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, 2008





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 85.4 million shares of voting stock held by
nonaffiliates of Titanium Metals Corporation as of June 30, 2008 approximated
$1.2 billion.  There are no shares of non-voting common stock
outstanding.  As of February 19, 2009, 181,086,421 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.














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.





1


PART
I





ITEM
1:  BUSINESS





General.  Titanium Metals
Corporation is 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 Metals Corporaton 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.





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.  Over the past three years, we used our operating cash
flow and capital resources to fund completion of the expansion of our productive
capacity.  The expansion of our existing productive capacity and the
availability of our secure third-party conversion capabilities allow us to
respond to the industry’s demand volatility.  As the titanium industry
progresses through its demand cycle, we will continue to evaluate opportunities
to strategically expand our existing production and conversion capacities
through internal expansion and long-term third-party arrangements, as well as
potential joint ventures and acquisitions.




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 we
accounted for approximately 16% of 2007 and 15% of 2008 worldwide industry
shipments of titanium mill products and approximately 6% of worldwide titanium
sponge production in each of 2007 and 2008.  The following chart
illustrates our estimates of aggregate industry mill product shipments over the
past ten years:





Industry
Mill Product Shipments by 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 titanium mill product shipment
volume.  Over the past 30 years, the titanium industry has had various
cyclical peaks and troughs in mill product shipments.  Since 1999,
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 industries.  Over the last several
years we, and the industry as a whole, have experienced significantly increased
demand with periods of increased volatility.  We estimate that
industry shipments approximated 89,000 metric tons in 2007 and 102,000 metric
tons in 2008, with each year setting a new industry shipment
record.  The estimated 15% growth in 2008 was supported by continued
strength in the commercial aerospace sector and growth in the industrial
sector.  However, we currently expect 2009 total industry mill product
shipments to decrease by approximately 15% to ­­25%, driven by
anticipated reductions in the commercial aerospace and industrial
sectors.




2





Commercial aerospace sector -
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.  While industry shipments increased approximately 15% in
2008 due in part to strength in the commercial aerospace sector, demand from the
commercial aerospace sector is expected to be negatively impacted in 2009 by (i)
revisions and push-outs of production schedules for the Boeing 787, (ii)
adjustments and delays in certain other commercial aircraft build-out schedules
and (iii) Boeing’s labor dispute, which lasted approximately eight weeks and
ended in November 2008.  These factors are expected to continue to
negatively impact demand until uncertainties within the commercial aerospace
production cycle are resolved and demand is stabilized on a longer term
basis.  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.





Our
business is more dependent on commercial aerospace demand than is the overall
titanium industry.  We shipped approximately 65% of our mill products
to the commercial aerospace sector in 2008, whereas we estimate approximately
46% of the overall titanium industry’s mill products were shipped to the
commercial aerospace sector in 2008.





The Airline Monitor, a
leading aerospace publication, traditionally issues worldwide forecasts each
January and July for commercial aircraft deliveries, approximately one-third of
which are expected to be required by the U.S. over the next 20
years.  The Airline
Monitor’s most recently issued forecast (January 2009)estimates deliveries of
large commercial aircraft (aircraft with over 100 seats) totaled 944 (including
172 twin aisle aircraft which require more titanium) in 2008, 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
      aisle2009
            
            
            1,002
            
            
            
            187
            
            
            
            6
            %
            
            
            9
            %2010
            
            
            828
            
            
            
            243
            
            
            
            (17
            %)
            
            
            30
            %2011
            
            
            885
            
            
            
            285
            
            
            
            7
            %
            
            
            17
            %2012
            
            
            1,005
            
            
            
            310
            
            
            
            14
            %
            
            
            9
            %2013
            
            
            1,105
            
            
            
            365
            
            
            
            10
            %
            
            
            18
            %





The
latest forecast fromThe
Airline Monitor reflects a 16% decrease in forecasted deliveries over the
next five years compared to the July 2008 forecast, mainly due to The Airline Monitor’sexpectation that airlines will delay or cancel existing orders due to
general economic conditions and revisions of production schedules for the Boeing
787.  Boeing and Airbus booked orders for 1,561 planes in 2008, a
decrease from the record bookings in 2005 through 2007, and The Airline Monitor forecasts
that aggregate new orders in 2009 will be lower than 2008.  The strong
bookings in 2005 through 2008 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
increases for firm order backlog for both Airbus and Boeing.  Airbus’
firm order backlog is estimated at 1,117 twin aisle planes and 2,598 single
aisle planes, and Boeing’s firm order backlog is estimated at 1,375 twin aisle
planes and 2,304 single aisle planes.  Boeing does not plan to
increase their build rates to make up for aircraft not delivered due to the
strike, and Boeing has announced that the most recent delay of the 787 will
postpone the first customer aircraft delivery until 2010.





At
year-end 2008, a total of 198 firm orders had been placed for the Airbus A380, a
program officially launched in 2000 with its first delivery in October
2007.  Additionally, at year-end 2008, a total of 910 firm orders have
been placed for the Boeing 787, a program officially launched in April 2004,
with anticipated first deliveries in 2010.  The 787 will contain more
composite materials than other Boeing aircraft.  In early years of the
manufacturing cycle for the Boeing 787, and any aircraft model, we believe
additional titanium will be required to produce each aircraft, and as the
program reaches maturity, less titanium will be required for each aircraft
manufactured.  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, 2008, a total of 483 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.  However, the final titanium buy weight may change as
the A350 XWB is still in the design phase.





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 new generation models require a significantly higher
percentage of titanium.  Additionally, Boeing generally uses a higher
percentage of titanium in its airframes than Airbus.  Based on
information we receive from airframe and engine manufacturers and other industry
sources, we estimate approximately 18 metric tons of titanium products are
required to manufacture each Boeing 737, approximately 76 metric tons are
required to manufacture each Boeing 747, approximately 59 metric tons are
required to manufacture each Boeing 777 and approximately 134 metric tons will
be required to manufacture each Boeing 787, including both the airframes and
engines.  Additionally, based on these same sources, we estimate
approximately 12 metric tons of titanium products are required to manufacture
each Airbus A320, approximately 18 metric tons are required to manufacture each
Airbus A330, approximately 32 metric tons are required to manufacture each
Airbus A340, approximately 74 metric tons will be required to manufacture each
Airbus A350 XWB and approximately 146 metric tons are required to manufacture
each Airbus A380, including both the airframes and engines.





Military sector - 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.  Since 2001, titanium
shipments to military aerospace have increased, as discussed
below.  Based on its physical and performance properties, titanium has
become widely accepted for use in applications for 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.





As the
strategic military environment demands greater 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
middle of the next 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 middle or end of the next
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, has begun low-rate
initial production and assembly with delivery of the first production aircraft
planned in 2010.  Although no specific delivery schedules have been
announced, according to The
Teal Group, a leading aerospace publication, procurement is expected to
extend over the next 30 to 40 years and may include production of as many as
approximately 4,000 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.





3


Industrial and emerging markets
sectors - 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
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, potentially large growth area, utilizes titanium in
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
growth opportunities.  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 emerging market demand presently represents only about 5% of the
2008 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.





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
to prepare the sponge for incorporation into one of our melted
products.  We electrolytically separate and recycle the residual
magnesium chloride, a by-product of the VDP process, to improve cost efficiency
and reduce environmental impact.




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 to 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 melted products to our
customers.





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.





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 a supplier, whereby they will
provide an annual output capacity of 4,500 metric tons of titanium mill rolling
services 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 another supplier whereby they will provide 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-products from our
mill production processes, as well as the scrap purchased from our customers or
on the open metals market, is typically recycled and introduced into the melting
process once the scrap is sorted and cleaned.  We have the capacity to
recycle 14,000 to 16,000 metric tons of titanium scrap annually at our facility
in Morgantown, Pennsylvania depending on the scrap and end-use product
mix.  We believe our capability and expertise in recycling titanium
scrap provides a competitive advantage.





4


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 2008 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
            %





Sponge - 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 and South
Africa.  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, Nevada.  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, and we supplement our
produced sponge with purchases from third parties.  From 2006 through
2008, other sponge producers have also undertaken 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.





We are
party to long-term sponge supply agreements that require us to make minimum
annual purchases.  These long-term supply agreements, together with
our current sponge production capacity in Henderson, should provide us with a
total annual available sponge supply at levels ranging from 18,000 metric tons
up to 26,000 metric tons through 2024, which we expect to meet our sponge supply
requirements.  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 2009, including those sources under existing supply
agreements.  Due to anticipated reductions in demand in 2009 for
titanium products, we continue to evaluate alternatives to balance our internal
and external sources for titanium sponge.





Scrap - We recycle titanium
scrap into melted products that will be sold to our customers or used as
intermediate feedstock for our mill production process.  Our titanium
scrap is 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 27% of our
scrap requirement from the open metals market in 2008, and we expect our scrap
purchases to remain at the same rate during 2009.  We expect our scrap
consumption to remain at high levels as we continue to emphasize the utilization
of scrap for our electron beam cold hearth (“EB”) melting
activity.  We also occasionally sell scrap, usually in a form or grade
we cannot economically recycle for use in our production
operations.





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
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.  This demand precedes the increase in scrap
generation by downstream customers and the supply chain.  The pressure
on scrap generation and the supply chain at this stage of the cycle 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 scrap 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
generally tend to correspond with the changes in raw material
costs.





All of
our major competitors utilize scrap as a raw material in their titanium melt
operations, and steel manufacturers also use titanium scrap as an alloy to
produce interstitial-free steels, stainless steels and high-strength-low-alloy
steels.  Prices for all forms and grades of titanium scrap declined
steadily during the first half of 2008 due to increased availability and reduced
demand.  The global recession reduced demand for titanium scrap in the
second half of 2008, which resulted in sharp declines in scrap prices late in
2008.  As a result of the market forces described above, general
economic conditions are expected to continue to affect the prices of titanium
scrap in 2009.





Other - Various alloy
additions used in the production of titanium products, such as vanadium and
molybdenum, are also available from a number of suppliers.  The
decline in demand from steel manufacturers for vanadium and molybdenum also
resulted in dramatic drops in cost for these alloys, and we expect alloy costs
will 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), the
Safran companies (“Safran,” Snecma and related companies), 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 2008 sales revenues to customers under LTAs were 56%
of our total sales revenues.





In
certain events of nonperformance by us or the customer, an LTA may be terminated
early.  Although it is possible that some portion of the business
would continue on a non-LTA basis, the termination or expiration of one or more
of the LTAs could result in a material adverse effect on our business, results
of operations, financial position or liquidity.  The LTAs were
designed to limit selling price volatility to the customer and to us, 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.





5


Markets and
customer base.  As discussed previously, we produce a wide
range of melted and mill titanium products for our customers, and selling prices
generally reflect raw material and other productions costs as well as reasonable
profit margins.  Selling prices are generally influenced by industry
and global economic conditions.  For instance, since early 2007,
increases in global capacity and manufacturing activity for titanium products
throughout the supply chain have increased the availability of titanium scrap,
which has resulted in declining costs for this raw material.  This
decline in raw material costs has, in turn, contributed to lower selling prices
for certain products under LTAs, due in part to raw material indexed pricing
adjustments included in certain of these agreements, as well as for our
non-contract sales volume.





The
demand for our titanium products is global, and our global productive
capabilities allow us to respond to our customers’ needs.  The
following table summarizes our sales revenue by geographical
location:





Year
      ended December 31,2006
            
            
            2007
            
            
            2008(Percentage
      of total sales revenue)Sales
      revenue to customers within:North America
            
            
            59
            %
            
            
            58
            %
            
            
            56
            %Europe
            
            
            32
            %
            
            
            33
            %
            
            
            33
            %Other
            
            
            9
            %
            
            
            9
            %
            
            
            11
            %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.


Our
concentration of customers, primarily in commercial aerospace, may impact our
overall exposure to credit and other risks, either positively or negatively,
because 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 31,2006
                
                
                2007
                
                
                2008(Percentage
      of total sales revenue)Ten largest
      customers
                
                
                49
                %
                
                
                49
                %
                
                
                49
                %Significant
      customers:PCC and PCC-related entities
      (1)
                
                
                11
                %
                
                
                11
                %
                
                
                10
                %Boeing (2)
                
                
                -
                
                
                
                10
                %
                
                
                12
                %Total LTAs
                
                
                39
                %
                
                
                47
                %
                
                
                56
                %Significant LTAs:Rolls-Royce (1)
      (2)
                
                
                -
                
                
                
                12
                %
                
                
                13
                %Boeing (2)
                
                
                -
                
                
                
                10
                %
                
                
                12
                %(1)PCC
      and PCC-related entities serve as suppliers to certain commercial
      aerospace manufacturers, including 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%.





The
following table provides supplemental sales revenue information by industry
sector:





Year
      ended December 31,2006
            
            
            2007
            
            
            2008(Percentage
      of total sales revenue)Commercial
    aerospace
            
            
            57
            %
            
            
            55
            %
            
            
            59
            %Military
            
            
            15
            %
            
            
            19
            %
            
            
            16
            %Industrial and emerging
      markets
            
            
            17
            %
            
            
            16
            %
            
            
            15
            %Other titanium
      products
            
            
            11
            %
            
            
            10
            %
            
            
            10
            %Total
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %




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 Safran.  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.  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.





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, healthcare, automotive and power generation 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.





Our
backlog was approximately $1.0 billion at December 31, 2007 and $0.7 billion at
December 31, 2008.  Over 91% of our 2008 year-end backlog is scheduled
for shipment during 2009.  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
properties and qualities.


6


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.





Trade and tariffs -
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 2009.





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, slab 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, slab and mill products and
thus our results of operations, financial position or liquidity.





Section
2533b of Title 10, United States Code, legislation formerly known as the “Berry
Amendment,” requires that subject to certain exceptions the United States
Department of Defense (“DoD”) expend funds for products containing specialty
metals, including titanium, only if the specialty metals have been melted or
produced in the United States.  In 2008, the DoD proposed regulations
regarding the implementation of this specialty metals law that may reduce its
effectiveness.  We have filed comments urging the DoD not to adopt the
proposed regulations and will continue to resist attempts to undermine this
specialty metals law.  A weakening in the enforcement of this
specialty metals law 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, with additional activities at
our Witton, England facility.  We incurred research and development
costs of $4.7 million in 2006, $4.2 million in 2007 and $4.3 million in
2008.





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 2009 through 2026 and we have certain other patent
applications pending.  We continually seek patent protection with
respect to our technology 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 following table shows our
approximate employee headcount at the end of the past 3 years:





Employees
      at December 31,2006
            
            
            2007
            
            
            2008U.S.
            
            
            1,545
            
            
            
            1,670
            
            
            ­­­1,775Europe
            
            
            835
            
            
            
            860
            
            
            
            895Total
            
            
            2,380
            
            
            
            2,530
            
            
            
            2,670




Our
production and maintenance workers in Henderson and our production, maintenance,
clerical and technical workers in Toronto, Ohio (approximately half of our total
U.S. employees) are represented by the United Steelworkers of America under
contracts expiring in January 2011 and June 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 expired at the end of 2008, and a new labor agreement is
currently under negotiation.  Our labor agreement with our U.K.
managerial and professional employees runs through March 2011.  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 and health
laws and regulations.  In the U.S., such laws include the
Occupational, Safety and Health Act, the Clean Air Act, the Clean Water Act, the
Toxic Substances Control 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, common law theories of liability 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.





7


Our
policy is to maintain compliance in all material respects with applicable
requirements of environmental and worker health and safety laws and strive to
improve environmental, health and safety performance.  We incurred
capital expenditures related to health, safety and environmental compliance and
improvement of approximately $2.0 million in 2006, $3.0 million in 2007 and $2.1
million in 2008.





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 or the expenditure of
additional funds on compliance.  Furthermore, 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.





As part
of our continuing environmental assessment with respect to our plant site in
Henderson in the third quarter of 2008 we completed and submitted to the Nevada
Department of Environmental Protection (“NDEP”) a Remedial Alternative Study
(“RAS”) with respect to the groundwater located beneath the plant
site.  The RAS, which was submitted pursuant to an existing agreement
between the NDEP and us, addressed the presence of certain contaminants in the
plant site groundwater that require remediation.  The RAS proposes
various alternatives to the NDEP for the remediation of these
contaminants.  Upon our completion and submission of the RAS to NDEP,
we increased our estimated cost to complete the groundwater remediation by $2.6
million during 2008.  The NDEP completed its review of the RAS and our
proposed remedial alternatives during the fourth quarter of 2008, and the NDEP
issued its record of decision concerning the remediation plan in February
2009.  See Note 15 to the Consolidated Financial
Statements.





Related
parties.  At December 31, 2008, Contran Corporation and other
entities or persons related to Harold C. Simmons held approximately 52.5% of our
outstanding common stock.  See Notes 1 and 14 to the Consolidated
Financial Statements.





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 and impact our profitability.  The commercial
aerospace sector has a significant influence on titanium companies, particularly
mill product producers.  The cyclical nature of the commercial
aerospace sector has been the principal driver of the fluctuations in the
performance of most titanium product producers.  Our business is more
dependent on commercial aerospace demand than is the overall titanium
industry.  We shipped approximately 65% of our mill products to
commercial aerospace customers in 2008, whereas we estimate approximately 46% of
the overall titanium industry’s mill products were shipped to commercial
aerospace customers in 2008.  Our melted and mill product sales to
commercial aerospace customers accounted for 57% of our total sales in 2006, 55%
in 2007 and 59% in 2008.  In addition to general economic conditions,
the commercial aerospace sector is expected to be negatively impacted in 2009 by
(i) revisions and push-outs of production schedules for the Boeing 787, (ii)
adjustments and delays in certain other commercial aircraft build-out schedules
and (iii) Boeing’s labor dispute, which lasted approximately eight weeks and
ended in November 2008.  These factors are expected to continue to
negatively impact commercial aerospace demand until uncertainties within the
commercial aerospace production cycle are resolved and demand is stabilized on a
longer term basis.  We estimate that 2009 industry mill product
shipments into the commercial aerospace sector will decrease 15% to 25% from
2008 levels.  Events that could adversely affect the commercial
aerospace sector, such as future terrorist attacks, world health crises, the
general economic downturn or unforeseen reductions in orders from commercial
airlines, could significantly decrease our results of operations and financial
condition.  See “Business – Titanium
industry– Commercial
aerospace sector.”





Sales
under LTAs with customers in the commercial aerospace sector accounted for
approximately 35% of our 2008 total sales.  These LTAs expire at
various times beginning in 2011 through 2017.  If we are unable to
maintain our relationships with our major commercial aerospace customers,
including Boeing, Rolls-Royce, Safran, UTC and Wyman-Gordon, under the LTAs we
have with these customers, our sales could decrease substantially, negatively
impacting our profitability.  See “Business – Customer agreements” and “Business –
Markets and customer base.”





Global economic
conditions may affect pricing and demand for our products which could lead to
reduced revenues and profitability.  Pricing and demand for our
products are affected by a number of factors, including changes in demand for
our customer’s products, changes in general economic conditions, availability of
credit, changes in market demand, lower overall pricing due to overcapacity,
lower priced imports and increases in the use of substitute
materials.  The current global economic downturn could lead to
further reductions in demand for our products and our customers' products,
excess inventory within the titanium supply chain and excess capacity throughout
the industry, including our manufacturing locations.  Furthermore,
reductions in credit generally available in the financial
markets could have adverse impacts on the industry including our
business.  In addition to the impact that global economic conditions have
already had on our business, if these conditions worsen or persist, our
financial condition and results of operations may be further
impacted.





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 market prices 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 excess capacity
resulting from reduced demand 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 and South
Africa, 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, also influences 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
contain minimum annual purchase requirements and, in certain cases, include
take-or-pay provisions which require us to pay penalties if we do not meet the
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.





8


Although
overall inflationary trends in recent years have been moderate, during the same
period certain critical raw material costs in our industry, 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.





We may not be
able to implement price increases.  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.  Pricing under our LTAs, which were designed to
limit selling price volatility to our customers and us, are generally revised on
an annual basis.  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,
slab 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 and maintenance workers in Henderson and our production, maintenance,
clerical and technical workers in Toronto, are represented by the United
Steelworkers of America under contracts expiring in January 2011 and June 2011,
for the respective locations.  A majority of the salaried and hourly
employees at our European facilities are represented by various European labor
unions.  Our labor agreement with our managerial and professional U.K.
employees expires in 2011.  Our labor agreement with our U.K.
production and maintenance employees expired at the end of 2008, and a new labor
agreement is currently under negotiation.  The agreements with our
French and Italian employees are renewed annually.  A prolonged labor
dispute or work stoppage could materially impact our operating
results.  We may not succeed in concluding collective bargaining
agreements with the unions on terms acceptable to us or maintaining 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.





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 61,250 metric tons (estimated 20%of
worldwide annual practical capacity) as of December 31, 2008, and our mill
product capacity aggregates approximately 27,700 metric tons (estimated 18% of
worldwide annual practical capacity) as of December 31, 2008.  Of our
worldwide melting capacity, 40% is represented by EB melting furnaces, 59% by
vacuum arc remelting (“VAR”) furnaces and 1% by a vacuum induction melting
(“VIM”) furnace.





December
      31, 2008 Annual
      PracticalCapacity
      (3)Manufacturing
      Location
            
            Products
      Manufactured
            
            MeltedProducts
            
            Mill
      Products(metric
      tons)Henderson,
      Nevada (1)
            
            Sponge,
      Ingot
            
            12,250
            
            -Morgantown,
      Pennsylvania (1)
            
            Slab,
      Ingot, Raw MaterialsProcessing
            
            33,500
            
            -Toronto,
      Ohio (1)
            
            Billet,
      Bar, Plate, Sheet, Strip
            
            -
            
            15,000Vallejo,
      California (2)
            
            Ingot
      (including non-titaniumsuperalloys)
            
            1,600
            
            -Ugine,
      France (2)
      (4)
            
            Ingot,
      Billet
            
            3,200
            
            2,600Waunarlwydd,
      Wales(1)
            
            Bar,
      Plate, Sheet
            
            -
            
            3,100Witton,
      England (2)
            
            Ingot,
      Billet, Bar
            
            10,700
            
            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 of December 31, 2008 and do not reflect the increases expected
to
be               
realized during 2009 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
contractually obligated 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 each of 2006 and 2007 and 81% in 2008.  While
practical capacity and utilization measures can vary significantly based upon
the mix of products produced, we anticipate operating our plants at lower
production levels in 2009 due to reduced demand.





9


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 increased our annual productive capacity to approximately 12,600
metric tons.





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 operated at approximately 78% of
annual practical capacity in 2008.  We expect
lower  capacity utilization in 2009, as melt capacities increase
during 2009.





In early
2008, we completed an 8,500 metric ton expansion of our EB melt capacity in
Morgantown.  In addition, we have commenced construction of another EB
furnace at the same facility, which is currently on schedule to be completed in
the first half of 2009 which, upon completion, will increase our EB melt
capacity by approximately 26%.  Also during 2008, we completed an
addition to our VAR capacity in Morgantown, which increased our VAR capacity by
approximately 5,000 metric tons.  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 and slab principally from our U.S. melting
facilities.  Our U.S. forging and rolling facility operated at
approximately 87% of annual practical capacity in 2008, and we expect lower
utilization in 2009.  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
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.





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.  TIMET UK’s melting and mill
products production in 2008 was approximately 81% and 61%, respectively, of
annual practical capacity, and we expect lower utilization in
2009.  In mid-2008 we completed construction of a new VAR furnace at
our Witton location, which increased our European VAR capacity by approximately
2,000 metric tons.





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.  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 for three years
following the capacity implementation in late 2008.  During 2008,
TIMET Savoie utilized 97% of the maximum annual capacity CEZUS was contractually
required to provide, and we expect to utilize less than the maximum annual
capacity CEZUS is required to provide in 2009.





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.





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, 2008.


10


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 2007,
2008 and the first two months of 2009 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, 2007:
            
            High
            
            
            LowFirst quarter
            
            $
            38.85
            
            
            $
            28.83Second quarter
            
            $
            39.80
            
            
            $
            30.30Third quarter
            
            $
            35.32
            
            
            $
            25.75Fourth quarter
            
            $
            36.50
            
            
            $
            25.26Year
      ended December 31, 2008:First quarter
            
            $
            26.79
            
            
            $
            13.05Second quarter
            
            $
            19.65
            
            
            $
            13.33Third quarter
            
            $
            15.00
            
            
            $
            9.80Fourth quarter
            
            $
            11.32
            
            
            $
            5.31January
      1, 2009 to February 19, 2009
            
            $
            9.89
            
            
            $
            6.35





On
February 19, 2009, the closing price of TIMET common stock was $7.15 per share,
and there were approximately 2,325 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
2006, 2007 and 2008, an aggregate of 1.3 million, 1.6 million and a nominal
number of shares of our Series A Preferred Stock were converted into 17.2
million, 21.3 million and 0.3 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,
2008.




We
initiated a quarterly dividend on our common stock during the fourth quarter of
2007 resulting in dividends of $13.7 million, or $0.075 per common share during
2007, and we paid an aggregate of $54.5 million, or $0.30 per common share, in
dividends on our common stock during 2008.  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.





During
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, with any repurchased shares to be retired and
cancelled.  During 2008, we purchased 2.3 million shares of our common
stock in open market transactions for an aggregate purchase price of $36.5
million, and all shares acquired under this repurchase program during 2008 have
been cancelled.  At December 31, 2008, we could purchase an additional
$63.5 million of our common stock under our board of directors’
authorization.


Performance
graph.Set forth below is a line graph comparing, for the
period December 31, 2003 through December 31, 2008, 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.




Equity c ompensation p lan i nformation .


11




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 31,2004
            
            
            2005
            
            
            2006
            
            
            2007
            
            2008($
      in millions, except per share and product shipment data)STATEMENT
      OF INCOME DATA:Net sales
            
            $
            501.8
            
            
            $
            749.8
            
            
            $
            1,183.2
            
            
            $
            1,278.9
            
            
            $
            1,151.5Gross margin
            
            
            63.7
            
            
            
            199.4
            
            
            
            436.1
            
            
            
            447.4
            
            
            
            287.7Operating income
            
            
            43.0
            
            
            
            171.1
            
            
            
            382.8
            
            
            
            372.0
            
            
            
            219.7Interest expense
            
            
            12.5
            
            
            
            4.0
            
            
            
            3.4
            
            
            
            2.6
            
            
            
            1.8Net income attributable tocommon
      stockholders
            
            
            43.3
            
            
            
            143.7
            
            
            
            274.5
            
            
            
            263.1
            
            
            
            162.2Earnings per
share:Basic (1)
            
            $
            0.34
            
            
            $
            1.10
            
            
            $
            1.77
            
            
            $
            1.62
            
            
            $
            0.89Diluted (1)
            
            
            0.33
            
            
            
            0.86
            
            
            
            1.53
            
            
            
            1.46
            
            
            
            0.89Dividends per common
      share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0.075
            
            
            
            0.30BALANCE
      SHEET DATA:Cash and cash
      equivalents
            
            $
            7.2
            
            
            $
            17.7
            
            
            $
            29.4
            
            
            $
            90.0
            
            
            $
            45.0Total assets (2)
            
            
            700.6
            
            
            
            907.3
            
            
            
            1,216.9
            
            
            
            1,419.9
            
            
            
            1,367.7Outstanding indebtedness (3)
            
            
            43.4
            
            
            
            51.6
            
            
            
            0.7
            
            
            
            0.5
            
            
            
            0.2Debt payable to Capital
      Trust
            
            
            12.0
            
            
            
            5.9
            
            
            
            -
            
            
            
            -
            
            
            
            -Stockholders’ equity (2)
            
            
            406.4
            
            
            
            562.2
            
            
            
            878.9
            
            
            
            1,132.7
            
            
            
            1,079.6CASH
      FLOW DATA:Cash flows (used) provided
      by:Operating
    activities
            
            $
            (22.4
            )
            
            $
            72.9
            
            
            $
            79.1
            
            
            $
            192.1
            
            
            $
            197.6Investing
    activities
            
            
            (44.5
            )
            
            
            (61.5
            )
            
            
            (26.5
            )
            
            
            (108.2
            )
            
            
            (142.6
            )Financing
    activities
            
            
            38.7
            
            
            
            -
            
            
            
            (42.5
            )
            
            
            (24.5
            )
            
            
            (97.7
            )Net cash (used)
      provided
            
            $
            (28.2
            )
            
            $
            11.4
            
            
            $
            10.1
            
            
            $
            59.4
            
            
            $
            (42.7
            )Melted
      product shipments:Volume (metric
    tons)
            
            
            5,360
            
            
            
            5,655
            
            
            
            5,900
            
            
            
            4,720
            
            
            
            3,850Average selling price (per
      kilogram)
            
            $
            13.45
            
            
            $
            19.85
            
            
            $
            38.30
            
            
            $
            40.65
            
            
            $
            30.00Mill
      product shipments:Volume (metric
    tons)
            
            
            11,365
            
            
            
            12,660
            
            
            
            14,160
            
            
            
            14,230
            
            
            
            15,050Average selling price (per
      kilogram)
            
            $
            32.05
            
            
            $
            41.75
            
            
            $
            57.85
            
            
            $
            66.90
            
            
            $
            60.70Order
      backlog at December 31 (4)
            
            $
            450
            
            
            $
            870
            
            
            $
            1,125
            
            
            $
            1,000
            
            
            $
            697Capital
      expenditures
            
            $
            23.6
            
            
            $
            61.1
            
            
            $
            100.9
            
            
            $
            100.9
            
            
            $
            121.3


(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.


(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.





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
2008 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
            
            
            9,782
            
            
            
            65
            %
            
            
            46,900
            
            
            
            46
            %Military
            
            
            2,114
            
            
            
            14
            %
            
            
            6,400
            
            
            
            7
            %Industrial
            
            
            2,855
            
            
            
            19
            %
            
            
            43,000
            
            
            
            42
            %Emerging
      markets
            
            
            299
            
            
            
            2
            %
            
            
            5,300
            
            
            
            5
            %15,050
            
            
            
            100
            %
            
            
            101,600
            
            
            
            100
            %(1) Estimates
      based on our titanium industry experience and information obtained from
      publicly-available external 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.


12


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 the 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 inventory 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.  We did not evaluate any long-lived assets for impairment
during 2008 because no such impairment indicators were present.





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 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
the Consolidated Financial Statements for a discussion of our uncertain tax
positions.





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 return 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 2008 to 2007





Summarized
financial information.  The following table summarizes certain
information regarding our results of operations for the years ended December 31,
2007 and 2008.  Our reported average selling prices reflect 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 31,2007
            
            
            %
      of Total Net Sales
            
            
            2008
            
            
            %
      of Total Net Sales(In
      millions, except product shipment data)Net
      sales:Melted products
            
            $
            191.9
            
            
            
            15
            %
            
            $
            115.5
            
            
            
            10
            %Mill products
            
            
            952.0
            
            
            
            74
            %
            
            
            913.5
            
            
            
            79
            %Other titanium
      products
            
            
            135.0
            
            
            
            11
            %
            
            
            122.5
            
            
            
            11
            %Total net sales
            
            
            1,278.9
            
            
            
            100
            %
            
            
            1,151.5
            
            
            
            100
            %Cost
      of sales
            
            
            831.5
            
            
            
            65
            %
            
            
            863.8
            
            
            
            75
            %Gross
      margin
            
            
            447.4
            
            
            
            35
            %
            
            
            287.7
            
            
            
            25
            %Selling,
      general, administrative anddevelopment
      expense
            
            
            69.0
            
            
            
            5
            %
            
            
            66.5
            
            
            
            6
            %Other
      expense, net
            
            
            6.4
            
            
            
            1
            %
            
            
            1.5
            
            
            
            0
            %Operating
      income
            
            $
            372.0
            
            
            
            29
            %
            
            $
            219.7
            
            
            
            19
            %Melted
      product shipments:Volume (metric
    tons)
            
            
            4,720
            
            
            
            
            
            
            
            3,850Average selling price (per
      kilogram)
            
            $
            40.65
            
            
            
            
            
            
            $
            30.00Mill
      product shipments:Volume (metric
    tons)
            
            
            14,230
            
            
            
            
            
            
            
            15,050Average selling price (per
      kilogram)
            
            $
            66.90
            
            
            
            
            
            
            $
            60.70





13





Net
sales.  Our net sales were $1,151.5 million during 2008
compared to net sales of $1,278.9 million during 2007.  Average
selling prices for melted and mill products decreased 26% and 9%, respectively,
from 2007 to 2008.  Revisions and delays in the build-out schedules of
certain commercial aircraft, and the resulting effects on production and
inventory levels throughout the supply-chain, continue to negatively impact
near-term demand and selling prices for titanium products.  Recent
declines in raw material costs, primarily titanium scrap, have also contributed
to lower selling prices for certain products under long-term agreements, due in
part to raw material indexed pricing adjustments included in certain of these
agreements.  Although we believe long-term demand trends are
favorable, the adjustments and delays in the production schedule for the Boeing
787, including production delays resulting from Boeing’s labor dispute which was
resolved during the fourth quarter of 2008, and the recent decline in global
economic conditions, are expected to continue to impact customer inventory
levels and product demand in 2009.





Cost of
sales.  Our cost of sales was $863.8 million during 2008
compared to cost of sales of $831.5 million in 2007, a 4% increase from 2007,
primarily resulting from a shift in our product mix to a higher concentration of
mill products for 2008.  Mill products carry a higher unit-cost than
melted products due to labor, overhead and yield costs associated with
additional processing.  Cost of sales for 2008 was favorably impacted
by declining costs for titanium scrap, but these favorable impacts were
substantially offset by higher costs of production, primarily energy, and
certain other raw materials.  We anticipate that our per-unit cost of
sales for both melted and mill products will continue to be favorably impacted
by declining titanium scrap costs, but these favorable effects could be offset
if production volumes decrease, which could result in additional per-unit
overhead allocations, or if costs of production and other raw materials
rise.





Gross
margin.  During 2008, our
gross margin was $287.7 million as compared to $447.4 million for 2007,
primarily reflecting decreases in the average selling prices for our melted and
mill products.





Operating
income.  Our operating income for 2008 was $219.7 million
compared to $372.0 million during 2007 primarily due to the decline in gross
margin.  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, based on our decision to delay the project
indefinitely.





Net other
non-operating income and expense.  During 2008, we recognized
other non-operating income of $19.4 million consisting primarily of $9.9 million
in foreign currency gains as the dollar strengthened against the pound sterling
and the euro in the second half of 2008 and a $6.7 million gain on sale of an
investment discussed in Note 11 to the Consolidated Financial
Statements.  During 2007, we recognized other non-operating income of
$24.2 million consisting primarily of an $18.3 million gain on the sale of our
investment in CompX discussed in Note 11 to the Consolidated Financial
Statements.





Income taxes.Our effective income tax rate was 29% in 2008 compared to 30% in
2007.  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 2008 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 2008, 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 2008 includes:




·
            An
      income tax benefit of $14.4 million related to an internal reorganization
      we implemented in the second quarter of
2007;




·
            An
      income tax benefit of $1.9 million related to the reversal of our deferred
      income tax asset valuation allowance related to our capital loss
      carryforward following the sale of an
  investment;




·
            An
      income tax benefit of $4.0 million from the special manufacturing
      deduction created by the American Jobs Creation Act of 2004;
      and




·
            An
      income tax expense of $2.7 million related to an increase in our reserve
      for uncertain tax positions.





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.





The U.K.
has proposed legislation that, if enacted, would increase our effective income
tax rate and our cash tax payments.


14


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 reflect 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 TotalNet 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
from $1,183.2 million in 2006.  Average selling prices for melted and
mill products increased 6% and 16%, respectively, in 2007 compared to
2006.  Customer demands influenced 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 increased pricing on our
products and the favorable shift in product mix more than offset the effect 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 stockpile and the rapid
rise in titanium sponge and scrap market prices experienced through early
2007.  In 2007, increases in global titanium sponge capacity and
increased use of titanium in the manufacture of components and products resulted
in the increased availability of titanium sponge and scrap.  As a
result, our cost of purchased titanium sponge and scrap declined during the
latter part of 2007.  These declining raw material costs, in certain
cases, resulted in indexed adjustments to selling prices under our long-term
sales agreements.  The majority of the products sold during 2007
included 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 reflecting the
net effect of increases in average selling prices, and partially offsetting cost
of sales increases associated with our higher raw material costs and higher cost
of production, as discussed above.





Operating
income.  Our operating income for 2007 was $372.0 million
compared to $382.8 million for 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 based on 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.





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.





15


European
operations





We have
substantial operations located in the United Kingdom, France and
Italy.  Approximately  37% of our sales originated in Europe
for 2008, a portion of which were denominated in foreign currency, principally
the British pound sterling or the euro.  Certain raw material costs,
principally purchases of 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, 2008, consolidated assets and liabilities denominated in currencies other
than functional currencies were approximately $82.2 million and $54.8 million,
respectively, consisting primarily of U.S. dollar cash, accounts receivable and
accounts payable.





Outlook





We sold a
record 15,050 metric tons of titanium mill products during 2008, despite
softening demand in the fourth quarter of the year.  In addition to
the global credit crisis and economic recession, circumstances within the
commercial aerospace market, including (i) the eight-week labor dispute at
Boeing, (ii) continued production delays on the Boeing 787 and (iii) the
resulting excess titanium inventory in the supply chain, have contributed to
weakened customer demand and lower prices for titanium products.





We expect
customer demand to remain volatile until uncertainties in the global
economy and within the commercial aerospace production schedules begin to be
resolved and inventory levels begin to stabilize.  Although we have
long-term agreements with a majority of our major customers, many of which
specify annual pricing mechanisms and minimum volume commitments that limit our
exposure to the volatility of market pricing and fluctuating demand, we still
anticipate reductions in our overall sales volumes and average selling prices
for 2009.  We anticipate that our per-unit cost of sales for both
melted and mill products will continue to be favorably impacted by declining
titanium scrap costs, but these favorable effects could be offset if production
volumes decrease, which could result in additional per-unit overhead
allocations, or if costs of production and other raw materials
rise.





Despite
the demand volatility the industry is currently experiencing and the uncertainty
surrounding the extent and duration of the current economic downturn, we believe
the overall industry outlook supports a long-term favorable trend in demand for
titanium products.  We continue to pursue our strategic plans to
increase and improve our production capabilities, with a focus on opportunities
to improve our operating flexibility, efficiency and cost structure, to meet the
long-term demands reflected in the titanium product volumes our customers have
committed to purchase under long-term agreements and in long-term market sector
forecasts.  In particular, we continue 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.  We have been successful over the last two years in
establishing significant flexibility and cost advantages in our entire
manufacturing process.  We believe that our strong customer
relationships, efficient manufacturing processes and strong balance sheet have
kept us well-positioned in the current economic environment. We are in a
strong financial position, with no debt and significant positive cash
flow.  We believe our financial strength will allow us to continue to
invest in our business, fully serve our current and prospective customer
requirements and pursue strategic opportunities.





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 31,2006
            
            
            2007
            
            
            2008(In
      millions)Cash
      provided by (used in):Operating
    activities
            
            $
            79.1
            
            
            $
            192.1
            
            
            $
            197.6Investing
    activities
            
            
            (26.5
            )
            
            
            (108.2
            )
            
            
            (142.6
            )Financing
    activities
            
            
            (42.5
            )
            
            
            (24.5
            )
            
            
            (97.7
            )Net cash provided by (used in)
      operating,investing and financing activities
            
            $
            10.1
            
            
            $
            59.4
            
            
            $
            (42.7
            )





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 $5.5 million, from $192.1 million in 2007 to $197.6 in
2008.  The net effects of the following significant items contributed
to the overall increase in cash provided by operating activities:





·
            lower
      operating income in 2008 of $152.3
million;




·
            lower
      net cash used in operations resulting from changes in receivables,
      inventories, payables and accrued liabilities of $42.1 million in 2008 in
      response to changing working capital requirements and improved collections
      of receivables; and




·
            lower
      net cash paid for income taxes in 2008 of $105.0 million due primarily to
      lower taxable income in 2008.





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 in operations resulting from 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 of $65.8 million due to the
      utilization of the remainder of our U.S. net operating loss carryforward
      in 2006.





16


Investing
activities.  Cash flows used in our investing activities
changed from $26.5 million in 2006 to $108.2 million in 2007 to $142.6 million
in 2008.  Our capital expenditures were $100.9 million during both
2006 and 2007 compared to $121.3 million in 2008.  Capital projects
and other significant investing activities include the following:





·
            During
      2008, 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 at several of our U.S. and European
      plants.




·
            During
      2007, we had lower capital expenditures on the sponge capacity expansion
      project compared to 2006, as the expansion was completed in April
      2007.  However, during 2007 we incurred a higher level of
      expenditures than we incurred during 2006 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.




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




·
            We
      purchased $26.4 million in marketable equity securities during
      2008.




·
            We
      received principal payments on notes receivable from affiliates of $2.6
      million in 2007 and $7.3 million in
2008.




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





Financing
activities.  We had net repayments under our U.S. bank credit
facility 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 net
borrowing activity during 2007 and 2008.  Other significant items
included in our cash flows from financing activities included:





·
            dividends
      paid on our common stock of $13.7 million in 2007 and $54.5 million in
      2008, as we began paying a quarterly dividend of $0.075 per share in the
      fourth quarter of 2007;




·
            dividends
      paid on our Series A Preferred Stock of $7.2 million in 2006, $5.6 million
      in 2007 and $0.3 million in 2008;




·
            dividends
      paid to CEZUS of $3.0 million in 2006, $8.1 million in 2007 and $6.8
      million in 2008;




·
            treasury
      stock purchases of $36.5 million during
2008;




·
            proceeds
      from the issuance of our common stock upon exercise of stock options of
      $11.3 million in 2006, $1.0 million in 2007 and a nominal amount in 2008;
      and


·
              an
      income tax benefit of $9.9 million in 2006, $2.1 million in 2007 and a
      nominal amount in 2008 related to the exercise of stock options.


Future
cash requirements





Liquidity.Our primary
source of liquidity on an ongoing 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.  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.





We paid a
quarterly cash dividend of $0.075 per share in 2007 and four such quarterly cash
dividends in 2008.  In February 2009, our board of directors decided
to suspend our quarterly dividend after considering the current economic and
financial environment.  We believe it is in our best interest to
enhance our financial strength which will allow us to continue investing in our
business and taking advantage of potential opportunities in our industry,
including acquisitions, long-term partnering agreements or joint ventures, if
and when such strategic opportunities arise.  Additionally, we will
have the flexibility to repurchase shares of our common stock under our
previously announced repurchase programs without sacrificing our ability to
pursue other opportunities in our industry.  The declaration and
payment of future dividends will be dependent upon the board's consideration of
our cash requirements, contractual requirements, strategic plans and other
factors deemed relevant by our board of directors.





At
December 31, 2008, we had aggregate borrowing availability under our existing
U.S and European credit facilities of $213.5 million, and we had an aggregate of
$45.0 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.





17


Repurchases of
common stock.  At February 19, 2009, we had approximately $63.5
million available for repurchase of our common stock under the authorizations
described in Note 10 to the Consolidated Financial Statements.





Capital
expenditures.  We currently estimate we will invest a total of
approximately $50 million to $60 million for capital expenditures during
2009.  In response to current economic conditions, our planned capital
expenditures are limited to those required to properly maintain our equipment
and facilities or complete active projects, such as the ongoing construction of
a melt furnace at our Morgantown facility.  Capital spending for 2009
is expected to be funded by cash flows from operating activities or existing
cash resources and available credit facilities.





We
continue to evaluate additional opportunities to improve or replace productive
assets 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, 2008 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 Date2009
            
            
            2010/2011
            
            
            2012/2013
            
            
            2014
      & After
            
            
            Total(In
      millions)Operating
      leases
            
            $
            6.2
            
            
            $
            10.7
            
            
            $
            9.2
            
            
            $
            24.3
            
            
            $
            50.4Purchase
      obligations:Raw materials (1)
            
            
            107.1
            
            
            
            218.9
            
            
            
            217.4
            
            
            
            639.6
            
            
            
            1,183.0Other (2)
            
            
            51.9
            
            
            
            39.0
            
            
            
            41.2
            
            
            
            64.3
            
            
            
            196.4Other
      contractual obligations (3)
            
            
            9.0
            
            
            
            0.5
            
            
            
            -
            
            
            
            -
            
            
            
            9.5$
            174.2
            
            
            $
            269.1
            
            
            $
            267.8
            
            
            $
            728.2
            
            
            $
            1,439.3


(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
      services purchased, as appropriate.  All open orders are
      primarily for delivery in 2009.


(3)
            These
      other obligations include an obligation under a worker’s compensation bond
      and capital and interest payments under capital lease agreements, both of
      which are recorded on our balance sheet as of December 31,
      2008.  Additionally, we have an obligation to Contran under an
      intercorporate services agreement (“ISA”) which will be recorded ratably
      over the 2009 service period.  We expect renew the ISA
      annually.





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, 2008, 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.





We
recorded net consolidated pension expense of $4.1 million in 2006, $4.6 million
in 2007 and $2.0 million in 2008.  Pension 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 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
      atDecember
      31, 2006
              and
      expense in 2007
            
            
            Obligation
      atDecember
      31, 2007
              and
      expense in 2008
            
            
            Obligation
      atDecember
      31, 2008
              and
      expense in 2009U.S.
      Plan
            
            
            5.90
            %
            
            
            5.90
            %
            
            
            5.75
            %U.K.
      Plan
            
            
            5.10
            %
            
            
            5.60
            %
            
            
            6.20
            %





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.


18


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
      31:2007
            
            
            2008
            
            
            2009U.S.
      Plan
            
            
            10.00
            %
            
            
            10.00
            %
            
            
            10.00
            %U.K.
      Plan
            
            
            6.50
            %
            
            
            6.65
            %
            
            
            6.80
            %





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 2008 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 2008 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 6.65% to 6.15%) would have increased 2008
pension expense by approximately $0.7 million, and lowering the discount rate
assumption by 0.25% (from 5.60% to 5.35%) would have increased our U.K. plan’s
2008 pension expense by approximately $0.8 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 benefit plans sponsored by Contran and related
companies.  A sub account of the CMRT held 8.5% of TIMET common stock
at December 31, 2008; 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 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,
2008, the asset mix for our portion of the CMRT (based on an aggregate asset
value of $46.9 million) was 43% debt securities, 47% U.S. equity securities, 6%
foreign equity securities and 4% cash and other securities.  During
2006, 2007 and 2008, the assumed long-term rate of return for our U.S. plan
assets that were 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, the current and projected asset
mix and the investment objectives of the CMRT’s managers for our portion of the
CMRT.  During the history of the CMRT from its inception in 1987
through December 31, 2008, the average annual rate of return earned by our
portion of the CMRT, as calculated based on the average percentage change in the
net asset value per unit for each applicable year, has been 11%.





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, 2008 was 70% equity securities and 30% debt
and other 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 6.70% for 2006, 6.50% for 2007 and 6.65% for
2008.  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.  As part of this evaluation, we considered the historical
long-term average annual rates of return and recent economic downturn impacting
virtually all global equity markets, and based on our evaluation, the recent
declines in value for our plans’ assets are not indicative of a long-term trend
requiring an adjustment to our long-term expected rate of return for any of our
defined benefit pension plans.  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%, a discount rate of 5.75% and
various other assumptions, we estimate that our U.S. plan will have pension
expense of approximately $6.7 million in 2009.  A 0.25% increase or
decrease in the discount rate would decrease or increase estimated pension
expense by approximately $0.1 million in 2009, respectively.  A 0.5%
increase or decrease in the long-term rate of return would  decrease
or increase estimated pension expense by approximately $0.2 million in 2009,
respectively.





Based on
an expected rate of return on plan assets of 6.80%, a discount rate of 6.20% and
various other assumptions (including an exchange rate of $1.44/£1.00), we
estimate that pension expense for our U.K. plan will approximate $8.0 million in
2009.  A 0.25% increase or decrease in the discount rate would
decrease or increase estimated pension expense by approximately $0.6 million in
2009, respectively.  A 0.5% increase or decrease in the long-term rate
of return would decrease or increase estimated pension expense by approximately
$0.6 million in 2009, respectively.  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
cash contributions of $0.4 million in 2006, $0.1 million in 2007 and nil in
2008 to our U.S. plan and cash contributions of approximately $18.2 million in
2006 and $­10.5 million in each of 2007 and 2008 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 2008, we believe that we will be
required to make contributions of $7.3 million to our U.K. plan and none to our
U.S. plan in 2009.





The
current global economic downturn has negatively impacted the performance of each
plans’ assets during 2008, and as a result, the fair values of the plans’ assets
have decreased significantly over the last year.  The fair value
of the assets of the U.S. plan was $93.6 million at December 31, 2006,
$98.4 million at December 31, 2007 and $46.9 at December 31, 2008, and the fair
value of the assets of the U.K. plan was $189.5 million at December 31, 2006,
$202.6 million at December 31, 2007 and $114.9 million at December 31,
2008.





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
overfunded status of the U.S. plan from $17.9 million at December 31, 2006 to
$23.4 million at December 31, 2007, and the effect of negative investment
returns and a decrease to the discount rate during 2008 resulted in an
underfunded status of $30.0 million at December 31, 2008.  In 2007 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 underfunded status of the U.K.
plan from $51.1 million at December 31, 2006 to $34.8 million at December 31,
2007.  During 2008, negative investment returns and a strengthening
dollar versus the pound sterling both contributed to an increase in the
underfunded status of our U.K. plan while the increase in the discount rate
partially offset these effects, thereby increasing the underfunded status for
our U.K. plan to $46.2 million at December 31, 2008.





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 $1.8 million in 2006 and $1.3 million in each of 2007 and 2008.





We
recorded consolidated OPEB expense of $3.6 million in 2006, $3.1 million in 2007
and $2.9 million in 2008.  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 2008 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 2008, we used a
beginning health care trend rate of 5.83%.  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 2008,
respectively.  For 2009, we are using a beginning health care trend
rate of 5.46%, which is projected to reduce to an ultimate rate of 4.0% in
2013.





19


Based on
a discount rate of 5.75%, a health care trend rate as discussed above and
various other assumptions, we estimate that OPEB expense will approximate $2.8
million in 2009.  A 0.25% increase or decrease in the discount rate
would have a nominal impact on estimated OPEB expense in 2009.  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 2009, respectively.  Based upon the
actuarial assumptions being used in 2008, we believe we will be required to pay
OPEB benefits of $1.9 million in 2009, 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 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 2006, 2007 and 2008.





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, 2007 and 2008.  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 the last several years, 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, 2007 and 2008, 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 $2.7 million at December 31, 2007 and $16.4 million at December
31, 2008.  The potential change in the aggregate market value of these
securities, assuming a 10% change in prices, would have been nominal at December
31, 2007 and $1.6 million at December 31, 2008.  See Note 4 to the
Consolidated Financial Statements.





Interest bearing
notes receivable.  We held a note receivable from CompX with
the principal amount of $50.5 million at December 31, 2007 and $42.7 million at
December 31, 2008.  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 Notes 11 and 14
to the Consolidated Financial Statements.





We held a
note receivable from Contran with the principal amount of $16.7 million at
December 31, 2008.  Our note receivable accrues interest at variable
rates, related to the spread under prime.  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 14 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.





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, 2008.  Based
upon their evaluation, these executive officers have concluded that our
disclosure controls and procedures were effective as of December 31,
2008.





20


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, 2008.





The
effectiveness of our internal control over financial reporting as of December
31, 2008 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, 2008 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 2008, 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, 2008 have
been filed as exhibits 31.1 and 31.2 to this Annual Report on Form
10-K.





ITEM
9B:  OTHER INFORMATION





Not
applicable.


21





PART
III





ITEM
10:  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The
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 COMPENSATION





The
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 MATTERS





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





ITEM
13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





The
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 SERVICES





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


22


PART
IV





ITEM
15:  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(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 SEC 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, 2008
will be furnished to the SEC upon request.





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), incorporated by reference to Exhibit 10.5 to the
      Registrant’s Annual Report on Form 10-K for the year ended December 21,
      2007.10.6*
            
            2008
      Discretionary Bonus Plan (as of February 21, 2008), incorporated by
      reference to exhibit 10.6 to the Registrant’s Annual Report on Form 10-K
      for the year ended December 21, 2007.  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, incorporated by reference to
      Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2007.10.9**
            
            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.





23


Item
      No.
            
            Exhibit
      Index 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,
2006.10.16*
              
              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
      10.21 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
      on 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, incorporated by reference Exhibit 10.23
      to the Registrant’s Annual Report on Form 10-K for the year ended December
      31, 2007.  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.10.24*
              
              Consulting
      Agreement with Charles H. Entrekin, PhD, effective April 14, 2008,
      incorporated by reference to Exhibit 10.1 to the Registrant’s Current
      Report on Form 8-K filed with the SEC on April 16,
2008.10.25*
              
              Titanium
      Metal Corporation 2008 Long-Term Incentive Plan, incorporated by reference
      to Exhibit 4.6 of the Registrant’s Registration Statement on Form S-8
      (File No. 333-151101) filed with the SEC on May 22,
  2008.10.26
              
              Stock
      Purchase Agreement dated as of December 31, 2008 between Titanium Metals
      Corporation and Contran Corporation, incorporated by reference to Exhibit
      10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on
      January 7, 2009.10.27
              
              Form
      of Secured Promissory Note dated as of December 31, 2008 made by Contran
      Corporation payable to Titanium Metals Corporation, incorporated by
      reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
      filed with the SEC on January 7, 2009.10.28
              
              Pledge
      and Security Agreement dated as of December 31, 2008 between Contran
      Corporation and Titanium Metals Corporation, incorporated by reference to
      Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the
      SEC on January 7, 2009.21.1
              
              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, incorporated by reference to Exhibit 99.1 to
      the Registrant’s Annual Report on Form 10-K for the year ended December
      31, 2007.


*      Management
contract, compensatory plan or arrangement.


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


24


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 26,
      2009
              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 26,
      2009
              Chairman of the
      Board
            Terry N. Worrell, February 26,
      2009
              DirectorBy          /s/ Steven L.
      Watson
            By          /s/ Paul J.
      ZucconiSteven L. Watson, February 26,
      2009
              Vice Chairman of the Board
      and
              Chief Executive
      Officer
            Paul J. Zucconi, February 26,
      2009
              DirectorBy          /s/ Keith R.
      Coogan
            By         /s/ Bobby D.
      O’BrienKeith R. Coogan, February 26,
      2009
              Director
            Bobby D. O’Brien, February 26,
      2009
              PresidentBy         /s/ Glenn R.
      Simmons
            By          /s/ James W.
      BrownGlenn R. Simmons, February 26,
      2009
              Director
            James W. Brown, February 26,
      2009
              Vice President and Chief
      FinancialOfficer
              Principal Financial
      OfficerBy         /s/ Thomas P.
      Stafford
            By          /s/ Scott E.
      SullivanThomas P. Stafford, February
      26, 2009
              Director
            Scott E. Sullivan, February 26,
      2009
              Vice President and Controller
              Principal Accounting
      Officer











25




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, 2007 and 2008
            F-3Consolidated
      Statements of Income –Years
      ended December 31, 2006, 2007 and 2008
            F-5Consolidated
      Statements of Comprehensive Income –Years
      ended December 31, 2006, 2007 and 2008
            F-6Consolidated
      Statements of Cash Flows –Years
      ended December 31, 2006, 2007 and 2008
            F-8Consolidated
      Statements of Changes in Stockholders’ Equity –Years
      ended December, 2006, 2007 and 2008
            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, 2007 and 2008 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2008 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,
2008, 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 under Item 9A.  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.  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 13 to the Consolidated Financial Statements, the Company
changed the manner in which it accounts for pension and other postretirement
benefit obligations in 2006.





F-1


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.





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
26, 2009





F-2


TITANIUM
METALS CORPORATION


CONSOLIDATED
BALANCE SHEETS


(In
millions, except per share data)





December
      31,ASSETS
            
            2007
            
            
            2008Current
      assets:Cash and cash
      equivalents
            
            $
            90.0
            
            
            $
            45.0Accounts and other
      receivables
            
            
            209.9
            
            
            
            145.4Inventories
            
            
            562.7
            
            
            
            569.7Refundable income
      taxes
            
            
            14.5
            
            
            
            2.3Prepaid expenses and
      other
            
            
            6.1
            
            
            
            4.8Deferred income
    taxes
            
            
            14.6
            
            
            
            21.7Total current
    assets
            
            
            897.8
            
            
            
            788.9Marketable
      securities
            
            
            2.7
            
            
            
            16.4Notes
      receivable from affiliates
            
            
            50.5
            
            
            
            58.4Property
      and equipment, net
            
            
            382.0
            
            
            
            427.1Pension
      asset
            
            
            23.3
            
            
            
            -Deferred
      income taxes
            
            
            2.6
            
            
            
            17.8Other
            
            
            61.0
            
            
            
            59.1Total assets
            
            $
            1,419.9
            
            
            $
            1,367.7





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 STOCKHOLDERS’
      EQUITY
            
            2007
            
            
            2008Current
      liabilities:Accounts payable
            
            $
            72.6
            
            
            $
            58.5Accrued and other current
      liabilities
            
            
            87.7
            
            
            
            76.1Customer advances
            
            
            17.4
            
            
            
            17.6Total current
      liabilities
            
            
            177.7
            
            
            
            152.2Accrued
      OPEB cost
            
            
            29.3
            
            
            
            28.5Accrued
      pension cost
            
            
            36.0
            
            
            
            77.5Deferred
      income taxes
            
            
            11.3
            
            
            
            -Other
            
            
            9.0
            
            
            
            9.2Total liabilities
            
            
            263.3
            
            
            
            267.4Minority
      interest
            
            
            23.9
            
            
            
            20.7Stockholders’
      equity:Series A Preferred Stock, $0.01 par value; $3.6 million
      liquidation preference; 4.0 million shares authorized, 0.1 million shares
              issued
      andoutstanding,
      respectively
            
            
            4.1
            
            
            
            3.2Common stock, $0.01 par value; 200 million shares authorized,183.0
      and 181.1 million shares issued and outstanding, respectively
            
            
            1.8
            
            
            
            1.8Additional paid-in
      capital
            
            
            558.2
            
            
            
            523.4Retained earnings
            
            
            589.0
            
            
            
            696.7Accumulated other comprehensive
      loss
            
            
            (20.4
            )
            
            
            (145.5
            )Total stockholders’
      equity
            
            
            1,132.7
            
            
            
            1,079.6Total liabilities, minority
      interest and stockholders’ equity
            
            $
            1,419.9
            
            
            $
            1,367.7Commitments
      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 31,2006
            
            
            2007
            
            
            2008Net
      sales
            
            $
            1,183.2
            
            
            $
            1,278.9
            
            
            $
            1,151.5Cost
      of sales
            
            
            747.1
            
            
            
            831.5
            
            
            
            863.8Gross margin
            
            
            436.1
            
            
            
            447.4
            
            
            
            287.7Selling,
      general, administrative anddevelopment
      expense
            
            
            67.0
            
            
            
            69.0
            
            
            
            66.5Other
      income (expense), net
            
            
            13.7
            
            
            
            (6.4
            )
            
            
            (1.5
            )Operating income
            
            
            382.8
            
            
            
            372.0
            
            
            
            219.7Interest
      expense
            
            
            3.4
            
            
            
            2.6
            
            
            
            1.8Other
      non-operating income, net
            
            
            39.0
            
            
            
            24.2
            
            
            
            19.4Income before income taxes and
      minority interest
            
            
            418.4
            
            
            
            393.6
            
            
            
            237.3Provision
      for income taxes
            
            
            128.4
            
            
            
            116.9
            
            
            
            69.1Minority
      interest in after tax earnings
            
            
            8.7
            
            
            
            8.5
            
            
            
            5.7Net income
            
            
            281.3
            
            
            
            268.2
            
            
            
            162.5Dividends
      on Series A Preferred Stock
            
            
            6.8
            
            
            
            5.1
            
            
            
            0.3Net income attributable
      tocommon
      stockholders
            
            $
            274.5
            
            
            $
            263.1
            
            
            $
            162.2Earnings
      per share attributable to common stockholders:Basic
            
            $
            1.77
            
            
            $
            1.62
            
            
            $
            0.89Diluted
            
            $
            1.53
            
            
            $
            1.46
            
            
            $
            0.89Weighted
      average shares outstanding:Basic
            
            
            155.0
            
            
            
            162.8
            
            
            
            181.4Diluted
            
            
            183.8
            
            
            
            184.3
            
            
            
            182.5Cash
      dividend per common share
            
            $
            -
            
            
            $
            0.075
            
            
            $
            0.30


See
accompanying notes to Consolidated Financial Statements.
 F-5


TITANIUM
METALS CORPORATION


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


(In
millions)





Year
      ended December 31,2006
            
            
            2007
            
            
            2008Net
      income
            
            $
            281.3
            
            
            $
            268.2
            
            
            $
            162.5Other
      comprehensive income, net of tax:Currency translation
      adjustment
            
            
            12.8
            
            
            
            9.5
            
            
            
            (64.5
            )Unrealized gains (losses) and
      reclassification adjustment on marketable securities
            
            
            10.3
            
            
            
            (19.9
            )
            
            
            (8.2
            )Pension plans
            
            
            -
            
            
            
            12.0
            
            
            
            (54.1
            )OPEB plan
            
            
            -
            
            
            
            0.4
            
            
            
            1.7Additional minimum pension
      liabilities
            
            
            0.1
            
            
            
            -
            
            
            
            -Other, net
            
            
            0.5
            
            
            
            -
            
            
            
            -Total other comprehensive income
      (loss)
            
            
            23.7
            
            
            
            2.0
            
            
            
            (125.1
            )Comprehensive
    income
            
            $
            305.0
            
            
            $
            270.2
            
            
            $
            37.4Currency
      translation adjustment:Beginning of year
            
            $
            5.0
            
            
            $
            17.8
            
            
            $
            27.3Change during year
            
            
            16.3
            
            
            
            9.5
            
            
            
            (64.5
            )Reclassification adjustment to
      eliminate thecumulative
      effects of VALTIMET
            
            
            (3.5
            )
            
            
            -
            
            
            
            -End of year
            
            $
            17.8
            
            
            $
            27.3
            
            
            $
            (37.2
            )Unrealized
      gains (losses) on marketable securities:Beginning of year
            
            $
            9.6
            
            
            $
            19.9
            
            
            $
            -Change during year
            
            
            10.3
            
            
            
            (1.6
            )
            
            
            (8.2
            )Reclassification adjustment for
      realized gainincluded
      in net income
            
            
            -
            
            
            
            (18.3
            )
            
            
            -End of year
            
            $
            19.9
            
            
            $
            -
            
            
            $
            (8.2
            )Pension
      plans:Beginning of year
            
            $
            -
            
            
            $
            (53.4
            )
            
            $
            (41.4
            )Amortization of prior service cost
      and net lossesincluded
      in net periodic pension cost
            
            
            -
            
            
            
            2.9
            
            
            
            2.0Net actuarial gain (loss) arising
      during year
            
            
            -
            
            
            
            9.1
            
            
            
            (55.3
            )Net prior service cost arising
      during year
            
            
            -
            
            
            
            -
            
            
            
            (0.8
            )Adoption of SFAS
    158
            
            
            (53.4
            )
            
            
            -
            
            
            
            -End of year
            
            $
            (53.4
            )
            
            $
            (41.4
            )
            
            $
            (95.5
            )


See
accompanying notes to Consolidated Financial Statements.
 F-6


TITANIUM
METALS CORPORATION


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


(CONTINUED)


(In
millions)




Year
      ended December 31,2006
                
                
                2007
                
                
                2008OPEB
      plan:Beginning of year
                
                $
                -
                
                
                $
                (6.7
                )
                
                $
                (6.3
                )Amortization of prior service cost
      and net lossesincluded
      in net OPEB expense
                
                
                -
                
                
                
                0.3
                
                
                
                0.1Net actuarial gain (loss) arising
      during year
                
                
                -
                
                
                
                0.1
                
                
                
                1.6Adoption of SFAS
    158
                
                
                (6.7
                )
                
                
                -
                
                
                
                -End of year
                
                $
                (6.7
                )
                
                $
                (6.3
                )
                
                $
                (4.6
                )Additional
      miminum pension liabilities:Beginning of year
                
                $
                (52.3
                )
                
                $
                -
                
                
                $
                -Change during year
                
                
                0.1
                
                
                
                -
                
                
                
                -Adoption of SFAS
    158
                
                
                52.2
                
                
                
                -
                
                
                
                -End of year
                
                $
                -
                
                
                $
                -
                
                
                $
                -Other,
      net:Beginning of year
                
                $
                (0.5
                )
                
                $
                -
                
                
                $
                -Change during year
                
                
                (1.1
                )
                
                
                -
                
                
                
                -Reclassification
      adjustment
                
                
                1.6
                
                
                
                -
                
                
                
                -End of year
                
                $
                -
                
                
                $
                -
                
                
                $
                -Total
      accumulated other comprehensive loss:Beginning of year
                
                $
                (38.2
                )
                
                $
                (22.4
                )
                
                $
                (20.4
                )Comprehensive income (loss), net
      of tax
                
                
                23.7
                
                
                
                2.0
                
                
                
                (125.1
                )Adoption of SFAS
    158
                
                
                (7.9
                )
                
                
                -
                
                
                
                -End of year
                
                $
                (22.4
                )
                
                $
                (20.4
                )
                
                $
                (145.5
                )






See
accompanying notes to Consolidated Financial Statements.
 F-7


TITANIUM
METALS CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
millions)





Year
      ended December 31,2006
            
            
            2007
            
            
            2008Cash
      flows from operating activities:Net income
            
            $
            281.3
            
            
            $
            268.2
            
            
            $
            162.5Depreciation and
      amortization
            
            
            34.1
            
            
            
            41.1
            
            
            
            47.7Gain on sale of marketable and
      other securities
            
            
            -
            
            
            
            (18.3
            )
            
            
            (6.7
            )Gain on sale of
      VALTIMET
            
            
            (40.9
            )
            
            
            -
            
            
            
            -Loss on disposal of property and
      equipment
            
            
            0.8
            
            
            
            7.7
            
            
            
            0.4Equity in earnings of joint
      ventures, net of distributions
            
            
            (10.7
            )
            
            
            -
            
            
            
            (0.5
            )Deferred income
    taxes
            
            
            10.3
            
            
            
            (14.7
            )
            
            
            (4.1
            )Excess tax benefit on stock option
      exercises
            
            
            (9.9
            )
            
            
            (2.1
            )
            
            
            (0.3
            )Minority interest
            
            
            8.8
            
            
            
            8.4
            
            
            
            5.7Other, net
            
            
            -
            
            
            
            2.5
            
            
            
            2.6Change in assets and
      liabilities:Receivables
            
            
            (61.3
            )
            
            
            7.7
            
            
            
            46.9Inventories
            
            
            (121.3
            )
            
            
            (51.4
            )
            
            
            (45.3
            )Prepaid conversion
      services
            
            
            (50.0
            )
            
            
            -
            
            
            
            -Accounts payable and accrued
      liabilities
            
            
            28.6
            
            
            
            (10.6
            )
            
            
            (13.8
            )Income taxes
            
            
            18.2
            
            
            
            (35.5
            )
            
            
            12.2Pensions and other postretirement
      benefit plans
            
            
            (9.1
            )
            
            
            (9.6
            )
            
            
            (9.9
            )Other, net
            
            
            0.2
            
            
            
            (1.3
            )
            
            
            0.2Net cash provided by operating
      activities
            
            
            79.1
            
            
            
            192.1
            
            
            
            197.6Cash
      flows from investing activities:Capital
    expenditures
            
            
            (100.9
            )
            
            
            (100.9
            )
            
            
            (121.3
            )Purchases of marketable
      securities
            
            
            -
            
            
            
            -
            
            
            
            (26.4
            )Proceeds from sale of
      VALTIMET
            
            
            75.0
            
            
            
            -
            
            
            
            -Principal payments on notes
      receivable from affiliates
            
            
            -
            
            
            
            2.6
            
            
            
            7.3Other, net
            
            
            (0.6
            )
            
            
            (9.9
            )
            
            
            (2.2
            )Net cash used in investing
      activities
            
            
            (26.5
            )
            
            
            (108.2
            )
            
            
            (142.6
            )Cash
      flows from financing activities:Indebtedness:Borrowings
            
            
            639.2
            
            
            
            -
            
            
            
            63.9Repayments
            
            
            (691.9
            )
            
            
            -
            
            
            
            (63.9
            )Dividends paid:Common stock
            
            
            -
            
            
            
            (13.7
            )
            
            
            (54.5
            )Series A Preferred
      Stock
            
            
            (7.2
            )
            
            
            (5.6
            )
            
            
            (0.3
            )Minority
    shareholder
            
            
            (3.0
            )
            
            
            (8.1
            )
            
            
            (6.8
            )Issuance of common
      stock
            
            
            11.3
            
            
            
            1.0
            
            
            
            0.3Excess tax benefits of stock
      option exercises
            
            
            9.9
            
            
            
            2.1
            
            
            
            0.3Treasury stock
      purchases
            
            
            -
            
            
            
            -
            
            
            
            (36.5
            )Other, net
            
            
            (0.8
            )
            
            
            (0.2
            )
            
            
            (0.2
            )Net cash used in financing
      activities
            
            
            (42.5
            )
            
            
            (24.5
            )
            
            
            (97.7
            )Net
      cash provided by (used in) operating, investing and financing
      activities
            
            $
            10.1
            
            
            $
            59.4
            
            
            $
            (42.7
            )


See
accompanying notes to Consolidated Financial Statements.
 F-8


TITANIUM
METALS CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)


(In
millions)





Year
      ended December 31,2006
            
            
            2007
            
            
            2008Cash
      and cash equivalents:Net increase (decrease)
      from:Operating, investing and
      financing activities
            
            $
            10.1
            
            
            $
            59.4
            
            
            $
            (42.7
            )Effect of exchange rate changes
      on cash
            
            
            1.7
            
            
            
            1.2
            
            
            
            (2.3
            )Net cash provided (used) during
      year
            
            
            11.8
            
            
            
            60.6
            
            
            
            (45.0
            )Cash and cash equivalents at
      beginning of year
            
            
            17.6
            
            
            
            29.4
            
            
            
            90.0Cash and cash equivalents at end
      of year
            
            $
            29.4
            
            
            $
            90.0
            
            
            $
            45.0Supplemental
      disclosures:Cash paid for:Interest
            
            $
            3.4
            
            
            $
            2.8
            
            
            $
            1.6Income taxes
            
            $
            100.1
            
            
            $
            165.9
            
            
            $
            60.9Non-cash investing
      activities:Promissory
      notes received upon sale of marketableand
      other securities
            
            $
            -
            
            
            $
            52.6
            
            
            $
            16.7


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, 2006, 2007 AND 2008


(In millions)








Common
      Shares
            
            
            Common
      Stock
            
            
            Series
      A
              Preferred
      Stock
            
            
            Additional
      Paid-in Capital
            
            
            Retained
      Earnings
            
            
            Accumulated
      Other Comprehensive Loss
            
            
            Treasury
      Stock and Other
            
            
            TotalBalance
      at January 1, 2006
            
            
            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
      AStock
      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 A
      Preferred       Stock
            
            
            21.3
            
            
            
            0.2
            
            
            
            (70.9
            )
            
            
            70.7
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Tax benefit of stock
      options      exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2.1
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2.1Dividends
    declared:Series A Preferred
      Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5.6
            )
            
            
            -
            
            
            
            -
            
            
            
            (5.6
            )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
            )
            
            $
            -
            
            
            $
            1,132.7Net income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            162.5
            
            
            
            -
            
            
            
            -
            
            
            
            162.5Other comprehensive
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (125.1
            )
            
            
            -
            
            
            
            (125.1
            )Conversion of Series A
      Preferred       Stock
            
            
            0.3
            
            
            
            -
            
            
            
            (0.9
            )
            
            
            0.9
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Treasury stock
      purchases
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (36.5
            )
            
            
            (36.5
            )Treasury stock
      retirement
            
            
            (2.3
            )
            
            
            -
            
            
            
            -
            
            
            
            (36.5
            )
            
            
            -
            
            
            
            -
            
            
            
            36.5
            
            
            
            -Dividends
    declared:Series A Preferred
      Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (0.3
            )
            
            
            -
            
            
            
            -
            
            
            
            (0.3
            )Common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (54.5
            )
            
            
            -
            
            
            
            -
            
            
            
            (54.5
            )Other
            
            
            0.1
            
            
            
            -
            
            
            
            -
            
            
            
            0.8
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0.8Balance
      at December 31, 2008
            
            
            181.1
            
            
            $
            1.8
            
            
            $
            3.2
            
            
            $
            523.4
            
            
            $
            696.7
            
            
            $
            (145.5
            )
            
            $
            -
            
            
            $
            1,079.6


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,
2008, subsidiaries of Contran Corporation held 27.9% of our outstanding common
stock.  Substantially all of Contran's outstanding voting stock is
held by trusts established for the benefit of certain children and grandchildren
of Harold C. Simmons, of which Mr. Simmons is sole trustee, or is held by Mr.
Simmons or persons or other entities related to Mr. Simmons.  At
December 31, 2008, Mr. Simmons and his spouse owned an aggregate of 16.1% of our
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 8.5% of our common stock.  Mr.
Simmons is the sole trustee of the CMRT and a member of the trust investment
committee for the CMRT.  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
February 16, 2006 and May 15, 2006.  All share and per share
disclosures for all periods presented have been adjusted to give effect to each
of these stock splits.


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 other 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.  Unallocated overhead costs resulting from periods with
abnormally low production levels are charged to expense in the period
incurred.  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 all of our marketable securities as available-for-sale.  We
adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements,
which establishes a framework for measuring fair value on January 1,
2008.  The statement requires fair value measurements to be classified
and disclosed in one of the following three categories:





·
            Level
      1 – Unadjusted quoted prices in active markets that are accessible at the
      measurement date for identical, unrestricted assets or
      liabilities;




·
            Level
      2 – Quoted prices in markets that are not active, or inputs which are
      observable, either directly or indirectly, for substantially the full term
      of the assets or liability; and




·
            Level
      3 – Prices or valuation techniques that require inputs that are both
      significant to the fair value measurement and
  unobservable.





F-11


Unrealized
gains or losses on these securities are recognized through other comprehensive
income, except for any decline in value we conclude is other than
temporary.  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.





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.





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.  The settlement dates and methods of asset
retirement obligations identified at certain 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 to remove the asbestos or other
environmental contaminants in connection with a major renovation or demolition
of an affected property, or if the settlement dates and methods otherwise become
determinate, 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 notes receivable from affiliates approximates fair value because the
applicable interest rates are variable based upon stated market
indices.





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.  We recognize currency transaction gains and losses in income
in the period they are incurred.  We recognized net currency
transaction losses of $4.0 million in 2006, losses of $1.2 million in 2007 and
gains of $9.9 million in 2008.





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 $4.7 million in 2006, $4.2 million in 2007 and $4.3
million in 2008.  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 2006,
$14.8 million during 2007 and $15.6 million in 2008 related to employee medical
benefits.  We also paid $1.1 million during both 2006 and 2007 and
$0.9 million in 2008 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 for these
types of insurance policies.   See Note 14 for discussion of
policies provided by related parties.





F-12


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 $180.0 million at December
31, 2007 and $170.3 million at December 31, 2008.  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.





Recent accounting
pronouncements.  On January 1, 2007, we adopted Financial
Accounting Standards Board (“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 SFAS 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 and 2008 was not material, and at December 31, 2007 and
December 31, 2008 we had $0.2 million and $0.3 million, respectively, 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):





Year
      ended December 31,2007
            
            
            2008(In
      millions)Unrecognized
      tax benefits:Beginning
    balance
            
            $
            2.2
            
            
            $
            1.8Gross decreases in tax
      positions taken in prior periods
            
            
            (0.5
            )
            
            
            (0.5
            )Gross increases in tax
      positions taken in current period
            
            
            0.2
            
            
            
            2.7Settlements with taxing
      authorities – cash paid
            
            
            (0.1
            )
            
            
            -Change in foreign currency
      exchange rates
            
            
            -
            
            
            
            (0.6
            )Ending balance
            
            $
            1.8
            
            
            $
            3.4




If our
uncertain tax positions were recognized, a benefit of $0.4 million and $2.5
million would affect our effective income tax rate from continuing operations in
2007 and 2008, respectively.  We currently estimate that our
unrecognized tax benefits will decrease by approximately $0.7 million during the
next twelve months due to the reversal of certain timing differences and the
expiration of certain statutes of limitations.





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 2005 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 2002 for the United Kingdom, 2004 for Italy and Germany and 2005
for France.





On
January 1, 2008, we adopted SFAS 157.  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 FASB
Staff Position (“FSP”) No. FAS 157-2, Effective Date of FASB Statement No.
157which 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).  Beginning in the first quarter of 2008,
all of our fair value measurements are in compliance with SFAS 157, except for
such nonfinancial assets and liabilities for which we will be required to be in
compliance with SFAS 157 prospectively beginning in the first quarter of
2009.  In addition, in accordance with the new standard we have
expanded our disclosures regarding the valuation methods and level of inputs we
utilize beginning in the first quarter of 2008, except for such nonfinancial
assets and liabilities, which will require disclosure in the first quarter of
2009.  The adoption of this standard did not have a material effect on
our consolidated financial position or results of operations.





On
January 1, 2008 we adopted 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 only to 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, other
post employment benefit 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 us.  SFAS 159 became effective for us on January 1,
2008.  We did not elect to measure any eligible items at fair value in
accordance with this new standard either at the date we adopted the new standard
or subsequently during 2008.  Therefore, the adoption of this standard
did not have a material effect on our consolidated financial position or results
of operations.





F-13


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.





During
the fourth quarter of 2008, the FASB issued FSP SFAS 132 (R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets, which amends SFAS No. 87, 88 and 106
to require expanded disclosures about employers’ pension plan
assets.  FSP 132 (R)-1 will be effective for us beginning with our
2009 Annual Report, and we will provide the expanded disclosures about our
pension plan assets at that time.


Note
3 – Inventories





December
      31,2007
            
            
            2008(In
      millions)Raw
      materials
            
            $
            121.8
            
            
            $
            138.0Work-in-process
            
            
            268.7
            
            
            
            264.1Finished
      products
            
            
            125.8
            
            
            
            119.8Inventory
      consigned to customers
            
            
            23.0
            
            
            
            19.2Supplies
            
            
            23.4
            
            
            
            28.6Total inventories
            
            $
            562.7
            
            
            $
            569.7





Note
4 – Marketable securities





Our
marketable securities consist of investments in the publicly traded shares of
related parties.  NL Industries, Inc., Kronos Worldwide, Inc. and
Valhi, Inc. are each majority owned subsidiaries of Contran.  These
securities are carried at fair value using quoted market prices, which represent
Level 1 inputs as defined in SFAS 157.  The following table summarizes
our marketable securities as of December 31, 2007 and 2008:





Marketable
      security
            
            SFAS
      157 fair value measurement level
            
            
            Market
      value
            
            
            Cost
      basis
            
            
            Unrealized
      gains (losses)(In
      millions)As
      of December 31, 2007:NL
            
            
            1
            
            
            $
            2.5
            
            
            $
            2.5
            
            
            $
            -Kronos
            
            
            1
            
            
            
            0.2
            
            
            
            0.2
            
            
            
            -Total
            
            
            
            
            
            $
            2.7
            
            
            $
            2.7
            
            
            $
            -As
      of December 31, 2008:Valhi
            
            
            1
            
            
            $
            13.4
            
            
            $
            26.4
            
            
            $
            (13.0
            )NL
            
            
            1
            
            
            
            3.0
            
            
            
            2.5
            
            
            
            0.5Kronos
            
            
            1
            
            
            
            -
            
            
            
            0.2
            
            
            
            (0.2
            )Total
            
            
            
            
            
            $
            16.4
            
            
            $
            29.1
            
            
            $
            (12.7
            )





During
2008, we purchased 1.3 million shares of Valhi common stock in market
transactions for an aggregate of $26.4 million, and we held approximately 1.1%
of Valhi common stock at December 31, 2008.  Additionally, we held
approximately 0.5% of NL’s outstanding common stock and less than 0.1% of
Kronos’ outstanding common stock at December 31, 2007 and 2008.  Valhi
and NL hold an aggregate of approximately 95.2% of Kronos’ outstanding common
stock at December 31, 2008.





F-14


For our
investments in marketable securities that currently have cost bases in excess of
their respective market values, we currently believe the decline in market
prices of these securities to be temporary in nature as a result of recent
market volatility.  The market values for these investments have been
below our cost bases for less than a year, and we will continue to monitor the
quoted market prices of these securities.  If in the future we were to
conclude that the decline in value of one or more of these securities is other
than temporary, we would recognize an impairment through an income statement
charge.  Such income statement impairment charge would be offset in
comprehensive income by the reversal of the previously unrealized losses to the
extent they were previously recognized in accumulated other comprehensive
income.





Note
5 – Property and equipment





December
      31,2007
            
            
            2008(In
      millions)Land
      and improvements
            
            $
            11.6
            
            
            $
            12.5Buildings
      and improvements
            
            
            55.0
            
            
            
            57.8Information
      technology systems
            
            
            70.3
            
            
            
            71.0Manufacturing
      equipment and other
            
            
            455.8
            
            
            
            481.1Construction
      in progress
            
            
            88.7
            
            
            
            109.3Total property and
      equipment
            
            
            681.4
            
            
            
            731.7Less
      accumulated depreciation
            
            
            299.4
            
            
            
            304.6Total property and equipment,
      net
            
            $
            382.0
            
            
            $
            427.1





Note
6 – Other noncurrent assets





December
      31,2007
            
            
            2008(In
      millions)Prepaid
      conversion services
            
            $
            47.2
            
            
            $
            44.7Other
            
            
            13.8
            
            
            
            14.4Total prepaid and other
      noncurrent assets
            
            $
            61.0
            
            
            $
            59.1





During
2006, we entered into a 20-year conversion services agreement whereby a supplier
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 the
supplier $50.0 million in return for the dedicated rolling
capacity.  We are ratably amortizing the amount we paid for the
conversion services into the cost of the applicable inventory rolled over the
20-year term of the agreement.


Note
7 – Accrued and other current liabilities





December
      31,2007
            
            
            2008(In
      millions)Employee
      related
            
            $
            45.5
            
            
            $
            38.3Deferred
      revenue
            
            
            14.3
            
            
            
            18.5Taxes,
      other than income
            
            
            7.3
            
            
            
            3.8Other
            
            
            20.6
            
            
            
            15.5Total accrued
      liabilities
            
            $
            87.7
            
            
            $
            76.1





Under the
terms of 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
cost of sales on the buffer inventory until the final product is delivered to
the customer.  As of December 31, 2007 and 2008, $14.1 million and
$13.8 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, 2007 and 2008.  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, 2007 and 2008, the formula-determined borrowing ceiling was not applicable
since we had no borrowings outstanding.  We were in compliance with
all such covenants during the years ended December 31, 2007 and
2008.





F-15


In August
2007, TIMET UK, our wholly-owned subsidiary in the U.K., terminated its previous
credit facility and entered into a working capital credit facility (the “U.K.
Facility”) that expires on July 31, 2010.  Under the U.K. facility,
TIMET UK 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 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 UK’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.  The credit agreement includes 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 the U.K. Facility at December 31, 2007
and 2008.  The U.K. Facility also contains financial ratios and
covenants customary in lending transactions of this type, including a minimum
net worth covenant.  TIMET UK was in compliance with all covenants
during the years ended December 31, 2007 and 2008.





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, 2007 and 2008, 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 $213.5 million as of December 31, 2008.





As of
December 31, 2008, we had $5.1 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 $9.1 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 $21.4 million as of December
31, 2008.  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, 2008.  TIMET Savoie made dividend payments to CEZUS of
$8.1 million in 2007 and $6.8 million in 2008.





Note
10 – Stockholders’ equity





Preferred
stock.At
December 31, 2007 and 2008,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
2006, 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.





During
2006, 2007 and 2008, an aggregate of 1.3 million, 1.6 million and a nominal
amount of shares of our Series A Preferred Stock were converted into 17.2
million, 21.3 million and 0.3 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,
2008.





Common
stock.  At December 31,
2007 and 2008, we were authorized to issue 200 million shares of common
stock.  Our U.S. Facility limits the payment of common stock dividends
under certain circumstances.  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 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, with any repurchased shares to be
retired and cancelled.  During 2008, we purchased 2.3 million shares
of our common stock in open market transactions for an aggregate purchase price
of $36.5 million, and all shares acquired under this repurchase program during
2008 have been cancelled.  At December 31, 2008, we could purchase an
additional $63.5 million of our common stock under our board of directors’
authorization.





Restricted stock
and common stock options.  In 1996, we adopted our 1996
Long-Term Performance Incentive Plan (“1996 Plan”) which 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 1996 Plan.  All
previously issued options generally vested over five years and expire ten years
from the date of grant.





F-16


In 2008,
we adopted our 2008 Long-Term Incentive Plan (“2008 Plan”) which provides for
the discretionary grant of restricted or unrestricted common stock, stock
options, stock appreciation rights and other incentive compensation to our
employees or other key individuals, including non-employee
directors.  We are authorized to grant awards representing an
aggregate total of up to 500,000 common shares under the 2008 Plan, and we
issued a nominal number of unrestricted common shares to our non-employee
directors during 2008.  Before the adoption of the 2008 Plan, eligible
non-employee directors were covered by an incentive plan that provided for the
issuance of share-based payments as an element of director compensation (the
“Director Plan”).  The share-based payments under the Director Plan
included annual grants of our common stock to each non-employee director as
partial payment of director fees, and during 2006 and 2007, we issued a nominal
number of shares to our eligible non-employee directors.





As of
January 1, 2006, we had stock options outstanding to purchase 2.1 million shares
of our common stock, all of which were exercisable.  During 2006,
options to purchase 1.8 million shares of our common stock were exercised, and a
nominal number of options were exercised in each of 2007 and 2008.  At
December 31, 2008, a nominal number of options remained outstanding, all of
which were exercised on or before February 23, 2009.  The intrinsic
value of our options exercised aggregated $31.5 million in 2006, $5.7 million in
2007 and $1.0 million in 2008, and the related income tax benefit from such
exercises was $9.9 million in 2006, $2.1 million in 2007 and $0.3 million in
2008 (before considering the effect of any available net operating loss
carryforward).  At December 31, 2008, we had no shares available for
future grant under the 1996 Plan and the Director Plan and 0.5 million
shares were available for future grant under the 2008
Plan.  Shares issued under these plans are newly issued
shares.





Note
11 – Other income and expense





Year
      ended December 31,2006
            
            
            2007
            
            
            2008(In
      millions)Other
      operating income (expense):Loss on asset
      impairment
            
            $
            -
            
            
            $
            (6.0
            )
            
            $
            -Equity in earnings of joint
      ventures
            
            
            14.1
            
            
            
            -
            
            
            
            0.5Other, net
            
            
            (0.4
            )
            
            
            (0.4
            )
            
            
            (2.0
            )Total other operating income
      (expense), net
            
            $
            13.7
            
            
            $
            (6.4
            )
            
            $
            (1.5
            )Other
      non-operating income (expense):Dividends and
      interest
            
            $
            3.6
            
            
            $
            7.0
            
            
            $
            5.3Foreign exchange (loss) gain,
      net
            
            
            (4.0
            )
            
            
            (1.2
            )
            
            
            9.9Gain on sale of marketable and
      othersecurities
            
            
            -
            
            
            
            18.3
            
            
            
            6.7Gain on sale of
      VALTIMET
            
            
            40.9
            
            
            
            -
            
            
            
            -Other, net
            
            
            (1.5
            )
            
            
            0.1
            
            
            
            (2.5
            )Total other non-operating
      income, net
            
            $
            39.0
            
            
            $
            24.2
            
            
            $
            19.4





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
impairment related to previously capitalized costs.





On
December 31, 2008, we sold our investment in certain privately held securities
to Contran for $16.7 million after obtaining approval from the independent
members of our board of directors.  The sales price will be paid to us
pursuant to the terms of a three-year promissory note maturing on December 31,
2011.  The promissory note from Contran bears interest at prime minus
1.5% which will be accrued and paid quarterly, allows for early principal
payments at any time and requires any unpaid principal and accrued interest to
be paid at the maturity date of the promissory note.  See Note
14.  We accounted for our investment at our historical cost of $10.0
million, and we recognized an after-tax capital gain of $6.2 million ($0.03 per
diluted share) from the sale of this investment as part of other non-operating
income during the fourth quarter of 2008.





On
October 26, 2007, after approval by the independent members of our board of
directors, CompX International, Inc. 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 CompX made
principal payments of $2.6 million during 2007 and $7.3 million during
2008.  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.





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 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.





F-17


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 31,2006
            
            
            2007
            
            
            2008(In
      millions)Income
      before income taxes and minority interest:U.S.
            
            $
            307.5
            
            
            $
            300.0
            
            
            $
            168.5Non-U.S.
            
            
            110.9
            
            
            
            93.6
            
            
            
            68.8Total
            
            $
            418.4
            
            
            $
            393.6
            
            
            $
            237.3Expected
      income tax expense, at 35%
            
            $
            146.4
            
            
            $
            137.8
            
            
            $
            83.1Non-U.S.
      tax rates
            
            
            (2.1
            )
            
            
            (2.1
            )
            
            
            (2.4
            )U.S.
      state income taxes, net
            
            
            7.1
            
            
            
            5.9
            
            
            
            5.7Nontaxable
      income
            
            
            (0.9
            )
            
            
            (12.6
            )
            
            
            (14.4
            )Adjustment
      of deferred income tax valuation allowance
            
            
            (17.1
            )
            
            
            (6.5
            )
            
            
            (1.6
            )Domestic
      manufacturing credit
            
            
            (2.4
            )
            
            
            (4.7
            )
            
            
            (4.0
            )Uncertain
      tax positions, net
            
            
            -
            
            
            
            0.3
            
            
            
            2.7Other,
      net
            
            
            (2.6
            )
            
            
            (1.2
            )
            
            
            -Provision for income
      taxes
            
            $
            128.4
            
            
            $
            116.9
            
            
            $
            69.1





Provision
      for income taxes:U.S. current income tax
      expense
            
            $
            88.3
            
            
            $
            107.9
            
            
            $
            58.7Non-U.S. current income tax
      expense
            
            
            29.8
            
            
            
            23.7
            
            
            
            14.4Total current income tax
      expense
            
            
            118.1
            
            
            
            131.6
            
            
            
            73.1U.S. deferred income tax expense
      (benefit)
            
            
            3.3
            
            
            
            (8.9
            )
            
            
            (0.2
            )Non-U.S. deferred income tax
      expense (benefit)
            
            
            7.0
            
            
            
            (5.8
            )
            
            
            (3.8
            )Total deferred income tax expense
      (benefit)
            
            
            10.3
            
            
            
            (14.7
            )
            
            
            (4.0
            )Provision for income
      taxes
            
            $
            128.4
            
            
            $
            116.9
            
            
            $
            69.1





Year
      ended December 31,2006
            
            
            2007
            
            
            2008(In
      millions)Comprehensive
      tax provision allocable to:Income before income taxes and
      minority interest
            
            $
            128.4
            
            
            $
            116.9
            
            
            $
            69.1Additional paid in
      capital
            
            
            (9.9
            )
            
            
            (2.1
            )
            
            
            (0.3
            )Other comprehensive
      income:Currency translation
      adjustment
            
            
            4.4
            
            
            
            (0.5
            )
            
            
            1.5Pensions
    adjustment
            
            
            (3.5
            )
            
            
            5.2
            
            
            
            (28.3
            )OPEB adjustment
            
            
            (4.0
            )
            
            
            0.2
            
            
            
            1.0Marketable
    securities
            
            
            -
            
            
            
            -
            
            
            
            (4.4
            )VALTIMET unrealized net gains on
      derivative financial instruments qualifying as cash flow
      hedges
            
            
            0.2
            
            
            
            -
            
            
            
            -$
            115.6
            
            
            $
            119.7
            
            
            $
            38.6





The
following table summarizes our deferred tax assets and deferred tax liabilities
as of December 31, 2007 and 2008:





December
      31,2007
            
            
            2008Assets
            
            
            Liabilities
            
            
            Assets
            
            
            Liabilities(In
      millions)Temporary
      differences relating to net assets:Inventories
            
            $
            9.4
            
            
            $
            -
            
            
            $
            17.0
            
            
            $
            -Property and equipment,
      including software
            
            
            -
            
            
            
            (38.5
            )
            
            
            -
            
            
            
            (41.3
            )Goodwill
            
            
            4.7
            
            
            
            -
            
            
            
            3.4
            
            
            
            -Accrued pension
    cost
            
            
            9.8
            
            
            
            -
            
            
            
            24.4
            
            
            
            -Pension asset
            
            
            -
            
            
            
            (8.8
            )
            
            
            -
            
            
            
            -Accrued OPEB
cost
            
            
            12.0
            
            
            
            -
            
            
            
            11.6
            
            
            
            -Accrued liabilities and other
      deductible differences
            
            
            12.5
            
            
            
            -
            
            
            
            21.8
            
            
            
            -Other taxable
      differences
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (0.2
            )Tax loss and credit
      carryforwards
            
            
            6.5
            
            
            
            -
            
            
            
            3.0
            
            
            
            -Valuation
    allowance
            
            
            (1.7
            )
            
            
            -
            
            
            
            (0.2
            )
            
            
            -Gross
      deferred tax assets (liabilities)
            
            
            53.2
            
            
            
            (47.3
            )
            
            
            81.0
            
            
            
            (41.5
            )Netting
      by tax jurisdiction
            
            
            (36.0
            )
            
            
            36.0
            
            
            
            (41.5
            )
            
            
            41.5Total
      deferred taxes
            
            
            17.2
            
            
            
            (11.3
            )
            
            
            39.5
            
            
            
            -Less
      current deferred taxes
            
            
            14.6
            
            
            
            -
            
            
            
            21.7
            
            
            
            -Net
      noncurrent deferred taxes
            
            $
            2.6
            
            
            $
            (11.3
            )
            
            $
            17.8
            
            
            $
            -





F-18


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.  During the fourth quarter of 2008, we recognized a $1.9
million decrease in our deferred income tax asset valuation allowance
attributable to the recognition of a capital gain on the sale of certain
privately held securities discussed in Note 11.




The
following table summarizes the components of the change in our deferred tax
asset valuation allowance in 2006, 2007 and 2008:




Year
      ended December 312006
              
              
              2007
              
              
              2008(In
      millions)Effect
      ofIncome before income taxes and
      minority interest
              
              $
              (17.1
              )
              
              $
              (6.5
              )
              
              $
              (1.6
              )Accumulated other comprehensive
      (income) loss
              
              
              (3.6
              )
              
              
              6.8
              
              
              
              -Currency translation adjustment
      and other
              
              
              (0.1
              )
              
              
              -
              
              
              
              0.1Change in deferred tax valuation
      allowance
              
              $
              (20.8
              )
              
              $
              0.3
              
              
              $
              (1.5
              )


In
October 2004, the American Jobs Creation Act of 2004 was enacted into law, which
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 includes income tax
benefits related to such special deductions of $2.4 million in 2006, $4.7
million in 2007 and $4.0 million in 2008.





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 and a $14.4 million benefit during 2008.  The internal
corporate reorganization was undertaken to align our European operations under a
single European holding company.





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 $26.5 million in 2006, $29.5 million in 2007 and $22.8 million
in 2008.





Change in
accounting for pension and OPEB plans.  On December 31, 2006,
we adopted 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.





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 plan is 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 31,2007
            
            
            2008(In
      millions)Change
      in projected benefit obligations:Balance at beginning of
      year
            
            $
            317.6
            
            
            $
            314.0Service cost
            
            
            5.5
            
            
            
            4.6Participants’
      contributions
            
            
            1.5
            
            
            
            1.5Interest cost
            
            
            16.9
            
            
            
            16.7Amendments
            
            
            -
            
            
            
            1.3Actuarial gain
            
            
            (19.4
            )
            
            
            (22.3
            )Benefits paid
            
            
            (12.4
            )
            
            
            (13.0
            )Change in currency exchange
      rates
            
            
            4.3
            
            
            
            (63.1
            )Balance at end of
      year
            
            $
            314.0
            
            
            $
            239.7Change
      in plan assets:Fair value at beginning of
      year
            
            $
            283.3
            
            
            $
            301.3Actual return on plan
      assets
            
            
            15.0
            
            
            
            (90.9
            )Employer
      contributions
            
            
            10.7
            
            
            
            10.5Participants’
      contributions
            
            
            1.5
            
            
            
            1.5Benefits paid
            
            
            (12.4
            )
            
            
            (13.0
            )Change in currency exchange
      rates
            
            
            3.2
            
            
            
            (47.2
            )Fair value at end of
      year
            
            $
            301.3
            
            
            $
            162.2Funded status
            
            $
            (12.7
            )
            
            $
            (77.5
            )





F-19





Year
      ended December 31,2007
            
            
            2008(In
      millions)Amounts
      recognized in balance sheets:Pension asset
            
            $
            23.3
            
            
            $
            -Noncurrent accrued pension
      cost
            
            
            (36.0
            )
            
            
            (77.5
            )Funded status
            
            
            (12.7
            )
            
            
            (77.5
            )Accumulated other comprehensive
      loss:Actuarial loss
            
            
            55.2
            
            
            
            119.3Prior service
cost
            
            
            1.8
            
            
            
            2.6Total
            
            $
            44.3
            
            
            $
            44.4Accumulated
      benefit obligation
            
            $
            308.3
            
            
            $
            236.4




The
amounts shown in the table above for actuarial losses and prior service cost at
December 31, 2007 and 2008 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, 2008
related to our pension plans, we currently expect to recognize net actuarial
losses of $9.3 million and prior service costs of $0.6 million as a component of
net periodic pension expense during 2009.  The table below details the
changes in plan assets and benefit obligations recognized in accumulated other
comprehensive income:





Year
      ended December 31,2007
            
            
            2008(In
      millions)Net actuarial gain (loss) arising
      during the year
            
            $
            13.1
            
            
            $
            (83.1
            )Net prior service cost arising
      during the year
            
            
            -
            
            
            
            (1.3
            )Amortization included in net
      periodic pension cost:Prior service
    cost
            
            
            0.5
            
            
            
            0.4Net actuarial
      losses
            
            
            3.5
            
            
            
            2.4Total
            
            $
            17.1
            
            
            $
            (81.6
            )





As of
December 31, 2008, all of our European and U.S. defined benefit pension plans
have accumulated benefit obligations in excess of fair value of plan
assets.  As of December 31, 2007, our European defined benefit pension
plans have accumulated benefit obligations totaling $233.5 million which are in
excess of fair value of plan assets of $203.0 million.  The projected
benefit obligations related to our European defined benefit pension plans were
$239.0 million at December 31, 2007.


The
components of the net periodic pension expense are set forth below:





Year
      ended December 31,2006
            
            
            2007
            
            
            2008(In
      millions)Service
      cost
            
            $
            4.7
            
            
            $
            5.5
            
            
            $
            4.6Interest
      cost
            
            
            14.0
            
            
            
            16.9
            
            
            
            16.7Expected
      return on plan assets
            
            
            (18.5
            )
            
            
            (21.8
            )
            
            
            (22.1
            )Amortization
      of prior service cost
            
            
            0.6
            
            
            
            0.5
            
            
            
            0.4Amortization
      of net losses
            
            
            3.3
            
            
            
            3.5
            
            
            
            2.4Net pension
    expense
            
            $
            4.1
            
            
            $
            4.6
            
            
            $
            2.0





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 31,2007
            
            
            2008Discountrate
            
            
            Salary
      increase
            
            
            Discountrate
            
            
            Salary
      increaseU.S.
      plan
            
            
            5.90
            %
            
            
            n/a
            
            
            
            5.75
            %
            
            
            n/aU.K.
      plan
            
            
            5.60
            %
            
            
            3.70
            %
            
            
            6.20
            %
            
            
            3.10
            %





Significant
      assumptions used to calculate net periodic pension expensefor the year
      ended December 31,Year
            
            Discount
      rate
            
            
            LTRR
            
            
            Salary
      IncreaseU.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
            %U.S.
      plan
            2008
            
            
            5.90
            %
            
            
            10.00
            %
            
            
            n/aU.K.
      plan
            2008
            
            
            5.60
            %
            
            
            6.65
            %
            
            
            3.70
            %





We
currently expect to make no cash contributions to our U.S. defined benefit
pension plan and approximately $7.3 million to our U.K. defined benefit pension
plan during 2009.  The U.S. plan paid benefits of approximately $5.4
million in 2006, $5.7 million in 2007 and $5.8 million in 2008, and the European
plans paid benefits of approximately $5.4 million in 2006, $6.7 million in 2007
and $7.2 million in 2008.  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-20





Projected
      retirement benefitsU.S.
      Plan
            
            
            U.K.
      Plan
            
            
            Total(In
      millions)Year
      ending December 31,2009
            
            $
            6.0
            
            
            $
            5.7
            
            
            $
            11.72010
            
            
            6.0
            
            
            
            5.9
            
            
            
            11.92011
            
            
            6.0
            
            
            
            6.0
            
            
            
            12.02012
            
            
            6.1
            
            
            
            6.2
            
            
            
            12.32013
            
            
            6.0
            
            
            
            6.3
            
            
            
            12.32014 through 2018
            
            
            30.5
            
            
            
            34.2
            
            
            
            64.7





The
assets of the defined benefit pension plans are invested as
follows:








December
      31,2007
            
            
            2008U.S.
      plan:Equity securities
            
            
            98.0
            %
            
            
            53.0
            %Debt securities
            
            
            -
            
            
            
            43.0Cash and other
            
            
            2.0
            
            
            
            4.0100.0
            %
            
            
            100.0
            %U.K.
      plan:Equity securities
            
            
            78.0
            %
            
            
            70.0
            %Debt securities
            
            
            22.0
            
            
            
            29.0Other
            
            
            -
            
            
            
            1.0100.0
            %
            
            
            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, 2008, the asset mix for
our portion of the CMRT (based on an aggregate asset value of $46.9 million) was
43% debt securities, 47% U.S. equity securities, 6% foreign equity securities
and 4% cash and other securities.  During 2006, 2007 and 2008, the
assumed long-term rate of return for our U.S. plan assets that were 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, the current and projected asset mix and the investment
objectives of the CMRT’s managers for our portion of the CMRT.  During
the history of the CMRT from its inception in 1987 through December 31, 2008,
the average annual rate of return earned by our portion of the CMRT, as
calculated based on the average percentage change in the net asset value per
unit for each applicable year, has been 11%.




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
      31,2007
              
              
              2008(In
      millions)Actuarial
      present value of accumulated OPEB obligations:Balance at beginning of
      year
              
              $
              30.2
              
              
              $
              31.4Service cost
              
              
              0.9
              
              
              
              1.1Interest cost
              
              
              1.7
              
              
              
              1.6Actuarial gain
              
              
              (0.1
              )
              
              
              (2.5
              )Participant
      contributions
              
              
              0.9
              
              
              
              0.9Benefits paid
              
              
              (2.2
              )
              
              
              (2.1
              )Balance at end of
      year
              
              $
              31.4
              
              
              $
              30.4Fair
      value of plan assets
              
              $
              -
              
              
              $
              -Funded status
              
              $
              (31.4
              )
              
              $
              (30.4
              )Amounts
      recognized in balance sheets:Current accrued OPEB
      cost
              
              $
              (2.1
              )
              
              $
              (1.9
              )Noncurrent accrued OPEB
      cost
              
              
              (29.3
              )
              
              
              (28.5
              )Funded status
              
              
              (31.4
              )
              
              
              (30.4
              )Accumulated other comprehensive
      loss:Net actuarial
loss
              
              
              11.1
              
              
              
              8.1Prior service
    credit
              
              
              (1.0
              )
              
              
              (0.7
              )Total
              
              $
              (21.3
              )
              
              $
              (23.0
              )




F-21


The
amounts shown in the table above for actuarial losses and prior service credit
at December 31, 2007 and 2008 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, 2008 related to our OPEB plan, we currently expect to recognize net
actuarial losses of $0.5 million and prior service credits of $0.1 million as a
component of net periodic OPEB expense during 2009.  The table below
details the changes in benefit obligations recognized in accumulated other
comprehensive income:





Year
      ended December 31,2007
            
            
            2008(In
      millions)Net
      actuarial gain arising during the year
            
            $
            0.1
            
            
            $
            2.5Amortization
      included in net OPEB expense:Prior service
    credit
            
            
            (0.4
            )
            
            
            (0.3
            )Net actuarial
    losses
            
            
            0.9
            
            
            
            0.5Total
            
            $
            0.6
            
            
            $
            2.7





The
components of the net periodic OPEB expense are set forth below:





Year
      ended December 31,2006
            
            
            2007
            
            
            2008(In
      millions)Service
      cost
            
            $
            0.9
            
            
            $
            0.9
            
            
            $
            1.1Interest
      cost
            
            
            1.8
            
            
            
            1.7
            
            
            
            1.6Amortization
      of prior service credit
            
            
            (0.5
            )
            
            
            (0.4
            )
            
            
            (0.3
            )Amortization
      of net losses
            
            
            1.4
            
            
            
            0.9
            
            
            
            0.5Net OPEB expense
            
            $
            3.6
            
            
            $
            3.1
            
            
            $
            2.9





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
      31,2007
            
            
            2008Discount
      rate
            
            
            5.90
            %
            
            
            5.75
            %Beginning
      HCCTR
            
            
            5.83
            %
            
            
            5.46
            %Ultimate
      HCCTR
            
            
            4.00
            %
            
            
            4.00
            %Ultimate
      year
            
            2010
            
            
            2013








Significant
      assumptions used to calculate net periodic
              OPEB
      expense for the year ended December 31,2006
            
            
            2007
            
            
            2008Discount
      rate
            
            
            5.50
            %
            
            
            5.90
            %
            
            
            5.90
            %Beginning
      HCCTR
            
            
            8.23
            %
            
            
            7.17
            %
            
            
            5.83
            %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 2008, and the actuarial present value of
accumulated OPEB obligations at December 31, 2008 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
2008, and the actuarial present value of accumulated OPEB obligations at
December 31, 2008 would have decreased approximately $2.5
million.





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 Prescription Drug,
Improvement and Modernization Act of 2003.  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 31,2009
            
            $
            1.92010
            
            
            2.12011
            
            
            2.32012
            
            
            2.42013
            
            
            2.62014 through 2018
            
            
            15.6





F-22


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 $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 and $8.2 million in
2008.  This agreement is renewed annually, and we expect to pay a net
amount of $8.6 million under the ISA during 2009.





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 $6.9 million in 2006, $7.9 million in 2007 and
$7.8 million in 2008.  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 2009.





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.





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 $2.3
million during 2006, $2.2 million during 2007 and $2.3 million during
2008.  We also paid BMI an electrical facilities upgrade fee of $0.8
million in each of 2006, 2007 and 2008.  This fee continues at $0.8
million annually through 2009 and terminates completely after January
2010.





Prior to
2006, 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 $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
$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 $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 Notes 4 and 11.





Our notes
receivable from affiliates, more fully discussed in Note 11, are summarized in
the table below.  Interest income on such notes was $0.5 million in
2007 and $2.7 million in 2008.





December
      31,2007
            
            
            2008(In
      millions)Notes
      receivable from affiliates:CompX
            
            $
            50.5
            
            
            $
            42.7Contran
            
            
            -
            
            
            
            16.7Total
      notes receivable from affiliates
            
            $
            50.5
            
            
            $
            59.4Less
      current portion of notes receivable
            
            
            -
            
            
            
            1.0Noncurrent notes receivable from affiliates
            
            $
            50.5
            
            
            $
            58.4


The
current portion of our notes receivable from affiliates at December 31, 2008 is
included with prepaid expenses and other current assets.





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.





F-23


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, 2007 and 2008.





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), the Safran companies (“Safran,” Snecma and related
companies), 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 or expiration 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 and to us, 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, Safran 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 31,2006
            
            
            2007
            
            
            2008Significant
      customer receivable balances as apercentage
      of total receivables:PCC and PCC-related entities
      (1)
      (2)
            
            
            -
            
            
            
            -
            
            
            
            12
            %VALTIMET (1)
            
            
            11
            %
            
            
            11
            %
            
            
            -Significant
      sales revenue as a percentage of totalsales
      revenue:Ten largest
      customers
            
            
            49
            %
            
            
            49
            %
            
            
            49
            %Significant
      customers:PCC and PCC-related entities
      (2)
            
            
            11
            %
            
            
            11
            %
            
            
            10
            %Boeing (1)
            
            
            -
            
            
            
            10
            %
            
            
            12
            %Commercial aerospace
      sector
            
            
            57
            %
            
            
            55
            %
            
            
            59
            %Total LTAs
            
            
            39
            %
            
            
            47
            %
            
            
            56
            %Significant
LTAs:Rolls-Royce (1)
      (2)
            
            
            -
            
            
            
            12
            %
            
            
            13
            %Boeing (1)
            
            
            -
            
            
            
            10
            %
            
            
            12
            %(1)Amounts
      excluded for periods when the concentration is not at least
      10%.
              (2)PCC
      and PCC-related entities serve as a supplier to certain commercial
      aerospace manufacturers, including 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.





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, 2008, 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 31,2009
            
            $
            6.22010
            
            
            5.52011
            
            
            5.22012
            
            
            4.92013
            
            
            4.32014 and
    thereafter
            
            
            24.3$
            50.4





Net rent
expense under all leases, including those with original terms of less than one
year, was $6.6 million in 2006, $6.8 million in 2007 and $8.1 million in
2008.  We are also obligated under certain operating leases for our
pro rata share of the lessor’s operating expenses.





F-24


Purchase
agreements.  We have LTAs with
titanium sponge and other suppliers that include minimum commitments to purchase
titanium sponge through 2024 and services through 2019.  Certain of
our purchase agreements include take-or-pay provisions which require us to pay
penalties if we do not meet the contractual volume commitments, and any such
payments are included in the purchase commitments in the table
below.  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
            
            
            Services
            
            
            Energy
            
            
            Total(In
      millions)Year
      ended December 31,2009
            
            $
            107.1
            
            
            $
            9.5
            
            
            $
            1.8
            
            
            $
            118.42010
            
            
            94.8
            
            
            
            10.6
            
            
            
            1.8
            
            
            
            107.22011
            
            
            124.1
            
            
            
            12.8
            
            
            
            1.8
            
            
            
            138.72012
            
            
            120.4
            
            
            
            12.8
            
            
            
            1.8
            
            
            
            135.02013
            
            
            97.0
            
            
            
            12.8
            
            
            
            1.8
            
            
            
            111.62014
      and thereafter
            
            
            639.6
            
            
            
            39.6
            
            
            
            12.8
            
            
            
            692.0$
            1,183.0
            
            
            $
            98.1
            
            
            $
            21.8
            
            
            $
            1,302.9





Environmental
matters.  As part of our continuing environmental assessment with
respect to our plant site in Henderson, Nevada, in the third quarter of 2008 we
completed and submitted to the Nevada Department of Environmental Protection
(“NDEP”) a Remedial Alternative Study (“RAS”) with respect to the groundwater
located beneath the plant site.  The RAS, which was submitted pursuant
to an existing agreement between the NDEP and us, addressed the presence of
certain contaminants in the plant site groundwater that require
remediation.  The RAS proposes various alternatives to the NDEP for
the remediation of these contaminants.  Upon our completion and
submission of the RAS to NDEP, we increased our estimated cost to complete the
groundwater remediation by $2.6 million during 2008.  The NDEP
completed its review of the RAS and our proposed remedial alternatives during
the fourth quarter of 2008, and the NDEP issued its record of decision
concerning the remediation plan in February 2009.





As of December 31, 2008, we have
$­­3.9 million accrued for remediation activities anticipated at our
Henderson plant site, which include amounts accrued at the lower end of the
range of estimated costs for the most likely remedial alternative contained in
the groundwater RAS submitted to the NDEP.  We will continue
evaluating alternative methods and timing of remediation activities, and if
necessary, we may revise our estimated costs in the future.  We
estimate the upper end of the range of reasonably possible costs related to all
of our environmental matters, including the current accrual, to be approximately
$6.4 million.  We expect these estimated costs to be incurred over a
remediation period of at least five years.





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,
2008, we have made aggregate payments under the two bonds of $2.3 million, and
$0.7 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.





F-25


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 31,2006
            
            
            2007
            
            
            2008(In
      millions)Numerator:Net income attributable
      to common stockholders (1)
            
            $
            274.5
            
            
            $
            263.1
            
            
            $
            162.2Dividends on Series A Preferred
      Stock
            
            
            6.8
            
            
            
            5.1
            
            
            
            0.3Diluted net income attributable
      tocommon
      stockholders
            
            $
            281.3
            
            
            $
            268.2
            
            
            $
            162.5Denominator:Average common shares
      outstanding
            
            
            155.0
            
            
            
            162.8
            
            
            
            181.4Average dilutive stock options
      andrestricted
      stock
            
            
            0.3
            
            
            
            0.1
            
            
            
            0.1Series A Preferred
      Stock
            
            
            28.4
            
            
            
            21.4
            
            
            
            1.0Other
            
            
            0.1
            
            
            
            -
            
            
            
            -Diluted shares
            
            
            183.8
            
            
            
            184.3
            
            
            
            182.5(1)
      Net income attributable to common stockholders includes a nominal amount
      of undeclared dividends on our SeriesA
      Preferred Stock for all periods presented.





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
President 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 supplemental information to our Consolidated Financial
Statements:





Year
      ended December 31,2006
            
            
            2007
            
            
            2008(In
      millions, except product shipment data)Titanium
      melted and mill products:Melted product net
      sales
            
            $
            226.0
            
            
            $
            191.9
            
            
            $
            115.5Mill product net
      sales
            
            
            819.2
            
            
            
            952.0
            
            
            
            913.5Other titanium product
      sales
            
            
            138.0
            
            
            
            135.0
            
            
            
            122.5Total net sales
            
            $
            1,183.2
            
            
            $
            1,278.9
            
            
            $
            1,151.5Melted
      product shipments:Volume (metric
      tons)
            
            
            5,900
            
            
            
            4,720
            
            
            
            3,850Average selling price (per
      kilogram)
            
            $
            38.30
            
            
            $
            40.65
            
            
            $
            30.00Mill
      product shipments:Volume (metric
      tons)
            
            
            14,160
            
            
            
            14,230
            
            
            
            15,050Average selling price (per
      kilogram)
            
            $
            57.85
            
            
            $
            66.90
            
            
            $
            60.70





Geographic
      segments:Net sales – point of
      origin:United States
            
            $
            865.3
            
            
            $
            931.3
            
            
            $
            806.7United Kingdom
            
            
            263.6
            
            
            
            317.5
            
            
            
            290.7France
            
            
            131.3
            
            
            
            140.7
            
            
            
            123.5Italy
            
            
            62.8
            
            
            
            57.2
            
            
            
            61.5Germany
            
            
            0.4
            
            
            
            0.4
            
            
            
            0.1Eliminations
            
            
            (140.2
            )
            
            
            (168.2
            )
            
            
            (131.0
            )$
            1,183.2
            
            
            $
            1,278.9
            
            
            $
            1,151.5Net sales – point of
      destination:United States
            
            $
            704.5
            
            
            $
            741.5
            
            
            $
            647.4United Kingdom
            
            
            158.4
            
            
            
            202.7
            
            
            
            185.8France
            
            
            146.4
            
            
            
            141.5
            
            
            
            127.6Other locations
            
            
            173.9
            
            
            
            193.2
            
            
            
            190.7$
            1,183.2
            
            
            $
            1,278.9
            
            
            $
            1,151.5Long-lived assets – property and
      equipment, net:United States
            
            $
            251.0
            
            
            $
            291.2
            
            
            $
            348.4United Kingdom
            
            
            71.7
            
            
            
            81.6
            
            
            
            68.1Other Europe
            
            
            7.1
            
            
            
            9.2
            
            
            
            10.6$
            329.8
            
            
            $
            382.0
            
            
            $
            427.1


F-26


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,
      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 (2)
            
            $
            75.0
            
            
            $
            76.3
            
            
            $
            52.3
            
            
            $
            59.4Basic earnings per share
      attributable tocommon stockholders (2)
            
            $
            0.46
            
            
            $
            0.47
            
            
            $
            0.32
            
            
            $
            0.36Diluted earnings per share
      attributable tocommon stockholders (2)
            
            $
            0.41
            
            
            $
            0.42
            
            
            $
            0.29
            
            
            $
            0.33Dividends declared per
      common share
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            0.075Year ended December 31,
      2008:(1)Net sales
            
            $
            293.7
            
            
            $
            297.3
            
            
            $
            295.4
            
            
            $
            265.2Gross margin
            
            $
            81.1
            
            
            $
            84.3
            
            
            $
            72.9
            
            
            $
            49.5Operating income
            
            $
            62.8
            
            
            $
            68.8
            
            
            $
            52.9
            
            
            $
            35.2Net income attributable tocommon
      stockholders (3)
            
            $
            40.3
            
            
            $
            47.3
            
            
            $
            40.2
            
            
            $
            34.4Basic earnings per share
      attributable to common stockholders (3)
            
            $
            0.22
            
            
            $
            0.26
            
            
            $
            0.22
            
            
            $
            0.19Diluted earnings per share
      attributable tocommon stockholders (3)
            
            $
            0.22
            
            
            $
            0.26
            
            
            $
            0.22
            
            
            $
            0.19Dividends declared per
      common share
            
            $
            0.075
            
            
            $
            0.075
            
            
            $
            0.075
            
            
            $
            0.075(1)The
      sum of quarterly amounts may not agree to the full year results due to
      rounding.
              (2)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 11.
              (3)Quarter
      ending December 31, 2008 includes $6.2 million gain related to the sale of
      certain privately held securities ($0.03 per diluted share). See Note
      11.














F-27