**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM 10-Q**
 
 
 þ  **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF**
 **THE
        SECURITIES EXCHANGE ACT OF 1934**
 
 **For
        the Quarterly Period Ended September 30, 2006**
 
 **OR**
 
 o  **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF**
 **THE
        SECURITIES EXCHANGE ACT OF 1934**
 
 **For
        the Transition Period from _____ to ______**
 
 
 **Commission
        file number 1-32669**
 
 
 **TRONOX
        INCORPORATED**
 (Exact
        Name of Registrant as Specified in its Charter)
 
 **Delaware**
              
              **20-2868245**(State
                  or Other Jurisdiction of
                Incorporation
                  or Organization)
              
              (I.R.S.
                  Employer
                Identification
                  Number)
 
 **123 Robert S.
        Kerr Avenue, Oklahoma City, Oklahoma 73102**
 (Address
        of principal executive offices)
 
 **Registrant’s
        telephone number, including area code: (405) 775-5000**
 
 
 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 (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirement
        for
        the past 90 days.
 Yes þ No o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 
 Large
        accelerated filer o Accelerated filer o Non-accelerated filer þ
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes o No þ
 
 As
        of
        October 31, 2006, 18,356,778 shares of the company’s Class A, $0.01 par value
        common stock and 22,889,431 shares of the company’s Class B, $0.01 par value
        common stock were outstanding.
  
  
 **TRONOX
        INCORPORATED**
 
 **INDEX**
 
 
 **Page****Part
                  I**
              
              **FINANCIAL
                  INFORMATION**Item
                  1.
              
              Financial
                  Statements (Unaudited)Condensed
                  Consolidated and Combined Statement of Operations for the Three
                  and Nine
                  Months Ended September 30, 2006 and 2005
              
              1Condensed
                  Consolidated Balance Sheet at September 30, 2006 and December 31,
                  2005
              
              2Condensed
                  Consolidated and Combined Statement of Cash Flows for the Nine
                  Months
                  Ended September 30, 2006 and 2005
              
              3Notes
                  to Condensed Consolidated and Combined Financial
                  Statements
              
              4Item
                  2.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of Operations
              
              38Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              50Item
                  4.
              
              Controls
                  and Procedures
              
              50Forward-Looking
                  Statements
              
              51**Part
                  II**
              
              **OTHER
                  INFORMATION**Item
                  1.
              
              Legal
                  Proceedings
              
              52Item
                  6.
              
              Exhibits
              
              53SIGNATURES
              
              54
 
   
   **PART
        I - FINANCIAL INFORMATION**
  
  **Item
        1. Financial Statements**
 
  **TRONOX
        INCORPORATED**
  **CONDENSED
        CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS**
 **(UNAUDITED)**
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****September
                    30,**
                
                **September
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005****(Millions
                    of dollars, except per share data)****Net
                    Sales**
                
                $
                376.2
                
                $
                327.4
                
                $
                1,085.3
                
                $
                1,017.5Cost
                    of goods sold
                
                
                334.1
                
                
                283.7
                
                
                952.0
                
                
                847.6**Gross
                    Margin**
                
                
                42.1
                
                
                43.7
                
                
                133.3
                
                
                169.9Selling,
                    general and administrative expenses
                
                
                28.1
                
                
                28.4
                
                
                89.3
                
                
                85.9Provision
                    for environmental remediation and restoration, net of
                  reimbursements
                
                
                0.1
                
                
                0.3
                
                
                (20.4
                )
                
                17.013.9
                
                
                15.0
                
                
                64.4
                
                
                67.0Interest
                    and debt expense - third parties
                
                
                (12.6
                )
                
                —
                
                
                (36.9
                )
                
                —Other
                    income (expense)
                
                
                0.8
                
                
                3.1
                
                
                10.5
                
                
                (12.1
                )**Income
                    from Continuing Operations before Income Taxes**
                
                
                2.1
                
                
                18.1
                
                
                38.0
                
                
                54.9Income
                    tax provision
                
                
                (2.8
                )
                
                (4.4
                )
                
                (20.8
                )
                
                (20.5
                )**Income
                    (Loss) from Continuing Operations**
                
                
                (0.7
                )
                
                13.7
                
                
                17.2
                
                
                34.4Loss
                    from discontinued operations, net of income tax benefit of $7.8,
                    $0.8,
                    $14.7 and $11.7, respectively
                
                
                (13.3
                )
                
                (1.5
                )
                
                (25.0
                )
                
                (21.8
                )**Net
                    Income (Loss)**
                
                $
                (14.0
                )
                $
                12.2
                
                $
                (7.8
                )
                $
                12.6**Income
                    (Loss) per Common Share**Basic
                    -Continuing
                    operations
                
                $
                (0.02
                )
                $
                0.60
                
                $
                0.43
                
                $
                1.50Discontinued
                    operations
                
                
                (0.33
                )
                
                (0.07
                )
                
                (0.62
                )
                
                (0.95
                )Net
                    income (loss)
                
                $
                (0.35
                )
                $
                0.53
                
                $
                (0.19
                )
                $
                0.55Diluted
                    -Continuing
                    operations
                
                $
                (0.02
                )
                $
                0.60
                
                $
                0.42
                
                $
                1.50Discontinued
                    operations
                
                
                (0.33
                )
                
                (0.07
                )
                
                (0.61
                )
                
                (0.95
                )Net
                    income (loss)
                
                $
                (0.35
                )
                $
                0.53
                
                $
                (0.19
                )
                $
                0.55**Dividends
                    Declared per Common Share**
                
                $
                0.05
                
                $
                —
                
                $
                0.10
                
                $
                —**Weighted
                    Average Shares Outstanding (in thousands)**Basic
                
                
                40,374
                
                
                22,889
                
                
                40,373
                
                
                22,889Diluted
                
                
                40,374
                
                
                22,889
                
                
                40,886
                
                
                22,889
 The
        accompanying notes are an integral part of these statements.
  1
  **TRONOX
        INCORPORATED**
 **CONDENSED
        CONSOLIDATED BALANCE SHEET**
 **(UNAUDITED)**
 
 **September
                  30,**
              
              **December
                  31,****2006**
              
              **2005****(Millions
                  of dollars)****ASSETS****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              56.2
              
              $
              69.0Accounts
                  receivable, net of allowance for doubtful accounts of
                $12.5
                  in 2006 and $11.3 in 2005
              
              
              369.4
              
              
              331.6Inventories
              
              
              296.5
              
              
              312.3Prepaid
                  and other assets
              
              
              27.2
              
              
              28.5Income
                  tax receivable
              
              
              9.3
              
              
              2.4Deferred
                  income taxes
              
              
              29.6
              
              
              35.6**Total
                  Current Assets**
              
              
              788.2
              
              
              779.4**Property,
                  Plant and Equipment — Net**
              
              
              860.8
              
              
              839.7**Long-Term
                  Receivables, Investments and Other Assets**
              
              
              201.7
              
              
              78.8**Goodwill
                  and Other Intangible Assets**
              
              
              62.7
              
              
              60.4**Total
                  Assets**
              
              $
              1,913.4
              
              $
              1,758.3**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Current
                  Liabilities**Accounts
                  payable
              
              $
              188.5
              
              $
              195.3Accrued
                  liabilities
              
              
              202.3
              
              
              168.9Long-term
                  debt due within one year
              
              
              3.6
              
              
              2.0Income
                  taxes payable
              
              
              7.1
              
              
              8.8**Total
                  Current Liabilities**
              
              
              401.5
              
              
              375.0**Noncurrent
                  Liabilities**Deferred
                  income taxes
              
              
              71.2
              
              
              79.0Environmental
                  remediation and/or restoration
              
              
              138.1
              
              
              145.9Long-term
                  debt
              
              
              553.2
              
              
              548.0Other
              
              
              238.5
              
              
              121.4**Total
                  Noncurrent Liabilities**
              
              
              1,001.0
              
              
              894.3**Commitments
                  and Contingencies (Notes 14 and 15)****Stockholders’
                  Equity**Class
                  A common stock, par value $0.01 - 100,000,000 shares
                  authorized,18,375,997
                  and 17,886,640
                shares issued and outstanding at September 30, 2006 and December
                  31,
                  2005, respectively
              
              
              0.2
              
              
              0.2Class
                  B common stock, par value $0.01 - 100,000,000 shares
                  authorized,22,889,431
                  shares issued
                and outstanding at September 30, 2006 andDecember
                  31, 2005
              
              
              0.2
              
              
              0.2Capital
                  in excess of par value
              
              
              475.5
              
              
              461.5Accumulated deficit
              
              
              (16.2
              )
              
              (2.9
              )Deferred
                  compensation
              
              
              —
              
              
              (5.4
              )Accumulated other comprehensive income
              
              
              51.4
              
              
              35.4Treasury stock
              
              
              (0.2
              )
              
              —**Total
                  Stockholders’ Equity**
              
              
              510.9
              
              
              489.0**Total
                  Liabilities and Stockholders’ Equity**
              
              $
              1,913.4
              
              $
              1,758.3
 
 The accompanying notes are an integral part of these
        statements.
  2
  
  
  **TRONOX
        INCORPORATED**
  **CONDENSED
        CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOWS**
 **(UNAUDITED)**
 
 **Nine
                  Months Ended**
                **September
                  30,****2006**
              
              **2005****(Millions
                  of dollars)****Cash
                  Flows from Operating Activities**Net
                  income (loss)
              
              $
              (7.8
              )
              $
              12.6Adjustments
                  to reconcile net income (loss) to net cash provided by operating
                  activities—Depreciation
                  and amortization
              
              
              74.4
              
              
              78.1Deferred
                  income taxes
              
              
              (9.3
              )
              
              (22.9
              )Asset
                  write-downs and impairments
              
              
              —
              
              
              12.3Provision
                  for environmental remediation and restoration, net of
                  reimbursements
              
              
              7.6
              
              
              37.4Allocations
                  from Kerr-McGee
              
              
              —
              
              
              35.2Other
                  noncash items affecting net income (loss)
              
              
              24.2
              
              
              8.9Changes
                  in assets and liabilities
              
              
              (26.2
              )
              
              (148.6
              )Net
                  cash provided by operating activities
              
              
              62.9
              
              
              13.0**Cash
                  Flows from Investing Activities**Capital
                  expenditures
              
              
              (61.3
              )
              
              (51.7
              )Collection
                  on repurchased receivables
              
              
              —
              
              
              165.0Other
                  investing activities
              
              
              1.5
              
              
              4.9Net
                  cash provided by (used in) investing activities
              
              
              (59.8
              )
              
              118.2**Cash
                  Flows from Financing Activities**Repayment
                  of debt
              
              
              (2.6
              )
              
              —Debt
                  issuance costs
              
              
              (2.3
              )
              
              —Dividends
                  paid
              
              
              (4.1
              )
              
              —Net
                  transfers with affiliates
              
              
              —
              
              
              (81.2
              )Net
                  cash used in financing activities
              
              
              (9.0
              )
              
              (81.2
              )**Effects
                  of Exchange Rate Changes on Cash and Cash
                  Equivalents**
              
              
              (6.9
              )
              
              2.9**Net
                  Increase (Decrease) in Cash and Cash Equivalents**
              
              
              (12.8
              )
              
              52.9**Cash
                  and Cash Equivalents at Beginning of Period**
              
              
              69.0
              
              
              23.8**Cash
                  and Cash Equivalents at End of Period**
              
              $
              56.2
              
              $
              76.7**Noncash
                  Investing Activities**
                Receivables
                  repurchased and contributed by Kerr-McGee
              
              $
              —
              
              $
              165.0Acquisition
                  of mining tenements through issuance of debt
              
              
              (9.4
              )
              
              —**Noncash
                  Financing Activities**
                Contribution
                  of repurchased receivables by Kerr-McGee
              
              
              —
              
              
              (165.0
              )****Issuance
                  of debt to acquire mine tenements
              
              
              9.4
              
              
              —
 
 The
        accompanying notes are an integral part of these statements.
  3
  **TRONOX
        INCORPORATED**
 **NOTES
        TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL
        STATEMENTS**
 **SEPTEMBER
        30, 2006**
 
 
 **1.
        The Company, Basis of Presentation and Accounting Policies**
 
 Tronox
        Incorporated is an inorganic chemical company with worldwide operations. Our
        business has two reportable segments: pigment and electrolytic and other
        chemical products. Our pigment segment primarily produces and markets titanium
        dioxide pigment, TiO 2 ,
        a white
        pigment used in a wide range of products for its exceptional ability to impart
        whiteness, brightness and opacity. The
        pigment segment has production
        facilities in the United States, Germany and the Netherlands, mining and
        production facilities in Australia, and a European marketing subsidiary in
        Switzerland. The electrolytic and other chemical products segment produces
        chemicals for both rechargeable and non-rechargeable batteries, sodium chlorate
        for pulp bleaching used in the paper industry and boron-based specialty
        chemicals used in pharmaceuticals, high-performance fibers and other specialty
        products. Also,
        t he
        company has in the past operated or held businesses or properties, or currently
        holds properties, that do not relate to the current chemical business. The
        terms
“Tronox” or “the company” are used interchangeably in these condensed
        consolidated and combined financial statements to refer to the consolidated
        group or to one or more of the companies that are part of the consolidated
        group.
 
 Tronox
        Incorporated was formed in May 2005 in preparation for the contribution and
        transfer by Kerr-McGee Corporation (“Kerr-McGee”) of certain entities, including
        those comprising substantially all of its chemical business (the
“Contribution”). The Contribution and an initial public offering (“IPO”) were
        completed during November 2005, resulting in approximately 43.3% of the total
        outstanding common stock of Tronox being held by the general public and 56.7%
        being held by Kerr-McGee. A Master Separation Agreement (“MSA”), dated November
        28, 2005, among Kerr-McGee, Kerr-McGee Worldwide Corporation and the company
        governs the relationship between the company and the Kerr-McGee group of
        companies throughout a transition period. On March 30, 2006, the company’s
        shares owned by Kerr-McGee were distributed as a dividend to its shareholders
        (“Distribution”). As a result, Kerr-McGee no longer has any ownership or voting
        interest in the company.
 
 Effective
        with the Distribution, the company established certain employee benefit plans
        to
        replace benefits previously sponsored by Kerr-McGee and issued stock-based
        compensation awards resulting from the conversion of certain Kerr-McGee
        stock-based awards held by company employees. See Notes 12 and 13 for further
        discussion of these events. In connection with the Distribution, Tronox
        consummated several noncash transactions with Kerr-McGee during the nine-month
        period ending September 30, 2006, primarily related to the employee benefit
        plan
        transfers, contribution of assets, insurance and income taxes that are reflected
        as adjustments to the contribution from Kerr-McGee. These items resulted
        in a
        net increase in capital in excess of par value of $15.6 million.
 
 **Basis
        of Presentation**
 
 The
        accompanying unaudited condensed consolidated and combined financial statements
        have been prepared by the company, pursuant to the rules and regulations
        of the
        Securities and Exchange Commission (“SEC”) and, in the opinion of management,
        include all adjustments, consisting only of adjustments that are normal and
        recurring in nature, necessary to a fair statement of the results for the
        interim periods presented. Certain information and footnote disclosures normally
        included in financial statements prepared in accordance with accounting
        principles generally accepted in the United States have been condensed or
        omitted pursuant to such rules and regulations. Although the company believes
        that the disclosures are adequate to make the information presented not
        misleading, these condensed consolidated and combined financial statements
        should be read in conjunction with the annual consolidated and combined
        financial statements and the notes thereto included in the company’s latest
        annual report on Form 10-K.
   4
  **Accounting
        Policies**
 
 ***Employee
        Stock-Based Compensation*** **-** Prior to
        the IPO, certain of the company’s employees participated in Kerr-McGee’s
        long-term incentive plans. Under these plans, employees received various
        stock-based compensation awards, including stock options, restricted stock,
        stock opportunity grants and performance units. In the fourth quarter of
        2005,
        the company established its own long-term incentive plan and awarded stock
        options and/or restricted stock under the plan to its employees and non-employee
        directors.
 
 *Fair-Value
        Method.* In
        December 2004, the Financial Accounting Standards Board (“ FASB”)
        issued Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123R”),
        which replaces Statement No. 123, “Accounting for Stock-Based Compensation”
(“FAS No. 123”), and supersedes Accounting Principles Board Opinion (“APB”) No.
        25, “Accounting for Stock Issued to Employees.” FAS No. 123R requires all
        share-based payments to employees to be recognized in the financial statements
        based on their fair values. The company adopted ** FAS
        No.
        123R effective January 1, 2006, using the modified prospective method. Under
        this method, stock-based compensation cost recognized in income from continuing
        operations for the three-month and nine-month periods ended September 30,
        2006,
        includes: 1) compensation cost for all stock option and stock awards that
        were
        unvested as of January 1, 2006, based on the grant-date fair value estimated
        in
        accordance with the original provisions of FAS No. 123 and 2) compensation
        cost
        for all stock options and nonvested stock awards granted subsequent to January
        1, 2006, based on the grant-date fair value estimated in accordance with
        the
        provisions of FAS No. 123R. Stock-based compensation expense recognized in
        the
        Condensed Consolidated and Combined Statement of Operations will be higher
        in
        the future (compared with periods prior to 2006), reflecting a change in
        the
        measurement basis of stock options from intrinsic to fair value. The magnitude
        of the increase will depend upon the number of options granted and other
        factors
        affecting fair value.
 
 *Pro
        Forma Fair-Value Method.* Prior
        to
        January 1, 2006, the company accounted for its stock-based awards under the
        intrinsic-value method permitted by APB No. 25 and disclosed compensation
        expense under the Pro Forma Fair-Value Method in accordance with provisions
        of
        FAS No. 123. Following this method, compensation expense for stock-based
        awards
        was measured based on the estimated grant-date fair value. If compensation
        expense for stock-based awards had been determined using the fair-value-based
        method, net income for the three-month and nine-month periods ending September
        30, 2005, would have been lower, as presented in the following table. Pro
        forma
        stock-based compensation expense presented below may not be representative
        of
        future compensation expense using the fair-value method of accounting as
        prescribed by FAS No. 123R.
  **Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30, 2005****(Millions
                  of dollars, except per share)**Net
                  income, as reported
              
              $
              12.2
              
              $
              12.6Add:
                  stock-based employee compensation expense included in reported
                  net income,
                  net of taxes
              
              
              0.5
              
              
              1.4Deduct:
                  stock-based employee compensation expense determined using a fair-value
                  method, net of taxes
              
              
              (0.8
              )
              
              (2.3
              )Pro
                  forma net income
              
              $
              11.9
              
              $
              11.7Basic
                  and diluted net income per common share:As
                  reported
              
              $
              0.53
              
              $
              0.55Pro
                  forma
              
              
              0.52
              
              
              0.51
 
 ***Earnings
        Per Share*** **-** Basic
        earnings per share includes no dilution and is computed by dividing net income
        or loss available to common stockholders by the weighted average number of
        common shares outstanding for the period. The weighted average number of
        common
        shares outstanding for the three and nine months ended September 30, 2005,
        includes 22,889,431 shares of Class B common stock issued to Kerr-McGee in
        connection with the Contribution, retroactively adjusted for the
        recapitalization. For the three and nine months ended September 30, 2005,
        there
        is no difference between basic and diluted earnings per share since there
        were
        no dilutive securities during that period. At the Distribution, forfeiture
        of
        Kerr-McGee stock-based awards resulted in the issuance of Tronox stock-based
        awards (see Note 12), which were included in the earnings per share calculation
        as if they were outstanding as of January 1, 2006, in accordance with the
        provisions of Statement of Financial Accounting Standard No. 128, “Earnings per
        Share” (“FAS No. 128”).
 
 5
 ***Goodwill
        and Other Intangible Assets*** **-** ****** Goodwill
        is initially measured as the excess of the purchase price of an acquired
        entity
        over the fair value of individual assets acquired and liabilities assumed.
        Goodwill and other indefinite-lived intangibles are not amortized but are
        reviewed annually for impairment, or more frequently if impairment indicators
        arise. The annual impairment assessment for goodwill and other indefinite-lived
        intangible assets was completed in the second quarter of 2006, and no impairment
        was indicated.
 
 ***New/Revised
        Accounting Standards***
 
 *Deferred
        Stripping Costs.* On
        January 1, 2006, the company adopted Emerging Issues Task Force ("EITF")
        Issue
        No. 04-6, "Accounting for Stripping Costs Incurred during Production in the
        Mining Industry" in relation to the mining activities conducted by the company
        and its partner under our joint venture arrangement in Australia. EITF Issue
        No.
        04-6 addresses the accounting for stripping costs incurred during the production
        phase of a mine and requires treatment of these costs as variable production
        costs that should be included as a component of inventory to be recognized
        in
        costs applicable to sales in the same period as the revenue from the sale
        of
        inventory. As a result, capitalization of post-production stripping costs
        is
        appropriate only to the extent product inventory exists at the end of a
        reporting period. The guidance allows application through recognition of
        a
        cumulative effect adjustment to opening retained earnings in the period of
        adoption, with no charge to current earnings for prior periods. The results
        for
        prior periods have not been restated. The cumulative effect adjustment reduced
        opening retained earnings by $1.4 million (net of taxes) and eliminated the
        $2.2
        million net deferred stripping asset from the balance sheet. Adoption of
        EITF
        Issue No. 04-6 did not have a material impact on the company’s cash position,
        net cash from operations, income from continuing operations or net income
        for
        the three-month and nine-month periods ended September 30, 2006.
  *Uncertain
        Tax Positions.* In
        July
        2006, the FASB issued Interpretation No. 48 (“FIN No. 48”), “Accounting for
        Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
        Accounting for Income Taxes” (“FAS No. 109”). FIN No. 48 is effective for fiscal
        years beginning after December 15, 2006, and clarifies the accounting for
        uncertainty in income taxes recognized in an enterprise's financial statements.
        FAS No. 109 does not prescribe a recognition threshold or measurement attribute
        for the financial statement recognition and measurement of a tax position
        taken
        in a tax return. FIN No. 48 clarifies the application of FAS No. 109 by defining
        criteria that an uncertain tax position must meet in order to be recognized
        in
        an enterprise's financial statements. The interpretation also provides guidance
        on measurement, derecognition, classification, interest and penalties,
        accounting in interim periods, disclosure and transition. The company is
        currently assessing the financial statement impact of adopting this
        interpretation.
 
 *Benefit
        Plans.* In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
        Plans - an Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“FAS No.
        158”). FAS No. 158 requires an employer that is a business entity and sponsors
        one or more single employer benefit plans to, among other things, recognize
        the
        funded status (the difference between the benefit obligation and the fair
        value
        of plan assets) in its balance sheet and recognize as a component of other
        comprehensive income, net of tax, previously unrecognized gains or losses
        and
        prior service costs or credits. As a result, some new disclosures will be
        required and some of the previous disclosures will no longer be required.
        FAS
        No. 158 is effective no later than the end of the company’s fiscal year ending
        December 31, 2006. Based on preliminary estimates received from the company’s
        actuary, it
        is
        estimated that the company will recognize a reduction of approximately $120
        million ($80 million after tax) in stockholders’ equity, which represents
        currently unrecognized net actuarial losses and prior service costs.
 
  6
  **2** **.
        Other Comprehensive Income (Loss)**
 
 Comprehensive
        income (loss) for the three and nine months ended September 30, 2006 and
        2005
        was as follows:
 
 **Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(Millions
                  of dollars)**Net
                  income (loss)
              
              $
              (14.0
              )
              $
              12.2
              
              $
              (7.8
              )
              $
              12.6After
                  tax changes in:Foreign
                  currency translation adjustments
              
              
              (2.7
              )
              
              (1.5
              )
              
              18.7
              
              
              (38.8
              )Deferred
                  gain (loss) on cash flow hedges
              
              
              (0.2
              )
              
              0.1
              
              
              (2.6
              )
              
              5.4Reclassification
                  of realized (gain) loss on cash flow
                hedges
                  to net income (loss)
              
              
              (0.1
              )
              
              0.5
              
              
              1.0
              
              
              0.5Minimum
                  pension liability adjustments
              
              
              —
              
              
              —
              
              
              (1.1
              )
              
              0.2Comprehensive
                  income (loss)
              
              $
              (17.0
              )
              $
              11.3
              
              $
              8.2
              
              $
              (20.1
              )
  **3.
        Inventories**
 
 Major
        categories of inventories at September 30, 2006 and December 31, 2005
        were:
 
 **September
                  30,**
                **2006**
              
              **December
                  31,**
                **2005****(Millions
                  of dollars)**Raw
                  materials
              
              $
              71.3
              
              $
              77.1Work-in-progress
              
              
              11.5
              
              
              15.2Finished
                  goods
              
              
              147.2
              
              
              154.7Materials
                  and supplies
              
              
              66.5
              
              
              65.3Total
              
              $
              296.5
              
              $
              312.3
 
 **4.
        Long-Term Receivables, Investments and Other Assets**
 
 Long-term
        receivables, investments and other assets at September 30, 2006 and
        December 31, 2005 were as follows:
 
 **September
                  30,**
                **2006**
              
              **December
                  31,**
                **2005****(Millions
                  of dollars)**Prepaid
                  pension cost
              
              $
              130.9
              
              $
              11.7Receivable
                  from insurer (Note 15)
              
              
              19.9
              
              
              23.5Investments
                  in equity method investees
              
              
              23.2
              
              
              17.5Debt
                  issuance costs
              
              
              11.6
              
              
              12.7Receivable
                  from the U.S. Department of Energy (Note 15)
              
              
              11.0
              
              
              12.5Other
              
              
              5.1
              
              
              0.9Total
              
              $
              201.7
              
              $
              78.8
  7
  **5.
        Accrued Liabilities**
 
 Accrued
        liabilities at September 30, 2006 and December 31, 2005, consisted of the
        following:
 
 **September
                  30,**
                **2006**
              
              **December
                  31,**
                **2005****(Millions
                  of dollars)**Reserves
                  for environmental remediation and restoration - current
                  portion
              
              $
              104.1
              
              $
              77.8Employee-related
                  costs and benefits
              
              
              45.0
              
              
              54.2Taxes
                  other than income taxes
              
              
              15.4
              
              
              6.4Interest
                  on debt
              
              
              11.9
              
              
              3.9Other(1)
              
              
              25.9
              
              
              26.6Total
              
              $
              202.3
              
              $
              168.9
 ________________________
 (1)  No
        other
        individual item is material to total current liabilities .
  **6.
        Long-Term Debt**
  Long-term
        debt at September 30, 2006 and December 31, 2005, consisted of the following:
 
 **September
                  30,**
                **2****006**
              
              **December
                  31,**
                **2005****(Millions
                  of dollars)**9.5%
                  Senior Unsecured Notes due December 2012
              
              $
              350.0
              
              $
              350.0Variable-rate
                  term loan due in installments throughNovember
                  2011
              
              
              198.5
              
              
              200.0Variable-rate
                  note payable due in installments throughJuly
                  2014
              
              
              8.3
              
              
              —Total
                  debt
              
              
              556.8
              
              
              550.0Less:
                  Current portion of long-term debt
              
              
              (3.6
              )
              
              (2.0
              )Total
                  long-term debt
              
              $
              553.2
              
              $
              548.0
 
 Tronox
        Western Australia Pty Ltd, a wholly-owned subsidiary of the company, completed
        the purchase of a 50% undivided interest in additional mining tenements and
        related mining assets in July 2006. The tenements provide additional heavy
        mineral resources to be processed by our joint venture, Tiwest Joint Venture,
        and provide feedstock for our pigment operations. The company acquired the
        mine
        tenements by entering into an eight-year note payable agreement. As a result,
        the company recorded noncash capital additions during the third quarter of
        2006
        of approximately $9.4 million and has additional debt outstanding of $8.3
        million, following a $1.1 million principal payment made during the third
        quarter. The debt requires scheduled payments through 2014, with an early
        payment option at the end of 2007. Interest is accrued at the rate of 13.26%
        per
        annum on the outstanding balance as of the first day of January of each calendar
        year and is calculated through December 31, with payments made on July 28
        of
        each year in which an installment is due.
 
 The
        scheduled maturities of our debt were as follows at September 30, 2006 (in
        millions of dollars):
 
 2006
                  fourth quarter ending December 31
              
              $
              0.52007
              
              
              3.62008
              
              
              2.72009
              
              
              2.82010
              
              
              2.92011
              
              
              191.22012
                  and thereafter
              
              
              353.1Total
                  debt
              
              $
              556.8
  8
 **7.
        Noncurrent Liabilities - Other**
 
 Noncurrent
        liabilities - other consisted of the following at September 30, 2006 and
        December 31, 2005:
 
 **September
                  30,**
                **2006**
              
              **December
                  31,**
                **2005****(Millions
                  of dollars)**Pension
                  and postretirement obligations
              
              $
              126.8
              
              $
              12.6Reserve
                  for income taxes payable
              
              
              40.3
              
              
              37.2Asset
                  retirement obligations
              
              
              30.7
              
              
              27.7Reserve
                  for workers’ compensation and general liability claims
              
              
              19.5
              
              
              18.5Other
              
              
              21.2
              
              
              25.4Total
              
              $
              238.5
              
              $
              121.4
 
 **8.
          Discontinued Operations, Restructuring and Exit
          Activities**
 
 ***Restructuring
        and Exit Activities*** - The
        following table presents a reconciliation of the beginning and ending balances
        of reserves for restructuring and exit activities for the nine months ended
        September 30, 2006. No significant changes in the status of such activities
        occurred during these periods.
 **Personnel**
                **Costs**
              
              **Dismantlement**
                **and
                  Closure**
              
              **Contract
                  Termination**
              
              **Total****(1)****(Millions
                  of dollars)**Beginning
                  balance
              
              $
              3.1
              
              $
              4.9
              
              $
              1.0
              
              $
              9.0Payments
              
              
              (0.3
              )
              
              (1.7
              )
              
              (0.4
              )
              
              (2.4
              )Adjustments
              
              
              0.2
              
              
              0.1
              
              
              (0.2
              )
              
              0.1Ending
                  balance
              
              $
              3.0
              
              $
              3.3
              
              $
              0.4
              
              $
              6.7
 _________________________
 (1)  Amounts
        exclude asset retirement obligations and include obligations of the discontinued
        forest products operations that have been retained by the company.
  In
        April 2005, in connection with the separation of the company from Kerr-McGee
        discussed in Note 1, the company initiated an employee compensation program
        designed to provide an incentive to certain employees to remain with the
        company
        over a one-year period. Costs associated with this program were split based
        upon
        the periods in which participating employees met the service requirements,
        with
        Kerr-McGee bearing the costs for the period they benefited from this arrangement
        up to the IPO date and the company incurring costs after the IPO date. During
        the three-month and nine-month periods ended September 30, 2006, the company
        incurred costs of nil and $1.7 million, respectively. Incentives were paid
        to
        employees during the second quarter of 2006, and Kerr-McGee reimbursed the
        company for its proportionate share of the incentives paid.
 
 The
        company has been working on the development of a raw materials feed project
        to
        improve efficiencies and reduce costs at its Savannah, Georgia, pigment
        facility. The initial trials of the project indicated that modifications
        would
        be required to achieve a satisfactory economic benefit. During the second
        quarter of 2006, additional studies were performed to determine the technical
        requirements needed to achieve operations and the additional cost to complete
        the project. The company is planning a trial to evaluate the effectiveness
        of
        the project. The trial will be scheduled when permitting and installation
        issues
        are confirmed, which is expected to occur by mid-2007. If it is determined
        that
        this is not a viable project, the assets will be written down approximately
        $4.0
        million to their net realizable value.
 
 ***Discontinued
        Operations*** - In
        2004, the company’s forest products operations met the criteria for reporting as
        discontinued operations. Pretax loss applicable to discontinued forest products
        operations for the three months ended September 30, 2006 and 2005 was $19.4
        million and $3.0 million, respectively. Pretax loss applicable to discontinued
        forest products operations for the nine months ended September 30, 2006 and
        2005
        was $25.1 million and $17.5 million, respectively.
 
 9
 In
        addition to the company’s forest products operations, losses from discontinued
        operations for all periods presented include adjustments to amounts previously
        reported as discontinued operations upon disposition of the company’s thorium
        compounds manufacturing, uranium and refining operations. These adjustments
        resulted from legal expenses and changes in the estimated cost of environmental
        remediation and restoration activities directly related to the disposed
        operations. Disposals of the company’s uranium and refining operations were
        completed in 1989 and 1995, respectively. The company ceased operations at
        its
        West Chicago thorium processing facility in 1973. The company retained certain
        environmental remediation obligations and continues remediation activities
        directly related to these former operations, as more fully discussed in
        Note 15.
 
 **9** **.
        Other Income (Expense)**
 
 Components
        of other income (expense) for the three and nine months ended September 30,
        2006
        and 2005 were as follows:
 
 **Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(Millions
                  of dollars)**Net
                  foreign currency transaction gain (loss)
              
              $
              (1.2
              )
              $
              0.4
              
              $
              6.9
              
              $
              (1.8
              )Equity
                  in net earnings of equity-method investees
              
              
              1.3
              
              
              1.7
              
              
              6.0
              
              
              1.9Provision
                  for litigation settlements
              
              
              —
              
              
              —
              
              
              (3.7
              )
              
              —Net
                  interest expense on borrowings with affiliates and interest
                  income
              
              
              0.5
              
              
              (3.3
              )
              
              1.8
              
              
              (10.9
              )Gain
                  on accounts receivables sales
              
              
              —
              
              
              4.2
              
              
              —
              
              
              0.2Other
                  income (expense)
              
              
              0.2
              
              
              0.1
              
              
              (0.5
              )
              
              (1.5
              )Total
              
              $
              0.8
              
              $
              3.1
              
              $
              10.5
              
              $
              (12.1
              )
 
 **10.
        Summarized Income Statement Information of Affiliates**
 
 The
        company has investments in companies, located near its facility in Henderson,
        Nevada, which are accounted for under the equity method. These investees
        provide
        services to the Henderson facility and also market and develop land in the
        area.
        The company recognized equity in net earnings of equity method investees
        of $1.3
        million and $1.7 million for the three months ended September 30, 2006 and
        2005,
        and $6.0 million and $1.9 million for the nine months ended September 30,
        2006
        and 2005, respectively (see Note 9). Unaudited summarized income statement
        information of the significant investees is as follows:
 
 **Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(Millions
                  of dollars)**Gross
                  revenues
              
              $
              7.9
              
              $
              7.7
              
              $
              35.2
              
              $
              25.0Gross
                  profit
              
              
              6.9
              
              
              6.8
              
              
              29.5
              
              
              20.3Income
                  before income taxes
              
              
              5.5
              
              
              5.2
              
              
              24.5
              
              
              14.9Net
                  income
              
              
              4.2
              
              
              4.3
              
              
              20.1
              
              
              12.4
 
  10
  **11.
        Income Taxes**
 
 In
        the
        following table, the U.S. Federal income tax rate is reconciled to the company's
        effective tax rate for income from continuing operations as reflected in
        the
        Condensed Consolidated and Combined Statement of Operations for the three
        and
        nine months ended September 30, 2006 and 2005.
 
 **Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(Millions
                  of dollars)**U.S.
                  statutory tax rate - provision
              
              
              35.0
              %
              
              35.0
              %
              
              35.0
              %
              
              35.0
              %Increases (decreases) resulting from -Taxation of foreign operations
              
              
              48.6
              
              
              10.7
              
              
              14.6
              
              
              (2.3
              )State income taxes
              
              
              (20.8
              )
              
              (1.1
              )
              
              (0.4
              )
              
              0.5Cash repatriation
              
              
              —
              
              
              (4.4
              )
              
              —
              
              
              8.2Permanent adjustments
              
              
              74.2
              
              
              (3.1
              )
              
              3.0
              
              
              0.6Prior-year accrual adjustment
              
              
              (20.2
              )
              
              (22.5
              )
              
              —
              
              
              (8.0
              )Interest on foreign tax contingencies
              
              
              7.1
              
              
              8.6
              
              
              1.6
              
              
              3.0Other
                  - net
              
              
              9.4
              
              
              1.1
              
              
              0.9
              
              
              0.3Total
              
              
              133.3
              %
              
              24.3
              %
              
              54.7
              %
              
              37.3
              %
 
  The
        company’s effective tax rate related to continuing operations for the third
        quarter of 2006 was 133.3% compared to 24.3% for the same period in 2005.
        The
        effective tax rate was  higher
        in the third quarter of 2006 partially  due to
        the
        taxation of foreign operations, in particular, non-deductible permanent
        differences and forecasted losses in certain foreign jurisdictions in which
        the
        actual tax rate was below the U.S. statutory rate. The foreign losses in
        relation to U.S. income are proportionately greater for 2006 contributing
        to the
        higher effective tax rate. In addition, the tax treatment of stock-based
        compensation as required under the tax sharing agreement entered into in
        connection with the company’s separation from Kerr-McGee contributed to the
        higher effective rate.
 
 During
        the second quarter of 2006, the Mississippi State Tax Commission began an
        income
        and franchise tax audit of Kerr-McGee Worldwide Corporation covering tax
        years
        2002 through 2004. Although no formal assessment has been received at this
        time,
        the auditors informally conveyed that an assessment for additional taxes
        may be
        forthcoming. Under the tax sharing agreement with Kerr-McGee dated November
        28,
        2005, Tronox is the controlling party for any Mississippi audit being conducted
        of Kerr-McGee Worldwide Corporation and would be potentially liable for the
        entire assessment, if one is made. However, Tronox believes that appropriate
        tax
        filings were made during the years under audit and is unable to determine
        any
        potential liability until a formal assessment is made. Accordingly, no reserve
        has been established related to this matter.
 
 The
        company received an updated preliminary written report from the local tax
        authorities in Germany dated November 2, 2006. The report takes exception
        to the
        deductibility of certain costs and expenses for income tax purposes, including
        amounts subject to transfer pricing guidelines, and also proposes adjustments
        to
        the company’s treatment of certain transactions for value added tax purposes.
        The report relates to the taxation periods under examination of 1998 through
        2001. The company believes that it has adequately provided for amounts that
        may
        be adjusted as a result of any audit settlement with the exception of the
        new
        issues raised in the updated preliminary written report. The company has
        not
        fully analyzed the new issues nor fully responded to other issues raised
        in
        prior reports. Consequently, the ultimate outcome is not presently known
        and,
        accordingly, additional provisions may be necessary and/or reclassifications
        of
        noncurrent tax liabilities to current may occur in the future related to
        this
        matter.
 
 Contingent
        tax liabilities of $40.3 million and $37.2 million, at September 30, 2006
        and
        December 31, 2005, respectively, have
        been
        included in noncurrent liabilities - other, separate and apart from deferred
        income taxes. It is not expected that these contingent amounts will be paid
        within the next 12 months. These contingencies relate primarily to certain
        deductions associated with plant shutdown activities, deductions related
        to the
        effects of foreign currency translation and other tax-related matters. The
        company believes that it has made adequate provision for income
        taxes that may be payable with respect to years open for
        examination.
 
 11
 **12.
        Employee Stock-Based Compensation**
 
 ***Overview*** - The
        company's Long Term Incentive Plan (“LTIP”) authorizes the issuance of shares of
        the company’s Class A common stock to certain employees and non-employee
        directors any time prior to November 16, 2015, in the form of fixed-price
        stock
        options, restricted stock, stock appreciation rights or performance awards.
        A
        total of 6,060,000 shares of the company’s Class A common stock are authorized
        to be issued under the LTIP, of which a maximum of 1.5 million shares of
        Class A
        common stock is authorized for issuance in connection with awards of restricted
        stock and performance awards to employees. The LTIP also includes certain
        limitations on the size of awards to an individual employee and to non-employee
        directors as a group. Subject to these limits, a committee of the Board of
        Directors administering the LTIP (“Committee”) determines the size and types of
        awards to be issued.
 
 The
        maximum period for exercise of an option granted under the LTIP may not be
        more
        than ten years from the date the grant is authorized by the Committee and
        the
        exercise price may not be less than the fair market value of the Class A
        common
        stock on the date the option is granted. The Committee will determine the
        nature
        and extent of the restrictions on grants of restricted stock, the duration
        of
        such restrictions, and any circumstances under which restricted shares will
        be
        forfeited.
 
 Stock-based
        awards granted by the company to its employees and non-employee directors
        (including awards issued as a result of the conversion of Kerr-McGee stock-based
        awards discussed below) generally have the following terms:
 
 **Vesting**
              
              **Cash-
                  or****Contractual**
              **Period**
              **Vesting**
              **Stock-**
              **Vesting
                  and Other****Life
                  (Years)**
              **(Years)**
              **Term**
              **Settled**
              **Conditions**Stock
                  options
              10
              3
              Graded(1)
              Stock
              Employee
                  serviceRestricted
                  stock-
                based
                  awards
              Not
                  applicable
              3
              Cliff(2)
              Stock
              Employee
                  service
  (1)
            An
                employee vests in one-third of the award at the end of each year
                of
                service. Employees terminating their employment due to retirement
                fully
                vest in their award upon retirement.  (2)
            An
                employee vests in the entire award at the end of the three-year service
                period. Employees terminating their employment due to retirement
                fully
                vest in their award upon retirement.  
 In
        the
        third quarter of 2006, the company issued approximately 10,000 Restricted
        Stock
        Units (“RSU awards”) to certain foreign employees in Germany and the Netherlands
        under sub-plans to the LTIP which were approved by the Committee in August
        2006.
        The sub-plans were required due to certain regulatory issues in those
        jurisdictions. RSU awards will generally have terms similar to those of
        restricted stock awards. RSU awards differ from restricted stock awards in
        that
        the units represent shares of Class A common stock that will remain in the
        name
        of Tronox until the restrictions lapse. As such, holders of RSU awards do
        not
        have the right to receive dividends and do not have the right to vote their
        shares until the restrictions lapse.
 
 ***Effect
        of Tronox Separation from Kerr-McGee*** - As
        provided in the Employee Benefits Agreement between Kerr-McGee and Tronox,
        except for vested stock options, vested performance unit awards and awards
        held
        by retirement-eligible employees, Kerr-McGee stock-based awards held by Tronox
        employees at the date of the Distribution were forfeited and replaced with
        stock-based awards of comparable value issued by Tronox. Retirement-eligible
        Tronox employees fully vested in their Kerr-McGee stock options, restricted
        stock and stock opportunity grants on the Distribution date. The company
        evaluated this forfeiture and replacement of stock-based awards as a
        modification of awards (as defined by FAS No. 123R). Under the provisions
        of FAS
        No. 123R, if the fair value of the modified awards is less than their fair
        value
        immediately prior to the modification, then the initial grant-date fair value
        of
        the originally issued awards should be recognized in earnings. Refer to Note
        1
        for additional information on the change in the accounting policy for
        stock-based awards.
 
  12
  The
        following weighted average assumptions were used with the Black-Scholes
        option-pricing model to evaluate the fair value of the Tronox stock option
        awards exchanged immediately after the modification:
 **March
                  30, 2006**Risk-free
                  interest rate
              
              
              4.6
              %Expected
                  dividend yield
              
              
              1.5
              %Expected
                  volatility
              
              
              34.5
              %Expected
                  term (years)
              
              
              6.3Weighted-average
                  estimated fair value of options converted
              
              $
              9.61Stock
                  fair value on the date of modification
              
              $
              17.47Estimated
                  fair value of the options as a % of the stock fair value on the
                  date of
                  modification
              
              
              55.0
              %
 
 Based
        on
        the analysis and assumptions above, the company determined that the
        modifications did not increase the fair value of the converted stock options.
        Therefore, there was no incremental effect on compensation cost recognized
        in
        the first quarter of 2006, and no incremental effect is expected on cost
        recognition in future periods. The analysis for the other equity awards was
        based on the company’s Class A common stock fair value on the date of
        modification listed above and the number of units resulting from the conversion.
        This analysis also revealed that the modification did not increase the fair
        value of the converted equity awards, thus, there was no incremental effect
        on
        compensation cost recognized in the first quarter of 2006. The conversion
        of
        Kerr-McGee performance units to Tronox equity awards represented a
        liability-to-equity award modification and resulted in an insignificant amount
        of incremental compensation expense in the first quarter of 2006 in accordance
        with the newly adopted accounting standard.
 
 ***Compensation
        Expense*** - The
        following summarizes total stock-based compensation expense recognized in
        income
        from continuing operations for the three and nine months ended September
        30,
        2006 and 2005. Stock-based compensation expense recognized in 2006 is based
        on
        the fair value of the awards, while in 2005 it reflected the intrinsic value
        of
        the awards, if any, according to the provisions of APB No. 25.
 **Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(Millions
                  of dollars)***Expense
                  resulting from awards issued originally by Tronox:*Stock
                  options
              
              $
              0.1
              
              $
              —
              
              $
              0.4
              
              $
              —Restricted
                  stock-based awards
              
              
              0.4
              
              
              —
              
              
              1.1
              
              
              —*Expense
                  resulting from awards issued originally by
                  Kerr-McGee:*Stock
                  options
              
              
              0.4
              
              
              —
              
              
              1.9
              
              
              —Restricted
                  stock and stock opportunity grants
              
              
              0.7
              
              
              0.9
              
              
              3.7
              
              
              2.2Total
                  stock-based compensation expense, pretax
              
              
              1.6
              
              
              0.9
              
              
              7.1
              
              
              2.2Income
                  tax benefit
              
              
              (0.5
              )
              
              (0.4
              )
              
              (1.1
              )
              
              (0.8
              )Total
                  stock-based compensation expense, net of taxes
              
              $
              1.1
              
              $
              0.5
              
              $
              6.0
              
              $
              1.4
 
 Primarily
        as a result of implementing FAS No. 123R for the conversion of Kerr-McGee
        awards, the company's income from continuing operations before and after
        income
        taxes for the nine months ended September 30, 2006, were $3.5 million and
        $2.8
        million lower, respectively, than if the company had continued to account
        for
        stock-based compensation under APB No. 25. Accordingly, the respective basic
        and
        diluted per share amounts were $0.09 and $0.07 lower. Compensation expense
        related to Tronox stock-based awards was not significantly impacted by the
        adoption of the new standard.
 
  13
  The
        following table presents unamortized compensation cost associated with awards
        outstanding at September 30, 2006, and the weighted average period over which
        it
        is expected to be recognized (before considering the associated income tax
        benefit). Compensation cost ultimately recognized may differ from amounts
        presented below due to new awards, if any, and changes in the estimate of
        forfeitures.
 **Unamortized
                  Cost (Pretax)**
              
              **Remaining
                  period****(Millions
                  of dollars)**
              
              **(Years)**Stock
                  options issued by Tronox Incorporated
              
              $
              1.1
              
              
              2.2Restricted
                  stock-based awards issued by Tronox Incorporated
              
              
              3.2
              
              
              2.2Stock
                  options converted from Kerr-McGee awards
              
              
              1.6
              
              
              1.2Restricted
                  stock and stock opportunity grants converted from Kerr-McGee
                  awards
              
              
              2.2
              
              
              1.1$
              8.1
 
 ***Stock
        Options*** - The
        following table presents a summary of activity for Tronox options for the
        nine
        months ended September 30, 2006:
 **Intrinsic****Number
                  of**
              
              
              
              **Contractual**
              
              **Value****Options**
              
              **Price******(1)
              
              **Life
                  (Years)****(1)**
              
              **(Millions)****(2)**Options
                  outstanding at December 31, 2005
              
              
              345,700
              
              $
              14.00Options
                  awarded (including those converted from Kerr-McGee awards)
              
              
              925,766
              
              
              9.64Options
                  forfeited
              
              
              (34,587
              )
              
              10.34Options
                  outstanding at September 30, 2006
              
              
              1,236,879
              
              $
              10.84
              
              
              8.3
              
              $
              2.4Options
                  exercisable at September 30, 2006
              
              
              2,650Outstanding
                  options expected to vest
              
              
              1,187,541
              
              $
              10.82
              
              
              8.3
              
              $
              2.4
  (1)
            Represents
                weighted average exercise price and weighted average remaining contractual
                life, as applicable.  (2)
            Reflects
                aggregate intrinsic value based on the difference between the market
                price
                of Tronox stock at September 30, 2006, and the options' exercise
                price. 
  *Valuation
        and cost attribution methods.* Options’
        fair value is determined on the date of grant using the Black-Scholes
        option-pricing model and is recognized in earnings (net of expected forfeitures)
        on a straight-line basis over the employee service period necessary to earn
        the
        awards, which is generally the vesting period. However, compensation cost
        associated with employees whose retention of the options is not contingent
        on
        providing future service is recognized immediately upon grant.
  *Tronox
        Stock Option valuation.* The fair
        value of the Tronox options granted in 2005 was estimated as of the date
        of the
        grant using the Black-Scholes option-pricing model with the following
        assumptions:
 
 **2005**Risk-free
                  interest rate
              
              
              4.6
              %Expected
                  dividend yield
              
              
              1.5
              %Expected
                  volatility
              
              
              34.5
              %Expected
                  term (years)
              
              
              6.3Per-unit
                  fair value of options granted
              
              $
              5.01
 
 
 Expected
        Volatility ** -
        In
        setting the volatility assumption, the company considers both the implied
        volatility of the traded options of peer group companies and historical
        volatility of peer group company stock prices over the same contractual term
        as
        the options.
 
 14
 Expected
        Term ** -
        The
        expected term represents a weighted average of the expected terms of three
        groups of plan participants: 1) participants eligible to retire at the
        measurement date, 2) participants eligible to retire one year after the
        measurement date and 3) participants not eligible to retire one year after
        the
        measurement date.
 
 *Kerr-McGee
        Stock Option valuation.* The
        following table presents inputs and assumptions used by Kerr-McGee to estimate
        the fair value of stock options granted to Tronox employees in 2005 and 2004.
        Prior to January 1, 2006, Kerr-McGee utilized the Black-Scholes option-pricing
        model to estimate fair value of stock option awards.
 
 **2005**
              
              **2004**Risk-free
                  interest rate
              
              
              3.9
              %
              
              3.5
              %Expected
                  dividend yield
              
              
              3.5
              %
              
              3.6
              %Expected
                  volatility
              
              
              26.4
              %
              
              22.6
              %Expected
                  term (years)
              
              
              6.0
              
              
              5.8Weighted-average
                  estimate of fair value of options converted
              
              $
              20.96
              
              $
              8.63
 
 ***Restricted
        Stock Awards and Stock Opportunity Grants*** - The
        following table summarizes information about restricted stock and stock
        opportunity grant activity during the first nine months of 2006:
 **Number
                  of**
              
              **Fair****Shares**
              
              **Value****(1)**Balance
                  at December 31, 2005
              
              
              321,790
              
              $
              13.77Awards
                  issued (including those converted from Kerr-McGee
                awards)
              
              
              652,859
              
              
              12.95Awards
                  forfeited
              
              
              (22,864
              )
              
              12.97Awards
                  earned (due to retirements)
              
              
              (5,416
              )
              
              12.03Balance
                  at September 30, 2006
              
              
              946,369
              
              $
              13.24Vested
                  at September 30, 2006
              
              
              —Outstanding
                  awards expected to vest
              
              
              915,563
              
              $
              13.22
  (1)
            Represents
                the weighted-average grant-date fair
                value.  
 *Valuation
        and cost attribution method.* Grant-date
        fair value of restricted stock and stock opportunity grants is determined
        by
        reference to market quotes for the company’s common stock. Compensation cost is
        recognized in earnings (net of expected forfeitures) on a straight-line basis
        over the employee service period necessary to earn the awards, which is
        generally the vesting period. However, compensation cost associated with
        employees whose retention of stock awards is not contingent on providing
        future
        service is recognized immediately upon grant.
 
 **13.
          Employee Benefit Plans**
 
 ***Overview*** - The
        company has noncontributory defined-benefit retirement plans in the U.S.
        and
        Germany, a contributory defined-benefit retirement plan in the Netherlands
        and
        company-sponsored contributory postretirement plans for health care and life
        insurance in the U.S. Most employees are covered under the company’s retirement
        plans, and substantially all U.S. employees may become eligible for
        postretirement benefits if they reach retirement age while working for the
        company. As discussed below, the company’s U.S. plans were established at the
        Distribution date, according to the employee benefits agreement between
        Kerr-McGee and Tronox.
 
 ***Establishment
        of U.S. Plans*** -
        Effective with the Distribution at March 30, 2006, the company established
        a
        U.S. qualified defined-benefit plan (funded), a U.S. supplemental nonqualified
        benefit plan (unfunded) and a U.S. postretirement plan (unfunded). Benefits
        under the qualified plan are generally based on years of service and final
        average pay. The supplemental nonqualified benefit plan is designed to maintain
        benefits for all employees at the plan formula level.
 
 The
        establishment of the U.S. plans resulted in a transfer of certain assets
        to the
        company and an assumption of obligations associated with current and former
        employees participating in such newly established plans. According to the
        employee benefits agreement between Kerr-McGee and Tronox, $450.3 million
        in
        qualified plan assets was transferred to Tronox’s newly established trust.
        Although not considered plan assets, certain nonqualified benefit payments
        will
        be paid from a newly established Grantor Trust. Assets in the amount of $4.4
        million were transferred, in the second quarter of 2006, from the Kerr-McGee
        Grantor Trust account to the Tronox Grantor Trust account, and have been
        reflected in the Condensed Consolidated Balance Sheet in long-term receivables,
        investments and other assets.
 
 15
 The
        following table presents U.S. obligations and assets assumed by Tronox effective
        March 30, 2006, based on actuarial analyses, as well as the funded status,
        unrecognized items and the resulting prepaid or accrued benefit
        cost.
 
 **Effective
                  March 30, 2006****U.S.
                  Retirement Plans**
              
              **U.S.
                  Postretirement Plans****(Millions
                  of dollars)**Accumulated
                  benefit obligation
              
              $
              (381.8
              )
              $
              (144.2
              )Projected
                  benefit obligation
              
              $
              (410.9
              )
              $
              (144.2
              )Fair
                  value of plan assets
              
              
              450.3
              
              
              —Funded
                  status - over (under)
              
              
              39.4
              
              
              (144.2
              )Unrecognized
                  prior service cost (credit)
              
              
              16.9
              
              
              (5.7
              )Unrecognized
                  actuarial loss
              
              
              59.2
              
              
              35.0Prepaid/(accrued)
                  benefit cost
              
              $
              115.5
              
              $
              (114.9
              )
 
 The
        actuarial present values of the benefit obligations presented above are based
        on
        a discount rate assumption and a rate of compensation increases assumption
        developed by management. The company selected a discount rate of 6% for its
        U.S.
        plans based on the results of a cash flow matching analysis which projected
        the expected cash flows of the plans using the March 31, 2006, Citigroup
        Pension Discount Curve and an assumption rate of compensation increases of
        3.5%
        based on the company’s long-term plans for compensation increases and expected
        economic conditions, including the effects of merit increases, promotions
        and
        general inflation. The company also selected an estimated long-term rate
        of
        return assumption as of March 30, 2006, of 8% to be used in the determination
        of
        net periodic cost for the period from March 31, 2006, through December 31,
        2006.
        This rate was developed after reviewing both a capital asset pricing model
        using
        historical data and a forecasted earnings model. An expected return analysis
        is
        performed which incorporates the current portfolio allocation, historical
        asset-class returns and an assessment of expected future performance using
        asset-class risk factors.
 
 Company
        contributions in 2006 to the U.S. postretirement plan are expected to be
        in the
        range of approximately $3.0 million to $4.0 million. This is lower than the
        previous estimate as of December 31, 2005, primarily due to the anticipated
        timing of claims submission. Over the next one to two years, it is expected
        that
        annual claims will range from $9.0 million to $10.0 million.
 
  16
  ***Retirement
        Expense*** - Prior
        to the Distribution and the establishment of the company’s U.S. plans,
        Kerr-McGee allocated costs associated with employees covered by its U.S.
        plans
        based on salary for defined-benefit pension plans and based on active headcount
        for health and welfare postretirement plans. The tables below present this
        allocated cost, as well as net periodic cost associated with the U.S. and
        foreign retirement plans sponsored by the company for the three-month and
        nine-month periods ending September 30, 2006 and 2005:
 
 **Retirement
                  Plans**
              
              **Postretirement
                  Plans****Three
                  Months Ended September 30,****2006**
              
              **2005****(1)**
              
              **2006**
              
              **2005****(1)****(Millions
                  of dollars)**Net
                  periodic cost -Service
                  cost
              
              $
              2.7
              
              $
              0.5
              
              $
              0.3
              
              $
              —Interest
                  cost
              
              
              7.1
              
              
              1.0
              
              
              2.1
              
              
              —Expected
                  return on plan assets
              
              
              (10.0
              )
              
              (0.9
              )
              
              —
              
              
              —Net
                  amortization -Prior
                  service cost (credit)
              
              
              0.7
              
              
              —
              
              
              (0.2
              )
              
              —Net
                  actuarial loss
              
              
              0.5
              
              
              0.3
              
              
              0.4
              
              
              —Sub-total
                  net periodic cost
              
              
              1.0
              
              
              0.9
              
              
              2.6
              
              
              —Allocated
                  benefit plan expense (credit) from Kerr-McGee
              
              
              —
              
              
              (0.1
              )
              
              —
              
              
              1.9Total
                  retirement expense
              
              $
              1.0
              
              $
              0.8
              
              $
              2.6
              
              $
              1.9
  (1)
              Includes
                  costs associated with active and inactive employees of the company’s
                  domestic chemical business and does not include costs associated
                  with
                  Kerr-McGee corporate employees that became employees of Tronox
                  after the
                  IPO.
 
 **Retirement
                  Plans**
              
              **Postretirement
                  Plans****Nine
                  Months Ended September 30,****2006**
              
              **2005****(1)**
              
              **2006**
              
              **2005****(1)****(Millions
                  of dollars)**Net
                  periodic cost -Service
                  cost
              
              $
              5.8
              
              $
              1.4
              
              $
              0.7
              
              $
              —Interest
                  cost
              
              
              14.7
              
              
              2.6
              
              
              4.2
              
              
              —Expected
                  return on plan assets
              
              
              (20.4
              )
              
              (2.2
              )
              
              —
              
              
              —Net
                  amortization -Prior
                  service cost (credit)
              
              
              1.4
              
              
              (0.1
              )
              
              (0.5
              )
              
              —Net
                  actuarial loss
              
              
              1.1
              
              
              0.7
              
              
              0.8
              
              
              —Sub-total
                  net periodic cost
              
              
              2.6
              
              
              2.4
              
              
              5.2
              
              
              —Allocated
                  benefit plan expense (credit) from Kerr-McGee
              
              
              0.7
              
              
              (0.3
              )
              
              2.6
              
              
              5.3Total
                  retirement expense
              
              $
              3.3
              
              $
              2.1
              
              $
              7.8
              
              $
              5.3
  (1)
              Includes
                  costs associated with active and inactive employees of the company’s
                  domestic chemical business and does not include costs associated
                  with
                  Kerr-McGee corporate employees that became employees of Tronox
                  after the
                  IPO.
 
  17
  **14.
        Commitments and Contractual Agreements**
 
 At
        September 30, 2006, the company had outstanding letters of credit of
        approximately $67.8 million. These letters of credit have been granted to
        the
        company by financial institutions to support environmental cleanup costs
        and
        miscellaneous operational and severance requirements in international
        locations.
 
 In
        the
        normal course of business, the company has various commitments under
        noncancelable operating lease agreements, principally for railcars and
        production equipment, and also enters into contractual agreements to purchase
        raw materials and utilities. Aggregate payments under these contracts are
        shown
        in the table below.
 
 
 **Payments
                  Due By Year****Type
                  of Obligation**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **2010**
              
              **After**
                **2010**
              
              **Total****(Millions
                  of dollars)**Operating
                  leases
              
              $
              9.3
              
              $
              8.5
              
              $
              6.3
              
              $
              5.5
              
              $
              17.1
              
              $
              46.7Purchase
                  obligations—Ore
                  contracts
              
              
              151.3
              
              
              147.9
              
              
              95.2
              
              
              41.8
              
              
              39.4
              
              
              475.6Other
                  purchase obligations
              
              
              132.0
              
              
              117.7
              
              
              79.8
              
              
              74.9
              
              
              21.2
              
              
              425.6Total
              
              $
              292.6
              
              $
              274.1
              
              $
              181.3
              
              $
              122.2
              
              $
              77.7
              
              $
              947.9
 
 
 **15.
        Contingencies**
 
 The
        following table summarizes the contingency reserve balances, provisions,
        payments and settlements for the nine months ended September 30, 2006, as
        well
        as balances, accruals and receipts of reimbursements of environmental costs
        from
        other parties.
 
 **Reserves
                  for**
                **Litigation**
              
              **Reserves
                  for**
                **Environmental**
                **Remediation****(1)**
              
              **Reimbursements**
                **Receivable****(1)****(Millions
                  of dollars)**Balance
                  at December 31, 2005
              
              $
              9.2
              
              $
              223.7
              
              $
              56.7Provisions
                  / Accruals
              
              
              3.7
              
              
              55.8
              
              
              48.2Payments
                  / Settlements
              
              
              (2.2
              )
              
              (37.3
              )
              
              (36.4
              )Balance
                  at September 30, 2006
              
              $
              10.7
              
              $
              242.2
              
              $
              68.5
  (1)
              Provisions
                  for environmental remediation and restoration include $55.1 million
                  related to the company’s former forest products operations, thorium
                  compounds manufacturing, uranium and refining operations. Accrual
                  of
                  reimbursements receivable includes $27.1 million related to the
                  company’s
                  former forest products operations and thorium compounds manufacturing.
                  These amounts are reflected in the Condensed Consolidated and Combined
                  Statement of Operations as a component of loss from discontinued
                  operations (net of tax).
 
 Management
        believes, after consultation with its internal legal counsel, that the company
        is currently reserved adequately for the probable and reasonably estimable
        costs
        of known environmental matters and other contingencies. However, additions
        to
        the reserves may be required as additional information is obtained that enables
        the company to better estimate its liabilities, including liabilities at
        sites
        now under review. At this time, however, the company cannot reliably estimate
        a
        range of future additions to the reserves for any individual site or for
        all
        sites collectively. Reserves for environmental sites are based on assumptions
        regarding the volumes of contaminated soils and groundwater involved, as
        well as
        associated excavation, transportation and disposal costs.
    18
  The
        company
        provides for costs related to contingencies when a loss is probable and the
        amount is reasonably estimable. It is not possible for the company to reliably
        estimate the amount and timing of all future expenditures related to
        environmental and legal matters and other contingencies because, among other
        reasons:
 
 ·
            Some
                sites are in the early stages of investigation, and other sites may
                be
                identified in the future. ·
            Remediation
                activities vary significantly in duration, scope and cost from site
                to
                site depending on the mix of unique site characteristics, applicable
                technologies and regulatory agencies
                involved. ·
            Remediation
                requirements are difficult to predict at sites where remedial
                investigations have not been completed or final decisions have not
                been
                made regarding remediation requirements, technologies or other factors
                that bear on remediation costs. ·
            Environmental
                laws frequently impose joint and several liability on all potentially
                responsible parties, and it can be difficult to determine the number,
                financial condition and possible defenses of other potentially responsible
                parties and their respective shares of responsibility for cleanup
                costs. ·
            Environmental
                laws and regulations, as well as enforcement policies, are continually
                changing, and the outcome of court proceedings, alternative dispute
                resolution proceedings (including mediation) and discussions with
                regulatory agencies are inherently
                uncertain. ·
            Unanticipated
                construction problems and weather conditions can hinder the completion
                of
                environmental remediation. ·
            Some
                legal matters are in the early stages of investigation or proceeding
                or
                their outcomes otherwise may be difficult to predict, and other legal
                matters may be identified in the future. ·
            The
                inability to implement a planned engineering design or use planned
                technologies and excavation methods may require revisions to the
                design of
                remediation measures, which delay remediation and increase costs. ·
            The
                identification of additional areas or volumes of contamination and
                changes
                in costs of labor, equipment and technology generate corresponding
                changes
                in environmental remediation costs. 
 Current
        and former operations of the company require the management of regulated
        materials and are subject to various environmental laws and regulations.
        These
        laws and regulations will obligate the company to clean up various sites
        at
        which petroleum, chemicals, low-level radioactive substances and/or other
        materials have been contained, disposed of or released. Some of these sites
        have
        been designated Superfund sites by the U.S. Environmental Protection Agency
        (“EPA”), pursuant to the Comprehensive Environmental Response, Compensation, and
        Liability Act of 1980 (“CERCLA”) or state equivalents. Similar environmental
        laws and regulations and other requirements exist in foreign countries in
        which
        the company operates.
 
 Following
        are discussions regarding certain environmental sites and litigation of the
        company.
 
 **Environmental**
 
 **Henderson,
        Nevada**
 
 In
        1998,
        Tronox LLC decided to exit the ammonium perchlorate business. At that time,
        Tronox LLC curtailed operations and began preparation for the shutdown of
        the
        associated production facilities in Henderson, Nevada, that produced ammonium
        perchlorate and other related products. Manufacture of perchlorate compounds
        began at Henderson in 1945 in facilities owned by the U.S. government. The
        U.S.
        Navy expanded production significantly in 1953 when it completed construction
        of
        a plant for the manufacture of ammonium perchlorate. The U.S. Navy continued
        to
        own the ammonium perchlorate plant, as well as other associated production
        equipment at Henderson, until 1962, when the plant was purchased by a
        predecessor of the company. The ammonium perchlorate produced at the Henderson
        facility was used primarily in federal government defense and space programs.
        Perchlorate that may have originated, at least in part, from the Henderson
        facility has been detected in nearby Lake Mead and the Colorado River, which
        contribute to municipal water supplies in Arizona, Southern California and
        Southern Nevada.
 
 19
 Tronox
        LLC began decommissioning the facility and remediating associated perchlorate
        contamination, including surface impoundments and groundwater, when it decided
        to exit the business in 1998. In 1999 and 2001, Tronox LLC entered into consent
        orders with the Nevada Division of Environmental Protection (“NDEP”) that
        require it to implement both interim and long-term remedial measures to capture
        and remove perchlorate from groundwater. In April 2005, Tronox LLC entered
        into an amended consent order with the NDEP that requires, in addition to
        the
        capture and treatment of groundwater, the closure of a certain impoundment
        related to the past production of ammonium perchlorate, including treatment
        and
        disposal of solution and sediment contained in the impoundment. A separate
        agreement reached in 1996 with the NDEP also requires Tronox LLC to test
        for
        various potential contaminants at the site, which is ongoing and is expected
        to
        be completed within the next 12 months. Results of testing may lead to further
        site characterization and remediation, the costs of which, if any, are not
        currently included in the financial reserves discussed below.
 
 In
        1999,
        Tronox LLC initiated the interim measures required by the consent orders.
        A
        long-term remediation system is operating in compliance with the consent
        orders.
        Initially, the remediation system was projected to operate through 2007.
        However, studies of the decline of perchlorate levels in the groundwater
        indicate that Tronox LLC may need to operate the system through 2011. The
        scope,
        duration and cost of groundwater remediation likely will be driven in the
        long
        term by drinking water standards regarding perchlorate, which to date have
        not
        been formally established by applicable state or federal regulatory authorities.
        The EPA and other federal and state agencies continue to evaluate the health
        and
        environmental risks associated with perchlorate as part of the process for
        ultimately setting drinking water standards. One state agency, the California
        Environmental Protection Agency (“CalEPA”), has set a public health goal for
        perchlorate, and the federal EPA has established a reference dose for
        perchlorate, which are preliminary steps to setting drinking water standards.
        The establishment of drinking water standards could materially affect the
        scope,
        duration and cost of the long-term groundwater remediation that Tronox LLC
        is
        required to perform.
 
 ***Financial
        Reserves*** *-* As of
        September 30, 2006, reserves for environmental remediation at Henderson totaled
        $30.5 million. As noted above, the long-term scope, duration and cost of
        groundwater remediation and impoundment closure are uncertain and, therefore,
        additional costs beyond those accrued may be incurred in the future. However,
        the amount of any additional costs cannot be reasonably estimated at this
        time.
 
 ***Litigation*** - In
        2000, Tronox LLC initiated litigation against the United States seeking
        contribution for its Henderson response costs. The suit was based on the
        fact
        that the government owned the plant in the early years of its operation,
        exercised significant control over production at the plant and the sale of
        products produced at the plant, even while not the owner, and was the largest
        consumer of products produced at the plant. Before trial, the parties agreed
        to
        a settlement of the claims against the United States. The settlement was
        memorialized in a consent decree approved by the court on January 13, 2006.
        In
        February 2006, under the consent decree, the United States paid Tronox LLC
        $20.5
        million in contribution for past costs. Commencing January 1, 2011, the United
        States will be obligated to pay 21% of Tronox LLC’s remaining response costs at
        Henderson, if any, related to perchlorate.
 
 ***Insurance*** - In
        2001, Tronox LLC purchased a 10-year, $100 million environmental cost cap
        insurance policy for groundwater and other remediation at Henderson. The
        insurance policy provides coverage only after Tronox LLC exhausts a self-insured
        retention of approximately $61.3 million and covers only those costs
        incurred to achieve a cleanup level specified in the policy. As noted above,
        federal and state agencies have not established a drinking water standard
        and,
        therefore, it is possible that Tronox LLC may be required to achieve a cleanup
        level more stringent than that covered by the policy. If so, the amount
        recoverable under the policy may be less than the ultimate cleanup
        cost.
 
 At
        September 30, 2006, the company had received $8.6 million of cost reimbursement
        under the insurance policy, and expects additional estimated aggregate cleanup
        cost of $90.3 million less the $61.3 million self-insured retention to be
        covered by the policy (for a net amount of $29.0 million in additional
        reimbursement). The company believes that additional reimbursement of
        approximately $29.0 million is probable, and, accordingly, the company has
        recorded a receivable in the financial statements for that amount.
 
  20
  **West
        Chicago, Illinois**
 
 In
        1973,
        Tronox LLC closed a facility in West Chicago, Illinois, that processed thorium
        ores for the federal government and for certain commercial purposes. Historical
        operations had resulted in low-level radioactive contamination at the facility
        and in surrounding areas. The original processing facility is regulated by
        the
        State of Illinois (the “State”), and four vicinity areas are designated as
        Superfund sites on the National Priorities List (“NPL”).
 
 ***Closed
        Facility*** -
        Pursuant to agreements reached in 1994 and 1997 among Tronox LLC, the City
        of
        West Chicago and the State regarding the decommissioning of the closed West
        Chicago facility, Tronox LLC has substantially completed the excavation of
        contaminated soils and has shipped those soils to a licensed disposal facility.
        Surface restoration was completed in 2004, except for areas designated for
        use
        in connection with the Kress Creek remediation discussed below. Groundwater
        monitoring and remediation is expected to continue for approximately eight
        years.
 
 ***Vicinity
        Areas*** - EPA
        has listed four areas in the vicinity of the closed West Chicago facility
        on the
        NPL and has designated Tronox LLC as a Potentially Responsible Party (“PRP”) in
        these four areas. Tronox LLC has substantially completed remedial work for
        three
        of the areas (known as the Residential Areas, Reed-Keppler Park and the Sewage
        Treatment Plant). The other NPL site, known as Kress Creek, is contiguous
        and
        involves low levels of insoluble thorium residues, principally in streambanks
        and streambed sediments, virtually all within a floodway. Tronox LLC has
        reached
        an agreement with the appropriate federal and state agencies and local
        communities regarding the characterization and cleanup of the sites, past
        and
        future government response costs, and the waiver of natural resource damages
        claims. The agreement is incorporated in consent decrees, which were approved
        and entered by the federal court in August 2005. The cleanup work, which
        began
        in the third quarter of 2005, is expected to take about four to five years
        to
        complete, will require excavation of contaminated soils and stream sediments,
        shipment of excavated materials to a licensed disposal facility and restoration
        of affected areas.
 
 ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of $84.5 million for costs related
        to the West Chicago facility and vicinity properties. During the quarter
        ended
        June 30, 2006, the company recorded an increase of $12.0 million to the reserve
        for Kress Creek due to a cost increase implemented by the commercially licensed
        disposal facility. Although actual costs may differ from current estimates,
        the
        amount of any revisions in remediation costs cannot be reasonably estimated
        at
        this time. The amount of the reserve is not reduced by reimbursements expected
        from the federal government under Title X of the Energy Policy Act of 1992
        (“Title X”) (discussed below).
 
 ***Government
        Reimbursement*** -
        Pursuant to Title X, the U.S. Department of Energy (“DOE”) is obligated to
        reimburse the company for certain decommissioning and cleanup costs incurred
        in
        connection with the West Chicago sites in recognition of the fact that about
        55%
        of the facility’s production was dedicated to U.S. government contracts. The
        amount authorized for reimbursement under Title X is $365 million plus
        inflation adjustments. That amount is expected to cover the government’s full
        share of West Chicago cleanup costs. Through September 30, 2006, the company
        had
        been reimbursed approximately $292.7 million under Title X.
 
 Reimbursements
        under Title X are provided by congressional appropriations. Historically,
        congressional appropriations have lagged the company’s cleanup expenditures. As
        of September 30, 2006, the government’s share of costs incurred by the company
        but not yet reimbursed by the DOE totaled approximately $22.0 million,
        which includes $8.6 million accrued in 2006. The company received $12.0 million
        from the government in April 2006 and believes that receipt of the remaining
        $22.0 million in due course following additional congressional
        appropriations is probable and has reflected that amount as a receivable
        in the
        financial statements. The company will recognize recovery of the government’s
        share of future remediation costs for the West Chicago sites as it incurs
        the
        cash expenditures.
 
 21
 **Ambrosia
        Lake, New Mexico**
 
 From
        the
        late 1950s until 1988, the company operated a uranium mining and milling
        operation at Ambrosia Lake near Grants, New Mexico, pursuant to a license
        issued
        by the Atomic Energy Commission (“AEC”), now the Nuclear Regulatory Commission
        (“NRC”). When the operation was sold, the company retained responsibility for
        certain environmental conditions existing at the site, including mill tailings,
        selected ponds and groundwater contamination related to the mill tailings
        and
        unlined ponds. Since 1989, the unaffiliated current owner of the site, Rio
        Algom
        Mining LLC (“Rio Algom”), has been decommissioning the site pursuant to the
        license issued by the NRC. Mill tailings, certain impacted surface soils
        and
        selected pond sediments have been consolidated in an onsite containment unit,
        and groundwater treatment has been ongoing. Under terms of the sales agreement,
        which included provisions capping the liability of Rio Algom, the company
        became
        obligated to solely fund the remediation for the items described above when
        total expenditures exceeded $30 million, which occurred in late 2000. A
        decommissioning plan for the remaining impacted soil was submitted by Rio
        Algom
        to the NRC in January 2005 and was approved in July 2006. The soil
        decommissioning plan will take about one to two years to complete. The state
        of
        New Mexico had raised issues about certain non-radiological constituents
        in the
        groundwater at the site. A request to cease groundwater treatment, that included
        the non-radiological constituents, was approved by the NRC in February 2006.
        Discussions regarding these issues are ongoing, and resolution of them could
        affect remediation costs and/or delay ultimate site closure.
 
 In
          addition to those remediation activities described above for which reserves
          have
          been established as described below, Rio Algom is investigating soil
          contamination potentially caused by past discharge of mine water from the
          site,
          for which no reserve has been established.
 
 ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of $10.0 million for the costs
        of
        the remediation activities described above, including groundwater remediation.
        Although actual costs may differ from current estimates, the amount of any
        revisions in remediation costs cannot be reasonably estimated at this
        time.
 
 ***Litigation***  - On
        January 18, 2006, Rio Algom filed suit against Tronox Worldwide LLC in the
        U.S.
        District Court for the District of New Mexico. The suit seeks a determination
        regarding responsibility for certain labor-related and environmental remediation
        costs. The company has not provided a reserve for this lawsuit because at
        this
        time it cannot reasonably determine the probability of a loss, and the amount
        of
        loss, if any, cannot be reasonably estimated. The case is currently in the
        discovery phase, with an initial trial date set for June 2007. The company
        currently believes that the ultimate resolution of the litigation is not
        likely
        to have a material adverse affect on the company.
 
 **Crescent,
          Oklahoma**
 
 Beginning
        in 1965, Cimarron Corporation (“Cimarron”) operated a facility near Crescent,
        Oklahoma, at which it produced uranium and mixed oxide nuclear fuels pursuant
        to
        licenses issued by the AEC (now NRC). Operations at the facility ceased in
        1975.
        Since that time, buildings and soils were decommissioned in accordance with
        the
        NRC licenses. In limited areas of the site, groundwater is contaminated with
        radionuclides, and, in 2003, Cimarron submitted to the NRC and the Oklahoma
        Department of Environmental Quality (“ODEQ”) a draft remediation work plan
        addressing the groundwater contamination. In 2005, the company began evaluating
        available technologies to address remaining groundwater issues. A remediation
        technology has been selected, and the company will submit for approval an
        amended plan to the NRC and the ODEQ by the end of 2006. The plan will describe
        the remediation of the remaining groundwater issues. While there can be no
        guarantee that the plan will be approved, the company believes the plan
        represents an appropriate remediation technology.
 
 ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of $11.2 million for the costs
        of the remediation activities described above. During the quarter ended
        September 30, 2006, the company recorded an increase of $6.0 million to the
        reserve for Crescent due to the estimated cost to implement the chosen
        groundwater remediation technology. Although actual costs may differ from
        current estimates the amount of any revisions in remediation costs cannot
        be
        reasonably estimated at this time.
 
 **Lakeview,
        Oregon**
 
 A
        predecessor of Tronox Worldwide LLC operated two uranium mines near Lakeview,
        Oregon, from 1958 to 1960. The mines are currently designated as a Superfund
        site. In 2001, the EPA issued a Record of Decision (“ROD”) requiring
        consolidation and capping of contaminated soils and continued neutralization
        of
        acidic waters in one of the two mines. Tronox Worldwide LLC believes that
        it has
        substantially completed the required work. Monitoring of the finished site
        conditions will continue for approximately five years.
 
 22
 ***Litigation*** - In
        April 2005, Tronox Worldwide LLC and two other parties reached an agreement
        with the federal government to settle a lawsuit filed by the government with
        respect to the remediation of contaminated materials at the site and to settle
        related claims by the parties. The suit sought reimbursement of Forest Service
        response costs, an injunction requiring compliance with a Unilateral
        Administrative Order issued to the private parties regarding cleanup of the
        site, and civil penalties for alleged noncompliance with the administrative
        order. The court approved the agreement in January 2006. As a result of the
        settlement, the parties have resolved their respective claims and agreed
        to
        apportion responsibility for the cleanup.
 
 ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of $2.1 million for its share
        of the remediation activities described above. During the quarter ended
        September 30, 2006, the company reduced its reserves by $0.4 million due
        to
        lower estimated costs to complete fieldwork. Although actual costs may differ
        from current estimates, the amount of any revisions in remediation costs
        cannot
        be reasonably estimated at this time.
 
 **Soda
        Springs, Idaho**
 
 From
        1963
        to 2000, Tronox LLC owned and operated a vanadium processing facility near
        Soda
        Springs, Idaho. In 1989, the EPA designated this site as a Superfund site
        under
        CERCLA, listed the site on the NPL and named Tronox LLC as a PRP. In 2000,
        the
        EPA amended a ROD previously issued by it, requiring Tronox LLC to address
        the
        presence of calcine tailings, a byproduct of vanadium processing. The amended
        ROD required the capping of the calcine tailings in place, the closure of
        certain impoundments and groundwater monitoring.
 
 Since
        2000, the vanadium processing facility plant and a fertilizer plant on the
        site
        have been closed, dismantled and removed from the site. All former impoundments
        included in the amended ROD have been closed. A ten-acre pond not covered
        by the
        ROD is scheduled for closure within the next two years. Tronox LLC anticipates
        constructing a landfill onsite as part of the closure. The duration of
        groundwater monitoring is not known.
 
 ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of $2.7 million for the costs
        of the remediation required by the ROD, as well as closure of the above
        mentioned ten-acre pond. Although actual costs may differ from current
        estimates, the amount of any revisions in remediation costs cannot be reasonably
        estimated at this time.
 
 **Milwaukee,
        Wisconsin**
 
 In
        1976,
        Tronox LLC closed a wood-treatment facility it had operated in Milwaukee,
        Wisconsin. Operations at the facility prior to its closure had resulted in
        the
        contamination of soil and groundwater at and around the site with creosote
        and
        other substances used in wood treating. In 1984, the EPA designated the
        Milwaukee wood-treatment facility as a Superfund site under CERCLA, listed
        the
        site on the NPL and named Tronox LLC as a PRP. Tronox LLC executed a consent
        decree in 1991 that required it to perform soil and groundwater remediation
        at
        and below the former wood-treatment area and to address a tributary creek
        of the
        Little Menominee River that had become contaminated as a result of the
        wood-treatment operations. Actual remedial activities were deferred until
        after
        the decree was finally entered in 1996 by a federal court in
        Milwaukee.
 
 Groundwater
        treatment was initiated in 1996 to remediate groundwater contamination below
        and
        in the vicinity of the former wood-treatment area. It is not possible to
        reliably predict how groundwater conditions will be affected by soil removal
        in
        the vicinity of the former wood-treatment area, which has been completed,
        and by
        ongoing groundwater treatment. It is unknown, therefore, how long groundwater
        treatment will continue. Soil cleanup of the former wood-treatment area began
        in
        2000 and was completed in 2002. Also in 2002, remedial designs for the upper
        portion of the tributary creek were agreed to with the EPA, after which Tronox
        LLC began the implementation of a remedy to reroute the creek and to remediate
        associated sediment and stream bank soils. Remediation of the upper portion
        of
        the creek is essentially complete, although Tronox LLC has a multi-year
        obligation to maintain revegetated areas and perform some additional sampling.
        Tronox LLC has not yet agreed with relevant regulatory authorities regarding
        remedial designs for the lower portion of the tributary creek.
 
 ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of $3.7 million for the costs
        of the remediation work described above. Although actual costs may differ
        from
        current estimates, the amount of any revisions in remediation costs cannot
        be
        reasonably estimated at this time. The costs associated with remediation,
        if
        any, of the lower portion of the tributary creek are not reasonably estimable
        at
        this time and, thus, no reserve has been recorded.
 
 23
 **New
        Jersey Wood-Treatment Site**
 
 Tronox
        LLC was named in 1999 as a PRP under CERCLA at a former wood-treatment site
        in
        New Jersey at which the EPA is conducting a cleanup. On April 15, 2005,
        Tronox LLC received a letter from the EPA asserting it is liable under CERCLA
        as
        a former owner or operator of the site and demanding reimbursement of costs
        expended by the EPA at the site. The letter made demand for payment of past
        costs in the amount of approximately $179 million, plus interest, though
        the EPA has informed Tronox LLC that as of May 31, 2006, project costs are
        approximately $226 million, plus other future costs and interest. Tronox
        LLC did
        not operate the site, which had been sold to a third party before Tronox
        LLC
        succeeded to the interests of a predecessor in the 1960s. The predecessor
        also
        did not operate the site, which had been closed down before it was acquired
        by
        the predecessor. Based on historical records, there are substantial
        uncertainties about whether or under what terms the predecessor assumed any
        liabilities for the site. In addition, although it appears there may be other
        PRPs to whom notice has been given, the company does not know whether the
        other
        PRPs have any valid defenses to liability for the site or whether the other
        PRPs
        have the financial resources necessary to meet their obligations, if proven.
        Tronox LLC and EPA have submitted the matter to nonbinding mediation that
        could
        lead to a settlement or resolution of EPA’s demand. In the event the mediation
        process does not lead to an acceptable solution, Tronox LLC intends to
        vigorously defend against the EPA’s demand.
 
 ***Financial
        Reserves*** - During
        the quarter ended September 30, 2006, the company recorded a reserve of $35.0
        million as a result of an offer made during settlement discussions. Although
        ultimate costs may differ from the current estimate, the amount of any revision
        cannot be reasonably estimated at this time.
 
 ***Reimbursement*** - During
        the quarter ended September 30, 2006, the company
        recorded a receivable of $17.5 million representing 50% of the settlement amount
        that Anadarko Petroleum Corporation, on behalf of Kerr-McGee, has consented
        to
        contribute at or before the time the settlement, if accepted, becomes payable.
        This receivable has been reflected in accounts receivable in the accompanying
        Condensed Consolidated Balance Sheet.
 
 **Sauget,
        Illinois**
 
 From
        1927
        to 1969, Tronox LLC operated a wood-treatment plant on a 60-acre site in
        the
        Village of Sauget (formerly known as Monsanto) in St. Clair County, Illinois.
        Operations on the property resulted in the contamination of soil, surface
        water
        and groundwater at the site with creosote and other substances used in wood
        treating. In 1988, Tronox LLC entered into a court-approved consent order
        with
        the Illinois Attorney General and Illinois Environmental Protection Agency.
        The
        investigation and feasibility study for sediments required by the order are
        complete. Pond sediment removal is expected to be complete in 2007 with final
        pond closure and groundwater investigation to follow.
 
 ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of approximately $7.7 million
        for the remediation activities related to contaminated soils and sediments.
        Additional groundwater characterization will occur upon completion of the
        soils
        and sediments removal. Although actual costs may differ from current estimates,
        the amount of any revisions in remediation costs cannot be reasonably estimated
        at this time.
 
 **Hattiesburg,
        Mississippi**
 
 In
        January 2003, Tronox LLC entered into a consent order with the Mississippi
        Department of Environmental Quality to implement a remedy pursuant to an
        approved remediation work plan for a wood-treatment site in Hattiesburg,
        Mississippi. Components of the work plan included excavation of certain
        materials from the former processing areas and off-site sediments and
        containment of other on-site and off-site materials. Remediation of the former
        processing and certain off-site areas was completed in 2003. Two of the four
        off-site remediation projects required by the work plan have not been completed
        where access has been denied by current leaseholders. Efforts to obtain
        necessary access are ongoing, and remedial activities are expected to take
        about
        one to two more years once access is obtained.
 
 24
 ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of approximately $2.5 million
        for the remediation activities described above. Although actual costs may
        differ
        from current estimates, the amount of any revisions in remediation costs
        cannot
        be reasonably estimated at this time.
 
 **Cleveland,
        Oklahoma**
 
 Triple
        S
        Refining Corporation (“Triple S”), formerly known as Kerr-McGee Refining
        Corporation, owned and operated a petroleum refinery near Cleveland, Oklahoma,
        until the facility was closed in 1972. In 1992, Triple S entered into a Consent
        Order with the Oklahoma Department of Health (later, the ODEQ), which addresses
        the remediation of air, soil, surface water and groundwater contaminated
        by
        hydrocarbons and other refinery related materials. Facility dismantling and
        several interim remedial measures have been completed. In 2006, the ODEQ
        approved the remedial design for soil and waste, which includes construction
        of
        an on-site disposal cell. A feasibility study of surface and groundwater
        remedial measures is under review by the ODEQ. Duration of remedial activities
        currently cannot be estimated.
 
 ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of approximately $4.0 million
        for
        the remediation activities described above, including the remedial measures
        recommended in the feasibility study currently under review. Although actual
        costs may differ from current estimates, the amount of any revisions in
        remediation costs cannot be reasonably estimated at this time.
 
 **Cushing,
          Oklahoma**
 
 In
        1972,
        Triple S closed a petroleum refinery it had operated near Cushing, Oklahoma.
        Prior to closing the refinery, Triple S also had produced uranium and thorium
        fuel and metal at the site pursuant to licenses issued by the AEC.
  In
        1990,
        Triple S entered into a consent agreement with the State of Oklahoma to
        investigate the site and take appropriate remedial actions related to petroleum
        refining and uranium and thorium residuals. Investigation and remediation
        of
        hydrocarbon contamination are being performed under the oversight of the
        ODEQ.
        Remediation to address hydrocarbon contamination in soils is expected to
        take
        about four more years. The long-term scope, duration and cost of groundwater
        remediation are uncertain and, therefore, additional costs beyond those accrued
        may be incurred in the future.
   In
        1993,
        Triple S received a decommissioning license from the NRC, the successor to
        the
        AEC’s licensing authority, to perform certain cleanup of uranium and thorium
        residuals. All known radiological contamination has been removed from the
        site
        and shipped to a licensed disposal facility. At the company’s request, the NRC
        terminated the site license in May 2006, thereby allowing the company to
        avoid
        costs that would otherwise be incurred in association with continued license
        maintenance.
  ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of $10.7 million for the costs
        of the ongoing remediation and decommissioning work described above. Although
        actual costs may differ from current estimates, the amount of any revisions
        in
        remediation costs cannot be reasonably estimated at this time.
 
 **Calhoun,
          Louisiana**
 
 From
        1973
        until 1988, Triple S owned and operated a gas condensate stripping facility
        located near Calhoun, Louisiana. When the facility was sold in 1988, Triple
        S
        retained responsibility for environmental conditions existing prior to the
        date
        of closing. Operations at the facility prior to the sale had resulted in
        the
        contamination of soil and groundwater with petroleum hydrocarbons. Soil and
        groundwater remediation is ongoing under a Corrective Action Plan approved
        by
        the Louisiana Department of Environmental Quality. Remediation is estimated
        to
        take about three years pending results of a risk evaluation being conducted
        as
        part of the approved plan. Triple S is implementing a new remediation
        technology, approved by the state in September 2006, for more effective soil
        and
        groundwater remediation.
 
 ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of $2.9 million for the costs
        of the remediation activities described above which reflects a decrease of
        $1.0
        million to the reserve for Calhoun, reflecting the state’s approval of a less
        expensive remediation technology. Although actual costs may differ from current
        estimates, the amount of any revisions in remediation costs cannot be reasonably
        estimated at this time.
 
 25
 **Jacksonville,
        Florida**
  In
        1970,
        Tronox LLC purchased a facility in Jacksonville, Florida, that manufactured
        and
        processed fertilizers, pesticides and herbicides. Tronox LLC closed the facility
        in 1978. In 1988, all structures were removed and Tronox LLC began site
        characterization studies. In 2000, Tronox LLC entered into a consent order
        with
        the EPA to conduct a remedial investigation and a feasibility study. The
        remedial investigation was completed and submitted to EPA in August 2005.
        It is anticipated that the feasibility study will be submitted to the EPA
        in
        late 2006 and that it will recommend soil remediation and excavation at the
        site
        as well as site capping.
  ***Financial
        Reserves*** - As of September
        30, 2006 ,
        the
        company had reserves of $5.4 million to complete the feasibility study and
        to
        conduct the cleanup and remediation activities the company expects to recommend
        to the EPA. Although actual costs may differ from the current estimates,
        the
        amount of any revisions in remediation costs cannot be reasonably estimated
        at
        this time.
  **Other
        Sites**
 
 In
        addition to the sites described above, the company is responsible for
        environmental costs related to certain other sites. These sites relate primarily
        to wood-treating, chemical production, landfills, mining, and oil and gas
        refining, distribution and marketing. As of September 30, 2006, the company
        had
        reserves of $29.3 million for the environmental costs in connection with
        these other sites. Although actual costs may differ from current estimates,
        the
        amount of any revisions in remediation costs cannot be reasonably estimated
        at
        this time. One such site is a mining site in South Dakota, which the company
        refers to as Riley Pass. Reserves for this site were increased during the
        quarter ended September 30, 2006 from $0.9 million to $2.2 million, as a
        result
        of a consent order requiring a predesign and vegetation study. Once the study
        is
        complete, additional costs may be required to remediate adjacent areas within
        the site, but such costs cannot be reasonably estimated at this
        time.
 
 Pursuant
        to the MSA (which recites that it binds successors), Kerr-McGee will reimburse
        the company for a portion of the environmental remediation costs it incurs
        and
        pays (net of any cost reimbursements it recovers or expects to recover from
        insurers, governmental authorities or other parties). The reimbursement
        obligation extends to costs incurred at any site associated with any of the
        company’s former businesses or operations.
 
 With
        respect to any site for which the company has established a reserve as of
        the
        effective date of the MSA, 50% of the remediation costs the company incurs
        in
        excess of the reserve amount (after meeting a $200,000 minimum threshold
        amount)
        will be reimbursable by Kerr-McGee, net of any amounts recovered or, in the
        company’s reasonable and good faith estimate, that will be recovered from third
        parties. With respect to any site for which the company has not established
        a
        reserve as of the effective date of the MSA, 50% of the amount of the
        remediation costs the company incurs and pays (after meeting a $200,000 minimum
        threshold amount) will be reimbursable by Kerr-McGee, net of any amounts
        recovered or, in the company’s reasonable and good faith estimate, that will be
        recovered from third parties. At September 30, 2006, the company had a
        receivable of $17.5 million, representing 50% of the settlement offer the company made related to the
        New
        Jersey wood-treatment site as described above, that Anadarko
        Petroleum Corporation, on behalf of Kerr-McGee, has consented to contribute
        at
        or before the time the settlement, if accepted, becomes payable .
 
 Kerr-McGee’s
        aggregate reimbursement obligation to the company cannot exceed
        $100 million and is subject to various other limitations and restrictions.
        For example, Kerr-McGee is not obligated to reimburse the company for amounts
        it
        pays to third parties in connection with tort claims or personal injury
        lawsuits, or for administrative fines or civil penalties that the company
        is
        required to pay. Kerr-McGee’s reimbursement obligation also is limited to costs
        that the company actually incurs and pays within seven years following the
        completion of the IPO.
 
  26
  **Litigation
        and Claims**
 
 **Western
        Fertilizer Contract**
 
 In
        1995,
        Tronox LLC executed an exclusive agreement with Western Fertilizer, Inc.
        (“Western Fertilizer”) for the storage and distribution of fertilizer produced
        by the company. In May 2000, the company terminated the agreement because
        the owner, operator and the key person of Western Fertilizer, had been sentenced
        to serve 17 years in prison for federal crimes involving activities
        unrelated to the company, thus rendering Western Fertilizer unable to perform
        its duties under the agreement. In June 2000, Western Fertilizer filed for
        bankruptcy, and its trustee alleged that the company did not have the right
        to
        terminate the agreement. In May 2003, Western Fertilizer’s bankruptcy claim
        against Tronox LLC was transferred to a litigation trust, and, in
        October 2004, the litigation trust filed an amended complaint in a pending
        federal lawsuit in the U.S. District Court in Idaho, seeking monetary damages
        of
        approximately $13.0 million for alleged breaches of contract. Discovery in
        the litigation was completed in February 2006. On March 1, 2006, both parties
        filed motions for summary judgment. On June 30, 2006, the Court ruled on
        the
        parties’ motions for summary judgment. It granted in part and denied in part the
        motion of each, ordered the parties to meet and confer regarding any remaining
        open issues and report back to the court. The company and plaintiff then
        undertook settlement discussions that resulted in an oral settlement agreement.
        The company currently expects a written settlement agreement will be signed
        by
        the parties and approved by the courts before the end of 2006.
 
 ***Financial
        Reserves*** - As of
        September 30, 2006, the company had reserves of $3.7 million related to the
        plaintiff’s claims, which is expected to be paid in the fourth quarter of 2006.
        Although costs associated with the resolution of the claims may ultimately
        differ, the amount of any difference is not expected to have a material adverse
        effect on the company.
 
 **Birmingham,
        Alabama**
 
 Until
        1995, Triple S operated a petroleum terminal in Birmingham, Alabama. In late
        2005, a local church, which is located on property adjacent to the site,
        demanded payment for damages of approximately $25 million in connection with
        a
        release of petroleum alleged to have occurred at the terminal and threatened
        litigation. In March 2006, the company filed a lawsuit seeking a declaration
        of
        the parties’ rights and injunctive relief. The defendant has moved to dismiss
        the company’s suit and has also filed a countersuit in the circuit court for
        Jefferson County, Alabama, against the company and third parties seeking
        property damages, injunctive relief and costs. A hearing on a jurisdictional
        issue is scheduled for the fall of 2006. The company has not provided a reserve
        for the litigation because at this time it cannot reasonably determine the
        probability of a loss, and the amount of loss, if any, cannot be reasonably
        estimated. The company currently believes that the ultimate resolution of
        the
        litigation is not likely to have a material adverse effect on the
        company.
 
 **Forest
        Products Litigation**
 
 Between
        December 31, 2002, and May 2, 2005, approximately 250 lawsuits (filed
        on behalf of approximately 5,100 claimants) were filed against Tronox LLC
        in
        connection with the former wood-treatment plant in Columbus, Mississippi.
        Substantially all of these lawsuits are pending in the U.S. District Court
        for
        the Northern District of Mississippi and have been consolidated for pretrial
        and
        discovery purposes. In December 2005, Tronox LLC entered into settlement
        agreements to resolve up to 879 of the Columbus claims. In June 2006, over
        400
        plaintiffs were involuntarily dismissed. In addition, a suit filed by the
        Maranatha Faith Center against Tronox LLC and Tronox Worldwide LLC on February
        18, 2000, relates to the former wood-treatment plant in Columbus and is pending
        in the Circuit Court of Lowndes County, Mississippi. Between September 9,
        2004, and February 23, 2005, three lawsuits (filed on behalf of 64 claimants)
        were filed against Tronox LLC in connection with a former wood-treatment
        plant
        located in Texarkana, Texas. Two of the Texarkana lawsuits that were filed
        in
        Oklahoma (on behalf of 30 claimants) have been dismissed on jurisdictional
        grounds. However, in December 2005, five plaintiffs (two of whom were in
        the
        dismissed Oklahoma case) filed a new lawsuit in a Texas federal court, and
        in
        July 2006, five plaintiffs (three of whom were in the dismissed Oklahoma
        cases)
        filed a new suit in Texas. Between January 3, 2005, and July 26, 2005,
        35 lawsuits (filed on behalf of approximately 4,600 claimants) were filed
        against Tronox LLC and Tronox Worldwide LLC in connection with the former
        wood-treatment plant in Avoca, Pennsylvania. All of these lawsuits seek recovery
        under a variety of common law and statutory legal theories for personal injuries
        and/or property damages allegedly caused by exposure to and/or release of
        creosote, a chemical used in the wood-treatment process. The company currently
        believes that the unresolved claims relating to the Columbus, Texarkana and
        Avoca plants are without substantial merit and is vigorously defending against
        them.
  27
 ***Financial
        Reserves*** - As of September
        30, 2006 ,
        the
        company had reserves of $7.0 million related to forest products litigation.
        Although actual costs may differ from the current reserves, the amount of
        any
        revisions in litigation costs cannot be reasonably estimated at this time.
        The
        company currently believes that the ultimate resolution of the forest products
        litigation is not likely to have a material adverse effect on the company.
  **Kemira**
 
 In
        2000,
        the company acquired its titanium dioxide production facility in Savannah,
        Georgia, from Kemira Pigments Oy, a Finnish company, and its parent, Kemira
        Oyj
        (together, “the Sellers”). After acquiring the facility, the company discovered
        that certain matters associated with environmental conditions and plant
        infrastructure were not consistent with representations made by the Sellers.
        The
        company sought recovery for breach of representations and warranties in a
        proceeding before the London Court of International Arbitration (“LCIA”). On
        May 9, 2005, the company received notice from the LCIA that the LCIA had
        found in favor of the company as to liability with respect to certain of
        the
        claims. The LCIA still must determine the amount of damages and a hearing
        related to this was held in late May 2006. A decision from the tribunal is
        expected in the fourth quarter of 2006. The company currently cannot reasonably
        estimate the amount of damages that will be awarded. The company will recognize
        a receivable, if and when damages are awarded and all contingencies associated
        with any recovery are resolved.
 
 **Other
        Matters**
 
 The
        company is party to a number of other legal and administrative proceedings
        involving environmental and/or other matters pending in various courts or
        agencies. These proceedings, individually and in the aggregate, are not expected
        to have a material adverse effect on the company. These proceedings also
        are
        associated with facilities currently or previously owned, operated or used
        by
        the company and/or its predecessors, some of which include claims for personal
        injuries, property damages, cleanup costs and other environmental matters.
        Current and former operations of the company also involve management of
        regulated materials and are subject to various environmental laws and
        regulations. These laws and regulations will obligate the company to clean
        up
        various sites at which petroleum and other hydrocarbons, chemicals, low-level
        radioactive substances and/or other materials have been contained, disposed
        of
        or released. Some of these sites have been designated Superfund sites by
        the EPA
        pursuant to CERCLA or state equivalents. Similar environmental laws and
        regulations and other requirements exist in foreign countries in which the
        company operates.
 
  28
  **16.
        Business Segments**
 
 The
        company has two reportable segments: pigment and electrolytic and other chemical
        products. The pigment segment primarily produces and markets titanium dioxide
        pigment and has production facilities in the United States, Australia, Germany
        and the Netherlands. The pigment segment also includes heavy minerals production
        operated via our joint venture arrangement. The heavy minerals production
        is
        integrated with our Australian pigment plant, but also has sales to third
        parties. The electrolytic and other chemical products segment represents
        the
        company’s electrolytic manufacturing and marketing operations, all of which are
        located in the United States. Segment performance is evaluated based on
        operating profit, which represents results of segment operations before
        considering general expenses and environmental provisions related to sites
        no
        longer in operation, interest and debt expense, other income (expense) and
        income taxes.
 
 **Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(Millions
                  of dollars)****Net
                  Sales**Pigment
              
              $
              349.0
              
              $
              302.0
              
              $
              1,007.0
              
              $
              944.2Electrolytic
                  and other chemical products
              
              
              27.2
              
              
              25.4
              
              
              78.3
              
              
              73.3Total
              
              $
              376.2
              
              $
              327.4
              
              $
              1,085.3
              
              $
              1,017.5**Operating
                  Profit**Pigment
              
              $
              15.6
              
              $
              15.0
              
              $
              51.5
              
              $
              80.2Electrolytic
                  and other chemical products(1)
              
              
              1.7
              
              
              0.5
              
              
              24.8
              
              
              (6.3
              )17.3
              
              
              15.5
              
              
              76.3
              
              
              73.9Corporate
                  and nonoperating sites(2)
              
              
              (3.3
              )
              
              (0.5
              )
              
              (11.8
              )
              
              (1.3
              )Provision
                  for environmental remediation and restoration(3)
              
              
              (0.1
              )
              
              —
              
              
              (0.1
              )
              
              (5.6
              )Total
                  operating profit
              
              
              13.9
              
              
              15.0
              
              
              64.4
              
              
              67.0Interest
                  and debt expense - third parties
              
              
              (12.6
              )
              
              —
              
              
              (36.9
              )
              
              —Other
                  income (expense)
              
              
              0.8
              
              
              3.1
              
              
              10.5
              
              
              (12.1
              )Income
                  tax provision
              
              
              (2.8
              )
              
              (4.4
              )
              
              (20.8
              )
              
              (20.5
              )Income
                  (loss) from continuing operations
              
              $
              (0.7
              )
              $
              13.7
              
              $
              17.2
              
              $
              34.4
  (1)
              Includes
                  nil and $0.3 million for the three months ended September 30, 2006
                  and
                  2005 and $(20.4) million and $11.3 million for the nine months
                  ended
                  September 30, 2006 and 2005, respectively, of environmental charges,
                  net
                  of reimbursements, related to ammonium perchlorate at the company’s
                  Henderson facility.
 
 (2)
              Includes
                  general corporate expenses not identified to a specific segment
                  and
                  general expenses related to various businesses in which the company’s
                  affiliates are no longer engaged, but that have not met the criteria
                  for
                  reporting as discontinued
                  operations.
 
 (3)
              Includes
                  environmental provisions related to various businesses in which
                  the
                  company’s affiliates are no longer engaged, but that have not met the
                  criteria for reporting as discontinued
                  operations.
  29
  **17.
        Condensed Consolidating and Combining Financial Information**
 
 The
        senior unsecured notes, issued jointly by Tronox Worldwide LLC and Tronox
        Finance Corp., with an aggregate principal amount of $350 million have been
        fully and unconditionally guaranteed by Tronox Incorporated and all of its
        material wholly-owned domestic subsidiaries. As a result of these guarantee
        arrangements, the company is required to present condensed consolidating
        and
        combining financial information.
 
 The
        following tables for the periods ended September 30, 2006 and December 31,
        2005,
        present condensed consolidating and combining financial information for (a)
        Tronox Incorporated, the parent company and also one of the guarantors, (b)
        the
        Issuers, Tronox Worldwide LLC and Tronox Finance Corp., (c) the guarantor
        subsidiaries and (d) the nonguarantor subsidiaries.
 
 Tronox
        Incorporated and Tronox Finance Corp. were formed subsequent to September
        30,
        2005. Therefore, condensed consolidating and combining financial information
        for
        the period ended September 30, 2005, present condensed consolidating and
        combining financial information for (a) the Issuer, Tronox Worldwide LLC,
        (b)
        the guarantor subsidiaries and (c) the nonguarantor subsidiaries.
  Other
        income (expense) in the Condensed Consolidating and Combining Statement of
        Operations for all periods presented includes equity interest in income (loss)
        of subsidiaries.
  30
  **Condensed
        Consolidating Statement of Operations**
 **Three
        Months Ended September 30, 2006**
 
 **Tronox
                  Incorporated**
              
              **Issuers**
              
              **Guarantor
                  Subsidiaries**
              
              **Non-Guarantor
                  Subsidiaries**
              
              **Eliminations**
              
              **Consolidated****(Millions
                  of dollars)****Net
                  Sales**
              
              $
              —
              
              $
              —
              
              $
              204.2
              
              $
              201.7
              
              $
              (29.7
              )
              $
              376.2Cost
                  of goods sold
              
              
              —
              
              
              —
              
              
              173.5
              
              
              189.0
              
              
              (28.4
              )
              
              334.1**Gross
                  Margin**
              
              
              —
              
              
              —
              
              
              30.7
              
              
              12.7
              
              
              (1.3
              )
              
              42.1Selling,
                  general and administrative expenses
              
              
              0.7
              
              
              0.1
              
              
              15.9
              
              
              13.5
              
              
              (2.1
              )
              
              28.1Provision
                  for environmental remediation and restoration, net of
                  reimbursements
              
              
              —
              
              
              —
              
              
              0.1
              
              
              —
              
              
              —
              
              
              0.1(0.7
              )
              
              (0.1
              )
              
              14.7
              
              
              (0.8
              )
              
              0.8
              
              
              13.9Interest
                  and debt expense - third parties
              
              
              —
              
              
              (12.8
              )
              
              0.3
              
              
              (0.1
              )
              
              —
              
              
              (12.6
              )Other
                  income (expense)
              
              
              (13.7
              )
              
              (2.2
              )
              
              (4.7
              )
              
              (2.1
              )
              
              23.5
              
              
              0.8**Income
                  (Loss) from Continuing Operations before Income
                  Taxes**
              
              
              (14.4
              )
              
              (15.1
              )
              
              10.3
              
              
              (3.0
              )
              
              24.3
              
              
              2.1Income
                  tax benefit (provision)
              
              
              0.4
              
              
              2.3
              
              
              (4.9
              )
              
              (0.6
              )
              
              —
              
              
              (2.8
              )**Income
                  (Loss) from Continuing Operations**
              
              
              (14.0
              )
              
              (12.8
              )
              
              5.4
              
              
              (3.6
              )
              
              24.3
              
              
              (0.7
              )Loss
                  from discontinued operations, net of taxes
              
              
              —
              
              
              (0.9
              )
              
              (12.4
              )
              
              —
              
              
              —
              
              
              (13.3
              )**Net
                  Income (Loss)**
              
              $
              (14.0
              )
              $
              (13.7
              )
              $
              (7.0
              )
              $
              (3.6
              )
              $
              24.3
              
              $
              (14.0
              )
 
 
 **Condensed
        Combining Statement of Operations**
 **Three
        Months Ended September 30, 2005**
 
 **Issuer**
              
              **Guarantor
                  Subsidiaries**
              
              **Non-Guarantor
                  Subsidiaries**
              
              **Eliminations**
              
              **Combined****(Millions
                  of dollars)****Net
                  Sales**
              
              $
              —
              
              $
              190.3
              
              $
              166.0
              
              $
              (28.9
              )
              $
              327.4Cost
                  of goods sold
              
              
              —
              
              
              162.7
              
              
              148.5
              
              
              (27.5
              )
              
              283.7**Gross
                  Margin**
              
              
              —
              
              
              27.6
              
              
              17.5
              
              
              (1.4
              )
              
              43.7Selling,
                  general and administrative expenses
              
              
              (0.1
              )
              
              14.5
              
              
              15.7
              
              
              (1.7
              )
              
              28.4Provision
                  for environmental remediation and restoration, net of
                  reimbursements
              
              
              —
              
              
              0.3
              
              
              —
              
              
              —
              
              
              0.30.1
              
              
              12.8
              
              
              1.8
              
              
              0.3
              
              
              15.0Other
                  income (expense)
              
              
              37.6
              
              
              28.2
              
              
              2.6
              
              
              (65.3
              )
              
              3.1**Income
                  (Loss) from Continuing Operations before Income
                  Taxes**
              
              
              37.7
              
              
              41.0
              
              
              4.4
              
              
              (65.0
              )
              
              18.1Income
                  tax provision
              
              
              —
              
              
              (1.6
              )
              
              (2.8
              )
              
              —
              
              
              (4.4
              )**Income
                  (Loss) from Continuing Operations**
              
              
              37.7
              
              
              39.4
              
              
              1.6
              
              
              (65.0
              )
              
              13.7Loss
                  from discontinued operations, net of taxes
              
              
              —
              
              
              (1.5
              )
              
              —
              
              
              —
              
              
              (1.5
              )**Net
                  Income**
              
              $
              37.7
              
              $
              37.9
              
              $
              1.6
              
              $
              (65.0
              )
              $
              12.2
 
 
 
 31
 **Condensed
        Consolidating Statement of Operations**
 **Nine
        Months Ended September 30, 2006**
 
 **Tronox
                  Incorporated**
              
              **Issuers**
              
              **Guarantor
                  Subsidiaries**
              
              **Non-Guarantor
                  Subsidiaries**
              
              **Eliminations**
              
              **Consolidated****(Millions
                  of dollars)****Net
                  Sales**
              
              $
              —
              
              $
              —
              
              $
              600.4
              
              $
              570.9
              
              $
              (86.0
              )
              $
              1,085.3Cost
                  of goods sold
              
              
              —
              
              
              —
              
              
              514.9
              
              
              519.0
              
              
              (81.9
              )
              
              952.0**Gross
                  Margin**
              
              
              —
              
              
              —
              
              
              85.5
              
              
              51.9
              
              
              (4.1
              )
              
              133.3Selling,
                  general and administrative expenses
              
              
              2.0
              
              
              0.4
              
              
              51.3
              
              
              39.6
              
              
              (4.0
              )
              
              89.3Provision
                  for environmental remediation and restoration, net of
                  reimbursements
              
              
              —
              
              
              —
              
              
              (20.4
              )
              
              —
              
              
              —
              
              
              (20.4
              )(2.0
              )
              
              (0.4
              )
              
              54.6
              
              
              12.3
              
              
              (0.1
              )
              
              64.4Interest
                  and debt expense - third parties
              
              
              —
              
              
              (38.3
              )
              
              0.9
              
              
              0.5
              
              
              —
              
              
              (36.9
              )Other
                  income (expense)
              
              
              (6.5
              )
              
              27.0
              
              
              (3.6
              )
              
              3.4
              
              
              (9.8
              )
              
              10.5**Income
                  (Loss) from Continuing Operations before Income
                  Taxes**
              
              
              (8.5
              )
              
              (11.7
              )
              
              51.9
              
              
              16.2
              
              
              (9.9
              )
              
              38.0Income
                  tax benefit (provision)
              
              
              0.7
              
              
              6.4
              
              
              (15.7
              )
              
              (12.2
              )
              
              —
              
              
              (20.8
              )**Income
                  (Loss) from Continuing Operations**
              
              
              (7.8
              )
              
              (5.3
              )
              
              36.2
              
              
              4.0
              
              
              (9.9
              )
              
              17.2Loss
                  from discontinued operations, net of taxes
              
              
              —
              
              
              (1.2
              )
              
              (23.8
              )
              
              —
              
              
              —
              
              
              (25.0
              )**Net
                  Income (Loss)**
              
              $
              (7.8
              )
              $
              (6.5
              )
              $
              12.4
              
              $
              4.0
              
              $
              (9.9
              )
              $
              (7.8
              )
 
 
 **Condensed
        Combining Statement of Operations**
 **Nine
        Months Ended September 30, 2005**
 
 **Issuer**
              
              **Guarantor
                  Subsidiaries**
              
              **Non-Guarantor
                  Subsidiaries**
              
              **Eliminations**
              
              **Combined****(Millions
                  of dollars)****Net
                  Sales**
              
              $
              —
              
              $
              576.8
              
              $
              534.7
              
              $
              (94.0
              )
              $
              1,017.5Cost
                  of goods sold
              
              
              —
              
              
              463.9
              
              
              471.8
              
              
              (88.1
              )
              
              847.6**Gross
                  Margin**
              
              
              —
              
              
              112.9
              
              
              62.9
              
              
              (5.9
              )
              
              169.9Selling,
                  general and administrative expenses
              
              
              0.2
              
              
              41.5
              
              
              50.0
              
              
              (5.8
              )
              
              85.9Provision
                  for environmental remediation and restoration, net of
                  reimbursements
              
              
              —
              
              
              17.0
              
              
              —
              
              
              —
              
              
              17.0(0.2
              )
              
              54.4
              
              
              12.9
              
              
              (0.1
              )
              
              67.0Other
                  income (expense)
              
              
              146.5
              
              
              128.7
              
              
              (0.8
              )
              
              (286.5
              )
              
              (12.1
              )**Income
                  from Continuing Operations before Income Taxes**
              
              
              146.3
              
              
              183.1
              
              
              12.1
              
              
              (286.6
              )
              
              54.9Income
                  tax provision
              
              
              (0.8
              )
              
              (17.4
              )
              
              (2.3
              )
              
              —
              
              
              (20.5
              )**Income
                  from Continuing Operations**
              
              
              145.5
              
              
              165.7
              
              
              9.8
              
              
              (286.6
              )
              
              34.4Loss
                  from discontinued operations, net of taxes
              
              
              (3.3
              )
              
              (18.5
              )
              
              —
              
              
              —
              
              
              (21.8
              )**Net
                  Income**
              
              $
              142.2
              
              $
              147.2
              
              $
              9.8
              
              $
              (286.6
              )
              $
              12.6
 
  32
  **Condensed
        Consolidating Balance Sheet as of September 30, 2006**
 
 **Tronox
                  Incorporated**
              
              **Issuers**
              
              **Guarantor
                  Subsidiaries**
              
              **Non-Guarantor
                  Subsidiaries**
              
              **Eliminations**
              
              **Consolidated****(Millions
                  of dollars)****ASSETS****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              —
              
              $
              —
              
              $
              18.2
              
              $
              38.0
              
              $
              —
              
              $
              56.2Intercompany
                  receivables
              
              
              —
              
              
              —
              
              
              43.1
              
              
              11.2
              
              
              (54.3
              )
              
              —Accounts
                  receivable, net of allowance for doubtful accounts
              
              
              —
              
              
              0.4
              
              
              184.0
              
              
              185.0
              
              
              —
              
              
              369.4Inventories
              
              
              —
              
              
              —
              
              
              180.1
              
              
              117.6
              
              
              (1.2
              )
              
              296.5Prepaid
                  and other assets
              
              
              0.4
              
              
              0.2
              
              
              7.7
              
              
              18.9
              
              
              —
              
              
              27.2Income
                  tax receivable
              
              
              —
              
              
              —
              
              
              —
              
              
              9.6
              
              
              (0.3
              )
              
              9.3Deferred
                  income taxes
              
              
              —
              
              
              20.1
              
              
              23.8
              
              
              2.2
              
              
              (16.5
              )
              
              29.6**Total
                  Current Assets**
              
              
              0.4
              
              
              20.7
              
              
              456.9
              
              
              382.5
              
              
              (72.3
              )
              
              788.2**Property,
                  Plant and Equipment—Net**
              
              
              —
              
              
              9.9
              
              
              451.0
              
              
              399.9
              
              
              —
              
              
              860.8**Investments
                  in Subsidiaries**
              
              
              2,190.9
              
              
              977.4
              
              
              173.9
              
              
              —
              
              
              (3,342.2
              )
              
              —**Long-Term
                  Receivables, Investments and****Other
                  Assets**
              
              
              123.6
              
              
              12.1
              
              
              54.4
              
              
              11.6
              
              
              —
              
              
              201.7**Goodwill
                  and Other Intangible Assets**
              
              
              —
              
              
              —
              
              
              28.2
              
              
              34.5
              
              
              —
              
              
              62.7**Total
                  Assets**
              
              $
              2,314.9
              
              $
              1,020.1
              
              $
              1,164.4
              
              $
              828.5
              
              $
              (3,414.5
              )
              $
              1,913.4**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Current
                  Liabilities**Intercompany
                  borrowings
              
              $
              535.6
              
              $
              —
              
              $
              88.1
              
              $
              248.0
              
              $
              (871.7
              )
              $
              —Accounts
                  payable
              
              
              —
              
              
              2.4
              
              
              73.2
              
              
              112.9
              
              
              —
              
              
              188.5Accrued
                  liabilities
              
              
              12.9
              
              
              23.4
              
              
              124.7
              
              
              37.7
              
              
              3.6
              
              
              202.3Long-term
                  debt due within one year
              
              
              —
              
              
              2.0
              
              
              —
              
              
              1.6
              
              
              —
              
              
              3.6Income
                  taxes payable
              
              
              —
              
              
              —
              
              
              7.4
              
              
              —
              
              
              (0.3
              )
              
              7.1**Total
                  Current Liabilities**
              
              
              548.5
              
              
              27.8
              
              
              293.4
              
              
              400.2
              
              
              (868.4
              )
              
              401.5**Noncurrent
                  Liabilities**Deferred
                  income taxes
              
              
              —
              
              
              —
              
              
              51.5
              
              
              36.2
              
              
              (16.5
              )
              
              71.2Environmental
                  remediation and/or restoration
              
              
              —
              
              
              3.9
              
              
              134.2
              
              
              —
              
              
              —
              
              
              138.1Long-term
                  debt
              
              
              —
              
              
              546.5
              
              
              —
              
              
              6.7
              
              
              —
              
              
              553.2Other
              
              
              112.5
              
              
              10.6
              
              
              46.6
              
              
              68.6
              
              
              0.2
              
              
              238.5**Total
                  Noncurrent Liabilities**
              
              
              112.5
              
              
              561.0
              
              
              232.3
              
              
              111.5
              
              
              (16.3
              )
              
              1,001.0**Total
                  Stockholders’ Equity**
              
              
              1,653.9
              
              
              431.3
              
              
              638.7
              
              
              316.8
              
              
              (2,529.8
              )
              
              510.9**Total
                  Liabilities and Stockholders’ Equity**
              
              $
              2,314.9
              
              $
              1,020.1
              
              $
              1,164.4
              
              $
              828.5
              
              $
              (3,414.5
              )
              $
              1,913.4
 
  33
  **Condensed
        Consolidating Balance Sheet as of December 31, 2005**
 
 **Tronox
                  Incorporated**
              
              **Issuers**
              
              **Guarantor
                  Subsidiaries**
              
              **Non-Guarantor
                  Subsidiaries**
              
              **Eliminations**
              
              **Consolidated****(Millions
                  of dollars)****ASSETS****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              —
              
              $
              —
              
              $
              23.8
              
              $
              45.2
              
              $
              —
              
              $
              69.0Intercompany
                  receivables
              
              
              —
              
              
              —
              
              
              53.0
              
              
              11.4
              
              
              (64.4
              )
              
              —Accounts
                  receivable, net of allowance for doubtful accounts
              
              
              0.8
              
              
              —
              
              
              173.9
              
              
              156.9
              
              
              —
              
              
              331.6Inventories
              
              
              —
              
              
              —
              
              
              192.2
              
              
              121.3
              
              
              (1.2
              )
              
              312.3Prepaid
                  and other assets
              
              
              0.8
              
              
              —
              
              
              12.8
              
              
              14.9
              
              
              —
              
              
              28.5Income
                  tax receivable
              
              
              —
              
              
              —
              
              
              —
              
              
              2.4
              
              
              —
              
              
              2.4Deferred
                  income taxes
              
              
              —
              
              
              8.4
              
              
              26.6
              
              
              3.1
              
              
              (2.5
              )
              
              35.6**Total
                  Current Assets**
              
              
              1.6
              
              
              8.4
              
              
              482.3
              
              
              355.2
              
              
              (68.1
              )
              
              779.4**Property,
                  Plant and Equipment—Net**
              
              
              —
              
              
              —
              
              
              475.8
              
              
              363.9
              
              
              —
              
              
              839.7**Investments
                  in Subsidiaries**
              
              
              2,222.4
              
              
              996.8
              
              
              203.5
              
              
              —
              
              
              (3,422.7
              )
              
              —**Long-Term
                  Receivables, Investments and****Other
                  Assets**
              
              
              —
              
              
              13.2
              
              
              53.9
              
              
              11.7
              
              
              —
              
              
              78.8**Goodwill
                  and Other Intangible Assets**
              
              
              —
              
              
              —
              
              
              28.2
              
              
              32.2
              
              
              —
              
              
              60.4**Total
                  Assets**
              
              $
              2,224.0
              
              $
              1,018.4
              
              $
              1,243.7
              
              $
              763.0
              
              $
              (3,490.8
              )
              $
              1,758.3**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Current
                  Liabilities**Intercompany
                  borrowings
              
              $
              543.1
              
              $
              —
              
              $
              111.5
              
              $
              214.7
              
              $
              (869.3
              )
              $
              —Accounts
                  payable
              
              
              0.3
              
              
              2.2
              
              
              75.4
              
              
              117.4
              
              
              —
              
              
              195.3Accrued
                  liabilities
              
              
              2.0
              
              
              14.3
              
              
              119.8
              
              
              32.8
              
              
              —
              
              
              168.9Long-term
                  debt due within one year
              
              
              —
              
              
              2.0
              
              
              —
              
              
              —
              
              
              —
              
              
              2.0Income
                  taxes payable
              
              
              2.2
              
              
              —
              
              
              6.3
              
              
              0.3
              
              
              —
              
              
              8.8**Total
                  Current Liabilities**
              
              
              547.6
              
              
              18.5
              
              
              313.0
              
              
              365.2
              
              
              (869.3
              )
              
              375.0**Noncurrent
                  Liabilities**Deferred
                  income taxes
              
              
              0.3
              
              
              —
              
              
              54.2
              
              
              27.0
              
              
              (2.5
              )
              
              79.0Environmental
                  remediation and/or restoration
              
              
              —
              
              
              7.2
              
              
              128.5
              
              
              10.2
              
              
              —
              
              
              145.9Long-term
                  debt
              
              
              —
              
              
              548.0
              
              
              —
              
              
              —
              
              
              —
              
              
              548.0Other
              
              
              —
              
              
              1.2
              
              
              56.4
              
              
              66.1
              
              
              (2.3
              )
              
              121.4**Total
                  Noncurrent Liabilities**
              
              
              0.3
              
              
              556.4
              
              
              239.1
              
              
              103.3
              
              
              (4.8
              )
              
              894.3**Total
                  Stockholders’ Equity**
              
              
              1,676.1
              
              
              443.5
              
              
              691.6
              
              
              294.5
              
              
              (2,616.7
              )
              
              489.0**Total
                  Liabilities and Stockholders’ Equity**
              
              $
              2,224.0
              
              $
              1,018.4
              
              $
              1,243.7
              
              $
              763.0
              
              $
              (3,490.8
              )
              $
              1,758.3
 
   34
  **Condensed
        Consolidating Statement of Cash Flows**
 **Nine
        Months Ended September 30, 2006**
 
 **Tronox
                  Incorporated**
              
              **Issuers**
              
              **Guarantor
                  Subsidiaries**
              
              **Non-Guarantor
                  Subsidiaries**
              
              **Eliminations**
              
              **Consolidated****(Millions
                  of dollars)****Cash
                  Flows from Operating Activities**Net
                  income (loss)
              
              $
              (7.8
              )
              $
              (6.5
              )
              $
              12.4
              
              $
              4.0
              
              $
              (9.9
              )
              $
              (7.8
              )Adjustments
                  to reconcile net income (loss) to net cash provided by operating
                  activities—Depreciation
                  and amortization
              
              
              —
              
              
              —
              
              
              42.9
              
              
              31.5
              
              
              —
              
              
              74.4Deferred
                  income taxes
              
              
              (0.7
              )
              
              —
              
              
              (13.7
              )
              
              5.1
              
              
              —
              
              
              (9.3
              )Equity
                  in earnings of subsidiaries
              
              
              6.5
              
              
              (6.5
              )
              
              (9.8
              )
              
              —
              
              
              9.8
              
              
              —Provision
                  for environmental remediation and restoration, net of
                  reimbursements
              
              
              —
              
              
              0.9
              
              
              6.7
              
              
              —
              
              
              —
              
              
              7.6Other
                  noncash items affecting net income (loss)
              
              
              0.1
              
              
              2.0
              
              
              18.3
              
              
              3.8
              
              
              —
              
              
              24.2Changes
                  in assets and liabilities
              
              
              (0.4
              )
              
              (7.6
              )
              
              (4.7
              )
              
              (13.5
              )
              
              —
              
              
              (26.2
              )Net
                  cash provided by (used in) operating activities
              
              
              (2.3
              )
              
              (17.7
              )
              
              52.1
              
              
              30.9
              
              
              (0.1
              )
              
              62.9**Cash
                  Flows from Investing Activities**Capital
                  expenditures
              
              
              —
              
              
              —
              
              
              (25.2
              )
              
              (36.1
              )
              
              —
              
              
              (61.3
              )Other
                  investing activities
              
              
              —
              
              
              —
              
              
              1.5
              
              
              —
              
              
              —
              
              
              1.5Net cash used in investingactivities
              
              
              —
              
              
              —
              
              
              (23.7
              )
              
              (36.1
              )
              
              —
              
              
              (59.8
              )**Cash
                  Flows from Financing Activities**Repayment
                  of debt
              
              
              —
              
              
              (1.5
              )
              
              —
              
              
              (1.1
              )
              
              —
              
              
              (2.6
              )Debt
                  issuance costs
              
              
              —
              
              
              (2.3
              )
              
              —
              
              
              —
              
              
              —
              
              
              (2.3
              )Dividends
                  paid
              
              
              (4.1
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (4.1
              )Net
                  transfers with affiliates
              
              
              6.4
              
              
              21.5
              
              
              (34.0
              )
              
              6.0
              
              
              0.1
              
              
              —Net cash provided by (usedin)
                  financing activities
              
              
              2.3
              
              
              17.7
              
              
              (34.0
              )
              
              4.9
              
              
              0.1
              
              
              (9.0
              )**Effects
                  of Exchange Rate Changes on Cash and Cash
                  Equivalents**
              
              
              —
              
              
              —
              
              
              —
              
              
              (6.9
              )
              
              —
              
              
              (6.9
              )**Net
                  Decrease in****Cash
                  and Cash Equivalents**
              
              
              —
              
              
              —
              
              
              (5.6
              )
              
              (7.2
              )
              
              —
              
              
              (12.8
              )**Cash
                  and Cash Equivalents at Beginning of Period**
              
              
              —
              
              
              —
              
              
              23.8
              
              
              45.2
              
              
              —
              
              
              69.0**Cash
                  and Cash Equivalents at End of Period**
              
              $
              —
              
              $
              —
              
              $
              18.2
              
              $
              38.0
              
              $
              —
              
              $
              56.2
 
  35
  **Condensed
        Combining Statement of Cash Flows**
 **Nine
        Months Ended September 30, 2005**
 
 **Issuer**
              
              **Guarantor
                  Subsidiaries**
              
              **Non-Guarantor
                  Subsidiaries**
              
              **Eliminations**
              
              **Combined****(Millions
                  of dollars)****Cash
                  Flows from Operating Activities**Net
                  income
              
              $
              142.2
              
              $
              147.2
              
              $
              9.8
              
              $
              (286.6
              )
              $
              12.6Adjustments
                  to reconcile net income to net cash provided by operating activities—Depreciation
                  and amortization
              
              
              —
              
              
              43.2
              
              
              34.9
              
              
              —
              
              
              78.1Deferred
                  income taxes
              
              
              1.5
              
              
              (22.5
              )
              
              (1.9
              )
              
              —
              
              
              (22.9
              )Asset
                  write-downs and impairments
              
              
              1.3
              
              
              11.0
              
              
              —
              
              
              —
              
              
              12.3Equity
                  in earnings of subsidiaries
              
              
              (146.9
              )
              
              (18.6
              )
              
              —
              
              
              165.5
              
              
              —Provision
                  for environmental remediation and restoration, net of
                  reimbursements
              
              
              3.7
              
              
              33.7
              
              
              —
              
              
              —
              
              
              37.4Allocations
                  from Kerr-McGee
              
              
              0.4
              
              
              39.0
              
              
              (4.2
              )
              
              —
              
              
              35.2Other
                  noncash items affecting net income
              
              
              0.4
              
              
              5.7
              
              
              2.8
              
              
              —
              
              
              8.9Changes
                  in assets and liabilities
              
              
              (5.3
              )
              
              (73.2
              )
              
              (70.1
              )
              
              —
              
              
              (148.6
              )Net
                  cash provided by
                (used
                  in) operating activities
              
              
              (2.7
              )
              
              165.5
              
              
              (28.7
              )
              
              (121.1
              )
              
              13.0**Cash
                  Flows from Investing Activities**Capital
                  expenditures
              
              
              —
              
              
              (22.4
              )
              
              (29.3
              )
              
              —
              
              
              (51.7
              )Collection
                  on repurchased receivables
              
              
              —
              
              
              70.3
              
              
              94.7
              
              
              —
              
              
              165.0Other
                  investing activities
              
              
              —
              
              
              3.3
              
              
              1.6
              
              
              —
              
              
              4.9Net
                  cash provided by investing activities
              
              
              —
              
              
              51.2
              
              
              67.0
              
              
              —
              
              
              118.2**Cash
                  Flows from Financing Activities**Net
                  transfers with affiliates
              
              
              2.7
              
              
              (186.8
              )
              
              (18.2
              )
              
              121.1
              
              
              (81.2
              )Net
                  cash provided by (used in) financing activities
              
              
              2.7
              
              
              (186.8
              )
              
              (18.2
              )
              
              121.1
              
              
              (81.2
              )**Effects
                  of Exchange Rate Changes on Cash and Cash
                  Equivalents**
              
              
              —
              
              
              —
              
              
              2.9
              
              
              —
              
              
              2.9**Net
                  Increase in Cash and Cash Equivalents**
              
              
              —
              
              
              29.9
              
              
              23.0
              
              
              —
              
              
              52.9**Cash
                  and Cash Equivalents at Beginning of Period**
              
              
              —
              
              
              4.8
              
              
              19.0
              
              
              —
              
              
              23.8**Cash
                  and Cash Equivalents at End of Period**
              
              $
              —
              
              $
              34.7
              
              $
              42.0
              
              $
              —
              
              $
              76.7
 
  36
  **18.
        Subsequent Events**
 
 The
        company has a toll manufacturing agreement with U.S. Avestor LLC (“U.S.
        Avestor”) at its Soda Springs, Idaho facility. Pursuant to the terms of the
        agreement, the company supplies the personnel, property and manufacturing
        and
        research facilities, and U.S. Avestor supplies the supervisory expertise,
        manufacturing equipment and raw materials necessary to manufacture and develop
        blended vanadium oxide. U.S. Avestor pays the company for its actual costs
        incurred in performing the manufacturing and development services under the
        agreement, plus an additional percentage of the actual costs.
 
 On
        October 31, 2006, Avestor Corp., the parent company of U.S. Avestor, filed
        a
        Notice of Intention with the Office of the Superintendent of Bankruptcy in
        Montréal with a view to making a proposal to its creditors. At this time, it is
        not clear what the financial impact, if any, might be to Tronox, if or when
        this
        toll manufacturing agreement might cease.
  37
  **Item
        2.**  **Management’s
        Discussion and Analysis of Financial Condition and Results of** **Operations**
 
 **Overview**
 
 We
        are
        the world’s third-largest producer and marketer of titanium dioxide based on
        reported industry capacity by the leading titanium dioxide producers, and
        we
        have an estimated 13% market share of the $9 billion global market in 2005
        based on reported industry sales. We also produce and market electrolytic
        manganese dioxide and sodium chlorate, as well as boron-based and other
        specialty chemicals. We operate seven production facilities and have direct
        sales and technical service organizations in the United States, Europe and
        the
        Asia/Pacific region. Also, the company has in the past operated or held
        businesses or properties, or currently holds properties, that do not relate
        to
        the current chemical business.
 
 Our
        business has two reportable segments: pigment and electrolytic and other
        chemical products. Our pigment segment primarily produces and markets titanium
        dioxide pigment, a white pigment used in a wide range of products for its
        exceptional ability to impart whiteness, brightness and opacity. Performance
        of
        our pigment segment is cyclical and tied closely to general economic conditions,
        including global gross domestic product. Events that negatively affect
        discretionary spending also may negatively affect demand for finished products
        that contain titanium dioxide. Our pigment segment also is affected by seasonal
        fluctuations in the demand for coatings, the largest end-use market for titanium
        dioxide. The electrolytic and other chemical products segment produces chemicals
        for both rechargeable and non-rechargeable batteries, sodium chlorate for
        pulp
        bleaching used in the paper industry and boron-based specialty chemicals
        used in
        pharmaceuticals, high-performance fibers and other specialty products. We
        are a
        key supplier and have leading market positions in each of these products.
 
 *Distribution
        of Tronox Class B shares* ***.*** ** On
        March
        30, 2006, Kerr-McGee completed its spin-off of Tronox Class B shares (“the
        Distribution”). Concurrently, as provided in the employee benefits agreement
        between Tronox and Kerr-McGee, certain of our employees received Tronox
        stock-based awards as a result of a conversion of unvested Kerr-McGee stock
        options, restricted stock, stock opportunity grants and performance units.
        Approximately 920,000 stock options and 625,000 restricted stock-based awards
        resulted from the conversion based on the closing stock prices of Kerr-McGee
        and
        Tronox on March 30, 2006.
 
 Also
        concurrent with the Distribution, Tronox established certain tax-qualified
        and
        nonqualified pension and postretirement plans for its U.S. employees previously
        covered under the U.S. benefit plans of Kerr-McGee. As a result, the company
        assumed certain obligations and received associated trust assets in accordance
        with the employee benefits agreement between the two companies.
 
 The
        company adopted Statement of Financial Accounting Standard ("SFAS") No. 123
        (revised 2004), "Share-Based Payment" effective January 1, 2006, using the
        modified prospective method of transition. Including the effects of adopting
        the
        new accounting standard and the effects of the conversion of Kerr-McGee
        stock-based awards, stock-based compensation expense in the first nine months
        of
        2006 totaled $7.1 million ($6.0 million on an after tax basis). In accordance
        with this standard, for the remainder of the 2006 year, we expect to recognize
        $1.5 million to $2.0 million of stock-based compensation expense, pretax.
        The
        total unamortized compensation cost as of September 30, 2006, was $8.1 million. Compensation
        cost ultimately recognized may differ from this amount due to new awards,
        if
        any, and changes in the estimate of forfeitures.
 
 *Asset
        Impairment.* The
        company has been working on the development of a raw materials feed project
        to
        improve efficiencies and reduce costs at its Savannah, Georgia, pigment
        facility. The initial trials of the project indicated that modifications
        would
        be required to achieve a satisfactory economic benefit. During the second
        quarter of 2006, additional studies were performed to determine the technical
        requirements needed to achieve operations and the additional cost to complete
        the project. The company is planning a trial to evaluate the effectiveness
        of
        the project. The trial will be scheduled when permitting and installation
        issues
        are confirmed, which is expected to occur by mid-2007. If it is determined
        that
        this is not a viable project, the assets will be written down approximately
        $4.0
        million to their net realizable value.
 
  38
  **Results
        of Operations**
 
 The
        following table summarizes segment operating profit, with a reconciliation
        to
        consolidated and combined net income (loss) for the three and nine months
        ended
        September 30, 2006 and 2005:
 
 **Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(Millions
                  of dollars)****Net
                  Sales—**Pigment
              
              $
              349.0
              
              $
              302.0
              
              $
              1,007.0
              
              $
              944.2Electrolytic
                  and other chemical products
              
              
              27.2
              
              
              25.4
              
              
              78.3
              
              
              73.3Total
              
              $
              376.2
              
              $
              327.4
              
              $
              1,085.3
              
              $
              1,017.5**Operating
                  Profit**(1)**—**Pigment
              
              $
              15.6
              
              $
              15.0
              
              $
              51.5
              
              $
              80.2Electrolytic
                  and other chemical products(2)
              
              
              1.7
              
              
              0.5
              
              
              24.8
              
              
              (6.3
              )Subtotal
              
              
              17.3
              
              
              15.5
              
              
              76.3
              
              
              73.9Corporate
                  and nonoperating sites(3)
              
              
              (3.3
              )
              
              (0.5
              )
              
              (11.8
              )
              
              (1.3
              )Provision
                  for environmental remediation and restoration(4)
              
              
              (0.1
              )
              
              —
              
              
              (0.1
              )
              
              (5.6
              )Operating profit
              
              
              13.9
              
              
              15.0
              
              
              64.4
              
              
              67.0Interest
                  and debt expense - third parties
              
              
              (12.6
              )
              
              —
              
              
              (36.9
              )
              
              —Other
                  income (expense)(5)
              
              
              0.8
              
              
              3.1
              
              
              10.5
              
              
              (12.1
              )Income
                  tax provision
              
              
              (2.8
              )
              
              (4.4
              )
              
              (20.8
              )
              
              (20.5
              )Income
                  (loss) from continuing operations
              
              
              (0.7
              )
              
              13.7
              
              
              17.2
              
              
              34.4Discontinued
                  operations, net of taxes
              
              
              (13.3
              )
              
              (1.5
              )
              
              (25.0
              )
              
              (21.8
              )Net
                  income (loss)
              
              $
              (14.0
              )
              $
              12.2
              
              $
              (7.8
              )
              $
              12.6
  (1)
              Our
                  management evaluates segment performance based on segment operating
                  profit, which represents the results of segment operations before
                  unallocated costs, such as general corporate expenses not identified
                  to a
                  specific segment and environmental provisions related to sites
                  no longer
                  in operation, income tax expense or benefit and other income (expense).
                  Total operating profit of both of our segments is a non-GAAP financial
                  measure of the company’s performance, as it excludes general expenses and
                  environmental provisions related to sites no longer in operation
                  which are
                  a component of operating profit, the most comparable GAAP measure.
                  Our
                  management considers total operating profit of our segments to
                  be an
                  important supplemental measure of our operating performance by
                  presenting
                  trends in our core businesses and facilities currently in operation.
                  This
                  measure is used by us for planning and budgeting purposes and to
                  facilitate period-to-period comparisons in operating performance
                  of our
                  reportable segments in the aggregate by eliminating items that
                  affect
                  comparability between periods. We believe that total operating
                  profit of
                  our segments is useful to investors because it provides a means
                  to
                  evaluate the operating performance of our segments and our company
                  on an
                  ongoing basis using criteria that are used by our internal decision
                  makers. Additionally, it highlights operating trends and aids analytical
                  comparisons. However, total operating profit of our segments has
                  limitations and should not be used as an alternative to operating
                  profit,
                  a performance measure determined in accordance with GAAP, as it
                  excludes
                  certain costs that may affect our operating performance in future
                  periods.
  (2)
              Includes
                  nil and $0.3 for the three months ended September 30, 2006 and
                  2005,
                  respectively, and $(20.4) million and $11.3 million for the nine
                  months
                  ended September 30, 2006 and 2005, respectively, of environmental
                  charge,
                  net of reimbursements, related to ammonium perchlorate at the company’s
                  Henderson, Nevada, facility.
 
 (3)
              Includes
                  general corporate expenses not identified to a specific segment
                  and
                  general expenses related to various businesses in which the company’s
                  affiliates are no longer engaged, but that have not met the criteria
                  for
                  reporting as discontinued
                  operations.
 
 (4)
              Includes
                  environmental provisions related to various businesses in which
                  the
                  company’s affiliates are no longer engaged, but that have not met the
                  criteria for reporting as discontinued operations.
 
 (5)
              Three
                  months and nine months ended September 30, 2005, include interest
                  expense
                  allocated to us by Kerr-McGee based on specifically identified
                  borrowings
                  from Kerr-McGee at Kerr-McGee’s average borrowing
                  rates.
  39
  ***Quarter
        Ended September 30, 2006 Compared to Quarter Ended September 30,
        2005***
 
 *Net
        Sales.* Net
        sales increased by $48.8 million, or 14.9%, to $376.2 million in the
        third quarter of 2006 from $327.4 million in the third quarter of 2005. The
        increase was due to a $47.0 million increase in the pigment segment sales
        and a
        $1.8 million increase in the electrolytic and other chemical product segment
        sales. See further discussions below under “ *Pigment
        Segment - Net Sales* ”
and
        “ *Electrolytic
        and Other Chemical Products Segment - Net Sales* .”
  *Gross
        Margin.* Gross
        margin for the third quarter of 2006 was $42.1 million compared to $43.7
        million
        in the third quarter of 2005. As a percent of sales, gross margin declined
        to
        11.2% from 13.3% as compared to the same period of the prior year. Margins
        were
        negatively impacted at our Australian operations because of several factors.
        First, during winter months in Australia, mine production was negatively
        affected due to difficult mining conditions caused by elevated clay levels
        and
        lower ore content. Toward the end of the third quarter, production was back
        to
        first quarter levels, but was still below the levels in 2005. This resulted
        in
        increased per unit costs for mineral products when compared to prior-year
        results. In addition, costs were impacted by the temporary shutdown of the
        Chandala synthetic rutile facility for maintenance that had been scheduled
        for
        2007, but had to be accelerated due to increased deterioration in the kiln.
        Due
        to the shutdown, production during the third quarter was well below the typical
        range and resulted in a charge to cost of sales during the quarter. Production
        was restarted on August 30 and has returned to pre-shutdown levels. At our
        U.S.
        pigment facilities, higher costs for process chemicals, energy and waste
        treatment continue to dampen results compared to the prior year period. Higher
        process chemical costs were primarily attributable to increased pricing for
        chlorine, coke and caustic. Energy costs, for all of our plants in the United
        States, were higher in 2006 compared to 2005 primarily due to higher realized
        natural gas prices.
 
 *Selling,
        General and Administrative Expenses.* Selling,
        general and administrative expenses decreased $0.3 million in the third
        quarter of 2006 compared to the third quarter of 2005. The decrease was
        primarily due to a decrease in employee incentive compensation related to
        cash
        bonuses resulting from lower projected payouts under the 2006 plan, partially
        offset by increased other compensation and benefit costs, including costs
        related to stock-based awards, increased
        retirement and postretirement expense and other stand-alone company expenses
        such as audit fees and infrastructure costs.
 
 *Provision
        for Environmental Remediation and Restoration, net of Reimbursements.* The
        provision for environmental remediation and restoration, net of reimbursements,
        was $0.1 million in the third quarter of 2006 compared to an expense of
        $0.3 million in the same period of 2005 (see Note 15 to the Condensed
        Consolidated and Combined Financial Statements included in Item 1 of this
        quarterly report on Form 10-Q).
  *Interest
        and Debt Expense - Third Parties* .
        Interest and debt expense to outside parties was $12.6 million in the third
        quarter of 2006 compared to nil in the same period of the prior year. The
        increase was due to interest on the company’s unsecured notes and term loan
        facility that were entered into concurrent with the initial public offering
        (“IPO”) in November 2005, and the note payable issued in July 2006 to acquire
        additional mining tenements in Australia.
 
 *Other
        Income (Expense).* Other
        i ncome
        for
        the third quarter of 2006 was $0.8 million compared to income of $3.1 million
        in
        the third quarter of 2005. The $2.3 million change was primarily due to losses
        in 2006 compared to gains in 2005 attributable to changes in the exchange
        rates
        for both the euro and the Australian dollar ($1.6 million), the elimination of the
        asset
        securitization program and a gain associated with the return of estimated
        fees
        previously paid in excess of actual costs incurred ($4.2 million), and lower
        income in 2006 from equity-method affiliates of ($0.4 million) partially
        offset
        by the elimination of $3.8 million of interest expense allocated from affiliates
        in 2005.
 
 *Income
        Tax Provision.* Our
        effective tax rate related to continuing operations for the third quarter
        of
        2006 was 133.3% compared to 24.3% for the same period in 2005. Our effective
        tax
        rate was higher in the third quarter of 2006 partially  due to
        the
        taxation of foreign operations, in particular, non-deductible permanent
        differences and forecasted losses in certain foreign jurisdictions in which
        our
        actual tax rate is below the U.S. statutory rate. The foreign losses in relation
        to U.S. income are proportionately greater for 2006 contributing to the higher
        effective tax rate. In addition, the tax treatment of stock-based compensation
        as required under our tax sharing agreement entered into in connection with
        our
        separation from Kerr-McGee contributed to the higher effective
        rate.
  40
  *Loss
        from Discontinued Operations.* The loss
        from discontinued operations, net of taxes, in the third quarter of 2006
        was
        $13.3 million compared to $1.5 million in the third quarter of 2005. The
        2006
        loss was primarily attributable to legal fees and environmental costs associated
        with the company’s former forest products operations of $12.3 million, net of
        taxes, including $11.0 million, net of tax, as a result of ongoing settlement
        discussions related to nonbinding mediation with the U.S. Environmental
        Protection Agency (EPA) regarding reimbursement for remediation of the former
        wood-treatment site in New Jersey. In addition, environmental costs of $3.8
        million, net of taxes, for the proposed groundwater remediation solution
        at a
        former nuclear fuels plant in Crescent, Oklahoma, and additional costs for
        erosion and vegetation studies of $0.8 million, net of taxes, related to
        former
        uranium mines at Riley Pass, South Dakota. These losses were partially offset
        by
        the recognition of amounts due from the Department of Energy (“DOE”) of $3.3
        million, net of taxes, related to their share of costs at the former West
        Chicago site. The loss in 2005 was primarily related to legal fees and
        environmental costs associated with the company’s former forest products
        operations of $1.9 million, net of taxes and a write-off of a deferred legal
        settlement of $2.3 million, net of taxes, related to the former refining
        business. These losses were partially offset by the recognition of amounts
        due
        from the DOE of $3.9 million, net of taxes, related to their share of costs
        at
        the former West Chicago site. (See Note 15 to the Condensed Consolidated
        and Combined Financial Statements included in Item 1 of this quarterly report
        on
        Form 10-Q).
 
 *Pigment
        Segment*
 
 *Net
        Sales.* Net
        sales increased $47.0 million, or 15.6% in the third quarter of 2006
        compared to the same period in 2005. Higher sales volumes accounted for $42.8
        million of the increase. The remainder of the increase was due to an increase
        in
        average selling prices resulting from the change in the euro exchange rate
        between the third quarter of 2006 and the third quarter of 2005. The increased
        volumes in the third quarter were primarily attributable to
        strong
        sales demand due
        to
        improving economic conditions in Europe and continued strength in the
        Asia/Pacific region. In the United States, the change in volumes can, in
        part, be attributed to lower volumes in 2005 due to hurricanes Katrina and
        Rita.
 
 *Operating
        Profit.* Operating profit in the third quarter of 2006 was $15.6 million, an
        increase of $0.6 million from $15.0 million in the third quarter of
        2005. Offsetting the favorable affects of the increased sales mentioned above,
        operating results were negatively impacted $10.3 million due to higher
        production and distribution costs. The increased production costs were largely
        attributed to our Australian operations. Costs at the pigment plant were
        adversely impacted by unscheduled maintenance and repairs which also adversely
        impacted production volume. In addition, difficult mining conditions, caused
        by
        elevated clay levels and lower ore content and the temporary shutdown of
        the
        Chandala facility for maintenance that had been scheduled for 2007, but had
        to
        be accelerated due to increased deterioration in the kiln also contributed
        to
        higher costs. Due to the shutdown, production during the third quarter was
        well
        below the typical range and resulted in a charge to cost of sales during
        the
        period. Production was restarted on August 30 and has returned to pre-shutdown
        levels. In our U.S. operations, increased process chemical, energy and waste
        treatment costs continue to impact the current year profitability versus
        the
        prior year. Higher process chemical costs were primarily attributable to
        increased pricing for chlorine, coke and caustic at our pigment plants in
        the
        United States. Energy costs, for all of our plants in the United States,
        were
        higher in 2006 compared to 2005 primarily due to higher realized natural
        gas
        prices.
  Operating
        costs in our European operations were slightly higher in local currency but
        were
        unfavorably impacted by the exchange rate changes on the euro between the
        third
        quarter of 2006 and the third quarter of 2005. Selling, general and
        administrative expenses decreased $2.4
        million primarily due to a decrease
        in employee incentive compensation related to cash bonuses resulting from
        lower
        projected payouts under the 2006 plan partially offset by increased compensation
        and benefit costs, including costs related to stock-based awards and
        increased retirement and postretirement expense.
 
 *Electrolytic
        and Other Chemical Products Segment*
 
 *Net
        Sales.* Net
        sales in the third quarter of 2006 were $27.2 million, an increase of
        $1.8 million compared to the third quarter of 2005. Pricing for manganese
        dioxide and sodium chlorate remains ahead of last year as sales prices were
        increased early in 2006 in an effort to offset rising costs. Sales volumes
        of
        sodium chlorate increased 13% over the prior year. The company has been
        aggressively pursuing market share in the sodium chlorate market and is
        currently in a sold out position. Sales of manganese dioxide were behind
        last
        year's levels due to lower customer demand as 2005 sales were favorably impacted
        by hurricanes Rita and Katrina. Sales of lithium manganese oxide (LMO) into
        advanced batteries, primarily for high-end power tools, have attained commercial
        success and continue to grow as the application grows in
        popularity.
  41
 *Operating
        Profit.* Operating profit in the third quarter of 2006 was $1.7 million, compared
        with operating profit of $0.5 million in the same period of 2005. The $1.2
        million increase in profit was primarily due to higher sales prices and volumes,
        offset somewhat by higher manufacturing costs, including feedstock and energy
        costs. Slightly lower selling,
        general and administrative expenses also contributed to the favorable
        results.
 
 ***Nine
          Months Ended September 30, 2006 Compared to Nine Months Ended September
          30,
          2005***
 
 *Net
        Sales.* Net
        sales increased by $67.8 million, or 6.7%, to $1,085.3 million in the
        nine months ended September 30, 2006, from $1,017.5 million in the same
        period of 2005. The increase was due to an increase in the pigment segment
        sales
        of $62.8 million and an increase in the electrolytic and other chemical product
        segment sales of $5.0 million. See further discussions below under
“ *Pigment
        Segment - Net Sales* ”
and
        “ *Electrolytic
        and Other Chemical Products Segment - Net Sales* .”
  *Gross
        Margin.* Gross
        margin for the nine months ended September 30, 2006, was $133.3 million compared
        to $169.9 million in the same period of 2005. As a percent of sales, gross
        margin declined to 12.3% from 16.7% in the same period of the prior year.
        Margins in the nine-month period were negatively impacted by our Australian
        and
        U.S. operations. In Australia, difficult mining conditions, a temporary shutdown
        of the Chandala kiln and unplanned maintenance and repairs in the pigment
        plant
        increased costs and reduced production which increased the per unit cost
        of
        sales. In our U.S. operations, higher process chemical, waste treatment and
        energy costs, as well as several unplanned production outages at our Savannah,
        Georgia, facility were the primary drivers for the cost increase. Higher
        process
        chemical costs were primarily attributable to increased pricing for chlorine,
        coke and caustic at our pigment plants in the United States. Feedstock costs
        were higher for our Henderson, Nevada, manganese dioxide operations. Energy
        costs, for all of our plants in the United States, were higher in 2006 compared
        to 2005 primarily due to higher realized natural gas prices.
 
 *Selling,
        General and Administrative Expenses.* Selling,
        general and administrative expenses increased $3.4 million in the nine
        months ended September 30, 2006, compared to the same period of 2005. The
        increase was primarily due to increased compensation and benefit costs,
        including costs related to stock-based awards, certain retention
        award programs, increased retirement and postretirement expense and other
        stand-alone company expenses, such as audit fees and infrastructure costs.
        Partially offsetting the increase was a decrease in
        employee incentive compensation related to cash bonuses resulting from lower
        projected payouts under the plan.
 
 *Provision
        for Environmental Remediation and Restoration, net of Reimbursements.* The
        provision for environmental remediation and restoration, net of reimbursements,
        was income of $20.4 million in the nine months ended September 30, 2006,
        compared to an expense of $17.0 million in the same period of 2005. The
        income recognized in 2006 consisted of a $20.5 million reimbursement settlement
        of our claim against the United States for contribution of past costs for
        ammonium perchlorate remediation at our Henderson, Nevada, facility. The provision in the nine months ended September 30, 2005, included $11.3 million
        related to the remediation of ammonium perchlorate contamination at the
        Henderson, Nevada, facility, and $5.6 million related to remediation of the
        former agricultural chemical, Jacksonville, Florida, site for soil removal
        and
        excavation (see Note 15 to the Condensed Consolidated and Combined
        Financial Statements included in Item 1 of this quarterly report on Form
        10-Q).
  *Interest
        and Debt Expense - Third Parties* .
        Interest and debt expense to outside parties was $36.9 million in the nine
        months ended September 30, 2006, compared to nil in the same period of the
        prior
        year. The increase was due to interest on the company’s unsecured notes and term
        loan facility that were entered into concurrent with the initial public offering
        (“IPO”) in November 2005, and the note payable issued in July 2006 to acquire
        additional mining tenements in Australia.
 
 *Other
        Income (Expense).* Other
        i ncome
        for
        the nine months ended September 30, 2006, was $10.5 million compared to expense
        of $12.1 million in the nine months ended September 30, 2005. The $22.6 million
        change was primarily due to the favorable effects of an increase in income
        from
        equity- method affiliates of $4.1 million, the elimination in 2006 of interest
        expense allocated from affiliates ($12.5 million), and net gains in 2006
        compared to net losses in 2005 attributable to changes in the exchange rates
        for
        both the euro and the Australian dollar ($8.7 million). Partially offsetting
        these favorable effects was a provision for litigation settlements in 2006
        of
        $3.7 million related to the Western Fertilizer case (see
        Note 15 to the Condensed Consolidated and Combined Financial Statements
        included in Item 1 of this quarterly report on Form 10-Q) .
 
 42
 *Income
        Tax Provision.* Our
        effective tax rate related to continuing operations in the nine-month period
        ending September 30, 2006, was 54.7% compared to 37.3% for the same period
        in
        2005. Our effective tax rate was higher in 2006 partially due to the
        taxation of foreign operations, in particular, non-deductible differences
        and
        forecasted losses in certain foreign jurisdictions in which our actual tax
        rate
        is below the U.S. statutory rate. The foreign losses in relation to U.S.
        income
        are proportionately greater for 2006, contributing to the higher effective
        tax
        rate. In addition, the 2005 rate contained a benefit from changes in prior-year
        estimates without a corresponding benefit in 2006. The treatment of stock-based
        compensation as required under our Tax Sharing Agreement entered into in
        connection with our separation from Kerr-McGee also contributed to the higher
        effective rate.
 
 *Loss
        from Discontinued Operations.* The loss
        from discontinued operations, net of taxes, in the nine months ended September
        30, 2006, was $25.0 million compared to $21.8 million in the same period
        of
        2005. In 2006, the loss from discontinued operations included $15.8 million,
        net
        of taxes, for legal fees and environmental costs associated with the company’s
        former forest products operations, including $11.0 million, net of tax, as
        a
        result of ongoing settlement discussions related to nonbinding mediation
        with
        the EPA regarding reimbursement for remediation of the former wood-treatment
        site in New Jersey. The loss also included environmental costs for the former
        West Chicago site, net of DOE reimbursements and net of taxes, of $2.4 million,
        and additional environmental costs of $3.8 million, net of taxes, for the
        proposed groundwater remediation solution at a former nuclear fuels plant
        in
        Crescent, Oklahoma. The 2005 loss includes $11.4 million loss, net of tax,
        on
        our former forest products operations, including an environmental provision
        of
        $3.2 million, net of taxes, for additional soil volumes related to the Sauget,
        Illinois wood-treatment plant. The 2005 loss also includes a $5.2 million
        environmental provision, net of taxes, for pond closure, rock placement and
        surface water channels at the Ambrosia Lake, New Mexico, site associated
        with
        our former uranium mining and milling operations. (See Note 15 to the
        Condensed Consolidated and Combined Financial Statements included in Item
        1 of
        this quarterly report on Form 10-Q).
 
 *Pigment
          Segment*
 
 *Net
        Sales.* Net
        sales increased $62.8 million, or 6.7%, in the nine months ended September
        30, 2006, compared to the same period in 2005. Higher sales volumes accounted
        for $59.1 million of the increase in net sales with pricing contributing
        the
        remainder. Pricing was negatively affected by approximately $8.0 million
        related
        to exchange rate changes on the euro between the first nine months of 2006
        and
        the same period of 2005. Higher sales volumes in 2006 were primarily
        attributable to strong sales demand due
        to
        improving economic conditions in Europe and continued strength in the
        Asia/Pacific region
 
 *Operating Profit.* Operating profit in the nine months ended September 30, 2006, was $51.5 million,
        a decrease of $28.7 million from $80.2 million in the same period of
        2005. Offsetting the favorable effects of the increased sales volumes mentioned
        above, operating results were negatively impacted $46.3 million due to higher
        production and distribution costs. Operating profit was negatively impacted
        by
        our Australian and U.S. operations. In Australia, difficult mining conditions,
        a
        temporary shutdown of the Chandala kiln and unplanned maintenance and repairs
        in
        the pigment plant increased costs and reduced production which increased
        per
        unit costs of sale. In our U.S. operations, higher process chemical, waste
        treatment and energy costs, as well as several unplanned production outages
        at
        our Savannah, Georgia, facility were the primary drivers for the cost increase.
        Higher process chemical costs were primarily attributable to increased pricing
        for chlorine, coke and caustic at our pigment plants in the United States.
        Energy costs for all of our plants in the United States were higher in 2006
        compared to 2005 primarily due to higher realized natural gas prices.
 
 Operating
        costs in our European operations were slightly higher in local currency,
        but
        were more than offset by the favorable impact of exchange rate changes on
        the
        euro between the first nine months of 2006 and the same period in 2005. Selling,
        general and administrative expenses decreased $6.9
        million primarily due to a decrease
        in employee incentive compensation related to cash bonuses resulting from
        lower
        projected payouts under the plan, partially offset by increased other
        compensation and benefit costs, including costs related to stock-based awards,
        certain retention
        award programs, and increased retirement and postretirement
        expense.
 
 43
 *Electrolytic
        and Other Chemical Products Segment*
 
 *Net
        Sales.* Net
        sales in the first nine months of 2006 were $78.3 million, an increase of
        $5.0 million compared to the same period of 2005. Pricing remains ahead of
        last year as sales prices were increased early in the year in an effort to
        offset rising costs. Volumes for manganese dioxide on a year-to-date basis
        are
        behind the volumes in the same period of last year despite a strong first
        quarter . The
        reduction is due to lower customer demand as 2005 and early 2006 were favorably
        impacted by hurricanes Rita and Katrina. I ncreased
        market share in sodium chlorate and new opportunities in other products as
        well
        as the continued commercialization and ramp up of the lithium manganese product
        line more than offset the lower volumes in manganese dioxide.
 
 *Operating
        Profit.* Operating profit in the nine months ended September 30, 2006, was
        $24.8 million, compared with an operating loss of $6.3 million in the
        same period of 2005. The $31.1 million improvement was primarily due to the
        $20.5 million recovery of past environmental remediation costs from the United
        States in 2006 compared to a net environmental provision of $11.3 million
        in
        2005 related to ammonium perchlorate remediation associated with our Henderson,
        Nevada, facility. In 2006, increased manufacturing costs primarily related
        to
        feedstock costs and energy, more than offset the sales gains during the year. ****
 
 **Financial
          Condition and Liquidity**
 
 *Overview* .
        The
        following table provides certain information useful in the analysis of our
        financial condition and liquidity:
 
 **September
                  30, 2006**
              
              **December
                  31, 2005****(Millions
                  of dollars)**Current
                  ratio(1)
              
              
              2.0:1
              
              
              2.1:1Cash
                  and cash equivalents
              
              $
              56.2
              
              $
              69.0Working
                  capital(2)
              
              
              386.7
              
              
              404.4Total
                  assets(3)
              
              
              1,913.4
              
              
              1,758.3Long-term
                  debt
              
              
              553.2
              
              
              548.0Stockholders’
                  equity(4)
              
              
              510.9
              
              
              489.0
  (1)
              Represents a ratio of current assets to current
                liabilities. (2)
              Represents excess of current assets over current
                liabilities. (3)
              Effective
                  March 30, 2006, the company assumed certain U.S. benefit plan obligations
                  and received a transfer of related assets which resulted in increases
                  in
                  total assets of $122.8 million, stockholders’ equity of $2.1 million and
                  total liabilities of $120.7 million.
 (4)
              It
                  is estimated that our adoption of a new accounting standard as
                  of December
                  31, 2006, will result in a reduction of stockholders’ equity of
                  approximately $80 million ($120 million on a pretax basis). See
                  “*New/Revised Accounting Standards*”
                  below.
 
 Our
        primary cash needs are for working capital, capital expenditures, environmental
        cash expenditures and debt service under the senior secured credit facility
        and
        the unsecured notes. We believe that our cash flows from operations, together
        with borrowings under our revolving credit facility, will be sufficient to
        meet
        these cash needs for the foreseeable future. However, our ability to generate
        cash is subject to general economic, financial, competitive, legislative,
        regulatory and other factors that are beyond our control. If our cash flows
        from
        operations are less than we expect, we may need to raise additional capital.
        We
        may also require additional capital to finance our future growth and
        development, implement additional marketing and sales activities, and fund
        our
        ongoing research and development activities.
 
 Cash
        and
        cash equivalents at September 30, 2006, consisted of $40.1 million, which
        was held in the United States, and $16.1 million held in other countries.
 
  44
  Prior
        to
        the IPO, we participated in Kerr-McGee’s centralized cash management system and
        relied on Kerr-McGee to provide necessary cash financing. The related cash
        activity between us and Kerr-McGee has been reflected as net transfers with
        affiliates within financing activities in our condensed consolidated and
        combined statement of cash flows. Additionally, as discussed below under
        “ *Cash
        Flows from Operating Activities,* ”
prior
        to the IPO, certain expenditures related to our operations were paid by
        Kerr-McGee on our behalf and, therefore, did not affect cash flows from
        operating, investing and financing activities reported in our condensed
        consolidated and combined statement of cash flows. As such, the amounts of
        cash
        and cash equivalents, as well as cash flows from operating, investing and
        financing activities in our condensed consolidated and combined financial
        statements presented as of or for the nine months ended September 30, 2005,
        are
        not representative of the amounts that would have been required or generated
        by
        us as a stand-alone company.
 
 We
        have
        an interest in The Landwell Company LP (“Landwell”), a limited partnership
        formed to market or develop land in the Henderson, Nevada, area. Landwell
        entered into an agreement in late 2004 to sell to Centex Homes approximately
        2,200 contiguous acres of land in Henderson for eventual use as a new, mixed-use
        master planned community. The agreement contains conditions to closing that
        are
        generally typical in sales of large tracts of undeveloped land. We have been
        advised by Landwell’s general partner that it is doubtful that closing
        conditions on a significant portion of the land under contract will be satisfied
        in the fourth quarter of 2006, as previously projected. It is currently
        projected that closing will not occur until the first half of 2007 after
        zoning
        approval has been granted by the City of Henderson. This large parcel under
        contract, in addition to other parcels available for sale by Landwell or
        under
        contract, are in the vicinity of our Henderson facility, where we are in
        the
        preliminary stage of exploring the possible sale of 100% owned acreage
        considered surplus for plant operations. Land sale proceeds before taxes
        could
        be as much as $50 million in 2007. Cash flows resulting from the above described
        agreement with Centex Homes, net of taxes, are required to be used to pay
        down
        outstanding debt under our senior secured credit facility.
 
 *Credit
        Facilities and Debt Covenants.* **** In
        November 2005, our wholly-owned subsidiary, Tronox Worldwide LLC, entered
        into a
        senior secured credit facility. This facility consists of a $200 million
        six-year term loan facility and a five-year multicurrency revolving credit
        facility of $250 million. This facility is unconditionally and irrevocably
        guaranteed by Tronox and Tronox Worldwide LLC’s direct and indirect material
        domestic subsidiaries. The facility is secured by a first priority security
        interest in certain domestic assets, including certain property and equipment,
        inventory and receivables, of Tronox Worldwide LLC and the guarantors of
        the
        senior secured credit facility. The facility is also secured by pledges of
        the
        equity interest in Tronox Worldwide LLC and Tronox Worldwide LLC’s direct and
        indirect domestic subsidiaries and up to 65% of the voting and 100% of the
        non-voting equity interests in Tronox Worldwide LLC’s direct foreign
        subsidiaries and the direct foreign subsidiaries of the guarantors of the
        senior
        secured credit facility.
  The
        terms
        of the credit agreement provide for customary representations and warranties,
        affirmative and negative covenants, and events of default. We are also required
        to maintain compliance with the following financial covenants in 2006 (in
        each
        case, as defined in the agreement):
  •
              
              Consolidated
                  Total Leverage Ratio of no more than 3.75:1•
              
              Consolidated
                  Interest Coverage Ratio of at least 2:1•
              
              Limitation
                  on Capital Expenditures
  We
        were
        in compliance with these financial covenants at September 30, 2006. However,
        since the covenants become more restrictive beginning in the first quarter
        of
        2007, there can be no assurance that we will be in compliance with such
        covenants in the future. Future compliance with the covenants may be adversely
        affected by various economic, financial and industry factors. Noncompliance
        with
        the covenants would constitute an event of default under the credit agreement,
        allowing the lenders to accelerate repayment of any outstanding borrowings
        and/or to terminate their commitments to the credit facility. In the event
        of
        any future noncompliance with any covenants, we would seek to negotiate
        amendments to the applicable covenants or to obtain waivers from our
        lenders.
 
 Also
        in
        November, 2005, our wholly-owned subsidiaries, Tronox Worldwide LLC and Tronox
        Finance Corp., issued $350 million in aggregate principal amount of 91⁄2% senior
        unsecured notes due 2012 in a private offering concurrent with the IPO. During
        the second quarter of 2006, the company registered these notes with the
        Securities and Exchange Commission (“SEC”) and subsequently completed an
        exchange of all notes and guarantees for publicly tradable notes and guarantees
        having substantially identical terms, on July 14, 2006. These notes are
        guaranteed by our material direct and indirect wholly-owned domestic
        subsidiaries.
 
 45
 *Cash
        Flows from Operating Activities.* Cash
        flows from operating activities for the nine months ended September 30, 2005,
        exclude expenditures of $44.9 million for general corporate expenses, employee
        benefits and net interest costs associated with our present and discontinued
        operations which were paid by Kerr-McGee on our behalf. Therefore, reported
        amounts are not representative of cash flows from operating activities we
        will
        generate or use as a stand-alone company. While such costs are reflected
        in our
        condensed consolidated and combined statement of operations because they
        were
        allocated to us by Kerr-McGee, they did not result in cash outlays by us.
        As a
        stand-alone company, we expect costs and expenses of this nature will require
        the use of our cash and other sources of liquidity. Excluding any one-time
        adjustments (such as the implementation of FAS 123R,  changes in our cash
        bonus accrual and our on-going companywide effort to reduce cash costs, called
        Project Cornerstone), we expect that our general corporate expenses may be
        $15
        million to $20 million greater on an annual basis than we have incurred
        historically, which will further reduce our cash flows from operating activities
        as compared to historical experience. Cash flows from operating activities
        for
        the nine months ended September 30, 2005, also exclude $165 million paid
        by
        Kerr-McGee on our behalf to repurchase pigment receivables upon termination
        of
        an accounts receivable monetization program.
 
 Cash
        flows from operating activities for the nine months ended September 30, 2006,
        were $62.9 million compared to $13.0 million for the same period in
        2005. The $49.9 million increase in cash flows from operating activities
        for the nine months ended September 30, 2006, was due primarily to the impact
        of
        the termination of the accounts receivable monetization program in 2005 and
        a
        decrease in inventories for the nine months in 2006 compared to an increase
        for
        the same period in 2005. This was partially offset by interest payments on
        long-term debt arrangements, timing of income tax payments, a decrease in
        environmental reimbursement receipts and cash bonus program payments in 2006.
        Termination of our accounts receivable monetization program resulted in an
        extension of the collection period for accounts receivable arising from pigment
        sales compared to the collection period of receivables prior to program
        termination. This had a one-time impact, in the 2005 period, of reducing
        our
        cash flows from operating activities related to the increase in our accounts
        receivable.
 
 *Cash
        Used in Investing Activities.* Net cash
        used in investing activities for the nine months ended September 30, 2006,
        was
        $59.8 million, a decrease of $178.0 million compared to the same period in
        2005.
        The decrease is due primarily to the collection of repurchased accounts
        receivable of $165.0 million contributed to us by Kerr-McGee in the 2005
        period
        as well as increased capital expenditures. Capital expenditures were higher
        due
        to significant ongoing projects that include changes to the Uerdingen, Germany,
        pigment facility to convert waste to a saleable product and reduce raw material
        costs, upgrading the oxidation line at the Botlek, Netherlands, facility
        and
        process improvements at the Hamilton, Mississippi, facility for the purpose
        of
        producing a new grade of pigment for use in architectural paints.
 
 Capital
        expenditures for the 2006 annual period are forecasted to be $90 million
        ($9.4
        million of which is noncash activity in the third quarter of 2006, related
        to
        the Australian mining tenements). The process and technology improvement
        projects at Uerdingen, Botlek and Hamilton described above comprise the majority
        of the total 2006 annual forecast.
 
 *Cash
        Used in Financing Activities.* Net cash
        used in financing activities was $9.0 million for the nine months ended
        September 30, 2006, and $81.2 million for the same period in 2005. The decrease
        in use of funds primarily resulted from becoming a stand-alone and
        self-supported company. The cash used for the nine months ended September
        30,
        2006, consisted of payments related to our long-term debt of $4.9 million
        and
        the payment of $4.1 million in dividends, while the net financing activity
        for
        the same period in 2005 represented funds transferred to
        Kerr-McGee.
  46
  ***Commitments
        and Contractual Agreements***
 
 In
        the
        normal course of business, we enter into operating leases, purchase obligations
        and borrowing arrangements. Operating leases primarily consist of rental
        of rail
        cars and production equipment. Aggregate payments under these borrowings
        and
        contracts are summarized in the following table:
 
 **Payments
                  Due By Year****Type
                  of Obligation**
              
              **Total**
              
              **2007**
                **-2008**
              
              **2009**
                **-2010**
              
              **After**
                **2010****(Millions
                  of dollars)**Long-term
                  debt, including current portion
              
              $
              556.3
              
              $
              6.3
              
              $
              5.7
              
              $
              544.3Interest
                  payments on current and long-term debt
              
              
              267.3
              
              
              95.9
              
              
              94.8
              
              
              76.6Operating
                  leases
              
              
              46.7
              
              
              17.8
              
              
              11.8
              
              
              17.1Purchase
                  obligations:Ore
                  contracts
              
              
              475.6
              
              
              299.2
              
              
              137.0
              
              
              39.4Other
                  purchase obligations
              
              
              425.6
              
              
              249.7
              
              
              154.7
              
              
              21.2Total
              
              $
              1,771.5
              
              $
              668.9
              
              $
              404.0
              
              $
              698.6
 
 Tronox
        Western Australia Pty Ltd, a wholly-owned subsidiary of the company, completed
        the purchase of a 50% undivided interest in additional mining tenements and
        related mining assets in July 2006. The tenements provide additional heavy
        mineral resources to be processed by our joint venture, Tiwest Joint Venture,
        and provide feedstock for our pigment operations. The company acquired the
        mine
        tenements by entering into an eight-year note payable agreement. As a result,
        the company recorded noncash capital additions during the third quarter of
        2006
        of approximately $9.4 million and has additional debt outstanding of $8.3
        million, following a $1.1 million principal payment made during the third
        quarter. The debt requires scheduled payments through 2014, with an early
        payment option at the end of 2007. Interest is accrued at the rate of 13.26%
        per
        annum on the outstanding balance as of the first day of January of each calendar
        year and is calculated through December 31, with payments made on July 28
        of
        each year in which an installment is due.
 
 At
        October 31, 2006, we had outstanding letters of credit of approximately $67.6
        million. These letters of credit have been granted to us by financial
        institutions to support our environmental cleanup costs, insurance claims
        and
        miscellaneous operational and severance requirements.
  We
        are
        obligated under an employee benefits agreement with Kerr-McGee to maintain
        the
        Material Features (as defined in the employee benefits agreement) of the
        U.S.
        postretirement plan without change for a period of three years following
        the
        Distribution date of March 30, 2006. Company contributions in 2006 to this
        plan
        are expected to be in the range of approximately $3.0 million to $4.0 million.
        This is lower than the previous estimate as of December 31, 2005, primarily
        due
        to the anticipated timing of claims submission. Over the next one to two
        years,
        it is expected that annual claims will range from $9.0 million to $10.0
        million.
 
 **Critical
        Accounting Policies**
 
 The
        following description of critical accounting policies is not intended to
        be an
        all-inclusive discussion of the uncertainties considered and estimates made
        by
        management in applying benefit plan accounting principles and policies. Results
        may vary significantly if different policies were used or required and if
        new or
        different information becomes known to management. There were no other
        significant changes in critical accounting policies from those previously
        disclosed in the company’s latest annual report on Form 10-K.
 
 ***U.S.
          Benefit Plans***
 
 As
        discussed under Note 13 to the Condensed Consolidated and Combined Financial
        Statements included in Item 1 of this quarterly report on Form 10-Q, as of
        March
        30, 2006, the company established certain U.S. benefit plans to cover our
        U.S.
        employees who previously participated in certain U.S. benefit plans sponsored
        by
        Kerr-McGee. In order to establish the appropriate amounts on the company’s
        balance sheet and estimate net periodic cost for the remainder of 2006, an
        actuarial analysis was performed based on assumptions developed by management.
        A
        brief description of the methodology used by management to develop certain
        significant assumptions is included below.
 
 47
 *Discount
        Rate* .
        The
        company selected a discount rate of 6% for its U.S. plans based on the results
        of a cash flow matching analysis which projected the expected cash flows
        of the
        plans using the March 31, 2006, Citigroup Pension Discount Curve.
 *Rate of Compensation Increases* .
          The
          company’s estimated rate of compensation increases was 3.5% based on the
          company’s long-term plans for compensation increases and expected economic
          conditions, including the effects of merit increases, promotions and general
          inflation.
 ** *Long-term Rate of Return.* The
          estimated long-term rate of return assumption used in the determination
          of net
          periodic cost for the period from March 31, 2006, through December 31,
          2006, was
          8%. This rate was developed after reviewing both a capital asset pricing
          model
          using historical data and a forecasted earnings model. An expected return
          analysis is performed which incorporates the current portfolio allocation,
          historical asset-class returns and an assessment of expected future performance
          using asset-class risk factors.
 
 The
        above
        assumptions are specific to us and our employee groups covered, and, therefore,
        are expected to be different from assumptions formed by Kerr-McGee for its
        plans. Application of such assumptions by us may result in different amounts
        of
        net periodic cost (benefit) recognized in our financial statements in future
        periods compared to the net periodic cost (benefit) historically allocated
        to us
        by Kerr-McGee. It is estimated that total U.S. net periodic cost for the
        annual
        2006 period will be approximately $10.6 million, which includes $3.3 million
        allocated from Kerr-McGee for the period January 1 through March 30, 2006.
        (See
        Note 13 to the Condensed Consolidated and Combined Financial Statements included
        in Item 1 of this quarterly report on Form 10-Q).
 
 *Unrecognized
        Gains (Losses) and Prior Service Cost.* Net
        periodic cost for the period March 31 through December 31, 2006, and future
        periods will include amortization of unrecognized items assumed at the time
        the
        company established the plans. According to the March 30, 2006, actuarial
        valuation, unrecognized prior service cost totaled $11.2 million and
        unrecognized actuarial loss was $94 million. The component of the 2006 net
        periodic cost related to amortization of unrecognized items for our newly
        established U.S. retirement plans is estimated to be approximately $2.8 million.
 
 The
        following table shows the impact of changes in the primary assumptions used
        in
        actuarial calculations associated with our pension and other postretirement
        benefits. The net periodic cost (benefit) amounts reflect the impact on net
        periodic cost (benefit) for the nine-month period ending December 31, 2006,
        following the establishment of our benefit plans. The projected benefit
        obligation (“PBO”) amounts reflect the impact on the projected benefit
        obligation as of March 30, 2006.
 
 **Pension
                  Benefits****(1)**
              
              **Other
                  Postretirement Benefits****Net
                  Periodic Cost (Benefit)**
              
              **Projected
                  Benefit Obligation**
              
              **Net
                  Periodic Cost (Benefit)**
              
              **Accumulated
                  Postretirement Benefit Obligation**(**Millions
                  of dollars)**Increase
                  of 0.5% in —Discount
                  rates
              
              $
              (0.4
              )
              $
              (23.0
              )
              $
              (0.3
              )
              $
              (6.9
              )Expected
                  return on plan assets
              
              
              (1.7
              )
              
              —
              
              
              —
              
              
              —Rate
                  of compensation increase
              
              
              0.5
              
              
              4.4
              
              
              —
              
              
              0.1Decrease
                  of 0.5% in —Discount
                  rates
              
              $
              2.0
              
              $
              25.5
              
              $
              0.3
              
              $
              7.5Expected
                  return on plan assets(2)
              
              
              1.7
              
              
              —
              
              
              —
              
              
              —Rate
                  of compensation increase
              
              
              (0.5
              )
              
              (4.4
              )
              
              —
              
              
              (0.1
              )Change
                  in health care cost trend rate of 1%Increase
              
              $
              —
              
              $
              —
              
              $
              1.0
              
              $
              9.1Decrease
              
              
              —
              
              
              —
              
              
              (0.8
              )
              
              (7.8
              )
  (1)
            The
                sensitivity analysis reflects only the impact of assumption changes
                on our
                U.S. qualified retirement plan. While Tronox sponsors other retirement
                plans for its U.S. employees, the PBO for the U.S. qualified retirement
                plan at March 31, 2006, represented 98% of the total PBO for all
                U.S.
                retirement plans.  (2)
            If
                the actual return on plan assets was one percent lower than the expected
                return, our expected cash contributions to our pension and other
                postretirement benefit plans would not significantly
                change.  48
 
 **New/Revised
        Accounting Standards**
 
 *Deferred
        Stripping Costs.* On
        January 1, 2006, the company adopted Emerging Issues Task Force ("EITF")
        Issue
        No. 04-6, "Accounting for Stripping Costs Incurred during Production in the
        Mining Industry" in relation to the mining activities conducted by the company
        and its partner under our joint venture arrangement in Australia. EITF Issue
        No.
        04-6 addresses the accounting for stripping costs incurred during the production
        phase of a mine and requires treatment of these costs as variable production
        costs that should be included as a component of inventory to be recognized
        in
        costs applicable to sales in the same period as the revenue from the sale
        of
        inventory. As a result, capitalization of post-production stripping costs
        is
        appropriate only to the extent product inventory exists at the end of a
        reporting period. The guidance allows application through recognition of
        a
        cumulative effect adjustment to opening retained earnings in the period of
        adoption, with no charge to current earnings for prior periods. The results
        for
        prior periods have not been restated. The cumulative effect adjustment reduced
        opening retained earnings by $1.4 million (net of taxes) and eliminated the
        $2.2
        million net deferred stripping asset from the balance sheet. Adoption of
        EITF
        Issue No. 04-6 did not have a material impact on the company’s cash position,
        net cash from operations, income from continuing operations or net income
        for
        the three-month and nine-month periods ended September 30, 2006.
 
 *Uncertain
        Tax Positions.* In July
        2006, the FASB issued Interpretation No. 48 (“FIN No. 48”), “Accounting for
        Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
        Accounting for Income Taxes” (“FAS No. 109”). FIN No. 48 is effective for fiscal
        years beginning after December 15, 2006, and clarifies the accounting for
        uncertainty in income taxes recognized in an enterprise's financial statements.
        FAS No. 109 does not prescribe a recognition threshold or measurement attribute
        for the financial statement recognition and measurement of a tax position
        taken
        in a tax return. FIN No. 48 clarifies the application of FAS No. 109 by defining
        criteria that an uncertain tax position must meet in order to be recognized
        in
        an enterprise's financial statements. The interpretation also provides guidance
        on measurement, derecognition, classification, interest and penalties,
        accounting in interim periods, disclosure and transition. The company is
        currently assessing the financial statement impact of adopting this
        interpretation.
 
 *Benefit
        Plans.* In
        September 2006, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for
        Defined Benefit Pension and Other Postretirement Plans - an Amendment of FASB
        Statements No. 87, 88, 106 and 132(R)” (“FAS No. 158”). FAS No. 158 requires an
        employer that is a business entity and sponsors one or more single employer
        benefit plans to, among other things, recognize the funded status (the
        difference between the benefit obligation and the fair value of plan assets)
        in
        its balance sheet and recognize as a component of other comprehensive income,
        net of tax, previously unrecognized gains or losses and prior service costs
        or
        credits. As a result, some new disclosures will be required and some of the
        previous disclosures will no longer be required. FAS No. 158 is effective
        no
        later than the end of the company’s fiscal year ended December 31, 2006. Based
        on preliminary estimates received from the company’s actuary, it
        is
        estimated that the company will recognize a reduction of approximately $120
        million ($80 million after tax) in stockholders’ equity, which represents
        currently unrecognized net actuarial losses and prior service costs.
 
  49
  **Item
        3.**  **Quantitative
        and Qualitative Disclosures About Market Risk**
 
 We
        are
        exposed to market risks, including credit risk, from fluctuations in foreign
        currency exchange rates and natural gas prices. To reduce the impact of these
        risks on earnings and to increase the predictability of cash flows, from
        time to
        time, we enter into derivative contracts, primarily forward contracts to
        buy and
        sell foreign currencies. We also enter into financial derivative instruments
        that generally fix the commodity prices to be paid for a portion of our
        forecasted natural gas purchases. These contracts have been designated and
        qualified as cash flow hedges. The following table presents the forecasted
        percentage hedged and the weighted average price per MMBtu for contracts
        outstanding at September 30, 2006, to purchase natural gas for our U.S.
        operations.
 
 **U.S.
                  Natural gas purchases****%
                  hedged**
              
              **Average**
                **Contract
                  Price**
                **$/MMBtu**Q4,
                  2006
              
              
              81
              %
              $
              8.32Q1,
                  2007
              
              
              44
              %
              $
              9.40Q2,
                  2007
              
              
              22
              %
              $
              8.46
 
 **Item
        4.**  **Controls
        and Procedures**
  As
        of the
        end of the period covered by this report, an evaluation was carried out under
        the supervision and with the participation of the company’s management,
        including its Chief Executive Officer and Chief Financial Officer, of the
        effectiveness of the company’s disclosure controls and procedures pursuant to
        Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer
        and Chief Financial Officer concluded that the company’s disclosure controls and
        procedures are effective in alerting them in a timely manner to material
        information relating to the company (including its consolidated subsidiaries)
        and required to be included in the company’s periodic SEC filings.
  The
        company consolidated its financial applications used for revenue and finished
        goods inventory into a common worldwide system, including certain of its
        significant processes during the period covered by this report. The
        consolidation included copying existing data from the financial applications
        previously used by our European operations to the financial applications
        used by
        our U.S. and Asia/Pacific operations. The company relies upon these financial
        applications as part of its system of internal control over financial reporting.
        General controls were in place during this transition to ensure integrity
        of the
        hardware, software and data. Tests were performed to substantiate data
        integrity, application performance, financial reports and effectiveness of
        the
        processes. The company has continually performed its internal controls over
        financial reporting. As a result, management believes the change did not
        materially affect the company’s internal control over financial reporting.
  There
        were
        no other changes in the company’s internal control over financial reporting that
        occurred during the third quarter of 2006 that have materially affected or
        are
        reasonably likely to materially affect the company’s internal control over
        financial reporting.
   50
  **SPECIAL
        NOTE REGARDING FORWARD-LOOKING STATEMENTS**
 
 Forward-Looking
        Statements
 
 Statements
        in this quarterly report regarding the company’s or management’s intentions,
        beliefs or expectations, or that otherwise speak to future events, are
“forward-looking statements” within the meaning of the U.S. Private Securities
        Litigation Reform Act of 1995. These forward-looking statements include those
        statements preceded by, followed by or that otherwise include the words
“believes,” “will,” “expects,” “anticipates,” “intends,” “estimates,”
“projects,” “target,” “budget,” “goal,” “plans,” “objective,” “outlook,”
“should,” or similar words. Future results and developments discussed in these
        statements may be affected by numerous factors and risks, such as the accuracy
        of the assumptions that underlie the statements, the market value of Tronox’s
        products, demand for consumer products for which Tronox’s businesses supply raw
        materials, the financial resources of competitors, changes in laws and
        regulations, the ability to respond to challenges in international markets,
        including changes in currency exchange rates, political or economic conditions
        in areas where Tronox operates, trade and regulatory matters, general economic
        conditions, and other factors and risks identified in the company’s U.S. SEC
        filings. Actual results and developments may differ materially from those
        expressed or implied in this quarterly report. The company does not undertake
        to
        update forward-looking statements to reflect the impact of circumstances
        or
        events that arise after the date the forward-looking statement was made.
        Investors are urged to consider closely the disclosures in this quarterly
        report
        on Form 10-Q, and risk factors in the company’s latest annual report on Form
        10-K and other SEC filings.
 
  51
  **PART
        II - OTHER INFORMATION**
 
 **Item
        1.  Legal Proceedings**
 
 ***Savannah
        Plant Emissions***
 
 On
        September 8, 2003, the Environmental Protection Division of the Georgia
        Department of Natural Resources issued a unilateral Administrative Order
        to our
        subsidiary, Tronox Pigments (Savannah) Inc., claiming that the Savannah
        plant exceeded emission allowances provided for in the facility’s Title V
        air permit. On September 19, 2005, the Environmental Protection Division
        rescinded the Administrative Order and filed a Withdrawal of Petition for
        Hearing on Civil Penalties. Accordingly, the proceeding on administrative
        penalties has been dismissed, without prejudice. However, the Environmental
        Protection Division’s most recent actions do not resolve the alleged violations,
        and representatives of Tronox Pigments (Savannah) Inc., the Environmental
        Protection Division and the Environmental Protection Agency (“EPA”) are engaged
        in discussions to resolve the existing air permit disputes and potential
        civil
        penalties. We believe that any penalties related to this matter are not likely
        to have a material adverse effect on us.
 
 ***New
        Jersey Wood-Treatment Site***
 
 Tronox
        LLC was named in 1999 as a PRP under CERCLA at a former wood-treatment site
        in
        New Jersey at which the EPA is conducting a cleanup. On April 15, 2005,
        Tronox LLC received a letter from the EPA asserting it is liable under CERCLA
        as
        a former owner or operator of the site and demanding reimbursement of costs
        expended by the EPA at the site. The letter made demand for payment of past
        costs in the amount of approximately $179 million, plus interest, though
        the EPA has informed Tronox LLC that as of May 31, 2006, project costs are
        approximately $226 million, plus other future costs and interest. Tronox
        LLC did
        not operate the site, which had been sold to a third party before Tronox
        LLC
        succeeded to the interests of a predecessor in the 1960s. The predecessor
        also
        did not operate the site, which had been closed down before it was acquired
        by
        the predecessor. Based on historical records, there are substantial
        uncertainties about whether or under what terms the predecessor assumed any
        liabilities for the site. In addition, although it appears there may be other
        PRPs to whom notice has been given, the company does not know whether the
        other
        PRPs have any valid defenses to liability for the site or whether the other
        PRPs
        have the financial resources necessary to meet their obligations, if proven.
        Tronox LLC and EPA have submitted the matter to nonbinding mediation that
        could
        lead to a settlement or resolution of EPA’s demand. In the event the mediation
        process does not lead to an acceptable solution, Tronox LLC intends to
        vigorously defend against the EPA’s demand.
 
 ***Forest
        Products***
  Between
        December 31, 2002, and May 2, 2005, approximately 250 lawsuits (filed
        on behalf of approximately 5,100 claimants) were filed against Tronox LLC
        in
        connection with the former wood-treatment plant in Columbus, Mississippi.
        Substantially all of these lawsuits are pending in the U.S. District Court
        for
        the Northern District of Mississippi and have been consolidated for pretrial
        and
        discovery purposes. In December 2005, Tronox LLC entered into settlement
        agreements to resolve up to 879 of the Columbus claims. In June 2006, over
        400
        plaintiffs were involuntarily dismissed. In addition, a suit filed by the
        Maranatha Faith Center against Tronox LLC and Tronox Worldwide LLC on February
        18, 2000, relates to the former wood-treatment plant in Columbus and is pending
        in the Circuit Court of Lowndes County, Mississippi. Between September 9,
        2004, and February 23, 2005, three lawsuits (filed on behalf of 64 claimants)
        were filed against Tronox LLC in connection with a former wood-treatment
        plant
        located in Texarkana, Texas. Two of the Texarkana lawsuits that were filed
        in
        Oklahoma (on behalf of 30 claimants) have been dismissed on jurisdictional
        grounds. However, in December 2005, five plaintiffs (two of whom were in
        the
        dismissed Oklahoma case) filed a new lawsuit in a Texas federal court, and
        in
        July 2006, five plaintiffs (three of whom were in the dismissed Oklahoma
        cases)
        filed a new suit in Texas. Between January 3, 2005, and July 26, 2005,
        35 lawsuits (filed on behalf of approximately 4,600 claimants) were filed
        against Tronox LLC and Tronox Worldwide LLC in connection with the former
        wood-treatment plant in Avoca, Pennsylvania. All of these lawsuits seek recovery
        under a variety of common law and statutory legal theories for personal injuries
        and/or property damages allegedly caused by exposure to and/or release of
        creosote, a chemical used in the wood-treatment process. The company currently
        believes that the unresolved claims relating to the Columbus, Texarkana and
        Avoca plants are without substantial merit and is vigorously defending against
        them.
 
 52
 For
        a
        discussion of other legal proceedings and contingencies, including proceedings
        related to our environmental liabilities, see Note 15 to the Condensed
        Consolidated and Combined Financial Statements included in Item 1 of this
        quarterly report on Form 10-Q.
  
 **Item
        6.  Exhibits**
  **Exhibit
        No.**
  
 31.1
              Certification
                  Pursuant to 15 U.S.C. Section 7241, asadopted
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  200231.2
              Certification
                  Pursuant to 15 U.S.C. Section 7241, asadopted
                  pursuantto
                  Section 302 of the Sarbanes-Oxley Act of 200232.1
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 200232.2
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002
 
  53
  
 
 **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized on November 14, 2006.
 
 **TRONOX
                  INCORPORATED**By:
              /s/
                Thomas W. AdamsName:
                  Thomas W. AdamsTitle:
                  Chief Executive OfficerBy:
              /s/
                Mary MikkelsonName:
                  Mary MikkelsonTitle:
                  Senior Vice President and ChiefFinancial
                  Officer (Principal Financialand
                  Accounting Officer)