                                                      149,412            157,773            173,297
        Belgium                                                     126,782            123,760            150,728
        Norway                                                      102,843            111,811            131,457
        Other                                                        82,320             89,560            110,358
        Eliminations                                               (303,352)          (303,838)          (378,462)
                                                                  ---------          ---------         ----------

                                                                  $ 835,099          $ 875,188         $1,008,177
                                                                  =========          =========         ==========

    Net sales - point of destination:
        Europe                                                    $ 425,338          $ 456,834         $  567,496
        United States                                               258,347            271,865            296,643
        Canada                                                       47,061             53,371             53,170
        Latin America                                                25,514             19,970             15,920
        Asia                                                         46,169             47,549             49,020
        Other                                                        32,670             25,599             25,928
                                                                  ---------          ---------         ----------

                                                                  $ 835,099          $ 875,188         $1,008,177
                                                                  =========          =========         ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                   2001               2002               2003
                                                                   ----               ----               ----
                                                                                 (In thousands)


    Net property and equipment:
<S>                                                                 <C>                <C>               <C>
        Germany                                                     $182,387           $213,170          $252,411
        Canada                                                        54,676             54,719            63,623
        Belgium                                                       46,841             54,625            64,895
        Norway                                                        38,549             49,737            50,811
        Other                                                          7,297              6,568             3,999
                                                                    --------           --------          --------

                                                                    $329,750           $378,819          $435,739
                                                                    ========           ========          ========
</TABLE>

Note 4 -       Accounts and other receivables:

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                        2002             2003
                                                                                        ----             ----
                                                                                           (In thousands)

<S>                                                                                   <C>          <C>
Trade receivables                                                                     $ 124,044    $  146,971
Insurance claims                                                                          2,558            58
Recoverable VAT and other receivables                                                    12,861        12,710
Allowance for doubtful accounts                                                          (2,605)       (2,919)
                                                                                      ---------    ----------

                                                                                      $ 136,858    $  156,820
                                                                                      =========    ==========
</TABLE>







Note 5 -       Marketable securities:

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                         2002            2003
                                                                                         ----            ----
                                                                                            (In thousands)

Available-for-sale marketable equity securities:
<S>                                                                                      <C>            <C>
  Valhi                                                                                  $  9,845       $ 70,450
  Tremont Group                                                                            30,634              -
  Tremont Corporation                                                                         243              -
  Other                                                                                       179             37
                                                                                         --------       --------

                                                                                         $ 40,901       $ 70,487
                                                                                         ========       ========
</TABLE>


     At December  31, 2002,  the Company  owned 20% of Tremont  Group,  Inc. and
Valhi owned the remaining 80%.  Tremont  Group's only asset was an 80% ownership
interest in Tremont  Corporation  ("Tremont").  The  Company's  stock of Tremont
Group was  redeemdable  at the option of the Company for fair value based on the
value of the  underlying  Tremont  shares,  and the  Company  accounted  for its
investment in Tremont Group as an available-for-sale marketable security carried
at fair  value  based on the fair value of the  underlying  Tremont  shares.  At
December 31, 2002,  the Company also directly held a nominal number of shares of
Tremont and owned 1,186,200  shares of Valhi common stock.  The Company accounts
for its  investment  in its parent  companies as  available-for-sale  marketable
securities carried at fair value.

     In February 2003 Valhi completed a series of merger  transactions  pursuant
to which, among other things, Tremont Group and Tremont both became wholly-owned
subsidiaries  of Valhi.  Under these merger  transactions,  (i) Valhi issued 3.5
million  shares of its common  stock to the Company in return for the  Company's
20% ownership  interest in Tremont Group and (ii) Valhi issued 3.4 shares of its
common  stock  (plus  cash  in  lieu  of  fractional   shares)  to  all  Tremont
stockholders  (other than Valhi and Tremont Group) in exchange for each share of
Tremont  common  stock  held  by  such   stockholders.   The  Company   received
approximately 27,770 shares of Valhi common stock in the second transaction. The
number of shares of Valhi common stock issued to the Company in exchange for the
Company's 20% ownership interest in Tremont Group was equal to the Company's 20%
pro-rata  interest in the shares of Tremont  common stock held by Tremont Group,
adjusted  for the same 3.4  exchange  ratio.  The  Company  reported  a  pre-tax
securities  transaction gain of approximately  $2.3 million in the first quarter
of 2003 which represented the difference  between the market value of the shares
of Valhi  received  and the cost basis of the Tremont  Group and Tremont  shares
exchanged.  Following these  transactions,  the Company owned  approximately 4.7
million shares of Valhi's outstanding common stock  (approximately 4% of Valhi's
outstanding  shares).  The  Company  will  continue to account for its shares of
Valhi common stock as available-for-sale marketable equity securities carried at
fair value (based on quoted market prices).

     The aggregate cost basis for the Company's  investment in Valhi at December
31, 2003 was $34.6 million. The aggregate cost basis of the Company's investment
in Tremont  Group and Valhi at  December  31,  2002 was $26.2  million  and $5.9
million, respectively.

     The Valhi common stock owned by the Company is subject to the  restrictions
on  resale  pursuant  to  certain  provisions  of the  Securities  and  Exchange
Commission ("SEC") Rule 144. The shares of Valhi common stock cannot be voted by
the  Company  under  Delaware  Corporation  Law,  but the Company  does  receive
dividends  from Valhi on these  shares,  when  declared and paid.  For financial
reporting purposes,  Valhi reports its proportional  interest in these shares as
treasury stock.

Note 6 - Inventories:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                        2002             2003
                                                                                        ----             ----
                                                                                           (In thousands)


<S>                                                                                    <C>              <C>
Raw materials                                                                          $ 54,077         $ 61,959
Work in process                                                                          15,936           19,855
Finished products                                                                       109,203          147,270
Supplies                                                                                 30,666           36,936
                                                                                       --------         --------

                                                                                       $209,882         $266,020
                                                                                       ========         ========
</TABLE>

Note 7 - Investment in TiO2 manufacturing joint venture:

     Kronos Louisiana, Inc. ("KLA"), a wholly-owned subsidiary of Kronos, owns a
50% interest in Louisiana Pigment Company,  L.P. ("LPC"). LPC is a manufacturing
joint venture that is also  50%-owned by Tioxide  Americas Inc.  ("Tioxide"),  a
wholly-owned  subsidiary  of Huntsman  International  Holdings  LLC, a 60%-owned
subsidiary  of Huntsman  Corporation.  LPC owns and operates a  chloride-process
TiO2 plant in Lake Charles, Louisiana.

     KLA is  required  to purchase  one-half  of the TiO2  produced by LPC.  LPC
operates on a break-even basis and,  accordingly,  the Company reports no equity
in earnings of LPC.  Kronos' cost for its share of the TiO2 produced is equal to
its share of LPC's  costs.  Kronos'  share of net costs is  reported  as cost of
sales as the related TiO2  acquired  from LPC is sold.  Distributions  from LPC,
which  generally  relate  to  excess  cash  generated  by LPC from its  non-cash
production  costs,  and  contributions  to LPC, which  generally  relate to cash
required by LPC when it builds  working  capital,  are  reported as part of cash
generated by operating  activities in the Company's  Consolidated  Statements of
Cash Flows. Such distributions are reported net of any contributions made to LPC
during the periods.  Net distributions of $11.3 million in 2001, $8.0 million in
2002 and $.9 million in 2003 are stated net of  contributions of $6.2 million in
2001, $14.2 million in 2002 and $13.1 million in 2003.

     LPC made net cash  distributions of $22.6 million in 2001, $15.9 million in
2002 and $1.8 million in 2003, equally split between the partners.

Summary balance sheets of LPC are shown below:

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                    2002                2003
                                                                                    ----                ----
                                                                                         (In thousands)

           ASSETS

<S>                                                                                <C>                <C>
Current assets                                                                     $  56,745          $  57,028
Property and equipment, net                                                          235,739            226,971
                                                                                   ---------          ---------

                                                                                   $ 292,484          $ 283,999
                                                                                   =========          =========

   LIABILITIES AND PARTNERS' EQUITY

Other liabilities, primarily current                                               $  29,716          $  23,229
Partners' equity                                                                     262,768            260,770
                                                                                   ---------          ---------

                                                                                   $ 292,484          $ 283,999
                                                                                   =========          =========
</TABLE>

Summary income statements of LPC are shown below:

<TABLE>
<CAPTION>
                                                                         Years ended December 31,
                                                              2001                 2002                 2003
                                                              ----                 ----                 ----
                                                                              (In thousands)

Revenues and other income:
<S>                                                          <C>                  <C>                  <C>
  Kronos                                                     $  93,393            $  92,428            $  101,293
  Tioxide                                                       94,009               93,833               101,619
  Interest                                                         303                   53                    73
                                                             ---------            ---------            ----------

                                                               187,705              186,314               202,985
                                                             ---------            ---------            ----------
Cost and expenses:
  Cost of sales                                                187,295              185,946               201,947
  General and administrative                                       410                  368                   398
                                                             ---------            ---------            ----------

                                                               187,705              186,314               202,345
                                                             ---------            ---------            ----------

Net income from continuing operations                             -                    -                      640
  Cumulative effect of change in accounting principle             -                    -                     (640)
                                                             ---------            ---------            ----------

        Net income                                           $    -               $    -               $     -
                                                             =========            =========            ==========
</TABLE>

Note 8 -       Other noncurrent assets:

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                        2002             2003
                                                                                        ----             ----
                                                                                           (In thousands)

<S>                                                                                    <C>              <C>
    Deferred financing costs, net                                                      $ 10,550         $ 10,417
    Goodwill                                                                              6,406            6,406
    Unrecognized net pension obligations                                                  5,561           13,747
    Intangible asset, net                                                                 2,230            1,859
    Restricted cash equivalents                                                           1,344                -
    Other                                                                                 2,646            1,628
                                                                                       --------         --------

                                                                                       $ 28,737         $ 34,057
                                                                                       ========         ========
</TABLE>

     Goodwill and the  definite-lived  customer list  intangible  asset resulted
from the acquisition of EWI in January 2002. See Note 2. The intangible asset is
amortized on a straight-line  basis over a period of seven years  (approximately
five years remaining at December 31, 2003) with no assumed residual value and is
presented  net of  accumulated  amortization  of  $372,000  and  $743,000  as of
December 31, 2002 and 2003,  respectively.  Amortization  expense of  intangible
assets was approximately $372,000 in 2002 and $371,000 in 2003, and amortization
expense of intangible assets is expected to be approximately $370,000 in each of
2004 through 2008.

Note 9 - Accrued liabilities:

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                         2002           2003
                                                                                        ------         ------
                                                                                            (In thousands)

<S>                                                                                   <C>          <C>
    Employee benefits                                                                 $ 34,349     $ 38,368
    Interest                                                                               240          206
    Deferred income                                                                        333          -
    Other                                                                               35,512       42,543
                                                                                      --------     --------

                                                                                      $ 70,434     $ 81,117
                                                                                      ========     ========
</TABLE>

Note 10 -      Other noncurrent liabilities:

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                       2002             2003
                                                                                       ----             ----
                                                                                           (In thousands)


<S>                                                                                     <C>              <C>
  Employee benefits                                                                     $  4,025         $  4,849
  Insurance                                                                                7,674            4,331
  Other                                                                                    9,351           10,273
                                                                                        --------         --------

                                                                                        $ 21,050         $ 19,453
                                                                                        ========         ========
</TABLE>

Note 11 -      Long-term debt:

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                          2002             2003
                                                                                          ----             ----
                                                                                              (In thousands)


Kronos International, Inc. and subsidiaries:
<S>                                                                                    <C>             <C>
  8.875% Senior Secured Notes                                                          $ 296,942       $  356,136
  Bank credit facility                                                                    27,077                -
  Other                                                                                    1,887              603
                                                                                       ---------       ----------

                                                                                         325,906          356,739

  Less current maturities                                                                  1,298              288
                                                                                       ---------       ----------

                                                                                       $ 324,608       $  356,451
                                                                                       =========       ==========
</TABLE>

     In June 2002,  Kronos  International,  Inc.  ("KII"),  which  conducts  the
Company's TiO2 operations in Europe,  issued (euro)285  million principal amount
($280 million when issued) of its 8.875% Senior  Secured Notes (the "Notes") due
2009. The Notes are  collateralized by first priority liens on 65% of the common
stock or other  ownership  interests  of certain of KII's  first-tier  operating
subsidiaries.  In  addition,  the  indenture  contains  customary  cross-default
provisions   with  respect  to  other  debt  and   obligations  of  KII  or  its
subsidiaries.  The Notes are issued  pursuant to an indenture  which  contains a
number of covenants and restrictions  which,  among other things,  restricts the
ability of KII and its subsidiaries to incur debt, incur liens, pay dividends or
merge or consolidate with, or sell or transfer all or substantially all of their
assets to, another  entity.  The Notes are  redeemable,  at KII's option,  on or
after  December  30, 2005 at  redemption  prices  ranging  from  104.437% of the
principal amount,  declining to 100% on or after December 30, 2008. In addition,
on or before June 30,  2005,  KII may redeem up to 35% of the Notes with the net
proceeds  of a qualified  public  equity  offering at 108.875% of the  principal
amount.  In the event of a change of control of KII,  as  defined,  KII would be
required to make an offer to purchase its Notes at 101% of the principal amount.
KII would also be required  to make an offer to purchase a specified  portion of
its  Notes at par  value in the event  KII  generates  a  certain  amount of net
proceeds from the sale of assets  outside the ordinary  course of business,  and
such net  proceeds  are not  otherwise  used  for  specified  purposes  within a
specified time period. At December 31, 2003 the quoted market price of the Notes
was  approximately   (euro)1,000  per  (euro)1,000   principal  amount  (2002  -
(euro)1,010 per (euro)1,000 principal amount).

     Also in June 2002,  KII's operating  subsidiaries  in Germany,  Belgium and
Norway  (collectively,  the "Borrowers") entered into a (euro)80 million secured
revolving  bank credit  facility  that  matures in June 2005  ("European  Credit
Facility").  Borrowings  under  this  facility  were  used in part to repay  and
terminate Kronos' short-term non-U.S. bank credit agreements.  Borrowings may be
denominated in euros,  Norwegian kroners or U.S.  dollars,  and bear interest at
the applicable  interbank market rate plus 1.75%. The facility also provides for
the  issuance  of letters of credit up to euro 5 million.  The  European  Credit
Facility is  collateralized  by the accounts  receivable and  inventories of the
borrowers,  plus a  limited  pledge of all of the  other  assets of the  Belgian
borrower.  The European Credit Facility contains certain  restrictive  covenants
which, among other things, restricts the ability of the borrowers to incur debt,
incur liens, pay dividends or merge or consolidate with, or sell or transfer all
or  substantially  all of their assets to,  another  entity.  In  addition,  the
European  Credit  Facility  contains  customary  cross-default  provisions  with
respect  to other  debt and  obligations  of the  Borrowers,  KII and its  other
subsidiaries.  At December  31,  2003,  no amounts  were  outstanding  under the
European Credit Facility,  and the equivalent of $97.5 million was available for
additional borrowing by the subsidiaries.

     Under  the  cross-default  provisions  of  the  Notes,  the  Notes  may  be
accelerated  prior to their stated maturity if KII or any of KII's  subsidiaries
default under any other  indebtedness  in excess of $20 million due to a failure
to pay such  other  indebtedness  at its due date  (including  any due date that
arises  prior to the stated  maturity as a result of a default  under such other
indebtedness).  Under  the  cross-default  provisions  of  the  European  Credit
Facility,  any outstanding  borrowings under the European Credit Facility may be
accelerated prior to their stated maturity if the Borrowers or KII default under
any other indebtedness in excess of (euro)5 million due to a failure to pay such
other  indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other indebtedness).  In
the event the  cross-default  provisions  of  either  the Notes or the  European
Credit Facility become  applicable,  and such  indebtedness is accelerated,  the
Company  would be  required  to repay such  indebtedness  prior to their  stated
maturity.

     In March 2002,  NL  redeemed  $25  million  principal  amount of its 11.75%
Senior Secured Notes ("NL Senior Secured  Notes") at par value,  using available
cash on hand.  In  addition,  NL used a  portion  of the net  proceeds  from the
issuance of the Notes to redeem in full the  remaining  $169  million  principal
amount of the NL  Senior  Secured  Notes.  In  accordance  with the terms of the
indenture  governing  the  NL  Senior  Secured  Notes,  on  June  28,  2002,  NL
irrevocably  placed on deposit with the NL Senior Secured Notes trustee funds in
an amount  sufficient to pay in full the  redemption  price plus all accrued and
unpaid  interest  due  on  the  July  28,  2002  redemption  date.   Immediately
thereafter,  NL was released  from its  obligations  under such  indenture,  the
indenture was  discharged  and all collateral was released to NL. Because NL had
been  released as the primary  obligor  under the indenture as of June 30, 2002,
the NL Senior  Secured Notes were  eliminated  from the balance sheet as of that
date along with the funds  placed on deposit with the trustee to effect the July
28, 2002 redemption. NL recognized a loss on the early extinguishment of debt of
approximately $2 million in the second quarter of 2002,  consisting primarily of
the interest on the NL Senior  Secured  Notes for the period from July 1 to July
28, 2002. Such loss is recognized as a component of interest expense.

     In September  2002,  certain of NL's U.S.  subsidiaries  entered into a $50
million  revolving  credit facility (nil  outstanding at December 31, 2003) that
matures  in  September   2005  ("U.S.   Credit   Facility").   The  facility  is
collateralized by the accounts receivable,  inventories and certain fixed assets
of the  borrowers.  Borrowings  under this facility are limited to the lesser of
$45 million or a  formula-determined  amount based upon the accounts  receivable
and  inventories of the borrowers.  Borrowings bear interest at either the prime
rate or rates based upon the  eurodollar  rate.  The facility  contains  certain
restrictive covenants which, among other things,  restricts the abilities of the
borrowers to incur debt,  incur liens,  pay dividends in certain  circumstances,
sell  assets or enter into  mergers.  At  December  31,  2003,  $39  million was
available for borrowing under the facility.

     Deferred  financing  costs of $10.7 million for the KII Senior  Notes,  the
European  Credit  Facility and the U.S. Credit Facility are being amortized over
the life of the  respective  agreements  and are  included  in other  noncurrent
assets as of December 31, 2003.

     In January 2004,  Kronos' Canadian  subsidiary  entered into a new Cdn. $30
million  revolving credit facility that matures in January 2009. The facility is
collateralized  by the accounts  receivable  and  inventories  of the  borrower.
Borrowings  under this facility are limited to the lesser of Cdn. $26 million or
a  formula-determined  amount based upon the accounts receivable and inventories
of the  borrower.  Borrowings  bear  interest  at rates  based  upon  either the
Canadian prime rate, the U.S. prime rate or LIBOR. The facility contains certain
restrictive  covenants  that,  among other things,  restricts the ability of the
borrower to incur debt,  incur liens,  pay  dividends in certain  circumstances,
sell assets or enter into mergers.

     Unused lines of credit available for borrowing under the Company's non-U.S.
credit  facilities  approximated  $99.9 million at December 31, 2003  (including
approximately $97.5 million under the European Credit Facility).

     In January  and  February  2004,  certain of KII's  operating  subsidiaries
borrowed a net (euro)40  million ($50 million when borrowed)  under the European
Credit Facility at an interest rate of 3.825%.

     Aggregate maturities of long-term debt at December 31, 2003:

<TABLE>
<CAPTION>
Years ending December 31,                                         Amount
                                                              (In thousands)

<S>                                                               <C>
  2004                                                            $    288
  2005                                                                 153
  2006                                                                 145
  2007                                                                  18
  2008                                                                 -
  2009 and thereafter                                              356,135
                                                                  --------

                                                                  $356,739
                                                                  ========
</TABLE>

Note 12 - Minority interest:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                        2002            2003
                                                                                        ----            ----
                                                                                           (In thousands)
Minority interest in net assets:
<S>                                                                                     <C>             <C>
  Kronos Worldwide, Inc.                                                                $   -           $ 77,763
  Other                                                                                    8,516           9,028
                                                                                        --------        --------

                                                                                        $  8,516        $ 86,791
                                                                                        ========        ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                 Years ended December 31,
                                                                           2001            2002           2003
                                                                           ----            ----           ----
                                                                                     (In thousands)
Minority interest in net earnings:
<S>                                                                         <C>            <C>            <C>
  Kronos Worldwide, Inc.                                                    $  -           $  -           $ 1,602
  Other                                                                         960          1,264            442
                                                                            -------        -------        -------

                                                                            $   960        $ 1,264        $ 2,044
                                                                            =======        =======        =======
</TABLE>

     Kronos Worldwide,  Inc. The Company commenced recognizing minority interest
in Kronos' net assets and net earnings  following  the  Company's  December 2003
distribution  of a  portion  of  the  shares  of  Kronos  common  stock  to  its
stockholders. See Note 13.

     Other. Other minority interest relates  principally to NL's  majority-owned
environmental management subsidiary,  NL Environmental Management Services, Inc.
("EMS").  EMS was established in 1998, at which time EMS  contractually  assumed
certain of NL's  environmental  liabilities.  EMS's earnings are based, in part,
upon its ability to favorably  resolve these  liabilities on an aggregate basis.
The  stockholders  of EMS,  other than NL,  actively  manage  the  environmental
liabilities  and share in 39% of EMS's  cumulative  earnings.  NL  continues  to
consolidate EMS and provides accruals for the reasonably estimable costs for the
settlement of EMS's environmental liabilities, as discussed in Note 18.

Note 13 - Stockholders' equity:

<TABLE>
<CAPTION>
                                                                                 Shares of common stock
                                                                     Issued         Treasury        Outstanding
                                                                                   (In thousands)


<S>                                                                     <C>             <C>             <C>
Balance at December 31, 2000                                            66,839          (16,787)        50,052

Treasury shares acquired                                                     -           (1,059)        (1,059)
Treasury shares reissued                                                     -               38             38
Other                                                                        6             -                 6
                                                                       -------          -------        -------

Balance at December 31, 2001                                            66,845          (17,808)        49,037

Treasury shares acquired                                                  -              (1,384)        (1,384)
Treasury shares reissued                                                  -                  37             37
                                                                       -------          -------        -------

Balance at December 31, 2002                                            66,845          (19,155)        47,690

Treasury shares reissued                                                  -                 101            101
                                                                       -------          -------        -------

Balance at December 31, 2003                                            66,845          (19,054)        47,791
                                                                       =======          =======        =======
</TABLE>

     Kronos  Worldwide,  Inc. Prior to December 2003,  Kronos was a wholly-owned
subsidiary  of  the  Company.  In  December  2003,  the  Company  completed  the
distribution of  approximately  48.8% of Kronos' common stock to NL stockholders
(including Valhi and Tremont) in the form of a pro-rata  dividend.  Stockholders
of the Company received one share of Kronos common stock for every two shares of
NL held.

     The Company is a party to a tax sharing  agreement with Contran pursuant to
which the  Company  generally  computes  its  provision  for  income  taxes on a
separate-company  basis, and the Company makes payments to or receives  payments
from  Valhi in  amounts  that it would  have paid to or  received  from the U.S.
Internal  Revenue  Service  had the Company not been a member of the Contran Tax
Group.  Prior to the Company's  completion of the  distribution  of 48.8% of the
outstanding  shares  of  common  stock  of  Kronos,  Kronos  and its  qualifying
subsidiaries  were members of the Company's tax group.  Following  completion of
the distribution,  Kronos and its qualifying  subsidiaries are no longer members
of the  Company's tax group,  but Kronos and its  qualifying  subsidiaries  will
remain members of the Contran Tax Group. The Company's  distribution of 48.8% of
the outstanding shares of common stock of Kronos 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  common stock  distributed
($17.25 per share,  equal to the closing market price of Kronos' common stock on
December 8, 2003,  the date the  distribution  was  completed) and the Company's
adjusted  tax basis in such stock at the date of  distribution.  With respect to
the shares of Kronos  distributed  to Valhi and Tremont (20.2 million  shares in
the aggregate),  effective  December 1, 2003,  Valhi and the Company amended the
terms of their tax  sharing  agreement  to not  require the Company to pay up to
Valhi the tax liability generated from the distribution of such Kronos shares to
Valhi and Tremont,  since the tax on that portion of the gain is deferred at the
Valhi level due to Valhi,  Tremont and the Company being members of the same tax
group. The Company was required to recognize a tax liability with respect to the
Kronos shares  distributed  to the Company's  stockholders  other than Valhi and
Tremont, and such tax liability was approximately $22.5 million.

     In  accordance  with GAAP,  the net carrying  value of the shares of Kronos
distributed ($88.5 million) and the $22.5 million tax liability discussed above,
have been  recognized as a reduction of the Company's  stockholders'  equity and
charged directly to retained earnings.

     Common stock options. The NL Industries, Inc. 1998 Long-Term Incentive Plan
(the "NL Option Plan") provides for the discretionary grant of restricted common
stock,  stock options,  stock  appreciation  rights ("SARs") and other incentive
compensation  to officers and other key employees of the Company and nonemployee
directors.  Although  certain stock options  granted  pursuant to a similar plan
which preceded the NL Option Plan ("Predecessor Option Plan") remain outstanding
at December 31, 2003, no additional options may be granted under the Predecessor
Option Plan.

     Up to five million shares of NL common stock may be issued  pursuant to the
NL Option Plan and, at December 31, 2003,  3,864,500  shares were  available for
future grants. The NL Option Plan provides for the grant of options that qualify
as  incentive  options and for options  which are not so  qualified.  Generally,
stock options and SARs (collectively, "options") are granted at a price equal to
or  greater  than 100% of the  market  price at the date of  grant,  vest over a
five-year period and expire ten years from the date of grant.  Restricted stock,
forfeitable  unless  certain  periods of employment  are  completed,  is held in
escrow in the name of the grantee until the restriction period expires.  No SARs
have been granted under the NL Option Plan.

     Following  the  December  2003  distribution  of a portion of the shares of
Kronos common stock held by the Company, the exercise price for each outstanding
option to  purchase  NL common  stock was  reduced by $8.63 (or  one-half of the
closing  price of Kronos'  common  stock on December 8, 2003,  the  distribution
date).





     Changes in outstanding  options granted pursuant to the NL Option Plan, the
Predecessor Option Plan and the nonemployee  director plan are summarized in the
table below.

<TABLE>
<CAPTION>
                                                                             Amount        Weighted-     Weighted-
                                                           Exercise         payable         average    average fair
                                                           price per          upon         exercise     value at
                                              Shares         share          exercise         price        grant
                                              ------       ---------        --------       ---------    ----------
                                                           (In thousands, except per share amounts)

<S>                                             <C>    <C>    <C>             <C>        <C>            <C>
Outstanding at December 31, 2000                1,602  $ 5.00-21.97           $ 24,363   $  15.21

Granted                                           484   20.11-20.51              9,737   $  20.12       $  7.52
Exercised                                         (38)  11.28-21.97               (627)  $  16.45
Canceled                                          (34)  11.28-20.11               (513)  $  15.38
                                               ------  ------------          ---------

Outstanding at December 31, 2001                2,014    5.00-21.97             32,960   $  16.36

Granted                                            12   13.81-13.81                166   $  13.81       $  5.71
Exercised                                        (545)   5.00-15.75             (7,444)  $  13.65
Canceled                                         (220)  11.88-21.97             (3,623)  $  16.43
                                               ------  ------------          ---------

Outstanding at December 31, 2002                1,261    8.69-21.97             22,059   $  17.50

Exercised                                         (95)  11.28-15.19             (1,271)  $  13.43
Canceled                                          (26)   9.34-20.11               (391)  $  15.00
Adjusted for Kronos common stock
   distribution                                   -          -                  (9,885)  $   8.63
                                               ------  ------------          ---------

Outstanding at December 31, 2003                1,140  $ 0.06-13.34          $  10,512   $   9.22
                                               ======  ============          =========
</TABLE>

     At December 31, 2001,  2002 and 2003 options to purchase  658,560,  428,400
and 695,700  shares,  respectively,  were  exercisable,  and options to purchase
214,200 shares become exercisable in 2004. Of the exercisable  options,  options
to purchase  592,700  shares at December 31, 2003 had exercise  prices less than
the  Company's  December  31,  2003  quoted  market  price of $11.70  per share.
Outstanding options at December 31, 2003 expire at various dates through 2011.

     The following table summarizes the Company's stock options  outstanding and
exercisable as of December 31, 2003 by price range.

<TABLE>
<CAPTION>
                                Options outstanding                                      Options exercisable
                                                     Weighted-
                                                      average         Weighted-                        Weighted-
                                    Outstanding      remaining         average       Exercisable        average
            Range of                    at          contractual       exercise           at            exercise
        exercise prices              12/31/03          life             price         12/31/03           price
     ---------------------          ----------       --------         ---------      ----------       -----------

<C>                <C>                   <C>            <C>            <C>               <C>            <C>
$  0.06        -   $  4.84               78,300         4.4            $   3.05          48,600         $   2.92
$  4.85        -   $  7.26              299,300         5.4            $   5.75         124,700         $   5.87
$  7.27        -   $  9.68              162,000         3.7            $   9.21         162,000         $   9.21
$  9.69        -   $ 12.09              505,400         6.4            $  11.46         265,400         $  11.45
$ 12.10        -   $ 14.51               95,000         4.1            $  13.34          95,000         $  13.34
                                      ---------                                       ---------

                                      1,140,000         5.5            $   9.22         695,700          $  9.59
                                      =========                                       =========
</TABLE>

     The  pro  forma  information  required  by  SFAS  No.  123 is  based  on an
estimation  of the fair value of options  issued  subsequent to January 1, 1995.
See Note 1. No options were granted in 2003. The weighted-average fair values of
options   granted  during  2001  and  2002  were  $7.52  and  $5.71  per  share,
respectively.  The fair values of employee stock options were  calculated  using
the  Black-Scholes  stock option  valuation  model with the  following  weighted
average  assumptions for grants in 2001 and 2002:  stock price volatility of 46%
and 47%,  respectively;  risk-free  rate of return  of 5% and 4%,  respectively;
dividend yield of 4.0% and 5.8%,  respectively;  and an expected term of 9 and 7
years, respectively.  For purposes of pro forma disclosures,  the estimated fair
value of the options is amortized to expense over the options' vesting period.

Note 14 - Income taxes:

<TABLE>
<CAPTION>
                                                                               Years ended December 31,
                                                                          2001             2002           2003
                                                                          ----             ----           ----
                                                                                     (In millions)
Pre-tax income (loss):
<S>                                                                     <C>              <C>             <C>
  U.S.                                                                  $  3.3           $(17.4)         $(21.8)
  Non-U.S.                                                               154.0             67.5            86.1
                                                                        ------           ------          ------

                                                                        $157.3           $ 50.1          $ 64.3
                                                                        ======           ======          ======

Expected tax expense (benefit), at U.S.
 federal statutory income tax rate of 35%                               $ 55.0           $ 17.5          $ 22.5
Non-U.S. tax rates                                                        (4.0)            (6.8)           (1.1)
Incremental U.S. tax and rate differences
 on equity in earnings of non-tax group
 companies                                                                 6.0               .5             1.9
Change in deferred income tax valuation allowance, net                   (24.7)            (3.4)           (7.2)

Nondeductible expenses                                                      .6              3.4             3.4
Nontaxable income                                                         (3.2)              -               -
Change in Belgian income tax law                                           -               (2.3)             -
U.S. state income taxes, net                                                .5              (.1)             .1
Refund of prior year German income taxes                                   -                -             (38.0)
Tax contingency reserve adjustment, net                                    1.0              2.9            14.7
Other, net                                                                 3.7               .3             2.2
                                                                        ------           ------          ------

                                                                        $ 34.9           $ 12.0          $ (1.5)
                                                                        ======           ======          ======
</TABLE>









<TABLE>
<CAPTION>
                                                                               Years ended December 31,
                                                                          2001             2002           2003
                                                                          ----             ----           ----
                                                                                     (In millions)
Components of income tax expense (benefit):
  Currently payable (refundable):
<S>                                                                     <C>              <C>             <C>
    U.S. federal and state                                              $  2.6           $   .1          $   .2
    Non-U.S.                                                              29.0             10.4           (35.4)
                                                                        ------           ------          ------
                                                                          31.6             10.5           (35.2)
                                                                        ------           ------          ------
  Deferred income taxes (benefit):
    U.S. federal and state                                                11.5             (4.0)           (3.8)
    Non-U.S.                                                              (8.2)             5.5            37.5
                                                                        ------           ------          ------
                                                                           3.3              1.5            33.7
                                                                        ------           ------          ------

                                                                        $ 34.9           $ 12.0          $ (1.5)
                                                                        ======           ======          ======
</TABLE>


<TABLE>
<CAPTION>
                                                                               Years ended December 31,
                                                                          2001             2002           2003
                                                                          ----             ----           ----
                                                                                     (In millions)
Comprehensive provision for income taxes (benefit) allocable to:
<S>                                                                     <C>              <C>           <C>
  Net income (loss)                                                     $ 34.9           $ 12.0        $ (1.5)
  Retained earnings                                                       -                -             22.5
  Additional paid-in capital                                              -                 (.2)           -
  Acquired definite-lived intangible asset                                -                  .9            -
  Other comprehensive income:
    Marketable securities                                                  (.3)            (1.3)          9.4
    Pension liabilities                                                   (2.2)            (7.2)        (12.2)
                                                                        ------           ------        ------

                                                                        $ 32.4           $  4.2        $ 18.2
                                                                        ======           ======        ======
</TABLE>







     The  components  of the net deferred tax liability at December 31, 2002 and
2003, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables.

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                        2002                        2003
                                                             -------------------------   ---------------
                                                             Assets     Liabilities      Assets      Liabilities
                                                                                (In millions)
Tax effect of temporary differences related to:
<S>                                                         <C>          <C>              <C>         <C>
  Inventories                                               $  3.4       $  (3.3)         $  1.5      $  (4.1)
  Property and equipment                                      44.3         (59.1)           46.0        (62.7)
  Accrued OPEB costs                                          10.6            -              9.8           -
  Accrued (prepaid) pension cost                               8.5         (24.8)           25.1        (33.5)
  Accrued environmental liabilities and                                                                    -
   other deductible differences                               32.9            -             28.8
  Noncompete agreement                                          .1            -               -            -
  Other accrued liabilities and deductible differences        16.4           -               5.9           -
  Other taxable differences                                     -         (137.7)             -        (157.7)
Tax on unremitted earnings of non-U.S. subsidiaries             -          (4.1)              -          (4.3)
Tax loss and tax credit carryforwards                        163.8            -            154.9           -
Valuation allowance                                         (185.3)           -           (193.8)          -
                                                           -------       -------          ------      ------
  Adjusted gross deferred tax assets                                                        78.2
   (liabilities)                                              94.7        (229.0)                      (262.3)
Netting of items by tax jurisdiction                         (82.3)         82.3           (60.7)        60.7
                                                           -------       -------          ------      -------
                                                              12.4        (146.7)           17.5       (201.6)
Less net current deferred tax asset

 (liability)                                                  10.5          (3.2)           10.8         (3.4)
                                                           -------       -------          ------      -------

  Net noncurrent deferred tax asset

   (liability)                                              $  1.9       $(143.5)         $  6.7      $(198.2)
                                                            ======       =======          ======      =======
</TABLE>

<TABLE>
<CAPTION>
                                                                                  Years ended December 31,
                                                                            2001           2002             2003
                                                                            ----           ----             ----
                                                                                        (In millions)

Increase (decrease) in valuation allowance:
  Recognition of certain deductible tax
   attributes for which the benefit had not
   previously been recognized under the
<S>                                                                     <C>           <C>               <C>
   "more-likely-than-not" recognition criteria                          $  (24.7)     $    (3.4)        $  (7.2)
  Foreign currency translation                                              (7.5)          21.6            28.2
  Offset to the change in gross deferred
   income tax assets due principally to
   redeterminations of certain tax attributes
   and implementation of certain tax
   planning strategies                                                      (3.7)          12.6           (12.5)
                                                                        --------       --------         -------

                                                                        $  (35.9)      $   30.8         $   8.5
                                                                        ========       ========         =======
</TABLE>

     A reduction  in the Belgian  income tax rate from 40% to 34% was enacted in
December  2002 and became  effective  in January  2003.  This  reduction  in the
Belgian  income tax rate  resulted in a $2.3 million  decrease in the  Company's
income tax expense in 2002 because the Company had  previously  recognized a net
deferred income tax liability with respect to Belgian temporary differences.

     In 2001, NL completed a restructuring of its German subsidiaries,  and as a
result NL  recognized a $17.6  million net income tax  benefit.  This benefit is
comprised  of a  $23.2  million  decrease  in NL's  deferred  income  tax  asset
valuation  allowance  due to a change in  estimate  of NL's  ability  to utilize
certain  German  income  tax  attributes   that  did  not  previously  meet  the
"more-likely-than-not"   recognition   criteria,   offset  by  $5.6  million  of
incremental   U.S.   taxes  on   undistributed   earnings  of  certain   foreign
subsidiaries.

     In the first  quarter  of 2003,  the  Company  was  notified  by the German
Federal  Fiscal Court (the  "Court")  that the Court had ruled in the  Company's
favor  concerning a claim for refund suit in which the Company sought refunds of
prior taxes paid during the periods 1990  through  1997.  KII and the  Company'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 refund of taxes and related interest to the Company's German operating
subsidiary of (euro)103.2 million ($123.0 million),  and an aggregate additional
liability of taxes and related  interest to KII of  (euro)91.9  million  ($109.6
million).  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 return with respect to the 1990 tax year. In February 2004,
the  Company's  German  operating  subsidiary  received  interest of  (euro)16.8
million ($19.2 million). The Company believes it will receive the net refunds of
taxes and related  interest for the remaining  years during 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  the  Company  received
(euro)21.5  million  ($24.6  million) in 2003.  The Company has  recognized  the
aggregate  (euro)32.8  million ($38 million)  benefit of such net refunds in its
2003 results of operations.

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

o    NL's and EMS's 1998 U.S.  federal  income tax returns are  currently  being
     examined  by  the  U.S.  tax  authorities,  and  NL and  EMS  have  granted
     extensions of the statute of limitations  for  assessments  until September
     30, 2004.  Based on the  examination to date, NL anticipates  that the U.S.
     tax  authorities  will  propose 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 this initiative,  a final settlement with the
     IRS is to be reached  through  expedited  negotiations  and, if  necessary,
     through a specified expidited  arbitration  procedure.  NL anticipates that
     settlement of this matter will likely occur in 2004,  resulting in payments
     of  federal  and state tax and  interest  ranging  from $33  million to $45
     million.  Additional payments in later years may be required as part of the
     settlement.  NL has  provided  adequate  accruals  to cover  the  currently
     expected range of settlement outcomes.

o    The Company 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 ($8 million at December  31,
     2003).  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 the Company's  Belgian
     TiO2 operations in connection with this assessment.  In April 2003,  Kronos
     received a notification from the Belgian tax authorities of their intent to
     assess a tax  deficiency  related  to 1999  that,  including  interest,  is
     expected to be approximately  (euro)13  million ($16 million).  The Company
     believes the proposed  assessment is  substantially  without merit, and the
     Company has filed a written  response.  In December  2003,  the Belgian tax
     authorities agreed to a settlement of certain tax assessments for the years
     1991 to 1997 of  approximately  (euro)5 million,  including  interest ($6.3
     million) separate from the assessments noted previously.

o    The  Norwegian  tax  authorities  have  notified  Kronos of their intent to
     assess tax deficiencies of  approximately  kroner 12 million ($2 million at
     December 31, 2003)  relating to the years 1998 to 2000.  Kronos has filed a
     written protest 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,  the Company had the  equivalent  of $438 million of
German income tax loss  carryforwards  with no expiration  date. The Company has
provided a deferred tax  valuation  allowance of $185.3  million at December 31,
2002 and $193.8  million at December 31, 2003,  principally  related to Germany,
partially  offsetting  deferred tax assets that the Company believes do not meet
the "more-likely-than-not" recognition criteria.

     In  January  2004,  the  German  federal  government  enacted  new  tax law
amendments  that limit the annual  utilization  of income tax loss  carryforward
effective  January 1, 2004. The new law may  significantly  affect the Company's
future income tax expense and cash tax payments.

Note 15 - Employee benefit plans:

     Defined  benefit  plans.  The Company  maintains  various  defined  benefit
pension  plans.  Non-U.S.  employees  are  covered by plans in their  respective
countries  and a majority of U.S.  employees  are eligible to  participate  in a
contributory  savings plan. Variances from actuarially assumed rates will result
in increases or decreases in accumulated  pension  obligations,  pension expense
and funding  requirements in future  periods.  At December 31, 2003, the Company
currently  expects to contribute the equivalent of  approximately  $9 million to
all of its defined benefit pension plans during 2004.

     The funded status of the  Company's  defined  benefit  pension  plans,  the
components of net periodic defined benefit pension cost related to the Company's
consolidated  business  segments and charged to  continuing  operations  and the
rates used in determining the actuarial present value of benefit obligations are
presented in the tables  below.  The Company uses a September  30th  measurement
date for their defined benefit pension plans.





<TABLE>
<CAPTION>

                                                                                       Years ended December 31,
                                                                                      2002                  2003
                                                                                      ----                  ----
                                                                                            (In thousands)
Change in projected benefit obligations ("PBO"):
<S>                                                                                  <C>                <C>
  Benefit obligations at beginning of the year                                       $261,805           $ 302,377
  Service cost                                                                          4,538               5,347
  Interest cost                                                                        16,510              18,225
  Participant contributions                                                             1,057               1,357
  Plan amendments                                                                           -               3,200
  Actuarial losses (gains)                                                             (1,704)             25,437
  Change in foreign currency exchange rates                                            37,033              43,514
  Benefits paid                                                                       (16,862)            (21,823)
                                                                                      -------            --------

      Benefit obligations at end of the year                                         $302,377           $ 377,634
                                                                                     ========           =========

Change in plan assets:
  Fair value of plan assets at beginning of the year                                 $208,267           $ 226,761
  Actual return on plan assets                                                         (3,087)             (6,391)
  Employer contributions                                                                9,310              14,082
  Participant contributions                                                             1,057               1,357
  Change in foreign currency exchange rates                                            28,076              27,249
  Benefits paid                                                                       (16,862)            (21,823)
                                                                                     --------            --------

      Fair value of plan assets at end of year                                       $226,761           $ 241,235
                                                                                     ========           =========

Funded status at end of the year:
  Plan assets less than PBO                                                          $(75,616)         $ (136,399)
  Unrecognized actuarial losses                                                        68,390             131,172
  Unrecognized prior service cost                                                       4,881               8,566
  Unrecognized net transition obligations                                               5,011               5,079
                                                                                     --------           ---------

                                                                                     $  2,666           $   8,418
                                                                                     ========           =========

Amounts recognized in the balance sheet:
  Prepaid pension costs                                                              $ 17,572           $    -
  Unrecognized net pension obligations                                                  5,561              13,747
  Accrued pension costs:
    Current                                                                            (7,019)             (8,366)
    Noncurrent                                                                        (43,757)            (81,180)
  Accumulated other comprehensive loss                                                 30,309              84,217
                                                                                     --------           ---------

                                                                                     $  2,666           $   8,418
                                                                                     ========           =========
</TABLE>
<TABLE>
<CAPTION>

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

Net periodic pension cost:
<S>                                                                       <C>             <C>               <C>
  Service cost benefits                                                   $  3,976        $  4,538          $  5,347
  Interest cost on PBO                                                      15,605          16,510            18,225
  Expected return on plan assets                                           (16,143)        (16,099)          (17,580)
  Amortization of prior service cost                                           201             307               354
  Amortization of net transition obligations                                   510             515               733
  Recognized actuarial losses                                                  443           1,223             1,800
                                                                          --------        --------          --------

                                                                          $  4,592        $  6,994         $   8,879
                                                                          ========        ========         =========
</TABLE>

     The  weighted-average  rate  assumptions  used in determining the actuarial
present  value of  benefit  obligations  as of  December  31,  2002 and 2003 are
presented in the table below. Such weighted-average  rates were determined using
the projected benefit obligations at each date.





<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                                     2002                 2003
                                                                                     ----                 ----

<S>                                                                                  <C>                  <C>
Discount rate                                                                        5.9%                 5.5%
Increase in future compensation levels                                               2.6%                 2.8%
</TABLE>

     The weighted-average  rate assumptions used in determining the net periodic
pension  cost for 2001,  2002 and 2003 are  presented  in the table  below.  The
weighted-average  discount  rate and the  weighted-average  increase  in  future
compensation  levels were determined using the projected benefit  obligations at
the beginning of each year, and the  weighted-average  long-term  return on plan
assets was  determined  using the fair value of plan assets at the  beginning of
each year.
<TABLE>
<CAPTION>

                                                                                       December 31,
                                                                      2001               2002              2003
                                                                      ----               ----              ----

<S>                                                                   <C>                <C>               <C>
Discount rate                                                         6.5%               6.2%              5.9%
Increase in future compensation levels                                3.0%               2.8%              2.6%
Long-term return on plan assets                                       7.8%               7.5%              7.2%
</TABLE>

     As of December  31,  2003,  the  accumulated  benefit  obligations  for all
defined  benefit  pension  plans was  approximately  $332  million  (2002 - $273
million).  At December 31,  2003,  the  projected  benefit  obligations  for all
defined benefit pension plans was comprised of $57 million related to U.S. plans
and $320 million related to non-U.S. plans (2002 - $51 million and $251 million,
respectively).  The Company  uses a September  30th  measurement  date for their
defined benefit pension plans.

     At December 31, 2003, the fair value of plan assets for all defined benefit
pension  plans was  comprised  of $44  million  related  to U.S.  plans and $197
million  related  to  non-U.S.  plans  (2002 - $43  million  and  $183  million,
respectively).

     Selected information related to the Company's defined benefit pension plans
that have accumulated benefit obligations in excess of fair value of plan assets
is presented below. At December 31, 2002 and 2003, 79% and 86%, respectively, of
the projected benefit obligations of such plans relate to non-U.S. plans.
<TABLE>
<CAPTION>

                                                                                        ___December 31,___
                                                                                      2002              2003
                                                                                      ----              ----
                                                                                          (In thousands)

<S>                                                                                <C>               <C>
  Projected benefit obligation                                                     $252,316          $377,634
  Accumulated benefit obligation                                                    229,373           332,399
  Fair value of plan assets:
    U.S. plans                                                                       43,487            44,356
    Non - U.S. plans                                                                135,950           196,879
</TABLE>

     At December 31, 2003,  all of the assets  attributable  to U.S.  plans were
invested  in  the  Combined  Master  Retirement  Trust  ("CMRT"),  a  collective
investment  trust  established by Valhi to permit the  collective  investment by
certain master trusts which fund certain  employee  benefits plans  sponsored by
Contran and certain of its affiliates.

     At  December  31,  2003,  the asset mix of the CMRT was 50% in U.S.  equity
securities,  24% in U.S. fixed income  securities,  7% in  international  equity
securities  and 19% in cash and other  investments.  At December 31,  2002,  the
assets of the U.S.  plans were  allocated  as 39% to equity  managers and 61% to
fixed asset managers.

     The CMRT's  long-term  investment  objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indicies) utilizing both third-party  investment
managers as well as investments  directed by Mr. Harold Simmons.  Mr. Simmons is
the  trustee  of the CMRT.  The  trustee  of the  CMRT,  along  with the  CMRT's
investment committee,  actively manage the investments of the CMRT. Such parties
have in the past,  and may in the future,  periodically  change the asset mix of
the CMRT based upon,  among other things,  advice they receive from  third-party
advisors and their  expectations as to what asset mix will generate the greatest
overall return.

     For the year ended December 31, 2003, the assumed  long-term rate of return
for plan assets invested in the CMRT was 10%. In determining the appropriateness
of such long-term rate of return assumption, the Company considered, among other
things,  the historical  rates of return for the CMRT, the current and projected
asset mix of the CMRT and the  investment  objectives  of the  CMRT's  managers.
During  the  16-year  history  of the CMRT from its  inception  in 1987  through
December 31, 2003, the average annual rate of return has been 12.4%.

     Defined   contribution   plans.  The  Company   maintains  various  defined
contribution pension plans with Company contributions based on matching or other
formulas.  Defined  contribution  plan  expense  approximated  $600,000 in 2001,
$600,000 in 2002 and $700,000 in 2003.

     Postretirement  benefits  other than  pensions.  In addition  to  providing
pension benefits,  the Company  currently  provides certain health care and life
insurance benefits for eligible retired employees.  Based on communications with
a  certain   insurance   provider  of  certain  retiree   benefits  of  NL,  and
consultations  with NL's  actuaries,  NL has been  released  from  certain  life
insurance retiree benefit obligations as of December 31, 2002 through the use of
an equal  amount of plan  assets.  In 1989 the  Company  began  phasing out such
benefits for active U.S.  employees  over a ten-year  period and U.S.  employees
retiring after 1998 are not entitled to any such  benefits.  The majority of all
retirees are required to contribute a portion of the cost of their  benefits and
certain  current  and future  retirees  are  eligible  for  reduced  health care
benefits at age 65. The Company's  policy is to fund medical  claims as they are
incurred, net of any contributions by the retiree.

     The components of the periodic OPEB cost and accumulated  OPEB  obligations
and the  rates  used in  determining  the  actuarial  present  value of  benefit
obligations    are   presented   in   the   tables   below.    Variances    from
actuarially-assumed  rates will result in  additional  increases or decreases in
accumulated OPEB obligations, net periodic OPEB cost and funding requirements in
future  periods.  At December 31, 2003,  the expected rate of increase in future
health  care  costs  is 8% to 10%  in  2004,  declining  to  5.5%  in  2009  and
thereafter.  (In 2002 the expected rate of increase in future  healthcare  costs
ranged from 9% in 2003, declining to 5.5% in 2007 and thereafter.) If the health
care cost trend rate was increased  (decreased) by one percentage point for each
year,  OPEB  expense  would have  increased  by $.2  million  (decreased  by $.2
million)  in  2003,  and  the  actuarial   present  value  of  accumulated  OPEB
obligations at December 31, 2003 would have increased by $2.2 million (decreased
by $1.9 million).




<TABLE>
<CAPTION>


                                                                                     Years ended December 31,
                                                                                      2002             2003
                                                                                      ----             ----
                                                                                          (In thousands)

Change in accumulated OPEB obligations:
<S>                                                                                   <C>          <C>
  Obligations at beginning of the year                                                $ 35,137     $ 32,899
  Service cost                                                                             103          152
  Interest cost                                                                          2,028        2,063
  Actuarial losses                                                                       5,436        1,355
  Release of benefit obligations                                                        (5,778)        -
  Change in foreign currency exchange rates                                                 32          772
  Benefits paid:
     Company funds                                                                      (3,464)      (3,812)
     Plan assets                                                                          (595)        -
                                                                                      --------     --------

  Obligations at end of the year                                                      $ 32,899     $ 33,429
                                                                                      ========     ========

Change in plan assets:
  Fair value of plan assets at beginning of the year                                   $ 6,400     $   -
  Actual return on plan assets                                                             (27)        -
  Employer contributions                                                                 3,464        3,812
  Release of benefit obligations                                                        (5,778)        -
  Benefits paid                                                                         (4,059)      (3,812)
                                                                                      --------     --------

  Fair value of plan assets at end of the year                                        $   -        $   -
                                                                                      ========     ========

Funded status at end of the year:
  Plan assets less than benefit obligations                                           $(32,899)    $(33,429)
  Unrecognized net actuarial losses                                                      5,345        6,854
  Unrecognized prior service credit                                                     (3,708)      (1,633)
                                                                                      --------     --------

                                                                                      $(31,262)    $(28,208)
                                                                                      ========     ========

Accrued OPEB costs recognized in the balance sheet:
  Current                                                                             $ (4,785)    $ (4,797)
  Noncurrent                                                                           (26,477)     (23,411)
                                                                                      --------      -------

                                                                                      $(31,262)    $(28,208)
                                                                                      ========     ========
</TABLE>


<TABLE>
<CAPTION>

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

Net periodic OPEB cost (credit):
<S>                                                                      <C>           <C>           <C>
  Service cost                                                           $    94       $   103       $   152
  Interest cost                                                            2,536         2,028         2,063
  Expected return on plan assets                                            (773)           (3)         -
  Amortization of prior service credit                                    (2,075)       (2,075)       (2,075)
  Recognized actuarial losses                                                 27            27           189
                                                                         -------       -------       -------

                                                                         $  (191)      $    80       $   329
                                                                         =======       =======       =======
</TABLE>


     The  weighted  average  discount  rate used in  determining  the  actuarial
present  value of benefit  obligations  as of December 31, 2003 was 5.9% (2002 -
6.5%).  Such weighted  average rate was determined  using the projected  benefit
obligation  as of  such  dates.  The  impact  of  assumed  increases  in  future
compensation  levels does not have a material  affect on the  actuarial  present
value of the benefit  obligation as  substantially  all of such benefits  relate
solely to eligible retirees, for which compensation is not applicable.

     The weighted  average  discount rate used in  determining  the net periodic
OPEB cost for 2003 was 6.5% (2002 - 7.0%;  2001 - 7.3%).  Such weighted  average
rate was determined using the projected  benefit  obligation as of the beginning
of each year. The impact of assumed increases in future compensation levels does
not have a material affect on the net periodic OPEB cost as substantially all of
such benefits relate solely to eligible retirees,  for which compensation is not
applicable.  The impact of assumed  rate of return on plan  assets also does not
have a  material  affect on the net  periodic  OPEB  cost as there  were no plan
assets as of December 31, 2002 or 2003.

     As of December 31, 2003, the accumulated  benefit  obligations for all OPEB
plans was  approximately  $33.4 million (2002 - $32.9 million).  At December 31,
2003, the  accumulated  benefit  obligations for all OPEB plans was comprised of
$27.9 million related to U.S. plans and $5.5 million  related to non-U.S.  plans
(2002 - $29.6  million  and $3.3  million,  respectively).  The  Company  uses a
September 30th measurement date for their OPEB plans.

     In  December  2003,  the  Medicare   Prescription  Drug,   Improvement  and
Modernization  Act of 2003 (the "Medicare  2003 Act") was enacted.  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  equivalent to Medicare Part D. Detailed
regulations  necessary to implement  the Medicare 2003 Act have not been issued,
including  those that would  specify  the  manner in which plan  sponsors  could
demonstrate their eligibility to receive the subsidy.  Certain accounting issues
raised by the  Medicare  2003 Act,  including  how to  account  for the  federal
subsidy,  are  not  explicitly  addressed  by  current  existing   authoritative
guidance.  In accordance  with FASB Staff  Position No.  106-1,  the Company has
elected  to defer  accounting  for the  effects of the  Medicare  2003 Act until
authoritative  guidance  on how to  account  for the  federal  subsidy  has been
issued.   Consequently,   the  Company's  accumulated   postretirement   benefit
obligation  and net periodic  postretirement  benefit  cost, as reflected in the
accompanying Consolidated Financial Statements, do not reflect any effect of the
Medicare 2003 Act.  Specific  authoritative  guidance on the  accounting for the
federal subsidy is pending,  and that guidance,  when issued,  could require the
Company to change previously  reported financial  information,  depending on the
transition provisions of such guidance.

Note 16 - Related party transactions:

     The Company may be deemed to be controlled  by Harold C. Simmons.  See Note
1.  Corporations  that may be deemed to be controlled by or affiliated  with Mr.
Simmons sometimes engage in (a) intercorporate  transactions such as guarantees,
management and expense  sharing  arrangements,  shared fee  arrangements,  joint
ventures,  partnerships,  loans, options, advances of funds on open account, and
sales,  leases and  exchanges  of assets,  including  securities  issued by both
related  and  unrelated  parties  and  (b)  common  investment  and  acquisition
strategies,   business   combinations,    reorganizations,    recapitalizations,
securities  repurchases,  and  purchases and sales (and other  acquisitions  and
dispositions)  of  subsidiaries,   divisions  or  other  business  units,  which
transactions  have involved both related and unrelated parties and have included
transactions  which  resulted  in the  acquisition  by one  related  party  of a
publicly-held  minority equity  interest in another  related party.  The Company
continuously considers,  reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business,  tax and other  objectives then relevant,  it is possible that the
Company might be a party to one or more such transactions in the future.

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

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

<TABLE>
<CAPTION>

                                                                                              December 31,
                                                                                          2002           2003
                                                                                          ----           ----
                                                                                            (In thousands)

Current receivables from affiliates:
<S>                                                                                      <C>             <C>
  CompX                                                                                  $    20       $  -
  TIMET                                                                                       84            50
  Other                                                                                      103             5
                                                                                         -------       -------

                                                                                         $   207       $    55
                                                                                         =======       =======

Noncurrent receivable from affiliate -
  loan to Contran family trust                                                           $18,000       $14,000
                                                                                         =======       =======

Current payables to affiliates:
  Louisiana Pigment Company                                                              $ 7,614       $ 8,560
  Valhi                                                                                        -        10,512
  Other                                                                                      413           465
                                                                                         -------       -------

                                                                                         $ 8,027       $19,537
                                                                                         =======       =======
</TABLE>

     Amounts payable to LPC are generally for the purchase of TiO2. Purchases of
TiO2 from LPC were  $93.4  million  in 2001,  $92.4  million  in 2002 and $101.3
million in 2003. See Note 7.

     From time to time,  loans and  advances  are made  between  the Company and
various  related  parties,  pursuant to term and demand  notes.  These loans and
advances are entered into  principally  for cash management  purposes.  When the
Company loans funds to related  parties,  the lender is generally able to earn a
higher  rate of return on the loan than the lender  would earn if the funds were
invested in other  instruments.  While  certain of such loans may be of a lesser
credit  quality  than cash  equivalent  instruments  otherwise  available to the
Company,  the Company  believes that it has evaluated the credit risks involved,
and that those risks are reasonable and reflected in the terms of the applicable
loans. When the Company borrows from related parties,  the borrower is generally
able to pay a lower rate of interest than the borrower  would pay if it borrowed
from other parties.

     In 2001,  EMS, NL's  majority-owned  environmental  management  subsidiary,
extended a $25 million  revolving  credit  facility to one of the family  trusts
discussed  in Note 1 ($18  million and $14 million  outstanding  at December 31,
2002 and 2003, respectively). The loan bears interest at prime, is due on demand
with 60 days notice and is collateralized by certain shares of Contran's Class A
common stock and Class E cumulative preferred stock held by the trust. The value
of the  collateral  is  dependent,  in part,  on the value of Valhi as Contran's
beneficial  ownership  interest in Valhi is one of  Contran's  more  substantial
assets.  The terms of this loan were approved by special committees of both NL's
and EMS' respective  board of directors  composed of independent  directors.  At
December 31, 2003,  $11 million is available  for borrowing by the family trust,
and the loan has been  classified  as a  noncurrent  asset  because EMS does not
presently intend to demand repayment within the next 12 months.

     At  December  31, 2002 and 2003,  the Company had entered  into a revolving
credit  facility  with Tremont  pursuant to which Tremont could borrow up to $15
million from the Company through December 31, 2004. Borrowings (none at December
31,  2002 and 2003)  bear  interest  at prime  plus 2%,  with  interest  payable
quarterly,  and are collateralized by the 10.2 million shares of NL common stock
and 5.1 million  shares of Kronos  owned by  Tremont.  The  creditworthiness  of
Tremont is dependent  in part on the value of the Company as Tremont's  interest
in the Company is one of  Tremont's  most  substantial  assets.  At December 31,
2003, Tremont had $15 million of borrowing availability under the facility.

     Interest  income on all loans to affiliates was $2.0 million in 2001,  $1.9
million in 2002 and $799,000 in 2003.

     Under the terms of  various  intercorporate  services  agreements  ("ISAs")
entered into between the Company and various related parties, including Contran,
employees  of  one  company  will  provide  certain  management,  tax  planning,
financial and administrative  services to the other company on a fee basis. Such
charges are based upon  estimates  of the time  devoted by the  employees of the
provider of the services to the affairs of the recipient,  and the  compensation
of such  persons.  Because  of the large  number of  companies  affiliated  with
Contran,  the Company  believes it benefits  from cost savings and  economies of
scale gained by not having  certain  management,  financial  and  administrative
staffs duplicated at each entity,  thus allowing certain  individuals to provide
services to multiple companies but only be compensated by one entity.  These ISA
agreements are reviewed and approved by the applicable  independent directors of
the companies that are parties to the agreements.

     The Company is a party to an intercorporate services agreement with Contran
("Contran  ISA") whereby Contran  provides  certain  management  services to the
Company on a fee  basis.  Intercorporate  services  fee  expense  related to the
Contran ISA was $1.2  million in 2001,  $1.5 million in 2002 and $2.0 million in
2003.

     The Company was party to an intercorporate  services agreement with Tremont
("Tremont ISA").  Under the terms of the contract,  the Company provided certain
management  and  financial  services  to Tremont on a fee basis  during 2001 and
2002.  Intercorporate  services  fee income  related to the  Tremont ISA was $.1
million  in each of 2001 and 2002.  The  Company  also has an ISA with  Titanium
Metals  Corporation  ("TIMET")  whereby the Company provides certain services to
TIMET  for  approximately  $300,000  in each of 2001 and 2002 and  approximately
$14,000 in 2003.  Certain other  subsidiaries of the Company are also parties to
similar ISAs among themselves, and expenses associated with these agreements are
eliminated in the Company's consolidated financial statements.

     The Company and Tall Pines  Insurance  Company ("Tall Pines")  (formerly NL
Insurance,  Ltd. of Vermont), a wholly-owned  subsidiary of Tremont, are parties
to an Insurance  Sharing  Agreement  with  respect to certain loss  payments and
reserves  established  by Tall Pines that (i) arise out of claims  against other
entities for which the Company is contractually responsible and (ii) are subject
to payment by Tall Pines under certain reinsurance  contracts.  Also, Tall Pines
will credit the Company with respect to certain  underwriting  profits or credit
recoveries that Tall Pines receives from  independent  reinsurers that relate to
retained  liabilities.  At December  31,  2003,  the Company has $1.6 million of
restricted cash that  collateralizes  certain of Tall Pines' outstanding letters
of credit.

     Tall Pines,  Valmont  Insurance  Company  and EWI RE,  Inc.  provide for or
broker certain  insurance  policies for Contran and certain of its  subsidiaries
and affiliates,  including the Company.  Tall Pines and Valmont are wholly-owned
subsidiaries  of Valhi,  and EWI is currently a  wholly-owned  subsidiary of NL.
Prior to January 2002,  EWI was owned by Contran or parties  related to Contran.
Consistent  with  insurance  industry  practices,  Tall  Pines,  Valmont and EWI
receive  commissions  from the insurance and  reinsurance  underwriters  for the
policies that they provide or broker. The aggregate premiums paid by the Company
to Tall Pines and Valmont  were $8.3  million in 2001,  $9.5 million in 2002 and
$7.2 million in 2003, and the aggregate  premiums paid by affiliates (other than
the  Company and its joint  venture)  for  policies  provided or brokered by EWI
prior to its  acquisition  by the  Company  were $6.2  million  in 2001 and $6.5
million in 2002. These amounts  principally  included payments for insurance and
reinsurance  premiums paid to third parties,  but also included commissions paid
to Tall Pines,  Valmont and EWI. In the Company's opinion,  the amounts that the
Company paid for these insurance  policies and the allocation  among the Company
and its affiliates of relative  insurance premiums are reasonable and similar to
those they could have obtained  through  unrelated  insurance  companies  and/or
brokers.  The  aggregate  premiums paid by affiliates of the Company to EWI were
$7.0 million in 2003.  The Company  expects that these  relationships  with Tall
Pines, Valmont and EWI will continue in 2004.

     Contran and  certain of its  subsidiaries  and  affiliates,  including  the
Company, purchase certain of their insurance policies as a group, with the costs
of  the  jointly-owned   policies  being  apportioned  among  the  participating
companies.  With  respect to  certain  of such  policies,  it is  possible  that
unusually  large losses  incurred by one or more insureds  during a given policy
period could leave the other  participating  companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates,  including the Company, have entered
into a loss sharing  agreement under which any uninsured loss is shared by those
entities  who have  submitted  claims  under the  relevant  policy.  The Company
believes  the  benefits in the form of reduced  premiums  and  broader  coverage
associated  with  the  group  coverage  for  such  policies  justifies  the risk
associated with the potential for any uninsured loss.

     During 2002 the Company and certain  officers of the Company  entered  into
agreements  whereby stock options held by such officers to purchase an aggregate
of 513,800  shares of the Company's  common stock were exercised or canceled for
value.  The officers  tendered  52,179 shares of their own Company common stock,
held by such officers for at least six months, to pay for a portion of the stock
option  exercise  price,  and such shares were valued at the market price of the
Company's common stock on the date of exercise. The remaining aggregate exercise
price was paid by such officers by tendering of a portion of the shares acquired
upon  exercise of the options,  also based on the market price of the  Company's
common stock on the date of exercise. On a net basis, the Company made aggregate
cash  payments  to  the  officers  of  approximately  $2.2  million,   of  which
approximately   $1.7   million  was   recorded  as   compensation   expense  and
approximately $.5 million (equal to the intrinsic value of the options exercised
through the tender of the 52,179  shares) was recorded as a direct  reduction to
equity through  treasury stock.  The aggregate number of treasury shares held by
the  Company  did not  change  as a result  of these  transactions.  Payment  of
required  tax  withholding  related  to these  transactions  were  funded by the
officers using a portion of the cash payments made to them.

Note 17 - Leverkusen fire and insurance claim; litigation settlement gains:

     In March 2001, NL suffered a fire at its Leverkusen, Germany TiO2 facility.
Production at the facility's chloride-process plant returned to full capacity on
April 8, 2001. The facility's  sulfate-process  plant became  approximately  50%
operational  in September  2001,  and became fully  operational  in late October
2001. The damages to property and the business interruption losses caused by the
fire were covered by insurance,  but the effect on the financial  results of the
Company on a  quarter-to-quarter  basis was impacted by the timing and amount of
insurance  recoveries.  The Company's  operating  income in 2001 includes  $27.3
million of  business  interruption  insurance  recoveries  losses  caused by the
Leverkusen fire. Of such business  interruption  proceeds amount,  $20.1 million
was recorded as a reduction of cost of sales to offset  unallocated period costs
that resulted from lost production and the remaining $7.2 million,  representing
recovery  of lost  margin,  was  recorded  as other  income.  The  Company  also
recognized insurance recoveries of $29.1 million in 2001 for property damage and
related  cleanup and other extra costs,  resulting in an insurance gain of $17.5
million as such recoveries exceeded the carrying value of the property destroyed
and the cleanup and other extra expenses incurred.

     In 2001, 2002 and 2003, the Company recognized $11.7 million,  $5.2 million
and $823,000,  respectively, of net gains from legal settlements, of which $11.4
million in 2001, and all in 2002 and 2003,  relates to settlements  with certain
of its former insurance carriers.  These settlements  resolved court proceedings
in which the Company  sought  reimbursement  from the carriers for legal defense
expenditures and indemnity coverage for certain of its environmental remediation
expenditures.  Proceeds from substantially all of the 2001 settlements, plus the
proceeds from similar  settlements in 2000, were  transferred by the carriers to
special  purpose  trusts  formed by the Company to pay for certain of its future
remediation and other environmental expenditures. At December 31, 2002 and 2003,
restricted  cash  equivalents  and debt  securities  include an aggregate of $59
million and $24 million, respectively, held by such special purpose trusts.

Note 18 - 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.

     The Company  believes these actions are without merit,  intends to continue
to deny all  allegations  of wrongdoing  and liability and to defend against all
actions vigorously. The Company has neither lost nor settled any of these cases.
The  Company 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.  Considering the Company's previous  involvement in the
lead and lead  pigment  businesses,  there can be no assurance  that  additional
litigation similar to that currently pending will not be filed, and there can be
no assurance that the Company 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. With respect to the
Company's  plants,  neither the Company  nor any of its  subsidiaries  have been
notified  of  any  environmental  claim  in the  United  States  or any  foreign
jurisdiction by the U.S. EPA or any applicable  foreign  authority or any state,
provincial or local authority.

     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 70
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.  Environmental  Protection  Agency'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  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 of 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 past two years is presented in the table below.
<TABLE>
<CAPTION>

                                                                                     Years ended December 31,
                                                                                      2002             2003
                                                                                      ----             ----
                                                                                          (In thousands)

<S>                                                                                   <C>             <C>
Balance at the beginning of the year                                                  $100,748        $ 91,506
Additions charged to expense                                                             9,388          26,211
Payments                                                                               (18,630)        (40,236)
                                                                                      --------        --------

Balance at the end of the year                                                        $ 91,506        $ 77,481
                                                                                      ========        ========

Amounts recognized in the balance sheet:
  Current liability                                                                   $ 51,307        $ 19,627
  Noncurrent liability                                                                  40,199          57,854
                                                                                      --------        --------

                                                                                      $ 91,506        $ 77,481
                                                                                      ========        ========
</TABLE>

     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 December 31,
2003, the Company had accrued $77 million for those environmental  matters which
are reasonably estimable.  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 which it is possible to estimate costs is  approximately  $110
million. The Company's estimates of such liabilities have not been discounted to
present  value,  and the  Company has not  recognized  any  potential  insurance
recoveries other than the settlements in 2001 discussed in Note 17.

     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  December  31,  2003,  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
had 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.

     Other  litigation.  The Company's  Belgian  subsidiary and various  Belgian
employees  are the  subject  of civil and  criminal  proceedings  related  to an
accident that resulted in two  fatalities in such facility in 2000. At a hearing
held in January 2004, the government  requested the court to impose fines on the
Company's  subsidiary  and  certain  of its  employees  in an  amount  equal  to
approximately  (euro)367,500 ($460,000). The Company's subsidiary has undertaken
the defense of and liability  for any fines and costs  incurred by its employees
arising out of these  proceedings.  The court's decision is anticipated in April
2004.

     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 to asbestos, silica and/or mixed dust in connection with formerly owned
operations.  Approximately 425 of these cases involving a total of approximately
32,000  plaintiffs  and  their  spouses  remain  pending.  Of these  plaintiffs,
approximately 22,000 are represented by 8 cases pending in Texas and Mississippi
state  courts.  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.

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

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

     Concentrations of credit risk. Sales of TiO2 accounted for more than 90% of
net sales from continuing  operations  during each of the past three years.  The
remaining  sales result from the mining and sale of ilmenite ore (a raw material
used in the sulfate pigment production process), and the manufacture and sale of
iron-based  water  treatment  chemicals  (derived from  co-products  of the TiO2
production  processes).  TiO2 is generally sold to the paint, plastics and paper
industries.  Such markets are  generally  considered  "quality-of-life"  markets
whose demand for TiO2 is influenced by the relative  economic  well-being of the
various geographic regions.  TiO2 is sold to over 4,000 customers,  with the top
ten customers approximating 25% of net sales in each of the last three years. By
volume,  approximately  one-half of the  Company's  TiO2 sales were to Europe in
each of the past three years and  approximately 38% in 2001, 39% in 2002 and 40%
in 2003 of sales were attributable to North America.

     At December 31, 2003,  consolidated  cash, cash  equivalents and restricted
cash includes $38 million invested in U.S. Treasury  securities  purchased under
short-term  agreements to resell (2002 - $80 million),  of which $17 million are
held in trust for the Company by a single U.S. bank (2002 - $24 million).

     Capital  expenditures.  At December 31, 2003 the estimated cost to complete
capital projects in process approximated $9.6 million.

     Long-term  contracts.  NL has long-term  supply  contracts that provide for
NL's chloride-process  TiO2 feedstock  requirements through 2007. The agreements
require NL to purchase  certain  minimum  quantities  of feedstock  with average
minimum annual purchase commitments aggregating approximately $165 million.

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

     The  Company  also  leases  various  other  manufacturing   facilities  and
equipment.  Some of the leases  contain  purchase  and/or  various  term renewal
options at fair market and fair rental values,  respectively.  In most cases the
Company  expects  that,  in the normal  course of business,  such leases will be
renewed or replaced by other leases. Net rent expense approximated $9 million in
2001, $10 million in 2002 and $12 million in 2003. At December 31, 2003,  future
minimum  payments  under  noncancellable  operating  leases having an initial or
remaining term of more than one year were as follows:
<TABLE>
<CAPTION>

Years ending December 31,                                                                            Amount
                                                                                                 (In thousands)

<S>                                                                                                <C>
  2004                                                                                              $ 3,255
  2005                                                                                                2,271
  2006                                                                                                1,468
  2007                                                                                                1,316
  2008                                                                                                1,194
  2009 and thereafter                                                                                19,881
                                                                                                    -------

                                                                                                    $29,385
                                                                                                    =======
</TABLE>

     Approximately  $19.4 million of the $29.4 million  aggregate future minimum
rental  commitments  at December  31, 2003 relates to NL's  Leverkusen  facility
lease discussed above. The minimum commitment amounts for such lease included in
the table above for each year through the 2050 expiration of the lease are based
upon the current annual rental rate as of December 31, 2003.

Note 19 - Financial instruments:

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

                                                                     December 31,                December 31,
                                                                         2002                        2003
                                                              ---------------------------  -------------------------
                                                                Carrying        Fair         Carrying      Fair
                                                                 Amount        Value          Amount       Value
                                                              ------------- -------------  -------------------------
                                                                                  (In millions)
Cash, cash equivalents, current and noncurrent restricted
   cash equivalents and current and noncurrent restricted
<S>                                                              <C>           <C>             <C>          <C>
   marketable debt securities                                    $  130.4      $  130.4        $ 99.8       $ 99.8
Marketable equity securities - classified as
   available-for-sale                                            $   40.9      $   40.9        $ 70.5       $ 70.5

Notes payable and long-term debt:
  Fixed rate with market quotes-
    8.875% Senior Secured Notes                                  $  296.9      $  299.9       $ 356.1     $  356.1
  Variable rate debt                                                 29.0          29.0            .6           .6
Minority interest in Kronos common stock                         $    -        $    -         $  77.8     $  530.2

Common stockholders' equity                                      $  265.3      $  810.7       $ 200.9     $  559.2
</TABLE>

     Fair  value  of the  Company's  marketable  equity  securities,  restricted
marketable debt securities and Notes, and the fair value of the Company's common
stockholder's  equity and  minority  interest  in Kronos,  are based upon quoted
market prices at each balance sheet date.

     At December  31, 2003,  the Company had entered into a short-term  currency
forward  contract  maturing January 2, 2004 to exchange an aggregate of (euro)40
million for an  equivalent  amount of U.S.  dollars at an exchange  rate of U.S.
$1.25 per euro.  Such contract was entered into in conjunction  with the January
2004  payment  of  an  intercompany   dividend  from  one  of  Kronos'  European
subsidiaries.  At December 31, 2003, the actual exchange rate was U.S. $1.25 per
euro.  The  estimated  fair  value of such  foreign  currency  contract  was not
material at December 31, 2003. The Company held no other significant  derivative
financial instruments at December 31, 2002 or 2003.

Note 20  - Accounting principles newly adopted in 2003:

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

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

                                                                                                          Amount
                                                                                                      (in millions)

Increase in carrying value of net property, plant and equipment:
<S>                                                                                                      <C>
  Cost                                                                                                  $  .4
  Accumulated depreciation                                                                                (.1)
Decrease in carrying value of previously-accrued closure and
 post-closure activities                                                                                   .3
Asset retirement obligation recognized                                                                    (.6)
                                                                                                        -----

  Net impact                                                                                            $  -
                                                                                                        =====
</TABLE>

     The  increase  in the asset  retirement  obligations  from  January 1, 2003
($600,000) to December 31, 2003  ($800,000) is due to accretion  expense and the
effects of  currency  translation.  Accretion  expense,  which is  reported as a
component of cost of sales in the accompanying statement of income, approximated
$100,000 for the year ended  December 31, 2003.  If the Company had adopted SFAS
No. 143 as of January 1, 2001, the asset retirement  obligations would have been
approximately $500,000 at December 31, 2001.

     Estimates of the ultimate cost to be incurred to settle the Company's asset
retirement obligations require a number of assumptions, are inherently difficult
to develop  and the  ultimate  outcome  may differ from  current  estimates.  As
additional  information  becomes  available,  cost estimates will be adjusted as
necessary.  It  is  possible  that  technological,   regulatory  or  enforcement
developments,  the results of studies or other  factors  could  necessitate  the
recording of additional liabilities.

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

Note 21 -      Quarterly results of operations (unaudited):
<TABLE>
<CAPTION>

                                                                                 Quarter ended
                                                       March 31         June 30        Sept. 30        Dec. 31
                                                                 (In millions, except per share data)

Year ended December 31, 2002
<S>                                                     <C>          <C>                <C>          <C>
  Net sales                                             $202.4       $ 226.9            $234.1       $211.8
  Cost of sales                                          156.3         176.2             177.5        161.8

  Net income                                            $  6.4       $  14.0           $  8.8        $  7.6

    Basic and diluted earnings per common share         $  .13       $   .29           $  .18        $  .16

Year ended December 31, 2003
  Net sales                                             $253.0       $ 266.6           $242.9        $245.7
  Cost of sales                                          188.4         197.6            177.4         175.8

  Net income                                            $  9.4       $  28.8           $ 16.6        $  8.9

    Basic and diluted earnings per common share
                                                        $  .20       $   .60           $  .35        $  .18
</TABLE>



         The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.

     Net income in the  second  quarter  of 2002  included  a  one-time  foreign
currency  transaction  gain of $6.3 million  related to the  extinguishments  of
certain  intercompany  indebtedness.  Net income in the second quarter 2002 also
included $2.0 million pretax of additional interest expense related to the early
extinguishments of the Company's 11.75% Senior Secured Notes.

Note 22 - Accounting principles not yet adopted:

     The Company is required to comply with the  consolidation  requirements  of
FASB  Interpretation  ("FIN")  No.  46R,  "Consolidation  of  Variable  Interest
Entities,  an interpretation of ARB No. 51," as amended at March 31, 2004. While
the Company  currently does not believe it has any involvement with any variable
interest entity (as that term is defined in FIN No. 46R) covered by the scope of
FIN No. 46R, the  interpretation is complex and therefore the impact of adopting
the  consolidation  requirements  of FIN No.  46R has not yet been  definitively
determined.





                         REPORT OF INDEPENDENT AUDITORS
                        ON FINANCIAL STATEMENT SCHEDULES



To the Stockholders and Board of Directors of NL Industries, Inc.:

     Our audits of the  consolidated  financial  statements  referred  to in our
report dated March 5, 2004,  appearing on page F-2 of the 2003 Annual  Report on
Form  10-K of NL  Industries,  Inc.,  also  included  an audit of the  financial
statement  schedules  listed in the index on page F-1 of this Form 10-K.  In our
opinion,  these financial  statement  schedules  present fairly, in all material
respects,  the information  set forth therein when read in conjunction  with the
related consolidated financial statements.







                                                      PricewaterhouseCoopers LLP


Dallas, Texas
March 5, 2004






                      NL INDUSTRIES, INC. AND SUBSIDIARIES

           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                            Condensed Balance Sheets

                           December 31, 2002 and 2003

                                 (In thousands)
<TABLE>
<CAPTION>

                                                                                           2002             2003
                                                                                           ----             ----

Current assets:
<S>                                                                                     <C>               <C>
  Cash and cash equivalents                                                             $  1,034          $ 2,428
  Restricted cash equivalents                                                             50,798           14,725
  Restricted marketable debt securities                                                    9,670            6,147
  Accounts and notes receivable                                                            2,476              536
  Receivable from subsidiaries                                                             1,467              932
  Prepaid expenses                                                                         1,055              709
  Deferred income taxes                                                                    6,107            7,745
                                                                                          --------        -------

      Total current assets                                                                72,607           33,222
                                                                                          --------        -------

Other assets:
  Marketable securities                                                                   31,056           52,741
  Restricted marketable debt securities                                                    6,740            4,284
  Investment in subsidiaries                                                             329,460          104,827
  Note receivable from Kronos Worldwide, Inc.                                               -             200,000
  Other                                                                                    2,327              331
  Property and equipment, net                                                              3,033              647
                                                                                        --------        ---------

      Total other assets                                                                 372,616          362,830
                                                                                        --------        ---------

                                                                                        $445,223        $ 396,052
                                                                                        ========        =========

Current liabilities:
  Payable to affiliates                                                                 $  1,656        $  12,429
  Accounts payable and accrued liabilities                                                17,344           14,375
  Income taxes                                                                               325              372
  Accrued environmental costs                                                             11,904           13,745
                                                                                        --------        ---------

      Total current liabilities                                                           31,229           40,921
                                                                                        --------        ---------

Noncurrent liabilities:
  Notes payable to affiliates                                                             44,600           22,320
  Deferred income tax                                                                     64,509           75,406
  Accrued environmental costs                                                              7,989           26,510
  Accrued pension cost                                                                    10,659           13,019
  Accrued postretirement benefits cost                                                    14,671           12,235
  Other                                                                                    6,239            4,727
                                                                                        --------        ---------

      Total noncurrent liabilities                                                       148,667          154,217
                                                                                        --------        ---------

Stockholders' equity                                                                     265,327          200,914
                                                                                        --------        ---------

                                                                                       $ 445,223        $ 396,052
                                                                                       =========        =========
Contingencies (Note 3)
</TABLE>






                      NL INDUSTRIES, INC. AND SUBSIDIARIES

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                         Condensed Statements of Income

                  Years ended December 31, 2001, 2002 and 2003

                                 (In thousands)

<TABLE>
<CAPTION>

                                                                       2001            2002            2003
                                                                       ----            ----            ----

Revenues and other income (expense):
<S>                                                                 <C>             <C>              <C>
    Equity in income from continuing operations of subsidiaries     $ 154,410       $  68,911        $ 88,445
  Interest and dividends                                                4,354           2,494           1,858
  Interest income from subsidiaries                                    22,969          12,165           1,184
  Securities transactions, net                                         (1,133)           (105)          2,737
  Litigation settlements gains, net                                    11,730           5,225             823
  Disposition of property & equipment                                      83               1          10,325
  Other income, net                                                     4,514           4,080             414
                                                                     --------        --------         -------

                                                                      196,927          92,771         105,786
                                                                     --------        --------         -------

Costs and expenses:
  General and administrative                                           13,831          35,431          54,154
  Interest                                                             58,263          34,217             909
                                                                     --------        --------        --------

                                                                       72,094          69,648          55,063
                                                                     --------        --------        --------

  Income before income taxes                                          124,833          23,123          50,723

Provision for income taxes (benefit)                                    3,426         (13,687)        (12,939)
                                                                     --------        --------        --------

  Net income                                                         $121,407        $ 36,810        $ 63,662
                                                                     ========        ========        ========
</TABLE>







                      NL INDUSTRIES, INC. AND SUBSIDIARIES

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                       Condensed Statements of Cash Flows

                  Years ended December 31, 2001, 2002 and 2003

                                 (In thousands)
<TABLE>
<CAPTION>

                                                                       2001              2002             2003
                                                                       ----              ----             ----

Cash flows from operating activities:
<S>                                                                 <C>               <C>              <C>
    Net income                                                      $ 121,407         $  36,810        $  63,662
    Distributions from Kronos                                          30,500           111,000                -
    Litigation settlement gains, net                                  (10,307)                -                -
    Noncash interest expense (income), net                             (3,113)           15,704             (869)
    Deferred income taxes                                               7,498            (9,119)          (2,807)
    Equity in earnings of subsidiaries                               (154,410)          (68,911)         (88,445)
    Securities transactions                                             1,133               105           (2,737)
    Other, net                                                          1,824            (1,899)         (11,304)
                                                                    ---------         ---------        ---------
                                                                       (5,468)           83,690          (42,500)

  Net change in assets and liabilities                                  1,563             4,480           15,555
                                                                    ---------         ---------        ---------

       Net cash provided (used) by operating activities
                                                                       (3,905)           88,170          (26,945)
                                                                    ---------         ---------        ---------

Cash flows from investing activities:
    Capital expenditures                                                  (13)               (2)               -
    Repayment of loans to affiliates                                        -           194,000                -
    Change in restricted cash equivalents and restricted
       marketable debt securities, net                                 18,539            16,622           42,744
    Proceeds from disposition of property and equipment                    20                 9           12,420
    Proceeds from disposition of marketable equity securities               4              -                -
                                                                    ---------         ---------        ---------

       Net cash provided by investing activities                       18,550           210,629           55,164
                                                                    ---------         ---------        ---------

Cash flows from financing activities:
  Indebtedness - principal payments                                         -          (194,000)               -
  Loans from affiliates, net                                           46,678            64,600            2,620
  Dividends paid                                                      (39,758)         (157,978)         (31,183)
  Treasury stock:
    Purchased                                                         (15,502)          (21,254)               -
    Reissued                                                              718               454            1,738
                                                                    ---------         ---------        ---------

       Net cash used by financing activities                           (7,864)         (308,178)         (26,825)
                                                                    ---------         ---------        ---------

Net change during the year from operating investing and
    financing activities                                                6,781            (9,379)           1,394
Balance at beginning of year                                            3,632            10,413            1,034
                                                                    ---------         ---------        ---------

Balance at end of year                                              $  10,413         $   1,034        $   2,428
                                                                    =========         =========        =========
</TABLE>






                      NL INDUSTRIES, INC. AND SUBSIDIARIES

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                    Notes to Condensed Financial Information


Note 1 - Basis of presentation:

     The  Consolidated  Financial  Statements  of NL  Industries,  Inc.  and the
related Notes to Consolidated  Financial  Statements are incorporated  herein by
reference.  The accompanying financial statements reflect NL Industries,  Inc.'s
investment in Kronos Worldwide,  Inc. and NL's other  subsidiaries on the equity
method of accounting.

Note 2 - Investment in and advances to subsidiaries:
<TABLE>
<CAPTION>

                                                                                             December 31,
                                                                                          2002            2003
                                                                                          ----            ----
                                                                                            (In thousands)
Current:
<S>     <C>    <C>    <C>    <C>    <C>    <C>
    Receivable from:
       Kronos - income taxes                                                        $    417            $     384
       EWI - income taxes                                                                350                   89
       153506 Canada                                                                     392                  405
       TIMET                                                                              84                   50
       CompX                                                                              20                    -
       Other                                                                             204                    4
                                                                                    --------             --------

                                                                                    $  1,467             $    932
                                                                                    ========             ========
    Payable to:
       Kronos - income taxes                                                             978               11,722
       Tremont                                                                           281                  445
       EMS                                                                                79                  217
       Other                                                                             318                   45
                                                                                    --------             --------

                                                                                    $  1,656             $ 12,429
                                                                                    ========             ========

Noncurrent:
    Notes receivable from Kronos                                                    $   -                $200,000
                                                                                    ========             ========

    Notes payable to Kronos                                                         $ 44,600             $   -
                                                                                    ========             ========

    Notes payable to EMS Financial                                                  $   -                $ 22,320
                                                                                    ========             ========
</TABLE>

     During   2002  the  Company   completed   certain   capital   restructuring
transactions  whereby Kronos  distributed to the Company certain affiliate notes
receivable,  net  and the  Company  recorded  a  corresponding  decrease  in its
investment in Kronos.

     In December 2003, NL completed the distribution of  approximately  48.8% of
the outstanding shares of Kronos' common stock to NL stockholders in the form of
a pro-rata  dividend.  As part of the plan immediately prior to the distribution
of shares of Kronos common stock,  Kronos paid a $200 million  dividend to NL in
the form of a long-term note payable. The $200 million long-term note payable to
NL is  unsecured  and bears  interest  at 9% per annum,  with  interest  payable
quarterly and all principal due in 2010.
<TABLE>
<CAPTION>

                                                                                            December 31,
                                                                                      2002                2003
                                                                                      ----               ----
                                                                                           (In thousands)

Investment in:
<S>                                                                                <C>               <C>
    Kronos                                                                         $  313,479        $  81,588
    Other subsidiaries                                                                 15,981           23,239
                                                                                   ----------        ---------

                                                                                   $  329,460        $ 104,827
                                                                                   ==========        =========
</TABLE>

<TABLE>
<CAPTION>

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

Equity in income from continuing operations of subsidiaries:
<S>                                                                      <C>           <C>              <C>
    Kronos                                                               $ 150,742     $  66,264        $ 86,642
    Other subsidiaries                                                       3,668         2,647           1,803
                                                                         ---------     ---------        --------

                                                                         $ 154,410     $  68,911        $ 88,445
                                                                         =========     =========        ========
</TABLE>

Note 3 - Long-term debt:

     The Company's  $194 million of 11.75% Senior  Secured Notes at December 31,
2001 were redeemed at par value in 2002.






                      NL INDUSTRIES, INC. AND SUBSIDIARIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                 (In thousands)

<TABLE>
<CAPTION>
                                                          Additions
                                         Balance at       charged to                                                     Balance
                                          beginning       costs and          Net          Currency                       at end
           Description                     of year         expenses       deductions     translation      Other          of year
---------------------------------         ---------       ---------       ----------     -----------      -----          -------

Year ended December 31, 2001:
<S>                                       <C>               <C>            <C>            <C>             <C>             <C>
  Allowance for doubtful accounts         $ 2,222           $   485        $  (245)       $  (104)        $   -           $ 2,358
                                          =======           =======        =======        =======         ========        =======

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

Year ended December 31, 2002:
  Allowance for doubtful accounts         $ 2,358           $   481        $  (533)       $   299         $   -           $ 2,605
                                          =======           =======        =======        =======         ========        =======

  Amortization of intangibles             $  -              $   372        $  -           $  -            $   -           $   372
                                          =======           =======        =======        =======         ========        =======

Year ended December 31, 2003:
  Allowance for doubtful accounts        $ 2,605            $   367        $  (439)       $   387         $   -           $ 2,920
                                         =======            =======        =======        =======         ========        =======

  Amortization of intangibles            $   372            $   371        $  -           $  -            $   -           $   743
                                         =======            =======        =======        =======         ========        =======
</TABLE>



Note - Certain  information  has been omitted from this  Schedule  because it is
       disclosed in the notes to the Consolidated Financial Statements.