UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2007

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

For the transition period from                      to                     

THE TIMKEN COMPANY

(Exact name of registrant as specified in its charter)

Ohio (State or other jurisdiction of incorporation or organization)		34-0577130 (I.R.S. Employer Identification No.)
1835 Dueber Avenue, S.W., Canton, Ohio (Address of principal executive offices)		44706 (Zip Code)

(330) 438-3000
(Registrant’s telephone number, including area code)

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

Title of each class		Name of each exchange on which registered
Common Stock, without par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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 Exchange Act.    

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing 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 filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

Yes o No þ

     As of June 30, 2007, the aggregate market value of the registrant’s common shares held by non-affiliates of the registrant was $3,099,627,323 based on the closing sale price as reported on the New York Stock Exchange.

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at January 31, 2008
Common Shares, without par value		95,807,259 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document		Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held May 1, 2008 (Proxy Statement)		Part III

 

 

THE TIMKEN COMPANY
INDEX TO FORM 10-K REPORT

						PAGE
I.		PART I.
		Item 1.		Business			1
				General			1
				Products			1
				Geographical Financial Information			2
				Industry Segments			3
				Sales and Distribution			4
				Competition			4
				Trade Law Enforcement			5
				Joint Ventures			6
				Backlog			6
				Raw Materials			6
				Research			7
				Environmental Matters			7
				Patents, Trademarks and Licenses			8
				Employment			8
				Available Information			8
		Item 1A.		Risk Factors			8
		Item 1B.		Unresolved Staff Comments			12
		Item 2.		Properties			13
		Item 3.		Legal Proceedings			13
		Item 4.		Submission of Matters to a Vote of Security Holders			13
		Item 4A.		Executive Officers of the Registrant			14
II.		PART II.
		Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			15
		Item 6.		Selected Financial Data			18
		Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
		Item 7A.		Quantitative and Qualitative Disclosures about Market Risk			41
		Item 8.		Financial Statements and Supplementary Data			42
		Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			74
		Item 9A.		Controls and Procedures			74
		Item 9B.		Other Information			76
III.		Part III.
		Item 10.		Directors, Executive Officers and Corporate Governance			76
		Item 11.		Executive Compensation			76
		Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			76
		Item 13.		Certain Relationships and Related Transactions, and Director Independence			76
		Item 14.		Principal Accountant Fees and Services			76
IV.		Part IV.
		Item 15.		Exhibits and Financial Statement Schedules			77
EX-12
EX-21
EX-23
EX-24
EX-31.1
EX-31.2
EX-32

PART I.

Item 1. Business

General

As used herein, the term “Timken” or the “Company” refers to The Timken Company and its subsidiaries unless the context otherwise requires. Timken, an outgrowth of a business originally founded in 1899, was incorporated under the laws of the state of Ohio in 1904.

Timken is a leading global manufacturer of highly engineered bearings, alloy and specialty steel and related components. The Company is the world’s largest manufacturer of tapered roller bearings and alloy seamless mechanical steel tubing and the largest North American-based bearings manufacturer. Timken had facilities in 28 countries on six continents and employed approximately 25,000 people as of December 31, 2007.

Products

The Timken Company manufactures two basic product lines: anti-friction bearings and steel products. Differentiation in these two product lines comes in two different ways: (1) differentiation by bearing type or steel type and (2) differentiation in the applications of bearings and steel.

Tapered Roller Bearings. In the bearing industry, Timken is best known for the tapered roller bearing, which was originally patented by the Company founder, Henry Timken. The tapered roller bearing is Timken’s principal product in the anti-friction industry segment. It consists of four components: (1) the cone or inner race, (2) the cup or outer race, (3) the tapered rollers, which roll between the cup and cone and (4) the cage, which serves as a retainer and maintains proper spacing between the rollers. Timken manufactures or purchases these four components and then sells them in a wide variety of configurations and sizes.

The tapered rollers permit ready absorption of both radial and axial load combinations. For this reason, tapered roller bearings are particularly well-adapted to reducing friction where shafts, gears or wheels are used. The uses for tapered roller bearings are diverse and include applications on passenger cars, light and heavy trucks and trains, as well as a wide variety of industrial applications, ranging from very small gear drives to bearings over two meters in diameter for wind energy machines. A number of applications utilize bearings with sensors to measure parameters such as speed, load, temperature or overall bearing condition.

Matching bearings to the specific requirements of customers’ applications requires engineering and often sophisticated analytical techniques. The design of Timken’s tapered roller bearing permits distribution of unit pressures over the full length of the roller. This design, combined with high precision tolerances, proprietary internal geometry and premium quality material, provides Timken bearings with high load-carrying capacities, excellent friction-reducing qualities and long lives.

Precision Cylindrical and Ball Bearings. Timken’s aerospace and super precision facilities produce high-performance ball and cylindrical bearings for ultra high-speed and/or high-accuracy applications in the aerospace, medical and dental, computer and other industries. These bearings utilize ball and straight rolling elements and are in the super precision end of the general ball and straight roller bearing product range in the bearing industry. A majority of Timken’s aerospace and super precision bearings products are custom-designed bearings and spindle assemblies. They often involve specialized materials and coatings for use in applications that subject the bearings to extreme operating conditions of speed and temperature.

Spherical and Cylindrical Bearings. Timken produces spherical and cylindrical roller bearings for large gear drives, rolling mills and other process industry and infrastructure development applications. In February 2003, the Company purchased the Engineered Solutions business (referred to as “Torrington”) of Ingersoll-Rand Company Limited. Timken’s cylindrical and spherical roller bearing capability was significantly enhanced with the acquisition of Torrington’s broad range of spherical and heavy-duty cylindrical roller bearings for standard industrial and specialized applications. These products are sold worldwide to original equipment manufacturers and industrial distributors serving major industries, including construction and mining, natural resources, defense, pulp and paper production, rolling mills and general industrial goods.

Needle Bearings. With the acquisition of Torrington in February 2003, the Company became a leading global manufacturer of highly engineered needle roller bearings. Timken produces a broad range of radial and thrust needle roller bearings, as well as bearing assemblies, which are sold to original equipment manufacturers and industrial distributors worldwide. Major applications include automotive, consumer, construction, agriculture and general industrial.

Bearing Reconditioning. A small part of the business involves providing bearing reconditioning services for industrial and railroad customers, both internationally and domestically. These services accounted for less than 5% of the Company’s net sales for the year ended December 31, 2007.

Aerospace Products and Services. Through strategic acquisitions and ongoing product development, Timken continues to expand its portfolio of parts, systems and services for the aerospace market, where they are used in helicopters and fixed-wing aircraft for the military and commercial aviation. Timken provides design, manufacture and testing for a wide variety of power transmission and drive train components including transmissions, gears and rotor head components. Other parts include bearings, airfoils (such as blades, vanes, rotors and diffusers), nozzles, gears and other precision flight critical components.

Timken also supplies comprehensive aftermarket maintenance, repair and overhaul services and parts for gas turbine engines, gearboxes and accessory systems in rotary- and fixed-wing aircraft. Services range from aerospace bearing repair and component reconditioning to the complete overhaul of engines, transmissions and fuel controls.

Steel. Steel products include steels of low and intermediate alloy, as well as some carbon grades. These products are available in a wide range of solid and tubular sections with a variety of lengths and finishes. These steel products are used in a wide array of applications, including bearings, automotive transmissions, engine crankshafts, oil drilling components and other similarly demanding applications.

Timken also produces custom-made steel products, including steel components for automotive and industrial customers. This steel components business has provided the Company with the opportunity to further expand its market for tubing and capture higher value-added steel sales. It also enables Timken’s traditional tubing customers in the automotive and bearing industries to take advantage of higher-performing components that cost less than current alternative products. Customizing of products is an important portion of the Company’s steel business.

Geographical Financial Information

(Dollars in thousands)		United States				Europe				Other Countries				Consolidated
2007
Net sales		$	3,392,065			$	963,908			$	880,047			$	5,236,020
Long-lived assets			1,228,399				264,531				229,151				1,722,081
2006
Net sales		$	3,370,244			$	849,915			$	753,206			$	4,973,365
Long-lived assets			1,152,101				275,094				174,364				1,601,559
2005
Net sales		$	3,295,171			$	812,960			$	715,036			$	4,823,167
Long-lived assets			1,053,416				270,710				149,948				1,474,074

Industry Segments

The Company has three reportable segments: Industrial Group, Automotive Group and Steel Group. Financial information for the segments is discussed in Note 14 to the Consolidated Financial Statements.

Description of types of products and services from which each reportable segment derives its revenues
The Company’s reportable segments are business units that target different industry segments or types of product. Each reportable segment is managed separately because of the need to specifically address customer needs in these different industries.

The Automotive Group includes sales of bearings and other products and services (other than steel) to automotive original equipment manufacturers, or OEMs, for passenger cars, light trucks, medium/heavy trucks and trailers. The Industrial Group includes sales of bearings and other products and services (other than steel) to a diverse customer base, including industrial equipment, off-highway, rail and aerospace and defense customers. The Industrial Group also includes aftermarket distribution operations, including automotive applications, for products other than steel. The Company’s bearing products are used in a variety of products and applications, including passenger cars, trucks, locomotive and railroad cars, machine tools, rolling mills and farm and construction equipment, aircraft, missile guidance systems, computer peripherals and medical instruments.

The Steel Group includes sales of low and intermediate alloy and carbon grade steel. These are available in a wide range of solid and tubular sections with a variety of lengths and finishes. The Company also manufactures custom-made steel products, including precision steel components. Approximately 10% of the Company’s steel is consumed in its bearing operations. In addition, sales are made to other anti-friction bearing companies and to the automotive and truck, forging, construction, industrial equipment, oil and gas drilling and to steel service centers.

Measurement of segment profit or loss and segment assets
The Company evaluates performance and allocates resources based on return on capital and profitable growth. The primary measurement used by management to measure the financial performance of each segment is adjusted EBIT (earnings before interest and taxes, excluding special items such as impairment and restructuring charges, rationalization and integration costs, one-time gains or losses on sales of assets, allocated receipts received or payments made under the Continued Dumping and Subsidy Offset Act (CDSOA), gains and losses on the dissolution of a subsidiary, acquisition-related currency exchange gains, and other items similar in nature). The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are recorded at values based on market prices, which creates intercompany profit on intersegment sales or transfers that is eliminated in consolidation.

Factors used by management to identify the enterprise’s reportable segments
The Company reports net sales by geographic area in a manner that is more reflective of how the Company operates its segments, which is by the destination of net sales. Long-lived assets by geographic area are reported by the location of the subsidiary.

Export sales from the U.S. and Canada are less than 10% of revenue. The Company’s Automotive and Industrial Groups have historically participated in the global bearing industry, while the Steel Group has concentrated primarily on U.S. customers.

Timken’s non-U.S. operations are subject to normal international business risks not generally applicable to domestic business. These risks include currency fluctuation, changes in tariff restrictions, difficulties in establishing and maintaining relationships with local distributors and dealers, import and export licensing requirements, difficulties in staffing and managing geographically diverse operations, and restrictive regulations by foreign governments, including price and exchange controls.

Sales and Distribution

Timken’s products in the Automotive Group and Industrial Group are sold principally by their own internal sales organizations. A portion of the Industrial Group’s sales are made through authorized distributors.

Traditionally, a main focus of the Company’s sales strategy has consisted of collaborative projects with customers. For this reason, the Company’s sales forces are primarily located in close proximity to its customers rather than at production sites. In some instances, the sales forces are located inside customer facilities. The Company’s sales force is highly trained and knowledgeable regarding all bearings products, and associates assist customers during the development and implementation phases and provide ongoing support.

The Company has a joint venture in North America focused on joint logistics and e-business services. This alliance is called CoLinx, LLC and was founded by Timken, SKF, INA and Rockwell Automation. The e-business service was launched in April 2001 and is focused on information and business services for authorized distributors in the Industrial Group. The Company also has another e-business joint venture which focuses on information and business services for authorized industrial distributors in Europe, Latin America and Asia. This alliance, which Timken founded with SKF, Sandvik AB, INA and Reliance, is called Endorsia.com International AB.

Timken’s steel products are sold principally by its own sales organization. Most orders are customized to satisfy customer-specific applications and are shipped directly to customers from Timken’s steel manufacturing plants. Approximately 10% of Timken’s Steel Group net sales are intersegment sales. In addition, sales are made to other anti-friction bearing companies and to the automotive and truck, forging, construction, industrial equipment, oil and gas drilling and aircraft industries and to steel service centers.

Timken has entered into individually negotiated contracts with some of its customers in its Automotive Group, Industrial Group and Steel Group. These contracts may extend for one or more years and, if a price is fixed for any period extending beyond current shipments, customarily include a commitment by the customer to purchase a designated percentage of its requirements from Timken. Timken does not believe that there is any significant loss of earnings risk associated with any given contract.

Competition

The anti-friction bearing business is highly competitive in every country in which Timken sells products. Timken competes primarily based on price, quality, timeliness of delivery, product design and the ability to provide engineering support and service on a global basis. The Company competes with domestic manufacturers and many foreign manufacturers of anti-friction bearings, including SKF Group, Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd.

Competition within the steel industry, both domestically and globally, is intense and is expected to remain so. However, the recent combination of a weakened U.S. dollar, worldwide rationalization of uncompetitive capacity, raw material cost increases and North American and global market strength have allowed steel industry prices to increase and margins to improve. Timken’s worldwide competitors for steel bar products include North American producers such as Republic, Mac Steel, Mittal Steel USA (a wholly-owned subsidiary of ArcelorMittal), Steel Dynamics, Nucor and a wide variety of offshore steel producers who export into North America. Competitors for seamless mechanical tubing include Dofasco Tubular Products (a wholly-owned subsidiary of ArcelorMittal), Michigan Seamless Tube, Plymouth Tube, V & M Tube, Sanyo Special Steel, Ovako and Tenaris. Competitors in the precision steel components sector include Formtec, Linamar, Jernberg and overseas companies such as Tenaris, Ovako, Stackpole and FormFlo.

Maintaining high standards of product quality and reliability, while keeping production costs competitive, is essential to Timken’s ability to compete with domestic and foreign manufacturers in both the anti-friction bearing and steel businesses.

Trade Law Enforcement

The U.S. government has six antidumping duty orders in effect covering ball bearings from five countries and tapered roller bearings from China. The five countries covered by the ball bearing orders are France, Germany, Italy, Japan and the United Kingdom. The Company is a producer of these products in the United States. The U.S. government determined in August 2006 that each of these six antidumping duty orders should remain in effect for an additional five years.

The CDSOA provides for distribution of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. The Company reported CDSOA receipts, net of expenses, of $7.9 million, $87.9 million and $77.1 million in 2007, 2006 and 2005, respectively.

In September 2002, the World Trade Organization (WTO) ruled that CDSOA payments are not consistent with international trade rules. In February 2006, U.S. legislation was enacted that would end CDSOA distributions for imports covered by antidumping duty orders entering the U.S. after September 30, 2007. Instead, any such antidumping duties collected would remain with the U.S. Treasury. This legislation would be expected to eventually reduce possible distributions in years beyond 2007, with distributions eventually ceasing.

In July 2007, the U.S. Court of International Trade (CIT) ruled that the procedure for determining recipients eligible to receive CDSOA distributions is unconstitutional. This ruling is now under appeal. The Company is unable to determine, at this time, if such rulings will have a materially adverse impact on the Company’s financial results. A federal court could rule that an appropriate remedy would be return of distributions received in prior years. The Company is unable to determine, at this time, the likelihood of a federal court finally ruling on any particular remedy.

In addition to the CIT rulings, there are a number of factors that can affect whether the Company receives any CDSOA distributions and the amount of such distributions in any year. These factors include, among other things, potential additional changes in the law, ongoing and potential additional legal challenges to the law and the administrative operation of the law. Accordingly, the Company cannot reasonably estimate the amount of CDSOA distributions it will receive in future years, if any. It is possible that CIT rulings might prevent the Company from receiving any CDSOA distributions in 2008 and beyond. Any reduction of CDSOA distributions would reduce our earnings and cash flow.

Joint Ventures

The balances related to investments accounted for under the equity method are reported in other non-current assets on the Consolidated Balance Sheet, which were approximately $14.4 million and $12.1 million at December 31, 2007 and 2006, respectively.

During 2002, the Company’s Automotive Group formed a joint venture, Advanced Green Components, LLC (AGC), with Sanyo Special Steel Co., Ltd. (Sanyo) and Showa Seiko Co., Ltd. (Showa). AGC is engaged in the business of converting steel to machined rings for tapered bearings and other related products. The Company had been accounting for its investment in AGC under the equity method since AGC’s inception. During the third quarter of 2006, AGC refinanced its long-term debt of $12.2 million. The Company guaranteed half of this obligation. The Company concluded the refinancing represented a reconsideration event to evaluate whether AGC was a variable interest entity under FASB Interpretation No. 46 (revised December 2003). The Company concluded that AGC was a variable interest entity and the Company was the primary beneficiary. Therefore, the Company consolidated AGC, effective September 30, 2006. As of September 30, 2006, the net assets of AGC were $9.0 million, primarily consisting of the following: inventory of $5.7 million; property, plant and equipment of $27.2 million; goodwill of $9.6 million; short-term and long-term debt of $20.3 million; and other non-current liabilities of $7.4 million. The $9.6 million of goodwill was subsequently written-off as part of the annual test for impairment in accordance with Statement of Financial Accounting Standards No. 142. All of AGC’s assets are collateral for its obligations. Except for AGC’s indebtedness for which the Company is a guarantor, AGC’s creditors have no recourse to the assets of the Company.

Backlog

The backlog of orders of Timken’s domestic and overseas operations is estimated to have been $2.60 billion at December 31, 2007 and $1.96 billion at December 31, 2006. Actual shipments are dependent upon ever-changing production schedules of the customer. Accordingly, Timken does not believe that its backlog data and comparisons thereof, as of different dates, are reliable indicators of future sales or shipments.

Raw Materials

The principal raw materials used by Timken in its North American bearing plants to manufacture bearings are its own steel tubing and bars, purchased strip steel and energy resources. Outside North America, the Company purchases raw materials from local sources with whom it has worked closely to ensure steel quality, according to its demanding specifications.

The principal raw materials used by Timken in steel manufacturing are scrap metal, nickel and other alloys. The availability and prices of raw materials and energy resources are subject to curtailment or change due to, among other things, new laws or regulations, changes in demand levels, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and prevailing price levels. For example, the weighted average price of scrap metal decreased 7.7% from 2004 to 2005, increased 7.9% from 2005 to 2006, and increased 14.7% from 2006 to 2007. Prices for raw materials and energy resources continue to remain high compared to historical levels.

The Company continues to expect that it will be able to pass a significant portion of these increased costs through to customers in the form of price increases or raw material surcharges.

Disruptions in the supply of raw materials or energy resources could temporarily impair the Company’s ability to manufacture its products for its customers or require the Company to pay higher prices in order to obtain these raw materials or energy resources from other sources, which could affect the Company’s sales and profitability. Any increase in the prices for such raw materials or energy resources could materially affect the Company’s costs and its earnings.

Timken believes that the availability of raw materials and alloys is adequate for its needs, and, in general, it is not dependent on any single source of supply.

Research

Timken has developed a significant global footprint of technology centers.

The Company operates two corporate innovation and development centers. The largest technical center is located in North Canton, Ohio, near Timken’s world headquarters, and it supports innovation and development know-how for all friction management and power transmission product lines. It is the lead center specifically for taper bearing capabilities. The other technical center is in Greenville, South Carolina. It is the lead center specifically for needle bearing products.

In addition, Timken’s business groups operate several technology centers for product excellence within the United States in Mesa, Arizona, Canton, Ohio and Keene and Lebanon, New Hampshire. Through the 2007 Aerospace business acquisition, Timken has gained additional competence at a center in Manchester, Connecticut. Within Europe, technology is developed in Ploiesti, Romania; Colmar, France; Halle-Westfallen, Germany; and Brno, Czech Republic. In Asia, the Company supports related technical capabilities in Bangalore, India.

The Company’s technology commitment is to develop new and improved friction management and power transmission product designs with a heavy influence in related steel materials and lean manufacturing processes.

Expenditures for research, development and application amounted to approximately $60.5 million, $67.9 million, and $60.1 million in 2007, 2006 and 2005, respectively. Of these amounts, $6.2 million, $8.0 million and $7.2 million, respectively, were funded by others.

Environmental Matters

The Company continues its efforts to protect the environment and comply with environmental protection laws. Additionally, it has invested in pollution control equipment and updated plant operational practices. The Company is committed to implementing a documented environmental management system worldwide and to becoming certified under the ISO 14001 standard where appropriate to meet or exceed customer requirements. By the end of 2007, 28 of the Company’s plants had obtained ISO 14001 certification.

The Company believes it has established adequate reserves to cover its environmental expenses and has a well-established environmental compliance audit program, which includes a proactive approach to bringing its domestic and international units to higher standards of environmental performance. This program measures performance against applicable laws, as well as standards that have been established for all units worldwide. It is difficult to assess the possible effect of compliance with future requirements that differ from existing ones. As previously reported, the Company is unsure of the future financial impact to the Company that could result from the United States Environmental Protection Agency’s (EPA’s) final rules to tighten the National Ambient Air Quality Standards for fine particulate and ozone. The Company is also unsure of potential future financial impacts to the Company that could result from possible future legislation regulating emissions of greenhouse gases.

The Company and certain U.S. subsidiaries have been designated as potentially responsible parties by the EPA for site investigation and remediation at certain sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as the Superfund, or state laws similar to CERCLA. The claims for remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation.

Management believes any ultimate liability with respect to pending actions will not materially affect the Company’s operations, cash flows or consolidated financial position. The Company is also conducting voluntary environmental investigation and/or remediation activities at a number of current or former operating sites. Any liability with respect to such investigation and remediation activities, in the aggregate, is not expected to be material to the operations or financial position of the Company.

New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements may require the Company to incur costs or become the basis for new or increased liabilities that could have a materially adverse effect on Timken’s business, financial condition or results of operations.

Patents, Trademarks and Licenses

Timken owns a number of U.S. and foreign patents, trademarks and licenses relating to certain products. While Timken regards these as important, it does not deem its business as a whole, or any industry segment, to be materially dependent upon any one item or group of items.

Employment

At December 31, 2007, Timken had 25,175 associates. Approximately 17% of Timken’s U.S. associates are covered under collective bargaining agreements.

Available Information

Timken’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available, free of charge, on Timken’s website at www.timken.com as soon as reasonably practical after electronically filing or furnishing such material with the SEC.

Item 1A: Risk Factors

The following are certain risk factors that could affect our business, financial condition and result of operations. The risks that are highlighted below are not the only ones that we face. These risk factors should be considered in connection with evaluating forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results and financial condition to differ materially from those projected in forward-looking statements. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected.

The bearing industry is highly competitive, and this competition results in significant pricing pressure for our products that could affect our revenues and profitability.

The global bearing industry is highly competitive. We compete with domestic manufacturers and many foreign manufacturers of anti-friction bearings, including SKF Group, Schaeffler Group, NTN Corporation, JTEKT Corporation and NSK Ltd. The bearing industry is also capital- intensive and profitability is dependent on factors such as labor compensation and productivity and inventory management, which are subject to risks that we may not be able to control. Due to the competitiveness within the bearing industry, we may not be able to increase prices for our products to cover increases in our costs and, in many cases, we may face pressure from our customers to reduce prices, which could adversely affect our revenues and profitability.

Competition and consolidation in the steel industry, together with potential global overcapacity, could result in significant pricing pressure for our products.

Competition within the steel industry, both domestically and worldwide, is intense and is expected to remain so. Global production overcapacity has occurred in the past and may reoccur in the future, which, when combined with high levels of steel imports into the United States, may exert downward pressure on domestic steel prices and result in, at times, a dramatic narrowing, or with many companies the elimination, of gross margins. In addition, many of our competitors are continuously exploring and implementing strategies, including acquisitions and the addition or repositioning of capacity, which focus on manufacturing higher margin products that compete more directly with our steel products. These factors could lead to significant downward pressure on prices for our steel products, which could have a materially adverse effect on our revenues and profitability.

We may not be able to realize the anticipated benefits from, or successfully execute, Project O.N.E.

During 2005, we began implementing Project O.N.E., a multi-year program designed to improve business processes and systems to deliver enhanced customer service and financial performance. During the second quarter of 2007, we completed the first major U.S. implementation of Project O.N.E. During 2008, we expect to implement Project O.N.E. in Europe and parts of the U.S. We may not be able to efficiently operate our business after implementation of Project O.N.E., which could have a materially adverse effect on our business and financial performance and could impede our ability to realize the anticipated benefits from this program. If we are not able to successfully operate our business after implementation of this program, we may lose the ability to schedule production, receive orders, ship product, track inventory and prepare financial statements. Our future success will depend, in part, on our ability to improve our business processes and systems. We may not be able to successfully do so without substantial costs, delays or other difficulties. We may also face significant challenges in improving our processes and systems in a timely and efficient manner.

Implementing, and operating under, Project O.N.E. will be complex and time-consuming, may be distracting to management and disruptive to our businesses, and may cause an interruption of, or a loss of momentum in, our businesses as a result of a number of obstacles, such as:

	•		the loss of key associates or customers;
	•		the failure to maintain the quality of customer service that we have historically provided;
	•		the need to coordinate geographically diverse organizations; and
	•		the resulting diversion of management’s attention from our day-to-day business and the need to dedicate additional management personnel to address obstacles to the implementation of Project O.N.E.

If we are not successful in executing, or operating under, Project O.N.E., or if it fails to achieve the anticipated results, then our operations, margins, sales and reputation could be adversely affected.

Any change in the operation of our raw material surcharge mechanisms or the availability or cost of raw materials and energy resources could materially affect our earnings.

We require substantial amounts of raw materials, including scrap metal and alloys and natural gas to operate our business. Many of our customer contracts contain surcharge pricing provisions. The surcharges are tied to a widely-available market index for that specific raw material. Any change in the relationship between the market indices and our underlying costs could materially affect our earnings.

Moreover, future disruptions in the supply of our raw materials or energy resources could impair our ability to manufacture our products for our customers or require us to pay higher prices in order to obtain these raw materials or energy resources from other sources, and could thereby affect our sales and profitability. Any increase in the prices for such raw materials or energy resources could materially affect our costs and therefore our earnings.

Warranty, recall or product liability claims could materially adversely affect our earnings.

In our business, we are exposed to warranty and product liability claims. In addition, we may be required to participate in the recall of a product. A successful warranty or product liability claim against us, or a requirement that we participate in a product recall, could have a materially adverse effect on our earnings.

The failure to achieve the anticipated results of our restructuring, rationalization and realignment initiatives could materially affect our earnings.

After reaching a new four-year agreement with the union representing employees in the Canton, Ohio bearing and steel plants in 2005, we refined our plans to rationalize our Canton bearing operations. During 2005, we announced plans for our Automotive Group to restructure its business and improve performance. In response to reduced production demand from North American automotive manufacturers, in September 2006, we announced further planned reductions in our Automotive Group workforce. In August 2007, we announced the realignment of our operations. We will now operate under two major business groups: the Steel Group and the Bearings and Power Transmission Group.

The Canton bearing operations, Automotive Group and Bearing and Power Transmission Group initiatives are each targeted to deliver annual pretax savings, assuming certain amounts of costs. The failure to achieve the anticipated results of any of these plans, including our targeted costs and annual savings, could materially adversely affect our earnings. In addition, increases in other costs and expenses may offset any cost savings from these efforts.

We may incur further impairment and restructuring charges that could materially affect our profitability.

We have taken approximately $131.0 million in impairment and restructuring charges, during the last three years, for the Canton bearing operations, Automotive Group and Bearing and Power Transmission Group initiatives. We expect to take additional charges in connection with these initiatives. Changes in business or economic conditions, or our business strategy may result in additional restructuring programs and may require us to take additional charges in the future, which could have a materially adverse effect on our earnings.

Any reduction of CDSOA distributions in the future would reduce our earnings and cash flows.

The CDSOA provides for distribution of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. The Company reported CDSOA receipts, net of expenses, of $7.9 million, $87.9 million and $77.1 million in 2007, 2006 and 2005, respectively. In February 2006, U.S. legislation was enacted that would end CDSOA distributions for imports covered by antidumping duty orders entering the United States after September 30, 2007. Instead, any such antidumping duties collected would remain with the U.S. Treasury. This legislation is expected to reduce any distributions in years beyond 2007, with distributions eventually ceasing.

In separate cases in July and September 2006, the U.S. Court of International Trade (CIT) ruled that the procedure for determining recipients eligible to receive CDSOA distributions is unconstitutional. The ruling of the CIT is now under appeal. The Company is unable to determine, at this time, if these rulings will have a materially adverse impact on the Company’s financial results. A federal court could rule that an appropriate remedy would be the return of distributions received in prior years. The Company is unable to determine, at this time, the likelihood of a federal court finally ruling on any particular remedy.

In addition to the CIT ruling, there are a number of other factors that can affect whether the Company receives any CDSOA distributions and the amount of such distributions in any year. These factors include, among other things, potential additional changes in the law, other ongoing and potential additional legal challenges to the law, and the administrative operation of the law. It is possible that CIT rulings might prevent us from receiving any CDSOA distributions in 2008 and beyond. Any reduction of CDSOA distributions would reduce our earnings and cash flow.

Weakness in any of the industries in which our customers operate, as well as the cyclical nature of our customers’ businesses generally, could adversely impact our revenues and profitability by reducing demand and margins.

Our revenues may be negatively affected by changes in customer demand, changes in the product mix and negative pricing pressure in the industries in which we operate. Many of the industries in which our end customers operate are cyclical. Margins in those industries are highly sensitive to demand cycles, and our customers in those industries historically have tended to delay large capital projects, including expensive maintenance and upgrades, during economic downturns. As a result, our business is also cyclical and our revenues and earnings are impacted by overall levels of industrial production.

Certain automotive industry companies have recently experienced significant financial downturns. In 2005, we increased our reserve for accounts receivable relating to our automotive industry customers. If any of our automotive industry customers becomes insolvent or files for bankruptcy, our ability to recover accounts receivable from that customer would be adversely affected and any payment we received in the preference period prior to a bankruptcy filing may be potentially recoverable. In addition, financial instability of certain companies that participate in the automotive industry supply chain could disrupt production in the industry. A disruption of production in the automotive industry could have a materially adverse effect on our financial condition and earnings.

Environmental regulations impose substantial costs and limitations on our operations and environmental compliance may be more costly than we expect.

We are subject to the risk of substantial environmental liability and limitations on our operations due to environmental laws and regulations. We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations concerning issues such as air emissions, wastewater discharges, solid and hazardous waste handling and disposal and the investigation and remediation of contamination. The risks of substantial costs and liabilities related to compliance with these laws and regulations are an inherent part of our business, and future conditions may develop, arise or be discovered that create substantial environmental compliance or remediation liabilities and costs.

Compliance with environmental legislation and regulatory requirements may prove to be more limiting and costly than we anticipate. New laws and regulations, including those which may relate to emissions of greenhouse gases, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require us to incur costs or become the basis for new or increased liabilities that could have a materially adverse effect on our business, financial condition or results of operations. We may also be subject from time to time to legal proceedings brought by private parties or governmental authorities with respect to environmental matters, including matters involving alleged property damage or personal injury.

Unexpected equipment failures or other disruptions of our operations may increase our costs and reduce our sales and earnings due to production curtailments or shutdowns.

Interruptions in production capabilities, especially in our Steel Group, would inevitably increase our production costs and reduce sales and earnings for the affected period. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. Our manufacturing processes are dependent upon critical pieces of equipment, such as furnaces, continuous casters and rolling equipment, as well as electrical equipment, such as transformers, and this equipment may, on occasion, be out of service as a result of unanticipated failures. In the future, we may experience material plant shutdowns or periods of reduced production as a result of these types of equipment failures.

The global nature of our business exposes us to foreign currency fluctuations that may affect our asset values, results of operations and competitiveness.

We are exposed to the risks of currency exchange rate fluctuations because a significant portion of our net sales, costs, assets and liabilities, are denominated in currencies other than the U.S. dollar. These risks include a reduction in our asset values, net sales, operating income and competitiveness.

For those countries outside the United States where we have significant sales, devaluation in the local currency would reduce the value of our local inventory as presented in our Consolidated Financial Statements. In addition, a stronger U.S. dollar would result in reduced revenue, operating profit and shareholders’ equity due to the impact of foreign exchange translation on our Consolidated Financial Statements. Fluctuations in foreign currency exchange rates may make our products more expensive for others to purchase or increase our operating costs, affecting our competitiveness and our profitability.

Changes in exchange rates between the U.S. dollar and other currencies and volatile economic, political and market conditions in emerging market countries have in the past adversely affected our financial performance and may in the future adversely affect the value of our assets located outside the United States, our gross profit and our results of operations.

Global political instability and other risks of international operations may adversely affect our operating costs, revenues and the price of our products.

Our international operations expose us to risks not present in a purely domestic business, including primarily:

	•		changes in tariff regulations, which may make our products more costly to export or import;
	•		difficulties establishing and maintaining relationships with local OEMs, distributors and dealers;
	•		import and export licensing requirements;
	•		compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and environmental or other regulatory requirements, which could increase our operating and other expenses and limit our operations; and
	•		difficulty in staffing and managing geographically diverse operations.

These and other risks may also increase the relative price of our products compared to those manufactured in other countries, reducing the demand for our products in the markets in which we operate, which could have a materially adverse effect on our revenues and earnings.

Underfunding of our defined benefit and other postretirement plans has previously caused and may in the future cause a significant reduction in our shareholders’ equity.

Due to accounting standards, the underfunded status of our pension fund assets and our postretirement health care obligations, we were required to take a total net reduction of $276 million, net of income taxes, against our shareholders’ equity in 2006. In the future we may be required to take additional charges related to pension and other postretirement liabilities and these charges may be significant.

The underfunded status of our pension fund assets may cause us to prepay the funding of our pension obligations which may divert funds from other uses.

The increase in our defined benefit pension obligations, as well as our ongoing practice of managing our funding obligations over time, have led us to prepay a portion of our funding obligations under our pension plans. We made cash contributions of approximately $80 million, $243 million and $226 million in 2007, 2006 and 2005, respectively, to our U.S.-based pension plans and currently expect to make cash contributions of $0.5 million in 2008 to such plans. However, we cannot predict whether changing economic conditions or other factors will lead us or require us to make contributions in excess of our current expectations, diverting funds we would otherwise apply to other uses.

Our defined benefit plans’ assets and liabilities are substantial and expenses and contributions related to those plans are affected by factors outside our control, including the performance of plan assets, interest rates, actuarial data and experience, and changes in laws and regulations.

Our defined benefit plan had assets with an estimated value of approximately $2.5 billion and liabilities with an estimated value of approximately $2.7 billion, both as of December 31, 2007. Our future funding obligations for the defined benefit pension plans depend upon a number of factors, including the level of benefits provided for by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine the discount rate to calculate the amount of liabilities, actuarial data and experience, and any changes in government laws and regulations. In addition, if the market values of the investments held by the trusts do not perform as expected, or the liabilities increase, our pension expenses would increase and, as a result, could materially adversely affect our business. Due to the value of our defined benefit plan assets and liabilities, even a minor decrease in interest rates, to the extent not offset by contributions and asset returns, could increase our obligations under such plans. We may be legally required to make contributions to the pension plans in the future in excess of our current expectations, and those contributions could be material.

Work stoppages or similar difficulties could significantly disrupt our operations, reduce our revenues and materially affect our earnings.

A work stoppage at one or more of our facilities could have a materially adverse effect on our business, financial condition and results of operations. Also, if one or more of our customers were to experience a work stoppage, that customer would likely halt or limit purchases of our products, which could have a materially adverse effect on our business, financial condition and results of operations.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Timken has Automotive Group, Industrial Group and Steel Group manufacturing facilities at multiple locations in the United States and in a number of countries outside the United States. The aggregate floor area of these facilities worldwide is approximately 16,237,000 square feet, all of which, except for approximately 1,608,000 square feet, is owned in fee. The facilities not owned in fee are leased. The buildings occupied by Timken are principally made of brick, steel, reinforced concrete and concrete block construction. All buildings are in satisfactory operating condition in which to conduct business.

Timken’s Automotive and Industrial Groups’ manufacturing facilities in the United States are located in Bucyrus, Canton, New Philadelphia, and Niles, Ohio; Mesa, Arizona; Los Alamitos, California; Manchester, Connecticut; Cairo, Sylvania, Ball Ground and Dahlonega, Georgia; Carlyle, Illinois; South Bend, Indiana; Lenexa, Kansas; Keene and Lebanon, New Hampshire; Randleman, Iron Station and Rutherfordton, North Carolina; Gaffney, Union, Honea Path and Walhalla, South Carolina; Pulaski and Mascot, Tennessee; Ogden, Utah; and Altavista, Virginia. These facilities, including research facilities in Canton, Ohio and Greenville, South Carolina, and warehouses at plant locations, have an aggregate floor area of approximately 6,623,000 square feet.

Timken’s Automotive and Industrial Groups’ manufacturing plants outside the United States are located in Benoni, South Africa; Brescia, Italy; Colmar, Vierzon, Maromme and Moult, France; Northampton and Wolverhampton, England; Medemblik, The Netherlands; Bilbao, Spain; Halle-Westfallen, Germany; Olomouc, Czech Republic; Ploiesti, Romania; Mexico City, Mexico; Sao Paulo, Brazil; Singapore, Singapore; Jamshedpur, India; Sosnowiec, Poland; St. Thomas and Bedford, Canada; and Yantai and Wuxi, China. These facilities, including warehouses at plant locations, have an aggregate floor area of approximately 5,923,000 square feet.

Timken’s Steel Group’s manufacturing facilities in the United States are located in Canton and Eaton, Ohio; and Columbus, North Carolina. These facilities have an aggregate floor area of approximately 3,691,000 square feet.

In addition to the manufacturing and distribution facilities discussed above, Timken owns warehouses and steel distribution facilities in the United States, United Kingdom, France, Singapore, Mexico, Argentina, Australia, Brazil, Germany and China, and leases several relatively small warehouse facilities in cities throughout the world.

The overall Automotive Group plant utilization was between approximately 80% and 90%, higher than 2006. In 2007, Industrial Group plant utilization was between 85% and 90%, the same as 2006. Also, in 2007, Steel Group plants operated at near capacity, which was similar to 2006.

Item 3. Legal Proceedings

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a materially adverse effect on the Company’s consolidated financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

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

Item 4A. Executive Officers of the Registrant

The executive officers are elected by the Board of Directors normally for a term of one year and until the election of their successors. All executive officers, except for two, have been employed by Timken or by a subsidiary of the Company during the past five-year period. The executive officers of the Company as of February 28, 2008 are as follows:

Name		Age		Current Position and Previous Positions During Last Five Years
Ward J. Timken, Jr.		40		2002		Corporate Vice President – Office of the Chairman; Director
				2004		Executive Vice President and President – Steel Group; Director
				2005		Chairman of the Board
James W. Griffith		54		2002		President and Chief Executive Officer; Director
Michael C. Arnold		51		2000		President – Industrial Group
				2007		Executive Vice President and President – Bearings & Power Transmission
William R. Burkhart		42		2000		Senior Vice President and General Counsel
Alastair R. Deane		46		2000		Senior Vice President of Engineering, Automotive Driveline Driveshaft business group of GKN Automotive, Incorporated, a global supplier of driveline components and systems
				2005		Senior Vice President – Technology, The Timken Company
Jacqueline A. Dedo		46		2000		Vice President and General Manager Worldwide Market Operations, Motorola, Inc., a global communications company
				2004		President – Automotive Group, The Timken Company
				2007		Senior Vice President – Innovation and Growth
Glenn A. Eisenberg		46		2002		Executive Vice President – Finance and Administration
J. Ted Mihaila		53		2000		Controller, Industrial Group
				2006		Senior Vice President and Controller
Salvatore J. Miraglia, Jr.		57		2000		Senior Vice President – Technology
				2005		President – Steel Group

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is traded on the New York Stock Exchange under the symbol “TKR.” The estimated number of record holders of the Company’s common stock at December 31, 2007 was approximately 6,325. The estimated number of beneficial shareholders at December 31, 2007 was approximately 49,012.

The following table provides information about the high and low sales prices for the Company’s common stock and dividends paid for each quarter for the last two fiscal years.

		2007												2006
		Stock prices								Dividends				Stock prices								Dividends
		High				Low				per share				High				Low				per share
First quarter		$	30.79			$	27.43			$	0.16			$	36.58			$	26.57			$	0.15
Second quarter		$	36.73			$	30.35			$	0.16			$	36.25			$	27.68			$	0.15
Third quarter		$	38.25			$	30.63			$	0.17			$	34.99			$	29.05			$	0.16
Fourth quarter		$	38.78			$	28.95			$	0.17			$	31.89			$	27.60			$	0.16

Assumes $100 invested on January 1, 2003, in Timken Company Common Stock, S&P 500 Index and Peer Index.

				2003					2004					2005					2006					2007
	Timken Company			$	108.44				$	143.87				$	180.93				$	168.22				$	193.40
	S&P 500				128.68					142.68					149.69					173.33					182.85
	80% Bearing/20% Steel ***				141.10					183.83					272.07					371.98					383.49

*** Effective in 2003, the weighting of the peer index was revised from 70% Bearing/30% Steel to more accurately reflect the Company post Torrington acquisition.

The line graph compares the cumulative total shareholder returns over five years for The Timken Company, the S&P 500 Stock Index, and a peer index that proportionally reflects The Timken Company’s two principal businesses. The S&P Steel Index comprises the steel portion of the peer index. This index was comprised of seven steel companies in 1996 and is now three (Allegheny Technologies, Nucor and US Steel Corp.) as industry consolidation and bankruptcy have reduced the number of companies in the index. The remaining portion of the peer index is a self constructed bearing index that consists of six companies. These six companies are Kaydon, FAG, JTEKT (formerly Koyo Seiko), NSK, NTN and SKF. The last five are non-US bearing companies that are based in Germany (FAG), Japan (JTEKT, NSK, NTN), and Sweden (SKF). FAG was eliminated from the bearing index in 2003 when its minority interests were acquired and its shares delisted.

Issuer Purchases of Common Stock:

The following table provides information about purchases by the Company during the quarter ended December 31, 2007 of its common stock.

										Total number				Maximum
										of shared				number of
										purchased as				shares that
										part of publicly				may yet
		Total number				Average				announced				be purchased
		of shares				price paid				plans or				under the plans
Period		purchased (1)				per share (2)				programs				or programs (3)
10/1/07 - 10/31/07			83			$	37.83				—				4,000,000
11/1/07 - 11/30/07			1,692				31.58				—				4,000,000
12/1/07 - 12/31/07			977				32.98				—				4,000,000
Total			2,752			$	32.27				—				4,000,000

Item 6. Selected Financial Data

Summary of Operations and Other Comparative Data

		2007				2006				2005				2004				2003
(Dollars in thousands, except per share data)
Statements of Income
Net Sales		$	5,236,020			$	4,973,365			$	4,823,167			$	4,287,197			$	3,626,490
Gross profit			1,053,834				1,005,094				999,957				824,376				632,082
Selling, administrative and general expenses			695,283				677,342				646,904				575,910				511,053
Impairment and restructuring charges			40,378				44,881				26,093				13,538				19,154
Loss on divestitures			528				64,271				—				—				—
Operating income			317,645				218,600				326,960				234,928				101,875
Other income (expense) — net			251				80,416				67,726				12,100				9,903
Earnings before interest and taxes (EBIT) (1)			317,896				299,016				394,686				247,028				111,778
Interest expense			42,684				49,387				51,585				50,834				48,401
Income from continuing operations			219,389				176,439				233,656				134,046				38,940
Income from discontinued operations, net of income taxes			665				46,088				26,625				1,610				(2,459	)
Net income		$	220,054			$	222,527			$	260,281			$	135,656			$	36,481
Balance Sheets
Inventories — net		$	1,087,712			$	952,310			$	900,294			$	799,717			$	634,906
Property, plant and equipment — net			1,722,081				1,601,559				1,474,074				1,508,598				1,531,423
Total assets			4,379,237				4,027,111				3,993,734				3,942,909				3,689,789
Total debt:
Short-term debt			108,370				40,217				63,437				157,417				114,469
Current portion of long-term debt			34,198				10,236				95,842				1,273				6,725
Long-term debt			580,587				547,390				561,747				620,634				613,446
Total debt:			723,155				597,843				721,026				779,324				734,640
Net debt:
Total debt			723,155				597,843				721,026				779,324				734,640
Less: cash and cash equivalents			(30,144	)			(101,072	)			(65,417	)			(50,967	)			(28,626	)
Net debt: (2)			693,011				496,771				655,609				728,357				706,014
Total liabilities			2,418,568				2,550,931				2,496,667				2,673,061				2,600,162
Shareholders’ equity		$	1,960,669			$	1,476,180			$	1,497,067			$	1,269,848			$	1,089,627
Capital:
Net debt			693,011				496,771				655,609				728,357				706,014
Shareholders’ equity			1,960,669				1,476,180				1,497,067				1,269,848				1,089,627
Net debt + shareholders’ equity (capital)			2,653,680				1,972,951				2,152,676				1,998,205				1,795,641
Other Comparative Data
Income from continuing operations/Net sales			4.2	%			3.5	%			4.8	%			3.1	%			1.1	%
EBIT /Net sales			6.1	%			6.0	%			8.2	%			5.8	%			3.1	%
Return on equity (3)			11.2	%			12.0	%			15.6	%			10.6	%			3.6	%
Net sales per associate (4)		$	207.0			$	191.5			$	186.7			$	170.0			$	170.6
Capital expenditures		$	313,921			$	296,093			$	217,411			$	143,781			$	125,596
Depreciation and amortization		$	218,353			$	196,592			$	209,656			$	201,173			$	200,548
Capital expenditures /Net sales			6.0	%			6.0	%			4.5	%			3.4	%			3.5	%
Dividends per share		$	0.66			$	0.62			$	0.60			$	0.52			$	0.52
Basic earnings per share — continuing operations (5)		$	2.32			$	1.89			$	2.55			$	1.49			$	0.47
Diluted earnings per share — continuting operations (5)		$	2.29			$	1.87			$	2.52			$	1.48			$	0.47
Basic earnings per share (5)		$	2.33			$	2.38			$	2.84			$	1.51			$	0.44
Diluted earnings per share (5)		$	2.30			$	2.36			$	2.81			$	1.49			$	0.44
Net debt to capital (2)			26.1	%			25.2	%			30.5	%			36.5	%			39.3	%
Number of associates at year-end (6)			25,175				25,418				26,528				25,128				25,299
Number of shareholders (7)			49,012				42,608				54,514				42,484				42,184

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Introduction

The Timken Company is a leading global manufacturer of highly engineered anti-friction bearings and alloy steels and a provider of related products and services. The 2007 consolidated financial statements include the results of operations for the Company’s three operating segments: (1) Industrial Group, (2) Automotive Group and (3) Steel Group. The Industrial and Automotive Groups design, manufacture and distribute a range of bearings and related products and services. Industrial Group customers include both original equipment manufacturers and distributors for agriculture, construction, mining, energy, mill, machine tool, aerospace and rail applications. The Industrial Group customers also include aftermarket distributors for automotive applications. Automotive Group customers include original equipment manufacturers and suppliers for passenger cars, light trucks, and medium- to heavy-duty trucks. Steel Group products include steels of low and intermediate alloy and carbon grades, in both solid and tubular sections, as well as custom-made steel products for both industrial and automotive applications, including bearings.

During the fourth quarter of 2007, the Company implemented changes in its management structure. Beginning in the first quarter of 2008, the Company will operate under two business groups: the Steel Group and the Bearings and Power Transmission Group and will report four segments: (1) Mobile Industries, (2) Process Industries, (3) Aerospace and Defense and (4) Steel.

Financial Overview

Overview:

		2007				2006				$ Change				% Change
(Dollars in millions, except earnings per share)
Net sales		$	5,236.0			$	4,973.4			$	262.6				5.3	%
Income from continuing operations			219.4				176.4				43.0				24.4	%
Income from discontinued operations			0.7				46.1				(45.4	)			(98.5	)%
Net income			220.1				222.5				(2.4	)			(1.1	)%
Diluted earnings per share:
Continuing operations		$	2.29			$	1.87			$	0.42				22.5	%
Discontinued operations			0.01				0.49				(0.48	)			(98.0	)%
Net income per share		$	2.30			$	2.36			$	(0.06	)			(2.5	)%
Average number of shares — diluted			95,612,235				94,294,716				—				1.4	%

The Timken Company reported net sales for 2007 of approximately $5.24 billion, compared to $4.97 billion in 2006, an increase of 5.3%. Higher sales were driven by continued strong industrial markets across the Industrial and Steel Groups and the favorable impact of currency, offset by lower sales in the Automotive Group due to the divestiture of its steering operations in December 2006 and the closure of the Steel Group’s seamless steel tube manufacturing operations located in Desford, England in April 2007. In December 2006, the Company completed the divestiture of its Latrobe Steel subsidiary. Discontinued operations for 2006 represent the operating results and related gain on sale, net of tax, of this business. For 2007, net income per diluted share was $2.30, compared to $2.36 for 2006. Income from continuing operations per diluted share was $2.29 for 2007, compared to $1.87 for 2006.

The Company’s results for 2007 reflect the ongoing strength of global industrial markets and the performance of the Steel Group, partially offset by expenses related to growth initiatives, restructuring activities and higher raw material and manufacturing costs. Additionally, the Company’s 2007 results reflect lower disbursements received under the Continued Dumping and Subsidy Offset Act (CDSOA), compared to 2006. The Company continued its focus on increasing production capacity in targeted areas, including major capacity expansions for industrial products at several manufacturing locations around the world.

The Company expects that the continued strength in industrial markets throughout 2008 should drive year-over-year volume increases. While global industrial markets are expected to remain strong, the improvements in the Company’s operating performance will be partially constrained by restructuring initiatives, as well as strategic investments, including Asian growth and Project O.N.E. initiatives. The objective of the Asian growth initiatives is to increase market share, influence major design centers and expand the Company’s network of sources of globally competitive friction management products.

Project O.N.E. is a five-year program, which began in 2005, designed to improve the Company’s business processes and systems. The Company expects to invest approximately $190 million, which includes internal and external costs, to implement Project O.N.E. As of December 31, 2007, the Company has incurred costs of approximately $157.0 million, of which approximately $91.1 million has been capitalized to the Consolidated Balance Sheet. The Company completed the installation of Project O.N.E. for a major portion of its domestic operations during the second quarter of 2007.

The Company’s results for 2007 also reflect a lower tax rate primarily due to favorable adjustments to the Company’s accruals for uncertain tax positions, partially offset by increased losses at certain foreign subsidiaries where no tax benefit could be claimed.

The Company’s strategy for the Industrial Group is to pursue growth in selected industrial markets and achieve a leadership position in targeted Asian sectors. The Company is increasing large-bore bearing capacity in Romania, China, India and the United States to serve heavy industrial markets. The Industrial Group began to benefit from this increase in large-bore bearing capacity during the later part of 2007, with a significant impact expected in 2008. In addition, the Company is investing in a new aerospace precision products manufacturing facility in China, which is expected to make its first shipment in 2008. In October 2007, the Company completed the acquisition of the assets of The Purdy Corporation, located in Manchester, Connecticut, for $200 million. This acquisition further expands the growing range of power-transmission products and capabilities that the Company provides to aerospace customers. In December 2007, the Company announced the establishment of a joint venture in China to manufacture ultra-large-bore bearings for the growing Chinese wind energy market.

The Company’s strategy for the Automotive Group is to either implement structural changes to its business to improve its financial performance or exit those businesses where changes can not be made. In 2005, the Company announced plans for its Automotive Group to restructure its business. These plans included the closure of its automotive engineering center in Torrington, Connecticut and its manufacturing engineering center in Norcross, Georgia, which were completed at the end of 2006. Additionally, the Company announced the closure of its manufacturing facility in Clinton, South Carolina, which was completed in October 2007. In February 2006, the Company announced plans to downsize its manufacturing facility in Vierzon, France, which was completed in July 2007.

In September 2006, the Company announced further planned reductions in its Automotive Group workforce. In March 2007, the Company announced the closure of its manufacturing facility in Sao Paulo, Brazil. However, the closure of the manufacturing facility in Sao Paulo, Brazil has been delayed to serve higher customer demand, until further notice.

These plans are targeted to collectively deliver annual pretax savings of approximately $75 million, with expected net workforce reductions of approximately 1,300 to 1,400 positions and pretax costs of approximately $115 million to $125 million, which include restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses. Due to the delay in the timing of the closure of the manufacturing facility in Sao Paulo, Brazil, the Company does not expect to realize the pretax savings of approximately $75 million until 2009.

In December 2006, the Company completed the divestiture of its steering operations located in Watertown, Connecticut and Nova Friburgo, Brazil, resulting in a loss on divestiture of $54.3 million. The steering operations employed approximately 900 associates.

The Company’s strategy for the Steel Group is to focus on opportunities where the Company can offer differentiated capabilities while driving profitable growth. In January 2007, the Company announced plans to invest approximately $60 million to enable the Company to competitively produce steel bars down to 1-inch diameter for use in power transmission and friction management applications for a variety of customers, including the rapidly growing automotive transplants. During the first quarter of 2007, the Company added a new induction heat-treat line in Canton, Ohio, which increased capacity and the ability to provide differentiated product to more customers in its global energy markets. In April 2007, the Company completed the closure of its seamless steel tube manufacturing operations located in Desford, England. In February 2008, the Company completed the acquisition of the assets of Boring Specialties, Inc., a provider of a wide range of precision deep-hole oil and gas drilling and extraction products and services.

The Statement of Income

Sales by Segment:

		2007				2006				$ Change				% Change
(Dollars in millions, and exclude intersegment sales)
Industrial		$	2,298.7			$	2,072.5			$	226.2				10.9	%
Automotive			1,522.2				1,573.0				(50.8	)			(3.2	)%
Steel			1,415.1				1,327.9				87.2				6.6	%
Total Company		$	5,236.0			$	4,973.4			$	262.6				5.3	%

The Industrial Group’s net sales for 2007 increased 10.9% compared to 2006 primarily due to favorable pricing and higher volume across several industrial end markets, particularly in the heavy industry, aerospace and rail sectors, as well as the favorable impact of foreign currency translation and acquisitions. The change in net sales included $61.3 million related to the impact of foreign currency translation and $29.7 million from acquisitions, primarily the purchase of the assets of The Purdy Corporation in October 2007. The Automotive Group’s net sales in 2007 decreased 3.2% compared to 2006 due to the divestiture of its steering operations and lower demand from North American heavy truck customers, offset by higher demand from North American light truck customers, higher demand in Europe and the favorable impact of foreign currency translation. Net sales in 2006 included $96.8 million of sales related to the Company’s former steering operations, which was divested in December 2006. The change in net sales from 2006 to 2007 includes $43.2 million related to the impact of foreign currency translation. The Steel Group’s 2007 net sales increased 6.6% over 2006 primarily due to increased pricing and surcharges to recover high raw material and energy costs, as well as strong demand in all market sectors, especially the energy market sector, partially offset by lower sales due to the divestment of the Steel Group’s former Timken Precision Steel Components – Europe business and the closure of its European seamless steel tube facility. The Timken Precision Steel Components – Europe business and the seamless steel tube facility accounted for $62.6 million of the change in sales.

Gross Profit:

		2007				2006				$ Change				Change
(Dollars in millions)
Gross profit		$	1,053.8			$	1,005.1			$	48.7				4.8	%
Gross profit % to net sales			20.1	%			20.2	%			—			(10		) bps
Rationalization expenses included in cost of products sold		$	31.3			$	18.5			$	12.8				69.2	%

Gross profit margin decreased slightly in 2007 compared to 2006, due to higher raw material costs across the Company’s three segments, higher costs associated with the Industrial Group’s capacity additions, higher manufacturing costs in the Steel Group, as well as higher rationalization expenses, partially offset by favorable sales volume from the Industrial and Steel Groups, price increases and increased productivity in the Steel Group.

In 2007, rationalization expenses included in cost of products sold primarily related to certain Automotive Group domestic manufacturing facilities, the closure of the Company’s seamless steel tube manufacturing operations located in Desford, England, the eventual closure of the Company’s manufacturing operations located in Sao Paulo, Brazil and the continued rationalization of the Company’s Canton, Ohio Industrial Group bearing facilities. In 2006, rationalization expenses included in cost of products sold related to the Company’s Canton, Ohio Industrial Group bearing facilities, certain Automotive Group domestic manufacturing facilities, certain facilities in Torrington, Connecticut and the closure of the Company’s seamless steel tube manufacturing operations located in Desford, England. Rationalization expenses in 2007 and 2006 primarily included accelerated depreciation on assets, the relocation of equipment and inventory adjustments.

Selling, Administrative and General Expenses:

		2007				2006				$ Change				Change
(Dollars in millions)
Selling, administrative and general expenses		$	695.3			$	677.3			$	18.0				2.7	%
Selling, administrative and general expenses % to net sales			13.3	%			13.6	%			—			(30		) bps
Rationalization expenses included in selling, administrative and general expenses		$	3.2			$	5.9			$	(2.7	)			(45.8	)%

The increase in selling, administrative and general expenses in 2007 compared to 2006 was primarily due to higher costs associated with investments in Project O.N.E. and higher costs associated with ramping up new facilities in Asia, partially offset by reductions in Automotive Group selling, administrative and general expenses as a result of restructuring initiatives, as well as lower performance-based compensation.

In 2007, the rationalization expenses included in selling, administrative and general expenses primarily related to the Automotive Group engineering facilities, the Canton, Ohio Industrial Group bearing facilities and the closure of the Steel Group’s seamless steel tube manufacturing operations located in Desford, England. In 2006, the rationalization expenses included in selling, administrative and general expenses primarily related to the Automotive Group engineering facilities.

Impairment and Restructuring Charges:

		2007				2006				$ Change
(Dollars in millions)
Impairment charges		$	11.8			$	15.3			$	(3.5	)
Severance and related benefit costs			23.1				25.8				(2.7	)
Exit costs			5.5				3.8				1.7
Total		$	40.4			$	44.9			$	(4.5	)

Bearing and Power Transmission Reorganization

In August 2007, the Company announced the realignment of its management structure. Beginning in the first quarter of 2008, the Company will operate under two major business groups: the Steel Group and the Bearings and Power Transmission Group. The Company anticipates the organizational changes will streamline operations and eliminate redundancies. The Company expects to save approximately $10 million to $20 million as a result of these changes. During 2007, the Company recorded $3.5 million of severance and related benefit costs related to this initiative.

Industrial

In May 2004, the Company announced plans to rationalize the Company’s three bearing plants in Canton, Ohio within the Industrial Group. On September 15, 2005, the Company reached a new four-year agreement with the United Steelworkers of America, which went into effect on September 26, 2005, when the prior contract expired. This rationalization initiative is expected to deliver annual pretax savings of approximately $20 million through streamlining operations and workforce reductions, with pretax costs of approximately $35 to $40 million by the end of 2009.

In 2007, the Company recorded $4.8 million of impairment charges and $0.6 million of exit costs associated with the Industrial Group’s rationalization plans. In 2006, the Company recorded $1.0 million of impairment charges and $0.6 million of exit costs associated with the Industrial Group’s rationalization plans. Including rationalization costs recorded in cost of products sold and selling, administrative and general expenses, the Industrial Group has incurred cumulative pretax costs of approximately $30.4 million as of December 31, 2007 for these rationalization plans.

In November 2006, the Company announced plans to vacate its Torrington, Connecticut office complex. In 2006, the Company recorded $1.5 million of severance and related benefit costs and $0.1 million of impairment charges associated with the Industrial Group vacating the Torrington complex.

In addition to the above charges, the Company recorded an impairment charge of $5.3 million related to one of the Industrial Group’s entities during 2007. The Company also recorded $0.3 million of severance and related benefits and impairment charges of $0.1 million during 2007 related to other company initiatives. In 2006, the Company recorded $1.4 million of environmental exit costs related to a former plant in Columbus, Ohio and $0.1 million of severance and related benefit costs related to other company initiatives.

Automotive

In 2005, the Company announced plans for its Automotive Group to restructure its business and improve performance. These plans included the closure of a manufacturing facility in Clinton, South Carolina and engineering facilities in Torrington, Connecticut and Norcross, Georgia. In February 2006, the Company announced additional plans to rationalize production capacity at the Company’s Vierzon, France bearing manufacturing facility in response to changes in customer demand for its products.

In September 2006, the Company announced further planned reductions in its Automotive Group workforce. In March 2007, the Company announced the closure of its manufacturing facility in Sao Paulo, Brazil. However, the closure of the manufacturing facility in Sao Paulo, Brazil has been delayed to serve higher customer demand, until further notice.

These plans are targeted to collectively deliver annual pretax savings of approximately $75 million, with expected net workforce reductions of approximately 1,300 to 1,400 positions and pretax costs of approximately $115 million to $125 million, which include restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses. Due to the delay in the timing of the closure of the manufacturing facility in Sao Paulo, Brazil, the Company does not expect to realize the pretax savings of approximately $75 million until 2009. The Automotive Group has incurred cumulative pretax costs of approximately $97.1 million as of December 31, 2007 for these plans.

In 2007, the Company recorded $11.7 million of severance and related benefit costs, $2.5 million of exit costs and $1.6 million of impairment charges associated with the Automotive Group’s restructuring and workforce reduction plans. Exit costs of $1.7 million recorded during 2007 were the result of environmental charges related to the eventual closure of the manufacturing facility in Sao Paulo, Brazil. In 2006, the Company recorded $16.5 million of severance and related benefit costs, $1.6 million of exit costs and $1.6 million of impairment charges associated with the Automotive Group’s restructuring and workforce reduction plans.

In 2006, the Company recorded an additional $0.7 million of severance and related benefit costs and $0.3 million of impairment charges for the Automotive Group related to the announced plans to vacate its Torrington campus office complex and $0.1 million of severance and related benefit costs related to other company initiatives.

In addition, the Company recorded impairment charges of $11.9 million in 2006 representing the write-off of goodwill associated with the Automotive Group in accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.”

Steel

In April 2007, the Company completed the closure of its European seamless steel tube facility located in Desford, England. The Company recorded $7.3 million of severance and related benefit costs and $2.4 million of exit costs during 2007 compared to $6.9 million of severance and related benefit costs in 2006 related to this action.

The Company also recorded $0.3 million of severance and related benefits during 2007 related to other company initiatives. In addition, the Company recorded an impairment charge and removal costs of $0.6 million in 2006 related to the write-down of property, plant and equipment at one of the Steel Group’s facilities.

Rollforward of Restructuring Accruals:

		2007				2006
(Dollars in millions)
Beginning balance, January 1		$	32.0			$	18.1
Expense			28.6				29.6
Payments			(36.1	)			(15.7	)
Ending balance, December 31		$	24.5			$	32.0

The restructuring accrual at December 31, 2007 and 2006 is included in accounts payable and other liabilities on the Consolidated Balance Sheet. The accrual at December 31, 2007 includes $16.3 million of severance and related benefits, with the remainder of the balance primarily representing environmental exit costs. The majority of the $16.3 million accrual related to severance and related benefits are expected to be paid by the middle of 2008.

Loss on Divestitures:

		2007				2006				$ Change
(Dollars in millions)
Loss on Divestitures		$	0.5			$	64.3			$	(63.8	)

In June 2006, the Company completed the divestiture of its Timken Precision Steel Components – Europe business and recorded a loss on disposal of $10.0 million. In 2007, the Company recorded a gain of $0.2 million related to this divestiture. In December 2006, the Company completed the divestiture of the Automotive Group’s steering business located in Watertown, Connecticut and Nova Friburgo, Brazil and recorded a loss on disposal of $54.3 million. In 2007, the Company recorded an additional loss of $0.7 million related to the divestiture of the steering business.

Interest Expense and Income:

		2007				2006				$ Change				% Change
(Dollars in millions)
Interest expense		$	42.7			$	49.4			$	(6.7	)			(13.6	)%
Interest income		$	7.0			$	4.6			$	2.4				52.2	%

Interest expense for 2007 decreased compared to 2006 due to lower average debt outstanding in 2007 compared to 2006 and lower interest rates. Interest income increased for 2007 compared to 2006 due to interest received on higher cash balances.

Other Income and Expense:

		2007				2006				$ Change				% Change
(Dollars in millions)
CDSOA receipts, net of expenses		$	7.9			$	87.9			$	(80.0	)			(91.0	)%
Other expense – net:
Gain on divestitures of non-strategic assets		$	4.2			$	7.1			$	(2.9	)			(40.8	)%
Gain on dissolution of subsidiaries			0.4				0.9				(0.5	)			(55.6	)%
Other			(12.2	)			(15.5	)			3.3				21.3	%
Other expense – net		$	(7.6	)		$	(7.5	)		$	(0.1	)			(1.3	)%

The U.S. Continued Dumping and Subsidy Offset Act (CDSOA) receipts are reported net of applicable expenses. CDSOA provides for distribution of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people. In 2007, the Company received CDSOA receipts, net of expenses, of $7.9 million. In 2006, the Company received CDSOA receipts, net of expenses, of $87.9 million. Refer to Other Matters – Continued Dumping and Subsidy Offset Act (CDSOA) for additional discussion.

In 2007, the gain on divestitures of non-strategic assets primarily related to the sale of assets operated by the Steel Group’s former European seamless steel tube facility located in Desford, England, which closed in April 2007, partially offset by losses recognized on the sale of assets at the Company’s former bearing manufacturing facility in Clinton, South Carolina, which closed in October 2007. In 2006, the gain on divestitures of non-strategic assets primarily related to the sale of assets of PEL Technologies (PEL). In 2000, the Company’s Steel Group invested in PEL, a joint venture to commercialize a proprietary technology that converted iron units into engineered iron oxide for use in pigments, coatings and abrasives. The Company consolidated PEL effective March 31, 2004 in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46). In 2006, the Company liquidated the joint venture. Refer to Note 12 – Equity Investments in the Notes to Consolidated Financial Statements for additional discussion.

For 2007, other expense primarily included $5.9 of losses on the disposal of fixed assets, $3.6 million for minority interests, $3.0 million of donations, $1.3 million of losses from equity investments, offset by $1.3 million of foreign currency exchange gain. For 2006, other expense primarily included $5.7 million of losses from equity investments, $3.7 million of donations, $3.3 million for minority interests, $1.3 million of losses on the disposal of fixed assets and $0.5 million of foreign currency exchange losses.

In February 2008, the Company completed the sale of its former European seamless steel tube facility located in Desford, England for approximately $28.0 million. The sale is expected to result in a pretax gain of approximately $20.0 million during the first quarter of 2008.

Income Tax Expense:

		2007				2006				$ Change				Change
(Dollars in millions)
Income tax expense		$	62.9			$	77.8			$	(14.9	)			(19.2	)%
Effective tax rate			22.3	%			30.6	%			—			(830		) bps

The decrease in the effective tax rate for 2007 compared to 2006 was primarily caused by higher tax benefits in 2007 resulting from adjustments to the Company’s accruals for uncertain tax positions, partially offset by increased losses in 2007 at certain foreign subsidiaries where no tax benefit could be claimed.

The effective tax rate for 2007 was lower than the U.S. Federal statutory tax rate of 35% primarily due to the net tax benefit of adjustments to the Company’s accruals for uncertain tax positions, including a favorable adjustment of $32.1 million recorded in the first quarter of 2007, as well as the favorable impact of certain foreign income being taxed at rates less than 35%. These items were partially offset by the inability to record a tax benefit for losses at certain foreign subsidiaries.

The effective tax rate for 2006 was less than the U.S. Federal statutory tax rate primarily due to the impact of certain foreign income being taxed at a rate less than 35%, as well as the net tax benefit of adjustments to tax reserves resulting principally from the settlement of prior tax years with the Internal Revenue Service. These items were offset partially by the inability to record a tax benefit for losses at certain foreign subsidiaries and the tax impact of the impairment of non-deductible goodwill recorded in the fourth quarter of 2006.

Discontinued Operations:

		2007				2006				$ Change				% Change
(Dollars in millions)
Operating results, net of tax		$	—			$	33.2			$	(33.2	)			(100.0	)%
Gain on disposal, net of tax			0.7				12.9				(12.2	)			(94.6	)%
Total		$	0.7			$	46.1			$	(45.4	)			(98.5	)%

In December 2006, the Company completed the divestiture of its Latrobe Steel subsidiary and recognized a gain on disposal, net of tax, of $12.9 million. Latrobe Steel is a global producer and distributor of high-quality, vacuum melted specialty steels and alloys. Discontinued operations for 2006 represent the operating results and related gain on sale, net of tax, of this business. Discontinued operations for 2007 represent an additional $0.7 million gain on disposal, net of tax, due to a purchase price adjustment. Refer to Note 2 – Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional discussion.

Business Segments:

The primary measurement used by management to measure the financial performance of each segment is adjusted EBIT (earnings before interest and taxes, excluding the effect of amounts related to certain items that management considers not representative of ongoing operations such as impairment and restructuring, rationalization and integration charges, one-time gains or losses on sales of non-strategic assets, allocated receipts received or payments made under the CDSOA and gains and losses on the dissolution of a subsidiary). Refer to Note 14 – Segment Information in the Notes to Consolidated Financial Statements for the reconciliation of adjusted EBIT by Group to consolidated income before income taxes.

Industrial Group:

		2007				2006				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	2,300.5			$	2,074.5			$	226.0				10.9	%
Adjusted EBIT		$	237.7			$	201.3			$	36.4				18.1	%
Adjusted EBIT margin			10.3	%			9.7	%			—			60		bps

Sales by the Industrial Group include global sales of bearings and other products and services (other than steel) to a diverse customer base, including: industrial equipment; construction and agriculture; rail; and aerospace and defense customers. The Industrial Group also includes aftermarket distribution operations, including automotive applications, for products other than steel.

The Industrial Group’s net sales for 2007 increased 10.9% compared to 2006 primarily due to favorable pricing and higher volume across several industrial end markets, particularly in the heavy industry, aerospace and rail sectors, as well as the favorable impact of foreign currency translation and acquisitions. The change in net sales included $61.3 million related to the impact of foreign currency translation and $29.7 million from acquisitions, primarily related to the purchase of the assets of The Purdy Corporation. Adjusted EBIT margin was higher in 2007 compared to 2006 primarily due to favorable pricing and higher volume, partially offset by increases in raw material and logistics costs, as well as higher manufacturing costs associated with capacity additions. The adjusted EBIT margin for 2007 also benefited from the Purdy acquisition. The Company expects the Industrial Group to benefit from continued strength in most industrial segments in 2008. The Industrial Group is also expected to benefit from additional manufacturing supply capacity throughout 2008 in currently constrained products.

Automotive Group:

		2007				2006				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	1,522.2			$	1,573.0			$	(50.8	)			(3.2	)%
Adjusted EBIT (loss)		$	(70.3	)		$	(73.7	)		$	3.4				4.6	%
Adjusted EBIT (loss) margin			(4.6	)%			(4.7	)%			—			10		bps

The Automotive Group includes sales of bearings and other products and services (other than steel) to automotive original equipment manufacturers and suppliers. The Automotive Group’s net sales in 2007 decreased 3.2% compared to 2006 primarily due to the divestiture of its steering operations and lower demand from North American heavy truck customers, offset by higher demand from North American light truck customers, higher demand in Europe and the favorable impact of foreign currency translation. Net sales for 2006 included $96.8 million of sales related to the Company’s former steering operations that were divested in December 2006. The change in net sales from 2006 to 2007 includes $43.2 million related to the impact from foreign currency translation. Profitability for 2007 improved compared to 2006 primarily due to a decrease of $14 million in product warranty expense and the favorable impact of restructuring initiatives, partially offset by higher raw material costs. Overall, the Automotive Group’s profitability over the past two years has been significantly impacted by decreases in volume, increases in raw materials costs and costs associated with investments in Project O.N.E, partially offset by pricing and the favorable impact of restructuring initiatives.

During 2007, the Company recorded approximately $17.5 million of impairment and restructuring charges and $20.8 million of rationalization costs recorded in cost of products sold and selling, administrative and general expenses related to the Automotive Group. During 2006, the Company recorded approximately $32.6 million of impairment and restructuring charges and $16.5 million of rationalization costs recorded in cost of products sold and selling, administrative and general expenses related to the Automotive Group. The Automotive Group’s adjusted EBIT (loss) excludes these charges as they are not representative of ongoing operations. Refer to Note 14 – Segment Information in the Notes to Consolidated Financial Statements for additional discussion of the measurement of segment profit or loss.

The Automotive Group’s sales are expected to remain at current levels throughout 2008, and the Automotive Group is expected to deliver improved margins due to its restructuring initiatives and pricing and portfolio management initiatives. The Automotive Group expects to realize annual pretax savings of approximately $75 million by 2009 from restructuring initiatives. However, these savings, which will be partially realized in 2008, are expected to be partially offset by increases in raw material and other manufacturing costs and investments in Project O.N.E.

Steel Segment:

		2007				2006				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	1,561.6			$	1,472.3			$	89.3				6.1	%
Adjusted EBIT		$	213.1			$	206.7			$	6.4				3.1	%
Adjusted EBIT margin			13.6	%			14.0	%			—			(40		) bps

The Steel Group sells steel of low and intermediate alloy and carbon grades in both solid and tubular sections, as well as custom-made steel products for both automotive and industrial applications, including bearings.

The Steel Group’s 2007 net sales increased 6.1% over 2006 primarily due to increased pricing and surcharges to recover high raw material and energy costs, as well as strong demand in all market sectors, especially the energy market sector, partially offset by lower sales due to the divestment of the Steel Group’s former Timken Precision Steel Components — Europe business and the closure of its European seamless steel tube facility. The Steel Group’s former Timken Precision Steel Components — Europe business and seamless steel tube facility accounted for $62.6 million of the change. The increase in the Steel Group’s profitability in 2007 compared to 2006, on a dollar basis, was primarily due to favorable sales mix, increased volume and surcharges, partially offset by higher raw material costs and LIFO expense and higher manufacturing costs. The Steel Group also benefited from higher levels of production in 2007. The Company expects the Steel Group to continue to benefit from strong demand across all market sectors in 2008 with slight increases in volume. The Company also expects the Steel Group’s Adjusted EBIT to be slightly higher in 2008 primarily due to price increases and higher manufacturing productivity. Scrap costs are expected to remain at current levels as are alloy and energy costs. However, the majority of these costs are expected to be recovered through surcharges and price increases.

2006 compared to 2005

Overview:

		2006				2005				$ Change				% Change
(Dollars in millions, except earnings per share)
Net sales		$	4,973.4			$	4,823.2			$	150.2				3.1	%
Income from continuing operations			176.4				233.7				(57.3	)			(24.5	)%
Income from discontinued operations			46.1				26.6				19.5				73.3	%
Net income			222.5				260.3				(37.8	)			(14.5	)%
Diluted earnings per share:
Continuing operations		$	1.87			$	2.52			$	(0.65	)			(25.8	)%
Discontinued operations			0.49				0.29				0.20				69.0	%
Net income per share		$	2.36			$	2.81			$	(0.45	)			(16.0	)%
Average number of shares — diluted			94,294,716				92,537,529				—				1.9	%

Sales by Segment:

		2006				2005				$ Change				% Change
(Dollars in millions, and exclude intersegment sales)
Industrial Group		$	2,072.5			$	1,925.2			$	147.3				7.7	%
Automotive Group			1,573.0				1,661.1				(88.1	)			(5.3	)%
Steel Group			1,327.9				1,236.9				91.0				7.4	%
Total Company		$	4,973.4			$	4,823.2			$	150.2				3.1	%

The Industrial Group’s net sales in 2006 increased from 2005 primarily due to higher demand across most end markets, with the highest growth in aerospace, heavy industry and industrial distribution. The Automotive Group’s net sales in 2006 decreased from 2005 primarily due to significantly lower volume, driven by reductions in vehicle production by North American original equipment manufacturers, partially offset by improved pricing. The Steel Group’s net sales in 2006 increased from 2005 primarily due to increased pricing and surcharges to recover high raw material and energy costs, as well as strong demand in industrial and energy market sectors, partially offset by lower sales to automotive customers.

Gross Profit:

		2006				2005				$ Change				Change
(Dollars in millions)
Gross profit		$	1,005.8			$	1,000.0			$	5.8				0.6	%
Gross profit % to net sales			20.2	%			20.7	%			—			(50) bps
Rationalization expenses included in cost of products sold		$	18.5			$	14.5			$	4.0				27.6	%

Gross profit margin decreased in 2006 compared to 2005, primarily due to the impact of lower volume in the Automotive Group, driven by reductions in vehicle production by North American original equipment manufacturers, leading to underutilization of manufacturing capacity, as well as an increase in product warranty reserves. The impact of lower volumes and the increase in product warranty reserves in the Automotive Group more than offset favorable sales volume from the Industrial and Steel businesses, price increases, and increased productivity in the Company’s other businesses.

In 2006, rationalization expenses included in cost of products sold related to the Company’s Canton, Ohio Industrial Group bearing facilities, certain Automotive Group domestic manufacturing facilities, certain facilities in Torrington, Connecticut and the closure of the Company’s seamless steel tube manufacturing operations located in Desford, England. In 2005, rationalization expenses included in cost of products sold related to the rationalization of the Company’s Canton, Ohio bearing facilities and costs for certain facilities in Torrington, Connecticut.

Selling, Administrative and General Expenses:

		2006				2005				$ Change				Change
(Dollars in millions)
Selling, administrative and general expenses		$	677.3			$	646.9			$	30.4				4.7	%
Selling, administrative and general expenses % to net sales			13.6	%			13.4	%			—			20		bps
Rationalization expenses included in selling, administrative and general expenses		$	5.9			$	2.8			$	3.1				110.7	%

The increase in selling, administrative and general expenses in 2006 compared to 2005 was primarily due to higher costs associated with investments in the Asian growth initiative and Project O.N.E. and higher rationalization expenses, partially offset by lower bad debt expense.

In 2006, the rationalization expenses included in selling, administrative and general expenses primarily related to Automotive Group engineering facilities. In 2005, the rationalization expenses included in selling, administrative and general expenses primarily related to the Company’s Canton, Ohio bearing facilities and costs associated with the Torrington acquisition.

Impairment and Restructuring Charges:

		2006				2005				$ Change
(Dollars in millions)
Impairment charges		$	15.3			$	0.8			$	14.5
Severance and related benefit costs			25.8				20.3				5.5
Exit costs			3.8				5.0				(1.2	)
Total		$	44.9			$	26.1			$	18.8

Industrial

In 2006, the Company recorded $1.0 million of impairment charges and $0.6 million of exit costs associated with the Industrial Group’s rationalization plans. In 2005, the Company recorded $0.8 million of impairment charges and environmental exit costs of $2.2 million associated with the Industrial Group’s rationalization plans.

In November 2006, the Company announced plans to vacate its Torrington, Connecticut office complex. In 2006, the Company recorded $1.5 million of severance and related benefit costs and $0.1 million of impairment charges associated with the Industrial Group vacating the Torrington complex.

In addition, the Company recorded $1.4 million of environmental exit costs in 2006 related to a former plant in Columbus, Ohio and $0.1 million of severance and related benefit costs related to other Company initiatives.

Automotive

In 2006, the Company recorded $16.5 million of severance and related benefit costs, $1.6 million of exit costs and $1.6 million of impairment charges associated with the Automotive Group’s restructuring plans. In 2005, the Company recorded approximately $20.3 million of severance and related benefit costs and $2.8 million of exit costs as a result of environmental charges related to the closure of a manufacturing facility in Clinton, South Carolina, and administrative facilities in Torrington, Connecticut and Norcross, Georgia.

In 2006, the Company recorded an additional $0.7 million of severance and related benefit costs and $0.3 million of impairment charges for the Automotive Group related to the announced plans to vacate its Torrington campus office complex and $0.1 million of severance and related benefit costs related to other company initiatives.

In addition, the Company recorded impairment charges of $11.9 million in 2006 representing the write-off of goodwill associated with the Automotive Group in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Refer to Note 8 — Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements for additional discussion.

Steel

The Company recorded approximately $6.9 million of severance and related benefit costs in 2006 related to the closure of its European seamless steel tube manufacturing operations located in Desford, England. In addition, the Company recorded an impairment charge and removal costs of $0.6 million related to the write-down of property, plant and equipment at one of the Steel Group’s facilities.

Loss on Divestitures:

		2006				2005				$ Change
(Dollars in millions)
Loss on Divestitures		$	64.3			$	—			$	64.3

In June 2006, the Company completed the divestiture of its Timken Precision Steel Components - Europe business and recorded a loss on disposal of $10.0 million. In December 2006, the Company completed the divestiture of the Automotive Group’s steering business located in Watertown, Connecticut and Nova Friburgo, Brazil and recorded a loss on disposal of $54.3 million.

Interest Expense and Income:

		2006				2005				$ Change				% Change
(Dollars in millions)
Interest expense		$	49.4			$	51.6			$	(2.2	)			(4.3	)%
Interest income		$	4.6			$	3.4			$	1.2				35.3	%

Interest expense for 2006 decreased slightly compared to 2005 due to lower average debt outstanding in 2006 compared to 2005, partially offset by higher interest rates. Interest income increased for 2006 compared to 2005 due to higher invested cash balances and higher interest rates.

Other Income and Expense:

		2006				2005				$ Change				% Change
(Dollars in millions)
CDSOA receipts, net of expenses		$	87.9			$	77.1			$	10.8				14.0	%
Other expense — net:
Gain on divestitures of non-strategic assets		$	7.1			$	8.9			$	(1.8	)			(20.2	)%
Gain (loss) on dissolution of subsidiaries			0.9				(0.6	)			1.5			NM
Other			(16.2	)			(17.7	)			1.5				8.5	%
Other expense — net		$	(8.2	)		$	(9.4	)		$	1.2				12.8	%

CDSOA receipts are reported net of applicable expenses. In 2006, the Company received CDSOA receipts, net of expenses, of $87.9 million. In 2005, the Company received CDSOA receipts, net of expenses, of $77.1 million.

In 2006, the gain on divestitures of non-strategic assets primarily related to the sale of assets of PEL.

In 2005, the gain on divestitures of non-strategic assets of $8.9 million related to the sale of certain non-strategic assets, including NRB Bearings, a joint venture based in India, and the Industrial Group’s Linear Motion Systems business, based in Europe.

For 2006, other expense primarily included losses from equity investments, donations, minority interests and losses on the disposal of assets. For 2005, other expense primarily included losses on the disposal of assets, losses from equity investments, donations, minority interests and foreign currency exchange losses.

Income Tax Expense:

		2006				2005				$ Change				Change
(Dollars in millions)
Income tax expense		$	77.8			$	112.9			$	(35.1	)			(31.1	)%
Effective tax rate			30.6	%			32.6	%			—			(200		) bps

The effective tax rate for 2006 was less than the U.S. Federal statutory tax rate primarily due to the impact of certain foreign income being taxed at a rate less than 35%, as well as the net tax benefit of adjustments to tax reserves resulting principally from the settlement of prior tax years with the Internal Revenue Service. These items were offset partially by the inability to record a tax benefit for losses at certain foreign subsidiaries, and the tax impact of the impairment of non-deductible goodwill recorded in the fourth quarter of 2006.

The effective tax rate for 2005 was less than the U.S. Federal statutory tax rate due to tax benefits on foreign income, including the extraterritorial income exclusion on U.S. exports, tax holidays in China and the Czech Republic, and earnings of certain foreign subsidiaries being taxed at a rate less than 35%, as well as the aggregate tax benefit of other U.S. tax items. These benefits were offset partially by taxes incurred on foreign remittances, including a remittance during the fourth quarter of 2005 pursuant to the American Jobs Creation Act of 2004, U.S. state and local income taxes and the inability to record a tax benefit for losses at certain foreign subsidiaries.

Discontinued Operations:

		2006				2005				$ Change				% Change
(Dollars in millions)
Operating results, net of tax		$	33.2			$	26.6			$	6.6				24.8	%
Gain on disposal, net of tax			12.9				—				12.9			NM
Total		$	46.1			$	26.6			$	19.5				73.3	%

In December 2006, the Company completed the divestiture of its Latrobe Steel subsidiary. Discontinued operations represent the operating results and related gain on sale, net of tax, of this business.

Business Segments:

Industrial Group:

		2006				2005				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	2,074.5			$	1,927.1			$	147.4				7.6	%
Adjusted EBIT		$	201.3			$	199.9			$	1.4				0.7	%
Adjusted EBIT margin			9.7	%			10.4	%			—			(70		) bps

The Industrial Group’s net sales for 2006 increased compared to 2005 primarily due to higher demand across most end markets, particularly aerospace, heavy industry and industrial distribution markets. While sales increased in 2006, adjusted EBIT margin was lower compared to 2005 primarily due to higher manufacturing costs associated with ramping up new facilities to meet customer demand and investments in the Asian growth initiative and Project O.N.E., mostly offset by higher volume and increased pricing.

Automotive Group:

		2006				2005				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	1,573.0			$	1,661.1			$	(88.1	)			(5.3	)%
Adjusted EBIT (loss)		$	(73.7	)		$	(19.9	)		$	(53.8	)		NM
Adjusted EBIT (loss) margin			(4.7	)%			(1.2	)%			—			(350		) bps

The Automotive Group’s net sales in 2006 decreased compared to 2005 primarily due to lower volume, driven by reductions in vehicle production by North American original equipment manufacturers, partially offset by improved pricing. Profitability for 2006 decreased compared to 2005 primarily due to lower volume, leading to the underutilization of manufacturing capacity, and an increase of $18.8 million in warranty reserves, partially offset by improved pricing and a decrease in allowances for automotive industry credit exposure.

During 2006, the Company recorded $16.5 million of severance and related benefit costs, $1.6 million of exit costs and $1.6 million of impairment charges associated with the Automotive Group’s restructuring plans. In 2005, the Company recorded approximately $20.3 million of severance and related benefit costs and $2.8 million of exit costs as a result of environmental charges related to the closure of a manufacturing facility in Clinton, South Carolina and administrative facilities in Torrington, Connecticut and Norcross, Georgia.

Steel Segment:

		2006				2005				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	1,472.3			$	1,415.1			$	57.2				4.0	%
Adjusted EBIT		$	206.7			$	175.8			$	30.9				17.6	%
Adjusted EBIT margin			14.0	%			12.4	%			—			(160		) bps

In December 2006, the Company completed the sale of its Latrobe Steel subsidiary. Sales and Adjusted EBIT from these operations are included in discontinued operations. Previously reported amounts for the Steel Group have been adjusted to remove the Latrobe Steel operations. The Steel Group’s 2006 net sales increased over 2005 primarily due to increased pricing and surcharges to recover high raw material and energy costs, as well as strong demand in industrial and energy market sectors, partially offset by lower automotive demand. The increase in the Steel Group’s profitability in 2006 compared to 2005 was primarily due to a favorable sales mix, improved manufacturing productivity and increased pricing.

The Balance Sheet

Total assets, as shown on the Consolidated Balance Sheet at December 31, 2007, increased by $352.2 million from December 31, 2006. This increase was primarily due to the acquisition of the assets of The Purdy Corporation, the impact of foreign currency translation and the increase in property, plant and equipment — net to fund Industrial growth initiatives and Project O.N.E.

Current Assets:

		December 31,
		2007				2006				$ Change				% Change
(Dollars in millions)
Cash and cash equivalents		$	30.2			$	101.1			$	(70.9	)			(70.1	)%
Accounts receivable, net			748.5				685.8				62.7				9.1	%
Inventories, net			1,087.7				952.3				135.4				14.2	%
Deferred income taxes			69.1				85.6				(16.5	)			(19.3	)%
Deferred charges and prepaid expenses			14.2				11.1				3.1				27.9	%
Other current assets			95.6				74.4				21.2				28.5	%
Total current assets		$	2,045.3			$	1,910.3			$	135.0				7.1	%

The decrease in cash and cash equivalents in 2007 was primarily due to the use of cash to reduce borrowings under the Company’s Senior Credit Facility that were used for the acquisition of the assets of The Purdy Corporation. Refer to the Consolidated Statement of Cash Flows for further explanation. Net accounts receivable increased primarily due to higher sales in the fourth quarter of 2007 as compared to same period in 2006, as well as acquisitions and the impact of foreign currency translation. The increase in inventories was primarily due to higher raw material costs, higher volume, the impact of foreign currency translation and acquisitions. The decrease in deferred income taxes was primarily due to tax accounting method changes and other items, such as LIFO, that resulted in additional deductions claimed on the Company’s 2006 U.S. Federal income tax return. The increase in other current assets was primarily driven by the reclassification of administrative facilities in Torrington, Connecticut and manufacturing facilities in Desford, England to “assets held for sale.”

Property, Plant and Equipment — Net:

		December 31,
		2007				2006				$ Change				% Change
(Dollars in millions)
Property, plant and equipment		$	3,932.8			$	3,664.8			$	268.0				7.3	%
Less: allowances for depreciation			(2,210.7	)			(2,063.3	)			(147.4	)			(7.1	)%
Property, plant and equipment — net		$	1,722.1			$	1,601.5			$	120.6				7.5	%

The increase in property, plant and equipment — net was primarily due to capital expenditures exceeding depreciation expense, the impact of foreign currency translation and acquisitions.

Other Assets:

		December 31,
		2007				2006				$ Change				% Change
(Dollars in millions)
Goodwill		$	271.8			$	201.9			$	69.9				34.6	%
Other intangible assets			160.5				104.1				56.4				54.2	%
Deferred income taxes			100.9				169.4				(68.5	)			(40.4	)%
Other non-current assets			78.7				39.9				38.8				97.2	%
Total other assets		$	611.9			$	515.3			$	96.6				18.7	%