RESULTS OF OPERATIONS

Business Overview

We are primarily a holding company. We operate through our wholly-owned and majority-owned subsidiaries, including NL Industries, Inc., Kronos Worldwide, Inc., CompX International, Inc., Tremont LLC and Waste Control Specialists LLC ("WCS"). Kronos (NYSE: KRO), NL (NYSE: NL) and CompX (NYSE: CIX) each file periodic reports with the Securities and Exchange Commission ("SEC").

We have three consolidated operating segments:

• Chemicals - Our chemicals segment is operated through our majority ownership of Kronos. Kronos is a leading global producer and marketer of value-added titanium dioxide pigment products ("TiO2"). TiO2 is used for a variety of manufacturing applications, including plastics, paints, paper and other industrial products.

• Component Products - We operate in the component products industry through our majority ownership of CompX. CompX is a leading global manufacturer of security products, precision ball bearing slides and ergonomic computer support systems used in the office furniture, transportation, tool storage and a variety of other industries. CompX is also a leading manufacturer of stainless steel exhaust systems, gauges and throttle controls for the performance marine industry.

• Waste Management - WCS is our wholly-owned subsidiary which owns and operates a West Texas facility for the processing, treatment, storage and disposal of hazardous, toxic and certain types of low-level radioactive waste. WCS obtained a byproduct disposal license in 2008 and is in the process of constructing the byproduct disposal facility, which is expected to begin disposal operations in September 2009. In January 2009 WCS received a low-level radioactive waste disposal permit, and construction of the low-level radioactive waste facility is currently expected to begin in the fourth quarter of 2009, following the completion of some pre-construction licensing and administrative matters, and is expected to be operational in the fourth quarter of 2010.

General

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in this Quarterly Report on Form 10-Q that are not historical in nature are forward-looking in nature about our future that are not statements of historical fact. Statements in this report including, but not limited to, statements found in Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that represent our beliefs and assumptions based on currently available information. In some cases you can identify these forward-looking statements by the use of words such as "believes," "intends," "may," "should," "could," "anticipates," "expected" or comparable terminology, or by discussions of strategies or trends. Although we believe the expectations reflected in such forward-looking statements are reasonable, we do not know if these expectations will be correct. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. While it is not possible to identify all factors, we continue to face many risks and uncertainties. Among the factors that could cause our actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the SEC including, but not limited to, the following:

· Future supply and demand for our products;

· The cyclicality of certain of our businesses (such as Kronos' TiO2 operations);

· Customer inventory levels (such as the extent to which Kronos' customers may, from time to time, accelerate purchases of TiO2 in advance of anticipated price increases or defer purchases of TiO2in advance of anticipated price decreases;

· Changes in our raw material and other operating costs (such as energy costs);

· General global economic and political conditions (such as changes in the level of gross domestic product in various regions of the world and the impact of such changes on demand for, among other things, TiO2);

· Competitive products and substitute products;

· Possible disruption of our business or increases in the cost of doing business resulting from terrorist activities or global conflicts;

· Customer and competitor strategies;

· The impact of pricing and production decisions;

· Competitive technology positions;

· The introduction of trade barriers;

· Restructuring transactions involving us and our affiliates;

· Potential consolidation or solvency of our competitors;

· Demand for high performance marine components;

· The ability of our subsidiaries to pay us dividends (such as Kronos' suspension of its dividend in 2009);

· Uncertainties associated with new product development;

· Fluctuations in currency exchange rates (such as changes in the exchange rate between the U.S. dollar and each of the euro, the Norwegian krone, the Canadian dollar and the New Taiwan dollar);

· Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime and transportation interruptions);

· The timing and amounts of insurance recoveries;

· Our ability to renew, amend, refinance or establish credit facilities;

· Our ability to maintain sufficient liquidity;

· The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters;

· The ultimate ability to utilize income tax attributes or changes in income tax rates related to such attributes, the benefit of which has been recognized under the more likely than not recognition criteria (such as Kronos' ability to utilize its German net operating loss carryforwards);

· Environmental matters (such as those requiring compliance with emission and discharge standards for existing and new facilities, or new developments regarding environmental remediation at sites related to our former operations);

· Government laws and regulations and possible changes therein (such as changes in government regulations which might impose various obligations on present and former manufacturers of lead pigment and lead-based paint, including NL, with respect to asserted health concerns associated with the use of such products);

· The ultimate resolution of pending litigation (such as NL's lead pigment litigation, environmental and other litigation and CompX's patent litigation);

· Our ability to comply with covenants contained in our revolving bank credit facilities; and

· Possible future litigation.

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

Operations Overview

Quarter Ended June 30, 2008 Compared to the Quarter Ended June 30, 2009 -

We reported a net loss attributable to Valhi stockholders of $19.0 million, or $.16 per diluted share, in the second quarter of 2009 compared to a net loss attributable to Valhi stockholders of $.2 million, or nil per diluted share, in the second quarter of 2008. Our diluted loss per share increased from 2008 to 2009 primarily due to the net effects of:

· lower operating income from each of our Chemicals, Component Products and Waste Management Segments in 2009;

· a gain from the second closing of a litigation settlement in 2009;

· interest income related to an escrow fund recognized by NL in 2008; and

· an income tax benefit recognized by our Chemicals Segment in 2008.

Our net loss attributable to Valhi stockholders in 2009 includes (i) a gain of $.05 per diluted share (net of tax and noncontrolling interest) as a result of the second close of a litigation settlement and (ii) income of $.01 per diluted share related to certain insurance recoveries we recognized.

Our net loss attributable to Valhi stockholders in 2008 includes (i) income of $.04 per diluted share (net of noncontrolling interest) related to the adjustment of certain German income tax attributes within our Chemicals Segment,
(ii) interest income of $.02 per diluted share related to certain escrow funds of NL and (iii) income of $.01 per diluted share related to certain insurance recoveries we recognized.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2009 -

We reported a net loss attributable to Valhi stockholders of $39.0 million, or $.34 per diluted share, in the first six months of 2009 compared to a net loss attributable to Valhi stockholders of $6.1 million, or $.05 per diluted share, in the first six months of 2008. Our diluted loss per share increased from 2008 to 2009 primarily due to the net effects of:

· lower operating income from each of our Chemicals, Component Products and Waste Management Segments in 2009;

· gain from a litigation settlements in 2009;

· a gain from a sale of a business in 2009;

· interest income related to an escrow fund recognized by NL in 2008; and

· an income tax benefit recognized by our Chemicals Segment in 2008.

Our net loss attributable to Valhi stockholders in 2009 includes (i) a gain of $.07 per diluted share as a result of a litigation settlement, (ii) a gain of $.04 per diluted share gain from the sale of a business, (iii) a gain of $.05 per diluted share (net of tax and noncontrolling interest) as a result of the second close of a litigation settlement and (iv) income of $.01 per diluted share related to certain insurance recoveries we recognized.

Our net loss attributable to Valhi stockholders in 2008 includes (i) income of $.04 per diluted share (net of noncontrolling interest) related to the adjustment of certain German income tax attributes within our Chemicals Segment,
(ii) interest income of $.02 per diluted share related to certain escrow funds of NL and (iii) income of $.01 per diluted share related to certain insurance recoveries we recognized.

Current Forecast for 2009 -

We expect to report a higher net loss for 2009 as compared to the net loss in 2008 primarily due to the net effects of:
· lower expected operating income from our Chemicals Segment. In late 2008, as a result of the decrease in global demand, our Chemicals Segment experienced a build up in inventory levels. In order to decrease inventory levels and improve liquidity, we implemented production curtailments. Through these curtailments we have successfully reduced our Chemicals Segment's inventory levels and increased our liquidity, although the resulting curtailments led to a net loss due to the large amount of unabsorbed fixed production costs we charged to expense as incurred; and

· recording a lower gain from litigation settlements.

Segment Operating Results - 2008 Compared to 2009 -

Chemicals -

We consider TiO2 to be a "quality-of-life" product, with demand affected by gross domestic product ("GDP") and overall economic conditions in our markets located in various regions of the world. Over the long-term, we expect demand for TiO2 will grow by 2% to 3% per year, consistent with our expectations for the long-term growth in GDP. However, even if we and our competitors maintain consistent shares of the worldwide market, demand for TiO2 in any interim or annual period may not change in the same proportion as the change in GDP, in part due to relative changes in the TiO2 inventory levels of our customers. We believe our customers' inventory levels are partly influenced by their expectation for future changes in market TiO2 selling prices. The majority of our TiO2 grades and substantially all of our production are considered commodity pigment products, we compete for sales primarily on the basis of price.

The factors having the most impact on our reported operating results are:
· TiO2 average selling prices;

· Currency exchange rates (particularly the exchange rate for the U.S. dollar relative to the euro, Norwegian krone and the Canadian dollar);

· TiO2 sales and production volumes; and

· Manufacturing costs, particularly raw materials, maintenance and energy-related expenses.

The key performance indicators for our Chemicals Segment are our TiO2 average selling prices, our levels of TiO2 sales and production volumes. Ti02 selling prices generally follow industry trends and prices will increase or decrease generally as a result of competitive market pressure.

                               Three months ended June 30,                      Six months ended June 30,
                           2008             2009         % Change          2008            2009         % Change
                                                          (Dollars in millions)

Net sales               $    391.8       $    282.1            (28 )%   $    724.4       $   530.1            (27 )%
Cost of sales                333.3            268.4            (19 )         609.3           512.8            (16 )

Gross margin            $     58.5       $     13.7            (77 )    $    115.1       $    17.3            (85 )

Operating income
(loss)                  $     10.8       $    (20.0 )                   $     21.8       $   (45.5 )

Percent of net sales:
 Cost of sales                  85 %             95 %                           84 %            97 %
 Gross margin                   15                5                             16               3
 Operating income                3               (7 )                            3              (9 )

Ti02 operating
statistics:
 Sales volumes*                141              114            (19 )%          269             211            (22 )%
 Production volumes*           133               87            (34 )           265             151            (43 )

Percent change in net
sales:
 Ti02 product pricing                                            1 %                                            3 %
 Ti02 sales volumes                                            (19 )                                          (22 )
 Ti02 product mix                                               (3 )                                           (3 )
 Changes in currency
  exchange rates                                                (7 )                                           (5 )

   Total                                                       (28 )%                                         (27 )%

* Thousands of metric tons

Net Sales - Our Chemicals Segment's sales decreased 28% in the second quarter of 2009 compared to the second quarter of 2008, and decreased 27% in the first six months of 2009 as compared to the same period in 2008, due to a decline in sales volumes and the unfavorable impact of changes in foreign currency exchange rates, which we estimate decreased sales by approximately $26 million in the quarter and $38 million in the year-to-date period. Average TiO2 selling prices increased slightly in the second quarter and year-to-date periods as compared to the same periods in 2008. We expect average selling prices in the second half of 2009 to be higher than average selling prices in the first half of 2009, as discussed below. The decline in sales volumes is primarily due to the impact of lower demand in our markets resulting from the current economic conditions.

Cost of Sales - Our Chemicals Segment's cost of sales percentage increased in the second quarter and first six months of 2009 compared to the same periods last year primarily due to the unfavorable effects of the significant amount of unabsorbed fixed production costs resulting from reduced production volumes. Our TiO2 production volumes decreased 34% in the second quarter and 43% in the first six months of 2009 due to temporary plant curtailments during the second quarter and first six months of 2009 that resulted in approximately $30 million and $80 million of unabsorbed fixed production costs which were charged directly to cost of sales in the second quarter and first six months of 2009, respectively. The unabsorbed fixed cost charge was partially offset by $9.3 million and $17.5 million in decreased maintenance costs in the second quarter and first six months of 2009, respectively, and currency fluctuations (primarily the euro).

Operating Income (Loss) - Our Chemicals Segment's operating income declined in the second quarter and first six months of 2009 primarily due to the decrease in our gross margin and decreased sales volumes. Our gross margin fell to 5% in the second quarter of 2009 compared to 15% in the second quarter of 2008 and 3% in the first six months of 2009 compared to 16% in the first six months of 2008 as a result of lower sales volumes and higher manufacturing costs resulting from lower production volumes. We estimate the effect of changes in foreign currency exchange rates positively affected our Chemicals Segment's operating income by $20 million and $48 million in the second quarter and first six months of 2009, respectively, as compared to the same periods in 2008.

Currency Exchange Rates - Our Chemicals Segment has substantial operations and assets located outside the United States (primarily in Germany, Belgium, Norway and Canada). The majority of sales generated from our foreign operations are denominated in foreign currencies, principally the euro, other major European currencies and the Canadian dollar. A portion of our sales generated from our foreign operations is denominated in the U.S. dollar. Certain raw materials used worldwide, primarily titanium-containing feedstocks, are purchased in U.S. dollars, while labor and other production costs are purchased primarily in local currencies. Consequently, the translated U.S. dollar value of our foreign sales and operating results are subject to currency exchange rate fluctuations which may favorably or adversely impact reported earnings and may affect the comparability of period-to-period operating results. Overall, we estimate that fluctuations in foreign currency exchange rates had the following effects on our Chemicals Segment's sales and operating loss in 2009 as compared to 2008.

                     Three months ended      Six months ended
                       June 30, 2009           June 30, 2009
                          vs. 2008                vs. 2008
                         Increase (decrease) in millions
Impact on:
 Net sales          $                (26 )   $             (38 )
 Operating income                     20                    48

Outlook - We currently expect our Chemicals Segment's results of operations will continue to be lower in 2009 as compared to 2008 primarily due to higher production costs resulting in part from reduced production volumes during the first six months of the year and the resulting unabsorbed fixed production costs. While we operated our Chemicals Segment's facilities at approximately 58% of capacity during the first half of 2009, we expect our operating rates will be near full capacity for the second half of the year. We expect our Chemicals Segment to report an operating loss in 2009 as compared to reporting operating income in 2008 due to lower expected income from operations in 2009.

In response to the worldwide economic slowdown and weak consumer confidence, we reduced our production volumes in 2009 in order to reduce our finished goods inventory, improve our liquidity and match production to market demand. Overall industry pigment demand is expected to be lower in 2009 as compared to 2008 as a result of worldwide economic conditions. While we currently expect our sales volumes in 2009 will be lower as compared to 2008, we expect to gain market share following anticipated reductions in industry capacity due to competitors' permanent plant shutdowns. We expect demand will improve somewhat in the second half of the year over the first six months of 2009. During the second and third quarters of 2009, we and our competitors have announced price increases, intended to be implemented in the second half of 2009. As a result, although our average selling prices during the first half of 2009 have declined from year-end 2008 levels, we anticipate prices will rise during the second half of 2009, which should result in slightly higher average worldwide TiO2 selling prices for all of 2009 as compared to 2008. To mitigate the negative impact of our significantly reduced production volumes, we are reducing our operating costs where possible, including maintenance expenditures and personnel costs.

Our expectations as to the future of the TiO2 industry are based upon a number of factors beyond our control, including worldwide growth of gross domestic product, competition in the marketplace, solvency and continued operation of competitors, unexpected or earlier than expected capacity additions or reductions and technological advances. If actual developments differ from our expectations, our results of operations could be unfavorably affected.

We believe that our annual attainable production capacity for 2009 is approximately 532,000 metric tons. We expect our production volumes in 2009 will be significantly lower than our attainable capacity. We currently expect we will operate at 70% to 80% of our attainable production capacity in 2009. Our expected capacity utilization levels could be adjusted upwards or downwards to match changes in demand for our product.

Component Products -

The key performance indicator for our Component Products Segment is operating
income margin.

                                  Three months ended June 30,                      Six months ended June 30,
                             2008             2009          % Change          2008             2009         % Change
                                                             (Dollars in millions)

Net sales                 $     43.7       $     29.2             (33 )%   $     84.2       $     57.7            (31 )%
Cost of sales                   32.7             23.0             (30 )          63.8             46.7            (27 )

Gross margin              $     11.0       $      6.2             (43 )%   $     20.4       $     11.0            (46 )%

Operating income (loss)   $      4.5       $      (.9 )                    $      7.5       $     (1.9 )

Percent of net sales:
 Cost of sales                    75 %             79 %                            76 %             81 %
 Gross margin                     25               21                              24               19
 Operating income                 10               (3 )                             9               (3 )

Net Sales - Our Component Products Segment's sales decreased in the second quarter and first six months of 2009 as compared to the same periods of 2008 primarily due to lower order rates from our customers resulting from unfavorable economic conditions in North America. We estimate the unfavorable effect of relative changes in currency exchange rates decreased our net sales by $.4 million and $.9 million in the second quarter and first six months of 2009, respectively, as compared to the same periods in 2008.

Cost of Sales - Our Component Products Segment's cost of sales percentage increased 4% in the second quarter of 2009 and 5% in the first six months of 2009 as compared to the same periods in 2008 due to reduced coverage of overhead and fixed manufacturing costs from lower sales volume and the related under-utilized capacity partially offset by cost reductions implemented in response to lower sales and the impact of relative changes in currency exchange rates.

Operating Income (Loss) - Our Component Products Segment had an operating loss in the second quarter and first six months of 2009 primarily due to lower operating margins discussed above, a $.7 million write-down of assets held for sale in the second quarter of 2009 and $.9 million in patent litigation expenses incurred in the second quarter of 2009 partially offset by the impact of relative changes in foreign currency exchange rates. See Notes 5 and 13 to the Condensed Consolidated Financial Statements.

Currency Exchange Rates - Our Component Products Segment has substantial operations and assets located outside the United States in Canada and Taiwan. The majority of sales generated from our foreign operations are denominated in the U.S. dollar, with the rest denominated in foreign currencies, principally the Canadian dollar and the New Taiwan dollar. Most of our raw materials, labor and other production costs for foreign operations are denominated primarily in local currencies. Consequently, the translated U.S. dollar values of our foreign sales and operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect comparability of period-to-period operating results. Overall, we estimate that fluctuations in currency exchange rates had the following effects on our Component Products Segment's sales and operating loss in 2009 as compared to 2008.

                     Three months ended      Six months ended
                       June 30, 2009           June 30, 2009
                          vs. 2008                vs. 2008
                         Increase (decrease) in millions
Impact on:
 Net sales          $                (.4 )   $             (.9 )
 Operating income                     .6                   1.3

Outlook - Demand for our Component Products Segment's products continues to be slow and unstable as customers react to the condition of the overall economy. While changes in market demand are not within our control, we are focused on the areas we can impact. Staffing levels are continuously being evaluated in relation to sales order rates resulting in headcount adjustments, to the extent possible, to match staffing levels with demand. We expect our lean manufacturing and cost improvement initiatives to continue to positively impact our productivity and result in a more efficient infrastructure that we can leverage when demand growth returns. Additionally, we continue to seek opportunities to gain market share in markets we currently serve, expand into new markets and develop new product features in order to mitigate the impact of reduced demand as well as broaden our sales base.

In addition to challenges with overall demand, volatility in the cost of raw materials is ongoing. We currently expect these costs to continue to be volatile for the remainder of 2009. If raw material prices increase, we may not be able . . .