UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





þ           ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For
the fiscal year ended December 31, 2007





Commission
file number 1-14368










Titanium
      Metals Corporation(Exact
      name of registrant as specified in its
charter)





Delaware
            13-5630895(State
      or other jurisdiction of incorporation or organization)
            (IRS
      employer identification no.)





5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240


(Address
of principal executive offices, including zip code)





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





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





Common Stock ($.01
      par
      value)
            New York Stock
      Exchange(Title
      of each class)
            (Name
      of each exchange on which
registered)





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





63⁄4% Series A Convertible
      Preferred Stock ($.01 par
      Value)(Title
      of class)





Indicate by check mark if the
Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.  Yes þ No o





Indicate by check mark if the
Registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.  Yes o No þ





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





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





Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer,a non-accelerated fileror a smaller
reporting company(as defined in Rule 12b-2 of
the Act).


Large accelerated filerþ                                                      Accelerated filer o                                Non-accelerated
filer o                                           Smaller
reporting company o





Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the
Act).


Yes o No þ





The
aggregate market value of the 87.8 million shares of voting stock held by
nonaffiliates of Titanium Metals Corporation as of June 30, 2007 approximated
$2.8 billion.  There are no shares of non-voting stock
outstanding.  As of February 21, 2008, 183,077,755 shares of common
stock were outstanding.





Documents
incorporated by reference:





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





1














Forward-Looking
Information





The
statements contained in this Annual Report on Form 10-K (“Annual Report”) that
are not historical facts, including, but not limited to, statements found in the
Notes to Consolidated Financial Statements and in Item 1 - Business, Item 1A –
Risk Factors, Item 2 – Properties, Item 3 - Legal Proceedings and Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”), are forward-looking statements that represent our
beliefs and assumptions based on currently available
information.  Forward-looking statements can generally be identified
by the use of words such as “believes,” “intends,” “may,” “will,” “looks,”
“should,” “could,” “anticipates,” “expects” or comparable terminology or by
discussions of strategies or trends.  Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we do
not know if these expectations will prove to be correct.  Such
statements by their nature involve substantial risks and uncertainties that
could significantly affect expected results.  Actual future results
could differ materially from those described in such forward-looking statements,
and we disclaim any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.  Among the factors that could cause actual
results to differ materially are the risks and uncertainties discussed in this
Annual Report, including risks and uncertainties in those portions referenced
above and those described from time to time in our other filings with the
Securities and Exchange Commission (“SEC”) which include, but are not limited
to:





·
            the
      cyclicality of the commercial aerospace
  industry;


·
            the
      performance of aerospace manufacturers and us under our long-term
      agreements;


·
            the
      existence or renewal of certain long-term
  agreements;


·
            the
      difficulty in forecasting demand for titanium
  products;


·
            global
      economic and political conditions;


·
            global
      productive capacity for titanium;


·
            changes
      in product pricing and costs;


·
            the
      impact of long-term contracts with vendors on our ability to reduce or
      increase supply;


·
            the
      possibility of labor disruptions;


·
            fluctuations
      in currency exchange rates;


·
            fluctuations
      in the market price of marketable
securities;


·
            uncertainties
      associated with new product or new market
  development;


·
            the
      availability of raw materials and
services;


·
            changes
      in raw material prices and other operating costs (including energy
      costs);


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


·
            competitive
      products and strategies; and


·
            other
      risks and uncertainties.





Should
one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or
expected.








PART
I





ITEM
1:  BUSINESS





General.  Titanium Metals
Corporation was formed in 1950 and was incorporated in Delaware in
1955.  Unless otherwise indicated, references in this report to “we”,
“us” or “our” refer to TIMET and its subsidiaries, taken as a
whole.  We are one of the world’s leading producers of titanium melted
and mill products.  We are the only producer with major titanium
production facilities in both the United States and Europe, the world’s
principal markets for titanium consumption.  We are currently the
largest U.S. producer of titanium sponge, a key raw material, and a major
recycler of titanium scrap.





Titanium
was first manufactured for commercial use in the 1950s.  Titanium’s
unique combination of corrosion resistance, elevated-temperature performance and
high strength-to-weight ratio makes it particularly desirable for use in
commercial and military aerospace applications where these qualities satisfy
essential design requirements for certain critical parts such as wing supports
and jet engine components.  While aerospace applications have
historically accounted for a substantial portion of the worldwide demand for
titanium, other end-use applications for titanium in military and industrial
markets have continued to develop, including the use of titanium-based alloys in
armor plating, structural components, chemical plants, power plants,
desalination plants and pollution control equipment.  Demand for
titanium is also increasing in emerging markets with diverse uses including oil
and gas production installations, automotive, geothermal facilities and
architectural applications.





Our
products include titanium sponge, melted products, mill products and industrial
fabrications.  The titanium industry is comprised of several
manufacturers that, like us, produce a relatively complete range of titanium
products and a significant number of producers worldwide that manufacture a
limited range of titanium mill products.





Our
long-term strategy is to maximize the value of our core aerospace business while
expanding our presence in non-aerospace markets and developing new applications
and products.  In the near-term, we intend to continue to utilize our
operating cash flow and capital resources to support increased levels of
investment in the expansion of our productive capacity and the expansion of our
secure third-party conversion capabilities in response to the industry’s
long-term favorable demand trend.  Opportunities to expand our
existing production and conversion capacities will continue to be accomplished
through internal expansion and long-term third-party arrangements, as well as
potential joint ventures and acquisitions.




2




Titanium
industry.We
develop certain industry estimates based on our extensive experience within the
titanium industry as well as information obtained from publicly available
external resources (e.g., United States Geological Survey, International
Titanium Association and Japan Titanium Society).  We estimate that we
accounted for approximately 20% of 2006 and 16% of 2007 worldwide industry
shipments of titanium mill products and approximately 7% of 2006 and 6% of 2007
worldwide titanium sponge production.  The following chart illustrates
our estimates of aggregate industry mill product shipments over the past ten
years:





Mill
Product Shipments by Industry Sector


(Volumes
Exclude Shipments within China and Russia)









The
cyclical nature of the commercial aerospace sector has been the principal driver
of the historical fluctuations in the performance of most titanium product
producers.  Over the past 30 years, the titanium industry has had
various cyclical peaks and troughs in mill product shipments.  Since
1998, titanium mill product demand in the military, industrial and emerging
market sectors has increased, primarily due to the continued development of
innovative uses for titanium products in these other industries.  Over
the last several years we, and the industry as a whole, have experienced
significantly increased demand.  We estimate that industry shipments
approximated 79,000 metric tons in 2006 and 89,000 metric tons in 2007, with
each year setting a new industry shipment record, and we currently expect 2008
total industry mill product shipments to increase by approximately 4% to 12% as
compared to the estimated 12% growth in 2007.





Demand
for titanium products within the commercial aerospace sector is derived from
both jet engine components (e.g., blades, discs, rings and engine cases) and
airframe components (e.g., bulkheads, tail sections, landing gear, wing supports
and fasteners).  The commercial aerospace sector has a significant
influence on titanium companies, particularly mill product
producers.  Deliveries of titanium generally precede aircraft
deliveries by about one year, and our business cycle generally correlates to
this timeline, although the actual timeline can vary considerably depending on
the titanium product.  We estimate that 2008 industry mill product
shipments into the commercial aerospace sector will increase 6% to 12% from
2007.





Our
business is more dependent on commercial aerospace demand than is the overall
titanium industry.  We shipped approximately 60% of our mill products
to the commercial aerospace sector in 2007, whereas we estimate approximately
44% of the overall titanium industry’s mill products were shipped to the
commercial aerospace sector in 2007 levels.





3


The Airline Monitor, a
leading aerospace publication, traditionally issues worldwide forecasts for
commercial aircraft deliveries each January and July, approximately one-third of
which is expected to be required by the U.S. over the next 20
years.  The Airline
Monitor’s most recently issued forecast (January 2008)estimates deliveries of
large commercial aircraft (aircraft with over 100 seats) totaled 888 (including
191 twin aisle aircraft) in 2007, and the following table summarizes the
forecasted deliveriesof large commercial
aircraft over the next five years:





Forecasted
      deliveries
            
            
            %
      increase (decrease)
              over
      previous yearYear
            
            Total
            
            
            Twin
      aisle
            
            
            Total
            
            
            Twin
      aisle2008
            
            
            1,005
            
            
            
            217
            
            
            
            13.2
            %
            
            
            13.6
            %2009
            
            
            1,130
            
            
            
            280
            
            
            
            12.4
            %
            
            
            29.0
            %2010
            
            
            1,220
            
            
            
            370
            
            
            
            8.0
            %
            
            
            32.1
            %2011
            
            
            1,190
            
            
            
            350
            
            
            
            (2.5
            )%
            
            
            (5.4
            )%2012
            
            
            985
            
            
            
            330
            
            
            
            (17.2
            )%
            
            
            (5.7
            )%





The
latest forecast fromThe
Airline Monitor reflects a 6% increase in forecasted deliveries over the
next five years compared to the July 2007 forecast over the next five years, in
large part due to the record level of new orders placed for Boeing and Airbus
models over the past three years.  Total order bookings for Boeing and
Airbus in 2007 were 2,863 planes, a significant increase over the record
bookings in 2005 and 55% higher than the bookings in 2006.  The Airline Monitorforecasts aggregate new
orders in 2008 will be lower than 2007, but the strong bookings in 2005 through
2007 have increased the order backlog for both Boeing and Airbus, which will be
delivered over the next several years.





Changes
in the economic environment and the financial condition of airlines can result
in rescheduling or cancellation of orders.  Accordingly, aircraft
manufacturer backlogs are not necessarily a reliable indicator of near-term
business activity, but may be indicative of potential business levels over a
longer-term horizon.  The latest forecast from The Airline Monitor estimates
Airbus’ firm order backlog at 904 twin aisle planes and 2,517 single aisle
planes and Boeing’s firm order backlog at 1,351 twin aisle planes and 2,045
single aisle planes.  Although The Airline Monitor’s latest
forecast reflects a reduced near-term delivery forecast for the Boeing 787
commercial aircraft, Boeing has not yet quantified the overall impact of their
recently announced delay.





Twin
aisle planes (e.g., Boeing 747, 767, 777 and 787 and Airbus A330, A340, A350 and
A380) tend to use a higher percentage of titanium in their airframes, engines
and parts than single aisle planes (e.g., Boeing 737 and 757 and Airbus A318,
A319 and A320), and newer models tend to use a higher percentage of titanium
than older models.  Additionally, Boeing generally uses a higher
percentage of titanium in its airframes than Airbus.  For example,
based on information we receive from airframe and engine manufacturers and other
industry sources, we estimate that approximately 59 metric tons, 45 metric tons
and 18 metric tons of titanium are purchased for the manufacture of each Boeing
777, 747 and 737, respectively, including both the airframes and
engines.  Based on these sources, we estimate that approximately 32
metric tons, 18 metric tons and 12 metric tons of titanium are purchased for the
manufacture of each Airbus A340, A330 and A320, respectively, including both the
airframes and engines.





At
year-end 2007, a total of 189 firm orders had been placed for the Airbus A380, a
program officially launched in 2000 with its first delivery in
late-2007.  Based on information we receive from airframe and engine
manufacturers and other industry sources, we estimate that approximately 146
metric tons of titanium (120 metric tons for the airframe and 26 metric tons for
the engines) will be purchased for each A380
manufactured.  Additionally, at year-end 2007, a total of 817 firm
orders have been placed for the Boeing 787, a program officially launched in
April 2004 with anticipated first deliveries in 2009.  Although the
787 will contain more composite materials than a typical Boeing aircraft, based
on these sources, we estimate that approximately 134 metric tons of titanium
(125 metric tons for the airframe and 9 metric tons for the engines) will be
purchased for each 787 manufactured.  We believe significant
additional titanium will be required in the early years of 787 manufacturing
until the program reaches maturity.  Additionally, during 2006, Airbus
officially launched the A350 XWB program, which is a major derivative of the
Airbus A330, with first deliveries scheduled for 2012/2013.  As of
December 31, 2007, a total of 320 firm orders had been placed for the A350
XWB.  These A350 XWBs will use composite materials and new engines
similar to those used on the Boeing 787 and are expected to require
significantly more titanium as compared with earlier Airbus
models.  Based on these sources, our preliminary estimates are that at
least 74 metric tons (65 metric tons for the airframe and 9 metric tons for the
engines) will be purchased for each A350 XWB manufactured.  However,
the final titanium buy weight may change as the A350 XWB is still in the design
phase.





Titanium
shipments into the military sector are largely driven by government defense
spending in North America and Europe.  Military aerospace programs
were the first to utilize titanium’s unique properties on a large scale,
beginning in the 1950s.  Titanium shipments to military aerospace
markets reached a peak in the 1980s before falling to historical lows in the
early 1990s after the end of the Cold War.  In recent years, titanium
has become an accepted use in ground combat vehicles as well as in naval
vessels.  The importance of military markets to the titanium industry
is expected to continue to rise in coming years as defense spending budgets
increase in reaction to terrorist activities and global conflicts and to replace
aging conventional armaments.  Defense spending for most systems is
expected to remain strong until at least 2010.  Current and
anticipated future military strategy leading to light armament and mobility
favor the use of titanium due to light weight and improved ballistic
performance.





4


As the
strategic environment demands a greater need for global lift and mobility, the
U.S. military needs more airlift capacity and capability.  Airframe
programs are expected to drive the military market demand for titanium through
2015.  Several of today’s active U.S. military programs, including the
C-17 and F-15, are currently expected to continue in production through the end
of the current decade, while other programs, such as the F/A 18 and F-16, are
expected to continue into the middle of the next decade.  European
military programs also have active aerospace programs offering the possibility
for increased titanium consumption.  Production levels for the Saab
Gripen, Eurofighter Typhoon, Dassault Rafale and Dassault Mirage 2000 are all
forecasted to remain steady through the end of the decade.





In
addition to the established programs, newer U.S. programs offer growth
opportunities for increased titanium consumption.  The F/A-22 Raptor
was given full-rate production approval in April 2005.  Additionally,
the F-35 Joint Strike Fighter, now known as the Lightning II, is expected to
enter low-rate initial production in late 2008, with delivery of the first
production aircraft in 2010.  Although no specific delivery patterns
have been established, according to The Teal Group, a leading
aerospace publication, procurement is expected to extend over the next 30 to 40
years and may include as many as approximately 3,500 planes, including sales to
foreign nations.





Utilization
of titanium on military ground combat vehicles for armor appliqué and integrated
armor or structural components continues to gain acceptance within the military
market segment.  Titanium armor components provide the necessary
ballistic performance while achieving a mission critical vehicle performance
objective of reduced weight in new generation vehicles.  In order to
counteract increased threat levels globally, titanium is being utilized on
vehicle upgrade programs in addition to new builds.  Based on active
programs, as well as programs currently under evaluation, we believe there will
be additional usage of titanium on ground combat vehicles that will provide
continued growth in the military market sector.  In armor and
armament, we sell plate and sheet products for fabrication into appliqué plate
and reactive armor for protection of the entire ground combat vehicle as well as
the vehicle’s primary structure.





The
number of end-use markets for titanium has continued to expand
significantly.  Established industrial uses for titanium include
chemical plants, power plants, desalination plants and pollution control
equipment.  Rapid growth of the Chinese and other Southeast Asian
economies has brought unprecedented demand for titanium-intensive industrial
equipment.  In November 2005, we entered into a joint venture with
XI'AN BAOTIMET VALINOX TUBES CO. LTD. (“BAOTIMET”) to produce welded titanium
tubing in the Peoples Republic of China.  BAOTIMET's production
facilities are located in Xi'an, China, and production began in January
2007.





Titanium
continues to gain acceptance in many emerging market applications, including
transportation, energy (including oil and gas) and
architecture.  Although titanium is often more expensive than other
competing metals, over the entire life cycle of the application, we believe that
titanium is a less expensive alternative due to its durability, longevity and
overall environmental impact.  In many cases customers also find the
physical properties of titanium to be attractive from the standpoint of weight,
performance, design alternatives and other factors.  The oil and gas
market, a relatively new and potentially large growth area, utilizes titanium
for down-hole casing, critical riser components, tapered stress joints, fire
water systems and saltwater-cooling systems.  Additionally, as
offshore development of new oil and gas fields moves into the ultra deep-water
depths and as geothermal energy production expands, market demand for titanium’s
light-weight, high-strength and corrosion-resistance properties is creating new
opportunities for the material.  We have focused additional resources
on development of alloys and production processes to promote the expansion of
titanium use in this market and in other non-aerospace
applications.





Although
we estimate that emerging market demand presently represents only about 6% of
the 2007 total industry demand for titanium mill products, we believe emerging
market demand, in the aggregate, could grow at double-digit rates over the next
several years.  We have ongoing initiatives to actively pursue and
expand our presence in these markets.





Products and operations.  We
are a vertically integrated titanium manufacturer whose products
include:





(i)
            titanium
      sponge, the basic form of titanium metal used in titanium
      products;





(ii)
            melted
      products (ingot, electrodes and slab), the result of melting titanium
      sponge and titanium scrap, either alone or with various
      alloys;





(iii)
            mill
      products that are forged and rolled from ingot or slab, including long
      products (billet and bar), flat products (plate, sheet and strip) and
      pipe; and





(iv)
            fabrications
      (spools, pipe fittings, manifolds, vessels, etc.) that are cut, formed,
      welded and assembled from titanium mill
  products.





During
the past three years, all of our net sales were generated by our integrated
titanium operations (our “Titanium melted and mill products” segment), which is
our only business segment.  Business and geographic financial
information is included in Note 17 to the Consolidated Financial
Statements.





Titanium
sponge is the commercially pure, elemental form of titanium metal with a porous
and sponge-like appearance.  The first step in our sponge production
involves the combination of titanium-containing rutile ores (derived from beach
sand) with chlorine and petroleum coke to produce titanium
tetrachloride.  Titanium tetrachloride is purified and then reacted
with magnesium in a closed system, producing titanium sponge and magnesium
chloride as co-products.  Our titanium sponge production facility in
Henderson, Nevada uses vacuum distillation process (“VDP”) technology, which
removes the magnesium and magnesium chloride residues by applying heat to the
sponge mass while maintaining a vacuum in a chamber.  The combination
of heat and vacuum boils the residues from the sponge mass, and then the sponge
mass is mechanically pushed out of the distillation vessel, sheared and
crushed.  The residual magnesium chloride, a by-product of the VDP
process, is electrolytically separated and recycled.





Melted
products (ingot, electrodes and slab) are produced by melting sponge and
titanium scrap, either alone or with alloys, to produce various grades of
titanium products suited for the ultimate application of the
product.  By introducing other alloys such as vanadium, aluminum,
molybdenum, tin and zirconium, the melted titanium product is engineered to
produce quality grades with varying combinations of certain physical attributes
such as strength-to-weight ratio, corrosion-resistance and milling
compatibility.  Titanium ingot is a cylindrical solid shape that, in
our case, weighs up to 8 metric tons.  Titanium slab is a rectangular
solid shape that, in our case, weighs up to 16 metric tons.  The
melting process for ingot and slab is closely controlled and monitored utilizing
computer control systems to maintain product quality and consistency and to meet
customer specifications.  In most cases, we use our ingot and slab as
the intermediate material for further processing into mill
products.  However, we also sell ingot, electrodes and slab to third
parties.





5


Mill
products are forged or rolled from our melted products (ingot or
slab).  Mill products include long products (billet and bar), flat
products (plate, sheet and strip) and pipe.  Our mill products can be
further machined to meet customer specifications with respect to size and finish
using specified grades of material.





We send
certain products to outside vendors for further processing (e.g., certain
rolling, forging, finishing and other processing steps in the U.S., and certain
melting and forging steps in France) before being shipped to
customers.  In France, our primary processor is also a partner in our
70%-owned subsidiary, TIMET Savoie, S.A.  During 2006, we entered into
a 20-year conversion services agreement with Haynes International, Inc., whereby
Haynes will provide an annual output capacity of 4,500 metric tons of titanium
mill rolling services at their facility in Kokomo, Indiana until 2026, with our
option to increase the output capacity to 9,000 metric
tons.  Additionally, during 2007, we entered into a long-term
agreement with Carpenter Technologies, Inc., whereby Carpenter is providing us
dedicated annual forging capacity of 3,000 metric tons beginning in 2008 and
increasing to 8,900 metric tons for 2011 through at least 2019.  These
agreements provide us with long-term secure sources for processing round and
flat products, resulting in a significant increase in our existing mill product
conversion capabilities, which allows us to assure our customers of our
long-term ability to meet their needs.





During
the production process and following the completion of manufacturing, we perform
extensive testing on our products.  Sonic inspection as well as
chemical and mechanical testing procedures are critical to ensuring that our
products meet our customers’ high quality requirements, particularly in
aerospace component production.  We certify that our products meet
customer specification at the time of shipment for substantially all customer
orders.





Titanium
scrap is a by-product of the forging, rolling and machining operations, and
significant quantities of scrap are generated in the production process for
finished titanium products and components.  Scrap by-product from our
mill production processes is typically recycled and introduced into the melting
process once the scrap is sorted and cleaned.





Distribution.  We
sell our products through our own sales force based in the U.S. and Europe and
through independent agents and distributors worldwide.  We also own
eight service centers (five in the U.S. and three in Europe), which we use to
sell our products on a just-in-time basis.  The service centers
primarily sell value-added and customized mill products, including bar, sheet,
plate, tubing and strip.  We believe our service centers provide a
competitive advantage because of our ability to foster customer relationships,
customize products to suit specific customer requirements and respond quickly to
customer needs.





Raw
materials.  The principal raw materials used in the production
of titanium ingot, slab and mill products are titanium sponge, titanium scrap
and alloys.  The following table summarizes our 2007 raw material
usage requirements in the production of our melted and mill
products:





Percentage
      of total raw material requirementsInternally
      produced sponge
            
            24%Purchased
      sponge
            
            31%Titanium
      scrap
            
            39%Alloys
            
            6%Total
            
            100%





The
primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum
coke.  Rutile ore is currently available from a limited number of
suppliers around the world, principally located in Australia, South Africa and
Sri Lanka.  We purchase the majority of our supply of rutile ore from
Australia.  We believe the availability of rutile ore will be adequate
for the foreseeable future and do not anticipate any interruptions of our rutile
supplies.





We
currently obtain chlorine from a single supplier near our sponge plant in
Henderson.  While we do not anticipate any chlorine supply problems,
we have taken steps to mitigate this risk in the event of supply disruption,
including establishing the feasibility of certain equipment modifications to
enable us to utilize material from alternative chlorine suppliers or to purchase
and utilize an intermediate product which will allow us to eliminate the
purchase of chlorine if needed.  Magnesium and petroleum coke are
generally available from a number of suppliers.





We are
currently the largest U.S. producer of titanium sponge.  In 2007, we
completed an expansion of our existing premium-grade titanium sponge facility at
our Henderson plant.  This expansion increased our annual productive
sponge capacity to approximately 12,600 metric tons, an increase of
approximately 47% over the previous productive sponge capacity
levels.  During 2006 and 2007, other sponge producers also increased
capacity and began construction on additional capacity expansion
projects.  However, we do not know the degree to which quality and
cost of the sponge produced by our competitors will be comparable to the
premium-grade sponge we produce in our Henderson facility.  Because we
cannot supply all of our needs for all grades of titanium sponge internally, we
continue to purchase a portion of our raw material requirements from third
parties.  During 2007, we entered into new long-term sponge supply
agreements that require us to make minimum annual purchases, including
agreements with Toho Titanium Co., Ltd. and Ardor (UK) Ltd. (together with
its Ust-Kamenogorsk titanium plant in Kazakhstan, collectively referred to as
"UST").  In connection with our titanium sponge supply agreement with
UST, we are also providing toll melting conversion services to
UST.  These long-term supply agreements, together with our current
sponge production capacity in Henderson, provide us with a total annual
available sponge supply at levels ranging from 18,000 metric tons up to 28,000
metric tons through 2024.  These third-party agreements, in part,
allowed us to indefinitely delay construction of an additional premium-grade
titanium sponge facility.  Titanium melted and mill products require
varying grades of sponge and/or scrap depending on the customers’ specifications
and expected end use.  We will continue to purchase sponge from a
variety of sources in 2008, including those sources under existing supply
agreements, and we will continue to evaluate sources of sponge
supply.





The
titanium scrap we utilize for melted products is internally generated from our
melted and mill product production processes, purchased from certain of our
customers under contractual agreements or acquired in the open metals
market.  Such scrap consists of alloyed and commercially pure solids
and turnings.  Scrap obtained through customer arrangements provides a
“closed-loop” arrangement resulting in certainty of supply and cost
stability.  Externally purchased scrap comes from a wide range of
sources, including customers, collectors, processors and brokers.  Due
to our successful efforts to increase the volume of scrap obtained through
“closed-loop” arrangements, we only purchased 20% to 30% of our scrap
requirement from external suppliers in 2007.   We expect our
scrap purchases to remain at the same rate during 2008, despite the large
increase in our scrap consumption during 2007 as our electron beam cold hearth
(“EB”) melting activity increased.  We also occasionally sell scrap,
usually in a form or grade we cannot economically use in our production
operations.





6


Overall
market forces can significantly impact the supply or cost of externally produced
scrap, as the amount of scrap generated in the supply chain varies during the
titanium business cycles.  Early in the titanium cycle, the demand for
titanium melted and mill products begins to increase the scrap requirements for
titanium manufacturers which precedes the increase in scrap generation by
downstream customers and the supply chain.  The pressure on scrap
generation and the supply chain places upward pressure on the market price of
scrap.  The opposite situation occurs when demand for titanium melted
and mill products begins to decline, resulting in greater availability of supply
and downward pressure on the market price of scrap.  During the middle
of the cycle, scrap generation and consumption are in relative equilibrium,
minimizing disruptions in supply or significant changes in the available supply
and market prices for scrap.  Increasing or decreasing cycles tend to
cause significant changes in both the supply and market price of
scrap.  These supply chain dynamics result in selling prices for
melted and mill products which tend to correspond with the changes in raw
material costs.





All of
our major competitors also utilize scrap as a raw material in their melt
operations.  In addition to use by titanium manufacturers, titanium
scrap is used in steel-making operations during production of interstitial-free
steels, stainless steels and high-strength-low-alloy steels.  Prices
for all forms and grades of titanium scrap declined steadily during 2007, both
for scrap used by titanium manufacturers and steel makers.  Although
demand from both sectors was strong during 2007, a combination of increased
scrap generation by the titanium supply chain and increased sponge supply helped
reduce scrap prices to levels experienced prior to 2005.





Various
alloys used in the production of titanium products are also available from a
number of suppliers.  The recent high level of global demand for steel
products has also resulted in a significant increase in the costs for several
alloys, such as vanadium and molybdenum.  In 2007, the costs of these
alloys remained above historical levels of the past 10 years but were below the
cost peaks we experienced in the spring of 2005.  Although
availability is not expected to be a concern and we have negotiated certain
price and cost protection with suppliers and customers, alloy costs may continue
to fluctuate in the future.





Customer
agreements.  We have long-term agreements (“LTAs”) with certain
major customers, including, among others, The Boeing Company (“Boeing”),
Rolls-Royce plc and its German and U.S. affiliates (“Rolls-Royce”), United
Technologies Corporation (“UTC,” Pratt & Whitney and related companies),
Société Nationale d ́Etude et de Construction
de Moteurs d ́Aviation (“Snecma”), Wyman-Gordon Company (“Wyman-Gordon,” a
unit of Precision Castparts Corporation (“PCC”)) and VALTIMET
SAS.  These agreements expire at various times through 2017, are
subject to certain conditions and generally provide for (i) minimum market
shares of the customers’ titanium requirements or firm annual volume
commitments, (ii)
formula-determined prices (including some elements based onmarket
pricing) and (iii) price adjustments for certain raw material, labor and energy
cost fluctuations.  Generally, the LTAs require our service and
product performance to meet specified criteria and contain a number of other
terms and conditions customary in transactions of these
types.  Certain provisions of these LTAs have been amended in the past
and may be amended in the future to meet changing business
conditions.  Our 2007 sales revenues to customers under LTAs were 47%
of our total sales revenues.





In
certain events of nonperformance by us or the customer, the LTAs may be
terminated early.  Although it is possible that some portion of the
business would continue on a non-LTA basis, the termination of one or more of
the LTAs could result in a material effect on our business, results of
operations, financial position or liquidity.  The LTAs were designed
to limit selling price volatility to the customer, while providing us with a
committed volume base throughout the titanium industry business cycles and
certain mechanisms to adjust pricing for changes in certain cost
elements.





Markets and
customer base.  The following table summarizes our sales
revenue by geographical location:





Year
      ended December 31,2005
            
            
            2006
            
            
            2007(Percentage
      of total sales revenue)Sales
      revenue to customers within:North America
            
            
            56
            %
            
            
            59
            %
            
            
            58
            %Europe
            
            
            36
            %
            
            
            32
            %
            
            
            33
            %Other
            
            
            8
            %
            
            
            9
            %
            
            
            9
            %Total
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %





Further
information regarding our external sales, net income, long-lived assets and
total assets can be found in our Consolidated Balance Sheets, Consolidated
Statements of Income and Notes 5 and 17 to the Consolidated Financial
Statements.





Substantially
all of our sales and operating income are derived from operations based in the
U.S., the U.K., France and Italy.  More than half of our sales revenue
is from sales to the commercial aerospace sector.  We have LTAs with
several major aerospace customers, including Boeing, Rolls-Royce, UTC, Snecma
and Wyman-Gordon.  This concentration of customers may impact our
overall exposure to credit and other risks, either positively or negatively, in
that all of these customers may be similarly affected by the same economic or
other conditions.  The following table provides supplemental sales
revenue information:





Year
      ended December 31,2005
              
              
              2006
              
              
              2007(Percentage
      of total sales revenue)Ten largest
      customers
              
              
              44
              %
              
              
              49
              %
              
              
              49
              %Significant
      customers:PCC and PCC-related entities
      (1)
              
              
              13
              %
              
              
              11
              %
              
              
              11
              %Boeing (2)
              
              
              -
              
              
              
              -
              
              
              
              10
              %Customers under
    LTAs
              
              
              47
              %
              
              
              39
              %
              
              
              47
              %Significant customers under
      LTAs:Rolls-Royce (1)
      (2)
              
              
              12
              %
              
              
              -
              
              
              
              12
              %Boeing (2)
              
              
              -
              
              
              
              -
              
              
              
              10
              %(1)PCC
      and PCC-related entities serve as suppliers to Rolls-Royce. Certain
      sales we make directly to PCC and PCC-related entities also count towards,
      and are reflected in, the
                table above as sales to Rolls-Royce under the Rolls-Royce
    LTA.(2)Amounts
      excluded for periods when the revenue percentage is not at least
      10%.




7


The
primary market for titanium products in the commercial aerospace sector consists
of two major manufacturers of large commercial airframes, Boeing Commercial
Airplanes Group (a unit of Boeing) and Airbus, as well as manufacturers of large
civil aircraft engines including Rolls-Royce, General Electric Aircraft Engines,
Pratt & Whitney and Snecma.  We sell directly to these major
manufacturers, as well as to companies (including forgers such as Wyman-Gordon)
that use our titanium to produce parts and other materials for such
manufacturers.  Approximately 57% of our sales revenue in both 2005
and 2006 and 55% of sales revenue in 2007 was generated by sales into the
commercial aerospace sector.  If any of the major aerospace
manufacturers were to significantly reduce aircraft and/or jet engine build
rates from those currently expected, there could be a material adverse effect,
both directly and indirectly, on our business, results of operations, financial
position and liquidity.





The
market for titanium in the military sector includes sales of melted and mill
titanium products engineered for applications for military aircraft (both
engines and airframes), armor and component parts, armor appliqué on ground
combat vehicles and other integrated armor or structural
components.  We sell directly to many of the major manufacturers
associated with military programs on a global basis.  Approximately
12% in 2005, 15% in 2006 and 19% in 2007 of our sales revenue was generated by
sales into the military sector.





Outside
of commercial aerospace and military sectors, we manufacture a wide range of
products for customers in the chemical process, oil and gas, consumer, sporting
goods, automotive and power generation sectors.  Approximately 16% in
2005, 17% in 2006 and 16% in 2007 of our sales revenue was generated by sales
into industrial and emerging market sectors.





In
addition to melted and mill products, which are sold into all market sectors, we
sell certain other products such as titanium fabrications, titanium scrap and
titanium tetrachloride.  Sales of these other products represented 15%
of our sales revenue in 2005, 11% in 2006 and 10% in 2007.





Our
backlog has grown significantly from approximately $0.9 billion at December 31,
2005, to $1.1 billion at December 31, 2006 and to $1.0 billion at December 31,
2007.  Over 87% of the 2007 year-end backlog is scheduled for shipment
during 2008.  Our order backlog may not be a reliable indicator of
future business activity.





We have
explored and will continue to explore strategic arrangements in the areas of
product development, production and distribution.  We will also
continue to work with existing and potential customers to identify and develop
new or improved applications for titanium that take advantage of its unique
qualities.





Competition.  The
titanium metals industry is highly competitive on a worldwide basis. Producers
of melted and mill products are located primarily in the United States, Japan,
France, Germany, Italy, Russia, China and the United
Kingdom.  Additionally, producers of other metal products, such as
steel and aluminum, maintain forging, rolling and finishing facilities that
could be used or modified to process titanium products.  There are
also several producers of titanium sponge in the world, at least four of which
are currently in some stage of increasing sponge production
capacity.  We believe entry as a new producer of titanium sponge would
require a significant capital investment, substantial technical expertise and
significant lead time.





Our
principal competitors in the aerospace titanium market are Allegheny
Technologies Incorporated (“ATI”) and RTI International Metals, Inc. (“RTI”),
both based in the United States, and Verkhnaya Salda Metallurgical Production
Organization (“VSMPO”), based in Russia.  UNITI (a joint venture
between ATI and VSMPO), RTI and certain Japanese producers are our principal
competitors in the industrial and emerging markets.  We compete
primarily on the basis of price, quality of products, technical support and the
availability of products to meet customers’ delivery schedules.





In the
U.S. market, the increasing presence of foreign participants has become a
significant competitive factor.  Prior to 1993, imports of foreign
titanium products into the U.S. were not significant, primarily attributable to
relative currency exchange rates and, with respect to Japan, Russia, Kazakhstan
and Ukraine, import duties (including antidumping duties).  However,
since 1993, imports of titanium sponge, ingot and mill products, principally
from Russia and Kazakhstan, have increased and have had a significant
competitive impact on the U.S. titanium industry.  To the extent we
are able to take advantage of this situation by purchasing sponge from such
countries for use in our own operations, the negative effect of these imports on
us can be somewhat mitigated.





Generally,
imports of titanium products into the U.S. are subject to a 15% “normal trade
relations” tariff.  For tariff purposes, titanium products are broadly
classified as either wrought (billet, bar, sheet, strip, plate and tubing) or
unwrought (sponge, ingot and slab).  Because a significant portion of
end-use products made from titanium products are ultimately exported, we, along
with our principal competitors and many customers, actively utilize the
duty-drawback mechanism to recover most of the tariff paid on
imports.





From
time-to-time, the U.S. government has granted preferential trade status to
certain titanium products imported from particular countries (notably wrought
titanium products from Russia, which carried no U.S. import duties from
approximately 1993 until 2004).  It is possible that such preferential
status could be granted again in the future.





The
Japanese government has raised the elimination or harmonization of tariffs on
titanium products, including titanium sponge, for consideration in multi-lateral
trade negotiations through the World Trade Organization (the so-called “Doha
Round”).  As part of the Doha Round, the United States has proposed
the staged elimination of all industrial tariffs, including those on
titanium.  The Japanese government has specifically asked that
titanium in all its forms be included in the tariff elimination
program.  We have urged that no change be made to these tariffs,
either on wrought or unwrought products.  The negotiations are ongoing
and are expected to continue during 2008.





We will
continue to resist efforts to eliminate duties on titanium products, although we
may not be successful in these activities.  Further reductions in, or
the complete elimination of, any or all of these tariffs could lead to increased
imports of foreign sponge, ingot and mill products into the U.S. and an increase
in the amount of such products on the market generally, which could adversely
affect pricing for titanium sponge, ingot and mill products and thus our results
of operations, financial position or liquidity.





8


In 2006,
legislation formerly known as the “Berry Amendment,” was re-enacted by Congress
with minor changes.  In general, the Berry Amendment requires that the
United States Department of Defense (“DoD”) expend funds for products containing
specialty metals, including titanium, that have been melted only in the United
States.  In 2007, the DoD adopted regulations implementing the revised
law which reduced the effectiveness of the law.  During 2007, progress
was achieved to move toward a successful implementation of the revised specialty
metals provision and legislation was enacted into law in early 2008 which is
expected to solidify the effectiveness of the law.  A weakening in the
enforcement of the specialty metals clause could increase foreign competition
for sales of titanium for defense products, adversely affecting our business,
results of operations, financial position or liquidity.





Research and
development.  Our research and development activities are
directed toward expanding the use of titanium and titanium alloys in all market
sectors.  Key research activities include the development of new
alloys, development of technology required to enhance the performance of our
products in the traditional industrial and aerospace markets and applications
development for emerging markets.  In addition, we continue to work in
partnership with the United States Defense Advanced Research Projects Agency
("DARPA") and others to explore means to reduce the cost of titanium
production.  The work with DARPA complements our research, development
and exploration of innovative technologies and improvements to the existing
processes such as Vacuum Distillation of sponge and Vacuum Arc Remelting
processes.  We conduct the majority of our research and development
activities at our Henderson Technical Laboratory in Henderson, with additional
activities at our Witton, England facility.  We incurred research and
development costs of $3.2 million in 2005, $4.7 million in 2006 and $4.2 million
in 2007.





Patents and
trademarks.  We hold U.S. and non-U.S. patents applicable to
certain of our titanium alloys and manufacturing technology, which expire at
various times from 2007 through 2025 and we have certain other patent
applications pending.  We continually seek patent protection with
respect to our technical base and have occasionally entered into cross-licensing
arrangements with third parties.  We believe the trademarks TIMET® and
TIMETAL®, which
are protected by registration in the U.S. and other countries, are important to
our business.  However, the majority of our titanium alloys and
manufacturing technologies do not benefit from patent or other intellectual
property protection.





Employees.  Our
employee headcount varies due to the cyclical nature of the aerospace industry
and its impact on our business.  Our employee headcount includes both
our full and part-time employees.  The increases in our headcount
during 2006 and 2007 reflect the increase in demand for titanium products during
those periods.  The following table shows our approximate employee
headcount at the end of the past 3 years:





Employees
      at December 31,2005
            
            
            2006
            
            
            2007U.S.
            
            
            1,450
            
            
            
            1,545
            
            
            
            1,670Europe
            
            
            790
            
            
            
            835
            
            
            
            860Total
            
            
            2,240
            
            
            
            2,380
            
            
            
            2,530





Our
production, maintenance, clerical and technical workers in Toronto, Ohio, and
our production and maintenance workers in Henderson (approximately half of our
total U.S. employees) are represented by the United Steelworkers of America
under contracts expiring in July 2008 and January 2011,
respectively.  Employees at our other U.S. facilities are not covered
by collective bargaining agreements.  A majority of the salaried and
hourly employees at our European facilities are represented by various European
labor unions.  Our labor agreement with our U.K. production and
maintenance employees runs through December 2008, and our labor agreement with
our U.K. managerial and professional employees runs through April
2008.  Our labor agreements with our French and Italian employees are
renewed annually.





We
currently consider our employee relations to be good.  However, it is
possible that there could be future work stoppages or other labor disruptions
that could materially and adversely affect our business, results of operations,
financial position or liquidity.





Regulatory and
environmental matters.  Our operations are governed by various
Federal, state, local and foreign environmental and worker safety laws and
regulations.  In the U.S., such laws include the Occupational, Safety
and Health Act, the Clean Air Act, the Clean Water Act and the Resource
Conservation and Recovery Act.  We use and manufacture substantial
quantities of substances that are considered hazardous, extremely hazardous or
toxic under environmental and worker safety and health laws and
regulations.  We have used and manufactured such substances throughout
the history of our operations.  Although we have substantial controls
and procedures designed to reduce continuing risk of environmental, health and
safety issues, we could incur substantial cleanup costs, fines and civil or
criminal sanctions, third party property damage or personal injury claims as a
result of violations or liabilities under these laws or non-compliance with
environmental permits required at our facilities.  In addition,
government environmental requirements or the enforcement thereof may become more
stringent in the future.  It is possible that some, or all, of these
risks could result in liabilities that would be material to our business,
results of operations, financial position or liquidity.





We
believe our operations are in compliance in all material respects with
applicable requirements of environmental and worker health and safety
laws.  Our policy is to continually strive to improve environmental,
health and safety performance.  We incurred capital expenditures
related to health, safety and environmental compliance and improvement of
approximately $25.1 million in 2005 (including $23.4 million related to the
construction of a water conservation facility at our Henderson location), $2.0
million in 2006 and $3.0 million in 2007.





From time
to time, we may be subject to health, safety or environmental regulatory
enforcement under various statutes, resolution of which typically involves the
establishment of compliance programs.  Occasionally, resolution of
these matters may result in the payment of penalties.  However, the
imposition of more strict standards or requirements under environmental, health
or safety laws and regulations could result in expenditures in excess of amounts
currently estimated to be required for such matters.  See Note 15 to
the Consolidated Financial Statements.





Related
parties.  At December 31, 2007, Contran Corporation and other
entities or persons related to Harold C. Simmons held approximately 51.7% of our
outstanding common stock.  See Notes 1 and 14 to the Consolidated
Financial Statements.





9


Available
information.  We maintain an Internet website at www.timet.com.  Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K, and any amendments thereto, are or will be available free of charge
on our website as soon as reasonably practicable after they are filed or
furnished, as applicable, with the SEC.  Additionally, our (i)
Corporate Governance Guidelines, (ii) Code of Business Conduct and Ethics and
(iii) Audit Committee, Management Development and Compensation Committee and
Nominations Committee charters are also available on our
website.  Information contained on our website is not part of this
Annual Report.  We will provide these documents to shareholders upon
request.  Requests should be directed to the attention of our Investor
Relations Department at our corporate offices located at 5430 LBJ Freeway, Suite
1700, Dallas Texas 75240.





The
general public may read and copy any materials on file with the SEC at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, DC 20549 and may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.  We are an electronic filer, and the SEC maintains an
Internet website at www.sec.gov that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.





ITEM
1A:  RISK FACTORS





Listed
below are certain risk factors associated with our business.  In
addition to the potential effect of these risk factors discussed below, any risk
factor that could result in reduced earnings, liquidity or operating losses,
could in turn adversely affect our ability to meet our liabilities or adversely
affect the quoted market prices for our securities.





The cyclical
nature of the commercial aerospace industry, which represents a significant
portion of our business, creates uncertainty regarding our future
profitability.  In addition, adverse changes to, or interruptions in,
our relationships with our major commercial aerospace customers could reduce our
revenues.  The commercial aerospace sector has a significant
influence on titanium companies, particularly mill product
producers.  Our business is more dependent on commercial aerospace
demand than is the overall titanium industry.  We shipped
approximately 60% of our mill products to commercial aerospace customers in
2007, whereas we estimate approximately 44% of the overall titanium industry’s
mill products were shipped to commercial aerospace customers in
2007.  The cyclical nature of the commercial aerospace sector has been
the principal driver of the historical fluctuations in the performance of most
titanium product producers.  Our product sales, including melted and
mill products, to commercial aerospace customers accounted for 57% of our net
sales for each of 2005 and 2006 and for 55% in 2007.  Events that
could adversely affect the commercial aerospace sector, such as future terrorist
attacks, world health crises or unforeseen reductions in orders from commercial
airlines, could significantly decrease our results of operations and financial
condition.





Sales
under LTAs with certain customers in the commercial aerospace sector account for
a significant percentage of our annual sales revenue.  If we are
unable to maintain our relationships with our major commercial aerospace
customers, including Boeing, Rolls-Royce, Snecma, UTC and Wyman-Gordon, under
the LTAs we have with these customers, our sales could decrease
substantially.





The titanium
metals industry is highly competitive, and we may not be able to compete
successfully.  The global titanium markets in which we operate
are highly competitive.  Competition is based on a number of factors,
such as price, product quality and service.  Some of our competitors
may be able to drive down prices for our products because their costs are lower
than our costs.  In addition, some of our competitors' financial,
technological and other resources may be greater than our resources, and such
competitors may be better able to withstand changes in market
conditions.  Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer
requirements.  Further, consolidation of our competitors or customers
in any of the industries in which we compete may result in reduced demand for
our products.  In addition, producers of metal products, such as steel
and aluminum, maintain forging, rolling and finishing
facilities.  Such facilities could be used or modified to process
titanium mill products, which could lead to increased competition and decreased
pricing for our titanium products.  In addition, many factors,
including the historical presence of excess capacity in the titanium industry,
work to intensify the price competition for available business at low points in
the business cycle.





Our dependence
upon certain critical raw materials that are subject to price and availability
fluctuations could lead to increased costs or delays in the manufacture and sale
of our products.  We rely on a limited number of suppliers
around the world, and principally on those located in Australia, for our supply
of titanium-containing rutile ore, one of the primary raw materials used in the
production of titanium sponge.  While chlorine, another of the primary
raw materials used in the production of titanium sponge, is generally widely
available, we currently obtain our chlorine from a single supplier near our
sponge plant in Henderson.  Also, we cannot supply all our needs for
all grades of titanium sponge and scrap internally and are therefore dependent
on third parties for a substantial portion of our raw material
requirements.  All of our major competitors utilize sponge and scrap
as raw materials in their melt operations.  Titanium scrap is also
used in certain steel-making operations, and demand for these steel products,
especially from China, has produced a significant increase in demand for
titanium scrap.  Purchase prices and availability of these critical
materials are subject to volatility.  At any given time, we may be
unable to obtain an adequate supply of these critical materials on a timely
basis, on price and other terms acceptable to us, or at all.  To help
stabilize our supply of titanium sponge, we have entered into LTAs with certain
sponge suppliers that contain fixed annual supply obligations.  These
LTAs also contain minimum annual purchase requirements.  See “Business
– Products and Operations – Raw materials,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources – Contractual commitments” and
Note 15 to the Consolidated Financial Statements.





Although
inflationary trends in recent years have been moderate, during the same period
certain critical raw material costs including titanium sponge and scrap have
been volatile.  While we are able to mitigate some of the adverse
impact of fluctuating raw material costs through LTAs with suppliers and
customers, rapid increases in raw material costs may adversely affect our
results of operations.





10


The rapid
increase in titanium prices may cause our customers to look for alternatives to
titanium in their products.  Our average selling prices for
melted and mill titanium have on average increased 50% and 28%, respectively, in
each of the last two years as a result of a sharp increase in titanium demand
that has exceeded industry expansion.  If prices for titanium are
sustained at this record level, new markets and application opportunities for
titanium may diminish as the use of titanium becomes too costly for many
manufacturers.  In addition, manufacturers that currently use titanium
for their products may look for less expensive alternatives for titanium in
existing products and applications.  If these events were to occur,
our sales and operating results could decrease substantially, resulting in
decreased profitability and our continued dependence on the military and
commercial aerospace industries.





We change
prices on certain of our products from time-to-time. Our ability to implement
price increases is dependent on market conditions, economic factors, raw
material costs and availability, competitive factors, operating costs and other
factors, some of which are beyond our control. The benefits of any price
increases may be delayed due to long manufacturing lead times and the terms of
existing contracts.  These factors have had, and may have, an adverse
impact on our revenues, operating results and financial condition.





Our failure to
develop new markets would result in our continued dependence on the cyclical
commercial aerospace sector, and our operating results would, accordingly,
remain cyclical.  In an effort to reduce dependence on the
commercial aerospace market and to increase participation in other markets, we
have devoted certain resources to developing new markets and applications for
our products.  Developing these emerging market applications involves
substantial risk and uncertainties due to the fact that titanium must compete
with less expensive alternative materials in these potential markets or
applications.  We may not be successful in developing new markets or
applications for our products, significant time may be required for such
development and uncertainty exists as to the extent to which we will face
competition in this regard.





Because we are
subject to environmental and worker safety laws and regulations, we may be
required to remediate the environmental effects of our operations or take steps
to modify our operations to comply with these laws and regulations, which could
reduce our profitability.  Various Federal, state, local and
foreign environmental and worker safety laws and regulations govern our
operations.  Throughout the history of our operations, we have used
and manufactured, and currently use and manufacture, substantial quantities of
substances that are considered hazardous, extremely hazardous or toxic under
environmental and worker safety and health laws and
regulations.  Although we have substantial controls and procedures
designed to reduce continuing risk of environmental, health and safety issues,
we could incur substantial cleanup costs, fines and civil or criminal sanctions,
third party property damage or personal injury claims as a result of violations
or liabilities under these laws or non-compliance with environmental permits
required at our facilities.  In addition, government environmental
requirements or the enforcement thereof may become more stringent in the
future.  Some or all of these risks may result in liabilities that
could reduce our profitability.





Reductions in, or
the complete elimination of, any or all tariffs on imported titanium products
into the United States could lead to increased imports of foreign sponge, ingot
and mill products into the U.S. and an increase in the amount of such products
on the market generally, which could decrease pricing for our
products.  In the U.S. titanium market, the increasing presence
of foreign participants has become a significant competitive
factor.  Until 1993, imports of foreign titanium products into the
U.S. had not been significant.  This was primarily attributable to
relative currency exchange rates and, with respect to Japan, Russia, Kazakhstan
and Ukraine, import duties (including antidumping duties).  However,
since 1993, imports of titanium sponge, ingot and mill products, principally
from Russia and Kazakhstan, have increased and have had a significant
competitive impact on the U.S. titanium industry.





Generally,
imports of titanium products into the U.S. are subject to a 15% “normal trade
relations” tariff.  For tariff purposes, titanium products are broadly
classified as either wrought (billet, bar, sheet, strip, plate and tubing) or
unwrought (sponge, ingot and slab).  From time-to-time, the U.S.
government has granted preferential trade status to certain titanium products
imported from particular countries (notably wrought titanium products from
Russia, which carried no U.S. import duties from approximately 1993 until
2004).  It is possible that such preferential status could be granted
again in the future, and we may not be successful in resisting efforts to
eliminate duties or tariffs on titanium products.  See discussion of
Doha Round in “Business – Competition.”





We may be unable
to reach or maintain satisfactory collective bargaining agreements with unions
representing a significant portion of our employees.  Our
production, maintenance, clerical and technical workers in Toronto, and our
production and maintenance workers in Henderson, are represented by the United
Steelworkers of America under contracts expiring in July 2008 and January 2011,
for the respective locations.  A majority of the salaried and hourly
employees at our European facilities are represented by various European labor
unions.  Each of our labor agreements with our U.K. employees expires
in 2008, and the agreements with our French and Italian employees are renewed
annually.  A labor dispute or work stoppage could materially decrease
our operating results.  We may not succeed in concluding collective
bargaining agreements with the unions to replace expiring agreements or to
maintain satisfactory relations under existing collective bargaining
agreements.  If our employees were to engage in a strike, work
stoppage or other slowdown, we could experience a significant disruption of our
operations or higher ongoing labor costs.





ITEM
1B:  UNRESOLVED STAFF COMMENTS





Not
applicable.








11





ITEM
2:  PROPERTIES





Set forth
below is a listing of our major production facilities.  In addition to
our U.S. sponge capacity discussed below, our worldwide melting capacity
aggregates approximately 44,650 metric tons (estimated18%of world
capacity) as of December 31, 2007, and our mill product capacity aggregates
approximately 22,600 metric tons (estimated 20% of world
capacity) as of December 31, 2007.  Of our worldwide melting capacity,
35% is represented by EB melting furnaces, 63% by vacuum arc remelting (“VAR”)
furnaces and 2% by a vacuum induction melting (“VIM”) furnace.




December
      31, 2007
                Annual
      Practical
                Capacity (3)Manufacturing
      Location
              
              Products
      Manufactured
              
              Melted
                Products
              
              
              Mill
      Products(metric
      tons)Henderson,
      Nevada (1)
              Sponge,
      Ingot
              
              
              12,250
              
              
              
              -Morgantown,
      Pennsylvania (1)
              Slab,
      Ingot, Raw MaterialsProcessing
              
              
              20,000
              
              
              
              -Toronto,
      Ohio (1)
              Billet,
      Bar, Plate, Sheet, Strip
              
              
              -
              
              
              
              11,000Vallejo,
      California (2)
              Ingot
      (including non-titaniumsuperalloys)
              
              
              1,600
              
              
              
              -Ugine,
      France (2)
      (4)
              Ingot,
      Billet
              
              
              2,100
              
              
              
              1,500Waunarlwydd
      (Swansea), Wales(1)
              Bar,
      Plate, Sheet
              
              
              -
              
              
              
              3,100Witton,
      England (2)
              Ingot,
      Billet, Bar
              
              
              8,700
              
              
              
              7,000


(1)           Owned
facility.


(2)           Leased
facility.


(3)           Practical
capacities are variable based on product mix and are not additive. These
capacities are as ofDecember 31, 2007 and do not reflect the increases expected
to be realized


during 2008 as a result of capacity expansion
projects, several of which are mentioned below.


(4)           Practical
capacities are based on the approximate maximum equivalent product that CEZUS is
contractuallyobligated to provide.





During
the past three years, our major production facilities have operated at varying
levels of practical capacity. Overall our plants operated at approximately 88%
of practical capacity in 2006 and 2007 and 80% in 2005.  In 2008, our
plants are expected to operate at approximately ­­93% of practical
capacity.  However, practical capacity and utilization measures can
vary significantly based upon the mix of products produced.





United States
production.  In 2007, we completed the expansion of our
existing premium-grade titanium sponge facility in Henderson and reached
practical capacity for  commercial production in early
2008.  This expansion increases our annual productive capacity to
approximately 12,600 metric tons, an increase of approximately 47% over the
previous productive sponge capacity levels.




Our U.S.
melting facilities in Henderson, Morgantown and Vallejo produce ingot and slab,
which are either used as feedstock for our mill products operations or sold to
third parties, and we are in the process of expanding our melt
capacity.  Our melting facilities are expected to operate at
approximately 94% of annual practical capacity in 2008, which is consistent with
our capacity utilization in 2007.  Melt capacities will increase
throughout 2008 as we complete and ramp up certain expansion
projects.





In early
2008, we completed an 8,500 metric ton expansion of our EB melt capacity in
Morgantown.  In addition, we have commenced efforts to add another EB
furnace at the same facility, which is currently on schedule to be completed in
the last half of 2009.  We also commenced an addition to our VAR
capacity in Morgantown during 2007, which is expected to be completed by
mid-2008.  Upon completion, these melt capacity additions will
increase our EB melt capacity by approximately 107% and our VAR capacity by
approximately 34%.  Our raw materials processing facility in
Morgantown primarily processes scrap used as melting feedstock, either in
combination with sponge or separately.




We
produce titanium mill products in the U.S. at our forging and rolling facility
in Toronto, which receives ingot or slab principally from our U.S. melting
facilities.  Our U.S. forging and rolling facility is expected to
operate at approximately 92% of annual practical capacity in 2008, up from 83%
in 2007.  Capacity utilization across our individual mill product
lines varies.





Under
various conversion services agreements with third-party vendors, we have access
to a dedicated annual capacity at certain of our vendors’
facilities.  Our access to outside conversion services includes
dedicated annual rolling capacity of at least 4,500 metric tons until 2026, with
the option to increase the output capacity to 9,000 metric
tons.  Additionally, we have access to dedicated annual forging
capacity of 3,300 metric tons beginning in 2008 and ramping up to 8,900 metric
tons for 2011 through at least 2019.  These agreements provide us with
a long-term secure source for processing round and flat products, resulting in a
significant increase in our existing mill product conversion capabilities, which
allows us to assure our customers of our long-term ability to meet their
needs.





European
production.  We conduct our operations in Europe primarily
through our wholly owned subsidiaries, TIMET UK, Ltd. and Loterios S.p.A., and
our 70% owned subsidiary, TIMET Savoie.  TIMET UK’s Witton laboratory
and manufacturing facilities are leased pursuant to long-term operating leases
expiring in 2014 and 2024, respectively.  TIMET UK’s melting facility
in Witton produces VAR ingot used primarily as feedstock for our Witton forging
operations.  TIMET UK forges the ingot into billet products for sale
to third parties or into an intermediate product for further processing into bar
or plate at our facility in Waunarlwydd (Swansea).  TIMET UK’s melting
and mill products production in 2008 is expected to operate at approximately 93%
and 80%, respectively, of annual practical capacity, compared to 82% and 75%,
respectively, in 2007.  During 2007 we also commenced construction of
a new VAR furnace at our Witton location, which is expected to be completed by
mid-2008.  Loterios manufactures large industrial use fabrications,
generally on a project engineering and design basis, and therefore, measures of
annual capacity are not practical or meaningful.





TIMET
Savoie has the right to utilize portions of the Ugine plant of Compagnie
Européenne du Zirconium-CEZUS, S.A. (“CEZUS”), the 30% minority partner in TIMET
Savoie, pursuant to a conversion services agreement which runs through
2015.  TIMET Savoie’s capacity is to a certain extent dependent upon
the level of activity in CEZUS’ zirconium business, which may from time to time
provide TIMET Savoie with capacity in excess of that which CEZUS is
contractually required to provide.  During 2007, TIMET Savoie utilized
92% of the maximum annual capacity CEZUS was contractually required to provide
in 2007, and we expect to utilize approximately 100% of the maximum annual
capacity CEZUS is required to provide in 2008.  Our agreement with
CEZUS provides for the expansion of the maximum annual melt capacity that CEZUS
is contractually required to provide to us to 2,900 metric tons.  We
expect the expansion to be fully operational by mid-2008.





ITEM
3:  LEGAL PROCEEDINGS





From time
to time, we are involved in litigation relating to our business.  See
Note 15 to the Consolidated Financial Statements.





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





No
matters were submitted to a vote of our security holders during the quarter
ended December 31, 2007.





12





PART
II





ITEM
5:  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES





Our
common stock is traded on the New York Stock Exchange (symbol:
TIE).  The high and low sales prices for our common stock during 2006,
2007 and the first two months of 2008 are set forth below.  All prices
(as well as all share numbers referenced herein) have been adjusted to reflect
previously affected stock splits.





Year
      ended December 31, 2006:
            
            High
            
            
            LowFirst quarter
            
            $
            25.93
            
            
            $
            15.96Second quarter
            
            $
            47.63
            
            
            $
            24.50Third quarter
            
            $
            34.88
            
            
            $
            22.77Fourth quarter
            
            $
            33.92
            
            
            $
            23.20Year
      ended December 31, 2007:First quarter
            
            $
            38.85
            
            
            $
            28.83Second quarter
            
            $
            39.80
            
            
            $
            30.30Third quarter
            
            $
            35.32
            
            
            $
            25.75Fourth quarter
            
            $
            36.50
            
            
            $
            25.26January
      1, 2008 to February 21, 2008
            
            $
            26.79
            
            
            $
            17.55





On
February 21, 2008, the closing price of TIMET common stock was $23.83 per share
and there were approximately 2,350 stockholders of record of TIMET common
stock.





We
previously issued $201.3 million of 6.625% mandatorily redeemable convertible
preferred securities, beneficial unsecured convertible securities (“BUCS”)
which, among other things, were redeemable for a certain number of shares of our
common stock.  Prior to 2005, we issued 3.9 million shares of our
Series A Preferred Stock in exchange for 3.9 million BUCS.  During
2005 and 2006, all of the BUCS that were not exchanged for shares of our Series
A Preferred Stock were redeemed for approximately 0.6 million shares of our
common stock and a nominal amount of cash.





Our
Series A Preferred Stock is not mandatorily redeemable but is redeemable at our
option at any time after September 1, 2007.  Holders of the Series A
Preferred Stock are entitled to receive cumulative cash dividends at the rate of
6.75% of the $50 per share liquidation preference per annum per share
(equivalent to $3.375 per annum per share), when, as and if declared by our
board of directors.  Whether or not declared, cumulative dividends on
Series A Preferred Stock are deducted from net income to arrive at net income
attributable to common stockholders.  Our U.S. long-term credit
agreement contains certain financial covenants that may restrict our ability to
make dividend payments on the Series A Preferred Stock.





During
2005, 2006 and 2007, an aggregate of 0.9 million, 1.3 million and 1.6 million
shares of our Series A Preferred Stock were converted into 12.4 million, 17.2
million and 21.3 million shares of our common stock, respectively.  As
a result of these conversions, approximately 0.1 million shares of Series A
Preferred Stock remain outstanding as of December 31, 2007.




We paid a
regular quarterly dividend on our common stock of $13.7 million, or $0.075 per
common share, on December 21, 2007.  However, declaration and payment
of future dividends on our common stock, and the amount thereof, is
discretionary and is dependent upon our results of operations, financial
condition, cash requirements for our business, contractual requirements and
restrictions and other factors deemed relevant by our Board of
Directors.  The amount and timing of past dividends is not necessarily
indicative of the amount and timing of future dividends which we might
pay.  In this regard, our U.S. long-term credit agreement contains
certain financial covenants that may restrict our ability to make dividend
payments on our common stock.  Subsequent to December 31, 2007, our
board of directors declared a dividend of $0.075 per share, payable on March
­­25, 2008 to holders of record of our common stock as of the close of
trading on March 11, 2008.





On
November 12, 2007 our board of directors authorized the repurchase of up to $100
million of our common stock in open market transactions or in privately
negotiated transactions, and any repurchased shares will be retired and
cancelled.  We did not purchase any shares under this repurchase
program as of December 31, 2007, but from January 1, 2008 through February 21,
2008, we purchased 0.1 million shares of our common stock in an open market
transaction for an aggregate purchase price of $1.9 million or $18.72 per
share.




Performance
graph.Set forth below is a line graph comparing, for the
period December 31, 2002 through December 31, 2007, the cumulative total
stockholder return on our common stock against the cumulative total return of
(a) the S&P Composite 500 Stock Index and (b) a self-selected peer group,
comprised solely of RTI International Metals, Inc. (NYSE: RTI), our principal
U.S. competitor with significant operations primarily in the titanium metals
industry for which meaningful stockholder return information is
available.  The graph shows the value at December 31 of each year,
assuming an original investment of $100 in each and reinvestment of cash
dividends and other distributions to stockholders.





Comparison
of Cumulative Return among Titanium Metals Corporation,


S&P
500 Composite Index and Self-Selected Peer Group





The
information contained in the performance graph shall not be deemed “soliciting
material” or “filed” with the SEC, or subject to the liabilities of Section 18
of the Securities Exchange Act, except to the extent we specifically request
that the material be treated as soliciting material or specifically incorporates
this performance graph by reference into a document filed under the Securities
Act or the Securities Exchange Act.





13


Equitycompensationplaninformation.  We
have certain equity compensation plans, all of which were approved by our
stockholders, which provide for the discretionary grant to our employees and
directors of, among other things, options to purchase our common stock and stock
awards.  As of December 31, 2007, there were a total of approximately
0.1 million options outstanding under all such plans to purchase shares of our
common stock at a weighted average exercise price of $3.50 per share, and
approximately 7.7 million shares were available for future grant or
issuance.  Our Board of Directors has approved a new equity
compensation plan that we intend to submit to our stockholders for approval at
our 2008 annual meeting of stockholders.  Although no equity
securities have been issued under the new equity compensation plan, up to 0.5
million shares may be issued under this plan if it is adopted and
approved.  We do not have any equity compensation plans that were not
approved by our stockholders.  See Note 10 to the Consolidated
Financial Statements.





ITEM
6:  SELECTED FINANCIAL DATA





The
selected financial data set forth below should be read in conjunction with our
Consolidated Financial Statements and Item 7 – MD&A.





Year
      ended December 31,2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            2007($
      in millions, except per share and product shipment data)STATEMENT
      OF INCOME DATA:Net sales
            
            $
            385.3
            
            
            $
            501.8
            
            
            $
            749.8
            
            
            $
            1,183.2
            
            
            $
            1,278.9Gross margin
            
            
            5.6
            
            
            
            63.7
            
            
            
            199.4
            
            
            
            436.1
            
            
            
            447.4Operating income
      (loss)
            
            
            (6.0
            )
            
            
            43.0
            
            
            
            171.1
            
            
            
            382.8
            
            
            
            372.0Interest expense
            
            
            16.4
            
            
            
            12.5
            
            
            
            4.0
            
            
            
            3.4
            
            
            
            2.6Net income (loss) attributable
      tocommon stockholders
            
            
            (24.4
            )
            
            
            43.3
            
            
            
            143.7
            
            
            
            274.5
            
            
            
            263.1Earnings (loss) per
      share:Basic (1)
            
            $
            (0.19
            )
            
            $
            0.34
            
            
            $
            1.10
            
            
            $
            1.77
            
            
            $
            1.62Diluted (1)
            
            $
            (0.19
            )
            
            $
            0.33
            
            
            $
            0.86
            
            
            $
            1.53
            
            
            $
            1.46Dividends per common
      share
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            0.075BALANCE
      SHEET DATA:Cash and cash
      equivalents
            
            $
            35.1
            
            
            $
            7.2
            
            
            $
            17.7
            
            
            $
            29.4
            
            
            $
            90.0Total assets (2)
            
            
            594.8
            
            
            
            700.6
            
            
            
            907.3
            
            
            
            1,216.9
            
            
            
            1,419.9Outstanding indebtedness (3)
            
            
            10.3
            
            
            
            43.4
            
            
            
            51.6
            
            
            
            0.7
            
            
            
            0.5Debt payable to Capital
      Trust
            
            
            207.5
            
            
            
            12.0
            
            
            
            5.9
            
            
            
            -
            
            
            
            -Stockholders’ equity (2)
            
            
            177.7
            
            
            
            406.4
            
            
            
            562.2
            
            
            
            878.9
            
            
            
            1,132.7CASH
      FLOW DATA:Cash flows provided (used)
      by:Operating
    activities
            
            $
            65.8
            
            
            $
            (22.4
            )
            
            $
            72.9
            
            
            $
            79.1
            
            
            $
            192.1Investing
    activities
            
            
            (14.5
            )
            
            
            (44.5
            )
            
            
            (61.5
            )
            
            
            (26.5
            )
            
            
            (108.2
            )Financing
    activities
            
            
            (22.1
            )
            
            
            38.7
            
            
            
            -
            
            
            
            (42.5
            )
            
            
            (24.5
            )Net cash provided
      (used)
            
            $
            29.2
            
            
            $
            (28.2
            )
            
            $
            11.4
            
            
            $
            10.1
            
            
            $
            59.4Melted
      product shipments:Volume (metric
    tons)
            
            
            4,725
            
            
            
            5,360
            
            
            
            5,655
            
            
            
            5,900
            
            
            
            4,720Average selling price (per
      kilogram)
            
            $
            12.15
            
            
            $
            13.45
            
            
            $
            19.85
            
            
            $
            38.30
            
            
            $
            40.65Mill
      product shipments:Volume (metric
    tons)
            
            
            8,875
            
            
            
            11,365
            
            
            
            12,660
            
            
            
            14,160
            
            
            
            14,230Average selling price (per
      kilogram)
            
            $
            31.50
            
            
            $
            32.05
            
            
            $
            41.75
            
            
            $
            57.85
            
            
            $
            66.90Order
      backlog at December 31 (4)
            
            $
            205
            
            
            $
            450
            
            
            $
            870
            
            
            $
            1,125
            
            
            $
            1,000Capital
      expenditures
            
            $
            12.5
            
            
            $
            23.6
            
            
            $
            61.1
            
            
            $
            100.9
            
            
            $
            100.9


(1)
            All
      share and per share disclosures for all periods presented have been
      adjusted to give effect of all stock splits to
  date.


(2)
            We
      adopted SFAS 158 effective December 31, 2006.  See Note 2 to the
      Consolidated Financial Statements.


(3)
            Outstanding
      indebtedness represents notes payable, current and noncurrent debt and
      capital lease obligations.


(4)
            Order
      backlog is defined as unfilled purchase orders (including those under
      consignment arrangements), which are generally subject to deferral or
      cancellation by the customer under certain
  conditions.







14





ITEM
7:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





SUMMARY





General
overview.  We are a vertically integrated producer of titanium
sponge, melted products and a variety of mill products for commercial aerospace,
military, industrial and other applications.  We are one of the
world’s leading producers of titanium melted products (ingot, electrodes and
slab) and mill products (billet, bar, plate, sheet and strip).  We are
the only producer with major titanium production facilities in both the United
States and Europe, the world’s principal markets for titanium.  We are
currently the largest producer of titanium sponge, a key raw material, in the
United States.





We sell
our titanium melted and mill products into four worldwide market
sectors.  Aggregate shipment volumes for titanium mill products in
2007 were derived from the following sectors:





TIMET
            
            
            Titanium
      Industry (1)Mill
      product shipments
            
            
            %
      of total
            
            
            Mill
      product shipments
            
            
            %
      of total(Metric
      tons)
            
            
            
            
            
            (Metric
      tons)Commercial
      aerospace
            
            
            8,590
            
            
            
            60
            %
            
            
            38,900
            
            
            
            44
            %Military
            
            
            2,340
            
            
            
            17
            %
            
            
            6,500
            
            
            
            7
            %Industrial
            
            
            2,875
            
            
            
            20
            %
            
            
            38,300
            
            
            
            43
            %Emerging
      markets
            
            
            425
            
            
            
            3
            %
            
            
            5,300
            
            
            
            6
            %14,230
            
            
            
            100
            %
            
            
            89,000
            
            
            
            100
            %(1) Estimates
      based on our titanium industry experience and information obtained from
      publicly-availableexternal resources (e.g., United States Geological
      Survey, International
              Titanium Association and JapanTitanium Society).





The
titanium industry derives a substantial portion of its demand from the highly
cyclical commercial aerospace sector.  As shown in the table above,
our business is more dependent on commercial aerospace demand than is the
overall titanium industry.








CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





We
prepare our Consolidated Financial Statements in accordance with accounting
principles generally accepted in the United States of America.  In the
preparation of these financial statements, we are required to make estimates and
judgments, and select from a range of possible estimates and assumptions, that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reported
period.  On an on-going basis, we evaluate our estimates, including
those related to allowances for uncollectible accounts receivable, inventory
allowances, asset lives, impairments of investments, the recoverability of other
long-lived assets, including property and equipment, pension and other
postretirement benefit obligations and the related underlying actuarial
assumptions, the realization of deferred income tax assets, and accruals for
asset retirement obligations, environmental remediation, litigation, income tax
and other contingencies.  We base our estimates and judgments, to
varying degrees, on historical experience, advice of external specialists and
various other factors we believe to be prudent under the
circumstances.  Actual results may differ from previously estimated
amounts and such estimates, assumptions and judgments are regularly subject to
revision.





We
consider the policies and estimates discussed below to be critical to an
understanding of our financial statements because their application requires our
most significant judgments in estimating matters for financial reporting that
are inherently uncertain.  See Notes to Consolidated Financial
Statements for additional information on these policies and estimates, as well
as discussion of additional accounting policies and estimates.





Inventory
valuation.  We provide reserves for estimated obsolete or
unmarketable inventories equal to the difference between the cost of inventories
and the estimated net realizable value using assumptions about future demand for
our products, alternate uses of the inventory and market conditions. If actual
market conditions are less favorable than those projected by us, we may be
required to recognize additional inventories reserves.





Impairment of
long-lived assets.  Generally, when events or changes in
circumstances indicate that the carrying amount of long-lived assets, including
property and equipment and intangible assets, may not be recoverable, we
undertake an evaluation of the assets or asset group.  If this
evaluation indicates that the carrying amount of the asset or asset group is not
recoverable, the amount of the impairment would typically be calculated using
discounted expected future cash flows or appraised values.  All
relevant factors are considered in determining whether an impairment
exists.





Income
taxes.  We record a
valuation allowance if realization of our gross deferred income tax assets is
not more-likely-than-not after giving consideration to recent historical results
and near-term projections, and we also consider the availability of tax planning
strategies that might impact either the need for, or amount of, any valuation
allowance.  We record reserves for uncertain tax positions in
accordance with Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertain Tax
Positions, for tax positions where we believe it is more-likely-than-not
our position will not prevail with the applicable tax
authorities.  See “Results of Operations – Income taxes” for discussion
of our analysis of our deferred income tax valuation allowances and Note 2 to
Consolidated Financial Statements for a discussion of our uncertain tax
positions.





15


Pension and OPEB
expenses and obligations.  Our pension and OPEB expenses and
obligations are calculated based on several estimates, including discount rates,
expected rates of returns on plan assets and expected health care trend
rates.  We review these rates annually with the assistance of our
actuaries.  See further discussion of the factors considered and
potential effect of these estimates in “Liquidity and Capital Resources – Defined benefit pension
plans” and “Liquidity and Capital Resources – Postretirement benefit plans other
than pensions.”





RESULTS
OF OPERATIONS





Comparison
of 2007 to 2006





Summarized
financial information.  The following table summarizes certain
information regarding our results of operations for the years ended December 31,
2006 and 2007.  Our reported average selling prices are a reflection
of actual selling prices after the effects of currency exchange rates, customer
and product mix and other related factors throughout the periods
presented.





For
      the year ended December 31,2006
            
            
            %
      of Total
              Net
      Sales
            
            
            2007
            
            
            %
      of Total
              Net
      Sales(In
      millions, except product shipment data)Net
      sales:Melted products
            
            $
            226.0
            
            
            
            19
            %
            
            $
            191.9
            
            
            
            15
            %Mill products
            
            
            819.2
            
            
            
            69
            %
            
            
            952.0
            
            
            
            74
            %Other titanium
      products
            
            
            138.0
            
            
            
            12
            %
            
            
            135.0
            
            
            
            11
            %Total net sales
            
            
            1,183.2
            
            
            
            100
            %
            
            
            1,278.9
            
            
            
            100
            %Cost
      of sales
            
            
            (747.1
            )
            
            
            63
            %
            
            
            (831.5
            )
            
            
            65
            %Gross
      margin
            
            
            436.1
            
            
            
            37
            %
            
            
            447.4
            
            
            
            35
            %Selling,
      general, administrative anddevelopment
      expense
            
            
            (67.0
            )
            
            
            6
            %
            
            
            (69.0
            )
            
            
            5
            %Other
      income (expense), net
            
            
            13.7
            
            
            
            1
            %
            
            
            (6.4
            )
            
            
            1
            %Operating
      income
            
            $
            382.8
            
            
            
            32
            %
            
            $
            372.0
            
            
            
            29
            %Melted
      product shipments:Volume (metric
    tons)
            
            
            5,900
            
            
            
            
            
            
            
            4,720Average selling price (per
      kilogram)
            
            $
            38.30
            
            
            
            
            
            
            $
            40.65Mill
      product shipments:Volume (metric
    tons)
            
            
            14,160
            
            
            
            
            
            
            
            14,230Average selling price (per
      kilogram)
            
            $
            57.85
            
            
            
            
            
            
            $
            66.90





Net
sales.  During 2007, net sales increased 8% to $1,278.9
million.  Overall industry fundamentals and outlook continue to
support a long-term favorable trend in demand for titanium across all major
market sectors.  Average selling prices for melted and mill products
increased 6% and 16%, respectively, in 2007 compared to 2006.  We
expect the current trend in customer demands to continue to influence a shift of
our product mix toward an increased proportion of mill products, which require
additional processing and resources and also command higher sales prices as
compared to melted products.  While our combined melted and mill
product shipment volume declined during 2007, our mill product shipment volume
increased slightly in 2007 compared to the prior year.  The long-term
demand outlook for our products continues to be favorable despite the near-term
effects of certain commercial aircraft production delays and other adjustments
to build-out schedules, fluctuations in customer inventory levels and product
mix.  The increased pricing on our products and the favorable shift in
product mix more than offset the effects of lower aggregate sales volume for
2007 compared to 2006.





Cost of
sales.  Our cost of sales increased $84.4 million, or 11%, in
2007 as compared to 2006 due to an increase in certain raw material costs,
including titanium sponge and scrap, and higher production costs associated with
our shift in product mix to a greater percentage of mill
products.  The higher cost of sponge in 2007 is partially due to our
final utilization in the first half of 2006 of lower-cost sponge previously
purchased from the U.S. Defense Logistics Agency (“DLA”) stockpile and the rapid
rise in titanium sponge and scrap market prices experienced through the first
half of 2007.  Over the past year, increases in global titanium sponge
capacity and increased use of titanium in the manufacture of components and
products have resulted in the increased availability of titanium sponge and
scrap.  As a result, our cost of purchased titanium sponge and scrap
has been declining during the latter part of 2007, and we anticipate this trend
will continue into 2008.  These declining raw material costs will
also, in certain cases, result in indexed adjustments to selling prices under
our long-term sales agreements. Despite these recent trends in titanium sponge
and scrap costs, the majority of the products sold during 2007 include higher
cost raw materials acquired during prior periods due to the elapsed time
required to convert these raw materials into their final form and to deliver
them to our customers.





Gross
margin.  During 2007, our
gross margin increased 3% to $447.4 million as compared to 2006.  Our
gross margin percentage decreased from 37% in 2006 to 35% in
2007.  Cost of sales increases associated with our higher raw material
costs and higher cost of production, as discussed above, were partially offset
by the increases in average selling prices.





Operating
income.  Our operating income for 2007 was $372.0 million
compared to $382.8 million in the same period in 2006.  The 2007
period includes a $6.0 million expense related to previously capitalized costs
associated with the planning and engineering for a new VDP sponge plant due to
our decision to delay the project indefinitely.  The 2006 period was
positively impacted by $14.1 million of equity in earnings related to our
interest in the VALTIMET joint venture that we sold in December 2006, partially
offset by $8.6 million of travel, relocation and severance expenses incurred in
connection with the relocation of our headquarters to Dallas, Texas and our
operational management and information technology group to Exton,
Pennsylvania.





Net other
non-operating income and expense.  During 2007, we recognized
other non-operating income of $24.2 million compared to other non-operating
income of $39.0 million during 2006.  As discussed in Note 4 to the
Consolidated Financial Statements, we realized an $18.3 million gain on the sale
of our investment in CompX during 2007, and we realized a $40.9 million gain on
the sale of our investment in VALTIMET during 2006.





16


Income taxes.Our effective income tax rate was 30% in 2007 compared to 31% in
2006.  We operate in multiple tax jurisdictions and, as a result, the
geographic mix of our pre-tax income or loss can impact our overall effective
tax rate.  Our effective income tax rate for 2007 was lower than the
U.S. statutory rate primarily due to a change in the mix of our pre-tax
earnings, with a higher percentage of earnings in lower tax rate jurisdictions
in 2007 primarily as a result of the implementation of an internal corporate
reorganization in 2007.  See Note 12 to the Consolidated Financial
Statements for a tabular reconciliation of our statutory income tax expense to
our actual tax expense.  Some of the more significant items impacting
this reconciliation are summarized below.





Our
income tax expense in 2007 includes:




·
            An
      income tax benefit of $12.6 million related to an internal reorganization
      we implemented in the second quarter of
2007;




·
            An
      income tax benefit of $6.5 million related primarily to the reversal of a
      portion of our deferred income tax asset valuation allowance related to
      our capital loss carryforward following the sale of our interest in CompX;
      and




·
            An
      income tax benefit of $4.7 million from the special manufacturing
      deduction created by the American Jobs Creation Act of
    2004.





Our
income tax expense in 2006 includes:




·
            an
      income tax benefit of $17.1 million related to the reversal of a portion
      of our deferred income tax asset valuation allowance related to our
      capital loss carryforward following the sale of our interest in
      VALTIMET;




·
            an
      income tax benefit of $2.4 million from the special manufacturing
      deduction created by the American Jobs Creation Act of 2004;
      and




·
            an
      income tax benefit of $1.0 million related to the elimination of certain
      items included in other comprehensive income following the sale of our
      interest in VALTIMET.








17





Comparison
of 2006 to 2005





Summarized
financial information.  The following table summarizes certain
information regarding our results of operations for the years ended December 31,
2005 and 2006.  Our reported average selling prices are a reflection
of actual selling prices after the effects of currency exchange rates, customer
and product mix, and other related factors throughout the periods
presented.





For
      the year ended December 31,2005
            
            
            %
      of Total
              Net
      Sales
            
            
            2006
            
            
            %
      of Total
              Net
      Sales(In
      millions, except product shipment data)Net
      sales:Melted products
            
            $
            112.2
            
            
            
            15
            %
            
            $
            226.0
            
            
            
            19
            %Mill products
            
            
            528.6
            
            
            
            70
            %
            
            
            819.2
            
            
            
            69
            %Other titanium
      products
            
            
            109.0
            
            
            
            15
            %
            
            
            138.0
            
            
            
            12
            %Total net sales
            
            
            749.8
            
            
            
            100
            %
            
            
            1,183.2
            
            
            
            100
            %Cost
      of sales
            
            
            (550.4
            )
            
            
            73
            %
            
            
            (747.1
            )
            
            
            63
            %Gross
      margin
            
            
            199.4
            
            
            
            27
            %
            
            
            436.1
            
            
            
            37
            %Selling,
      general, administrative anddevelopment
      expense
            
            
            (53.6
            )
            
            
            7
            %
            
            
            (67.0
            )
            
            
            6
            %Other
      operating income and expenses, net
            
            
            25.3
            
            
            
            3
            %
            
            
            13.7
            
            
            
            1
            %Operating
      income
            
            $
            171.1
            
            
            
            23
            %
            
            $
            382.8
            
            
            
            32
            %Melted
      product shipments:Volume (metric
    tons)
            
            
            5,655
            
            
            
            
            
            
            
            5,900Average selling price (per
      kilogram)
            
            $
            19.85
            
            
            
            
            
            
            $
            38.30Mill
      product shipments:Volume (metric
    tons)
            
            
            12,660
            
            
            
            
            
            
            
            14,160Average selling price (per
      kilogram)
            
            $
            41.75
            
            
            
            
            
            
            $
            57.85





Net
sales.  We experienced significant sales growth during 2006, as
net sales increased 58%, or $433.4 million, compared to 2005.  We, and
the industry as a whole, benefited significantly from strong demand for titanium
across all major industry market sectors that drove melted and mill titanium
prices to record levels.  In addition, during 2005 we had a higher mix
of sales to customers under LTAs whose terms contained pricing provisions that
limited our ability to immediately adjust selling prices in response to
increased production costs, particularly raw materials, or other market
changes.  As certain of those LTAs expired, or as prices were adjusted as
permitted under the LTAs, continued sales to these customers in 2006 were at
pricing terms that more closely reflected market pricing.  As a result of
these factors, average selling prices for melted and mill products increased 93%
and 39%, respectively, compared to 2005.  In addition to the improved
pricing, we delivered 4% more melted products and 12% more mill products
compared to 2005.  Further, other product sales increased 27% compared
to 2005 due principally to improved demand for our fabrication products related
primarily to increased construction of chemical, power and other industrial
facilities.





Cost of
sales.  Our cost of sales increased $196.7 million, or 36%, in
2006 compared to 2005 due to increased sales volumes and higher average cost of
raw materials, including purchased titanium sponge and titanium
scrap.  The higher cost of our purchased sponge was due principally to
our utilization in 2005 of lower-cost sponge purchased from the DLA
stockpile.  We purchased sponge from the DLA stockpile since 2000, but
the stockpile became fully depleted in 2005.  The higher cost of our
purchased titanium scrap was due to increased industry-wide demand as well as
demand in non-titanium markets that use titanium as an alloying
agent.  The impact of market increases in the cost of sponge and scrap
was mitigated, in part, because certain of our raw material purchases were
subject to long-term agreements.  In addition to the impact of higher
raw material costs, our cost of sales increased as our energy costs increased
and as we increased our manufacturing employee headcount by approximately 150
full time equivalents compared to 2005 in order to support the continued growth
of our business.  Our cost of sales was favorably impacted by our
increased production levels, as our overall plant operating rates improved to
88% in 2006 compared to the prior year plant operating rate of
80%.  Despite these overall increases, cost of sales was reduced to
63% of sales for 2006 compared to 73% for 2005, as increases in selling prices
more than offset the higher costs.





Gross
margin.  During 2006, our
gross margin increased 119% to $436.1 million compared to 2005.  Our
gross margin percentage increased from 27% in 2005 to 37% in
2006.  Our improved profitability was generally driven by the increase
in sales prices for our products and improved plant operating rates, which more
than offset the effect of our higher raw material and energy costs.





Operating
income.  Our operating income for 2006 increased 124% to $382.8
million compared to 2005, and our operating income percentage increased from 23%
in 2005 to 32% in 2006.  The increase in operating income was driven
primarily by an increase in gross margin which is somewhat offset by increases
in selling, general, administrative and development (“SGA&D”) expense and a
decrease in other operating income.





During
2006, our SGA&D expense increased $13.4 million to $67.0 million compared to
2005 primarily due to (i) $8.6 million of travel, relocation and severance
expenses incurred in connection with the relocation of our headquarters to
Dallas, Texas and our operational management and information technology group to
Exton, Pennsylvania, (ii) increased employee compensation as a result of
additional personnel to support expansion of our business and (iii) increased
audit and consulting fees associated with the expansion of our
business.  SGA&D expense decreased from 7% of sales in 2005 to 6%
of sales in 2006 due to the significant sales growth.





Our other
operating income for 2006 decreased $11.6 million from $25.3 million in 2005 to
$13.7 million in 2006, primarily related to our LTA with
Boeing.  During 2005, we recorded $17.1 million of other operating
income related to the take-or-pay provisions which were part of our previous LTA
with Boeing.  As discussed in Note 11 to the Consolidated Financial
Statements, beginning in 2006 under our current LTA with Boeing, the take-or-pay
provisions under the previous LTA were replaced with an annual makeup payment
early in the following year in the event Boeing purchases less than its annual
commitment in any year.  Based on the provisions of the new LTA, no
makeup payment was required for 2006.  Other operating income in 2005
also includes $1.8 million related to our settlement of a customer claim
regarding prior order cancellations.  Somewhat offsetting these
decreases was our equity in earnings of VALTIMET, which increased $9.0 million
to $14.1 million in 2006 due to their higher earnings resulting from stronger
demand and increased pricing in the industrial welded tubing
market.





18


Net other
non-operating income and expense.  During 2006, we recognized
other non-operating income of $39.0 million compared to other non-operating
income of $18.2 million during 2005.  As discussed previously, we
realized a $40.9 million gain on the sale of our investment in VALTIMET during
2006.  Net other non-operating income during 2005 included a gain on
the sale of certain real property of $13.9 million. Additionally, during 2006,
the U.S. dollar weakened relative to the British pound sterling and the euro,
which resulted in net currency transaction losses of $4.0 million as compared to
net currency transaction gains of $2.3 million in 2005 as the U.S. dollar
strengthened relative to the British pound sterling and the euro.





Income
taxes.  Our effective income tax rate was 31% in 2006 compared
to 13% in 2005.  We operate in multiple tax jurisdictions and, as a
result, the geographic mix of our pre-tax income or loss can impact our overall
effective tax rate.  Our effective income tax rate for 2006 was lower
than the U.S. statutory rate primarily due to a change in the mix of our pre-tax
earnings, with a higher percentage of earnings in lower tax rate jurisdictions
in 2006.  Our effective income tax rate for 2005 was lower than the
U.S. statutory rate primarily due to an income tax benefit of $50.1 million
related to the reversal of our deferred income tax asset valuation allowance
related to the U.S. and the U.K;.  See Note 12 to the Consolidated
Financial Statements for a tabular reconciliation of our statutory income tax
expense to our actual tax expense.  Some of the more significant items
impacting this reconciliation are summarized below.





Our
income tax expense in 2006 includes:




·
            an
      income tax benefit of $17.1 million related to the reversal of a portion
      of our deferred income tax asset valuation allowance related to our
      capital loss carryforward following the sale of our interest in
      VALTIMET;




·
            an
      income tax benefit of $2.4 million from the special manufacturing
      deduction created by the American Jobs Creation Act of 2004;
      and




·
            an
      income tax benefit of $1.0 million related to the elimination of certain
      items included in other comprehensive income following the sale of our
      interest in VALTIMET.





Our
income tax expense in 2005 includes:




·
            an
      income tax benefit of $50.1 million related to the reversal of our
      deferred income tax asset valuation allowance related to the U.S. and the
      U.K.;




·
            an
      income tax expense of $4.4 million related to the elimination of an amount
      included in other comprehensive income related to our defined benefit
      pension plan in the U.S.; and




·
            an
      income tax expense of $1.5 million related to the repatriation of
      dividends from our European
subsidiaries.





Minority
interest.  Minority interest relates principally to our French
subsidiary, TIMET Savoie, which is 30% owned by CEZUS.  Minority
interest increased $3.8 million from 2005, to $8.7 million during 2006, due to
increased net income at TIMET Savoie, whose results of operations were favorably
impacted by increased sales prices for melted and mill products during
2006.





Dividends on
Series A Preferred Stock.  Our Series A Preferred Stock accrues
a cumulative cash dividend of 6.75% of the $50 per share liquidation preference
per year.  Shares of our Series A Preferred Stock are also convertible
to shares of our common stock at any time by the shareholder.  During
2005, 0.9 million shares of our Series A Preferred Stock were converted into
12.4 million shares of our common stock, as compared to 1.3 million shares of
our Series A Preferred Stock converted to 17.2 million shares of common stock
during 2006.  Based on the number of Series A Preferred shares
outstanding throughout each year, cumulative dividends attributable to our
Series A Preferred Stock were $12.5 million during 2005, compared to $7.2
million during 2006.





European
operations





We have
substantial operations located in the U.K., France and
Italy.  Approximately 35% of our sales originated in Europe for 2007,
of which approximately 52% were denominated in the British pound sterling or the
euro.  Certain purchases of raw materials, principally titanium sponge
and alloys, for our European operations are denominated in U.S. dollars, while
labor and other production costs are primarily denominated in local currencies.
The functional currencies of our European subsidiaries are those of their
respective countries, and the European subsidiaries are subject to exchange rate
fluctuations that may impact reported earnings and may affect the comparability
of period-to-period operating results. Borrowings of our European operations may
be in U.S. dollars or in functional currencies. Our export sales from the U.S.
are denominated in U.S. dollars and are not subject to currency exchange rate
fluctuations.





We do not
use currency contracts to hedge our currency exposures.  At December
31, 2007, consolidated assets and liabilities denominated in currencies other
than functional currencies were approximately $87.3 million and $54.2 million,
respectively, consisting primarily of U.S. dollar cash, accounts receivable and
accounts payable.





Outlook





We
achieved record levels of net sales in 2007, reflecting strong demand for
titanium metal across all major market sectors (commercial aerospace,
industrial, military and emerging markets).  These results were
largely driven by higher average selling prices for both melted and mill
products, as well as favorable changes in product mix.  Our backlog
remains strong at $1.0 billion as of December 31, 2007 compared to $1.1 billion
at December 31, 2006.





We
continue to pursue our strategic plans that focus on anticipated long-term
favorable trends in demand by expanding our productive capacity with a focus on
opportunities to improve our operating flexibility, efficiency and cost
structure.  In particular, we continue to expand our operating
capabilities in the demanding aerospace industry segment in order to enhance our
ability to meet our current and prospective customers’ needs and strengthen our
position as a reliable supplier in markets where technical ability and precision
are critical.  These efforts include strategic initiatives to assure
we have the necessary availability of raw materials, melt capacity and mill
product processing capabilities.  While the recently announced delays
of initial deliveries of the Boeing 787 DreamlinerTMcommercial aircraft may contribute to short-term volatility in the
overall market demand for our products as adjustments are made at various levels
in the aircraft supply chain, we expect current industry-wide demand trends will
continue to be favorable.  With our current plant production levels
near practical capacity, we have taken several actions to significantly expand
our productive capacity across all areas of our manufacturing operations,
including the following:





19


Raw
materials.  During 2007,
weentered into long-term sponge supply agreements with three manufacturers
that, together with our current sponge production capacity at our facility in
Henderson, provide us with a total annual available sponge supply at levels
ranging from 18,000 metric tons up to 28,000 metric tons through
2024.  The completion of the additional long-term sponge supply
agreements, together with reaching full productive capacity at our Henderson
sponge facility and initiatives to increase our scrap recycling and melt
capabilities, provide TIMET with additional options and greater flexibility with
regard to its future raw material supply requirements.





In
addition, we continue to explore other opportunities to secure long-term
titanium sponge supply agreements and utilize sponge acquired from established
suppliers to supplement the titanium scrap utilized for melted products that is
internally generated at our production facilities, purchased from certain
customers under contractual agreements or acquired in the open metals
market.  In anticipation of a significant increase in the availability
of titanium scrap and moderation in its cost relative to levels experienced
during the past 18 months, we are increasing our capacity to recycle scrap and
use EB melt capacity to efficiently use a combination of sponge and scrap to
produce melted titanium products.





Our goal
is to have assured and flexible availability of raw materials which affords us
the ability to respond to industry demands in a timely and cost-efficient
manner.  We believe our projected mix of internally generated sponge
and scrap, along with our assured long-term third party sources of sponge and
scrap, will assist in controlling cost for the products we produce compared to
that which could be achieved solely through additional internal production of
sponge.





Melted
products.  We are in the process of expanding our global melt
capacity.  We recently completed an 8,500 metric ton expansion of our
EB melt capacity in Morgantown, and we have commenced construction of another EB
furnace at the same facility, which is currently on schedule to be completed in
the last half of 2009.  During 2007 we also commenced construction of
new VAR furnaces at our Witton, Morgantown and Savoie locations, all of which
are expected to be completed by mid-2008.  These additions will more
than double our EB melt capacity and will increase our VAR melt capacity by
approximately one-third.  As we continue to adjust our long-term
business plan in response to industry trends, we will consider more additions to
our melt capacity based on our raw material sources and product
mix.  We have also been able to leverage our melt capacity and
expertise as integral components of certain arrangements for additional and
alternative sources of raw materials and conversion services.





Mill products and
conversion services.  We have numerous capital projects in
process to improve and expand our production capacity for mill
products.  Also, under various conversion services agreements with
third-party vendors, we have access to a dedicated annual capacity at certain of
our vendors’ facilities.  Our access to outside conversion services
includes dedicated annual rolling capacity of at least 4,500 metric tons until
2026, with the option to increase the output capacity to 9,000 metric
tons.  Additionally, we have access to dedicated annual forging
capacity of 3,300 metric tons beginning in 2008 and increasing to 8,900 metric
tons for 2011 through at least 2019.  These agreements provide us with
a long-term secure source for processing round and flat products, resulting in a
significant increase in our existing mill product conversion capabilities, which
allows us to assure our customers of our long-term ability to meet their
needs.





Customer
agreements.  During 2007 and early 2008, we completed renewals,
extensions and, in certain cases, expansions of our long-term supply agreements
with several of our customers that supply components to the major aerospace jet
engine manufacturers.  As a result, we have enhanced our position as
the major supplier of titanium to the aerospace jet engine market, including
long-term supply agreements with terms up to 10 years and aggregate estimated
revenues of up to approximately $4 billion.  Based on existing
customer agreements and relationships, we currently estimate that we
will supply approximately two thirds of the global commercial aerospace jet
engine market requirements for titanium.  We also have existing
long-term supply agreements with other commercial aerospace and industrial
customers and continue to explore opportunities to expand or renew these
existing arrangements, as well as to enter into new long-term agreements in
these and other industry segments.





General.  We
intend to continue to explore other opportunities to expand our existing
production and conversion capacities through internal expansion and long-term
third-party arrangements, as well as potential joint ventures and
acquisitions.  We believe our efforts to allocate resources across our
entire manufacturing process, supplemented with committed capacity from
third-party sources, will allow us to achieve profitable growth and enhance
long-term return on invested capital.





We
estimate that 2008 industry mill product shipments into the commercial aerospace
sector will increase 6% to 12%, as compared to 2007. The latest forecast issued
in January 2008 byThe Airline
Monitor reflects a 6% increase in forecasted aircraft deliveries over the
next five years compared to the July 2007 forecast, in large part due to the
record level of new orders placed for Boeing and Airbus models during 2005 and a
stronger than expected order rate in 2006.  Defense spending for most
systems is expected to remain strong until at least 2010.  Current and
future military strategy leading to light armament and mobility favor the use of
titanium due to light weight and strong ballistic performance. Although we
estimate that emerging market demand presently represents only about 6% of the
2007 total industry demand for titanium mill products, we believe emerging
market demand, in the aggregate, could grow at double-digit rates over the next
several years.





Overall
industry outlook continues to support a long-term favorable trend in demand for
titanium across all major market sectors, including commercial aerospace,
military, industrial and emerging markets.  Commercial aerospace is
the leading driver for the anticipated increase in demand, in large part due to
the record level of new orders placed for Boeing and Airbus models during 2005
and a stronger than expected order rate in 2006.  With approximately
60% of our mill products sold for commercial aerospace applications, we are
particularly impacted by demand trends in that market sector, and we anticipate
that commercial aerospace demand will continue to favorably impact demand for
our products for the foreseeable future.








20





LIQUIDITY
AND CAPITAL RESOURCES





Our
consolidated cash flows for each of the past three years are presented
below.  The following should be read in conjunction with our
Consolidated Financial Statements and notes thereto.





Year
      ended December 31,2005
            
            
            2006
            
            
            2007(In
      millions)Cash
      provided by (used in):Operating
    activities
            
            $
            72.9
            
            
            $
            79.1
            
            
            $
            192.1Investing
    activities
            
            
            (61.5
            )
            
            
            (26.5
            )
            
            
            (108.2
            )Financing
    activities
            
            
            -
            
            
            
            (42.5
            )
            
            
            (24.5
            )Net cash provided by operating,
      investing
      and financing activities
            
            $
            11.4
            
            
            $
            10.1
            
            
            $
            59.4





Operating
activities.Cash flow from
operations is considered a primary source of our liquidity.  Changes
in pricing, production volume and customer demand, among other things, could
significantly affect our liquidity.  Cash provided by operating
activities increased $113.0 million, from $79.1 million in 2006 to $192.1
million in 2007.  The net effects of the following significant items
contributed to the overall increase in cash provided by operating
activities:





·
            lower
      operating income in 2007 of $10.8
million;




·
            the
      $50.0 million payment made to Haynes in 2006 in return for the dedicated
      rolling capacity;




·
            lower
      net cash used by changes in receivables, inventories, payables and accrued
      liabilities of $95.8 million in 2007 in response to changing working
      capital requirements; and




·
            higher
      net cash paid for income taxes in 2007 (including our tax benefit related
      to stock option exercises which was $7.8 million lower in 2007) of $65.8
      million due to the utilization of the remainder of our U.S. net operating
      loss carryforward in 2006 and a 2007 overpayment which resulted in
      refundable income taxes of $14.5
million.





Our
working capital requirements have changed significantly since 2005 as our net
sales and sales volume have increased dramatically.  Cash outflows to
support our working capital requirements for 2006 were influenced by increasing
unit cost for inventory as well as increased inventory purchases to support
higher levels of sales volume.  In contrast, as sales volumes have
decreased somewhat and purchased inventory costs per unit have declined during
2007, the cash outflow to support our working capital requirements was not as
significant during the 2007 compared to 2006.





Cash
provided by operating activities increased $6.2 million, from $72.9 million in
2005 to $79.1 million in 2006.  The net effects of the following
significant items contributed to the overall increase in cash provided by
operating activities:





·
            higher
      operating income of $211.7 million in
2006;




·
            the
      $50.0 million payment made to Haynes in 2006 in return for the dedicated
      rolling capacity;




·
            higher
      net cash used by changes in receivables, inventories, payables and accrued
      liabilities of $35.2 million in 2006, due primarily to higher accounts
      receivable and inventory levels resulting from the increased level of
      business activity;




·
            higher
      net cash paid for income taxes in 2006 (including our $9.9 million income
      tax benefit in 2006 related to the exercise of stock options) of $92.2
      million due to the utilization of the remainder of our U.S. net operating
      loss carryforward and higher taxable income in our foreign jurisdictions
      in 2006; and




·
            higher
      aggregate contributions to our defined benefit pension plans in 2006 of
      $9.8 million.





Investing
activities.  Cash flows used in our investing activities
changed from $61.5 million in 2005 to $26.5 million in 2006 to $108.2 million in
2007.  Our capital expenditures were $61.1 million during 2005,
compared to $100.9 million during both 2006 and 2007 and included the
following:





·
            The
      2005 amount includes expenditures related to construction on our now
      completed water conservation facility located in Henderson as well as the
      expansion of our sponge plant.




·
            The
      2006 amount includes expenditures related to our sponge plant expansion in
      Henderson, which became fully operational in 2007, and our new EB furnace
      at our facility in Morgantown, which became operational in early
      2008.




·
            During
      2007, we had lower expenditures on the sponge capacity expansion project,
      as the expansion was completed in April 2007.  However, we
      incurred a higher level of expenditures related to the EB melt capacity
      expansion project at our facility in Morgantown and other capacity
      expansion projects initiated in 2007 which largely offset the 2007
      expenditure reductions on the sponge plant expansion
    project.




·
            $75.0
      million received in 2006 from the sale of our interest in
      VALTIMET.





Financing
activities.  We had net borrowings of $8.3 million in 2005
under our U.S. and U.K. bank credit facilities which were used primarily to fund
our working capital and capital expenditures.  We had net repayments
of $52.7 million in 2006, funded primarily with a portion of the proceeds from
the sale of our interest in VALTIMET.  We had no borrowing activity
during 2007.  Other significant items included in our cash flows from
financing activities included:





·
            dividends
      paid on our common stock of $13.7 million in
  2007;




·
            dividends
      paid to CEZUS of $2.2 million in 2005, $3.0 million in 2006 and $8.1
      million in 2007;




·
            dividends
      paid on our Series A Preferred Stock of $12.5 million in 2005, $7.2
      million in 2006 and $5.6 million in
2007;




·
            proceeds
      from the issuance of our common stock upon exercise of stock options of
      $6.4 million in 2005, $11.3 million in 2006 and $1.0 million in 2007;
      and




·
            an
      income tax benefit of $9.9 million in 2006 and $2.1 million in 2007
      related to the exercise of stock
options.





21


Future
cash requirements





Liquidity.Our primary
source of liquidity on an on-going basis is our cash flows from operating
activities and borrowings under various credit facilities.  We
generally use these amounts to (i) fund capital expenditures, (ii) repay
indebtedness incurred primarily for working capital purposes and (iii) provide
for the payment of dividends (including first quarter 2008 regular quarterly
common stock dividends declared by our Board of Directors aggregating to $13.7
million).  From time-to-time we will incur indebtedness, generally to
(i) fund short-term working capital needs, (ii) refinance existing indebtedness,
(iii) make investments in marketable and other securities (including the
acquisition of securities issued by our subsidiaries and affiliates) or (iv)
fund major capital expenditures or the acquisition of other assets outside the
ordinary course of business.





We
routinely evaluate our liquidity requirements, capital needs and availability of
resources in view of, among other things, our alternative uses of capital, debt
service requirements, the cost of debt and equity capital and estimated future
operating cash flows.  As a result of this process, we have in the
past, or in light of our current outlook, may in the future, seek to raise
additional capital, modify our common and preferred dividend policies,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of common stock, purchase or redeem Series A Preferred Stock,
sell assets, or take a combination of such steps or other steps to increase or
manage our liquidity and capital resources.  In the normal course of
business, we investigate, evaluate, discuss and engage in acquisition, joint
venture, strategic relationship and other business combination opportunities in
the titanium, specialty metal and other industries.  In the event of
any future acquisition or joint venture opportunities, we may consider using
then-available liquidity, issuing equity securities or incurring additional
indebtedness.





At
December 31, 2007, we had aggregate borrowing availability under our existing
U.S and European credit facilities of $227.0 million, and we had an aggregate of
$90.0 million of cash and cash equivalents.  Our U.S. credit facility
matures in February 2011, and our U.K. credit facility matures in July
2010.  See Note 8 to the Consolidated Financial
Statements.  Based upon our expectations of our operating performance,
the anticipated demands on our cash resources, borrowing availability under our
existing credit facilities and anticipated borrowing capacity after the maturity
of these credit facilities, we expect to have sufficient liquidity to meet our
obligations for the short-term (defined as the next twelve-month period) and our
long-term obligations, including our planned capacity expansion projects, some
of which are discussed below.  If actual developments differ from our
expectations, our liquidity could be adversely affected.





Capital
expenditures.  We currently estimate we will invest a total of
approximately $120 million to $140 million for capital expenditures during 2008,
primarily for improvements in and expansion of existing productive
capacity.





We are
currently expanding our melt capacity at our Morgantown, Witton and Savoie
locations in response to industry demand trends, and we expect to complete these
additions during 2008 and 2009.





We
continue to evaluate additional opportunities to expand our productive capacity
including capital projects, acquisitions or other investments which, if
consummated, any required funding would be provided by borrowings under our U.S.
or European credit facilities.




Contractual
commitments.  As more fully
described in Notes 14 and 15 to the Consolidated Financial Statements, we were a
party to various agreements at December 31, 2007 that contractually commit us to
pay certain amounts in the future.  The following table summarizes
such contractual commitments that are enforceable and legally binding on us and
that specify all significant terms, including pricing, quantity and date of
payment:





Payment
      Due Date2008
            
            
            2009
      / 2010
            
            
            2011
      / 2012
            
            
            2013
      & After
            
            
            Total(In
      millions)Operating
      leases
            
            $
            5.7
            
            
            $
            10.7
            
            
            $
            9.1
            
            
            $
            32.6
            
            
            $
            58.1Purchase
      obligations:Raw materials (1)
            
            
            147.9
            
            
            
            203.1
            
            
            
            267.7
            
            
            
            789.0
            
            
            
            1,407.7Other (2)
            
            
            101.0
            
            
            
            32.2
            
            
            
            31.9
            
            
            
            85.4
            
            
            
            250.5Other
      contractual obligations (3)
            
            
            8.5
            
            
            
            0.6
            
            
            
            0.3
            
            
            
            -
            
            
            
            9.4$
            263.1
            
            
            $
            246.6
            
            
            $
            309.0
            
            
            $
            907.0
            
            
            $
            1,725.7


(1)
            These
      obligations generally relate to the purchase of titanium sponge pursuant
      to LTAs that expire at varying dates (as described in Item 1: Business)
      and various other open orders or commitments for purchase of raw
      materials.  Certain of the LTAs contain automatic renewal
      provisions; however, we have only included the purchase commitments
      associated with the initial terms of each
LTA.


(2)
            These obligations generally
      relate to contractual purchase obligations for conversion services,
      certain operating fees paid to CEZUS for use of a portion of its Ugine
      plant pursuant to an agreement expiring in 2015 (as described in Item 2:
      Properties), energy purchase obligations with BMI which expire in 2010 and
      various other open orders for purchase of energy, utilities and property
      and equipment.  These obligations are generally based on an
      average price and an assumed constant mix of products purchased, as
      appropriate.  All open orders are primarily for delivery in
      2008.


(3)
            These
      other obligations are recorded on our balance sheet as of December 31,
      2007 and consist of an obligation under a worker’s compensation bond and
      capital and interest payments under capital lease
      agreements.  Additionally, we have an obligation to Contran
      under an intercorporate services agreement (“ISA”) which will be recorded
      ratably over the 2008 service period.  We expect to enter into
      an ISA annually with Contran subsequent to
2008.





The above
table does not reflect any amounts that we might pay to fund our defined benefit
pension plans and OPEB plans, as the timing and amount of any such future
fundings are unknown and dependent on, among other things, the future
performance of defined benefit pension plan assets, interest rate assumptions
and actual future retiree medical costs.  See Note 13 to the
Consolidated Financial Statements and “Liquidity and Capital Resources - Defined benefit pension
plans” and “Liquidity and Capital Resources - Postretirement benefit plans other
than pensions.”





Off-balance sheet
arrangements.  We do not have any off-balance sheet financing
agreements other than the outstanding letters of credit and operating leases
discussed in Notes 8 and 15 to our Consolidated Financial
Statements.





Recent accounting
pronouncements.  See Note 2 to the Consolidated Financial
Statements.





Defined benefit
pension plans.  As of December 31, 2007, we maintain three
defined benefit pension plans – one each in the U.S., the U.K. and
France.  The majority of the discussion below relates to the U.S. and
U.K. plans, as the French plan is not material to our Consolidated Balance
Sheets, Statements of Income or Statements of Cash Flows.





22


We
recorded net consolidated pension expense of $7.9 million in 2005, $4.1 million
in 2006 and $4.6 million in 2007.  Pension expense or income for these
periods was calculated based upon a number of actuarial assumptions, most
significant of which are the discount rate and the expected long-term rate of
return.





The
discount rate we utilize for determining pension expense or income and pension
obligations is based on a review of long-term bonds (10 to 15 year maturities)
that receive one of the two highest ratings given by recognized rating agencies,
composite indices provided by our actuaries and discount rates derived from our
expected cash flows for each of our U.S. defined benefit pension and OPEB
plans.  Changes in our discount rate over the past three years reflect
the fluctuations in such bond rates during that period.  We establish
a rate that is used to determine obligations as of the year-end date and expense
or income for the subsequent year.  We used the following discount
rate assumptions for our defined benefit pension plans:





Discount
      rates used for:Obligation
      at
              December
      31, 2005
              and
      expense in 2006
            
            Obligation
      at
              December
      31, 2006
              and
      expense in 2007
            
            Obligation
      at
              December
      31, 2007
              and
      expense in 2008U.S.
      Plan
            5.50%
            
            5.90%
            
            5.90%U.K.
      Plan
            4.75%
            
            5.10%
            
            5.60%





In
developing our expected long-term rate of return assumptions, we evaluate
historical market rates of return and input from our actuaries, including a
review of asset class return expectations as well as long-term inflation
assumptions.  Projected returns are based on broad equity (large cap,
small cap and international) and bond (corporate and government) indices as well
as anticipation that the plans’ active investment managers will generate
premiums above the standard market projections.  We used the following
long-term rate of return assumptions for our defined benefit pension
plans:





Long-term
      rates of return used for pension expense for the year ended December
      31:2006
            
            2007
            
            2008U.S.
      Plan
            10.00%
            
            10.00%
            
            10.00%U.K.
      Plan
            6.70%
            
            6.50%
            
            6.65%





Lowering
the expected long-term rate of return on our U.S. plan’s assets by 0.5% (from
10.00% to 9.50%) would have decreased 2007 pension income by approximately $0.5
million, and lowering the discount rate assumption by 0.25% (from 5.90% to
5.65%) would have increased our U.S. plan’s 2007 pension income by approximately
$0.1 million.  Lowering the expected long-term rate of return on our
U.K. plan’s assets by 0.5% (from 6.50% to 6.00%) would have increased 2007
pension expense by approximately $1.0 million, and lowering the discount rate
assumption by 0.25% (from 5.10% to 4.85%) would have increased our U.K. plan’s
2007 pension expense by approximately $1.1 million.





All of
our U.S. plan’s assets are invested in the Combined Master Retirement Trust
("CMRT").  The CMRT is a collective investment trust sponsored by
Contran to permit the collective investment by certain master trusts which fund
certain employee benefits plans sponsored by Contran and related
companies.  A sub account of the CMRT held 8.4% of TIMET common stock
at December 31, 2007; however, our plan assets are invested only in the portion
of the CMRT that does not hold TIMET common stock.  See Note 14 to the
Consolidated Financial Statements.





The
CMRT's long-term investment objective is to provide a rate of return exceeding a
composite of broad market equity and fixed income indices (including the S&P
500 and certain Russell indices) utilizing both third-party investment managers
as well as investments directed by Mr. Simmons.  Mr. Simmons is the
sole trustee of the CMRT.  The trustee of the CMRT, along with the
CMRT’s investment committee, of which Mr. Simmons is a member, actively manage
the investments of the CMRT.  The trustee and investment committee
periodically change the asset mix of the CMRT based upon, among other things,
advice from third-party advisors and their respective expectations as to what
asset mix will generate the greatest overall return.  At December 31,
2007, the CMRT’s asset mix (based on an aggregate asset value of $757.1 million)
was 90% U.S. equity securities, 8% foreign equity securities and 2% fixed income
and other securities.  During 2005, 2006 and 2007, the assumed
long-term rate of return for our U.S. plan assets that invested in the CMRT was
10%.  In determining the appropriateness of the long-term rate of
return assumption, we considered, among other things, the historical rates of
return of the CMRT, the current and projected asset mix of the CMRT and the
investment objectives of the CMRT’s managers.  During the history of
the CMRT from its inception in 1987 through December 31, 2007, the average
annual rate of return earned by the CMRT, as calculated based on the average
percentage change in the CMRT’s net asset value per CMRT unit for each
applicable year, has been 14% (with an 11% return for 2007).





For our
U.K. plan, as a result of market fluctuations experienced and the strategic
movement toward our long-term funding and asset allocation strategies, actual
asset allocation as of December 31, 2007 was 78% equity securities and 22% fixed
income securities.  Our future expected long-term rate of return on
plan assets for our U.K. plan is based on our target asset allocation assumption
of 60% equity securities and 40% fixed income securities and all current
contributions to the plan are invested wholly in fixed income securities in
order to gradually affect the shift.  Based on various factors,
including economic and market conditions, gains on the plan assets during each
of the preceding years and projected asset mix, our assumed long-term rate of
return for our pension expense was 7.10% for 2005, 6.70% for 2006 and 6.50% for
2007.  Because all contributions continue to be put into fixed income
securities, we expect the asset mix for our U.K. plan to continue to move closer
to the projected mix, which reflects a higher percentage of fixed income
securities.





Although
the expected rate of return is a long-term measure, we continue to evaluate our
expected rate of return annually and adjust it as considered
necessary.  Actual returns on plan assets for a given year that are
greater than the assumed rates of return result in an actuarial gain, while
actual returns on plan assets for a given year that are less than the assumed
rates of return result in an actuarial loss.  All of these actuarial
gains and losses are not recognized in earnings currently, but instead are
deferred and amortized into income in the future as part of pension
expense.  However, any actuarial gains generated in future periods
reduce the negative amortization effect of any cumulative actuarial losses,
while any actuarial losses generated in future periods reduce the favorable
amortization effect of any cumulative actuarial gains.





Based on
an expected rate of return on plan assets of 10.00%, a discount rate of 5.90%
and various other assumptions, we estimate that our U.S. plan will have pension
income of approximately $4.3 million in 2008.  A 0.25% increase or
decrease in the discount rate would decrease or increase estimated pension
income by approximately $0.1 million in 2008, respectively.  A 0.5%
increase or decrease in the long-term rate of return would increase or decrease
estimated pension income by approximately $0.5 million in 2008,
respectively.





23


Based on
an expected rate of return on plan assets of 6.65%, a discount rate of 5.60% and
various other assumptions (including an exchange rate of $1.98/£1.00), we
estimate that pension expense for our U.K. plan will approximate $6.5 million in
2008.  A 0.25% increase or decrease in the discount rate would
decrease or increase estimated pension expense by approximately $1.1 million in
2008, respectively.  A 0.5% increase in the long-term rate of return
would decrease estimated pension expense in 2008 by approximately $1.0 million,
and conversely, a 0.5% decrease in the long-term rate of return would increase
estimated pension expense in 2008 by approximately $1.0
million.  Actual future pension expense will depend on actual future
investment performance, changes in future discount rates and various other
factors related to the participants in our pension plans.





We made
no cash contributions in 2005, $0.4 million in 2006 and $0.1 million in 2007 to
our U.S. plan and cash contributions of approximately $9.1 million in 2005,
$18.2 million in 2006 and $­10.5 million in 2007 to our U.K. plan. The
2006 contribution to our U.K. plan included a $9.9 million discretionary
contribution.  Based upon the current funded status of the plans and
the actuarial assumptions being used for 2007, we believe that we will be
required to make 2008 contributions of $9.6 million to our U.K. plan and none to
the U.S. plan.





The fair
value of the plans’ assets has increased significantly over the past three years
based mainly on performance of each plans’ equity securities.  The
fair value of the assets of the U.S. plan was $84.7 million at December 31,
2005, $93.6 million at December 31, 2006 and $98.4 million at December 31, 2007,
and the fair value of the assets of the U.K. plan was $138.1 million at December
31, 2005, $189.5 million at December 31, 2006 and $202.6 million at December 31,
2007.





The
combination of actual investment returns, changing discount rates and changes in
other assumptions has a significant effect on our funded plan status (plan
assets compared to projected benefit obligations).  The effect of
positive investment returns and an increase in the discount rate increased the
over-funded status of the U.S. plan from $5.3 million at December 31, 2005 to
$17.9 million at December 31, 2006 and to $23.4 million at December 31,
2007.  In 2006 the effect of positive investment returns and an
increase in the discount rate for our U.K. plan, more than offset the effect of
the weakening dollar compared to the British pound sterling, thereby reducing
the under-funded status of the U.K. plan from $54.8 million at December 31, 2005
to $51.1 million at December 31, 2006 and to $34.8 million at December 31,
2007.





Postretirement
benefit plans other than pensions.  We provide limited OPEB
benefits to a portion of our U.S. employees upon retirement.  We fund
such OPEB benefits as they are incurred, net of any retiree
contributions.  We paid OPEB benefits, net of retiree contributions,
of $2.3 million in 2005, $1.8 million in 2006 and $1.3 million in
2007.





We
recorded consolidated OPEB expense of $2.8 million in 2005, $3.6 million in 2006
and $3.1 million in 2007.  OPEB expense for these periods was
calculated based upon a number of actuarial assumptions, most significant of
which are the discount rate and the expected long-term health care trend
rate.





The
discount rate we utilize for determining OPEB expense and OPEB obligations is
the same as that used for our U.S. pension plan.  Lowering the
discount rate assumption by 0.25% (from 5.90% to 5.65%) would have had a nominal
impact on our 2007 OPEB expense.





We
estimate the expected long-term health care trend rate based upon input from
specialists in this area, as provided by our actuaries.  In estimating
the health care trend rate, we consider industry trends, our actual healthcare
cost experience and our future benefit structure.  For 2007, we used a
beginning health care trend rate of 7.17%.  If the health care trend
rate were increased or decreased by 1.0% for each year, OPEB expense would have
increased or decreased by approximately $0.3 million in 2007,
respectively.  For 2008, we are using a beginning health care trend
rate of 5.83%, which is projected to reduce to an ultimate rate of 4.0% in
2011.





Based on
a discount rate of 5.90%, a health care trend rate as discussed above and
various other assumptions, we estimate that OPEB expense will approximate $2.8
million in 2008.  A 0.25% increase or decrease in the discount rate
would have a nominal impact on estimated OPEB expense in 2008.  A 1.0%
increase or decrease in the health care trend rate for each year would increase
or decrease the estimated service and interest cost components of OPEB expense
by approximately $0.3 million in 2008, respectively.  Based upon the
actuarial assumptions being used in 2007, we believe we will be required to pay
OPEB benefits of $2.1 million in 2008, net of retiree contributions and a
Medicare Part D Federal subsidy.





Environmental
matters.  See “Business – Regulatory and environmental
matters” in Item 1and Note 15 to the
Consolidated Financial Statements for a discussion of environmental
matters.





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





See Notes
1 and 14 to the Consolidated Financial Statements for a discussion of certain
related party transactions that we were a party to during 2005, 2006 and
2007.





ITEM 7A:  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Interest
rates.  We are exposed to market risk from changes in interest
rates related to indebtedness.  We typically do not enter into
interest rate swaps or other types of contracts in order to manage our interest
rate market risk.  We had no outstanding bank indebtedness at December
31, 2006 and 2007.  Our borrowings accrue interest at variable rates,
generally related to spreads over bank prime rates and LIBOR.  Because
our bank indebtedness reprices with changes in market interest rates, the
carrying amount of such debt is believed to approximate fair value.




Foreign currency
exchange rates.  We are exposed to market risk arising from
changes in foreign currency exchange rates as a result of our international
operations.  We do not enter into currency forward contracts to manage
our foreign exchange market risk associated with receivables, payables or
indebtedness denominated in a currency other than the functional currency of the
particular entity. See “Results of Operations – European operations” in Item
7 - MD&A for further discussion.





Commodity
prices.  We are exposed to market risk arising from changes in
commodity prices as a result of our long-term purchase and supply agreements
with certain suppliers and customers.  These agreements, which offer
various fixed or formula-determined pricing arrangements, effectively obligate
us to bear (i) the risk of increased raw material and other costs to us that
cannot be passed on to our customers through increased titanium product prices
(in whole or in part) or (ii) the risk of decreasing raw material costs to our
suppliers that are not passed on to us in the form of lower raw material
prices.  However, our ability to offset increased material costs with
higher selling prices increased in 2006 and 2007, as many of our LTAs have
either expired or have been renegotiated with price adjustments that take into
account raw material, labor and energy cost fluctuations.





Securities
prices.  As of December 31, 2006 and 2007, we held certain
marketable securities that are exposed to market risk due to changes in prices
of the securities.  The aggregate market value of these equity
securities was $56.8 million at December 31, 2006 and $2.7 million at December
31, 2007.  The potential change in the aggregate market value of these
securities, assuming a 10% change in prices, would have been $5.7 million at
December 31, 2006 and nominal at December 31, 2007.  See Note 4 to the
Consolidated Financial Statements.





Interest bearing
note receivable.  At December 31, 2007, we held a note
receivable from CompX in the principal amount of $50.5 million.  Our
note receivable accrues interest at variable rates, related to the spread over
LIBOR.  Because our note receivable reprices with changes in market
interest rates, the carrying amount of such note receivable is believed to
approximate fair value.  See Note 4 to the Consolidated Financial
Statements.





ITEM
8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
information required by this Item is contained in a separate section of this
Annual Report.  See Index of Financial Statements on page
F.





ITEM
9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND
FINANCIAL DISCLOSURE





Not applicable.





24





ITEM
9A: CONTROLS AND PROCEDURES





Evaluation of
disclosure controls and procedures.We
maintain a system of disclosure controls and procedures.  The term
"disclosure controls and procedures," as defined by Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), means controls
and other procedures that are designed to ensure that information required to be
disclosed in the reports that we file or submit to the SEC under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.  Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file or submit to the SEC under the Exchange Act is accumulated and communicated
to our management, including our principal executive officer and our principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure.  Each
of Steven L. Watson, our Chief Executive Officer, and James W. Brown, our Chief
Financial Officer, have evaluated the design and operating effectiveness of our
disclosure controls and procedures as of December 31, 2007.  Based
upon their evaluation, these executive officers have concluded that our
disclosure controls and procedures were effective as of December 31,
2007.





Scope of
management’s report on internal control over financial
reporting.We also maintain internal control over financial
reporting.  The term "internal control over financial reporting," as
defined by Rule 13a-15(f) of the Exchange Act, means a process designed by, or
under the supervision of, our principal executive and principal financial
officers, or persons performing similar functions, and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP, and includes
those policies and procedures that:





·
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of our
      assets;





·
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with GAAP, and that our
      receipts and expenditures are being made only in accordance with
      authorizations of our management and directors;
  and





·
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on our Consolidated Financial
  Statements.





Section
404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) requires us to
include annually a management report on internal control over financial
reporting and such report is included below.  Our independent
registered public accounting firm is also required to annually attest to our
internal control over financial reporting.





Management’s
report on internal control over financial reporting.Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule
13a-15(f).  Our evaluation of the effectiveness of our internal
control over financial reporting is based upon the criteria established in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”).  Based on our evaluation under the COSO
framework, management has concluded that our internal control over financial
reporting was effective as of December 31, 2007.





The
effectiveness of our internal control over financial reporting as of December
31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which is included
in this Annual Report on Form 10-K.





Changes in
internal control over financial reporting.There have been no
changes to our internal control over financial reporting during the quarter
ended December 31, 2007 that have materially affected our internal control over
financial reporting.





Certifications.  Our
chief executive officer is required to annually file a certification with the
New York Stock Exchange (“NYSE”), certifying our compliance with the corporate
governance listing standards of the NYSE.  During 2007, our chief
executive officer filed such annual certification with the NYSE, which was not
qualified in any respect, indicating that he was not aware of any violations by
us of the NYSE corporate governance listing standards.  Our principal
executive officer and principal financial officer are also required to, among
other things, file quarterly certifications with the SEC regarding the quality
of our public disclosures, as required by Section 302 of the Sarbanes-Oxley
Act.  Such certifications for the year ended December 31, 2007 have
been filed as exhibits 31.1 and 31.2 to this Annual Report on Form
10-K.





ITEM
9B: OTHER INFORMATION





Not
applicable.





25






PART III


ITEM
      10:
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE
      REGISTRANTThe
      information required by this Item is incorporated by reference to our
      definitive proxy statement to be filed with the SEC pursuant to Regulation
      14A within 120 days after the end of the fiscal year covered by this
      Annual Report (the “Proxy Statement”).ITEM
      11:
            EXECUTIVE
      COMPENSATIONThe
      information required by this Item is incorporated by reference to the
      Proxy Statement.ITEM
      12:
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERSThe
      information required by this Item is incorporated by reference to the
      Proxy Statement.ITEM
      13:
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe
      information required by this Item is incorporated by reference to the
      Proxy Statement.  See also Note 14 to the Consolidated Financial
      Statements.ITEM
      14:
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICESThe
      information required by this Item is incorporated by reference to the
      Proxy Statement.





PART
IV
 
 ITEM
15:      EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
 
 (a) and
(c)     Financial Statements and Schedules
 
 The
Consolidated Financial Statements of the Registrant listed on the accompanying
Index of Financial Statements (see page F) are filed as part of this Annual
Report.
 
 All financial statement schedules have
been omitted either because they are not applicable or required, or the
information that would be required to be included is disclosed in the notes to
the consolidated financial statements.
 
 (b)           Exhibits
 
 The items
listed in the Exhibit Index are included as exhibits to this Annual
Report.  We have retained a signed original of any of these exhibits
that contain signatures, and we will provide such exhibit to the Securities and
Exchange Commission (“Commission”) or its staff upon request.  We will
furnish a copy of any of the exhibits listed below upon request and payment of
$4.00 per exhibit to cover the costs of furnishing the exhibits.  Such
requests should be directed to the attention of our Investor Relations
Department at our corporate offices located at 5430 LBJ Freeway, Suite 1700,
Dallas, Texas 75240.  Pursuant to Item 601(b)(4)(iii) of Regulation
S-K, any instrument defining the rights of holders of long-term debt issues and
other agreements related to indebtedness which do not exceed 10% of consolidated
total assets as of December 31, 2007 will be furnished to the Commission upon
request.





26






Item
      No.
              
              Exhibit
      Index3.1
              
              Amended
      and Restated Certificate of Incorporation of Titanium Metals Corporation,
      as amended effective February 14, 2003, incorporated by reference to
      Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2003.3.2
              
              Certificate
      of Amendment of Amended and Restated Certificate of Incorporation of
      Titanium Metals Corporation, effective August 5, 2004, incorporated by
      reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q
      for the quarter ended June 30, 2004.3.3
              
              Certificate
      of Amendment of Amended and Restated Certificate of Incorporation of
      Titanium Metals Corporation, effective February 15, 2006, incorporated by
      reference to Exhibit 99.1 the Registrant’s Current Report on Form 8-K
      filed with the SEC on February 15, 2006.3.4
              
              Bylaws
      of Titanium Metals Corporation as Amended and Restated, dated November 1,
      2007, incorporated by reference to Exhibit 3.1 to the Registrant’s Current
      Report on Form 8-K filed with the SEC on November 1,
  2007.4.1
              
              Form
      of Certificate of Designations, Rights and Preferences of 6 3/4 % Series A
      Convertible Preferred Stock, incorporated by reference to Exhibit 4.1 to
      the Registrant’s Pre-effective Amendment No. 1 to Registration Statement
      on Form S-4 (File No. 333-114218).9.1
              
              Shareholders’
      Agreement, dated February 15, 1996, among Titanium Metals Corporation,
      Tremont Corporation, IMI plc, IMI Kynoch Ltd., and IMI Americas, Inc.,
      incorporated by reference to Exhibit 2.2 to Tremont Corporation’s Current
      Report on Form 8-K filed with the SEC on March 1, 1996.9.2
              
              Amendment
      to Shareholders’ Agreement, dated March 29, 1996, among Titanium Metals
      Corporation, Tremont Corporation, IMI plc, IMI Kynoch Ltd., and IMI
      Americas, Inc., incorporated by reference to Exhibit 10.30 to Tremont
      Corporation’s Annual Report on Form 10-K for the year ended December 31,
      1995.9.3
              
              Voting
      Agreement executed October 5, 2004 but effective as of October 1, 2004
      among NL Industries, Inc., TIMET Finance Management Company and CompX
      Group, Inc., incorporated by reference to Exhibit 99.2 to the Current
      Report on Form 8-K of NL Industries, Inc. filed with the SEC on October 8,
      2004.10.1
              
              Form
      of Lease Agreement, dated November 12, 2004, between The Prudential
      Assurance Company Limited. and TIMET UK Ltd. related to the premises known
      as TIMET Number 2 Plant, The Hub, Birmingham, England, incorporated by
      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      filed with the SEC on November 17, 200410.2
              
              Credit
      Agreement among U.S. Bank National Association, Comerica Bank, Harris
      N.A., JP Morgan Chase Bank, N.A., The CIT Group/Business Credit, Inc., and
      Wachovia Bank, National Association as lenders and Titanium Metals
      Corporation as Borrower and U.S. Bank National Association, as Agent,
      dated February 17, 2006, incorporated by reference to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K filed with the SEC on February 23,
      2006.10.3*
              
              1996
      Long Term Performance Incentive Plan of Titanium Metals Corporation,
      incorporated by reference to Exhibit 10.19 to the Registrant’s Amendment
      No. 1 to Registration Statement on Form S-1 (File No.
      333-18829).10.4*
              
              2005
      Titanium Metals Corporation Profit Sharing Plan (Amended and Restated as
      of April 6, 2005), incorporated by reference to Appendix A to the
      Registrant’s Proxy Statement dated April 8, 2005 filed with the SEC on
      April 11, 2005.10.5*
              
              Amendment
      to the 2005 Titanium Metals Corporation Profit Sharing Plan (amended as of
      February 21, 2008), filed herewith.10.6*
              
              2008
      Discretionary Bonus Plan (as of February 21, 2008), filed
      herewith.  Certain exhibits to this Exhibit 10.6 have not been
      filed; upon request, the Registrant will furnish supplementally to the
      Commission a copy of any omitted exhibit.10.7
              
              Intercorporate
      Services Agreement among Contran Corporation, Tremont LLC and Titanium
      Metals Corporation, effective as of January 1, 2004, incorporated by
      reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2003.10.8
              
              Intercorporate
      Services Agreement among Contran Corporation and Titanium Metals
      Corporation, effective as of January 1, 2008, filed
    herewith.10.9**
              
              General
      Terms Agreement between The Boeing Company and Titanium Metals
      Corporation, incorporated by reference to Exhibit 10.2 to the Registrant’s
      Current Report on Form 8-K/A filed with the SEC on November 17,
      2006.10.10**
              
              Special
      Business Provisions between The Boeing Company and Titanium Metals
      Corporation, incorporated by reference to Exhibit 10.3 to the Registrant’s
      Current Report on Form 8-K/A filed with the SEC on November 17,
      2006.10.11**
              
              Agreement
      for the Purchase and Supply of Materials between Titanium Metals
      Corporation and certain subsidiaries and Rolls-Royce plc and certain
      subsidiaries effective January 1, 2007, incorporated by reference to
      Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2007.10.12
              
              Agreement
      Regarding Shared Insurance by and between CompX International Inc.,
      Contran Corporation, Keystone Consolidated Industries, Inc., Kronos
      Worldwide, Inc., NL Industries, Inc., Titanium Metals Corporation and
      Valhi, Inc. dated October 30, 2003, incorporated by reference to Exhibit
      10.20 to the Registrant’s Annual Report on Form 10-K for the year ended
      December 31, 2003.10.13
              
              Subscription
      Agreement executed October 5, 2004 but effective as of October 1, 2004
      among NL Industries, Inc., TIMET Finance Management Company and CompX
      Group, Inc., incorporated by reference to Exhibit 99.1 to the Current
      Report on Form 8-K of NL Industries, Inc. filed with the SEC on October 8,
      2004.10.14
              
              Certificate
      of Incorporation of CompX Group, Inc., incorporated by reference to
      Exhibit 99.3 to the Current Report on Form 8-K of NL Industries, Inc.
      filed with the SEC on October 8, 2004.10.15*
              
              Titanium
      Metals Corporation Amended and Restated 1996 Non-Employee Director
      Compensation Plan, as amended and restated effective May 23, 2006,
      incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly
      Report on Form 10-Q for the quarter ended June 30,
  2006.
  27
  10.16*
              
              Employment
      Agreement between Titanium Hearth Technologies, Inc. and Charles H.
      Entrekin, Ph.D., effective January 1, 2007, incorporated by reference to
      Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2006.10.17
              
              Access
      and Security Agreement between Titanium Metals Corporation and Haynes
      International, Inc. effective November 17, 2006, incorporated by reference
      to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K for the
      year ended December 31, 2006.  Certain exhibits to this Exhibit
      10.20 have not been filed; upon request, the Registrant will furnish
      supplementally to the Commission, subject to the Registrant’s request for
      confidential treatment of portions thereof, a copy of any omitted
      exhibit.10.18**
              
              Conversion
      Services Agreement between Titanium Metals Corporation and Haynes
      International, Inc. effective November 17, 2006, incorporated by reference
      to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the
      year ended December 31, 2006.10.19
              
              Stock
      Purchase Agreement dated as of October 16, 2007 between TIMET Finance
      Management Company and CompX International Inc., incorporated by reference
      to Exhibit 10.1 to the Current Report on Form 8-K filed by
      CompX International Inc. with the SEC on October 22, 2007 (File No.
      1-13905).10.20
              
              Agreement
      and Plan of Merger dated as of October 16, 2007 among
      CompX International Inc., CompX Group, Inc. and CompX KDL LLC,
      incorporated by reference to Exhibit 10.2 to the Current Report on
      Form 8-K filed by CompX International Inc. with the SEC on October
      22, 2007 (File No. 1-13905).10.21
              
              Form
      of Subordination Agreement among TIMET Finance Management Company, CompX
      International Inc., CompX Security Products, Inc., CompX Precision
      Slides Inc., CompX Marine Inc., Custom Marine Inc., Livorsi
      Marine Inc., Wachovia Bank, National Association as administrative
      agent for itself, Compass Bank and Comerica Bank, incorporated by
      reference to Exhibit 10.4 to the Current Report on Form 8-K filed by
      CompX International Inc. with the SEC on October 22, 2007 (File No.
      1-13905).10.22
              
              Subordinated
      Term Loan Promissory Note dated October 26, 2007 executed by CompX
      International Inc. and payable to the order of TIMET Finance Management
      Company, incorporated by reference to Exhibit 10.4 to the Current Report
      of Form 8-K filed by CompX International Inc. with the SEC on October 30,
      2007 (File No. 1-13905).10.23**
              
              Titanium
      Supply Agreement dated November 14, 2007 between Toho Titanium Co., Ltd.
      and Titanium Metals Corporation, filed herewith.  Certain
      exhibits and appendices to this Exhibit 10.23 have not been filed; upon
      request, the Registrant will furnish supplementally to the Commission,
      subject to the Registrant’s request for confidential treatment of portions
      thereof, a copy of any omitted exhibit.21.1
              
              Subsidiaries
      of the Registrant.23.1
              
              Consent
      of PricewaterhouseCoopers LLP.31.1
              
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2
              
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
              
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.99.1**
              
              Titanium
      Supply Agreement dated September 4, 2007 between Ardor (UK) Ltd. and
      Titanium Metals Corporation, filed herewith.
 *      Management
contract, compensatory plan or arrangement.
 **      Portions
of the exhibit have been omitted pursuant to a request for confidential
treatment.


28





SIGNATURES





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








TITANIUM
      METALS CORPORATION(Registrant)





By         /s/ Steven L.
      WatsonSteven L. Watson, February 28,
      2008
              Vice Chairman of the Board
      and
              Chief Executive
      Officer








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








By         /s/ Harold C.
      Simmons
            By         /s/ Terry N.
      WorrellHarold C. Simmons, February 28,
      2008
              Chairman of the
      Board
            Terry N. Worrell, February 28,
      2008
              DirectorBy          /s/ Steven L.
      Watson
            By          /s/ Paul J.
      ZucconiSteven L. Watson, February 28,
      2008
              Vice Chairman of the Board
      and
              Chief Executive
      Officer
            Paul J. Zucconi, February 28,
      2008
              DirectorBy         /s/ Keith R.
      Coogan
            By         /s/ James W.
      BrownKeith R. Coogan, February 28,
      2008
              Director
            James W. Brown, February 28,
      2008
              Vice President and Chief
      Financial
              Officer
              Principal Financial
      OfficerBy         /s/ Glenn R.
      Simmons
            By         /s/ Scott E.
      SullivanGlenn R. Simmons, February 28,
      2008
              Director
            Scott E. Sullivan, February 28,
      2008
              Vice President and
      Controller
              Principal Accounting
      OfficerBy         /s/ Thomas P.
      StaffordThomas P. Stafford, February
      28, 2008
              Director














29

















TITANIUM
METALS CORPORATION
 
 ANNUAL
REPORT ON FORM 10-K
 ITEMS
8and 15(a)
 
 INDEX
OF FINANCIAL STATEMENTS
 
 PageFinancial
      StatementsReport
      of Independent Registered Public Accounting Firm
              F-1Consolidated
      Balance Sheets – December 31, 2006 and 2007
              F-3Consolidated
      Statements of Income –Years
      ended December 31, 2005, 2006 and 2007
              F-5Consolidated
      Statements of Comprehensive Income –Years
      ended December 31, 2005, 2006 and 2007
              F-6Consolidated
      Statements of Cash Flows –Years
      ended December 31, 2005, 2006 and 2007
              F-8Consolidated
      Statements of Changes in Stockholders’ Equity –Years
      ended December, 2005, 2006 and 2007
              F-10Notes
      to Consolidated Financial Statements
              F-11We
      omitted all schedules to the Consolidated Financial Statements because
      they are not applicable or the required amounts are either not material or
      are presented in the Notes to the Consolidated Financial
      Statements.
 
 
 
  F
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Stockholders and Board of Directors of Titanium Metals Corporation:
 
 In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of comprehensive income, of changes in
stockholders’ equity and of cash flows present fairly, in all material respects,
the financial position of Titanium Metals Corporation and its subsidiaries at
December 31, 2006 and 2007 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2007 in
conformity with accounting principles generally accepted in the United States of
America.  Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).  The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting.  Our responsibility is to express opinions
on these financial statements and on the Company's internal control over
financial reporting based on our integrated audits (which were integrated audits
in 2007 and 2006).  We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects.  Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.  Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
 
 As
discussed in Note 2 to the Consolidated Financial Statements, the Company
changed the manner in which it accounts for pension and other postretirement
benefit obligations in 2006.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
 
 F-1
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
 
 
 
 
 /s/
PricewaterhouseCoopers LLP
 
 
 Dallas,
Texas
 February
28, 2008
 
  F-2
  
 TITANIUM
METALS CORPORATION
 CONSOLIDATED
BALANCE SHEETS
 (In
millions, except per share data)
 
 December
      31,ASSETS
              
              2006
              
              
              2007Current
      assets:Cash and cash
      equivalents
              
              $
              29.4
              
              
              $
              90.0Accounts and other receivables,
      lessallowance of $1.4 and $1.8,
      respectively
              
              
              213.0
              
              
              
              209.9Inventories
              
              
              501.5
              
              
              
              562.7Refundable income
      taxes
              
              
              -
              
              
              
              14.5Prepaid expenses and
      other
              
              
              4.6
              
              
              
              6.1Deferred income
    taxes
              
              
              9.1
              
              
              
              14.6Total current
    assets
              
              
              757.6
              
              
              
              897.8Marketable
      securities
              
              
              56.8
              
              
              
              2.7Note
      receivable from affiliate
              
              
              -
              
              
              
              50.5Property
      and equipment, net
              
              
              329.8
              
              
              
              382.0Pension
      asset
              
              
              17.9
              
              
              
              23.3Deferred
      income taxes
              
              
              3.5
              
              
              
              2.6Other
              
              
              51.3
              
              
              
              61.0Total
      assets
              
              $
              1,216.9
              
              
              $
              1,419.9
 
  See
accompanying notes to Consolidated Financial Statements.
 F-3
  TITANIUM
METALS CORPORATION
 CONSOLIDATED
BALANCE SHEETS (CONTINUED)
 (In
millions, except per share data)
 
 December
      31,LIABILITIES,
      MINORITY INTEREST AND
              
              2006
              
              
              2007STOCKHOLDERS’
      EQUITYCurrent
      liabilities:Accounts payable
              
              $
              87.8
              
              
              $
              72.6Accrued and other current
      liabilities
              
              
              82.0
              
              
              
              87.7Customer advances
              
              
              18.7
              
              
              
              17.4Income taxes
    payable
              
              
              22.0
              
              
              
              -Deferred income
    taxes
              
              
              0.6
              
              
              
              -Total current
      liabilities
              
              
              211.1
              
              
              
              177.7Accrued
      OPEB cost
              
              
              28.0
              
              
              
              29.3Accrued
      pension cost
              
              
              52.2
              
              
              
              36.0Deferred
      income taxes
              
              
              17.8
              
              
              
              11.3Other
              
              
              7.6
              
              
              
              9.0Total liabilities
              
              
              316.7
              
              
              
              263.3Minority
      interest
              
              
              21.3
              
              
              
              23.9Stockholders’
      equity:Series
      A Preferred Stock, $0.01 par value; $4.6 millionliquidation preference;
      4.0 million shares authorized, 1.7 and 0.1 million
      shares issued
                and outstanding, respectively
              
              
              75.0
              
              
              
              4.1Common stock, $0.01 par value; 200
      million shares authorized, 161.5
      and 183.0 million shares issued and outstanding, respectively
              
              
              1.6
              
              
              
              1.8Additional paid-in
      capital
              
              
              484.4
              
              
              
              558.2Retained earnings
              
              
              340.3
              
              
              
              589.0Accumulated other comprehensive
      loss
              
              
              (22.4
              )
              
              
              (20.4
              )Total stockholders’
      equity
              
              
              878.9
              
              
              
              1,132.7Total liabilities, minority
      interest and stockholders’ equity
              
              $
              1,216.9
              
              
              $
              1,419.9Commitments
      and contingencies (Note 15)
  See
accompanying notes to Consolidated Financial Statements.
 F-4
  
 
 TITANIUM
METALS CORPORATION
 CONSOLIDATED
STATEMENTS OF INCOME
 (In
millions, except per share data)
 
 
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007Net
      sales
              
              $
              749.8
              
              
              $
              1,183.2
              
              
              $
              1,278.9Cost
      of sales
              
              
              550.4
              
              
              
              747.1
              
              
              
              831.5Gross margin
              
              
              199.4
              
              
              
              436.1
              
              
              
              447.4Selling,
      general, administrative anddevelopment
      expense
              
              
              53.6
              
              
              
              67.0
              
              
              
              69.0Other
      income (expense), net
              
              
              25.3
              
              
              
              13.7
              
              
              
              (6.4
              )Operating income
              
              
              171.1
              
              
              
              382.8
              
              
              
              372.0Interest
      expense
              
              
              4.0
              
              
              
              3.4
              
              
              
              2.6Other
      non-operating income, net
              
              
              18.2
              
              
              
              39.0
              
              
              
              24.2Income before income taxes and
      minority interest
              
              
              185.3
              
              
              
              418.4
              
              
              
              393.6Provision
      for income taxes
              
              
              24.5
              
              
              
              128.4
              
              
              
              116.9Minority
      interest in after tax earnings
              
              
              4.9
              
              
              
              8.7
              
              
              
              8.5Net income
              
              
              155.9
              
              
              
              281.3
              
              
              
              268.2Dividends
      on Series A Preferred Stock
              
              
              12.2
              
              
              
              6.8
              
              
              
              5.1Net income attributable
      tocommon
      stockholders
              
              $
              143.7
              
              
              $
              274.5
              
              
              $
              263.1Earnings
      per share attributable to commonstockholders:Basic
              
              $
              1.10
              
              
              $
              1.77
              
              
              $
              1.62Diluted
              
              $
              0.86
              
              
              $
              1.53
              
              
              $
              1.46Weighted
      average shares outstanding:Basic
              
              
              130.8
              
              
              
              155.0
              
              
              
              162.8Diluted
              
              
              181.7
              
              
              
              183.8
              
              
              
              184.3Cash
      dividend declared per common share
              
              $
              -
              
              
              $
              -
              
              
              $
              0.075
  See
accompanying notes to Consolidated Financial Statements.
 F-5
  TITANIUM
METALS CORPORATION
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
 (In
millions)
 
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007Net
      income
              
              $
              155.9
              
              
              $
              281.3
              
              
              $
              268.2Other
      comprehensive income (loss), net of tax:Currency translation
      adjustment
              
              
              (11.8
              )
              
              
              12.8
              
              
              
              9.5Unrealized gains (losses) and
      reclassificationadjustment
      on marketable securities
              
              
              (3.0
              )
              
              
              10.3
              
              
              
              (19.9
              )Pension plans
              
              
              -
              
              
              
              -
              
              
              
              12.0OPEB plan
              
              
              -
              
              
              
              -
              
              
              
              0.4TIMET’s share of VALTIMET SAS’s
      unrealized net gains (losses) on derivative financial instruments
      qualifying
                ascash
      flow hedges
              
              
              (0.6
              )
              
              
              0.5
              
              
              
              -Additional minimum pension
      liabilities
              
              
              17.2
              
              
              
              0.1
              
              
              
              -Total other comprehensive
      income
              
              
              1.8
              
              
              
              23.7
              
              
              
              2.0Comprehensive
    income
              
              $
              157.7
              
              
              $
              305.0
              
              
              $
              270.2Currency
      translation adjustment:Beginning of year
              
              $
              16.8
              
              
              $
              5.0
              
              
              $
              17.8Change during year
              
              
              (11.8
              )
              
              
              16.3
              
              
              
              9.5Reclassification adjustment to
      eliminate thecumulative
      effects of VALTIMET
              
              
              -
              
              
              
              (3.5
              )
              
              
              -End of year
              
              $
              5.0
              
              
              $
              17.8
              
              
              $
              27.3Unrealized
      gains on marketable securities:Beginning of year
              
              $
              12.6
              
              
              $
              9.6
              
              
              $
              19.9Reclassification adjustment for
      realized gainincluded
      in net income
              
              
              -
              
              
              
              -
              
              
              
              (18.3
              )Change during year
              
              
              (3.0
              )
              
              
              10.3
              
              
              
              (1.6
              )End of year
              
              $
              9.6
              
              
              $
              19.9
              
              
              $
              -Pension
      plans:Beginning of year
              
              $
              -
              
              
              $
              -
              
              
              $
              (53.4
              )Amortization of prior service cost
      and net lossesincluded
      in net periodic pension cost
              
              
              -
              
              
              
              -
              
              
              
              2.9Net actuarial gain arising during
      year
              
              
              -
              
              
              
              -
              
              
              
              9.1Adoption of SFAS
    158
              
              
              -
              
              
              
              (53.4
              )
              
              
              -End of year
              
              $
              -
              
              
              $
              (53.4
              )
              
              $
              (41.4
              )
  See
accompanying notes to Consolidated Financial Statements.
 F-6
  TITANIUM
METALS CORPORATION
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
 (CONTINUED)
 (In
millions)
    Year
      ended December 31,2005
                
                
                2006
                
                
                2007OPEB
      plan:Beginning of year
                
                $
                -
                
                
                $
                -
                
                
                $
                (6.7
                )Amortization of prior service cost
      and net lossesincluded
      in net OPEB expense
                
                
                -
                
                
                
                -
                
                
                
                0.3Net actuarial gain arising during
      year
                
                
                -
                
                
                
                -
                
                
                
                0.1Adoption of SFAS
    158
                
                
                -
                
                
                
                (6.7
                )
                
                
                -End of year
                
                $
                -
                
                
                $
                (6.7
                )
                
                $
                (6.3
                )TIMET’s
      share of VALTIMET’s unrealized net gains (losses) on derivative financial
      instruments qualifying as cash flow hedges:Beginning of year
                
                $
                0.1
                
                
                $
                (0.5
                )
                
                $
                -Change during year
                
                
                (0.6
                )
                
                
                (1.1
                )
                
                
                -Reclassification adjustment to
      eliminate thecumulative
      effects of VALTIMET
                
                
                -
                
                
                
                1.6
                
                
                
                -End of year
                
                $
                (0.5
                )
                
                $
                -
                
                
                $
                -Additional
      minimum pension liabilities:Beginning of year
                
                $
                (69.5
                )
                
                $
                (52.3
                )
                
                $
                -Change during year
                
                
                17.2
                
                
                
                0.1
                
                
                
                -Adoption of SFAS
    158
                
                
                -
                
                
                
                52.2
                
                
                
                -End of year
                
                $
                (52.3
                )
                
                $
                -
                
                
                $
                -Total
      accumulated other comprehensive loss:Beginning of year
                
                $
                (40.0
                )
                
                $
                (38.2
                )
                
                $
                (22.4
                )Comprehensive income, net of
      tax
                
                
                1.8
                
                
                
                23.7
                
                
                
                2.0Adoption of SFAS
    158
                
                
                -
                
                
                
                (7.9
                )
                
                
                -End of year
                
                $
                (38.2
                )
                
                $
                (22.4
                )
                
                $
                (20.4
                )
   See
accompanying notes to Consolidated Financial Statements.
 F-7
 TITANIUM
METALS CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (In
millions)
 
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007Cash
      flows from operating activities:Net income
              
              $
              155.9
              
              
              $
              281.3
              
              
              $
              268.2Depreciation and
      amortization
              
              
              31.5
              
              
              
              34.1
              
              
              
              41.1Gain on sale of marketable
      securities
              
              
              -
              
              
              
              -
              
              
              
              (18.3
              )Gain on sale of
      VALTIMET
              
              
              -
              
              
              
              (40.9
              )
              
              
              -(Gain) loss on disposal of
      property and equipment
              
              
              (12.2
              )
              
              
              0.8
              
              
              
              7.7Equity in earnings of joint
      ventures,net
      of distributions
              
              
              (5.0
              )
              
              
              (10.7
              )
              
              
              -Deferred income
    taxes
              
              
              2.1
              
              
              
              10.3
              
              
              
              (14.7
              )Excess tax benefit on stock option
      exercises
              
              
              -
              
              
              
              (9.9
              )
              
              
              (2.1
              )Minority interest
              
              
              4.9
              
              
              
              8.8
              
              
              
              8.4Other, net
              
              
              -
              
              
              
              -
              
              
              
              2.5Change in assets and
      liabilities:Receivables
              
              
              (52.6
              )
              
              
              (61.3
              )
              
              
              7.7Inventories
              
              
              (108.8
              )
              
              
              (121.3
              )
              
              
              (51.4
              )Prepaid conversion
      services
              
              
              -
              
              
              
              (50.0
              )
              
              
              -Accounts payable and accrued
      liabilities
              
              
              35.4
              
              
              
              28.6
              
              
              
              (10.6
              )Customer advances
              
              
              9.2
              
              
              
              1.9
              
              
              
              (2.0
              )Income taxes
              
              
              14.4
              
              
              
              18.2
              
              
              
              (35.5
              )Pensions and other postretirement
      benefit plans
              
              
              0.7
              
              
              
              (9.1
              )
              
              
              (9.6
              )Other, net
              
              
              (2.6
              )
              
              
              (1.7
              )
              
              
              0.7Net cash provided by operating
      activities
              
              
              72.9
              
              
              
              79.1
              
              
              
              192.1Cash
      flows from investing activities:Capital
    expenditures
              
              
              (61.1
              )
              
              
              (100.9
              )
              
              
              (100.9
              )Proceeds from sale of
      VALTIMET
              
              
              -
              
              
              
              75.0
              
              
              
              -Principal payments on receivable
      from affiliate
              
              
              -
              
              
              
              -
              
              
              
              2.6Other, net
              
              
              (0.4
              )
              
              
              (0.6
              )
              
              
              (9.9
              )Net cash used in investing
      activities
              
              
              (61.5
              )
              
              
              (26.5
              )
              
              
              (108.2
              )Cash
      flows from financing activities:Indebtedness:Borrowings
              
              
              373.4
              
              
              
              639.2
              
              
              
              -Repayments
              
              
              (365.1
              )
              
              
              (691.9
              )
              
              
              -Dividends paid on common
      stock
              
              
              -
              
              
              
              -
              
              
              
              (13.7
              )Dividends paid to minority
      shareholder
              
              
              (2.2
              )
              
              
              (3.0
              )
              
              
              (8.1
              )Dividends paid on Series A
      Preferred Stock
              
              
              (12.5
              )
              
              
              (7.2
              )
              
              
              (5.6
              )Issuance of common
      stock
              
              
              6.4
              
              
              
              11.3
              
              
              
              1.0Excess tax benefits of stock
      option exercises
              
              
              -
              
              
              
              9.9
              
              
              
              2.1Other, net
              
              
              -
              
              
              
              (0.8
              )
              
              
              (0.2
              )Net cash used in financing
      activities
              
              
              -
              
              
              
              (42.5
              )
              
              
              (24.5
              )Net
      cash provided by operating, investing andfinancing
      activities
              
              $
              11.4
              
              
              $
              10.1
              
              
              $
              59.4
  See
accompanying notes to Consolidated Financial Statements.
 F-8
  TITANIUM
METALS CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
 (In
millions)
 
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007Cash
      and cash equivalents:Net increase (decrease)
      from:Operating, investing and
      financing activities
              
              $
              11.4
              
              
              $
              10.1
              
              
              $
              59.4Effect of exchange rate changes
      on cash
              
              
              (1.0
              )
              
              
              1.7
              
              
              
              1.2Net cash provided during
      year
              
              
              10.4
              
              
              
              11.8
              
              
              
              60.6Cash and cash equivalents at
      beginning of year
              
              
              7.2
              
              
              
              17.6
              
              
              
              29.4Cash and cash equivalents at end
      of year
              
              $
              17.6
              
              
              $
              29.4
              
              
              $
              90.0Supplemental
      disclosures:Cash paid for:Interest, net of amounts
      capitalized
              
              $
              3.4
              
              
              $
              3.4
              
              
              $
              2.8Income taxes, net
              
              $
              7.9
              
              
              $
              100.1
              
              
              $
              165.9
  See
accompanying notes to Consolidated Financial Statements.
 F-9
  TITANIUM
METALS CORPORATION
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 FOR THE
YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 (In millions)
 
 
 Common
      Shares
              
              
              Common
      Stock
              
              
              Series
      A
                Preferred
      Stock
              
              
              Additional
      Paid-in Capital
              
              
              Retained
      Earnings
              
              
              Accumulated
      Other Comprehensive Loss
              
              
              Treasury
      Stock
              
              
              TotalBalance
      at January 1, 2005
              
              
              127.3
              
              
              $
              1.3
              
              
              $
              173.6
              
              
              $
              349.7
              
              
              $
              (77.0
              )
              
              $
              (40.0
              )
              
              $
              (1.2
              )
              
              $
              406.4Net income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              155.9
              
              
              
              -
              
              
              
              -
              
              
              
              155.9Other comprehensive
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1.8
              
              
              
              -
              
              
              
              1.8Issuance of common
      stock
              
              
              2.2
              
              
              
              -
              
              
              
              -
              
              
              
              6.6
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6.6Conversion of Series A
                PreferredStock
      and BUCS
              
              
              12.4
              
              
              
              0.1
              
              
              
              (41.1
              )
              
              
              41.1
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              0.1Treasury stock
      retirement
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1.0
              )
              
              
              (0.2
              )
              
              
              -
              
              
              
              1.2
              
              
              
              -Tax benefit of
      stock options
                exercised and restricted
                stock vested
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3.9
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3.9Dividends declared on Series
      A
                Preferred Stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (12.5
              )
              
              
              -
              
              
              
              -
              
              
              
              (12.5
              )Balance
      at December 31, 2005
              
              
              141.9
              
              
              $
              1.4
              
              
              $
              132.5
              
              
              $
              400.3
              
              
              $
              66.2
              
              
              $
              (38.2
              )
              
              $
              -
              
              
              $
              562.2Net income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              281.3
              
              
              
              -
              
              
              
              -
              
              
              
              281.3Other comprehensive
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              23.7
              
              
              
              -
              
              
              
              23.7Issuance of common
      stock
              
              
              2.4
              
              
              
              -
              
              
              
              -
              
              
              
              11.2
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11.2Conversion of Series A
      Preferred
                Stock and BUCS
              
              
              17.2
              
              
              
              0.2
              
              
              
              (57.5
              )
              
              
              63.0
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5.7Tax benefit of stock
      options
                exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              9.9
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              9.9Change in accounting - SFAS
      158
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7.9
              )
              
              
              -
              
              
              
              (7.9
              )Dividends declared on Series
      A
                Preferred Stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7.2
              )
              
              
              -
              
              
              
              -
              
              
              
              (7.2
              )Balance
      at December 31, 2006
              
              
              161.5
              
              
              $
              1.6
              
              
              $
              75.0
              
              
              $
              484.4
              
              
              $
              340.3
              
              
              $
              (22.4
              )
              
              $
              -
              
              
              $
              878.9Net income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              268.2
              
              
              
              -
              
              
              
              -
              
              
              
              268.2Other comprehensive
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2.0
              
              
              
              -
              
              
              
              2.0Issuance of common
      stock
              
              
              0.2
              
              
              
              -
              
              
              
              -
              
              
              
              1.0
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1.0Conversion of Series APreferred
                Stock
              
              
              21.3
              
              
              
              0.2
              
              
              
              (70.9
              )
              
              
              70.7
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Tax benefit of stock
      options
                exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2.1
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2.1Dividends declared on Series
      A
                Preferred Stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5.6
              )
              
              
              -
              
              
              
              -
              
              
              
              (5.6
              )Dividends declared on common
                stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (13.7
              )
              
              
              -
              
              
              
              -
              
              
              
              (13.7
              )Change in accounting – FIN
      48
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (0.2
              )
              
              
              -
              
              
              
              -
              
              
              
              (0.2
              )Balance
      at December 31, 2007
              
              
              183.0
              
              
              $
              1.8
              
              
              $
              4.1
              
              
              $
              558.2
              
              
              $
              589.0
              
              
              $
              (20.4
              )
              
              $
              -
              
              
              $
              1,132.7
 
  See
accompanying notes to Consolidated Financial Statements.
 F-10
  TITANIUM
METALS CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 – Basis of presentation and organization
 
 Titanium
Metals Corporation, a Delaware corporation, is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
commercial aerospace, military, industrial and other applications.
 
 Basis of
presentation.  The Consolidated Financial Statements contained
in this Annual Report include the accounts of Titanium Metals Corporation and
its majority owned subsidiaries (collectively referred to as
“TIMET”).  Unless otherwise indicated, references in this report to
“we”, “us” or “our” refer to TIMET and its subsidiaries, taken as a
whole.  All material intercompany transactions and balances with
consolidated subsidiaries have been eliminated.  Our first three
fiscal quarters reported are the approximate 13-week periods ending on the
Saturday generally nearest to March 31, June 30 and September 30.  Our
fourth fiscal quarter and fiscal year always end on December 31.  For
presentation purposes, disclosures of quarterly information in the accompanying
notes have been presented as ended on March 31, June 30, September 30 and
December 31, as applicable.
 
 Organization.  At
December 31, 2007, Contran Corporation and subsidiaries held 27.9% of our
outstanding common stock, and the Combined Master Retirement Trust (“CMRT”), a
trust sponsored by Contran to permit the collective investment by trusts that
maintain the assets of certain employee benefit plans adopted by Contran and
certain related companies, held an additional 8.4% of our common
stock.  Substantially all of Contran's outstanding voting stock is
held by trusts established for the benefit of certain children and grandchildren
of Harold C. Simmons, of which Mr. Simmons is sole trustee, or is held by Mr.
Simmons or persons or other entities related to Mr. Simmons.  In
addition, Mr. Simmons is the sole trustee of the CMRT and a member of the trust
investment committee for the CMRT.  At December 31, 2007, Mr. Simmons
and his spouse owned an aggregate of 15.4% of our outstanding common
stock.  Consequently, Mr. Simmons may be deemed to control each of
Contran and us.
 
 Stock
splits.  We effected two-for-one splits of our common stock on
September 6, 2005, February 16, 2006 and May 15, 2006.  All share and
per share disclosures for all periods presented have been adjusted to give
effect to all of these stock splits.
 
  F-11
  Note
2 – Summary of significant accounting policies
 
 Use of
estimates.The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America (“GAAP”) requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period.  We use estimates in accounting for, among other
things, allowances for uncollectible accounts, inventory costing and allowances,
environmental accruals, self insurance accruals, deferred tax valuation
allowances, loss contingencies, valuation and impairment of financial
instruments, the determination of sales discounts and other rate assumptions for
pension and postretirement employee benefit costs, asset impairments, useful
lives of property and equipment, asset retirement obligations, restructuring
accruals and other special items.  Actual results may, in some
instances, differ from previously estimated amounts.  We review
estimates and assumptions periodically, and the effects of revisions are
reflected in the period they are determined to be necessary.
 
 Cash and cash
equivalents.We classify highly
liquid investments with original maturities of three months or less as cash
equivalents.
 
 Accounts
receivable.  We provide an allowance for doubtful accounts for
known and estimated potential losses arising from sales to customers based on a
periodic review of these accounts. Our periodic review of these accounts results
in an estimate of uncollectible accounts.  Our estimate of the
collectibility of trade accounts receivable is based on a historical analysis of
write-offs and evaluations of the aging trends and specific facts and
circumstances.
 
 Inventories and
cost of sales.We state inventories at
the lower of cost or market generally based on the specific identification cost
method, with certain raw materials stated based on the average cost
method.  Inventories include the costs for raw materials, the cost to
manufacture the raw materials into finished goods and
overhead.  Depending on the inventory’s stage of completion, our
manufacturing costs can include the costs of packing and finishing, utilities,
maintenance and depreciation, shipping and handling, and salaries and benefits
associated with our manufacturing process.  As inventory is sold to
third parties, we recognize the cost of sales in the same period that the sale
occurs.  We periodically review our inventory for estimated
obsolescence or instances when inventory is no longer marketable for its
intended use, and we record any write-down equal to the difference between the
cost of inventory and its estimated net realizable value based upon assumptions
about alternative uses, market conditions and other factors.
 
 Investments.We classify our marketable securities as available-for-sale securities
which are carried at fair value based upon quoted market prices, which represent
level one inputs as defined in Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements, with unrealized gains and/or losses included in
stockholders’ equity as a component of other comprehensive income.  We
base realized gains and losses upon the specific identification of the
securities sold.
 
 We
account for investments in companies which we do not control, but for which we
have the ability to exercise significant influence over operating and financial
policies, by the equity method.  Accordingly, our share of the net
earnings (losses) of these companies is included in consolidated net
income.  Differences between our investments in unconsolidated
affiliated companies and our proportionate share of the unconsolidated
affiliates’ reported equity are accounted for as if the unconsolidated
affiliates were a consolidated subsidiary.
 
 F-12
 We
evaluate our investments whenever events or conditions occur to indicate that
the fair value of such investments has declined below their carrying
amounts.  If the decline in fair value is judged to be other than
temporary, the carrying amount of the investment is written down to fair
value.
 
 Property,
equipment and depreciation.We state property and
equipment at cost.  We record depreciation expense on the
straight-line method over the estimated useful lives of 5 to 30 years for
buildings and building improvements and two to 25 years for machinery and
equipment.  We amortize capitalized software costs over the software’s
estimated useful life, generally three to five years.  We expense
maintenance (including planned major maintenance), repairs and minor renewals as
incurred and include such expenses in cost of sales.  We capitalize
major improvements.  We capitalized interest cost incurred on bank
debt of approximately $0.6 million during 2005 and $1.7 million during
2006.
 
 In
addition, we recognize the fair value of a liability for an asset retirement
obligation during the period in which the liability becomes reasonably
estimable, with an offsetting increase in the carrying amount of the related
long-lived asset.  Over time, the liability is accreted to its future
value, and the capitalized cost is depreciated over the remaining useful life of
the related asset.  Other than the asset retirement obligations
recognized as of December 31, 2007 (which are not material), the settlement
dates and methods of any other asset retirement obligations identified at any of
our locations are indeterminate and, therefore, we cannot reasonably estimate
the fair value of such liability.  We are aware of the existence of
asbestos and other environmental contaminants at certain owned facilities, and
other instances of asbestos or other environmental contaminants may be
identified in the future.  If in the future we decide, among other
things, to undergo a major renovation or demolish a property containing the
asbestos or other contaminants, our obligation to remove and dispose of or
remediate such contaminants in accordance with the applicable environmental
regulations may become reasonably estimable.
 
 Impairment of
long-lived assets.  We review long-lived assets for impairment
whenever events or changes in circumstances indicate the carrying amount of such
assets may not be recoverable.  We perform the impairment test
comparing the carrying amount of the assets to the undiscounted expected future
operating cash flows of the assets or asset group.  If this comparison
indicates the carrying amount is not recoverable, the amount of the impairment
would typically be calculated using discounted expected future cash flows or
appraised values.  We consider all relevant factors in determining
whether an impairment exists.
 
 Fair value of
financial instruments.Carrying amounts of
certain of our financial instruments including, among others, cash and cash
equivalents and accounts receivable, approximate fair value because of their
short maturities.  We carry our investments in marketable equity
securities at fair value based upon quoted market prices, and the carrying value
of our note receivable from an affiliate approximates fair value because it
bears interest at a variable market rate.
 
 Translation of
foreign currencies.We translate the assets
and liabilities of our subsidiaries whose functional currency is deemed to be
other than the U.S. dollar at year-end rates of exchange, while we translate
their revenues and expenses at average exchange rates prevailing during the
year.  We accumulate the resulting translation adjustments in the
currency translation adjustments component of other comprehensive income
(loss).  We recognize currency transaction gains and losses in income
in the period they are incurred.  We recognized net currency
transaction gains of $2.3 million in 2005, losses of $4.0 million in 2006 and
losses of $1.2 million in 2007.
 
 F-13
 Employee benefit
plans.Accounting and funding
policies for retirement plans and postretirement benefits other than pensions
(“OPEB”) are described in Note 13.
 
 Revenue
recognition.We record sales revenue
when we have certified that our product meets the related customer
specifications, the product has been shipped, and title and all the risks and
rewards of ownership have passed to the customer.  We record payments
we receive from customers in advance of these criteria being met as customer
advances or deferred revenue, depending on our products’ stage of completion,
until earned.  For inventory consigned to customers, we recognize
sales revenue when (i) the terms of the consignment end, (ii) we have completed
performance of all significant obligations and (iii) title and all of the risks
and rewards of ownership have passed to the customer.  We include
amounts charged to customers for shipping and handling in net
sales.  We state sales revenue net of price and early payment
discounts.  We report any tax assessed by a governmental authority
that we collect from our customers that is both imposed on and concurrent with
our revenue-producing activities (such as sales, use, value added and excise
taxes) on a net basis (meaning we do not recognize these taxes either in our
revenues or in our costs and expenses).
 
 Research and
development.We recognize research
and development expense, which includes activities directed toward expanding the
use of titanium and titanium alloys in all market sectors, as incurred, and we
classify research and development expense as part of selling, general,
administrative and development expense.  We recognized research and
development expense of $3.2 million in 2005, $4.7 million in 2006 and $4.2
million in 2007.  We record any related engineering and
experimentation costs associated with ongoing commercial production in cost of
sales.
 
 Self-insurance.  We are
self-insured for certain exposures relating to employee and retiree medical
benefits and workers’ compensation claims.  We purchase insurance from
third-party providers, which limits our maximum exposure to $0.3 million per
occurrence for employee medical benefit claims and $0.5 million per occurrence
for workers’ compensation claims.  We paid $12.7 million during both
2005 and 2006 and $14.8 million during 2007 related to employee medical
benefits.  We also paid $0.4 million during 2005 and $1.1 million
during both 2006 and 2007 related to workers’ compensation
claims.  Additionally, we maintain insurance from third-party
providers for automobile, property, product, fiduciary and other liabilities,
which are subject to various deductibles and policy limits typical to these
types of insurance policies.   See Note 14 for discussion of
policies provided by related parties.
 
 Income
taxes.We
recognize deferred income tax assets and liabilities for the expected future tax
consequences of temporary differences between the income tax and financial
reporting carrying amounts of our assets and liabilities, including investments
in our subsidiaries and affiliates who are not members of our U.S. Federal
income tax group and undistributed earnings of foreign subsidiaries which are
not permanently reinvested.  The earnings of our foreign subsidiaries
subject to permanent reinvestment plans aggregated $153.0 million at December
31, 2006 and $179.8 million at December 31, 2007.  It is not practical
for us to determine the amount of the unrecognized deferred income tax liability
related to such earnings due to the complexities associated with the U.S.
taxation on earnings of foreign subsidiaries repatriated to the U.S.  We
periodically evaluate our deferred income tax assets and recognize a valuation
allowance based on the estimate of the amount of such deferred tax assets which
we believe does not meet the more-likely-than-not recognition
criteria.  See Note 12.
 
 F-14
 Recent accounting
pronouncements.  In the third quarter of 2006, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.  SFAS 158
requires us to recognize an asset or liability for the over or under funded
status of each of our individual defined benefit pension and postretirement
benefit plans on our Consolidated Balance Sheets.  This standard did
not change the existing recognition and measurement requirements that determine
the amount of periodic benefit cost we recognize in net income.  We
adopted the asset and liability recognition and disclosure requirements of this
standard effective December 31, 2006 on a prospective basis, in which we
recognized through accumulated other comprehensive income all of our prior
unrecognized gains and losses and prior service costs or credits, net of tax, as
of December 31, 2006.  We now recognize all changes in the funded
status of these plans through comprehensive income, net of tax.  Any
future changes will be recognized either in net income, to the extent they are
reflected in periodic benefit cost, or through other comprehensive
income.  To the extent the net periodic benefit cost includes
amortization of actuarial losses and prior service cost, which were previously
recognized as a component of accumulated other comprehensive income at December
31, 2006, the effect on retained earnings, net of income taxes, was offset by a
change in accumulated other comprehensive income.  See Note
13.
 
 On
January 1, 2007, we adopted FASB Interpretation No. (“FIN”) 48, Accounting for Uncertain Tax
Positions.  FIN 48 clarifies when and how much of a benefit we
can recognize in our consolidated financial statements for certain positions
taken in our income tax returns under Statement of Financial Accounting
Standards No. 109, Accounting
for Income Taxes, and enhances the disclosure requirements for our income
tax policies and reserves.  Among other things, FIN 48 prohibits us
from recognizing the benefits of a tax position unless we believe it is
more-likely-than-not our position will prevail with the applicable tax
authorities and limits the amount of the benefit to the largest amount for which
we believe the likelihood of realization is greater than 50%.  FIN 48
also requires companies to accrue penalties and interest on the difference
between tax positions taken on their tax returns and the amount of benefit
recognized for financial reporting purposes under the new
standard.  We are required to classify any future reserves for
uncertain tax positions in a separate current or noncurrent liability, depending
on the nature of the tax position.  Our adoption of FIN 48 did not
have a material impact on our consolidated financial position or results of
operations.  Upon adopting FIN 48, we recognized a $0.2 million
decrease to retained earnings.
 
 We accrue
interest and penalties on our uncertain tax positions as a component of our
provision for income taxes.  The amount of interest and penalties we
accrued during 2007 was not material and at December 31, 2007 we had $0.2
million accrued for interest and an immaterial amount accrued for penalties for
our uncertain tax positions.
 
 The
following table shows the changes in the amount of our uncertain tax positions
(exclusive of the effect of interest and penalties) during 2007:
 
 Amount(in
      millions)Unrecognized
      tax benefits:Amount at adoption of FIN
      48
              
              $
              2.2Gross decreases in tax
      positions taken in prior periods
              
              
              (0.5
              )Gross increases in tax
      positions taken in current period
              
              
              0.2Settlements with taxing
      authorities – cash paid
              
              
              (0.1
              )Amount at December 31,
      2007
              
              $
              1.8
   F-15
 If our
uncertain tax positions were recognized, a benefit of $0.4 million would affect
our effective income tax rate from continuing operations.  We
currently estimate that our unrecognized tax benefits will decrease by
approximately $0.6 million during the next twelve months due to the reversal of
certain timing differences and the resolution of certain examination and filing
procedures related to one or more of our subsidiaries.
 
 We file
income tax returns in various U.S. Federal, state and local
jurisdictions.  We also file income tax returns in various foreign
jurisdictions, principally in the United Kingdom, Italy, France and
Germany.  Our domestic income tax returns prior to 2004 are generally
considered closed to examination by applicable tax authorities.  Our
foreign income tax returns are generally considered closed to examination for
years prior to 2001 for the United Kingdom, 2003 for Italy and Germany and 2004
for France.
 
 In the
third quarter of 2006 the FASB issued SFAS 157, which will become effective for
us on January 1, 2008.  SFAS 157 generally provides a consistent,
single fair value definition and measurement techniques for GAAP
pronouncements.  SFAS 157 also establishes a fair value hierarchy for
different measurement techniques based on the objective nature of the inputs in
various valuation methods.  In February 2008, the FASB issued FSP No.
FAS 157-2, Effective Date of
FASB Statement No. 157 which will delay the provisions of SFAS 157 for
one year for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually).  We will be required to ensure
all of our fair value measurements are in compliance with SFAS 157 on a
prospective basis beginning in the first quarter of 2008, except for fair value
measurements of non-financial assets and liabilities, which will be required to
be in compliance with SFAS 157 prospectively beginning in the first quarter of
2009.  In addition, we will be required to expand our disclosures
regarding the valuation methods and level of inputs we utilize in the first
quarter of 2008, except for the valuation methods and levels of input for
non-financial assets and liabilities, which will require disclosure in the first
quarter of 2009.  The adoption of this standard is not expected to
have a material effect on our consolidated financial position or results of
operations.
  In the
first quarter of 2007 the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.  SFAS 159 permits companies to choose, at
specified election dates, to measure eligible items at fair value, with
unrealized gains and losses included in the determination of net
income.  The decision to elect the fair value option is generally
applied on an item-by-item basis, is irrevocable unless a new election date
occurs and is applied to the entire item and not to only specified risks or cash
flows or a portion of the instrument.  Items eligible for the fair
value option include recognized financial assets and liabilities, other than
investments in a consolidated subsidiary, defined benefit pension plans, OPEB
plans, leases and financial instruments classified in equity.  An
investment accounted for by the equity method is an eligible
item.  The specified election dates include the date the company first
recognizes the eligible item, the date the company enters into an eligible
commitment, the date an investment first becomes eligible to be accounted for by
the equity method and the date SFAS 159 first becomes effective for the
company.  If we elect to measure eligible items at fair value under
the standard, we would be required to present certain additional disclosures for
each item we elect.  SFAS 159 becomes effective for us on January 1,
2008, and we have not chosen to apply SFAS 159 early.  We currently do
not have any material item which is eligible to be measured at fair value under
the new standard.  Therefore, we currently do not expect this standard
to have a material effect on our consolidated financial position or results of
operations.
 
 F-16
   In the
fourth quarter of 2007 the FASB issued SFAS No. 141 (R), Business
Combinations.  SFAS 141 (R) applies to us prospectively for
business combinations that close in 2009 and beyond.  SFAS 141 (R)
expands the definition of a business combination to include more transactions,
including some asset purchases, and requires an acquirer to recognize assets
acquired, liabilities assumed and any noncontrolling interest in the acquiree at
the acquisition date fair value with limited exceptions.  SFAS 141 (R)
also requires that acquisition costs be expensed as incurred and restructuring
costs that are not a liability of the acquiree at the date of the acquisition be
recognized in accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities.  Due to the unpredictable nature
of business combinations and the prospective application of this statement, we
are unable to predict the impact of the statement on our consolidated financial
position or results of operations.
 
 Also in
the fourth quarter of 2007 the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No.
51.SFAS 160 establishes a single method of accounting for
changes in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation.  On a prospective basis, any changes in ownership
will be accounted for as equity transactions with no gain or loss recognized on
the transactions unless there is a change in control.  Under existing
GAAP, such changes in ownership generally result either in the recognition of
additional goodwill (for an increase in ownership) or a gain or loss included in
the determination of net income (for a decrease in ownership).  SFAS
160 standardizes the presentation of noncontrolling interest as a component of
equity on the balance sheet and on a net income basis in the statement of
income.  SFAS 160 also requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish between
the interests of the parent and the interests of the noncontrolling owners of a
subsidiary. Those expanded disclosures include a reconciliation of the beginning
and ending balances of the equity attributable to the parent and the
noncontrolling owners and a schedule showing the effects of changes in a
parent’s ownership interest in a subsidiary on the equity attributable to the
parent.  SFAS 160 will be effective for us on a prospective basis in
the first quarter of 2009.  We will be required to reclassify our
balance sheet and statement of income to conform to the new presentation
requirements and to include the expanded disclosures at this
time.  Because the new method of accounting for changes in ownership
applies on a prospective basis, we are unable to predict the impact of the
statement on our consolidated financial position or results of operations.
However, to the extent we have subsidiaries that are not wholly owned at the
date of adoption, any subsequent increase in ownership of such subsidiaries for
an amount of consideration that exceeds the then-carrying value of the
noncontrolling interest related to the increased ownership would result in a
reduction in the amount of equity attributable to our shareholders.
 
 Note
3 – Inventories
 
 December
      31,2006
              
              
              2007(In
      millions)Raw
      materials
              
              $
              134.0
              
              
              $
              121.8Work-in-process
              
              
              239.4
              
              
              
              268.7Finished
      products
              
              
              93.5
              
              
              
              125.8Inventory
      consigned to customers
              
              
              16.9
              
              
              
              23.0Supplies
              
              
              17.7
              
              
              
              23.4Total inventories
              
              $
              501.5
              
              
              $
              562.7
 
  F-17
  Note
4 – Marketable securities
 
 Our marketable securities consist of
investments in related parties.  CompX International, Inc., NL
Industries, Inc. and Kronos Worldwide, Inc. are each majority owned subsidiaries
of Valhi Inc., a 93% owned subsidiary of Contran.  The following table
summarizes our marketable securities as of December 31, 2006 and
2007:
 
 Marketable
      security
              
              Shares
              
              
              Market
      value
              
              
              Cost
      basis
              
              
              Unrealized
      gains (losses)(in
      millions)As
      of December 31, 2006:CompX
              
              
              2.7
              
              
              $
              54.3
              
              
              $
              34.2
              
              
              $
              20.1NL
              
              
              0.2
              
              
              
              2.3
              
              
              
              2.5
              
              
              
              (0.2
              )Kronos
              
              
              -
              
              
              
              0.2
              
              
              
              0.2
              
              
              
              -Total marketable
      securities
              
              
              
              
              
              $
              56.8
              
              
              $
              36.9
              
              
              $
              19.9As
      of December 31, 2007:NL
              
              
              0.2
              
              
              $
              2.5
              
              
              $
              2.5
              
              
              $
              -Kronos
              
              
              -
              
              
              
              0.2
              
              
              
              0.2
              
              
              
              -Total marketable
      securities
              
              
              
              
              
              $
              2.7
              
              
              $
              2.7
              
              
              $
              -
 On
October 26, 2007, after approval by the independent members of our board of
directors, CompX acquired all of our minority common stock ownership position in
CompX for $19.50 per share, a recent price at which CompX had been repurchasing
its stock in open market transactions, or an aggregate of $52.6
million.  As consideration for the shares, CompX issued a $52.6
million subordinated promissory note to us.  The note bears interest
at LIBOR plus 1%, requires quarterly principal payments of $0.3 million
beginning September 30, 2008 and is subordinate to any outstanding balance under
CompX’s U.S. revolving bank credit facility.  CompX may make principal
prepayments at any time, in any amount, without penalty, and during 2007, CompX
made principal prepayments of $2.6 million.  Any outstanding principal
balance becomes due upon maturity in September 2014.  See Note
14.  As a result of the sale, we realized an $18.3 million after-tax
capital gain ($0.10 per diluted share) on the disposition of these CompX shares
in the fourth quarter of 2007.
 
 At
December 31, 2006 and 2007, we held approximately 0.5% of NL’s outstanding
common stock and less than 0.1% of Kronos’ outstanding common
stock.  Valhi and NL hold an aggregate of approximately 95% of Kronos’
outstanding common stock at December 31, 2007.  During 2006 and 2007,
CompX and Kronos each paid cash dividends on their respective common
stock.
 
 During
the first quarter of 2008, we purchased 0.5 million shares of Valhi common
stock, in a series of market transactions for an aggregate of $7.8
million.
 
 F-18
 Note
5 – Property and equipment
 
 December
      31,2006
              
              
              2007(In
      millions)Land
      and improvements
              
              $
              9.3
              
              
              $
              11.6Buildings
      and improvements
              
              
              41.6
              
              
              
              55.0Information
      technology systems
              
              
              66.0
              
              
              
              70.3Manufacturing
      equipment and other
              
              
              376.2
              
              
              
              455.8Construction
      in progress
              
              
              103.4
              
              
              
              88.7Total property and
      equipment
              
              
              596.5
              
              
              
              681.4Less
      accumulated depreciation
              
              
              266.7
              
              
              
              299.4Total property and equipment,
      net
              
              $
              329.8
              
              
              $
              382.0
 
 Note
6 – Other noncurrent assets
 
 December
      31,2006
              
              
              2007(In
      millions)Prepaid
      conversion services
              
              $
              49.7
              
              
              $
              47.2Other
              
              
              1.6
              
              
              
              13.8Total prepaid and other
      noncurrent assets
              
              $
              51.3
              
              
              $
              61.0
 
 During
the fourth quarter of 2006, we entered into a 20-year conversion services
agreement with Haynes International, Inc., whereby Haynes has agreed to provide
us with up to 4,500 metric tons of titanium mill rolling services at their
facility, and we have the option of increasing the output capacity to 9,000
metric tons.  Under the agreement, we paid Haynes $50.0 million in
return for the dedicated rolling capacity.  We are ratably amortizing
the $50.0 million we paid for the conversion services into the cost of the
applicable inventory rolled by Haynes over the 20-year term of the
agreement.
 
 Note
7 – Accrued and other current liabilities
 
 December
      31,2006
              
              
              2007(In
      millions)Employee
      related
              
              $
              46.4
              
              
              $
              45.5Deferred
      revenue
              
              
              6.9
              
              
              
              14.3Scrap
      purchases
              
              
              8.9
              
              
              
              4.6Taxes,
      other than income
              
              
              6.7
              
              
              
              7.3Other
              
              
              13.1
              
              
              
              16.0Total accrued
      liabilities
              
              $
              82.0
              
              
              $
              87.7
  
 F-19
 Under the
terms of our long-term agreements (“LTAs”) with certain of our customers, our
customers are required to purchase from us a buffer inventory of titanium
products for use by us in the production of titanium products ordered by the
customer in the future.  Generally, as the related inventory is placed
into buffer, the customer is billed and takes title to the inventory, although
we could retain an obligation to further process the material as directed by the
customer.  Accordingly, we defer the recognition of the revenue and
costs of sales on the buffer inventory until the final mill product is delivered
to the customer.  As of December 31, 2006 and 2007, $6.8 million and
$14.1 million of our deferred revenue related to the buffer inventory,
respectively.  The related buffer inventory is included in our
inventory consigned to others in Note 3.
 
 Note
8 – Bank debt
 
 We have a
$175 million U.S. long-term credit agreement (the “U.S. Facility”)
collateralized primarily by our U.S. accounts receivable, inventory, personal
property, intangible assets and a negative pledge on our U.S. fixed
assets.  The U.S. Facility matures in February 2011, and borrowings
under the U.S. Facility accrue interest at the U.S. prime rate or varying
LIBOR-based rates based on a quarterly ratio of outstanding debt to EBITDA as
defined by the agreement.  We had no outstanding borrowings under the
U.S. Facility as of December 31, 2006 and 2007.  The U.S. Facility
also provides for the issuance of up to $10 million of letters of
credit.
 
 The U.S.
Facility contains certain restrictive covenants that, among other things, limit
or restrict our ability to incur debt, incur liens, make investments, make
capital expenditures or pay dividends.  The U.S. Facility also
requires compliance with certain financial covenants, including minimum tangible
net worth, a fixed charge coverage ratio and a leverage ratio, and contains
other covenants customary in lending transactions of this type including
cross-default provisions with respect to our debt and
obligations.  Borrowings under the U.S. Facility are limited to the
lesser of $175 million or a formula-determined amount based upon U.S. accounts
receivable, inventory and fixed assets (subject to pledging fixed
assets).  The formula-determined amount only applies if borrowings
exceed 60% of the commitment amount or the leverage ratio exceeds a certain
level, but based on our outstanding borrowings and leverage ratio at December
31, 2006 and 2007, the formula determined borrowing ceiling was not applicable
at December 31, 2006 and 2007 since we had no borrowings
outstanding.  We were in compliance with all such covenants during the
years ended December 31, 2006 and 2007.
 
 In August
2007, TIMET U.K. terminated its previous credit facility and entered into a new
working capital credit facility (the “New U.K. Facility”) that expires on July
31, 2010.  Under the New U.K. facility, TIMET U.K. may borrow up to
£22.5 million, subject to a formula-determined borrowing base derived from the
value of accounts receivable, inventory and property, plant and
equipment.  Borrowings under the New U.K. Facility can be in various
currencies, including U.S. dollars, British pounds sterling and euros and are
collateralized by substantially all of TIMET U.K.’s assets.  Interest
on outstanding borrowings generally accrues at rates that vary from 1.125% to
1.375% above the lender’s published base rate.  Under our previous
U.K. credit facility, our borrowings were limited to the lesser of £22.5 million
or a formula-determined borrowing base derived from the value of accounts
receivable, inventory and property, plant and equipment.  The credit
agreement included revolving and term loan facilities and an overdraft facility
and required the maintenance of certain financial ratios and amounts, including
a minimum net worth covenant and other covenants customary in lending
transactions of this type.  We had no outstanding borrowings under
either U.K. facility at December 31, 2006 and 2007.  The New
U.K. Facility also contains financial ratios and covenants customary in
lending transactions of this type, including a minimum net worth
covenant.  TIMET U.K. was in compliance with all covenants during the
years ended December 31, 2006 and 2007.
   F-20
 We also
have overdraft and other credit facilities at certain of our other European
subsidiaries.  These facilities accrue interest at various rates and
are payable on demand, and as of December 31, 2006 and 2007, there were no
outstanding borrowings under these facilities.  Our consolidated
borrowing availability under our U.S., U.K. and other European credit facilities
aggregated to $227.0 million as of December 31, 2007.
 
 As of
December 31, 2007, we had $4.7 million of letters of credit outstanding under
our U.S. Facility which were required by various utilities and government
entities for performance and insurance guarantees, and we had $9.4 million of
letters of credit outstanding under our European credit facilities as collateral
under certain inventory purchase contracts.  These letters of credit
reduce our borrowing availability under our credit facilities.
 
 Note
9 – Minority interest
 
 Minority
interest relates principally to our 70%-owned French subsidiary, TIMET Savoie,
S.A..  Compagnie Européenne du Zirconium-CEZUS, S.A. (“CEZUS”) holds
the remaining 30% interest in TIMET Savoie.  We have the right to
purchase CEZUS’ interest in TIMET Savoie for 30% of TIMET Savoie’s equity
determined under French accounting principles, or $22.9 million as of December
31, 2007.  CEZUS has the right to require us to purchase its interest
in TIMET Savoie for 30% of TIMET Savoie’s registered capital, or $3.2 million as
of December 31, 2007.  TIMET Savoie made dividend payments to CEZUS of
$3.0 million in 2006 and $8.1 million in 2007.
 
 Note
10 – Stockholders’ equity
 
 Preferred
stock.At
December 31, 2007,we were authorized to
issue 10 million shares of preferred stock.  Our Board of Directors
determines the rights of preferred stock as to, among other things, dividends,
liquidation, redemption, conversions and voting rights.
 
 Prior to
2005, we issued 3.9 million shares of our Series A Preferred Stock in exchange
for 3.9 million of our previously issued 6.625% mandatorily redeemable
convertible preferred securities, beneficial unsecured convertible securities
(“BUCS”).  Each share of the Series A Preferred Stock is convertible,
at any time, at the option of the holder thereof, at a conversion price of $3.75
per share of our common stock (equivalent to a conversion rate of thirteen and
one-third shares of common stock for each share of Series A Preferred Stock),
with any partial shares paid in cash.  The conversion rate is subject
to adjustment if certain events occur, including, but not limited to, a stock
dividend on our common stock, subdivisions or certain reclassifications of our
common stock or the issuance of warrants to holders of our common
stock.
 
 Our
Series A Preferred Stock is not mandatorily redeemable but is redeemable at our
option at any time after September 1, 2007.  Holders of the Series A
Preferred Stock are entitled to receive cumulative cash dividends at the rate of
6.75% of the $50 per share liquidation preference per annum per share
(equivalent to $3.375 per annum per share), when, as and if declared by our
board of directors.  Whether or not declared, cumulative dividends on
Series A Preferred Stock are deducted from net income to arrive at net income
attributable to common stockholders.  Our U.S. Facility contains
certain financial covenants that may restrict our ability to make dividend
payments on the Series A Preferred Stock.
 
 F-21
 During
2005, 2006 and 2007, an aggregate of 0.9 million, 1.3 million and 1.6 million
shares of our Series A Preferred Stock were converted into 12.4 million, 17.2
million and 21.3 million shares of our common stock, respectively.  As
a result of these conversions, approximately 0.1 million shares of Series A
Preferred Stock remain outstanding as of December 31, 2007.
 
 Common
stock.  On February 15,
2006, we amended our certificate of incorporation to increase the number of
authorized shares of common stock from 90 million to 200 million
shares.  Our U.S. Facility limits the payment of common stock
dividends under certain circumstances.  Regular quarterly dividends
may be paid in the future when, as and if declared by our board of
directors.
 
 During
2005 and 2006, all of the BUCS that were not exchanged for shares of our Series
A Preferred Stock were redeemed for approximately 0.6 million shares of our
common stock and a nominal amount of cash.
 
 Treasury
stock.  During 2005, we retired the outstanding 0.4 million
shares of our treasury stock.  The retirement of such treasury stock,
which had a cost basis of $1.2 million, resulted in the reduction of common
stock for the par value of $0.01 for each retired share, a $1.0 million
reduction of additional paid-in capital and a $0.2 million decrease in retained
earnings.  On November 12, 2007 our board of directors authorized the
repurchase of up to $100 million of our common stock in open market transactions
or in privately negotiated transactions, and any repurchased shares will be
retired and cancelled.  We had not purchased any shares under this
repurchase program as of December 31, 2007, but from January 1, 2008 through
February 21, 2008, we purchased 0.1 million shares of our common stock in an
open market transaction for an aggregate purchase price of $1.9 million or
$18.72 per share.
 
 Restricted stock
and common stock options.  Our 1996 Long-Term Performance
Incentive Plan (the “Incentive Plan”) provides for the discretionary grant of
restricted common stock, stock options, stock appreciation rights and other
incentive compensation to our officers and other key employees.  No
restricted stock options or other share-based payments have been issued since
2000 under the Incentive Plan.  All previously issued options
generally vested over five years and expire ten years from the date of
grant.
 
 Eligible
non-employee directors are covered by an incentive plan that provides for the
issuance of share-based payments as an element of director compensation (the
“Director Plan”).  The share-based payments under the current Director
Plan include annual grants of our common stock to each non-employee director as
partial payment of director fees, and during 2005, 2006 and 2007, we issued a
nominal number of shares to our eligible non-employee directors.  We
previously granted options to eligible directors under a previous version of the
Director Plan.  These options vested in one year and expire ten years
from date of grant (five year expiration for grants prior to
1998).  There have been no stock options granted under the Director
Plan since 2003.
 
 The
weighted average remaining life of options outstanding under the Incentive Plan
and the Director Plan was 2.1 years at December 31, 2006 and 0.9 years at
December 31, 2007.  As of December 31, 2007, the amount payable upon
exercise of options outstanding was $0.5 million and the related aggregate
intrinsic value (defined as the excess of the market price of our common stock
over the exercise price) was $3.0 million.  At December 31, 2007, 7.0
million shares and 0.7 million shares, respectively, were available for future
grant under the Incentive Plan and the Director Plan.  Shares issued
under these plans are newly issued shares.
  F-22
  The
following table summarizes information about our stock options:
 
 Amount
      payable(Options)
              
              
              Exercise
      price
              
              
              upon
      exercise
              
              
              Weighted-average(in
      millions)
              
              
              per
      option
              
              
              (in
      millions)
              
              
              exercise
      priceOutstanding
      at December 31, 2004
              
              
              4.3
              
              
              $
              0.42-8.83
              
              
              $
              19.3
              
              
              $
              4.49Exercised
              
              
              (2.2
              )
              
              $
              0.90-7.33
              
              
              
              (6.4
              )
              
              $
              2.94Canceled
              
              
              -
              
              
              $
              2.00-7.33
              
              
              
              (0.2
              )
              
              $
              5.79Outstanding
      at December 31, 2005
              
              
              2.1
              
              
              $
              0.42-8.83
              
              
              $
              12.7
              
              
              $
              6.10Exercised
              
              
              (1.8
              )
              
              $
              0.42-8.83
              
              
              
              (11.3
              )
              
              $
              6.45Outstanding
      at December 31, 2006
              
              
              0.3
              
              
              $
              0.97-7.33
              
              
              $
              1.4
              
              
              $
              4.24Exercised
              
              
              (0.2
              )
              
              $
              0.97-7.33
              
              
              
              (0.9
              )
              
              $
              4.73Outstanding
      and exercisable atDecember
      31, 2007
              
              
              0.1
              
              
              $
              1.85-7.33
              
              
              $
              0.5
              
              
              $
              3.50
 
 The
intrinsic value of our options exercised aggregated $10.0 million in 2005, $31.5
million in 2006 and $5.7 million in 2007, and the related income tax benefit
from such exercises was $3.8 million in 2005, $9.9 million in 2006 and $2.1
million in 2007 (before considering the effect of any available net operating
loss carryforward).
 
 Note
11 – Other income and expense
 
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007(In
      millions)Other
      operating income (expense):Loss on asset
      impairment
              
              $
              -
              
              
              $
              -
              
              
              $
              (6.0
              )Equity in earnings of joint
      ventures
              
              
              5.0
              
              
              
              14.1
              
              
              
              -Boeing
    take-or-pay
              
              
              17.1
              
              
              
              -
              
              
              
              -Other, net
              
              
              3.2
              
              
              
              (0.4
              )
              
              
              (0.4
              )Total other operating income
      (expense), net
              
              $
              25.3
              
              
              $
              13.7
              
              
              $
              (6.4
              )Other
      non-operating income (expense):Dividends and
      interest
              
              $
              2.0
              
              
              $
              3.6
              
              
              $
              7.0Foreign exchange gain (loss),
      net
              
              
              2.3
              
              
              
              (4.0
              )
              
              
              (1.2
              )Gain on sale of marketable
      securities (Note 4)
              
              
              -
              
              
              
              -
              
              
              
              18.3Gain on sale of
      VALTIMET
              
              
              -
              
              
              
              40.9
              
              
              
              -Gain on sale of
      property
              
              
              13.9
              
              
              
              -
              
              
              
              -Other, net
              
              
              -
              
              
              
              (1.5
              )
              
              
              0.1Total other non-operating
      income, net
              
              $
              18.2
              
              
              $
              39.0
              
              
              $
              24.2
 
 During
2007, we capitalized the costs incurred for the initial planning and engineering
phase for the construction of a new vacuum distillation process titanium sponge
plant as part of construction in progress.  During the fourth quarter
of 2007, we decided to delay the project indefinitely, and as a result we
determined that the asset was no longer realizable and recognized a $6.0 million
expense related to previously capitalized costs.
 F-23
  Our
equity in earnings of joint ventures substantially reflects our share of the
earnings of VALTIMET, a manufacturer of welded stainless steel and titanium
tubing with operations in the United States, France, South Korea and
China.  During 2005 and 2006, we owned 43.7% of VALTIMET, Valinox
Welded, a French manufacturer of welded tubing, owned 51.3% and Sumitomo Metals
Industries, Ltd., a Japanese manufacturer of steel products, owned the remaining
5.0%.  We received cash dividends from VALTIMET of $3.4 million in
2006, which included $1.1 million declared in 2005 and $2.3 million declared in
2006.  On December 28, 2006, we sold our ownership interest in
VALTIMET to an affiliate of Valinox for $75.0 million in cash and recorded a
gain of $40.9 million.  We have entered into a separate ten-year
titanium supply agreement with VALTIMET that includes specified minimum annual
volumes, minimum prices and take-or-pay provisions.  See Notes 14 and
15.
 
 Based
upon the terms of our previous LTA with The Boeing Company, beginning in 2002,
Boeing was required to advance us $28.5 million annually (less $3.80 per pound
of titanium product sold to Boeing subcontractors in the preceding year) in
January of each year related to Boeing’s purchases from us for that
year.  To the extent Boeing did not meet the minimum volume
requirements under the previous LTA, we recognized income (which was classified
as other operating income and was not included in sales revenue, sales volume or
gross margin) under the take-or-pay provisions of the LTA.  Effective
July 1, 2005, we entered into a new LTA with Boeing pursuant to which, beginning
in 2006, the take-or-pay provisions of the previous LTA were replaced with an
annual makeup payment early in the following year in the event Boeing purchases
less than its annual volume commitment in any year.  Based on actual
purchases during 2005, we recognized take-or-pay income of $17.1 million during
2005 based on the provisions of our previous LTA.  During 2006 and
2007, Boeing purchases met the annual commitment level, so no make-up payment
was required based on the provisions of the new LTA.  See Note
15.
 
 In
November 2004, pursuant to an agreement with Basic Management, Inc. and certain
of our affiliates (“BMI”), we sold certain property located adjacent to our
Henderson, Nevada plant site to BMI, a 32%-owned indirect subsidiary of Contran,
and recorded a $12.0 million deferred gain related to the cash proceeds received
in November 2004.  During the second quarter of 2005, we ceased using
the property and recognized a $13.9 million non-operating gain related to the
sale of such property, which is comprised of (i) the $12.0 million cash proceeds
received in November 2004, (ii) the reversal of $0.6 million previously accrued
for potential environmental issues related to the property and (iii) an
additional $1.3 million cash payment received from BMI in June
2005.
 
  F-24
  Note
12 – Income taxes
 
 Summarized
in the following table are (i) the components of income before income taxes and
minority interest (“pre-tax income”), (ii) the difference between the provision
for income tax attributable to pre-tax income and the amounts that would be
expected using the U.S. Federal statutory income tax rate of 35%, (iii) the
components of the provision for income tax attributable to pre-tax income and
(iv) the components of the comprehensive tax provision:
 
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007(In
      millions)Income
      before income taxes and minority interest:U.S.
              
              $
              119.8
              
              
              $
              307.5
              
              
              $
              300.0Non-U.S.
              
              
              65.5
              
              
              
              110.9
              
              
              
              93.6Total
              
              $
              185.3
              
              
              $
              418.4
              
              
              $
              393.6Expected
      income tax expense, at 35%
              
              $
              64.9
              
              
              $
              146.4
              
              
              $
              137.8Non-U.S.
      tax rates
              
              
              (1.1
              )
              
              
              (2.1
              )
              
              
              (2.1
              )U.S.
      state income taxes, net
              
              
              3.9
              
              
              
              7.1
              
              
              
              5.9Nontaxable
      income
              
              
              (0.3
              )
              
              
              (0.9
              )
              
              
              (12.6
              )Elimination
      of equity adjustment components
              
              
              4.4
              
              
              
              (1.0
              )
              
              
              -Tax
      on repatriation of foreign earnings
              
              
              1.5
              
              
              
              -
              
              
              
              -Adjustment
      of deferred income tax valuation allowance
              
              
              (50.1
              )
              
              
              (17.1
              )
              
              
              (6.5
              )Domestic
      manufacturing credit
              
              
              -
              
              
              
              (2.4
              )
              
              
              (4.7
              )Other,
      net
              
              
              1.3
              
              
              
              (1.6
              )
              
              
              (0.9
              )Provision for income
      taxes
              
              $
              24.5
              
              
              $
              128.4
              
              
              $
              116.9
 
 Provision
      for income taxes:U.S. current income tax
      expense
              
              $
              5.1
              
              
              $
              88.3
              
              
              $
              107.9Non-U.S. current income tax
      expense
              
              
              17.3
              
              
              
              29.8
              
              
              
              23.7Total current income tax
      expense
              
              
              22.4
              
              
              
              118.1
              
              
              
              131.6U.S. deferred income tax expense
      (benefit)
              
              
              10.6
              
              
              
              3.3
              
              
              
              (8.9
              )Non-U.S. deferred income tax
      expense (benefit)
              
              
              (8.5
              )
              
              
              7.0
              
              
              
              (5.8
              )Total deferred income tax expense
      (benefit)
              
              
              2.1
              
              
              
              10.3
              
              
              
              (14.7
              )Provision for income
      taxes
              
              $
              24.5
              
              
              $
              128.4
              
              
              $
              116.9
  F-25
  
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007(In
      millions)Comprehensive
      tax provision allocable to:Income before income taxes and
      minority interest
              
              $
              24.5
              
              
              $
              128.4
              
              
              $
              116.9Additional paid in
      capital
              
              
              (3.9
              )
              
              
              (9.9
              )
              
              
              (2.1
              )Other comprehensive
      income:Currency translation
      adjustment
              
              
              -
              
              
              
              4.4
              
              
              
              (0.5
              )Pensions
    adjustment
              
              
              2.9
              
              
              
              (3.5
              )
              
              
              5.2OPEB adjustment
              
              
              -
              
              
              
              (4.0
              )
              
              
              0.2VALTIMET unrealized net gains on
      derivativefinancial instruments qualifying as
      cash flowhedges
              
              
              (0.2
              )
              
              
              0.2
              
              
              
              -$
              23.3
              
              
              $
              115.6
              
              
              $
              119.7
 
 The
following table summarizes our deferred tax assets and deferred tax liabilities
as of December 31, 2006 and 2007:
 
 December
      31,2006
              
              
              2007Assets
              
              
              Liabilities
              
              
              Assets
              
              
              Liabilities(In
      millions)Temporary
      differences relating to net assets:Inventories
              
              $
              -
              
              
              $
              (0.8
              )
              
              $
              9.4
              
              
              $
              -Property and equipment,
      including software
              
              
              -
              
              
              
              (37.9
              )
              
              
              -
              
              
              
              (38.5
              )Goodwill
              
              
              5.4
              
              
              
              -
              
              
              
              4.7
              
              
              
              -Accrued pension
    cost
              
              
              15.5
              
              
              
              -
              
              
              
              9.8
              
              
              
              -Pension asset
              
              
              -
              
              
              
              (6.3
              )
              
              
              -
              
              
              
              (8.8
              )Accrued OPEB
cost
              
              
              10.8
              
              
              
              -
              
              
              
              12.0
              
              
              
              -Accrued liabilities and other
      deductible differences
              
              
              8.2
              
              
              
              -
              
              
              
              12.5
              
              
              
              -Other taxable
      differences
              
              
              -
              
              
              
              (8.4
              )
              
              
              -
              
              
              
              -Tax loss and credit
      carryforwards
              
              
              9.1
              
              
              
              -
              
              
              
              6.5
              
              
              
              -Valuation
    allowance
              
              
              (1.4
              )
              
              
              -
              
              
              
              (1.7
              )
              
              
              -Gross
      deferred tax assets (liabilities)
              
              
              47.6
              
              
              
              (53.4
              )
              
              
              53.2
              
              
              
              (47.3
              )Netting
      by tax jurisdiction
              
              
              (35.0
              )
              
              
              35.0
              
              
              
              (36.0
              )
              
              
              36.0Total
      deferred taxes
              
              
              12.6
              
              
              
              (18.4
              )
              
              
              17.2
              
              
              
              (11.3
              )Less
      current deferred taxes
              
              
              9.1
              
              
              
              0.6
              
              
              
              14.6
              
              
              
              -Net
      noncurrent deferred taxes
              
              $
              3.5
              
              
              $
              (17.8
              )
              
              $
              2.6
              
              
              $
              (11.3
              )
 
 During
2005, we recognized a deferred income tax benefit related to a $0.5 million
decrease in our U.S. deferred income tax asset valuation allowance attributable
to our recognition, for U.S. income tax purposes only, of a capital gain on the
sale of certain property located at our Henderson, Nevada facility (see Note
11).  We utilized a portion of our U.S. capital loss carryforward to
offset the income taxes generated from the sale of such property.  We
recognized a corresponding deferred income tax expense in 2005 when we
recognized the gain for financial reporting purposes.
 
 F-26
 During
the first quarter of 2005, based on our recent history of U.S. income, our near
term outlook and the effect of our change in method of inventory determination
from the LIFO cost method to the specific identification cost method for U.S.
Federal income tax purposes (see Note 2), we changed our estimate of our ability
to utilize the tax benefits of our U.S. net operating loss (“NOL”)
carryforwards, alternative minimum tax (“AMT”) credit carryforwards and other
net deductible temporary differences (other than the majority of our capital
loss carryforwards).  Consequently, we determined that our net
deferred income tax asset related to such U.S. tax attributes and other net
deductible temporary differences met the “more-likely-than-not” recognition
criteria.  Accordingly, we reversed $36.4 million of the valuation
allowance attributable to such U.S. deferred income tax asset during
2005.
 
 During
the first quarter of 2005, based on our recent history of U.K. income, our near
term outlook and our historic U.K. profitability, we also changed our estimate
of our ability to utilize our net deductible temporary differences and other tax
attributes related to the U.K., primarily comprised of (i) the future benefits
associated with the reversal of our U.K. minimum pension liability deferred
income tax asset and (ii) the benefits of our U.K. NOL
carryforward.  Consequently, we determined that our net deferred
income tax asset in the U.K. met the “more-likely-than-not” recognition
criteria.  Accordingly, we reversed $13.2 million of the valuation
allowance attributable to such deferred income tax asset during
2005.
 
 We
recognized a deferred income tax benefit related to decreases in our deferred
income tax asset valuation allowance attributable to the recognition of a
capital gain on the sale of our 43.7% interest in VALTIMET of $17.1 million
during the fourth quarter of 2006 and $0.2 million in the third quarter of
2007.  During the fourth quarter of 2007, we recognized a deferred
income tax benefit related to a $6.4 million decrease in our deferred income tax
asset valuation allowance attributable to the recognition of a capital gain on
the sale of our minority common stock ownership position in
CompX.  The following table summarizes the components of the change in
our deferred tax asset valuation allowance in 2005, 2006 and 2007:
 Year
      ended December 312005
                
                
                2006
                
                
                2007(In
      thousands)Effect
      ofIncome before income taxes and
      minority interest
                
                $
                (50.1
                )
                
                $
                (17.1
                )
                
                $
                (6.5
                )Accumulated other comprehensive
      (income) loss
                
                
                1.0
                
                
                
                (3.6
                )
                
                
                6.8Currency translation adjustment
      and other
                
                
                (0.2
                )
                
                
                (0.1
                )
                
                
                -Change in deferred tax valuation
      allowance
                
                $
                (49.3
                )
                
                $
                (20.8
                )
                
                $
                0.3
  At
December 31, 2007, we had, for U.S. Federal income tax purposes, a capital loss
carryforward of $5.5 million that expires in 2008.  We have recognized
a deferred income tax asset valuation allowance for a majority of this capital
loss carryforward.
 
 F-27
 In
October 2004, the American Jobs Creation Act of 2004 was enacted into law. The
new law provides for a special deduction from U.S. taxable income equal to a
specified percentage of a U.S. company’s qualified income from domestic
manufacturing activities (as defined).  We believe that the majority
of our operations meet the definition of qualified domestic manufacturing
activities.  Our provision for income taxes for 2006 and 2007 includes
income tax benefits related to such special deductions of $2.4 million
and $4.7 million, respectively.  We did not derive any benefit
from the special manufacturing deduction in 2005 because our existing U.S. NOL
carryforwards fully offset our 2005 U.S. taxable income.  The new law
also provided for a special 85% deduction for certain dividends received from
controlled foreign corporations in 2005.  During 2005, we executed a
reinvestment plan and distributed an aggregate of $29.0 million of earnings from
our European subsidiaries, all of which qualified for the special dividend
received deduction.  In accordance with the requirements of FASB Staff
Position No. 109-2, we recognized the aggregate $1.5 million income tax related
to such repatriation in 2005.
 
 The
provision for income taxes in 2005 includes $4.4 million of deferred income
taxes resulting from the elimination of our minimum pension liability equity
adjustment component of accumulated other comprehensive income related to our
U.S. defined benefit pension plan.  In accordance with GAAP, we did
not recognize a deferred income tax benefit related to a portion of the minimum
pension equity adjustment we previously recognized, as during the time we
recognized the minimum pension equity adjustment, we had also recognized a
deferred income tax asset valuation related to our U.S. net operating loss
carryforward and other U.S. net deductible temporary differences.  In
accordance with GAAP, a portion of such valuation allowance recognized ($4.4
million) was recognized through the pension liability component of other
comprehensive income.  As discussed, during 2005 we concluded
recognition of such deferred income tax asset valuation allowance was no longer
required, and in accordance with GAAP the reversal of all of such valuation
allowance was recognized through the provision for income taxes included in the
determination of net income, including the $4.4 million portion of the valuation
allowance which was previously recognized through other comprehensive
income.  As of December 31, 2005, we were no longer required to
recognize a minimum pension liability related to our U.S. plan, and we reversed
the minimum pension liability previously recognized in other comprehensive
income.  After the reversal of such minimum pension liability, which
in accordance with GAAP was recognized on a net-of-tax basis, the $4.4 million
amount remained in accumulated other comprehensive income related to the U.S.
minimum pension liability, which in accordance with GAAP is required to be
recognized in the provision for income taxes during the period in which the
minimum pension liability is no longer required to be recognized.
 
 Similarly,
we did not recognize deferred income taxes related to our share of other
comprehensive income items of VALTIMET during a portion of the time we owned an
investment in VALTIMET, as during such time we had also recognized a deferred
income tax asset valuation related to our U.S. net operating loss carryforward
and other U.S. net deductible temporary differences.  Concurrent with
the sale of our investment in VALTIMET, we reversed the accumulated amount of
other comprehensive income items we had previously recognized with respect to
VALTIMET.  After such reversal, which in accordance with GAAP was
recognized on a net-of-tax basis, a $1.0 million deferred income tax benefit
remained in accumulated other comprehensive income, which in accordance with
GAAP is required to be recognized in the provision for income taxes during the
period in which we completed the sale of VALTIMET.  Also during 2006,
we reversed an aggregate of $0.5 million of deferred income taxes we had
previously provided on our share of the undistributed earnings of
VALTIMET.
 
 During
the second quarter of 2007, we implemented an internal corporate
reorganization.  As a result, we recognized a $12.6 million benefit
during 2007.
 
 F-28
 Note
13 – Employee benefit plans
 
 Variable
compensation plans.The majority of our
worldwide employees participate in compensation programs providing for variable
compensation and employer contributions under defined contribution pension plans
based primarily on our financial performance.  The cost of these plans
was approximately $23.7 million in 2005, $26.5 million in 2006 and $29.5 million
in 2007.
 
 Defined benefit
pension plans.We maintain
contributory defined benefit pension plans covering a majority of our European
employees and a noncontributory defined benefit pension plan covering a minority
of our U.S. employees.  Our funding policy is to annually contribute,
at a minimum, amounts satisfying the applicable statutory funding
requirements.  The U.S. defined benefit pension plans are closed to
new participants, and in some cases, benefit levels have been
frozen.  The U.K. defined benefit plan was closed to new participants
in 1996; however, employees participating in the plan continue to accrue
additional benefits based on increases in compensation and service.
 
 Information
concerning our defined benefit pension plans is set forth as
follows:
 
 Year
      ended December 31,2006
              
              
              2007(In
      millions)Change
      in projected benefit obligations:Balance at beginning of
      year
              
              $
              273.2
              
              
              $
              317.6Service cost
              
              
              4.7
              
              
              
              5.5Participants’
      contributions
              
              
              1.4
              
              
              
              1.5Interest cost
              
              
              14.0
              
              
              
              16.9Actuarial loss
      (gain)
              
              
              8.0
              
              
              
              (19.4
              )Benefits paid
              
              
              (10.8
              )
              
              
              (12.4
              )Change in currency exchange
      rates
              
              
              27.1
              
              
              
              4.3Balance at end of
      year
              
              $
              317.6
              
              
              $
              314.0Change
      in plan assets:Fair value at beginning of
      year
              
              $
              223.2
              
              
              $
              283.3Actual return on plan
      assets
              
              
              30.5
              
              
              
              15.0Employer
      contributions
              
              
              18.6
              
              
              
              10.7Participants’
      contributions
              
              
              1.4
              
              
              
              1.5Benefits paid
              
              
              (10.8
              )
              
              
              (12.4
              )Change in currency exchange
      rates
              
              
              20.4
              
              
              
              3.2Fair value at end of
      year
              
              $
              283.3
              
              
              $
              301.3Funded status
              
              $
              (34.3
              )
              
              $
              (12.7
              )
 
  F-29
  
 Year
      ended December 31,2006
              
              
              2007(In
      millions)Amounts
      recognized in balance sheets:Pension asset
              
              $
              17.9
              
              
              $
              23.3Noncurrent accrued pension
      cost
              
              
              (52.2
              )
              
              
              (36.0
              )Funded status
              
              
              (34.3
              )
              
              
              (12.7
              )Accumulated other comprehensive
      loss:Actuarial loss
              
              
              69.8
              
              
              
              55.2Prior service
cost
              
              
              2.3
              
              
              
              1.8Total
              
              $
              37.8
              
              
              $
              44.3Accumulated
      benefit obligation
              
              $
              313.2
              
              
              $
              308.3
  The
amounts shown in the table above for actuarial losses and prior service cost at
December 31, 2006 and 2007 have not yet been recognized as components of our
periodic defined benefit pension cost as of those dates.  These
amounts will be recognized as components of our periodic defined benefit cost in
future years.  However, the amounts, net of deferred income taxes, are
recognized in accumulated other comprehensive income (loss)
(“AOCI”).  Of the amounts included in AOCI as of December 31, 2007
related to our pension plans, we currently expect to recognize net actuarial
losses of $2.5 million and prior service costs of $0.4 million as a component of
net periodic pension expense during 2008.  The table below details the
changes in plan assets and benefit obligations recognized in accumulated other
comprehensive income.
 
 Year
      ended
                December 31,
    2007(In
      millions)Net actuarial gain arising during
      the year
              
              $
              13.1Amortization included in net
      periodic pension cost:Prior service
    cost
              
              
              0.5Net actuarial
      losses
              
              
              3.5Total
              
              $
              17.1
  As of
December 31, 2006 and 2007, our European defined benefit pension plans have
accumulated benefit obligations totaling $237.6 million and $233.5 million,
respectively, which are in excess of fair value of plan assets of $189.7 million
and $203.0 million, respectively.  The projected benefit obligations
related to our European defined benefit pension plans were $241.9 million and
$239.0 million at December 31, 2006 and 2007, respectively.
 
  F-30
  The
components of the net periodic pension expense are set forth below:
 
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007(In
      millions)Service
      cost
              
              $
              3.7
              
              
              $
              4.7
              
              
              $
              5.5Interest
      cost
              
              
              13.7
              
              
              
              14.0
              
              
              
              16.9Expected
      return on plan assets
              
              
              (14.8
              )
              
              
              (18.5
              )
              
              
              (21.8
              )Amortization
      of prior service cost
              
              
              0.5
              
              
              
              0.6
              
              
              
              0.5Amortization
      of net losses
              
              
              4.8
              
              
              
              3.3
              
              
              
              3.5Net pension
    expense
              
              $
              7.9
              
              
              $
              4.1
              
              
              $
              4.6
 
 We used
the following discount rate, long-term rate of return (“LTRR”) and salary rate
increase weighted-average assumptions to arrive at the aforementioned benefit
obligations and net periodic expense:
 
 Significant
      assumptions used to calculate projected and accumulated benefit
      obligations at December 31,2006
              
              
              2007Discount
                rate
              
              
              Salary
      increase
              
              
              Discount
                rate
              
              
              Salary
      increaseU.S.
      plan
              
              
              5.90
              %
              
              
              n/a
              
              
              
              5.90
              %
              
              
              n/aU.K.
      plan
              
              
              5.10
              %
              
              
              3.50
              %
              
              
              5.60
              %
              
              
              3.70
              %
 
 Significant
      assumptions used to calculate net periodic pension expense for the year
      ended December 31,Year
              
              Discount
      rate
              
              
              LTRR
              
              
              Salary
      IncreaseU.S.
      plan
              2005
              
              
              5.65
              %
              
              
              10.00
              %
              
              
              n/aU.K.
      plan
              2005
              
              
              5.30
              %
              
              
              7.10
              %
              
              
              3.25
              %U.S.
      plan
              2006
              
              
              5.50
              %
              
              
              10.00
              %
              
              
              n/aU.K.
      plan
              2006
              
              
              4.75
              %
              
              
              6.70
              %
              
              
              3.25
              %U.S.
      plan
              2007
              
              
              5.90
              %
              
              
              10.00
              %
              
              
              n/aU.K.
      plan
              2007
              
              
              5.10
              %
              
              
              6.50
              %
              
              
              3.50
              %
 
 We
currently expect to make no cash contributions to our U.S. defined benefit
pension plan and approximately $9.6 million to our U.K. defined benefit pension
plan during 2008.  The U.S. plan paid benefits of approximately $5.6
million in 2005, $5.4 million in 2006 and $5.7 million in 2007, and the European
plans paid benefits of approximately $4.4 million in 2005, $5.4 million in 2006
and $6.7 million in 2007.  Based upon current projections, we believe
that our pension plans will be required to pay the following pension benefits
over the next ten years:
 
  F-31
  
 Projected
      retirement benefitsU.S.
      Plan
              
              
              U.K.
      Plan
              
              
              Total(In
      millions)Year
      ending December 31,2008
              
              $
              6.0
              
              
              $
              6.9
              
              
              $
              12.92009
              
              
              6.0
              
              
              
              7.1
              
              
              
              13.12010
              
              
              5.9
              
              
              
              7.4
              
              
              
              13.32011
              
              
              5.9
              
              
              
              7.6
              
              
              
              13.52012
              
              
              5.9
              
              
              
              7.8
              
              
              
              13.72013 through 2017
              
              
              29.5
              
              
              
              43.2
              
              
              
              72.7
 
 The
assets of the defined benefit pension plans are invested as
follows:
 
 December
      31,2006
              
              
              2007U.S.
      plan:Equity securities
              
              
              93.9
              %
              
              
              98.0
              %Debt securities
              
              
              3.6
              
              
              
              -Cash and other
              
              
              2.5
              
              
              
              2.0100.0
              %
              
              
              100.0
              %U.K.
      plan:Equity securities
              
              
              79.0
              %
              
              
              78.0
              %Debt securities
              
              
              21.0
              
              
              
              22.0100.0
              %
              
              
              100.0
              %
 
 Our U.S.
plan’s assets are invested in the CMRT; however, our plan assets are invested
only in the portion of the CMRT that does not hold our common
stock.  The CMRT's long-term investment objective is to provide a rate
of return exceeding a composite of broad market equity and fixed income indices
(including the S&P 500 and certain Russell indices) utilizing both
third-party investment managers as well as investments directed by Mr.
Simmons.  Mr. Simmons is the sole trustee of the CMRT.  The
trustee of the CMRT, along with the CMRT’s investment committee, of which Mr.
Simmons is a member, actively manages the investments of the
CMRT.  The trustee and investment committee periodically change the
asset mix of the CMRT based upon, among other things, advice from third-party
advisors and their respective expectations as to what asset mix will generate
the greatest overall return.  At December 31, 2007, the CMRT’s asset
mix (based on an aggregate asset value of $757.1 million) was 90% U.S. equity
securities, 8% foreign equity securities and 2% cash and other
securities.  During 2005, 2006 and 2007, the assumed long-term rate of
return for our U.S. plan assets that invested in the CMRT was 10%.  In
determining the appropriateness of the long-term rate of return assumption, we
considered, among other things, the historical rates of return of the CMRT, the
current and projected asset mix of the CMRT and the investment objectives of the
CMRT’s managers.  During the history of the CMRT from its inception in
1987 through December 31, 2007, the average annual rate of return earned by the
CMRT, as calculated based on the average percentage change in the CMRT’s net
asset value per CMRT unit for each applicable year, has been 14% (with a 11%
return for 2007).
 
  F-32
  Postretirement
benefits other than pensions.  We provide certain health care
and life insurance benefits on a cost-sharing basis to certain of our U.S.
retirees and certain of our active U.S. employees upon retirement, for whom
health care coverage generally terminates once the retiree (or eligible
dependent) becomes Medicare-eligible or reaches age 65, effectively limiting
coverage for these participants to less than ten years based on our minimum
retirement age.  We also provide certain postretirement health care
and life insurance benefits on a cost sharing basis to closed groups of certain
of our U.S. retirees, for whom health care coverage generally reduces once the
retiree (or eligible dependent) becomes Medicare-eligible, but whose coverage
continues until death.  We fund such benefits as they are incurred,
net of any contributions by the retirees.
 
 The plan
under which these benefits are provided is unfunded, and contributions to the
plan during the year equal benefits paid.  The components of
accumulated OPEB obligations and periodic OPEB cost, based on a December 31
measurement date, are set forth as follows:
 December
      31,2006
                
                
                2007(In
      millions)Actuarial
      present value of accumulated OPEB obligations:Balance at beginning of
      year
                
                $
                30.8
                
                
                $
                30.2Service cost
                
                
                0.9
                
                
                
                0.9Interest cost
                
                
                1.8
                
                
                
                1.7Actuarial gain
                
                
                (1.5
                )
                
                
                (0.1
                )Participant
      contributions
                
                
                1.0
                
                
                
                0.9Benefits paid
                
                
                (2.8
                )
                
                
                (2.2
                )Balance at end of
      year
                
                $
                30.2
                
                
                $
                31.4Fair
      value of plan assets
                
                $
                -
                
                
                $
                -Funded status
                
                $
                (30.2
                )
                
                $
                (31.4
                )Amounts
      recognized in balance sheets:Current accrued OPEB
      cost
                
                $
                (2.2
                )
                
                $
                (2.1
                )Noncurrent accrued OPEB
      cost
                
                
                (28.0
                )
                
                
                (29.3
                )Funded status
                
                
                (30.2
                )
                
                
                (31.4
                )Accumulated other comprehensive
      loss:Net actuarial
loss
                
                
                12.1
                
                
                
                11.1Prior service
    credit
                
                
                (1.4
                )
                
                
                (1.0
                )Total
                
                $
                (19.5
                )
                
                $
                (21.3
                )
 F-33
 The
amounts shown in the table above for actuarial losses and prior service credit
at December 31, 2006 and 2007 have not yet been recognized as components of our
periodic OPEB cost as of those dates.  These amounts will be
recognized as components of our periodic OPEB cost in future
years.  However, the amounts, net of deferred income taxes, are
recognized in AOCI.  Of the amounts included in AOCI as of December
31, 2007 related to our OPEB plan, we currently expect to recognize net
actuarial losses of $0.8 million and prior service credits of $0.3 million as a
component of net periodic OPEB expense during 2008.  The table below
details the changes in benefit obligations recognized in accumulated other
comprehensive income.
 
 Year
      ended
                December 31,
    2007(In
      millions)Net actuarial gain arising during
      the year
              
              $
              0.1Amortization included in net OPEB
      expense:Prior service
    cost
              
              
              (0.5
              )Net actuarial
      losses
              
              
              0.9Total
              
              $
              0.5
  The
components of the net periodic OPEB expense are set forth below:
 
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007(In
      millions)Service
      cost
              
              $
              0.6
              
              
              $
              0.9
              
              
              $
              0.9Interest
      cost
              
              
              1.7
              
              
              
              1.8
              
              
              
              1.7Amortization
      of prior service cost
              
              
              (0.5
              )
              
              
              (0.5
              )
              
              
              (0.4
              )Amortization
      of net losses
              
              
              1.0
              
              
              
              1.4
              
              
              
              0.9Net OPEB expense
              
              $
              2.8
              
              
              $
              3.6
              
              
              $
              3.1
 
 We used
the following weighted-average discount rate and health care cost trend rate
(“HCCTR”) assumptions to arrive at the aforementioned benefit obligations and
net periodic expense:
 
 Significant
      assumptions used to calculate accumulated OPEB obligation at December
      31,2006
              
              
              2007Discount
      rate
              
              
              5.90%
              
              
              
              5.90%Beginning
      HCCTR
              
              
              7.17%
              
              
              
              5.83%Ultimate
      HCCTR
              
              
              4.00%
              
              
              
              4.00%Ultimate
      year
              
              2010
              
              
              2010
 
  F-34
  
 Significant
      assumptions used to calculate net periodic
                OPEB
      expense for the year ended December 31,2005
              
              
              2006
              
              
              2007Discount
      rate
              
              
              5.65%
              
              
              
              5.50%
              
              
              
              5.90%Beginning
      HCCTR
              
              
              9.29%
              
              
              
              8.23%
              
              
              
              7.17%Ultimate
      HCCTR
              
              
              4.00%
              
              
              
              4.00%
              
              
              
              4.00%Ultimate
      year
              
              2010
              
              
              2010
              
              
              2010
  If the
HCCTR were increased by one percentage point for each year, the aggregate of the
service and interest cost components of OPEB expense would have increased
approximately $0.3 million in 2007, and the actuarial present value of
accumulated OPEB obligations at December 31, 2007 would have increased
approximately $2.8 million.  If the HCCTR were decreased by one
percentage point for each year, the aggregate of the service and interest cost
components of OPEB expense would have decreased approximately $0.3 million in
2007, and the actuarial present value of accumulated OPEB obligations at
December 31, 2007 would have decreased approximately $2.5
million.
 
 The Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the “Medicare Act of 2003”)
introduced a prescription drug benefit under Medicare (Medicare Part D) as well
as a Federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part
D.  During 2005, we determined that the benefits provided by our U.S.
health and welfare plan are actuarially equivalent to the Medicare Part D
benefit and therefore we are eligible for the Federal subsidy provided for by
the Medicare Act of 2003.  The effect of such subsidy, which was
accounted for prospectively from the date actuarial equivalence was determined,
resulted in a reduction in our actuarial present value of our accumulated OPEB
obligation of $5.4 million at December 31, 2005 related to benefits attributed
to past service and will not have a material impact on the net periodic OPEB
cost going forward.
 
 Based
upon current projections, we believe that we will be required to pay the
following OPEB benefits, net of the projected Medicare Part D subsidy over the
next ten years:
 
 Projected
                OPEB
      benefits(In
      millions)Year
      ending December 31,2008
              
              $
              2.12009
              
              
              2.32010
              
              
              2.42011
              
              
              2.52012
              
              
              2.62013 through 2017
              
              
              13.9
 
  F-35
  Note
14 - Related party transactions
 
 Corporations
that may be deemed to be controlled by or affiliated with Mr. Simmons sometimes
engage in (i) intercorporate transactions such as guarantees, management and
expense sharing arrangements, shared fee arrangements, joint ventures,
partnerships, loans, options, advances of funds on open account, and sales,
leases and exchanges of assets, including securities issued by both related and
unrelated parties, and (ii) common investment and acquisition strategies,
business combinations, reorganizations, recapitalizations, securities
repurchases, and purchases and sales (and other acquisitions and dispositions)
of subsidiaries, divisions or other business units, which transactions have
involved both related and unrelated parties and have included transactions which
resulted in the acquisition by one related party of a publicly-held minority
equity interest in another related party.  We continuously consider,
review and evaluate such transactions, and understand that Contran and related
entities consider, review and evaluate such transactions.  Depending
upon the business, tax and other objectives then relevant, it is possible that
we might be a party to one or more such transactions in the future.
 
 Under the
terms of various intercorporate services agreements (“ISAs”) that we have
historically entered into with various related parties, including Contran,
employees of one company provide certain management, tax planning, legal,
financial, risk management, environmental, administrative, facility or other
services to the other company on a fee basis.  Such charges are based
upon estimates of the time devoted by the employees of the provider of the
services to the affairs of the recipient and the compensation of such persons,
or the cost of facilities, equipment or supplies provided.  Our
independent directors review and approve the fees we pay under the
ISAs.  We paid net ISA fees of $1.4 million during 2005 and $3.2
million during 2006.  During 2007, Contran employees began performing
certain executive and management functions previously performed by our
employees, and as a result, we had net ISA fees of $7.4 million in
2007.  We have extended this agreement through 2008, and we expect to
pay a net amount of $8.2 million under the ISA during 2008.
 
 Tall
Pines Insurance Company (including a predecessor company, Valmont Insurance
Company) and EWI RE, Inc. provide for or broker insurance policies for Contran
and certain of its subsidiaries and affiliates, including us.  Tall
Pines and EWI are subsidiaries of Contran.  Consistent with insurance
industry practices, Tall Pines and EWI receive commissions from the insurance
and reinsurance underwriters and/or assess fees for the policies that they
provide or broker.  Our aggregate premiums, including commissions, for
such policies were approximately $4.7 million in 2005, $6.9 million in 2006 and
$7.9 million in 2007.  Tall Pines purchases reinsurance for
substantially all of the risks it underwrites.  We expect that these
relationships with Tall Pines and EWI will continue in 2008.
 
 Contran
and certain of its subsidiaries and affiliates, including us, purchase certain
of their insurance policies as a group, with the costs of the jointly-owned
policies being apportioned among the participating companies.  With
respect to certain of such policies, it is possible that unusually large losses
incurred by one or more insureds during a given policy period could leave the
other participating companies without adequate coverage under that policy for
the balance of the policy period.  As a result, Contran and certain of
its subsidiaries and affiliates, including us, have entered into a loss sharing
agreement under which any uninsured loss is shared by those entities that have
submitted claims under the relevant policy.  We believe the benefits
in the form of reduced premiums and broader coverage associated with the group
coverage for such policies justify the risk associated with the potential for
any uninsured loss.
 F-36
 
 A
subsidiary of Contran owns 32% of BMI.  Among other things, BMI
provides utility services (primarily water distribution, maintenance of a common
electrical facility and sewage disposal monitoring) to us and other
manufacturers within an industrial complex located in Henderson,
Nevada.  Power transmission and sewer services are provided on a cost
reimbursement basis, similar to a cooperative, while water delivery is currently
provided at the same rates as are charged by BMI to an unrelated third
party.  Amounts paid by us to BMI for these utility services were $1.4
million during 2005, $2.3 million during 2006 and $2.2 million during
2007.  We also paid BMI an electrical facilities upgrade fee of $0.8
million in each of 2005, 2006 and 2007.  This fee continues at $0.8
million annually through 2009 and terminates completely after January
2010.
 
 We
previously extended market-rate loans to certain officers pursuant to a
Board-approved program to facilitate the officers’ purchase of our common stock
and BUCS and to pay applicable taxes on shares of our restricted common stock as
such shares vested.  We terminated this program in 2002, subject to
continuing only those loans outstanding at that time in accordance with their
then-current terms, and all remaining loans were repaid to us in full in
2005.
 
 In 2004,
we entered into an agreement with Waste Control Specialists LLC (“WCS”), a
majority owned subsidiary of Contran, for the removal of certain waste materials
from our Henderson plant site.  We paid $1.3 million in 2005 and $0.8
million in 2006 to WCS for the removal of such materials, and the work was
completed in 2006.
 
 We supply
titanium strip to VALTIMET under a long-term contract, which was amended in 2006
and extended to 2017.  Under the amended LTA, we have agreed to
provide a certain percentage of VALTIMET’s titanium requirements at
formula-determined selling prices, subject to certain minimum volumes,
take-or-pay provisions and other conditions.  Sales to VALTIMET were
$30.0 million in 2005 and $72.6 million in 2006.  Additionally,
VALTIMET provides welded tubing conversion services for us on a purchase order
basis.  Payments to VALTIMET for conversion and other services totaled
$4.8 million in 2005 and $8.5 million in 2006.  As a result of the
sale of our investment in VALTIMET, we no longer consider VALTIMET to be a
related party as of December 31, 2006.
 
 We have
previously purchased and sold investments in the common stock of certain related
parties.  See Note 4 for further discussion of these investment
transactions with related parties.  Our note receivable from affiliate
at December 31, 2007 relates to the unpaid balance of our promissory notes from
CompX discussed in Note 4.  Interest income on such promissory notes
from CompX was $0.5 million in 2007.
 
 During
2007, we engaged Kronos to provide consulting services for the planning and
engineering for the construction of a new vacuum distillation process titanium
sponge plant.  We incurred $0.3 million of expenses in 2007 for such
consulting services.
 
 Based on
the previous agreements and relationships, receivables from and payables to
various related parties in the normal course of business were nominal as of
December 31, 2006 and 2007.
 
  F-37
  Note
15 – Commitments and contingencies
 
 Long-term
agreements.  We have LTAs with certain major customers,
including, among others, Boeing, Rolls-Royce plc and its German and U.S.
affiliates, United Technologies Corporation (“UTC”, Pratt & Whitney and
related companies), Société Nationale d ́Etude et de Construction de Moteurs
d ́Aviation (“Snecma”), Wyman-Gordon (a unit of Precision Castparts Corporation
(“PCC”)) and VALTIMET.  These agreements have varying expiration dates
through 2017, are subject to certain conditions, and generally provide for (i)
minimum market shares of the customers’ titanium requirements or firm annual
volume commitments, (ii) formula-determined prices
(including some elements based onmarket pricing) and (iii) price
adjustments for certain raw material and energy cost
fluctuations.  Generally, the LTAs require our service and product
performance to meet specified criteria and contain a number of other terms and
conditions customary in transactions of these types.  In certain
events of nonperformance by us or the customer, the LTAs may be terminated
early.  Although it is possible that some portion of the business
would continue on a non-LTA basis, the termination of one or more of the LTAs
could result in a material effect on our business, results of operations,
financial position or liquidity.  The LTAs were designed to limit
selling price volatility to the customer, while providing us with a committed
base of volume throughout the titanium industry business cycles.
 
 Concentration of
credit and other risks.Substantially all of
our sales and operating income are derived from operations based in the U.S.,
the U.K., France and Italy.  As shown in the table below, we generate
over half of our sales revenue from sales to the commercial aerospace
sector.  As described previously, we have LTAs with certain major
aerospace customers, including Boeing, Rolls-Royce, UTC, Snecma and
Wyman-Gordon.  This concentration of customers may impact our overall
exposure to credit and other risks, either positively or negatively, in that all
of these customers may be similarly affected by the same economic or other
conditions.  The following table provides supplemental customer
receivable and sales revenue information:
 
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007Significant
      customer receivable balances as apercentage
      of total receivables:VALTIMET (1)
              
              
              -
              
              
              
              11
              %
              
              
              11
              %Significant
      sales revenue as a percentage of totalsales
      revenue:Ten largest
      customers
              
              
              44
              %
              
              
              49
              %
              
              
              49
              %Significant
      customers:PCC and PCC-related entities
      (2)
              
              
              13
              %
              
              
              11
              %
              
              
              11
              %Boeing (1)
              
              
              -
              
              
              
              -
              
              
              
              10
              %Commercial aerospace
      sector
              
              
              57
              %
              
              
              57
              %
              
              
              55
              %Customers under
    LTAs
              
              
              47
              %
              
              
              39
              %
              
              
              47
              %Significant customers under
      LTAs:Rolls-Royce (1)
      (2)
              
              
              12
              %
              
              
              -
              
              
              
              12
              %Boeing (1)
              
              
              -
              
              
              
              -
              
              
              
              10
              %(1)  Amounts excluded
      for periods when the concentration is not at least 10%.(2)  PCC and
      PCC-related entities serve as a supplier to Rolls-Royce. Certain
      sales we make directly to PCC and PCC-related entities also count towards,
      and are reflected in the table above as, sales to Rolls-Royce under the
      Rolls-Royce LTA.
  F-38
 Operating
leases.We
lease certain manufacturing and office facilities and various equipment under
non-cancelable operating leases with remaining terms ranging from one to twelve
years.  Most of the leases contain purchase options at fair market
value and/or various term renewal options at fair market rental
rates.  At December 31, 2007, future minimum payments under
non-cancelable operating leases having an initial term in excess of one year
were as follows:
 
 Amount(In
      millions)Year
      ending December 31,2008
              
              $
              5.72009
              
              
              5.62010
              
              
              5.12011
              
              
              4.62012
              
              
              4.52013 and
    thereafter
              
              
              32.6$
              58.1
 
 Net rent
expense under all leases, including those with original terms of less than one
year, was $5.1 million in 2005, $6.6 million in 2006 and $6.8 million in
2007.  We are also obligated under certain operating leases for our
pro rata share of the lessor’s operating expenses.
 
 Purchase
agreements.  We have LTAs with
titanium sponge and other suppliers that include minimum commitments to purchase
titanium sponge through 2024 and conversion services through 2019.  We
also have agreements with a certain energy provider to purchase minimum annual
levels of electricity through 2028.  Under these purchase agreements,
we are generally committed to the following minimum levels of
purchases:
 
 Titanium
      sponge
              
              
              Conversion
      services
              
              
              Energy
              
              
              Total(In
      millions)Year
      ended December 31,2008
              
              $
              96.4
              
              
              $
              2.0
              
              
              $
              1.8
              
              
              $
              100.22009
              
              
              100.0
              
              
              
              3.3
              
              
              
              1.8
              
              
              
              105.12010
              
              
              100.3
              
              
              
              4.4
              
              
              
              1.8
              
              
              
              106.52011
              
              
              129.5
              
              
              
              6.6
              
              
              
              1.8
              
              
              
              137.92012
              
              
              135.4
              
              
              
              6.6
              
              
              
              1.8
              
              
              
              143.82013
      and thereafter
              
              
              789.0
              
              
              
              46.2
              
              
              
              16.5
              
              
              
              851.7$
              1,350.6
              
              
              $
              69.1
              
              
              $
              25.5
              
              
              $
              1,445.2
 
 Environmental
matters.In November 2004, we and BMI entered into several
agreements under which we conveyed certain lands owned by us adjacent to our
Henderson, Nevada plant site on which settling ponds were located (the “TIMET
Pond Property”) to BMI, in exchange for (i) $12 million cash, (ii) BMI’s
assumption of the liability for certain environmental issues associated with the
TIMET Pond Property, including certain possible groundwater issues, and (iii) an
additional $1.3 million cash payment received from BMI in June
2005.  See Note 11.
 
 F-39
 We are continuing assessment work with
respect to groundwater remediation at our active plant site in Henderson,
Nevada.  As of December 31, 2007, we have $2.0 million accrued
representing our estimate of the probable costs of the remediation expected to
be required at the site under the current order with the state department of
environmental protection.  We expect these accrued expenses to be paid
over the remediation period of up to thirty years.  We estimate the
upper end of the range of reasonably possible costs related to this matter,
including the current accrual, to be approximately $4.1 million.
 
 We accrue
liabilities related to environmental remediation obligations when estimated
future costs are probable and estimable.  We evaluate and adjust our
estimates as additional information becomes available or as circumstances
change.  We generally do not discount estimated future expenditures to
their present value due to the uncertainty of the timing of the future
payments.  In the future, if the standards or requirements under
environmental laws or regulations become more stringent, if our testing and
analysis at our operating facilities identify additional environmental
remediation, or if we determine that we are responsible for the remediation of
hazardous substance contamination at other sites, then we may incur additional
costs in excess of our current estimates.  We do not know if actual
costs will exceed our current estimates, if additional sites or matters will be
identified which require remediation or if the estimated costs associated with
previously identified sites requiring environmental remediation will become
estimable in the future.
 
 Legal
proceedings.  We record liabilities related to legal
proceedings when estimated costs are probable and reasonably
estimable.  Such accruals are adjusted as further information becomes
available or circumstances change.  Estimated future costs are not
discounted to their present value.  It is not possible to estimate the
range of costs for certain matters.  No assurance can be given that
actual costs will not exceed accrued amounts or that costs will not be incurred
with respect to matters as to which no problem is currently known or where no
estimate can presently be made.  Further, additional legal proceedings
may arise in the future.
 
 We are
the primary obligor on two $1.5 million workers’ compensation bonds issued on
behalf of a former subsidiary, Freedom Forge Corporation (“Freedom Forge”),
which we sold in 1989.  Freedom Forge filed for Chapter 11 bankruptcy
protection on July 13, 2001, and they discontinued payment on the underlying
workers’ compensation claims in November 2001.  As of December 31,
2007, we have made aggregate payments under the two bonds of $2.1 million, and
$0.9 million remains accrued for future payments.
 
 From time
to time, we are involved in various employment, environmental, contractual,
intellectual property, product liability, general liability and other claims,
disputes and litigation relating to our business.  In certain
instances, we have insurance coverage for these items to eliminate or reduce our
risk of loss (other than standard deductibles, which are generally $1 million or
less).  We currently believe that the outcome of these matters,
individually or in the aggregate, will not have a material adverse effect on our
financial position, results of operations or liquidity beyond any accruals for
which we have already provided.  However, all such matters are subject
to inherent uncertainties, and were an unfavorable outcome to occur with respect
to several of these matters in a given period, it is possible that it could have
a material adverse impact on our results of operations or cash flows in that
particular period.  In cases where these claims, disputes and
litigation involve matters that we have concluded the risk of loss is not
probable, but is more than remote, we believe the range of loss, to the extent
we are able to reasonably estimate a range of loss, would be limited at the high
end of our standard insurance deductibles.
 
 F-40
 Note
16 – Earnings per share
 
 Basic
earnings per share is based on the weighted average number of unrestricted
common shares outstanding during each period.  Diluted earnings per
share attributable to common stockholders reflects the dilutive effect of common
stock options, restricted stock and the assumed conversion of the Series A
Preferred Stock and certain other securities, as applicable.  A
reconciliation of the numerator and denominator used in the calculation of basic
and diluted earnings per share is presented in the following table:
 
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007(In
      millions)Numerator:Net income attributable
      to  common stockholders (1)
              
              $
              143.7
              
              
              $
              274.5
              
              
              $
              263.1Dividends on Series A Preferred
      Stock
              
              
              12.2
              
              
              
              6.8
              
              
              
              5.1Other
              
              
              0.3
              
              
              
              -
              
              
              
              -Diluted net income attributable
      tocommon
      stockholders
              
              $
              156.2
              
              
              $
              281.3
              
              
              $
              268.2Denominator:Average common shares
      outstanding
              
              
              130.8
              
              
              
              155.0
              
              
              
              162.8Average dilutive stock options
      andrestricted
      stock (2)
              
              
              0.7
              
              
              
              0.3
              
              
              
              0.1Series A Preferred
      Stock
              
              
              49.6
              
              
              
              28.4
              
              
              
              21.4Other
              
              
              0.6
              
              
              
              0.1
              
              
              
              -Diluted shares
              
              
              181.7
              
              
              
              183.8
              
              
              
              184.3(1)  
      Net income attributable to common stockholders includes undeclared
      dividends on our Series A Preferred Stock of $0.8 million in 2005, $0.5
      million in 2006 and anominal
      amount
                in2007.(2)  
      Stock option conversion excludes anti-dilutive shares of 0.5 million in
      2005.
 
  F-41
  Note
17 – Business segment information
 
 Our
production facilities are located in the United States, United Kingdom, France
and Italy, and our products are sold throughout the world.  Our Chief
Executive Officer functions as our chief operating decision maker (“CODM”), and
the CODM receives consolidated financial information about us.  He
makes decisions concerning resource utilization and performance analysis on a
consolidated and global basis.  We have one reportable segment, our
worldwide “Titanium melted and mill products” segment.  The following
table provides segment information supplemental to our Consolidated Financial
Statements:
 
 Year
      ended December 31,2005
              
              
              2006
              
              
              2007(In
      millions, except product shipment data)Titanium
      melted and mill products:Melted product net
      sales
              
              $
              112.2
              
              
              $
              226.0
              
              
              $
              191.9Mill product net
      sales
              
              
              528.6
              
              
              
              819.2
              
              
              
              952.0Other titanium product
      sales
              
              
              109.0
              
              
              
              138.0
              
              
              
              135.0Total net sales
              
              $
              749.8
              
              
              $
              1,183.2
              
              
              $
              1,278.9Melted
      product shipments:Volume (metric
      tons)
              
              
              5,655
              
              
              
              5,900
              
              
              
              4,720Average selling price (per
      kilogram)
              
              $
              19.85
              
              
              $
              38.30
              
              
              $
              40.65Mill
      product shipments:Volume (metric
      tons)
              
              
              12,660
              
              
              
              14,160
              
              
              
              14,230Average selling price (per
      kilogram)
              
              $
              41.75
              
              
              $
              57.85
              
              
              $
              66.90
 
 Geographic
      segments:Net sales – point of
      origin:United States
              
              $
              512.3
              
              
              $
              865.3
              
              
              $
              931.3United Kingdom
              
              
              201.9
              
              
              
              263.6
              
              
              
              317.5France
              
              
              91.6
              
              
              
              131.3
              
              
              
              140.7Italy
              
              
              45.3
              
              
              
              62.8
              
              
              
              57.2Germany
              
              
              1.3
              
              
              
              0.4
              
              
              
              0.4Eliminations
              
              
              (102.6
              )
              
              
              (140.2
              )
              
              
              (168.2
              )$
              749.8
              
              
              $
              1,183.2
              
              
              $
              1,278.9Net sales – point of
      destination:United States
              
              $
              422.2
              
              
              $
              704.5
              
              
              $
              741.5United Kingdom
              
              
              136.6
              
              
              
              158.4
              
              
              
              202.7France
              
              
              87.8
              
              
              
              146.4
              
              
              
              141.5Other locations
              
              
              103.2
              
              
              
              173.9
              
              
              
              193.2$
              749.8
              
              
              $
              1,183.2
              
              
              $
              1,278.9Long-lived assets – property and
      equipment,
      net:United States
              
              $
              193.6
              
              
              $
              251.0
              
              
              $
              291.2United Kingdom
              
              
              53.6
              
              
              
              71.7
              
              
              
              81.6Other Europe
              
              
              5.8
              
              
              
              7.1
              
              
              
              9.2$
              253.0
              
              
              $
              329.8
              
              
              $
              382.0
  F-42
  Note
18 – Quarterly results of operations (unaudited)
 
 For
      the quarter endedMarch
      31
              
              
              June
      30
              
              
              Sept.
      30
              
              
              Dec.
      31(In
      millions, except per share data)Year ended December 31,
      2006: (1)Net sales
              
              $
              286.9
              
              
              $
              300.9
              
              
              $
              271.8
              
              
              $
              323.5Gross margin
              
              $
              108.3
              
              
              $
              106.3
              
              
              $
              97.8
              
              
              $
              123.7Operating income
              
              $
              95.1
              
              
              $
              93.6
              
              
              $
              84.6
              
              
              $
              109.5Net income attributable tocommon
      stockholders (2)
              
              $
              56.8
              
              
              $
              54.3
              
              
              $
              52.7
              
              
              $
              110.6Basic earnings per share
      attributable to common stockholders (2)
              
              $
              0.39
              
              
              $
              0.36
              
              
              $
              0.33
              
              
              $
              0.69Diluted earnings per share
      attributable to common stockholders (2)
              
              $
              0.32
              
              
              $
              0.31
              
              
              $
              0.29
              
              
              $
              0.61Year ended December 31, 2007:(1)Net sales
              
              $
              341.7
              
              
              $
              341.2
              
              
              $
              297.3
              
              
              $
              298.6Gross margin
              
              $
              133.4
              
              
              $
              135.5
              
              
              $
              98.0
              
              
              $
              80.5Operating income
              
              $
              116.2
              
              
              $
              118.0
              
              
              $
              81.3
              
              
              $
              56.6Net income attributable tocommon
      stockholders (3)
              
              $
              75.0
              
              
              $
              76.3
              
              
              $
              52.3
              
              
              $
              59.4Basic earnings per share
      attributable to common stockholders (3)
              
              $
              0.46
              
              
              $
              0.47
              
              
              $
              0.32
              
              
              $
              0.36Diluted earnings per share
      attributable to common stockholders (3)
              
              $
              0.41
              
              
              $
              0.42
              
              
              $
              0.29
              
              
              $
              0.33Dividends declared per
      common share
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              0.075(1)  
      The sum of quarterly
      amounts may not agree to the full year results due to
      rounding.(2)  
      Quarterending December 31,
      2006 includes $40.9 million gain related to the sale of our 43.7% interest
      in VALTIMET ($0.24 per diluted share, including a net income tax
      benefit
                of $3.9 million). See Note 11.(3)   Quarter
      ending December 31, 2007 includes $18.3 million gain related to the sale
      of our CompX marketable securities ($0.10 per diluted share). See
      Note 4.
 
 
 
 
 
  F-43