UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-K

FOR ANNUAL AND TRANSACTION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________

Commission File Number 1-10258

TREDEGAR CORPORATION

(Exact name of registrant as specified in its charter)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-KVirginia

FOR ANNUAL AND TRANSACTION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


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

For the fiscal year ended December 31, 2003

OR54-1497771

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

For the transition period from _________ to __________

Commission File Number 1-10258


TREDEGAR CORPORATION
(Exact name of registrant as specified in its charter)

Virginia
(State or other jurisdiction
of incorporation or organization)

54-1497771
(I.R.S. Employer
Identification No.)

1100 Boulders Parkway, Richmond, Virginia
23225
(Address of principal executive offices)
23225
(Zip Code)

Registrant's telephone number, including area code: 804-330-1000

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

Registrant’s telephone number, including area code:804-330-1000

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


Title of Each Class
Common Stock
Preferred Stock Purchase Rights
 Name of Each Exchange on Which Registered
Common Stock
New York Stock Exchange
Preferred Stock Purchase Rights
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 No x

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

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 at least the past 90 days.Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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 x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

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 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 at least the past 90 days. Yes |X| No |_|

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 |_|.

Indicate by check mark whether the registrant is an

Large accelerated filer (as defined in Exchange Act Rule 12b-2). Yes |X| No |_|

Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003: $451,838,488*

Number of shares of Common Stock outstanding as of January 28, 2004: 38,255,706 (38,081,940 as of June 30, 2003)

* In determining this figure, an aggregate of 7,939,279 shares of Common Stock beneficially owned by Floyd D. Gottwald, Jr., John D. Gottwald, William M. Gottwald and the members of their immediate families has been excluded because the shares are held by affiliates. The aggregate market value does, however, include 4,491,980 shares reported as beneficially owned by Bruce C. Gottwald and additional shares owned by members of his immediate family, none of whom is considered by Tredegar Corporation to be affiliates. The aggregate market value has been computed based on the closing price in the New York Stock Exchange Composite Transactions on June 30, 2003, as reported by TheWall Street Journal.o


Accelerated filer x
Non-accelerated filer o

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

Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2006 (the last business day of the registrant’s most recently completed second quarter): $479,651,105*

Number of shares of Common Stock outstanding as of January 31, 2007: 39,382,964 (38,790,297 as of June 30, 2006)

* In determining this figure, an aggregate of 8,471,011 shares of Common Stock beneficially owned by Floyd D. Gottwald, Jr., John D. Gottwald, William M. Gottwald and the members of their immediate families has been excluded because the shares are held by affiliates. The aggregate market value has been computed based on the closing price in the New York Stock Exchange Composite Transactions on June 30, 2006, as reported by The Wall Street Journal.




Documents Incorporated By Reference
Portions of the Tredegar Corporation (“Tredegar”) Proxy Statement for the 2007 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K. We expect to file our Proxy Statement with the Securities and Exchange Commission and mail it to shareholders on or about March 28, 2007.

Index to Annual Report on Form 10-K
Year Ended December 31, 2006


Documents Incorporated By Reference

        Portions of the Tredegar Corporation (“Tredegar”) Proxy Statement for the 2004 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K. We expect to file our Proxy Statement with the Securities and Exchange Commission and mail it to shareholders on or about March 8, 2004.


Index to Annual Report on Form 10-K
Year Ended December 31, 2003


Part I  
Page

Item 1.  1-41-3
Item 1A. 3-5

Item 1B.
None
Item 2.  4

5-6
Item 3.  5

6
Item 4.  None
 

 
Part II
 

Item 5.  5-6

7-8
Item 6.  6-13

9-16
Item 7.  14-35

17-35
Item 7A.  36

Item 8.  40-70

40-73
Item 9.  None

Item 9A.  36
Item 9B. None

 
Part III
 

Item 10.  37-38

Item 11.  *

Item 12.  39

Item 13.  39

Item 14.  *
 

 
Part IV
 

Item 15.  40

*Items 11 and 14 and portions of Items 10, 12 and 13 are incorporated by reference from the Proxy Statement.

The Securities and Exchange Commission (the “SEC”) has not approved or disapproved of this report or passed upon its accuracy or adequacy.



PART I


Item 1.
BUSINESS

Description of Business

Tredegar Corporation (“Tredegar”), a Virginia corporation incorporated in 1988, is engaged, through its subsidiaries, in the manufacture of plastic films and aluminum extrusions. Financial information related to Tredegar’s films and aluminum segments included in Note 3 to the notes to financial statements is incorporated herein by reference.

Film Products

Tredegar Film Products Corporation and its subsidiaries (together, “Film Products”) manufacture plastic films, elastics and laminate materials primarily for personal and household care products and packaging and surface protection applications. These products are produced at locations in the United States and at plants in The Netherlands, Hungary, Italy, China and Brazil. Film Products competes in all of its markets on the basis of product innovation, quality, price and service.
Personal and Household Care Materials. Film Products is one of the largest global suppliers of apertured, breathable, elastic and embossed films, and laminate materials for personal care markets, including:

* Items 11·

Apertured film and 14 and portions of Items 10 and 12 are incorporated by reference from the Proxy Statement.

The Securities and Exchange Commission (the “SEC”) has not approved or disapproved of this report or passed upon its accuracy or adequacy.



PART I


Item 1.BUSINESS

Description of Business

        Tredegar Corporation (“Tredegar”) is engaged, through its subsidiaries, in the manufacture of plastic films and aluminum extrusions. We also operate Therics Inc. (“Therics”), which has developed and recently launched an initial family of products used in bone grafting procedures. We sold our venture capital investment portfolio in the first half of 2003 (see pages 34-35 for more information).

Film Products

        Tredegar Film Products Corporation and its subsidiaries (together, “Film Products”) manufacture plastic films, nonwovens and laminate materials primarily for personal and household care products and packaging and surface protection applications. These products are produced at various locations throughout the United States and at plants in The Netherlands, Hungary, Italy, China, Brazil and Argentina. Film Products competes in all of its markets on the basis of product innovation, quality, price and service.

Personal and Household Care Films. Film Products is one of the largest global suppliers of apertured, breathable, elastic and embossed films, and nonwovens and laminatenonwoven materials for personal care markets, including:use as topsheet in feminine hygiene products, baby diapers and adult incontinent products (including materials sold under the ComfortQuilt

® and ComfortAireTMbrand names);

Apertured film and nonwoven materials for use as topsheet in feminine hygiene products, baby diapers and adult incontinent products;

·
Breathable, embossed and elastic materials for use as backsheet and other components for baby diapers, adult incontinent products and feminine hygiene products (including elastic fastening components sold under the Fabriflex®TM, StretchTabTM and FlexaireFlexAire®TM brand names); and

·
Absorbent transfer layers for baby diapers and adult incontinent products sold under the AquiDry®TM name. and AquiSoftTM brand names.

        In each of the last three years, personal care products accounted for more than 30% of Tredegar’s consolidated net sales.

        Film Products also makes apertured films and breathable barrier films that regulate vapor or fluid transmission. These products are typically used in industrial, medical, agricultural and household markets, including disposable mops, facial wipes, filter layers for personal protective suits, facial masks and landscaping fabric.

In each of the last three years, personal care products accounted for more than 30% of Tredegar’s consolidated net sales.

Film Products also makes apertured films, breathable barrier films and laminates that regulate vapor or fluid transmission. These products are typically used in industrial, medical, agricultural and household markets, including disposable mops, facial wipes, filter layers for personal protective suits, facial masks and landscaping fabric. Film Products supplies a family of laminates for use in protective apparel under the GuardDog LaminatesTM brand name.

Packaging and Protective Films. Film Products produces a broad line of packaging films with an emphasis on paper, as well as laminating films for food packaging applications. These products give our customers a competitive advantage by providing cost savings with thin-gauge films that are readily printable and convertible on conventional processing equipment. Major end uses include overwrap for bathroom tissue and paper towels, and retort pouches.

Film Products also produces films that are disposable, protective coversheets for photopolymers used in the manufacture of circuit boards. Other films sold under the UltraMask® and ForceFieldTM brand names are used as protective films to protect flat panel display components during fabrication, shipping and handling.
Raw Materials. The primary raw materials used by Film Products are low density, linear low density and high density polyethylene and polypropylene resins, which are obtained from domestic and foreign suppliers at competitive prices. We believe there will be an adequate supply of polyethylene and polypropylene resins in the immediate future. Film Products also buys polypropylene-based nonwoven fabrics based on these same resins, and we believe there will be an adequate supply of these materials in the immediate future.


Customers. Film Products sells to many branded product producers throughout the world. Its largest customer is The Procter & Gamble Company (“P&G”). Net sales to P&G totaled $255 million in 2006, $237 million in 2005 and $226 million in 2004 (these amounts include film sold to third parties that converted the film into materials used with products manufactured by P&G).
Packaging and Protective Films.Film Products produces a broad line of packaging films with an emphasis on paper, as well as laminating films for food packaging applications. These products give our customers a competitive advantage by providing cost savings with thin-gauge films that are readily printable and convertible on conventional processing equipment. Major end uses include overwrap for bathroom tissue and paper towels, and retort pouches.

        Film Products also produces films that are disposable, protective coversheets for photopolymers used in the manufacture of circuit boards. Other films sold under the UltraMask® and ForceFieldTM names are used as protective films to protect flat panel display components such as glass during fabrication, shipping and handling.

Raw Materials. The primary raw materials used by Film Products are low density, linear low density and high density polyethylene and polypropylene resins, which are obtained from domestic and foreign suppliers at competitive prices. We believe there will be an adequate supply of polyethylene and polypropylene resins in the immediate future. Film Products also buys nonwoven fabrics based on these same resins, and we believe there will be adequate supply of these materials in the immediate future.

Customers. Film Products sells to many branded product producers throughout the world. Its largest customer is The Procter & Gamble Company (“P&G”). Net sales to P&G totaled $207 million in 2003, $243 million in 2002 and $235 million in 2001 (these amounts include film sold to third parties that converted the film into materials used in products manufactured by P&G).



P&G and Tredegar have had a successful long-term relationship based on cooperation, product innovation and continuous process improvement. The loss or significant reduction in sales associated with P&G would have a material adverse effect on our business.


Research and Development and Intellectual Property. Film Products has technical centers in Richmond, Virginia; Terre Haute, Indiana; Chieti, Italy; and Shanghai, China; and holds 189 issued patents (73 of which are issued in the U.S.) and 110 trademarks (10 of which are issued in the U.S.). Expenditures for research and development (“R&D”) have averaged $7.4 million annually over the past three years.
Aluminum Extrusions

The William L. Bonnell Company, Inc. and its subsidiaries (together, "Aluminum Extrusions") produce soft-alloy aluminum extrusions primarily for building and construction, distribution, transportation, machinery and equipment, electrical and consumer durables markets.

Aluminum Extrusions manufactures mill (unfinished), anodized (coated) and painted aluminum extrusions for sale directly to fabricators and distributors that use our extrusions to produce window components, curtain walls and storefronts, tub and shower doors, industrial and agricultural machinery and equipment, ladders, bus bars, automotive parts, snowmobiles and tractor-trailer shapes, among other products. Sales are made primarily in the United States and Canada, principally east of the Rocky Mountains. Aluminum Extrusions competes primarily on the basis of product quality, service and price.

Aluminum Extrusions sales volume by market segment over the last three years is shown below:


  
 
by Market Segment 
  
2006
 2005 2004 
Building and construction:       
Commercial  
48
  44  41 
Residential  
14
  18  21 
Distribution  
19
  16  13 
Transportation  
9
  9  10 
Machinery and equipment  
5
  6  7 
Electrical  
3
  4  5 
Consumer durables  
2
  3  3 
Total  
100
  100  100 


Raw Materials. The primary raw materials used by Aluminum Extrusions consist of aluminum ingot, aluminum scrap and various alloys, which are purchased from domestic and foreign producers in open-market purchases and under short-term contracts. We believe there will be an adequate supply of aluminum and other required raw materials and supplies in the immediate future.

Intellectual Property. Aluminum Extrusions holds two U.S. patents and two U.S. trademarks.


General

Patents, Licenses and Trademarks. Tredegar considers patents, licenses and trademarks to be of significance for Film Products. We routinely apply for patents on significant developments in this business. Our patents have remaining terms ranging from 1 to 19 years. We also have licenses under patents owned by third parties.

Research and Development. Tredegar’s spending for R&D activities in 2006, 2005 and 2004 was related to Film Products and AFBS, Inc. (formerly known as Therics, Inc.). R&D spending at Film Products was approximately $8.1 million in 2006, $6.6 million in 2005 and $7.5 million in 2004.

On June 30, 2005, substantially all of the assets of AFBS, a wholly-owned subsidiary of Tredegar, were sold or assigned to a newly-created limited liability company, Therics, LLC, controlled and managed by an individual not affiliated with Tredegar. AFBS received a 17.5% equity interest in Therics, LLC, valued at $170,000 and a 3.5% interest in Theken Spine, LLC, valued at $800,000, along with potential future payments based on the sale of certain products by Therics, LLC. AFBS had operating losses of $3.5 million during the first six months of 2005 and $9.8 million in 2004. There was no R&D spending at AFBS in 2006. R&D spending at AFBS was approximately $2.4 million in 2005 and $7.8 million in 2004.

Backlog. Backlogs are not material to our operations.

Government Regulation. Laws concerning the environment that affect or could affect our domestic operations include, among others, the Clean Water Act, the Clean Air Act, the Resource Conservation Recovery Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended, regulations promulgated under these acts, and any other federal, state or local laws or regulations governing environmental matters. We believe that we are in substantial compliance with all applicable laws, regulations and permits. In order to maintain substantial compliance with such standards, we may be required to incur expenditures, the amounts and timing of which are not presently determinable but which could be significant, in constructing new facilities or in modifying existing facilities.

Employees. Tredegar employed approximately 3,000 people at December 31, 2006.

Available Information and Corporate Governance Documents. Our Internet address is www.tredegar.com. We make available, free of charge through our website, our 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, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. Information filed electronically with the SEC can be accessed on its website at www.sec.gov. In addition, our Corporate Governance Guidelines, Code of Conduct and the charters of our Audit, Executive Compensation and Nominating and Governance Committees are available on our website and are available in print, without charge, to any shareholder upon request by contacting Tredegar’s Corporate Secretary at 1100 Boulders Parkway, Richmond, Virginia 23225. The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into other filings we make with the SEC.

Item 1A.
RISK FACTORS

There are a number of risks and uncertainties that can have a material effect on the operating results of our businesses and our financial condition. These risk factors include, but are not limited to, the following:

General

·
Our future performance is influenced by costs incurred by our operating companies including, for example, the cost of energy and raw materials. These costs include, without limitation, the cost of resin (the raw material on which Film Products primarily depends), aluminum (the raw material on which Aluminum Extrusions primarily depends), natural gas (the principal fuel necessary for Aluminum Extrusions’ plants to operate), electricity and diesel fuel. Resin, aluminum and natural gas prices have risen significantly, and may continue to do so in the future. Tredegar attempts to mitigate the effects of increased costs through price increases and contractual pass-through provisions, but there are no assurances that higher prices can effectively be passed through to our customers or that we will be able to offset fully or on a timely basis the effects of higher raw material costs through price increases or pass-through arrangements. Further, there is no assurance that cost control efforts will be sufficient to offset any additional future declines in revenue or increases in energy, raw material or other costs.



·
Our substantial international operations subject us to risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations. Risks inherent in international operations include the following, by way of example: changes in general economic conditions, potential difficulty enforcing agreements and intellectual property rights, staffing and managing widespread operations, restrictions on foreign trade or investment, restrictions on the repatriation of income, fluctuations in exchange rates, imposition of additional taxes on our foreign income, nationalization of private enterprises and unexpected adverse changes in foreign laws and regulatory requirements.

·
Non-compliance with any of the covenants in our $300 million credit facility could result in all outstanding debt under the agreement becoming due, which could have an adverse effect on our financial condition or liquidity. The credit agreement governing our credit facility contains restrictions and financial covenants that could restrict our financial flexibility. Our failure to comply with these covenants could result in an event of default, which if not cured or waived, could have an adverse effect on our financial condition and liquidity.

Film Products

·
Film Products is highly dependent on sales associated with one customer, P&G. P&G comprised approximately 23% of Tredegar Corporation’s net sales in 2006, 25% in 2005 and 27% in 2004. The loss or significant reduction of sales associated with P&G would have a material adverse effect on our business. See discussion beginning on page 31 regarding theOther P&G-related factors that could adversely affect our business include, by way of example, (i) failure by P&G domestic backsheet business.

Researchto achieve success or maintain share in markets in which P&G sells products containing our materials, (ii) operational decisions by P&G that result in component substitution, inventory reductions and Developmentsimilar changes and Intellectual Property.(iii) delays in P&G rolling out products utilizing new technologies developed by Tredegar. While we have undertaken efforts to expand our customer base, there can be no assurance that such efforts will be successful, or that they will offset any delay or loss of sales and profits associated with P&G.


·
Growth of Film Products depends on our ability to develop and deliver new products at competitive prices, especially in the personal care market. Personal care products are now being made with a variety of new materials and the overall cycle for changing materials has accelerated. While we have substantial technical centersresources, there can be no assurance that our new products can be brought to market successfully, or if brought to market successfully, at the same level of profitability and market share of replaced films. A shift in Terre Haute, Indiana; Lake Zurich, Illinois; Chieti, Italy;customer preferences away from our technologies, our inability to develop and Shanghai, China;deliver new profitable products, or delayed acceptance of our new products in domestic or foreign markets, could have a material adverse effect on our business. In the long term, growth will depend on our ability to provide innovative materials at a cost that meets our customers’ needs.
·
Continued growth in Film Products' sale of high value protective film products is not assured.A shift in our customers' preference to new or different products could have a material adverse effect on our sale of protective films. Similarly, a decline in consumer demand for notebook computers or liquid crystal display (LCD) monitors or a decline in the rate of growth in purchases of LCD televisions could have a significant negative impact on protective film sales.

·
Our inability to protect our intellectual property rights or our infringement of the intellectual property rights of others could have a significant adverse impact on Film Products. Film Products operates in a field where our significant customers and holds 53 U.S.competitors have substantial intellectual property portfolios. The continued success of this business depends on our ability not only to protect our own technologies and trade secrets, but also to develop and sell new products that do not infringe upon existing patents or threaten existing customer relationships. An unfavorable outcome in any intellectual property litigation or similar proceeding could have a significant adverse impact on Film Products.


·
As Film Products expands its personal care business, we have greater credit risk that is inherent in broadening our customer base.

Aluminum Extrusions

·
Sales volume and 15 U.S. trademarks. Expenditures for research and development (“R&D”) have averaged $7.6 million per year over the past three years.

Aluminum Extrusions

profitability of Aluminum Extrusions is comprisedcyclical and highly dependent on economic conditions of The William L. Bonnell Company, Inc. and its subsidiaries (together, “Aluminum Extrusions”), which produce soft-alloy aluminum extrusions primarily for building and construction, distribution, transportation, electrical, consumer durables, and machinery and equipment markets.

        Aluminum Extrusions manufactures mill (unfinished), anodized (coated) and painted aluminum extrusions for sale directly to fabricators and distributors that use our extrusions to produce curtain walls, architectural shapes, tub and shower doors, window components, ladders, bus bars, tractor-trailer shapes, automotive parts and snowmobiles, among other products. Sales are made primarilyend-use markets in the United States and Canada, principally eastparticularly in the construction, distribution and transportation industries. Our market segments are also subject to seasonal slowdowns during the winter months. Because of the Rocky Mountains. Aluminum Extrusions competes primarilyhigh degree of operating leverage inherent in our operations (generally constant fixed costs until full capacity utilization is achieved), the percentage drop in operating profits in a cyclical downturn will likely exceed the percentage drop in volume. Any benefits associated with cost reductions and productivity improvements may not be sufficient to offset the adverse effects on profitability from pricing and margin pressure and higher bad debts that usually accompany a downturn. In addition, higher energy costs and the basisappreciation of the U.S. Dollar equivalent value of the Canadian Dollar can further reduce profits unless offset by price increases or cost reductions and productivity improvements.


·
The markets for our products are highly competitive with product quality, service, delivery performance and price.

price being the principal competitive factors. Aluminum Extrusions sales volume by market segment over the last three years is shown below:


 
 
 % of Aluminum Extrusions Sales Volume
by Market Segment
 
 
 
 2003
 2002
 2001
 
   Building and construction:              
       Residential   30  26  27    
       Commercial   31  35  31    
   Distribution   15  15  17    
   Transportation   10  10  10    
   Electrical   6  6  7    
   Consumer durables   4  4  3    
   Machinery and equipment   4  4  5    
 
 
   Total   100  100  100    
 
 

Raw Materials. The primary raw materials used by Aluminum Extrusions consist of aluminum ingot, aluminum scrap and various alloys, which are purchased from domestic and foreign producers in open-market purchases and under short-term contracts. We believe there will be adequate supply of aluminum and other required raw materials and supplies in the immediate future.

Intellectual Property. Aluminum Extrusions holds three U.S. patents and four U.S. trademarks.

Therics

        Located in Princeton, New Jersey, Therics currently employs 44 people. Therics began developing tissue-engineered products in 1996. Its primary focus is on commercializing products made from the TheriForm®process, a unique microfabrication technology used to create precise three-dimensional products. The process creates complex scaffolds for efficacious tissue in-growth. With this technology, the company has developed and recently launched an initial family of implants used in bone grafting procedures. Bone grafting procedures are performed by orthopaedic surgeons and neurosurgeons.

2



        Therics’ initial synthetic bone graft implants, which have received clearance from the U.S. Food and Drug Administration (the “FDA”), are made from beta-tricalcium phosphate (“(beta)-TCP”). (beta)-TCP has proven effective as a reliable bone substitutearound 1,800 customers in a variety of orthopaedicend-use markets within the broad categories of building and neurosurgical applications. Studies have shown itconstruction, distribution, transportation, machinery and equipment, electrical and consumer durables. No single customer exceeds 4% of Aluminum Extrusion’s net sales. Due to be equivalent to or better than autograft in healing defects. Unlike other materials that may remainthe diverse customer mix across many end-use markets, we believe the industry generally tracks the real growth of the overall economy (historical cross-cycle volume growth has been in the body for3% range).


During improving economic conditions, excess industry capacity is absorbed and pricing pressure becomes less of a factor in many of our end-use markets. Conversely, during an extended periodeconomic slowdown, excess industry capacity often drives increased pricing pressure in many end-use markets as competitors protect their position with key customers. Because the business is susceptible to these changing economic conditions, Aluminum Extrusions targets complex, customized, service-intensive business with more challenging requirements which is competitively more defensible compared to higher volume, standard extrusion applications.

Foreign imports, primarily from China, represent a growing portion of time, the body resorbs (beta)-TCP as bone healing occurs, providing a conduit for bone formation without impeding the body’s abilityNorth American aluminum extrusion market. Foreign competition to heal.

        Therics alsodate has been primarily large volume, standard extrusion profiles that impact some of our less strategic end-use markets. Market share erosion in other end-use markets human demineralized bone matrix (“DBM”) powder and allograft implantsremains possible.


There can be no assurance that it purchases from approved tissue donor banks. DBM and other bio-additives are typically mixed and used as filler and may be used in conjunction with other bone grafting materials to induce bone in-growth. Therics expects to offer bone grafting implants made from a unique and proprietary combination of DBM and (beta)-TCP later in 2004. We expect this new product will further improve the opportunity for bone in-growth.

        Sales for the orthobiologics market in the U.S., which includes bone substitutes, allograft bone/tissue, tissue-engineered substances and growth factors/bone proteins, was projected by Millennium Research Group to grow to $1.4 billion by 2006 from $706 million in 2002. Sales for the segment of this market most comparable to Therics’ initial family of bone grafting implants and DBM powder were estimated at $401 million in 2002. Therics products are sold through a network of independent sales representatives.

        We believe therewe will be adequate supply of (beta)-TCP in the immediate future. There are a limited number of suppliers of DBMable to maintain current margins and we currentlyprofitability. Our continued success and prospects depend on the largest of the concerns for our source of supply. A disruption of DBM supply would adversely affect our ability to meet sales goals.

        Therics relies on a combination of patent, trademark, copyrightretain existing customers and trade secret laws to protect the company’s proprietary technologies and products. Therics owns or holds exclusive rights to 34 issued patents and has more than 32 U.S. and foreign patent applications pending. Therics spent approximately $11.2 millionparticipate in 2003, $12.5 million in 2002 and $13 million in 2001 on R&D activities.

        Therics had no revenues and an operating loss of $11.7 million in 2003, revenues of $208,000 and an operating loss of $13.1 million in 2002 and revenues of $450,000 and an operating loss of $12.9 million in 2001. Revenues recognized by Therics to date relate entirely to payments received for R&D support. As of December 31, 2003, Tredegar had invested approximately $65 million in Therics. Therics’ identifiable assets included in Tredegar’s consolidated balance sheet were $8.9 million at December 31, 2003, including goodwill and intangible assets of $4.7 million. Therics also has future rental commitments under noncancelable operating leases through 2011 (most of which contain sublease options) totaling $11.1 million at December 31, 2003.

overall industry cross-cycle growth.


GeneralItem 1B.

Patents, Licenses and Trademarks. Tredegar considers patents, licenses and trademarks to be of significance for UNRESOLVED STAFF COMMENTS

None.

Item 2.
PROPERTIES

General

Most of the improved real property and the other assets used in our operations are owned, and none of the owned property is subject to an encumbrance that is material to our consolidated operations. We consider the plants, warehouses and other properties and assets owned or leased by us to be in generally good condition.


We believe that the capacity of our plants is adequate to meet our immediate needs. Our plants generally have operated at 50-95% of capacity. Our corporate headquarters, which is leased, is located at 1100 Boulders Parkway, Richmond, Virginia 23225.

Our principal plants and facilities are listed below:

Film Products and Therics. We routinely apply for patents on significant developments in each of these businesses. Our patents have remaining terms ranging from 1 to 17 years. We also have licenses under patents owned by third parties.

Research and Development. Tredegar spent approximately $18.8 million in 2003, $20.3 million in 2002 and $20.3 million in 2001 on R&D activities related to continuing operations.

Backlog. Backlogs are not material to our operations.

Government Regulation. Laws concerning the environment that affect or could affect our domestic operations include, among others, the Clean Water Act, the Clean Air Act, the Resource Conservation Recovery Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), as amended, regulations promulgated under these acts, and any other federal, state or local laws or regulations governing environmental matters. We believe that we are in substantial compliance with all applicable laws, regulations and permits. In order to maintain substantial compliance with such standards, we may be required to incur expenditures, the amounts and timing of which are not presently determinable but which could be significant, in constructing new facilities or in modifying existing facilities.

3



Employees. Tredegar employed approximately 3,000 people at December 31, 2003.

Available Information and Corporate Governance Documents.Our Internet address iswww.tredegar.com. We make available, free of charge through our web site, our 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, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. In addition, our Corporate Governance Guidelines, Code of Conduct and the charters of our Audit, Executive Compensation and Nominating and Governance Committees are available on our web site and are available in print, without charge, to any shareholder upon request by contacting Tredegar’s Corporate Secretary at 1100 Boulders Parkway, Richmond, Virginia 23225.


Item 2.PROPERTIES

General

        Most of the improved real property and the other assets used in our operations are owned, and none of the owned property is subject to an encumbrance that is material to our consolidated operations. We consider the plants, warehouses and other properties and assets owned or leased by us to be in generally good condition.

        We believe that the capacity of our plants is adequate to meet our immediate needs. Our plants generally have operated at 50-95% of capacity. Our corporate headquarters is located at 1100 Boulders Parkway, Richmond, Virginia 23225.

        Our principal plants and facilities are listed below:


Film Products
Principal Operations
Locations in the United States
Lake Zurich, Illinois
Pottsville, Pennsylvania
Red Springs, North Carolina (leased)
Richmond, Virginia (technical center) (leased)
Terre Haute, Indiana (technical center and production facility)
Locations in Foreign Countries
LaGrange, Georgia
Lake Zurich, Illinois (technical
   center and production
   facility)
New Bern, North Carolina
   (closing in 2004)
Pottsville, Pennsylvania
Terre Haute, Indiana
   (technical center and
   production facility)
Chieti, Italy (technical center)
Guangzhou, China
Kerkrade, The Netherlands
Rétság, Hungary
Roccamontepiano, Italy
San Juan, Argentina
São Paulo, Brazil
Shanghai, China
Principal Operations
Production of plastic films
nonwovens and laminate materials

Aluminum Extrusions
Principal Operations
Locations in the United States
Carthage, Tennessee
Kentland, Indiana
Newnan, Georgia
Locations in Canada
Carthage, Tennessee
Kentland, Indiana
Newnan, Georgia
Aurora, Ontario
Pickering, Ontario
Richmond Hill, Ontario
Ste Thérèse, Québec
Woodbridge, Ontario (leased)
Principal Operations
Production of aluminum extrusions, fabrication and finishing


ThericsItem 3.

        Therics leases space in Princeton, New Jersey.

4


LEGAL PROCEEDINGS

On June 23, 2005, the United States Environmental Protection Agency, Region 4 (“EPA”), issued an Administrative Order (Docket No. CAA-04-2005-1838, the “Order”) under the Clean Air Act (as amended from time to time, the “Act”) alleging certain violations by Aluminum Extrusions’ Carthage, Tennessee facility of the refrigerant management regulations promulgated pursuant to the Act. The Order alleged that the violations occurred primarily in 2002 and 2003.

The Order required Aluminum Extrusions to either replace the cooling system at issue or retrofit it with an EPA approved non-ozone depleting substance. The Order further required Aluminum Extrusions to comply with certain applicable provisions of the Act and to provide certified documentation verifying compliance with the Order. Aluminum Extrusions was required to comply with all terms of the Order within 180 days from issuance.

Aluminum Extrusions fulfilled all obligations imposed by the Order during 2005, and reported that fact in a letter to the EPA dated October 25, 2005. Although Aluminum Extrusions has not admitted any violations to the EPA pursuant to the Order, Aluminum Extrusions elected to replace the affected cooling system and incurred related replacement costs of approximately $110,000.

Pursuant to a Consent Agreement and Final Order (“CAFO”) that became effective May 9, 2006, Aluminum Extrusions (i) paid a civil penalty of $30,422 and (ii) undertook a supplemental environmental project ("SEP") in an amount of at least $208,170 ("Minimum SEP Expenditure"). The CAFO requires that the SEP be fully implemented within one year of the CAFO's effective date. On July 6, 2006, Aluminum Extrusions completed the SEP at a cost of $296,432. Management sent a report to the EPA in the fourth quarter of 2006 indicating that it believes that the SEP was completed in a satisfactory and timely manner. If, however, the EPA rules that the SEP was not completed satisfactorily or failed to spend at least the Minimum SEP Expenditure, Aluminum Extrusions could be responsible under the CAFO for additional penalties of up to $91,000.

Item 3.Item 4.
LEGAL PROCEEDINGS

        A consent order was entered into by the Environmental Protection Division, Department of Natural Resources, State of Georgia and The William L. Bonnell Company relating to alleged violations of the conditions and limitations contained in the National Pollutant Discharge Elimination System Permit No. GA0000507 (the “Permit”) for our wastewater treatment facility in Newnan, Georgia. The consent order was in effect through December 31, 2003. We agreed to pay penalties until the Permit issues associated with our wastewater treatment facility were resolved. We believe that the issues have been resolved and expect aggregate payments under the consent order to equal $160,000 (paid over a period ranging from the third quarter of 2001 to the first quarter of 2004).


Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.
PART II

        None.

PART IIItem 5.


Item 5.
MARKET FOR TREDEGAR’S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Prices of Common Stock and Shareholder Data

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol TG. We have no preferred stock outstanding. There were 39,286,079 shares of common stock held by 3,482 shareholders of record on December 31, 2006.
The following table shows the reported high and low closing prices of our common stock by quarter for the past two years.

      
 
2006
 2005 
  
High
 
Low
 High Low 
First quarter 
$
16.65
 
$
13.06
 $20.19 $16.08 
Second quarter  
16.89
  
13.84
  17.56  14.52 
Third quarter  
16.94
  
14.39
  16.67  12.09 
Fourth quarter  
23.32
  
16.31
  13.16  11.76 
The closing price of our common stock on February 20, 2007 was $23.86.

Dividend Information

We have paid a dividend every quarter since becoming a public company in July 1989. During 2006, 2005 and 2004, our quarterly dividend was 4 cents per share.
All decisions with respect to the declaration and payment of dividends will be made by the Board of Directors in its sole discretion based upon earnings, financial condition, anticipated cash needs, restrictions in our credit agreement and such other considerations as the Board deems relevant. See Note 8 beginning on page 59 for the restrictions contained in our credit agreement related to minimum shareholders’ equity required and aggregate dividends permitted.

Issuer Purchases of Equity Securities

During 2006, 2005 and 2004, we did not purchase any shares of our common stock in the open market. Under a standing authorization from our board of directors announced on August 8, 2006, we may purchase up to 5 million shares in the open market or in privately negotiated transactions at prices management deems appropriate.

Annual Meeting

Our annual meeting of shareholders will be held on May 17, 2007, beginning at 9:00 a.m. EDT at Lewis Ginter Botanical Garden, 1800 Lakeside Avenue, Richmond, Virginia, 23229. We expect to mail formal notice of the annual meeting, proxies and proxy statements to shareholders on or about March 28, 2007.


Comparative Tredegar Common Stock Performance

The following graph compares cumulative total shareholder returns for Tredegar, the S&P 600 Stock Index (an index comprised of companies with market capitalizations similar to Tredegar) and the Russell 2000 Index for the five years ended December 31, 2006. Tredegar is part of both the S&P SmallCap 600 Index and Russell 2000 Index.
Inquiries

Inquiries concerning stock transfers, dividends, dividend reinvestment, consolidating accounts, changes of address, or lost or stolen stock certificates should be directed to:

National City Bank
Dept. 5352
Corporate Trust Operations
P.O. Box 92301
Cleveland, Ohio 44101-4301
Phone: 800-622-6757
E-mail: shareholder.inquiries@nationalcity.com
All other inquiries should be directed to:

Tredegar Corporation
Investor Relations Department
1100 Boulders Parkway
Richmond, Virginia 23225
Phone: 800-411-7441
E-mail: invest@tredegar.com
Web site: www.tredegar.com


Quarterly Information

We do not generate or distribute quarterly reports to shareholders. Information on quarterly results can be obtained from our website. In addition, we file quarterly, annual and other information electronically with the SEC, which can be accessed on its website at www.sec.gov.

Market Prices of Common Stock and Shareholder Data

        Our common stock is traded on the New York Stock Exchange under the ticker symbol TG. We have no preferred stock outstanding. There were 38,176,821 shares of common stock held by 4,547 shareholders of record on December 31, 2003.

        The following table shows the reported high and low closing prices of our common stock by quarter for the past two years.


 
 
 2003
 2002
 
 High
 Low
 High
 Low
 
   First quarter  $15.08 $10.60 $19.75 $16.85    
   Second quarter   15.67  11.96  24.72  18.90    
   Third quarter   16.76  14.03  23.07  16.25    
   Fourth quarter   16.52  14.62  17.65  12.25    
 
 

Dividend Information

        We have paid a dividend every quarter since becoming a public company in July 1989. During 2001, 2002 and 2003, our quarterly dividend was 4 cents per share.

        All decisions with respect to payment of dividends will be made by the Board of Directors based upon earnings, financial condition, anticipated cash needs and such other considerations as the Board deems relevant. See Note 8 beginning on page 57 for minimum shareholders’ equity required and aggregate dividends permitted.

5



Annual Meeting

        Our annual meeting of shareholders will be held on April 29, 2004, beginning at 9:30 a.m. EDT at the University of Richmond’s Jepson Alumni Center in Richmond, Virginia. We expect to mail formal notice of the annual meeting, proxies and proxy statements to shareholders on or about March 8, 2004.

Inquiries

        Inquiries concerning stock transfers, dividends, dividend reinvestment, consolidating accounts, changes of address, or lost or stolen stock certificates should be directed to:

National City Bank
Dept. 5352
Corporate Trust Operations
P.O. Box 92301
Cleveland, Ohio 44193-0900
Phone: 800-622-6757
E-mail: shareholder.inquiries@nationalcity.com

        All other inquiries should be directed to:

Tredegar Corporation
Investor Relations Department
1100 Boulders Parkway
Richmond, Virginia 23225
Phone: 800-411-7441
E-mail: invest@tredegar.com
Web site: www.tredegar.com

Quarterly Information

        We do not generate or distribute quarterly reports to shareholders. Information on quarterly results can be obtained from our web site and from quarterly reports on Form 10-Q filed with the SEC.


Legal Counsel

Independent Registered Public Accounting Firm
Hunton & Williams LLP
Richmond, Virginia
Independent Accountants

PricewaterhouseCoopers LLP
Richmond, Virginia


Item Item 6.
SELECTED FINANCIAL DATA

        The tables that follow on pages 7-13 present certain selected financial and segment information for the eight years ended December 31, 2003.

6


The tables that follow on pages 10-16 present certain selected financial and segment information for the eight years ended December 31, 2006.
EIGHT-YEAR SUMMARY
           
Tredegar Corporation and Subsidiaries           
                  
Years Ended December 31 
2006
 2005 2004 2003 2002 2001 2000 1999 
(In Thousands, Except Per-Share Data)         
                  
Results of Operations (a):
             
Sales 
$
1,116,525
 $956,969 $861,165 $738,651 $753,724 $779,157 $879,475 $828,015 
Other income (expense), net  
1,444
(b) (544) (c) 15,604(d) 7,853  546  1,255  1,914  972 
   
1,117,969
  956,425  876,769  746,504  754,270  780,412  881,389  828,987 
Cost of goods sold  
944,839
(b) 810,621(c) 717,120(d) 606,242  582,658  618,323  706,817  648,254 
Freight  
28,096
  24,691  22,398  18,557  16,319  15,580  17,125  15,221 
Selling, general & administrative expenses  
68,360
(b) 64,723(c) 60,030(d) 53,341  52,252  47,954  47,321  44,675 
Research and development expenses  
8,088
  8,982  15,265  18,774  20,346  20,305  15,305  11,500 
Amortization of intangibles  
149
  299  330  268  100  4,914  5,025  3,430 
Interest expense  
5,520
  4,573  3,171  6,785  9,352  12,671  17,319  9,088 
Asset impairments and costs associated with exit and disposal activities  
4,080
(b) 16,334(c) 22,973(d) 11,426(e) 3,884(f) 16,935(g) 23,791(h) 4,628(i)
Unusual items  
-
  -  -  1,067(e) (6,147) (f) (971) (g) (762) (h) - 
   
1,059,132
  930,223  841,287  716,460  678,764  735,711  831,941  736,796 
Income from continuing operations before income taxes  
58,837
  26,202  35,482  30,044  75,506  44,701  49,448  92,191 
Income taxes  
20,636
(b) 9,973  9,222(d) 10,717  26,881  13,950(g) 18,135  32,728 
Income from continuing operations (a)  
38,201
  16,229  26,260  19,327  48,625  30,751  31,313  59,463 
Discontinued operations (a):                         
Income (loss) from venture capital investment activities  
-
  -  2,921  (46,569) (42,428) (16,627) 83,640  (4,626)
Income (loss) from operations of Molecumetics  
-
  -  -  891  (8,728) (5,768) (3,577) (2,189)
Income from discontinued energy segment  
-
  -  -  -  -  1,396  -  - 
Income (loss) from discontinued operations (a)  
-
  -  2,921  (45,678) (51,156) (20,999) 80,063  (6,815)
Net income (loss) 
$
38,201
 $16,229 $29,181 $(26,351)$(2,531)$9,752 $111,376 $52,648 
                          
Diluted earnings (loss) per share:                         
Continuing operations (a) 
$
.98
 $.42 $.68 $.50 $1.25 $.79 $.80 $1.54 
Discontinued operations (a)  
-
  -  .08  (1.19) (1.32) (.54) 2.06  (.18)
Net income (loss) 
$
.98
 $.42 $.76 $(.69)$(.07)$.25 $2.86 $1.36 
                          
Refer to notes to financial tables on page 16.
          

EIGHT-YEAR SUMMARY

Tredegar Corporation and Subsidiaries
 
Years Ended December 312003 2002 2001 2000 1999 1998 1997 1996 

(In thousands, except per-share data)
 
Results of Operations (a):                          
Sales  $738,651 $753,724 $779,157 $879,475 $828,015 $705,024 $586,466 $530,063 
Other income (expense), net   7,853  546  1,255  1,914  972  1,749  3,135  2,109 

    746,504  754,270  780,412  881,389  828,987  706,773  589,601  532,172 

Cost of goods sold   606,242  582,658  618,323  706,817  648,254  553,184  457,896  417,014 
Freight   18,557  16,319  15,580  17,125  15,221  10,946  8,045  6,548 
Selling, general & administrative expenses   53,341  52,252  47,954  47,321  44,675  37,127  36,659  39,477 
Research and development expenses   18,774  20,346  20,305  15,305  11,500  5,995  6,475  4,708 
Amortization of intangibles   268  100  4,914  5,025  3,430  205  50  256 
Interest expense   6,785  9,352  12,671  17,319  9,088  1,318  1,952  2,176 
Plant shutdowns, asset impairments  
    and restructurings   11,426(b) 3,884(c) 16,935(d) 23,791(e) 4,628(f) 664(g)   1,288(i)
Unusual items   1,067(b) (6,147)(c) (971)(d) (762)(e)   (765)(g) (2,250)(h) (12,715)(i)

    716,460  678,764  735,711  831,941  736,796  608,674  508,827  458,752 

Income from continuing operations  
    before income taxes   30,044  75,506  44,701  49,448  92,191  98,099  80,774  73,420 
Income taxes   10,717  26,881  13,950(d) 18,135  32,728  32,094(g) 28,339  25,553 

Income from continuing operations (a)   19,327  48,625  30,751  31,313  59,463  66,005  52,435  47,867 

Discontinued operations (a):  
    Income (loss) from venture capital  
       investment activities   (46,569) (42,428) (16,627) 83,640  (4,626) 394  8,883  1,369 
    Income (loss) from operations of Molecumetics   891  (8,728) (5,768) (3,577) (2,189) (2,243) (2,872) (4,201)
    Income from discontinued energy segment       1,396      4,713     

Income (loss) from discontinued operations (a)   (45,678) (51,156) (20,999) 80,063  (6,815) 2,864  6,011  (2,832)

Net income (loss)  $(26,351)$(2,531)$9,752 $111,376 $52,648 $68,869 $58,446 $45,035 

   
Diluted earnings (loss) per share:  
    Continuing operations (a)  $.50 $1.25 $.79 $.80 $1.54 $1.71 $1.33 $1.22 
    Discontinued operations (a)   (1.19) (1.32) (.54) 2.06  (.18) .07  .15  (.07)

    Net income (loss)  $(.69)$(.07)$.25 $2.86 $1.36 $1.78 $1.48 $1.15 

Refer to notes to financial tables on page 13.

7


EIGHT-YEAR SUMMARY
         
Tredegar Corporation and Subsidiaries         
                  
Years Ended December 31 
2006
 
2005
 
2004
 
2003
 
2002
 
2001
 
2000
 
1999 
(In Thousands, Except Per-Share Data)         
                  
Share Data:
                 
Equity per share 
$
13.15
 $12.53 $12.45 $11.72 $12.08 $12.53 $13.07 $9.88 
Cash dividends declared per share  
.16
  .16  .16  .16  .16  .16  .16  .16 
Weighted average common shares outstanding during the period  
38,671
  38,471  38,295  38,096  38,268  38,061  37,885  36,992 
Shares used to compute diluted earnings per share during the period  
38,931
  38,597  38,507  38,441  38,869  38,824  38,908  38,739 
Shares outstanding at end of period  
39,286
  38,737  38,598  38,177  38,323  38,142  38,084  37,661 
Closing market price per share:                         
High  
23.32
  20.19  20.25  16.76  24.72  21.70  32.00  32.94 
Low  
13.06
  11.76  13.00  10.60  12.25  15.30  15.00  16.06 
End of year  
22.61
  12.89  20.21  15.53  15.00  19.00  17.44  20.69 
Total return to shareholders (j)  
76.6
%
 (35.4)% 31.2% 4.6% (20.2)% 9.9% (14.9)% (7.3)%
                          
Financial Position:
                         
Total assets  
781,787
  781,758  769,474  753,025  837,962  865,031  903,768  792,487 
Cash and cash equivalents  
40,898
  23,434  22,994  19,943  109,928  96,810  44,530  25,752 
                          
Income taxes recoverable from sale of venture capital portfolio  
-
  -  -  55,000  -  -  -  - 
Debt  
62,520
  113,050  103,452  139,629  259,280  264,498  268,102  270,000 
Shareholders' equity (net book value)  
516,595
  485,362  480,442  447,399  462,932  477,899  497,728  372,228 
Equity market capitalization (k)  
888,256
  499,320  780,066  592,889  574,845  724,706  664,090  779,112 
                          
Refer to notes to financial tables on page 16.
               

EIGHT-YEAR SUMMARY

Tredegar Corporation and Subsidiaries
 
Years Ended December 312003 2002 2001 2000 1999 1998 1997 1996 

(In thousands, except per-share data)
 
Share Data:                          
Equity per share  $11.72 $12.08 $12.53 $13.07 $9.88 $8.46 $7.34 $5.79 
Cash dividends declared per share   .16  .16  .16  .16  .16  .15  .11  .09 
Weighted average common shares     outstanding during the period   38,096  38,268  38,061  37,885  36,992  36,286  36,861  36,624 
Shares used to compute diluted earnings  
    per share during the period   38,441  38,869  38,824  38,908  38,739  38,670  39,534  39,315 
Shares outstanding at end of period   38,177  38,323  38,142  38,084  37,661  36,661  37,113  36,714 
Closing market price per share:  
    High   16.76  24.72  21.70  32.00  32.94  30.67  24.65  15.13 
    Low   10.60  12.25  15.30  15.00  16.06  16.13  12.54  6.83 
    End of year   15.53  15.00  19.00  17.44  20.69  22.50  21.96  13.38 
Total return to shareholders (j)   4.6% (20.2)% 9.9% (14.9)% (7.3)% 3.1% 65.0% 87.8%
   
Financial Position:  
Total assets   753,025  837,962  865,031  903,768  792,487  457,178  410,937  341,077 
Cash and cash equivalents   19,943  109,928  96,810  44,530  25,752  25,409  120,065  101,261 
Income taxes recoverable from sale of  
    venture capital portfolio   55,000               
Debt   139,629  259,280  264,498  268,102  270,000  25,000  30,000  35,000 
Shareholders’ equity (net book value)   447,399  462,932  477,899  497,728  372,228  310,295  272,546  212,545 
Equity market capitalization (k)   592,889  574,845  724,706  664,090  779,112  824,873  814,940  491,050 

SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Net Sales (1)                 
                  
Segment 
2006
 
2005
 
2004
 
2003
 
2002
 
2001
 
2000
 
1999 
(In Thousands)                 
                  
Film Products 
$
511,169
 $460,277 $413,257 $365,501 $376,904 $382,740 $380,202 $342,300 
Aluminum Extrusions  
577,260
  471,749  425,130  354,593  360,293  380,387  479,889  461,241 
AFBS (formerly Therics)  
-
  252  380  -  208  450  403  161 
Total ongoing operations (m)  
1,088,429
  932,278  838,767  720,094  737,405  763,577  860,494  803,702 
Divested operations (a):                         
Fiberlux  
-
  -  -  -  -  -  1,856  9,092 
Total net sales  
1,088,429
  932,278  838,767  720,094  737,405  763,577  862,350  812,794 
Add back freight  
28,096
  24,691  22,398  18,557  16,319  15,580  17,125  15,221 
                          
Sales as shown in Consolidated Statements of Income 
$
1,116,525
 $956,969 $861,165 $738,651 $753,724 $779,157 $879,475 $828,015 
                          
Refer to notes to financial tables on page 16.
         

Refer to notes to financial tables on page 13.

8


SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Operating Profit
             
                  
Segment 
2006
 2005 2004 2003 2002 2001 2000 1999 
(In Thousands)                 
                  
Film Products:                         
Ongoing operations 
$
57,645
 $44,946 $43,259 $45,676 $72,307 $61,787 $47,112 $59,554 
Plant shutdowns, asset impairments and restructurings, net of gains on sale of assets and related income from LIFO inventory liquidations  
221
(b) (3,955) (c) (10,438) (d) (5,746) (e) (3,397) (f) (9,136) (g) (22,163) (h) (1,170) (i)
Unusual items  
-
  -  -  -  6,147(f) -  -  - 
Aluminum Extrusions:                         
Ongoing operations  
22,031
  19,302  22,637  15,117  27,304  25,407  52,953  56,501 
Plant shutdowns, asset impairments and restructurings, net of gains on sale of assets  
(1,434
) (b)
 122(c) (10,553) (d) (644) (e) (487) (f) (7,799) (g) (1,628) (h) - 
Gain on sale of land        -  1,385  -  -  -  - 
Other  
-
  -  7,316(d) -  -  -  -  - 
AFBS (formerly Therics):                         
Ongoing operations  
-
  (3,467) (9,763) (11,651) (13,116) (12,861) (8,024) (5,235)
Loss on investment in Therics, LLC  
(25
)
 (145) -  -  -  -  -  - 
Plant shutdowns, asset impairments and restructurings  
(637
) (b)
 (10,318) (c) (2,041) (d) (3,855) (e) -  -  -  (3,458) (i)
Unusual items  
-
  -  -  (1,067) (e) -  -  -  - 
Divested operations (a):                         
Fiberlux  
-
  -  -  -  -  -  (264) 57 
Unusual items  
-
  -  -  -  -  -  762(h) - 
Total  
77,801
  46,485  40,417  39,215  88,758  57,398  68,748  106,249 
Interest income  
1,240
  586  350  1,183  1,934  2,720  2,578  1,419 
Interest expense  
5,520
  4,573  3,171  6,785  9,352  12,671  17,319  9,088 
Gain on sale of corporate assets  
56
  61  7,560  5,155  -  -  -  712 
Loss from write-down of investment in Novalux  
-
(b) 5,000(c) -  -  -  -  -  - 
Stock option-based compensation costs  
970
  -  -  -  -  -  -  - 
Corporate expenses, net  
13,770
  11,357  9,674  8,724(e) 5,834  2,746(g) 4,559  7,101 
Income from continuing operations before income taxes  
58,837
  26,202  35,482  30,044  75,506  44,701  49,448  92,191 
Income taxes  
20,636
(b) 9,973  9,222  10,717  26,881  13,950(g) 18,135  32,728 
Income from continuing operations  
38,201
  16,229  26,260  19,327  48,625  30,751  31,313  59,463 
Income (loss) from discontinued operations (a)  
-
  -  2,921  (45,678) (51,156) (20,999) 80,063  (6,815)
                          
Net income (loss) 
$
38,201
 $16,229 $29,181 $(26,351)$(2,531)$9,752 $111,376 $52,648 
                          
Refer to notes to financial tables on page 16.
         

SEGMENT TABLES
Tredegar Corporation and Subsidiaries
 
Net Sales (l)

 
Segment2003 2002 2001 2000 1999 1998 1997 1996 

(In thousands)
 
Film Products  $365,501 $376,904 $382,740 $380,202 $342,300 $286,965 $298,862 $257,306 
Aluminum Extrusions   354,593  360,293  380,387  479,889  461,241  395,455  266,585  219,044 
Therics     208  450  403  161       

    Total ongoing operations (n)   720,094  737,405  763,577  860,494  803,702  682,420  565,447  476,350 
Divested operations (a):  
    Fiberlux         1,856  9,092  11,629  10,596  10,564 
    Molded Products                 21,131 
    Brudi                 13,380 
    Other (m)             29  2,378  2,090 

    Total net sales   720,094  737,405  763,577  862,350  812,794  694,078  578,421  523,515 
Add back freight   18,557  16,319  15,580  17,125  15,221  10,946  8,045  6,548 

Sales as shown in Consolidated  
    Statements of Income  $738,651 $753,724 $779,157 $879,475 $828,015 $705,024 $586,466 $530,063 

SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Identifiable Assets                 
                  
Segment 
2006
 
2005
 
2004
 
2003
 
2002
 
2001
 
2000
 
1999 
(In Thousands)                 
                  
Film Products 
$
498,961
 $479,286 $472,810 $422,321 $379,635 $367,291 $367,526 $360,517 
Aluminum Extrusions  
209,395
  214,374  210,894  185,336  176,631  185,927  210,434  216,258 
AFBS (formerly Therics)  
2,420
  2,759  8,613  8,917  10,643  9,931  9,609  9,905 
Subtotal  
710,776
  696,419  692,317  616,574  566,909  563,149  587,569  586,680 
General corporate  
30,113
  61,905  54,163  61,508  52,412  40,577  30,214  22,419 
Income taxes recoverable from sale of venture capital investment portfolio  
-
  -  -  55,000  -  -  -  - 
Cash and cash equivalents  
40,898
  23,434  22,994  19,943  109,928  96,810  44,530  25,752 
Identifiable assets from ongoing operations  
781,787
  781,758  769,474  753,025  729,249  700,536  662,313  634,851 
Divested operations (a):                         
Fiberlux  
-
  -  -  -  -  -  -  7,859 
Discontinued operations (a):                         
Venture capital  
-
  -  
-
  
-
  108,713  158,887  236,698  145,028 
Molecumetics  
-
  -  -  -  -  5,608  4,757  4,749 
Total 
$
781,787
 $781,758 $769,474 $753,025 $837,962 $865,031 $903,768 $792,487 
                          
Refer to notes to financial tables on page 16.
                         

Refer to notes to financial tables on page 13.

9


SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Depreciation and Amortization         
                  
Segment 
2006
 
2005
 
2004
 
2003
 
2002
 
2001
 
2000
 
1999 
(In Thousands)             
                  
Film Products 
$
31,847
 $26,673 $21,967 $19,828 $20,085 $22,047 $23,122 $18,751 
Aluminum Extrusions  
12,323
  11,484  10,914  10,883  10,506  11,216  9,862  9,484 
AFBS (formerly Therics)  
-
  437  1,300  1,641  463  2,262  1,782  1,195 
Subtotal  
44,170
  38,594  34,181  32,352  31,054  35,525  34,766  29,430 
General corporate  
111
  195  241  270  353  329  315  253 
Total ongoing operations  
44,281
  38,789  34,422  32,622  31,407  35,854  35,081  29,683 
Divested operations (a):                         
Fiberlux  
-
  -  -  -  -  -  151  498 
Discontinued operations (a):                         
Venture capital  
-
  -  -  -  -  -  18  22 
Molecumetics  
-
  -  -  -  527  2,055  1,734  1,490 
Total 
$
44,281
 $38,789 $34,422 $32,622 $31,934 $37,909 $36,984 $31,693 
                          
Capital Expenditures, Acquisitions and Investments
          
           
Segment  
2006
  2005  2004  2003  2002  2001  2000  1999 
(In Thousands)                 
                          
Film Products 
$
33,168
 $50,466 $44,797 $57,203 $24,063 $24,775 $53,161 $25,296 
Aluminum Extrusions  
7,381
  11,968  10,007  8,293  4,799  8,506  21,911  16,388 
AFBS (formerly Therics)  
-
  36  275  219  1,621  2,340  1,730  757 
Subtotal  
40,549
  62,470  55,079  65,715  30,483  35,621  76,802  42,441 
General corporate  
24
  73  572  93  60  519  384  606 
                          
Capital expenditures for ongoing operations  
40,573
  62,543  55,651  65,808  30,543  36,140  77,186  43,047 
Divested operations (a):                         
Fiberlux  
-
  -  -  -  -  -  425  812 
Discontinued operations (a):                         
Venture capital  
-
  -  -  -  -  -  86  - 
Molecumetics  
-
  -  -  -  793  2,850  2,133  1,362 
Total capital expenditures  
40,573
  62,543  55,651  65,808  31,336  38,990  79,830  45,221 
Acquisitions and other  
-
  -  1,420  1,579  -  1,918  6,316  215,227 
Novalux investment  
542
  1,095  5,000  -  -  -  -  - 
Venture capital investments  
-
  -  -  2,807  20,373  24,504  93,058  81,747 
Total 
$
41,115
 $63,638 $62,071 $70,194 $51,709 $65,412 $179,204 $342,195 
                          
Refer to notes to financial tables on page 16.
             

SEGMENT TABLES
Tredegar Corporation and Subsidiaries
 
Operating Profit

 
Segment2003 2002 2001 2000 1999 1998 1997 1996 

(In thousands)
 
Film Products:                          
    Ongoing operations  $45,676 $72,307 $61,787 $47,112 $59,554 $53,786 $50,463 $43,158 
    Plant shutdowns, asset impairments  
      and restructurings   (5,746)(b) (3,397)(c) (9,136)(d) (22,163)(e) (1,170)(f)     (1,288)(i)
    Unusual items     6,147(c)           1,968(i)

Aluminum Extrusions:  
    Ongoing operations   15,117  27,304  25,407  52,953  56,501  47,091  32,057  23,371 
    Plant shutdowns, asset impairments  
      and restructurings   (644)(b) (487)(c) (7,799)(d) (1,628)(e)   (664)(g)    
    Gain on sale of land   1,385               
    Unusual items                  

Therics:  
    Ongoing operations   (11,651) (13,116) (12,861) (8,024) (5,235)      
    Plant shutdowns, asset impairments  
      and restructurings   (3,855)(b)       (3,458)(f)      
    Unusual items   (1,067)(b)              

Divested operations (a):  
    Fiberlux         (264) 57  1,433  845  1,220 
    Molded Products                 1,011 
    Brudi                 231 
    Other (m)             (428) (267) (118)
    Unusual items         762(e)   765(g) 2,250(h) 10,747(i)

Total   39,215  88,758  57,398  68,748  106,249  101,983  85,348  80,300 
Interest income   1,183  1,934  2,720  2,578  1,419  2,279  4,959  2,956 
Interest expense   6,785  9,352  12,671  17,319  9,088  1,318  1,952  2,176 
Gain on sale of corporate assets   5,155        712       
Corporate expenses, net   8,724(b) 5,834  2,746(d) 4,559  7,101  4,845  7,581  7,660 

Income from continuing operations  
    before income taxes   30,044  75,506  44,701  49,448  92,191  98,099  80,774  73,420 
Income taxes   10,717  26,881  13,950(d) 18,135  32,728  32,094(g) 28,339  25,553 

Income from continuing operations   19,327  48,625  30,751  31,313  59,463  66,005  52,435  47,867 
(Loss) income from discontinued operations (a)   (45,678) (51,156) (20,999) 80,063  (6,815) 2,864  6,011  (2,832)

   
Net income (loss)  $(26,351)$(2,531)$9,752 $111,376 $52,648 $68,869 $58,446 $45,035 

NOTES TO FINANCIAL TABLES 

(In Thousands, Except Per-Share Data)

Refer to notes to financial tables on page 13.

10



SEGMENT TABLES
Tredegar Corporation and Subsidiaries
 
Identifiable Assets

 
Segment2003 2002 2001 2000 1999 1998 1997 1996 

(In thousands)
 
Film Products  $422,321 $379,635 $367,291 $367,526 $360,517 $132,241 $123,613 $116,520 
Aluminum Extrusions   185,336  176,631  185,927  210,434  216,258  201,518  101,855  83,814 
Therics   8,917  10,643  9,931  9,609  9,905       

    Subtotal   616,574  566,909  563,149  587,569  586,680  333,759  225,468  200,334 
General corporate   61,508  52,412  40,577  30,214  22,419  23,905  21,357  22,608 
Income taxes recoverable from sale of  
    venture capital investment portfolio   55,000               
Cash and cash equivalents   19,943  109,928  96,810  44,530  25,752  25,409  120,065  101,261 

    Identifiable assets from ongoing operations   753,025  729,249  700,536  662,313  634,851  383,073  366,890  324,203 
Divested operations (a):  
    Fiberlux           7,859  7,811  6,886  6,203 
    Other (m)               983  1,619 
Discontinued operations (a):  
    Venture capital     108,713  158,887  236,698  145,028  61,098  33,628  6,141 
    Molecumetics       5,608  4,757  4,749  5,196  2,550  2,911 

    Total  $753,025 $837,962 $865,031 $903,768 $792,487 $457,178 $410,937 $341,077 


Refer to notes to financial tables on page 13.

11



SEGMENT TABLES
Tredegar Corporation and Subsidiaries
 
Depreciation and Amortization

 
Segment2003 2002 2001 2000 1999 1998 1997 1996 

(In thousands)
 
Film Products  $19,828 $20,085 $22,047 $23,122 $18,751 $11,993 $10,947 $11,262 
Aluminum Extrusions   10,883  10,506  11,216  9,862  9,484  8,393  5,508  5,407 
Therics   1,641  463  2,262  1,782  1,195       

    Subtotal   32,352  31,054  35,525  34,766  29,430  20,386  16,455  16,669 
General corporate   270  353  329  315  253  254  313  390 

    Total ongoing operations   32,622  31,407  35,854  35,081  29,683  20,640  16,768  17,059 
Divested operations (a):  
    Fiberlux         151  498  544  515  507 
    Molded Products                 1,261 
    Brudi                 550 
    Other (m)               135  161 
Discontinued operations (a):  
    Venture capital         18  22  21     
    Molecumetics     527  2,055  1,734  1,490  1,260  996  780 

    Total  $32,622 $31,934 $37,909 $36,984 $31,693 $22,465 $18,414 $20,318 

   
Capital Expenditures, Acquisitions and Investments

   
Segment   2003  2002  2001  2000  1999  1998  1997  1996 

(In thousands)  
Film Products  $57,203 $24,063 $24,775 $53,161 $25,296 $18,456 $15,354 $11,932 
Aluminum Extrusions   8,293  4,799  8,506  21,911  16,388  10,407  6,372  8,598 
Therics   219  1,621  2,340  1,730  757       

    Subtotal   65,715  30,483  35,621  76,802  42,441  28,863  21,726  20,530 
General corporate   93  60  519  384  606  115  28  143 

    Capital expenditures for ongoing  
      operations   65,808  30,543  36,140  77,186  43,047  28,978  21,754  20,673 
Divested operations (a):  
    Fiberlux         425  812  1,477  530  417 
    Molded Products     ��            1,158 
    Brudi                 104 
    Other (m)               5  14 
Discontinued operations (a):  
    Venture capital         86    54     
    Molecumetics     793  2,850  2,133  1,362  3,561  366  1,594 

    Total capital expenditures   65,808  31,336  38,990  79,830  45,221  34,070  22,655  23,960 
Acquisitions and other   1,579    1,918  6,316  215,227  72,102  13,469   
Venture capital investments   2,807  20,373  24,504  93,058  81,747  35,399  20,801  3,138 

    Total  $70,194 $51,709 $65,412 $179,204 $342,195 $141,571 $56,925 $27,098 


Refer to notes to financial tables on page 13.

12



NOTES TO FINANCIAL TABLES

(In thousands, except per-share amounts)

(a)
In 2004, discontinued operations include a gain of $2,921 after-taxes primarily related to the reversal of a business and occupancy tax contingency accrual upon favorable resolution.  The accrual was originally recorded in connection with our venture capital investment operation. In 2003, we sold substantially all of our venture capital investment portfolio. In 2002, we ceased operations at Molecumetics, one of our biotechnology units, and sold its tangible assets. The operating results associated with the venture capital investment portfolio and Molecumetics have been reported as discontinued operations. In 2003, discontinued operations also include a gain of $891 after-taxes on the sale of intellectual property of Molecumetics and a loss on the divestiture of the venture capital investment portfolio of $46,269 after-taxes. Discontinued operations in 2002 also include a loss on the disposal of Molecumetics of $4,875 after-taxes.  In 1994, we divested our coal subsidiary, The Elk Horn Coal Corporation, and our remaining oil and gas properties. As a result of these events, we report the Energy segment as discontinued operations. In 2001, discontinued operations include a gain of $1,396 for the reversal of an income tax contingency accrual upon favorable conclusion of IRS examinations through 1997. The accrual was originally recorded in conjunction with the sale of The Elk Horn Coal Corporation. In 1998,We divested our coal subsidiary, The Elk Horn Coal Corporation, and our remaining oil and gas properties in 1994. As a result of these events, we report the Energy segment as discontinued operations include gains for the reimbursement of payments made by us to the United Mine Workers of America Combined Benefit Fund (the "Fund") and the reversal of a related accrued liability established to cover future payments to the Fund.operations. On March 28, 1996,April 10, 2000, we sold Molded Products. During the second quarter of 1996, we completed the sale of Brudi.Fiberlux. The operating results of Molded ProductsFiberlux were historically reported as part of the Plastics segment on a combined basis with Film Products and Fiberlux. Likewise, results for Brudi were combined with Aluminum Extrusions and reported as part of the Metal Products segment. Accordingly, results for Molded Products and Brudi have been included in continuing operations. We began reporting Molded Products and Brudi separately in our segment disclosures in 1995 after announcing our intent to divest these businesses. Fiberlux was sold on April 10, 2000.Products.

(b)Plant shutdowns, asset impairments and restructurings for 2006 include a net gain of $1,454 associated with the shutdown of the films manufacturing facility in LaGrange, Georgia, including a gain of $2,889 for related LIFO inventory liquidations (included in "Cost of goods sold" in the consolidated statements of income) and a gain of $261 on the sale of related property and equipment (included in "Other income (expense), net" in the consolidated statements of income), partially offset by severance and other costs of $1,566 and asset impairment charges of $130, charges of $1,020 for asset impairments in Film Products, a charge of $920 related to expected future environmental costs at the aluminum extrusions facility in Newnan, Georgia (included in "Cost of goods sold" in the consolidated statements of income), charges of $727 for severance and other employee-related costs in connection with restructurings in Film Products ($213) and Aluminum Extrusions ($514), and charges of $637 related to the estimated loss on the sub-lease of a portion of the AFBS (formerly Therics) facility in Princeton, New Jersey. Income taxes in 2006 include a reversal of a valuation allowance of $577 for deferred tax assets associated with capital loss carry-forwards recorded with the write-down of the investment in Novalux in 2005. Outside appraisal of the value of corporate assets, primarily real estate, performed in December 2006, indicates that realization of related deferred tax assets is more likely than not.
(c)Plant shutdowns, asset impairments and restructurings for 2005 include charges of $10,318 related to the sale or assignment of substantially all of AFBS' assets, charges of $2,221 related to severance and other employee-related costs in connection with restructurings in Film Products ($1,118), Aluminum Extrusions ($648) and corporate headquarters ($455, included in "Corporate expenses, net" in the operating profit by segment table), a charge of $2,101 related to the planned shutdown of the films manufacturing facility in LaGrange, Georgia, a net gain of $1,667 related to the shutdown of the films manufacturing facility in New Bern, North Carolina, including a gain on the sale of the facility ($1,816, included in "Other income (expense), net" in the consolidated statements of income), partially offset by shutdown-related expenses ($225), a net gain of $1,265 related to the shutdown of the aluminum extrusions facility in Aurora, Ontario, including a gain on the sale of the facility ($1,667, included in "Other income (expense), net" in the consolidated statements of income), shutdown-related costs ($1,111), partially offset by the reversal to income of certain accruals associated with severance and other costs ($709), a charge of $1,019 for process reengineering costs associated with the implementation of a global information system in Film Products (included in "Costs of goods sold" in the consolidated statements of income), a net charge of $843 related to severance and other employee-related costs associated with the restructuring of the research and development operations in Film Products (of this amount, $1,363 in charges for employee relocation and recruitment is included in "Selling, general & administrative expenses" in the consolidated statements of income); a gain of $653 related to the shutdown of the films manufacturing facility in Carbondale, Pennsylvania, including a gain on the sale of the facility ($630, included in "Other income (expense), net" in the consolidated statements of income), and the reversal to income of certain shutdown-related accruals ($23), charges of $583 for asset impairments in Film Products, a gain of $508 for interest receivable on tax refund claims (included in "Corporate expenses, net" in the operating profit by segment table and "Other income (expense), net" in the consolidated statements of income), a charge of $495 in Aluminum Extrusions, including an asset impairment ($597), partially offset by the reversal to income of certain shutdown-related accruals ($102), charges of $353 for accelerated depreciation related to restructurings in Film Products, and a charge of $182 in Film Products related to the write-off of an investment. As of December 31, 2005, the investment in Novalux, Inc. of $6,095 was written down to estimated fair value of $1,095. The loss from the write-down, $5,000, is included in "Other income (expense), net" in the consolidated statements of income.
(d)Plant shutdowns, asset impairments and restructurings for 2004 include a charge of $10,127 related to the planned shutdown of the aluminum extrusions plant in Aurora, Ontario, a charge of $3,022 related to the sale of the films business in Argentina, charges of $2,572 related to accelerated depreciation from plant shutdowns and restructurings in Film Products, charges of $2,459 related to severance and other costs associated with plant shutdowns in Film Products, charges of $1,547 for severance and other employee-related costs associated with restructurings in AFBS ($735), Film Products ($532) and Aluminum Extrusions ($280), a charge of $1,306 related to the estimated loss on the sub-lease of a portion of the AFBS facility in Princeton, New Jersey, a charge of $1,278 (of this amount, $59 for employee relocation is included in "Selling, general & administrative expenses" in the consolidated statements of income) related to severance and other employee-related costs associated with the restructuring of the research and development operations in Film Products and charges of $575 in Film Products and $146 in Aluminum Extrusions related to asset impairments. Income taxes in 2004 include a tax benefit of $4,000 related to the reversal of income tax contingency accruals upon favorable conclusion of IRS and state examinations through 2000. The other pretax gain of $7,316 included in the Aluminum Extrusions section of the operating profit by segment table is comprised of the present value of an insurance settlement of $8,357 (future value of $8,455) associated with environmental costs related to prior years, partially offset by accruals for expected future environmental costs of $1,041. The company received $5,143 of the $8,455 insurance settlement in 2004 and recognized receivables at present value for future amounts due ($1,497 received in February of 2005 and $1,717 received in February 2006). The gain from the insurance settlement is included in "Other income (expense), net" in the consolidated statements of income, while the accruals for expected future environmental costs are included in "Cost of goods sold."
(e)
Plant shutdowns, asset impairments and restructurings for 2003 include charges of $4,514 for severance costs in connection with restructurings in Film Products ($1,922), Aluminum Extrusions ($256), ThericsAFBS ($1,155) and corporate headquarters ($1,181, included in "Corporate expenses, net" in the operating profit by segment table), charges of $2,776 for asset impairments in the films business, charges of $2,700 related to the estimated loss on the sub-lease of a portion of the ThericsAFBS facility in Princeton, New Jersey, a charge of $611 primarily related to severance costs associated with the shutdown of the films manufacturing facilityplant in New Bern, North Carolina, a charge of $388 related to an early retirement program in our aluminum business and charges of $437 for additional costs incurred related to previously announced plant shutdowns in our films business. Unusual items for 2003 include a charge of $1,067 related to an adjustment for depreciation and amortization at ThericsAFBS based on our decision to suspend divestiture efforts.

(c)(f)Plant shutdowns, asset impairments and restructurings for 2002 include a charge of $1,457 for asset impairments in the films business, a charge of $1,007 for additional costs related to the shutdown of the films plant in Carbondale, Pennsylvania, a charge of $541 for additional costs related to the shutdown of the films plant in Tacoma, Washington, a charge of $487 for additional costs related to the shutdown of the aluminum extrusions plant in El Campo, Texas, and a charge of $392 for additional costs related to the 2000 shutdown of the films plant in Manchester, Iowa. Unusual items for 2002 include a net gain of $5,618 for payments received from P&G related to terminations and revisions to contracts and related asset write-downs,writedowns, and a gain of $529 related to the sale of assets.

(d)(g)Plant shutdowns, asset impairments and restructurings for 2001 include a charge of $7,799 for the shutdown of the aluminum extrusions plant in El Campo, Texas, a charge of $3,386 for the shutdown of the films plant in Tacoma, Washington, a charge of $2,877 for the shutdown of the films manufacturing facilityplant in Carbondale, Pennsylvania, a charge of $1,505 for severance costs related to further rationalization in the films business, and a charge of $1,368 for impairment of our films business in Argentina. Unusual items in 2001 include a gain of $971 (included in "Corporate expenses, net" in the operating profit by segment table) for interest received on tax overpayments. Income taxes in 2001 include a tax benefit of $1,904 related tofor the reversal of income tax contingency accruals upon favorable conclusion of IRS examinations through 1997.

(e)(h)Plant shutdowns, asset impairments and restructurings for 2000 include a charge of $17,870 related to excess capacity in the films business, a charge of $1,628 related to restructuring at our aluminum extrusions plant in El Campo, Texas, and a charge of $4,293 for the shutdown of the films plant in Manchester, Iowa. Unusual items in 2000 include a gain of $762 for the sale of Fiberlux.

(f)(i)
Plant shutdowns, asset impairments and restructurings for 1999 include a charge of $3,458 related to a write-off of in-process research and development expenses associated with the ThericsAFBS acquisition and a charge of $1,170 for the write-off of excess packaging film capacity.

(g)Plant shutdowns, asset impairments and restructurings for 1998 include a charge of $664 related to the shutdown of the powder-coat paint line in our aluminum extrusions plant in Newnan, Georgia. Unusual items for 1998 include a gain of $765 on the sale of APPX Software. Income taxes in 1998 include a tax benefit of $2,001 related to the sale, including a tax benefit for the excess of APPX Software’s income tax basis over its financial reporting basis.

(h)Unusual items for 1997 include a gain of $2,250 related to the redemption of preferred stock received in connection with the 1996 divestiture of Molded Products.

(i)Plant shutdowns, asset impairments and restructurings for 1996 include a charge of $1,288 related to the write-off of specialized machinery and equipment due to excess capacity in certain industrial packaging films. Unusual items for 1996 include a gain of $19,893 on the sale of Molded Products, a gain of $1,968 on the sale of a former films manufacturing site in Fremont, California, and a charge of $9,146 related to the loss on the divestiture of Brudi.

(j)
Total return to shareholders is computeddefined as the sum of the change in stock price during the year plus dividends per share, divided by the stock price at the beginning of the year.

(k)Equity market capitalization is the closing market price per share for the period timesmultiplied by the shares outstanding at the end of the period.

(l)Net sales represent gross sales less freight. Net sales is the measure used by the chief operating decision maker of each segment for purposes of assessing performance.

(m)Other includes primarily APPX Software (sold in 1998 - see (g)).

(n)Net sales include sales to P&G totaling $207,049$255,414 in 2003, $242,7602006, $236,554 in 20022005, and $235,236$226,122 in 2001.2004. These amounts include plastic film sold to others who converted the film into materials used in products manufactured by P&G.

13



Ite
Itemm 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONOPERATIONS

Executive Summary

        Tredegar is a manufacturer of plastic film and aluminum extrusions. We also are developing and marketing bone graft substitutes through our Therics subsidiary. Descriptions of our businesses are provided on pages 1-4.

        Our plastic films and aluminum extrusions businesses are quite different from Therics. They can be analyzed and valued by traditional measures of earnings and cash flow, and because they generate positive ongoing cash flow, they can be leveraged with borrowed funds. Therics is a start-up company whose prospects and value currently depend on its ability to develop, manufacture, market, sell and profit from its orthopaedic product line. Therics may never generate profits or positive cash flow. If it were a stand-alone, independent operation, it would typically be financed by private venture capital. More on Therics is provided in the business segment review on page 34.

        In Film Products, operating profit from ongoing operations and excluding volume shortfall payments was $45.7 million in 2003 compared to $63.1 million in 2002. This significant decline ($17.4 million or 28%) was almost entirely due to the loss of certain domestic backsheet business with P&G.

        In Aluminum Extrusions, operating profit from ongoing operations declined to $15.1 million in 2003 (volume of 228.2 million pounds) from $27.3 million in 2002 (volume of 234.3 million pounds). The $12.2 million or 45% decline in operating profit was driven by appreciation of the Canadian Dollar against the U.S. Dollar (unfavorable impact of $3.8 million), higher energy costs (up $3.2 million), lower volume (unfavorable impact of $1.7 million) and higher insurance costs (up $1.6 million).

        Our films and aluminum businesses showed little momentum as 2003 closed. First-quarter 2004 ongoing operating profit in films is expected to remain near 2003 fourth quarter-levels ($10.8 million). Profit growth will be difficult to achieve until we see a sustainable increase in sales. An important part of our strategy is the rollout of a new feminine pad topsheet for P&G for European markets, which began in 2003. We believe the rollout is progressing well, and we continue to invest in increased European capacity (see page 54 for net sales and identifiable assets by geographic area). We believe higher sales and profits will ultimately result from this and other new products as well as our capital investments (capital spending in 2003 was $57 million or $37 million in excess of depreciation) and global expansion over the last several years. More on Film Products is provided in the business segment review on pages 31-33.

        Our aluminum business continues to struggle under difficult market conditions, which are not likely to improve during the seasonally weak winter months. If our markets improve with the economy, we anticipate resumption in growth and increased profitability as we move into the spring. We have a high degree of operating leverage in Aluminum Extrusions at our current level of fixed costs and contribution margin, and we estimate that a 1% change in volume has a 4-5% impact on operating profit. More on Aluminum Extrusions is provided in the business segment review on pages 33-34.

        We sold our venture capital investment portfolio in the first quarter of 2003 for cash proceeds of approximately $21.5 million, and its activities have been reported as discontinued operations. The sale generated income taxes recoverable of approximately $55 million. We expect to receive these funds from the U.S. Internal Revenue Service (the “IRS”) in mid-2004. More on the sale of the venture capital portfolio is provided in the business segment review on pages 34-35.

        On October 17, 2003, we refinanced our debt. Key terms and borrowing capacity under our new credit facility are summarized in the financial condition review on pages 21-23.

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Forward-looking and Cautionary Statements

Critical Accounting Policies

        In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with generally accepted accounting principles. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our most critical accounting policies. These policies require management to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain.

Impairment and Useful Lives of Long-lived Identifiable Assets and Goodwill

        We regularly assess our long-lived identifiable assets for impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows. Any necessary impairment charges are recorded when we do not believe the carrying value of the long-lived asset will be recoverable. We also reassess the useful lives of our long-lived assets based on changes in our business and technologies.

        We assess goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1 of each year). We have made determinations as to what our reporting units are and what amounts of goodwill and intangible assets should be allocated to those reporting units.

        In assessing the recoverability of long-lived identifiable assets and goodwill, we must make assumptions regarding estimated future cash flows, discount rates and other factors to determine if impairment tests are met or the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record additional impairment charges. Based upon assessments performed, we recorded asset impairment losses for continuing operations related to long-lived identifiable assets of $2.8 million in 2003, $1.5 million in 2002 and $8.9 million in 2001.

Pension Benefits

        We have noncontributory and contributory defined benefit (pension) plans that have significant net pension income developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets and rate of future compensation increases. We are required to consider current market conditions, including changes in interest rates and plan asset investment returns, in determining these assumptions. Actuarial assumptions may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of net pension income recorded in future periods.

        The discount rate is used to determine the present value of future payments. In general, our liability increases as the discount rate decreases and vice versa. We reduced our discount rate in each of the last three years (the rate was 6.25% at the end of 2003, 6.75% at the end of 2002, 7.25% at the end of 2001 and 7.5% at the end of 2000) due to the decline in market interest rates. The compensation increase assumption affects the estimate of future payments, and was 4% at the end of 2003, 4.5% at the end of 2002 and 5% at the end of 2001. Lower compensation increases are expected as a result of lower inflation. A lower expected return on plan assets increases the amount of expense and vice versa. Decreases in the level of actual plan assets will also serve to increase the amount of pension expense. During 2003, the value of our plan assets increased due to improved general market conditions after declining in 2002, 2001 and 2000. Based on recent market and economic conditions and asset mix, we decreased our expected long-term return on plan assets to 8.4% in estimating our 2004 net pension income (our expected return was 8.6% in 2003 and 9% in 2002 and prior years).

        We currently expect net pension income to decline in 2004 by approximately $700,000 compared to 2003 after declining by $4.3 million in 2003 compared to 2002. We expect our minimum cash-funding requirement to be less than $500,000 in 2004.

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Deferred Tax Assets

        Many deductions for tax return purposes cannot be taken until the expenses are actually paid, rather than when the expenses are recorded for book purposes. In these circumstances, we accrue for the tax benefit expected to be received in future years if, in our judgment, it is more likely than not that we will receive such benefits. On a quarterly basis, we review our judgment regarding the likelihood the benefits of a deferred tax asset will be realized. During the periodic reviews, we must consider a variety of factors, including the nature and amount of the tax income and expense items, the anticipated timing of the ability to utilize the asset, the current tax statutes and the projected future earnings. We believe the realization of our deferred tax assets is reasonably assured. If circumstances change and management determines it is no longer more likely than not that an asset will be utilized, an offsetting valuation allowance would be recorded to reduce the asset and net earnings in that period.

Results of Operations

2003 versus 2002

Revenues.Overall, sales for 2003 decreased 2% compared with 2002. Net sales (sales less freight) for Film Products and Aluminum Extrusions declined primarily due to lower sales volume, partially offset by higher selling prices driven by higher raw material costs. For more information on net sales, see the business segment review beginning on page 31.

Operating Costs and Expenses. Gross profit (sales less cost of goods sold and freight) as a percentage of sales decreased to 15.4% in 2003 from 20.5% in 2002. In Film Products, an overall lower gross profit margin was driven primarily by the loss of certain domestic backsheet business (lower overall contribution to cover fixed costs), higher raw material prices and higher manufacturing costs on certain new products. In Aluminum Extrusions, the gross profit margin declined primarily due to the impact of the Canadian Dollar appreciating against the U.S. Dollar, higher energy costs, lower volume and higher insurance costs.

        As a percentage of sales, selling, general and administrative (“SG&A”) expenses increased to 7.2% compared with 6.9% in 2002, primarily due to lower sales, the appreciation of the Canadian Dollar and Euro against the U.S. Dollar, higher employee-related costs, and expenses associated with commencing the implementation of a new information system in Film Products.

        R&D expenses declined to $18.8 million in 2003 ($11.2 million for Therics and $7.6 million for Film Products) from $20.3 million in 2002 ($12.5 million for Therics and $7.8 million for Film Products). The decline was primarily due to cost reduction efforts at Therics.

        On June 16, 2003, we announced plans to close our films plant in New Bern, North Carolina (the “New Bern Plant”) in mid-2004. As a result of the shutdown, we expect to recognize charges totaling approximately $6.5 million ($4.2 million after taxes). During 2003, we recognized charges associated with this shutdown of $2.3 million ($1.5 million after taxes — see details below), and expect to recognize additional charges of approximately $4.2 million ($2.7 million after taxes) in the first half of 2004. Except for the New Bern Plant, previously announced shutdowns were substantially complete at December 31, 2003, and substantially all shutdown costs have been paid and the remaining accrued liabilities are not material.

        Losses associated with plant shutdowns, asset impairments and restructurings in 2003 totaled $11.4 million ($7.4 million after taxes) and included:


A fourth-quarter chargeFrom time to time, we may make statements that may constitute “forward-looking statements” within the meaning of $875,000 ($560,000 after taxes) for asset impairmentsthe “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on our then current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. Some of the risk factors that may cause such a difference are summarized on pages 3-5 and are incorporated herein.

Executive Summary

General
Tredegar is a manufacturer of plastic films business, including chargesand aluminum extrusions. Descriptions of $466,000 ($298,000 after taxes) relating to accelerated depreciationour businesses are provided on pages 1-5.
Income from continuing operations was $38.2 million (98 cents per diluted share) in 2006 compared with $16.2 million (42 cents per diluted share) in 2005. Gains on the sale of assets, atinvestment write-downs and other items and losses related to plant shutdowns, assets impairments and restructurings are described in results of operations beginning on page 20. The business segment review begins on page 33.

Film Products

In Film Products, net sales were $511.2 million in 2006, up 11.1% versus $460.3 million in 2005. Operating profit from ongoing operations was $57.6 million in 2006, up 28.3% compared to $44.9 million in 2005. Operating profit from ongoing operations excluding the New Bern Plant;

A fourth-quarter chargeestimated effects of $611,000 ($391,000 after taxes) for approximately 50%resin pass-through lag and year-end LIFO adjustments was $53.1 million in 2006, up 8.6% versus $48.9 million in 2005. Volume decreased to 253.5 million pounds in 2006 from 261.1 million pounds in 2005. We estimate that the growth in net sales excluding the effects of the total severance costspass-through of resin price changes and other employee-related costs expectedforeign exchange rate changes was approximately 6% in connection2006. Sales and operating profit growth in 2006 were driven primarily by increased sales of high-value surface protection films, elastic materials and new apertured topsheets, partially offset by lower sales of certain commodity barrier films that were dropped in conjunction with the shutdown of the New Bern Plant;

16



A third-quarter chargeplant in LaGrange, Georgia. The plant was shut down in the first half of $945,0002006 and had sales of commodity barrier films of approximately $20 million in 2005.

Film Products has index-based pass-through raw material cost agreements for the majority of its business. However, under certain agreements, changes in resin prices are not passed through for an average period of 90 days. Average quarterly prices of low-density polyethylene resin (“LDPE”) in the U.S. have been volatile over the last several years (see the chart on page 29). Resin prices in Europe, Asia and South America have exhibited similar trends.
Capital expenditures declined to $33.2 million in 2006 compared with $50.5 million in 2005. Capital expenditures in 2007 are expected to be approximately $35 million. Approximately half of the capital expenditures in 2006 related to expanding the production capacity for surface protection films. These films are primarily used to protect flat panel display components during fabrication, shipping and handling. Sales of surface protection films used primarily in this application totaled approximately $56 million in 2006, $30 million in 2005 and $16 million in 2004. Other capital expenditures in 2006 included capacity additions for elastic materials and a new information system, which was rolled out in U.S. locations. Depreciation expense was $31.7 million in 2006 compared with $26.5 million 2005, and is projected to be $34 million in 2007.

Aluminum Extrusions

In Aluminum Extrusions, net sales were $577.3 million in 2006, up 22.4% versus $471.7 million in 2005. Operating profit from ongoing operations was $22.0 million in 2006, up 14.0% compared to $19.3 million in 2005. Volume increased to 259.9 million pounds in 2006, up 5.5% compared to 246.4 million pounds in 2005. Growth in shipments in 2006 was driven by demand for extrusions used in commercial construction and hurricane protection products, partially offset by a decline in extrusions used in residential construction. The increase in operating profit during 2006 was primarily due to higher volume and selling prices and lower energy costs (energy costs were down $1.1 million), partially offset by appreciation of the Canadian Dollar ($605,0002.8 million) and higher charges for possible uncollectible accounts ($1.4 million).

Capital expenditures in 2006 were $7.4 million versus $12 million in 2005 and are expected to be approximately $14 million in 2007. Depreciation expense was $12.3 million in 2006 compared with $11.5 million in 2005, and is projected to be $12.8 million in 2007.

Other Developments

Consolidated net pension expense was $2.6 million in 2006, an increase of $5.3 million (9 cents per share after taxes) from the net pension income of $2.7 million recognized in 2005 (see Note 11 beginning on page 61 for more information). Most of this unfavorable change relates to a pension plan that is reflected in “Corporate expenses, net” in the segment operating profit table on page 13. We contributed $1.1 million to our pension plans in 2006 and expect required contributions of $1.1 million in 2007.

On October 26, 2006, we announced changes to our U.S. defined benefit (pension) and savings plans covering salaried and certain other employees. The changes had no impact on our net income or earnings per share in 2006. The changes relating to accelerated depreciationthe pension plan reduced our projected benefit obligation by approximately $10 million as of December 31, 2006. In 2007, the changes to the pension plan are expected to reduce our service cost, interest cost and amortization of prior service cost components of pension expense by approximately $600,000, $600,000 and $1.5 million, respectively, and the savings plan changes are expected to increase charges for company matching contributions by approximately $700,000. Based on these changes and other factors, we expect pension income of $2.0 million in 2007, a favorable change of $4.6 million or 7 cents per share after taxes compared with 2006.

Effective December 31, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No 87, 88, 106 and 132(R). In accordance with this new standard we recognized the funded status of our pension and other postretirement plans in our balance sheet as of December 31, 2006, which included plan assets at the New Bern Plant;

A third-quarter chargefair value in excess of $299,000,benefit obligations of $41.0 million. The adjustments in our balance sheet of our pension and other postretirement plans to recognize their funded status resulted in a second quarter chargedecrease in prepaid pension cost of $53,000$27.7 million, an increase in related liabilities of $3.3 million, a decrease in non-current deferred income tax liabilities of $11.4 million and a first-quarter chargedecrease in shareholders’ equity of $85,000 (collectively $280,000$19.6 million. Prepaid pension cost and related liabilities are included in “Other assets and deferred charges” and “Other noncurrent liabilities” in the consolidated balance sheets.

During the first quarter of 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”), which requires all stock-based compensation to be expensed and accounted for using a fair value-based method. The adoption of SFAS 123(R) and the granting of stock options in 2006 resulted in pretax charges for stock option-based compensation of $970,000 (2 cents per share after taxes) in 2006.

Strong cash flows from operations after investing activities and dividends of approximately $58 million and proceeds from the exercise of stock options of approximately $10 million resulted in a decline in net debt (total debt net of cash) of approximately $68 million in 2006. Consolidated net capitalization and other credit measures are provided in the financial condition section beginning on page 24.

Critical Accounting Policies

In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with generally accepted accounting principles. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our critical accounting policies. These policies require management to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain.


Impairment and Useful Lives of Long-lived Identifiable Assets and Goodwill

We regularly assess our long-lived identifiable assets for impairment when events or circumstances indicate that their carrying value may not be recoverable from future cash flows. Any necessary impairment charges are recorded when we do not believe the carrying value of the long-lived asset will be recoverable. We also reassess the useful lives of our long-lived assets based on changes in our business and technologies.

We assess goodwill for impairment when events or circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis (December 1 of each year). We have made determinations as to what our reporting units are and what amounts of goodwill and intangible assets should be allocated to those reporting units.

In assessing the recoverability of long-lived identifiable assets and goodwill, we must make assumptions regarding estimated future cash flows, discount rates and other factors to determine if impairment tests are met or the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record additional impairment charges. Based upon assessments performed, we recorded asset impairment losses for continuing operations related to long-lived identifiable assets of $1.2 million in 2006, $8.6 million in 2005 and $14.1 million in 2004.

Pension Benefits

We have noncontributory and contributory defined benefit (pension) plans that have significant net pension income developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets and rate of future compensation increases. We are required to consider current market conditions, including changes in interest rates and plan asset investment returns, in determining these assumptions. Actuarial assumptions may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of net pension income recorded in future periods.

The discount rate is used to determine the present value of future payments. The discount rate is the single rate that, when applied to expected benefit payments, provides a present value equal to the present value of expected benefit payments determined by using the AA-rated bond yield curve. In general, our liability increases as the discount rate decreases and vice versa. Our weighted average discount rate was 5.70% at the end of 2006, 5.70% at the end of 2005 and 6.00% at the end of 2004, with changes between periods due to changes in market interest rates. The compensation increase assumption affects the estimate of future payments, and was 4% at the end of 2006, 2005 and 2004. A lower expected return on plan assets increases the amount of expense and vice versa. Decreases in the level of actual plan assets will also serve to increase the amount of pension expense. During 2006, 2005, 2004 and 2003, the value of our plan assets increased due to improved general market conditions after declining in 2002, 2001 and 2000. Our expected long-term return on plan assets has been 8.4% since 2004 based on market and economic conditions and asset mix (our expected return was 8.6% in 2003 and 9% in 2002 and prior years). See page 65 for more information on expected long-term return on plan assets and asset mix.

See the executive summary beginning on page 17 for further discussion regarding the financial impact of our pension plans.

Income Taxes

Many deductions for tax return purposes cannot be taken until the expenses are actually paid, rather than when the expenses are recorded for book purposes. In these circumstances, we accrue for the tax benefit expected to be received in future years if, in our judgment, it is more likely than not that we will receive such benefits. In addition, the amount and timing of certain current deductions (which reduce taxes currently payable or generate income tax refunds) require interpretation of tax laws. In these circumstances, we estimate and accrue income tax contingencies for differences in interpretation that may exist with tax authorities. On a quarterly basis, we review our judgments regarding income tax contingency accruals and the likelihood the benefits of a deferred tax asset will be realized. During the periodic reviews, we must consider a variety of factors, including the nature and amount of the tax income and expense items, the current tax statutes, the current status of audits performed by tax authorities and the projected future earnings. We believe the realization of our net deferred tax assets is reasonably assured and that our income tax contingency accruals are adequate as measured under existing accounting standards. As circumstances change, our valuation allowances for deferred tax assets, income tax contingency accruals and net earnings are adjusted accordingly in that period.

Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position ("FSP") No. AUG AIR-1, Accounting for Planned Major Maintenance Activities. The FSP is effective for the first fiscal year beginning after December 15, 2006. The FSP eliminates the accrual method of accounting for major maintenance activities, but continues to permit the use of the direct expensing, built-in overhaul and deferral methods. The FSP also continues to require accruals or deferrals for interim periods of annual costs incurredthat clearly benefit two or more interim periods. We are evaluating the FSP and have not determined whether or not it will have a material effect on our financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, clarifying the accounting for uncertain tax positions. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006 with earlier application encouraged. We are evaluating the interpretation and have not determined if it will have a material effect on our financial position or results of operations.

Results of Operations

2006 versus 2005

Revenues. Sales in 2006 increased by 16.7% compared with 2005. Net sales (sales less freight) increased 11.1% in Film Products primarily due to growth in higher value-added products, including surface protection, elastic and apertured materials, and higher selling prices, which were driven by higher raw material costs. Net sales increased 22.4% in Aluminum Extrusions due to higher volume (up 5.5%) and selling prices. For more information on net sales and volume, see the executive summary beginning on page 17.

Operating Costs and Expenses. Gross profit (sales minus cost of goods sold and freight) as a percentage of sales increased to 12.9% in 2006 from 12.7% in 2005.  At Film Products, a higher gross profit margin was driven primarily by growth in higher value-added products, including surface protection, elastic and apertured materials, partially offset by the effects of higher average selling prices to cover higher average resin costs. Margins in Film Products also improved in 2006 versus 2005 from a favorable lag in the pass-through to customers of changes in resin costs and income from LIFO inventory liquidations of approximately $7.4 million in 2006 (including $2.9 million of income shown in “Cost of goods sold” in the consolidated statements of income from LIFO liquidations related to the shutdown of the films plantsfacility in Tacoma, Washington (the “Tacoma Plant”), Carbondale, Pennsylvania (the “Carbondale Plant”LaGrange, Georgia) compared with an unfavorable net lag and LIFO adjustment in 2005 of approximately $4.0 million. At Aluminum Extrusions, a lower gross profit margin was primarily due to the effects of higher selling prices to cover higher aluminum costs and appreciation of the Canadian Dollar, partially offset by higher volume and selling prices and lower energy costs. 
As a percentage of sales, selling, general and administrative (“SG&A”) expenses decreased to 6.1% in 2006 compared with 6.8% in 2005 due primarily to higher sales and Manchester, Iowa (the “Manchester Plant”);

A third-quarter chargethe divestiture of $322,000 ($206,000 after taxes) for severancesubstantially all of our interest in AFBS, Inc. (formerly known as Therics, Inc.) at the end of the second quarter of 2005. For more information on this divestiture, see the business segment review beginning on page 33.

R&D expenses declined to $8.1 million in 2006 from $9.0 million in 2005 primarily due to the divestiture of substantially all of our interest in AFBS.

Losses associated with plant shutdowns, asset impairments and other employee-related costsrestructurings, net of gains on sale of related assets and related income from LIFO inventory liquidations, in connection with restructurings in Film Products;

A third-quarter charge of $2.22006 totaled $1.9 million ($1.4 million after taxes) and a second-quarter charge of $549,000 ($357,000 after taxes) related to the estimated loss on the sub-lease of a portion of the Therics facility in Princeton, New Jersey;included:

A third-quarter charge of $256,000 ($163,000 after taxes) for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions;

A second-quarter charge of $3.9 million ($2.5 million after taxes) for severance and other employee-related costs in connection with restructurings in Film Products ($1.6 million before taxes), corporate headquarters ($1.2 million before taxes and included in “Corporate expenses, net” in the operating profit by segment table on page 10) and Therics ($1.2 million before taxes);
20

A second-quarter charge of $956,000 ($612,000 after taxes) for asset impairments in the films business, including charges of $312,000 ($200,000 after taxes) related to accelerated depreciation of assets at the New Bern Plant; and

A second-quarter charge of $388,000 ($248,000 after taxes) related to an early retirement program in Aluminum Extrusions.

        The loss from unusual items in 2003·

A fourth quarter net gain of $1.1$14,000 ($8,000 after taxes), a third-quarter net gain of $1 million ($694,000615,000 after taxes), a second-quarter net gain of $822,000 ($494,000 after taxes) relates toand a first-quarter pretax charge to adjust depreciation and amortization at Therics based on Tredegar’s decision to suspend divestiture efforts. Results for 2003 also includedof $404,000 ($243,000 after taxes) associated with the shutdown of the films manufacturing facility in LaGrange, Georgia, including a fourth-quarterpretax gain of $1.4$2.9 million ($886,000 after taxes)for related LIFO inventory liquidations (included in "Cost of goods sold" in the consolidated statements of income), severance and other costs of $1.6 million, asset impairment charges of $130,000 and a gain on the saledisposal of land at the facility in Richmond Hill, Ontario (total proceedsequipment of approximately $1.8 million), and gains totaling $5.2 million ($3.3 million after taxes) on the sale of corporate assets. The gains from the sale of corporate assets included:


A fourth-quarter gain of $2.6 million ($1.6 million after taxes) from the sale of 547,500 shares of Illumina, Inc. common stock (NASDAQ: ILMN) for total proceeds of $3.8 million;

A fourth-quarter gain of $355,000 ($229,000 after taxes) from the sale of 64,150 shares of Vascular Solutions, Inc. common stock (NASDAQ: VASC) for total proceeds of $403,000;

A third-quarter gain of $942,000 ($608,000 after taxes) from the sale of 200,000 shares of VASC for total proceeds of $1.1 million; and

A third-quarter gain of $1.3 million and fourth-quarter gain of $15,000 (collectively $841,000 after taxes) from the sale of corporate real estate (total proceeds of approximately $1.8 million).

        The gains from the sale of land and corporate assets are included$261,000 (included in “Other income (expense), net” in the consolidated statements of incomeincome);

·A third-quarter charge of $920,000 ($566,000 after taxes) related to expected future environmental costs at the aluminum extrusions facility in Newnan, Georgia (included in "Cost of goods sold" in the consolidated statements of income);
·A fourth quarter charge of $143,000 ($93,000 after taxes) and separatelya third quarter charge of $494,000 ($321,000 after taxes) related to the estimated loss on the sub-lease of a portion of the AFBS facility in Princeton, New Jersey;
·Second-quarter charges of $459,000 ($289,000 after taxes) and first-quarter charges of $268,000 ($170,000 after taxes) for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions ($514,000) and Film Products ($213,000); and
·First-quarter charges of $1 million ($876,000 after taxes) for asset impairments relating to machinery & equipment in Film Products.
In 2006, a pretax gain on the sale of public equity securities of $56,000 (proceeds also of $56,000) is included in “Other income (expense), net” in the consolidated statements of income and “Gain on the sale of corporate assets” in the segment operating profit table on page 13. Income taxes in 2006 include a reversal of a valuation allowance of $577,000 for deferred tax assets associated with capital loss carry-forwards recorded with the write-down of the investment in Novalux. Outside appraisal of the value of corporate assets, primarily real estate, performed in December 2006, indicates that realization of related deferred tax assets is more likely than not.

For more information on costs and expenses, see the executive summary beginning on page 17.

Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $1.2 million in 2006 and $586,000 in 2005. Interest income was up primarily due to a higher average yield earned on cash equivalents. Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year with the primary objectives being safety of principal and liquidity.
Interest expense increased to $5.5 million in 2006 compared with $4.6 million in 2005. Average debt outstanding and interest rates were as follows:
      
(In Millions) 
2006
 2005 
Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread:     
Average outstanding debt balance 
$
91.0
 $110.0 
Average interest rate  
5.9
%
 4.5%
Fixed-rate and other debt:       
Average outstanding debt balance 
$
4.4
 $5.9 
Average interest rate  
6.5
%
 5.5%
Total debt:       
Average outstanding debt balance 
$
95.4
 $115.9 
Average interest rate  
5.9
%
 4.6%
Income Taxes. The effective tax rate declined to 35.1% in 2006 compared with 38.1% in 2005 due to the numerous variances between years that are shown in the effective tax rate reconciliation provided in Note 14 of the notes to financial statements.


2005 versus 2004

Revenues. Overall, sales for 2005 increased 11.1% compared with 2004. Net sales (sales less freight) for Film Products increased 11.4% primarily due to sales of higher value-added products (mainly apertured, elastic and surface protection materials) and higher selling prices driven by higher raw material costs. Net sales for Aluminum Extrusions increased 11% primarily due to higher selling prices driven by higher raw material and energy costs and higher sales volume (volume was up 1.2%). For more information on net sales, see the business segment review beginning on page 33.

Operating Costs and Expenses. Gross profit (sales less cost of goods sold and freight) as a percentage of sales decreased to 12.7% in 2005 from 14.1% in 2004. At Film Products, the lower gross profit margin was driven primarily by higher resin costs, partially offset by higher overall gross profit from sales of higher value-added products. For more information on resin costs, see the executive summary beginning on page 17. At Aluminum Extrusions, the gross profit margin decreased in 2005 compared with 2004 primarily due to higher energy costs and strength of the Canadian Dollar, partially offset by price increases, higher volume and an energy surcharge.
As a percentage of sales, SG&A expenses decreased to 6.8% in 2005 compared with 7.0% in 2004 due to higher sales and the divestiture of substantially all of our interest in AFBS at the end of the second quarter of 2005, partially offset by the classification of certain costs at AFBS as operating versus R&D consistent with the commercialization of the company’s bone void filler products last year.

R&D expenses declined to $9.0 million in 2005 from $15.3 million in 2004. R&D spending at AFBS declined to $2.4 million in 2005 from $7.8 million in 2004 due to the divestiture of substantially all of our interest in AFBS at the end of the second quarter of 2005. Further contributing to lower R&D expenses at AFBS were cost reduction efforts and the classification of certain costs as operating versus R&D consistent with the commercialization of the company’s bone void filler products last year. R&D spending at Film Products dropped to $6.6 million in 2005 compared with $7.5 million in 2004 due to restructuring.

Losses associated with plant shutdowns, asset impairments and restructurings, net of gains on sale of related assets, in 2005 totaled $14.6 million ($9.4 million after taxes) and included:

·A fourth-quarter charge of $269,000 ($174,000 after taxes) and a second-quarter charge of $10 million ($6.5 million after taxes) related to the sale or assignment of substantially all of AFBS assets, including asset impairment charges of $5.6 million, lease-related losses of $3.3 million and severance (31 people) and other transaction-related costs of $1.4 million (see page 35 for additional information on the transaction);
·Fourth-quarter charges of $397,000 ($256,000 after taxes), third-quarter charges of $906,000 ($570,000 after taxes), second-quarter charges of $500,000 ($317,000 after taxes) and first-quarter charges of $418,000 ($266,000 after taxes) related to severance and other employee-related costs associated with restructurings in Film Products ($1.1 million before taxes) and Aluminum Extrusions ($648,000 before taxes) and at corporate headquarters ($455,000 before taxes; included in “Corporate expenses, net” in the segment operating profit table on page 10.

        For more13) (an aggregate of 21 people were affected by these restructurings);

·A fourth-quarter charge of $2.1 million ($1.3 million after taxes) related to the shutdown of the films manufacturing facility in LaGrange, Georgia, including asset impairment charges of $1.6 million and severance (15 people) and other costs of $486,000;
·A fourth-quarter gain of $1.9 million ($1.2 million after taxes), a third-quarter charge of $198,000 ($127,000 after taxes), a second-quarter net gain of $71,000 ($46,000 after taxes) and a first-quarter charge of $470,000 ($301,000 after taxes) related to the shutdown of the aluminum extrusions facility in Aurora, Ontario, including a $1.7 million gain on the sale of the facility (included in "Other income (expense), net" in the consolidated statements of income) and $1.1 million of shutdown-related costs partially offset by the reversal to income of certain accruals associated with severance and other costs of $709,000;
·A second-quarter charge of $27,000 ($16,000 after taxes) and a first-quarter gain of $1.6 million ($973,000 after taxes) related to the shutdown of the films manufacturing facility in New Bern, North Carolina, including a $1.8 million gain on the sale of the facility (included in "Other income (expense), net" in the consolidated statements of income), partially offset by shutdown-related expenses of $225,000;
·A first-quarter charge of $1 million ($653,000 after taxes) for process reengineering costs associated with the implementation of a global information on costssystem in Film Products (included in "Costs of goods sold" in the consolidated statements of income);


·Fourth-quarter charges of $118,000 ($72,000 after taxes), third-quarter charges of $595,000 ($359,000 after taxes), second-quarter charges of $250,000 ($150,000 after taxes) partially offset by a net first-quarter gain of $120,000 ($72,000 after taxes) related to severance and expenses, seeother employee-related accruals associated with the business segment review beginning on page 31.

Interest Incomerestructuring of the research and Expense.Interest income, whichdevelopment operations in Film Products (of this amount, $1.4 million in pretax charges for employee relocation and recruitment is included in SG&A expenses in the consolidated statements of income);

·A second-quarter gain of $653,000 ($392,000 after taxes) related to the shutdown of the films manufacturing facility in Carbondale, Pennsylvania, including a $630,000 gain on the sale of the facility (included in “Other income (expense), net” in the consolidated statements on income), and the reversal to income of income, was $1.2 million in 2003 and $1.9 million in 2002. Despite a higher average cash and cash equivalents balance, interest income was down due to lower average tax equivalent yield earned on cash equivalents (1% in 2003 and 1.9% in 2002). Our policy permits investmentcertain shutdown-related accruals of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year with the primary objectives being safety of principal and liquidity.

17


$23,000;

        Interest expense was $6.8 million·

Fourth-quarter charges of $583,000 ($351,000 after taxes) for asset impairments in 2003 (including aFilm Products;
·A net fourth-quarter charge of $737,000$495,000 ($310,000 after taxes) in Aluminum Extrusions, including an asset impairment of $597,000, partially offset by the reversal to income of certain shutdown-related accruals of $102,000;
·Fourth-quarter charges of $31,000 ($19,000 after taxes), third-quarter charges of $117,000 ($70,000 after taxes), second-quarter charges of $105,000 ($63,000 after taxes) and first-quarter charges of $100,000 ($60,000 after taxes) for accelerated depreciation related to restructurings in Film Products; and
·A fourth-quarter charge of $182,000 ($119,000 after taxes) in Film Products related to the write-off of deferred financing costs associated with credit facilities replaced) compared with $9.4 million in 2002. Capitalized interest costs were $593,000 in 2003 compared with $674,000 in 2002. Average debt outstanding and interest rates for 2003 and 2002 were as follows:

an investment.

 
 
 (In Millions)2003 2002 
 
 
   Floating-rate debt with interest charged on a rollover           
      basis at one-month LIBOR plus a credit spread:           
         Average outstanding debt balance  $180.8 $175.0    
          Average interest rate   2.0% 2.5%   
   Floating-rate debt fixed via interest rate swaps in the           
      second quarter of 2001 and maturing in the second           
      quarter of 2003:           
         Average outstanding debt balance  $28.9 $75.0    
          Average interest rate   5.4% 5.4%   
   Fixed-rate and other debt:           
         Average outstanding debt balance  $7.2 $7.3    
          Average interest rate   6.4% 7.2%   
 
 
   Total debt:           
         Average outstanding debt balance  $216.9 $257.3    
          Average interest rate   2.6% 3.5%   
 
 

Income Taxes. The effective tax rate from continuing operations was 35.7% in 2003 and 35.6% in 2002.

Discontinued Operations.On March 7, 2003, Tredegar Investments, Inc. (“Tredegar Investments”) reached definitive agreements to sell substantially all of its venture capital investment portfolio. For more information

Gain on the sale (including a summary of venture capital investment activities from 2001 through disposal in 2003), see the business segment review on pages 34-35. The results for venture capital investment activities have been reported as discontinued operations and results for prior periods have been reclassified to be consistent with the current presentation.

        Discontinued operations also include a gain of $1.4 million ($891 after taxes) in 2003 on the sale of intellectual property of Molecumetics (we ceased operations at Molecumetics on July 2, 2002). For more information on Molecumetics, see the business segment review on page 34.

2002 versus 2001

Revenues. Sales decreased by 3% in 2002 to $753.7 million compared with $779.2 million in 2001. Net sales (sales less freight) were lower in Aluminum Extrusions and Film Products. The lower net sales in Aluminum Extrusions were due primarily to a decline in volume due to continued weak economic conditions, especially in our end markets. Volume in Film Products was also down; however, the impact on net sales of lower overall volume was partially offset by revenue from volume shortfall payments. For more information on net sales, see the business segment review beginning on page 31.

Operating Costs and Expenses. Gross profit (sales minus cost of goods sold and freight) as a percentage of sales during 2002 increased to 20.5% from 18.6% in 2001, with higher margins realized in both Film Products and Aluminum Extrusions. The margin improvement in Film Products was driven by higher sales of new higher margin products combined with volume shortfall payments. The gross profit margin in Aluminum Extrusions was helped by the reduction of fixed costs that resulted primarily from the shutdown of our plant in El Campo, Texas (the “El Campo Plant”).

        SG&A expenses in 2002 were $52.3 million, compared with SG&A expenses of $48 million in 2001. The increase was primarily due to higher expenses in Film Products in support of additional marketing activities and personnel additions, particularly in Europe and Asia. SG&A expenses at the corporate level increased due to increased employee-related costs. These increases were offset slightly by a decrease in SG&A expenses in Aluminum Extrusions due to savings from the shutdown of the El Campo Plant, and lower expense related to bad debts. As a percentage of sales, SG&A expenses increased to 6.9% in 2002 from 6.2% in 2001.

18



        R&D expenses were flat at $20.3 million in 2002 and 2001. Spending at Therics was down slightly to $12.5 million in 2002 from $13 million in 2001, while spending in Film Products was up from $7.3 million in 2001 to $7.8 million in 2002.

        Losses associated with plant shutdowns, asset impairments and restructurings in 2002 totaled $3.9 million ($2.5 million after taxes) and primarily included:


A fourth-quarter charge of $1.5 million ($932,000 after taxes) for asset impairmentscorporate assets in Film Products;

A fourth-quarter charge of $392,000 ($251,000 after taxes) for additional costs incurred related to the 2000 shutdown of the Manchester Plant;

A fourth-quarter charge of $318,000 ($204,000 after taxes) for additional costs incurred related to the shutdown of the El Campo Plant;

A fourth-quarter charge of $259,000 ($166,000 after taxes) for additional costs incurred related to the shutdown of the Tacoma Plant;

A third-quarter charge of $178,000 ($114,000 after taxes) primarily for the relocation and employee-related costs in connection with the shutdown of the Carbondale Plant;

A second-quarter charge of $268,000 ($172,000 after taxes) primarily for relocation and employee-related costs in connection with the shutdown of the Tacoma Plant;

A first-quarter charge of $800,000 ($512,000 after taxes) for severance and other employee-related costs in connection with the shutdown of the Carbondale Plant; and

A first-quarter charge of $196,000 ($125,000 after taxes) for costs incurred in the transfer of business related to the shutdown of the El Campo Plant.

        The gain from unusual items in 2002 totaled $6.1 million ($3.9 million after taxes) and included:


A fourth-quarter net2005 includes a pretax gain of $5.6 million ($3.6 million after taxes) for payments of $11.7 million received from P&G related to terminations and revisions to contracts and related asset write-downs of $6.1 million; and

A fourth-quarter gain of $529,000 ($338,000 after taxes)$61,000 related to the sale of assets acquiredcorporate real estate. This gain is included in “Other income (expense), net” in the consolidated statements of income and separately shown in the segment operating profit table on page 13.

During the first quarter of 2005, we recognized a pretax gain for interest receivable on tax refund claims of $508,000 ($327,000 after taxes) (included in "Other income (expense), net" in the consolidated statements of income and "Corporate expenses, net" in the segment operating profit table on page 13).

During the fourth quarter of 2005, we recognized a pretax loss of $5 million ($3.8 million after taxes) from the write-down of our investment in Novalux, Inc. to estimated fair value at that time of $1.1 million. Novalux is a developer of laser technology for potential use in a prior acquisition.variety of applications. The reduction in estimated fair value was due to longer than anticipated delays both in bringing the company’s technology to market and in obtaining key development partnerships as well as liquidity issues. The loss from the write-down is included in “Other income (expense), net” in the consolidated statements of income and separately shown in the segment operating profit table on page 13. Subsequent to the first quarter of 2006, Novalux prospects improved and we invested an aggregate of $542,000 in May and September of 2006. As of December 31, 2006, our investment in Novalux was $6.6 million. Our carrying value in Novalux of $1.6 million and $1.1 million at December 31, 2006 and 2005, respectively, is included in “Other assets and deferred charges” in the consolidated balance sheet. Our voting ownership of Novalux as of December 31, 2006 is approximately 12% (11% on a fully diluted basis).

For more information on costs and expenses, see the business segment review beginning on page 33.

Interest Income and Expense. Interest income, which is included in “Other income (expense), net” in the consolidated statements of income, was $586,000 in 2005 and $350,000 in 2004. Interest income was up primarily due to a higher average yield earned on cash equivalents. Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year with the primary objectives being safety of principal and liquidity.


Interest expense increased to $4.6 million in 2005 compared with $3.2 million in 2004. Average debt outstanding and interest rates were as follows:
      
(In Millions) 
2005
 2004 
Floating-rate debt with interest charged on a rollover basis at one-month LIBOR plus a credit spread:     
Average outstanding debt balance 
$
110.0
 $105.2 
Average interest rate  
4.5
%
 2.7%
Fixed-rate and other debt:       
Average outstanding debt balance 
$
5.9
 $5.6 
Average interest rate  
5.5
%
 6.0%
Total debt:       
Average outstanding debt balance 
$
115.9
 $110.8 
Average interest rate  
4.6
%
 2.8%
Income Taxes. The effective tax rate from continuing operations was 38.1% in 2005, up from 26.0% in 2004. The lower rate in 2004 reflects a tax benefit of $4 million related to the reversal of income tax contingency accruals upon favorable conclusion of IRS and state examinations through 2000.

Financial Condition

Assets and Liabilities

Changes in operating assets and liabilities from December 31, 2005 to December 31, 2006 are summarized below:

        For more information on costs and expenses, see the business segment review beginning on page 31.

Interest Income and Expense. Interest income, which is included·

Accounts receivable increased $2.5 million (2.1%).
-Accounts receivable in “Other income (expense), net” in the consolidated statements of income, decreasedFilm Products increased by $6.5 million due mainly to $1.9 million from $2.7 million in 2001. Despite higher average cash and cash equivalents during the period, approximately $102 million in 2002 versus $72 million in 2001, interest incomesales. Days sales outstanding (“DSO”) was down due to lower average tax-equivalent yield earned on cash equivalents (approximately 1.9% in 2002 versus 3.8% in 2001).

19



        Interest expense decreased to $9.4 million in 2002 from $12.7 million in 2001 due primarily to lower average interest rates and lower average debt. Average debt outstanding and interest rates in 2002 and 2001 were as follows:


 
 
 (In Millions)2002 2001 
 
 
   Floating-rate debt with interest charged on a rollover           
      basis at one-month LIBOR plus a credit spread:           
         Average outstanding debt balance  $175.0 $203.0    
          Average interest rate   2.5% 5.0%   
   Floating-rate debt fixed via interest rate swaps in the           
      second quarter of 2001 and maturing in the second           
      quarter of 2003:           
         Average outstanding debt balance  $75.0 $47.0    
          Average interest rate   5.4% 5.4%   
   Fixed-rate and other debt:           
         Average outstanding debt balance  $7.3 $16.7    
          Average interest rate   7.2% 7.2%   
 
 
   Total debt:           
         Average outstanding debt balance  $257.3 $266.7    
          Average interest rate   3.5% 5.2%   
 
 

        The impact on interest expense of lower average interest rates and lower average debt was partially offset by lower capitalized interest ($674,000 in 2002 versus $1.8 million in 2001) from lower capital expenditures.

Income Taxes.The overall effective income tax rate for continuing operations was 35.6% in 2002 compared with 31.2% in 2001. The lower 2001 rate was attributable to the impact of the $1.9 million tax benefit related to the reversal of income tax contingency accruals upon favorable conclusion of IRS examinations. The effective income tax rate in 2001 without this benefit was 35.5%.

Discontinued Operations. Discontinued operations in 2002 include results for venture capital investment activities and Molecumetics. For more information, see the business segment review on pages 34-35.

Financial Condition

Assets

        Tredegar’s total assets decreased to $753 million46 at December 31, 2003, from $838 million2006 compared with 45 days at December 31, 2002, due primarily to the impact of the sale of substantially all of the venture capital investment portfolio and cash used to pay-down debt (see below for information on our debt refinancing), partially offset2005.

-Accounts receivable in Aluminum Extrusions decreased by capital expenditures in excess of depreciation, positive foreign currency translation adjustments associated$2.1 million. DSO was about 45, consistent with Canadian and European operations and appreciation of shares held in Vascular Solutions, Inc. (NASDAQ: VASC) and Illumina, Inc. (NASDAQ: ILMN). At December 31, 2003, we held 596,492 shares of VASC and 265,955 shares of ILMN with a combined market value of $5.4 million ($3.6 million at December 31, 2002). Approximately $55 million of the $61.5 million income taxes recoverable at December 31, 2003, relates to the carry-back of 2003 capital losses generated by the sale of the venture capital portfolio against gains realized in 2000. We expect to receive the income tax refund in mid-2004.

        The long-lived assets of Therics were separately classified in the accompanying balance sheet at December 31, 2002 as “Non-current assets of Therics held for sale” (approximately $10.4 million, including property, plant and equipment of $5.3 million and goodwill and other intangibles of $5.1 million). These assets were reclassified to operating asset categories based on our decision to support the 2004 rollout of its new line of orthopaedic products (see the business segment review on page 34 for more information).

20


last year.

Liabilities, Credit and Long-Term Obligations

        Total liabilities were $305.6

-Accounts receivable at Corporate declined by $1.9 million at December 31, 2003, down from $375 million at December 31, 2002, primarily due to debt reduction, partially offsetfunds received from an insurance settlement in February 2006.
·Inventories increased by an increase$6.5 million (10.4%).
-Inventories in the net noncurrent deferred income tax liability (noncurrent deferred income tax liabilities minus noncurrent deferred income tax assets). The net noncurrent deferred income tax liabilityFilm Products increased by $3.4 million. Inventory days climbed to $66.3 million43, up from 38 at December 31, 2003, from $27.4 million at December 31, 2002,September 30, 2006 due primarily to the reversal of deferred tax assets totaling approximately $35 million related to the sale of the venture capital portfolio.

        Debt outstanding at December 31, 2003 of $139.6 million consisted of $134.1 million borrowed under our new credit agreement (comprised of a term loan of $73.1 million and revolving credit borrowings of $61 million) and other debt of $5.5 million. The credit agreement, dated October 17, 2003, consists of a $175 million three-year revolving credit facility and a $75 million three-year term loan (a required term loan payment of $1.9 million was made on December 31, 2003). The amount available under the revolving credit facility is reducedbuild-up in inventory caused by $50 million on the earlier of the receipt of the approximately $55 million in income tax recoveries related to the sale of the venture capital portfolio or September 15, 2004. Term loan installments are due as follows:


 
 
 Term Loan Quarterly Repayment Schedule (In Thousands) 
 
 
   Installment due each quarter on March 31, June 30 and September 30, 2004  $1,875    
   Installment due each quarter on December 31, 2004, and March 31, June        
      30 and September 30, 2005   3,125    
   Installment due each quarter on December 31, 2005, and March 31 and        
      June 30, 2006   3,750    
   Final payment due on September 30, 2006   43,750    
 
 

        The credit spread over LIBOR and commitment fees charged on the unused amount under the credit agreement at various indebtedness-to-adjusted EBITDA levels is as follows:


 
 
 Pricing Under Credit Agreement (Basis Points) 
 
 
 Credit Spread Over LIBOR
   
 Indebtedness-to-
Adjusted EBITDA
Ratio
Revolver
($61 Million
Outstanding
at 12/31/03)
 Term Loan
($73 Million
Outstanding
at 12/31/03)
 Commitment
Fee
 
 
 
   > 2x but <= 3x   150  150  30    
   > 1x but <= 2x   125  125  25    
   <= 1x   100  100  20    
 
 

        At December 31, 2003, we had no interest rate swaps outstanding and the interest cost on debt was priced at one-month LIBOR plus the applicable credit spread of 125 basis points.

21



        The computations of adjusted EBITDA, adjusted EBIT, the leverage ratio and interest coverage ratio as defined in the credit agreement are presented below along with the related most restrictive covenants. Adjusted EBITDA and adjusted EBIT as defined in the credit agreement are not intended to represent cash flow from operations as defined by GAAP and should not be considered as either an alternative to net income or to cash flow.



Computations of Adjusted EBITDA, Adjusted EBIT, Leverage Ratio and
Interest Coverage Ratio as Defined in Credit Agreement Along with Related Most
Restrictive Covenants
For the Year Ended December 31, 2003 (In Thousands)

Computations of adjusted EBITDA and adjusted EBIT as defined in    
Credit Agreement:  
   Net loss  $(26,351)
   Plus:  
      After-tax losses related to discontinued operations   46,569 
      Total income tax expense for continuing operations   10,717 
      Interest expense   6,785 
      Depreciation and amortization expense for continuing operations   32,622 
      All non-cash losses and expenses, plus cash losses and expenses not  
         to exceed $10,000, for continuing operations that are classified as  
         unusual, extraordinary or which are related to plant shutdowns, asset  
         impairments and/or restructurings (cash-related of $8,652)   12,493 
   Minus:  
      After-tax income related to discontinued operations   (891)
      Total income tax benefits for continuing operations    
      Interest income   (1,183)
      All non-cash gains and income, plus cash gains and income not to  
         exceed $10,000, for continuing operations that are classified as unusual,  
         extraordinary or which are related to plant shutdowns, asset  
         impairments and/or restructurings (all cash-related)   (6,540)
   Plus or minus, as applicable, pro forma EBITDA adjustments associated  
      with acquisitions and asset dispositions   354 
 
 
   Adjusted EBITDA as defined in Credit Agreement   74,575 
   Less: Depreciation and amortization expense for continuing operations  
      (including pro forma for acquisitions and asset dispositions)   (32,729)
 
 
   Adjusted EBIT as defined in Credit Agreement  $41,846 
 
 
Indebtedness:  
   Total debt  $139,629 
   Face value of letters of credit   6,791 
 
 
   Indebtedness  $146,420 
 
 
Shareholders’ equity at December 31, 2003  $447,399 
Computations of leverage and interest coverage ratios as defined in  
Credit Agreement:  
   Leverage ratio (pro forma indebtedness-to-adjusted EBITDA)   1.96x 
   Interest coverage ratio (adjusted EBIT-to-interest expense)   6.17x 
Most restrictive covenants as defined in Credit Agreement:  
   Maximum permitted aggregate amount of dividends that can be paid  
      by Tredegar during the term of the Credit Agreement  $100,000 
   Minimum adjusted shareholders’ equity permitted (increases by  
      50% of net income generated after September 30, 2003)  $329,658 
   Maximum leverage ratio permitted:  
      Ongoing   3.00x 
      Pro forma for acquisitions   2.50x 
   Minimum interest coverage ratio permitted   2.50x 


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        Noncompliance with any one or more of the debt covenants may have an adverse effect on financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a waiver from the lenders. Renegotiation of the covenant through an amendment to the credit agreement may effectively cure the noncompliance, but may have an effect on financial condition or liquidity depending upon how the covenant is renegotiated.

        We are obligated to make future payments under various contracts as set forth below:



 Payments Due by Period

(In Millions)2004 2005 2006 2007 2008 Remainder Total 

Debt  $8.8 $17.4 $112.6 $.3 $.2 $.3 $139.6 
Operating leases:  
    Therics   1.4  1.4  1.5  1.6  1.6  3.6  11.1 
    Other   1.3  1.2  1.0  .9  .8    5.2 
Capital expenditure commitments *   7.7            7.7 

Total  $19.2 $20.0 $115.1 $2.8 $2.6 $3.9 $163.6 


* Represents contractual obligations for plant construction and purchases of real property and equipment. See Note 13 on page 63.

lower sales than expected. We believe that existing borrowing availability, our current cash balances, the income tax refund expected from the sale of the venture capital portfolio, and our cash flow from operations will be sufficient to satisfy our working capital, capital expenditure and dividend requirements for the foreseeable future.

        From time to time, we enter into transactions with third parties in connection with the sale of assets or businesses in which we agree to indemnify the buyers or third parties involved in the sale for certain liabilities or risks related to the assets or business. Also, in the ordinary course of our business, we may enter into agreements with third parties for the sale of goods or services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement. Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a deductible or basket. For these reasons, we are unable to estimate the maximum potential amount of the potential future liability under the indemnity provisions of these agreements. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. We disclose contingent liabilities if the probability of loss is reasonably possible and significant.

Shareholders’ Equity

        At December 31, 2003, we had 38,176,821 shares of common stock outstanding and a total market capitalization of $592.9 million, compared with 38,323,025 shares outstanding and a total market capitalization of $574.8 million at December 31, 2002.

        During 2003, we purchased 406,400 shares of our common stock for $5.2 million (an average price of $12.72 per share). During 2002, we purchased 110,700 shares of our common stock for $1.4 million (an average price of $12.91 per share). During 2001, we did not purchase any shares of common stock. Since becoming an independent company in 1989, we have purchased a total of 20.8 million shares for $122.8 million (an average price of $5.90 per share). Under a standing authorization from our board of directors, we may purchase an additional 3.4 million shares in the open market or in privately negotiated transactions at prices management deems appropriate.

Cash Flows

        The discussion below supplements the information presented in the consolidated statements of cash flows on page 44.

        In 2003, net cash provided by operating activities was $76.4 million compared with $65.3 million in 2002. The increase is due to a decrease in the level of primary net working capital (accounts receivable, inventories and accounts payable) partially offset by lower income from ongoing operations. Accounts receivable declined mainly from volume shortfall payments and contract terminations and revisions in Film Products accrued at the end of 2002 and received in 2003 (about $15 million in accounts receivable at the end of 2002 versus none at the end of 2003). Accounts payable increased due to the timing of payments. Inventories increased primarily due to the appreciation of the Euro and the Canadian Dollar.

23



        Net cash used in investing activities was $36.5 million in 2003 compared to $42.1 million in 2002. This decrease was due to positive cash flow from venture capital activities in 2003 versus negative cash flow in 2002 and higher proceeds from the sale of corporate assets and property disposals (see Note 15 on page 65 for more information), partially offset by higher capital expenditures and acquisitions (up $36.1 million). See the business segment review beginning on page 31 regarding capital expenditures in 2003 and 2002, the sale of the venture capital investment portfolio in 2003 and a related expected income tax refund.

        Net cash used in financing activities was $129.9 million in 2003 compared to $10.1 million in 2002. This increase was driven by scheduled debt payments and debt payments made in conjunction with our refinancing in 2003 (see pages 21-23 for more information).

        In 2002, net cash provided by operating activities was $65.3 million compared to $74.9 million in 2001. The decrease is due to an increase in working capital in 2002 versus a decrease in working capital in 2001, partially offset by higher income from manufacturing operations (up $8.3 million). The increase in working capital in 2002 was mainly due to higher receivables, primarily from volume shortfall payments and contract terminations and revisions in Film Products (up $14.7 million). The decrease in working capital in 2001 was mainly due to lower receivables (down $17.4 million), primarily from a 15% drop in volume in Aluminum Extrusionsunfavorable sales variance in the fourth quarter of 2001.

        Net cash used in investing activities was $42.1 million in 2002 compared2006 is due to $13.4 million in 2001. The increase was drivencustomer inventory corrections. Inventory days are still about 5 days below last year, which is indicative of the success achieved by negative cash flow from venture capital activities in 2002 versus positive cash flow in 2001, partially offset by lower capital expenditures and acquisitions (down $9.6 million).

        Net cash used in financing activities was about the same in 2002 and 2001.

        In 2001, net cash provided by operating activities was $74.9 million compared with $21.6 million in 2000. Ininventory management program initiated at the statementbeginning of cash flows, income taxes related to venture capital investment activities, divestitures and property disposals are classified in operating activities, while related gains and losses are effectively classified with proceeds in investing activities. In addition, income tax benefits on write-downs of venture capital investments typically lag financial reporting recognition. Consequently, despite pretax losses after operating expenses from venture capital investment activities of $26 million in 2001, cash provided by operating activities includes related income taxes paid of $14,000 for the year. Pretax gains after operating expenses for venture capital investment activities were $130.9 million in 2000 and cash used in operating activities includes related income taxes paid of $54 million. The remaining differences between 2001 and 2000 are primarily due to:


A decrease in working capital;

Increased spending at Therics and Molecumetics; and

Lower income from manufacturing operations (down $3.8 million).

        Net cash used in investing activities was $13.4 million in 2001 compared with net cash provided by investing activities of $5.2 million in 2000. This change was mainly driven by a decline in proceeds in excess of investments in venture capital of $52 million, partially offset by lower capital expenditures of $40.8 million. Capital expenditures in 2001 reflect the normal replacement of machinery and equipment and:


Press modernization at our aluminum extrusions plant in Kentland, Indiana;

A new films manufacturing facility in Shanghai, China;

Continued expansion of our films manufacturing capacity in Retsag, Hungary;

24


-

Machinery and equipment purchased for a new production line at our films plant in Terre Haute, Indiana; and

Machinery and equipment purchased to upgrade production lines at our films plant in Kerkrade, The Netherlands.

        Net cash used in financing activities was about the same in 2001 and 2000.

Quantitative and Qualitative Disclosures about Market Risk

        Tredegar has exposure to the volatility of interest rates, polyethylene and polypropylene resin prices, aluminum ingot and scrap prices, energy prices, foreign currencies and emerging markets. See the section on liabilities, credit and long-term obligations beginning on page 21 regarding credit agreements and interest rate exposures.

        Changes in resin prices, and the timing of those changes, could have a significant impact on profit margins in Film Products. Profit marginsInventories in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot and scrap prices as well as natural gas prices. There is no assurance of our ability to pass through higher raw material and energy costs to our customers.

        Resin costs for Film Products increased 26% in 2003. The changes in the price of low density polyethylene resin shown in the chart below (a primary raw material for Film Products) are generally reflective of the historical price changes of most of the resins that the company purchases.

        The price of resin is driven by several factors including supply and demand and the price of natural gas, ethane and ethylene. For a portion of the volume in Film Products, our most effective means of mitigating resin price fluctuations is by passing on resin price changes to customers. Some pass-through arrangements are on a time lag, where the impact of movement in resin prices is recovered in the subsequent quarter or quarters. Many of the mechanisms for pass-through with our customers are based on published prices. We estimate that pass-through arrangements have reduced the effects of resin price volatility by about 45% since the third quarter of 2001, with the remaining exposure resulting in a possible impact on quarterly operating profit of as much as $2$3.1 million.

25



        In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our exposure to aluminum price volatility under these fixed-price arrangements, which generally have a duration of not more than 12 months, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled deliveries. See Note 6 on page 55 for more information.

        In Aluminum Extrusions, we hedge from time-to-time a portion of our exposure to natural gas price volatility by entering into fixed-price forward purchase contracts with our natural gas suppliers. As of December 31, 2003, we had forward contracts with natural gas suppliers covering approximately 65% of our future needs through March 31, 2004, with an average fixed price of $5.38 per mmBtu. We estimate that, in an unhedged situation, every $1 per mmBtu per month change in the market price of natural gas has a $150,000 impact on the monthly operating profit of Aluminum Extrusions. Substantially higher prices of natural gas in 2003 resulted in a reduction in operating profit Inventory days were 35 in Aluminum Extrusions of approximately $3.2 million.

26


at December 31, 2006 compared with 32 days at December 31, 2005.

        We sell·

Net property, plant and equipment was up $2.9 million (0.9%) due primarily to customers in foreign markets through our foreign operations and through exports from U.S. plants. The percentage of sales and total assets for manufacturing operations related to foreign markets for 2003 and 2002 are as follows:


 
 
 Tredegar Corporation - Manufacturing Operations
Percentage of Net Sales and Total Assets Related to Foreign Markets
 
 
 
 2003
 2002
 
 % of Total
Net Sales*

 % Total
Assets -
 % of Total
Net Sales*

 % Total
Assets -
 
 Exports
From
U.S.

 Foreign
Oper-
ations

 Foreign
Oper-
ations*

 Exports
From
U.S.

 Foreign
Oper-
ations

 Foreign
Oper-
ations*

 
   Canada   4  17  13  3  18  13    
   Europe   4  12  15  3  9  9    
   Latin America   3  2  2  3  2  1    
   Asia   3  2  4  4  2  3    
 
 
   Total % exposure                       
       to foreign                       
       markets   14  33  34  13  31  26    
 
 
*The percentages for foreign markets are relative to Tredegar’s total net sales, and total assets from manufacturing operations (consolidated net sales and total assets from continuing operations excluding cash and cash equivalents, Therics, losses associated with plant shutdowns, asset impairments and restructurings, unusual items and gains from sale of assets).

        We attempt to match the pricing and cost of our products in the same currency (except in Canada where about 70% of our sales of aluminum extrusions are U.S. Dollar-based) and generally view the volatilityappreciation of foreign currencies and emerging markets, and the corresponding impact on earnings and cash flow, as part of the overall risk of operating in a global environment. Exports from the U.S. are generally denominated in U.S. Dollars. Our foreign currency exposure on income from foreign operations in Europe primarily relates to the Euro and the Hungarian Forint.

        The relatively high percentage of U.S. Dollar-priced sales in Canada is partly due to the shifting of a large portion of the customers previously served by the El Campo Plant in 2001. The resulting mismatch between the currency denomination of sales and costs causes lower U.S. Dollar translated profits when the Canadian Dollar appreciates since our costs are higher in U.S. Dollar equivalent terms while sales are mostly unaffected (the opposite effect occurs when the Canadian Dollar depreciates in value relative to the U.S. Dollar). We estimate that the significant appreciation of the Canadian Dollar relative to the U.S. Dollar during 2003 (up on average($9.1 million), capital expenditures of $40.6 million compared with depreciation of $44.1 million and asset impairments in Film Products of $1.2 million.

·Accounts payable increased by 10.8%$7.7 million (12.5%).
-Accounts payable days were 29 in 2003 and 17.5% when comparingFilm Products at December 31, 2003 and 2002 exchange rates) had an adverse impact on the operating profit2006 compared with 28 days at December 31, 2005.
-Accounts payable days were 27 in Aluminum Extrusions in 2003 of about $3.8 million. In Film Products, where we have been able to better match the currency of our sales and costs, we estimate that the significant appreciation of the Euro and Forint relative to the U.S. Dollar in 2003 (up on average by 16.6% and 13%, respectively, in 2003 and 16.7% and 7%, respectively, when comparing December 31, 2003 and 2002 exchange rates) had a positive impact on the operating profit in Film Products in 2003 of about $2.8 million.

27



        We are reviewing the loading of our aluminum extrusions plants in North America to optimize production mix and minimize cost in light of the increase in the U.S. Dollar equivalent cost structure of our plants in Canada.

Forward-looking and Cautionary Statements

        From time to time, we may make statements that may constitute “forward-looking statements” within the meaning of the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on our then current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. Factors that may cause such a difference include, but are not limited to the following:

General


Our future performance is influenced by costs incurred by our operating companies including, forexample, the cost of energy and raw materials.There is no assurance that we will be able to offset fully the effects of higher raw material costs through price increases. Further, there is no assurance that cost control efforts will be sufficient to offset any additional future declines in revenue or increases in energy, raw material or other costs.

Film Products


Film Products is highly dependent on sales associated with one customer, P&G. P&G comprised 29% of Tredegar’s net sales in 2003, 33% in 2002 and 31% in 2001. The loss or significant reduction of sales associated with P&G would have a material adverse effect on our business, as would delays in P&G rolling out products utilizing new technologies developed by Tredegar. While we have undertaken efforts to expand our customer base, there can be no assurance that such efforts will be successful, or that they will offset any delay or loss of sales and profits associated with P&G. See the business segment review on pages 31-33 for a discussion regarding the loss of P&G’s domestic backsheet business.

Growth of Film Products depends on our ability to develop and deliver new products, especially in thepersonal care market. Personal care products are now being made with a variety of new materials, replacing traditional backsheet and other components. While we have substantial technical resources, there can be no assurance that our new products can be brought to market successfully, or if brought to market successfully, at the same level of profitability and market share of replaced films. A shift in customer preferences away from our technologies, our inability to develop and deliver new profitable products, or delayed acceptance of our new products in domestic or foreign markets, could have a material adverse effect on our business.

28



Film Products operates in a field where our significant customers and competitors have substantialintellectual property portfolios. The continued success of this business depends on our ability not only to protect our own technologies and trade secrets, but also to develop and sell new products that do not infringe upon existing patents. Although we are not currently involved in any patent litigation, an unfavorable outcome of any such action could have a significant adverse impact on Film Products.

As Film Products expands its personal care business, we have greater credit risk that is inherent inbroadening our customer base.

Aluminum Extrusions


Sales volume and profitability of Aluminum Extrusions is cyclical and highly dependent on economicconditions of end-use markets in the United States and Canada, particularly in the construction,distribution and transportation industries.Our market segments are also subject to seasonal slowdowns during the winter months. From 1992 to the second quarter of 2000, profits in Aluminum Extrusions grew as a result of positive economic conditions in the markets we serve and manufacturing efficiencies. However, a slowdown in these markets in the second half of 2000 resulted in a 13% decline in sales volume and 28% decline in ongoing operating profit compared with the second half of 1999. The aluminum extrusions industry continued to be affected by poor economic conditions in 2001 and 2002. Our sales volume declined 23% and operating profit declined 49% in 2002 compared with 2000. In 2001, our sales volume declined 20% and operating profit declined 52% compared with 2000. The decline in ongoing operating profit during these periods at approximately two to three times the rate of the decline in sales volume illustrates the operating leverage inherent in our operations (fixed operating costs). Moreover, in 2003 higher energy and insurance costs and the appreciation of the Canadian Dollar against the U.S. Dollar had an adverse impact on operating profits. Any benefits associated with cost reductions and productivity improvements may not be sufficient to offset the adverse effects on profitability from pricing and margin pressure and higher bad debts that usually accompany a downturn.

The markets for our products are highly competitive with product quality, service and price being theprincipal competitive factors. As competitors increase capacity or reduce prices to increase business, there could be pressure to reduce prices to our customers. Aluminum Extrusions is under increasing domestic and foreign competitive pressures, including a growing presence of Chinese imports in a number of markets. This competition could result in loss of market share due to a competitor’s ability to produce at lower costs and sell at lower prices. There can be no assurance that we will be able to maintain current margins and profitability. Our continued success and prospects depend on our ability to retain existing customers and participate in overall industry cross-cycle growth.

Therics


Therics has incurred losses since inception, and we are unsure when, or if, it will become profitable. We are in the initial stages of commercializing certain orthobiologic products that have received FDA clearances. There can be no assurance that any of these products can be brought to market successfully.

The commercialization of new future products will require significant research, development, preclinical and clinical testing, and regulatory approvals. Where potential new products do not advance beyond early product development or do not demonstrate preclinical or clinical efficacy, they will not likely be commercialized. In addition, there can be no assurance that the FDA and other regulatory authorities will clear our products in a timely manner.

Our ability to develop and commercialize products will depend on our ability to internally developpreclinical, clinical, regulatory, manufacturing and sales, distribution and marketing capabilities, orenter into arrangements with third parties to provide those functions. We may not be successful in developing these capabilities or entering into agreements with third parties on favorable terms. To the extent we rely on third parties for these capabilities, our control over such activities may be reduced which could make us dependent upon these parties. The inability to develop or contract for these capabilities would significantly impair our ability to develop and commercialize products and thus our ability to become profitable.

29



Related factors that may impair our ability to develop and commercialize products include our reliance on pre-clinical and clinical data concerning our products and product introductions by competing companies. Likewise, in the event we are unable to manufacture our products efficiently, our ability to commercialize products and thus our operating results will be negatively affected.

We are relying to a significant degree on a sales force consisting of independent sales agents for the sale and marketing of our products. Market acceptance of our products, and thus our ability to become profitable, is largely dependent upon the competency of this sales force, whether they perform their duties in line with our expectations and their continued willingness to carry our products.

Our ability to develop and commercialize products will depend on market acceptance of those products. We are dependent upon the willingness of the medical community to learn about and try our products and then switch from currently used products to our products. In the event the community is reluctant or unwilling to utilize our products, our ability to generate profits will be significantly impaired. Commercial success is also dependent upon third party payor acceptance of our products.

Our ability to develop and commercialize certain products is dependent upon sufficient sources of supplyfor various raw materials. We may not be successful in procuring the types and quantities of raw materials necessary to commercialize certain orthobiologic products, which would significantly impair our ability to become profitable.

Future sales and profits are dependent upon obtaining and maintaining all necessary regulatory approvals. We have received clearances from the FDA for our TheriRidge™ and TheriLok™ (formerly named TheriFil™) products as medical devices, which approvals must be maintained in order to commercialize these products. Similar FDA approval will need to be obtained for any new products in order to market those products. In addition, depending upon where we intend to engage in marketing activities, we may need to obtain the necessary approvals from the regulatory agencies of the applicable jurisdictions. Failure to obtain and maintain the necessary regulatory approvals would significantly impair our ability to market our products and thus our ability to generate profits. Likewise, the marketing of our products and our profit generating capability would be impaired in the event approval of one or more of our products is limited or restricted by the FDA, either in conjunction with or subsequent to approval.

We are highly dependent on several principal members of our management and scientific staff. The loss of key personnel (or the inability to recruit key personnel) could have a material adverse effect on Therics’ business and results of operations, and could inhibit product research and development, commercialization and sales and marketing efforts. Failure to retain and recruit executive management in key areas, including sales and marketing and product research and development, could prevent us from achieving our business objectives.

We are dependent upon certain license rights, patents and other proprietary rights. Future success is dependent in part on our ability to maintain and enforce license, patent and other proprietary rights. Complex legal and technical issues define the strength and value of our intellectual property portfolio. While we own or license certain patents, the issuance of a patent does not establish conclusively either validity or enforceability.

The patent positions of biotechnology firms generally are highly uncertain and involve complex legal andfactual questions that can determine who has the right to develop a particular product. No clear policy has emerged regarding the breadth of claims covered by biotechnology patents in the U.S. The biotechnology patent situation outside the U.S. is even more uncertain and is currently undergoing review and revision in many countries. Changes in, or different interpretations of, patent laws in the U.S. and other countries might allow others to use our discoveries or to develop and commercialize our products without any compensation to us.

30



Our business exposes us to potential product liability claims. The testing, manufacturing, marketing and sale of our products subject us to product liability risk, an inherent risk for our industry. A successful product liability action against us may have a material adverse effect on our business. Moreover, present insurance coverage may not be adequate to cover potential future product liability claims.

Business Segment Review

        Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker of each segment for purposes of assessing performance.

Film Products

Net Sales. Net sales in Film Products were $365.5 million in 2003, $376.9 million in 2002 and $382.7 million in 2001. Net sales include revenue related to volume shortfall payments of $9.3 million in 2002 and $3 million in 2001 (none in 2003). While we continue to have volume shortfall agreements in place for certain products, the majority of payments received in 2002 relate to older supply agreements for which volume commitments have expired. We do not expect to receive significant revenues from volume shortfall payments in 2004. Total volume was 274.2 million pounds in 2003, 303.2 million pounds in 2002, and 310.4 million in 2001.

        Excluding the effects of volume shortfall payments, net sales and volume declines in 2003 were primarily due to the loss of certain domestic backsheet business with P&G. Domestic backsheet net sales excluding volume shortfall payments were approximately $45 million in 2003 and $95 million in 2002. Net sales related to the P&G domestic backsheet business (excluding volume shortfall payments) that was lost totaled approximately $16 million in 2003 (most of these sales occurred in the first quarter of 2003) and $63 million in 2002.

        Our domestic backsheet business has been declining since 2000, when related net sales to P&G and other customers were $136.1 million. During 2001 and 2002, we were successful in offsetting the negative impact of the decline by commercializing new diaper and feminine hygiene components for a growing global customer base. The decline accelerated significantly with the loss in 2003 of certain domestic backsheet business with P&G.

        We lost share in domestic backsheet as the market transitioned from products made from film to products made from laminates of film and nonwovens. We did not anticipate this market change and fell behind on the technology curve. Once initial business was lost, economies of scale began to increasingly favor the competition resulting in additional lost business. We have made a number of changes in response to losing this business, including increasing our marketing resources, conducting our own consumer research and selling to the broader marketplace. While we continue to sell backsheet products on a global basis, our primary prospects for growth relate to:


Apertured films and nonwoven materials used as topsheets in feminine hygiene products (for example, our new apertured topsheet product for P&G’s sanitary napkin business is currently being introduced in Europe);

Elastic films used in baby diapers (for example, our elastic fastening components improve overall comfort and fit);

Films used in adult incontinent products (for example, our elastic films and transfer layers meet the growing need for adult incontinent products that improve the lifestyles of an aging population);

Films used for surface protection (for example, our protective film is used to protect high-cost flat panel display components such as glass during fabrication, shipping and handling);

Films used for packaging (for example, our thin-gauge high density polyethylene film used as overwrap for tissue and towel products provides customers with cost savings and is readily printable and convertible on conventional processing equipment); and

Continued global expansion efforts.

31



        Excluding domestic backsheet sales, net sales in film Products grew at a compounded annual growth rate of 9.5% from 2000-2003 (6.7% on a volume basis).

Operating Profit. Operating profit in Film Products for 2003, 2002 and 2001 was as follows:



 (In Millions) 
 2003 2002 2001 

 
Operating profit as reported  $39.9 $75.1 $52.7 

Volume shortfall payments     9.3  3.0 
Unusual items:  
   Gain (loss) on terminations and revisions of contracts with P&G:  
      Proceeds from contract terminations and revisions     11.7   
      Related asset write-downs     (6.1)  

   Gain (loss) on terminations and revisions of contracts  
      with P&G     5.6   
Losses associated with plant shutdowns, asset  
   impairments and restructurings and other unusual items   (5.8) (2.9) (9.1)

    (5.8) 2.7  (9.1)

Operating profit excluding volume shortfall payments,  
   losses associated with plant shutdowns, asset  
   impairments and restructurings and unusual items  $45.7 $63.1 $58.8 


        Operating profit in 2001 includes goodwill amortization expense of $3.7 million (the required adoption of a new accounting standard (effective January 1, 2002) resulted in the elimination of goodwill amortization in 2002). Excluding the effects of volume shortfall payments, losses associated with plant shutdowns, asset impairments and restructurings, unusual items, and goodwill amortization, operating profit changes between years was primarily driven by the net sales and volume changes discussed in the sales section above. See the executive summary on page 14 for outlook.

Identifiable Assets.Identifiable assets in Film Products increased to $422.3 million26 days at December 31, 2003, from $379.62005.

·Accrued expenses increased by $5.9 million at December 31, 2002,(16.3%) due primarily to capital expendituresincentive compensation accruals (there was no significant incentive compensation earned in excess2005) and the timing of depreciation of $37.4 million (see the depreciation, amortizationpayments.
·Other noncurrent assets decreased and capital expenditures section below for more information) and appreciation of the Euro relative to the U.S. Dollar.

        Identifiable assets in Film Productsother noncurrent liabilities increased to $379.6 million at December 31, 2002, from $367.3 million at December 31, 2001 due primarily to the impactadoption of SFAS No. 158.

·Net deferred income tax liabilities in excess of assets increased by $3.2 million due to numerous changes between years in the balance of the following:

components shown in the December 31, 2006 and 2005 schedule of deferred income tax assets and liabilities provided in Note 14 of the notes to financial statements.

An increase

Net capitalization and indebtedness as defined under our revolving credit agreement as of December 31, 2006 are as follows:
  
Net Capitalization and Indebtedness as of Dec. 31, 2006 
(In Thousands) 
Net capitalization:   
Cash and cash equivalents $40,898 
Debt:    
$300 million revolving credit agreement maturing December 15, 2010
  60,000 
Other debt  2,520 
Total debt  62,520 
Debt net of cash and cash equivalents  21,622 
Shareholders' equity  516,595 
Net capitalization $538,217 
     
Indebtedness as defined in revolving credit agreement:    
Total debt $62,520 
Face value of letters of credit  5,907 
Liabilities relating to derivative financial instruments  116 
Indebtedness $68,543 

Under the revolving credit agreement, borrowings are permitted up to $300 million, and $239 million was available to borrow at December 31, 2006. The credit spread and commitment fees charged on the unused amount under the revolving credit agreement at various indebtedness-to-adjusted EBITDA levels are as follows:
 
Pricing Under Revolving Credit Agreement (Basis Points)
Indebtedness-to-Adjusted
EBITDA Ratio
 
Credit Spread
Over LIBOR
 
Commitment
Fee
> 2.50x but <= 3x 125 25
> 1.75x but <= 2.50x 100 20
> 1x but <=1.75x 87.5 17.5
<= 1x  75 15

At December 31, 2006, the interest rate on debt under the revolving credit agreement was priced at one-month LIBOR plus the applicable credit spread of 75 basis points.


The computations of adjusted EBITDA, adjusted EBIT, the leverage ratio and interest coverage ratio as defined in accounts receivablethe credit agreement are presented below along with the related most restrictive covenants. Adjusted EBITDA and adjusted EBIT as defined in the credit agreement are not intended to represent cash flow from operations as defined by GAAP and should not be considered as either an alternative to net income or to cash flow.
    
Computations of Adjusted EBITDA, Adjusted EBIT, Leverage Ratio and 
Interest Coverage Ratio as Defined in Credit Agreement Along with Related Most 
Restrictive Covenants 
For the Year Ended December 31, 2006 (In Thousands) 
Computations of adjusted EBITDA and adjusted EBIT as defined in   
Credit Agreement: 
Net income $38,201 
Plus:    
After-tax losses related to discontinued operations  - 
Total income tax expense for continuing operations  20,636 
Interest expense  5,520 
Charges related to stock option grants and awards accounted for under the fair value-based method  970 
Losses related to the application of the equity method of accounting  25 
Depreciation and amortization expense for continuing operations  44,281 
All non-cash losses and expenses, plus cash losses and expenses not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (cash-related of $3,850)  5,000 
Minus:    
After-tax income related to discontinued operations  - 
Total income tax benefits for continuing operations  - 
Interest income  (1,240)
All non-cash gains and income, plus cash gains and income not to exceed $10,000, for continuing operations that are classified as unusual, extraordinary or which are related to plant shutdowns, asset impairments and/or restructurings (cash-related of $317)  (3,206)
Plus or minus, as applicable, pro forma EBITDA adjustments associated with acquisitions and asset dispositions  - 
Adjusted EBITDA as defined in Credit Agreement  110,187 
Less: Depreciation and amortization expense for continuing operations (including pro forma for acquisitions and asset dispositions)  (44,281)
Adjusted EBIT as defined in Credit Agreement $65,906 
Indebtedness:    
Total debt $62,520 
Face value of letters of credit  5,907 
Indebtedness $68,427 
Shareholders' equity at December 31, 2006 $516,595 
Computations of leverage and interest coverage ratios as defined in    
Credit Agreement:    
Leverage ratio (indebtedness-to-adjusted EBITDA)  .62x 
Interest coverage ratio (adjusted EBIT-to-interest expense)  11.94x 
Most restrictive covenants as defined in Credit Agreement:    
Maximum permitted aggregate amount of dividends that can be paid by Tredegar during the term of the Credit Agreement ($100,000 plus 50% of net income generated after October 1, 2005) $119,546 
Minimum adjusted shareholders' equity permitted ($351,918 plus 50% of net income generated after October 1, 2005) $371,464 
Maximum leverage ratio permitted:    
Ongoing  3.00x 
Pro forma for acquisitions  2.50x 
     
Minimum interest coverage ratio permitted  2.50x 

Noncompliance with any one or more of $12.9 million primarily duethe debt covenants may have a material adverse effect on financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to receivablesobtain a waiver from the lenders. Renegotiation of $15.3 millionthe covenant(s) through an amendment to the credit agreement may effectively cure the noncompliance, but may have an effect on financial condition or liquidity depending upon how the covenant is renegotiated.
We are obligated to make future payments under various contracts as set forth below:
                
  Payments Due by Period 
(In Millions) 2007
 
2008
 
2009
 
2010
 
2011
 
Remainder
 
Total 
Debt $.7 $.5 $.5 $60.4 $.2 $.2 $62.5 
Operating leases:                      
AFBS (formerly Therics)  1.6  1.6  1.6  1.6  .4  -  6.8 
Other  2.1  1.6  .5  .5  .3  .8  5.8 
Capital expenditure commitments *  6.0  -  -  -  -  -  6.0 
Total $10.4 $3.7 $2.6 $62.5 $.9 $1.0 $81.1 
*Represents contractual obligations for plant construction and purchases of real property and equipment. See Note 13 on page 66.
We believe that existing borrowing availability, our current cash balances and our cash flow from operations will be sufficient to satisfy our working capital, capital expenditure and dividend requirements for the foreseeable future.

From time to time, we enter into transactions with third parties in connection with the sale of assets or businesses in which we agree to indemnify the buyers or third parties involved in the sale for certain liabilities or risks related to the assets or business. Also, in the ordinary course of our business, we may enter into agreements with third parties for the sale of goods or services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement. Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a deductible or basket. For these reasons, we are unable to estimate the maximum potential amount of the potential future liability under the indemnity provisions of these agreements. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. We disclose contingent liabilities if the probability of loss is reasonably possible and significant.

Shareholders’ Equity

At December 31, 2006, we had 39,286,079 shares of common stock outstanding and a total market capitalization of $888.3 million, compared with 38,737,016 shares of common stock outstanding and a total market capitalization of $499.3 million at December 31, 2005.
During 2006, 2005 and 2004, we did not purchase any shares of our common stock in the open market. Under a standing authorization from our board of directors, we may purchase up to 5 million shares in the open market or in privately negotiated transactions at prices management deems appropriate.

Cash Flows

The discussion in this section supplements the information presented in the consolidated statements of cash flows on page 44.

Cash provided by operating activities was $104.6 million in 2006 compared with $53.7 million in 2005. The increase is due primarily to improved operating results, higher deferred income taxes and lower incremental working capital investment (see assets and liabilities section on page 24 for discussion of working capital trends).

Cash used in investing activities was $40.6 million in 2006 compared with $55.0 million in 2005 due primarily to lower capital expenditures. Capital expenditures in 2006 in Film Products of $33.2 million (down from $50.5 million in 2005 and $1.5 million in excess of 2006 depreciation) primarily included the continued expansion of capacity for surface protection films and elastic materials, a new information system and normal replacement of machinery and equipment. Capital expenditures in Aluminum Extrusions were $7.4 million in 2006 compared to $12 million in 2005 and depreciation in 2006 of $12.3 million. See the executive summary beginning on page 17 and the business segment review beginning on page 33 for more information on capital expenditures.


Net cash flow used in financing activities was $47.0 million in 2006 and included the use of cash generated from operating activities in excess of investing activities to pay dividends and repay amounts due for terminations and revisionsoutstanding under our revolving credit facility. In addition, financing activities in 2006 included proceeds from the exercise of contracts and volume shortfalls; and

An increasestock options of $9.7 million, including $8.5 million in other assetsthe fourth quarter of $4.6 million primarily2006 due to an increase in the pension assetcompany’s stock price and certain stock option expiration dates in early 2007.

Cash provided by operating activities was $53.7 million in 2005 compared with $93.8 million in 2004. The decrease is due primarily to the income tax refund received in 2004 related to the sale in 2003 of our venture capital portfolio, partially offset by lower working capital investment in 2005 compared with 2004.

Cash used in investing activities was $55.0 million in 2005 compared with $52.2 million in 2004. The change is primarily attributable to higher capital expenditures (up $6.9 million) and lower proceeds from the sale of assets and property disposals (down $2.2 million), partially offset by a small acquisition in Film Products in 2004 ($1.4 million) and higher investment in Novalux, Inc. in 2004 ($5.0 million invested in 2004 compared with $1.1 million invested in 2005).

Capital expenditures in 2005 included the normal replacement of machinery and equipment and primarily:

·Continued expansion of capacity for apertured and elastic materials and surface protection films and a new global information system in Film Products; and
·Moving and upgrading the largest aluminum extrusion press at the facility shut down in Aurora, Ontario to the plant in Pickering, Ontario, and enlargement of the Pickering facility.

Net cash provided by financing activities was $3.6 million in 2005 and included the refinancing of our debt in December 2005 (see the assets and liabilities section beginning on page 24 for more information).

In 2004, cash provided by operating activities was $93.8 million compared with $76.4 million in 2003. The increase is due primarily to the income tax refund related to the sale of the venture capital portfolio (see the business segment review beginning on page 33) partially offset by higher primary working capital (accounts receivable, inventories and accounts payable) needed to support higher sales.

Cash used in investing activities was $52.2 million in 2004 compared with $38.5 million in 2003. The change is primarily attributable to proceeds from the sale of venture capital investments, net of investments made, of $18.7 million in 2003, and the $5 million investment in Novalux, Inc. made in the third quarter of 2004, partially offset by lower capital expenditures of $10.2 million.

Net cash used in financing activities was $40.5 million in 2004 compared with $129.9 million in 2003. In 2004, we used $50 million from tax refunds related to the sale of the venture capital portfolio to pay down debt. Additional net borrowings of $13.8 million related primarily to capital expenditures and higher primary working capital needed to support higher sales. Net cash used in financing activities in 2003 was driven by scheduled debt payments and debt payments made in conjunction with our refinancing in 2003.

Quantitative and Qualitative Disclosures about Market Risk

Tredegar has exposure to the volatility of interest rates, polyethylene and polypropylene resin prices, aluminum ingot and scrap prices, energy prices, foreign currencies and emerging markets. See the assets and liabilities section beginning on page 24 regarding credit agreements and interest rate exposures.

Changes in resin prices, and the timing of those changes, could have a significant impact on profit margins in Film Products. Profit margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot and scrap prices as well as natural gas prices (natural gas is the principal energy source used to operate our casting furnaces). There is no assurance of our ability to pass through higher raw material and energy costs to our customers.


See the executive summary beginning on page 17 and the business segment review beginning on page 33 for discussion regarding the impact of the lag in the pass-through of resin price changes. The volatility of average quarterly prices of low density polyethylene resin in the U.S. (a primary raw material for Film Products) are shown in the chart below.



Resin prices in Europe, Asia and South America have exhibited similar trends. The price of resin is driven by several factors including supply and demand and the price of oil, ethylene and natural gas. To address fluctuating resin prices, Film Products has index-based pass-through raw material cost agreements for the majority of its business. However, under certain agreements, changes in resin prices are not passed through for an average period of 90 days.
In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our exposure to aluminum price volatility (see the chart below) under these fixed-price arrangements, which generally have a duration of not more than 12 months, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled deliveries. See Note 6 on page 55 for more information.

In Aluminum Extrusions, we hedge from time-to-time a portion of our exposure to natural gas price volatility by entering into fixed-price forward purchase contracts with our natural gas suppliers. We estimate that, in an unhedged situation, every $1 per mmBtu per month change in the market price of natural gas has a $150,000 impact on the monthly operating profit in Aluminum Extrusions. Substantially higher energy costs (primarily natural gas) in 2005 resulted in a reduction in operating profit in Aluminum Extrusions of approximately $7 million in 2005 compared with 2004. In September 2005, we announced an energy surcharge for our aluminum extrusions business in the U.S. to be applied when the previous quarter’s NYMEX natural gas average settlement price is in excess of $8.85 per mmBtu.



We sell to customers in foreign markets through our foreign operations and through exports from U.S. plants. The percentage of sales and total assets for manufacturing operations related to foreign markets for 2006 and 2005 are as follows:
  
Tredegar Corporation - Manufacturing Operations
 
Percentage of Net Sales and Total Assets Related to Foreign Markets
 
  2006 2005 
  % of Total % Total % of Total % Total 
  Net Sales * Assets - Net Sales * Assets - 
  Exports Foreign Foreign Exports Foreign Foreign 
  From Oper- Oper- From Oper- Oper- 
  U.S. ations ations * U.S. ations ations * 
Canada  4  16  11  5  16  12 
Europe  1  12  14  1  14  14 
Latin America  -  2  2  1  2  2 
Asia  5  4  7  4  4  5 
Total % exposure to foreign markets  10  34  34  11  36  33 
 
*The percentages for foreign markets are relative to Tredegar's total net sales and total assets from manufacturing operations (consolidated net sales and total assets from continuing operations excluding cash and cash equivalents and AFBS (formerly Therics)).
We attempt to match the pricing and cost of our products in the same currency (except in Canada where about 80% of our sales of aluminum extrusions are U.S. Dollar-based) and generally view the volatility of foreign currencies (see trends for the Euro, Canadian Dollar and Chinese Yuan in the chart below) and emerging markets, and the corresponding impact on earnings and cash flow, as part of the overall risk of operating in a global environment. Exports from the U.S. are generally denominated in U.S. Dollars. Our foreign currency exposure on income from foreign operations relates to the Canadian Dollar, the Euro, the Chinese Yuan, the Hungarian Forint and the Brazilian Real.

The relatively high percentage of U.S. Dollar-priced sales in Canada is partly due to pension income.

        The increase in identifiable assets was partially offset by a decrease in net property, plant and equipment of $2.9 million resulting from asset write-downs due to impairment losses of $7.6 million offset by capital expenditures in excess of depreciation of $4.1 million.

Depreciation, Amortization and Capital Expenditures. Depreciation and amortization for Film Products was $19.8 million in 2003, down from $20.1 million in 2002. Depreciation expense in 2003 does not fully reflect significantly higher capital expenditures in 2003 since a large portion of the related assets were not placed in service by the end of the year (still in the construction in-progress phase). We project depreciation expense for Film Products to increase to about $23 million in 2004.

32



        Depreciation and amortization for Film Products was $20.1 million in 2002, down from $22 million in 2001. The required adoption of a new accounting standard (effective January 1, 2002) resulted in the elimination of goodwill amortization in 2002 of approximately $3.7 million. This was offset slightly by higher depreciation due to fixed asset additions.

        Capital expenditures in Film Products in 2003 totaled $57.2 million and reflect the normal replacement of machinery and equipment and:


Machinery and equipment purchased to upgrade lines and expand capacity at our filmsthe shifting of a large portion of the customers previously served by the aluminum extrusions plant in Kerkrade,El Campo, Texas, in 2001. The Netherlands,resulting mismatch between the currency denomination of sales and costs causes lower U.S. Dollar translated profits when the Canadian Dollar appreciates since our costs are higher in U.S. Dollar equivalent terms while sales are mostly unaffected (the opposite effect occurs when the Canadian Dollar depreciates in value relative to the U.S. Dollar). We estimate that the appreciation of the Canadian Dollar relative to the U.S. Dollar had an adverse impact on operating profit of about $2.8 million in 2006 compared with 2005, and $3.5 million in 2005 compared with 2004. In Film Products, where we have been able to better match the currency of our sales and costs, we estimate that the change in value of foreign currencies (primarily the Euro and Hungarian Forint and to a lesser extent the Chinese Yuan and Brazilian Real) relative to the U.S. Dollar had a positive impact on operating profit of about $500,000 in 2006 compared with 2005, and $600,000 in 2005 compared with 2004.

We continue to review the loading of our aluminum extrusions plants in North America to optimize production mix and minimize cost in light of the increase in the U.S. Dollar equivalent cost structure of our plants in Canada. In addition, we have partially hedged our exposure to the Canadian Dollar and Euro as shown in the following tables (accounted for as cash flow hedges):
(In Thousands Except Exchange Rates)   
    
Notional
Amount as
a % of
Forecasted
USD-Equiv.
   
USD-Equivalent
Strike Prices of
Options Bought &
 
Pretax
Unrealized
Gain (Loss)
on Options at
 
USD-
Equiv.
Average
 
Cash
(Paid to)
Received
from
 
Gain (Loss) on
Options Recognized
in Income for Period
 
  Notional CAD- Net Option Sold on CAD/USD 12/31/06 Reference Counter-  Portion
 
 Portion 
Description of Currency Amount Related Premium Call Put Included in Price of party at Deemed Deemed 
Exposure, Options Hedging Strategy of Option Costs for (Paid) Options Options Shareholders' CAD for Expiration Effective Ineffective 
Used & Periods Covered Contracts Period Received Bought Sold Equity Period of Options as Hedge as Hedge 
Exposure: About 80% of sales of extrusions manufactured in facilities in Canada are denominated or economically priced in U.S. Dollars ("USD") while conversion costs are denominated or economically priced in Canadian Dollars ("CAD").
                   
Hedge Strategy: Bought average rate call options & sold average rate put options on CAD/USD.
                   
Periods Covered by Option Contracts:
                     
5/11/06 to end of second quarter 2006 $2,500  38%$- $0.9500 $0.8850  n/a $0.8995 $- $- $- 
Third quarter 2006  5,000  40% -  0.9500  0.8749  n/a  0.8919  -  -  - 
Fourth quarter 2006  6,500  53% -  0.9324  0.8650  n/a  0.8793  -  -  - 
First quarter 2007  3,500  28% -  0.9100  0.8380 $(3) n/a  n/a  n/a  - 
First quarter 2007  3,500  28% -  0.9000  0.8345  (2) n/a  n/a  n/a  - 
Second quarter 2007  3,500  28% -  0.9100  0.8430  (18) n/a  n/a  n/a  - 
Second quarter 2007  3,500  28% -  0.9000  0.8364  (8) n/a  n/a  n/a  - 
Third quarter 2007  3,500  28% -  0.9100  0.8473  (27) n/a  n/a  n/a  - 
Third quarter 2007  3,500  28% -  0.9000  0.8403  (11) n/a  n/a  n/a  - 
Fourth quarter 2007  3,500  28% -  0.9100  0.8516  (33) n/a  n/a  n/a  - 
Fourth quarter 2007  3,500  28% -  0.9000  0.8446  (14) n/a  n/a  n/a  - 
                 $(116)            
(In Thousands Except Exchange Rates)       
    Sensitivity Analysis of Amount Tredegar (Pays to) Receives 
Average Average from Counterparty in 2007 for Settlement of CAD/USD Options 
CAD Per USD Equiv. First Second Third Fourth   
USD of CAD Quarter Quarter Quarter Quarter Total 
1.21951 $0.8200 $(136)$(164)$(197)$(232)$(729)
1.20482  0.8300  (52) (81) (115) (149) (397)
1.19048  0.8400  -  (12) (32) (67) (111)
1.17647  0.8500  -  -  -  (7) (7)
1.16279  0.8600  -  -  -  -  - 
1.14943  0.8700  -  -  -  -  - 
1.13636  0.8800  -  -  -  -  - 
1.12360  0.8900  -  -  -  -  - 
1.11111  0.9000  -  -  -  -  - 
1.09890  0.9100  39  39  39  39  155 
1.08696  0.9200  116  116  116  116  465 
1.07527  0.9300  194  194  194  194  774 
1.06383  0.9400  271  271  271  271  1,084 
(In Thousands Except Exchange Rates)             
    Notional         
    Amount as       Pretax 
    a % of   USD-Equivalent Unrealized 
    Forecasted   Strike Prices of Gain (Loss) 
    USD-Equiv.   Options Bought & on Options at 
  Notional Royalty Net Option Sold on EUR/USD 12/31/06 
Description of Currency Amount from Premium Call Put Included in 
Exposure, Options Hedging Strategy of Option Nether- (Paid) Options Options Shareholders' 
Used & Periods Covered Contracts lands Sub Received Sold Bought Equity* 
Exposure: Significant royalty on sales from film technology licensed to subsidiary in the Netherlands is earned in Euros ("EUR").
           
Hedge Strategy: Sold average rate call options & bought average rate put options on EUR/USD.
           
Periods Covered by Option Contracts:
             
First quarter 2007 $3,200  74%$- $1.3350 $1.2800  n/a 
Second quarter 2007  3,200  82% -  1.3480  1.2800  n/a 
Third quarter 2007  3,200  75% -  1.3575  1.2800  n/a 
Fourth quarter 2007  3,200  76% -  1.3640  1.2800  n/a 
* Hedge transactions occurred on 1/4/07 and therefore there was no unrealized gain or loss at 12/31/06.   

(In Thousands Except Exchange Rates)       
    Sensitivity Analysis of Amount Tredegar (Pays to) Receives 
Average Average from Counterparty in 2007 for Settlement of EUR/USD Options 
EUR Per USD Equiv. First Second Third Fourth   
USD of EUR Quarter Quarter Quarter Quarter Total 
0.84034 $1.1900 $225 $225 $225 $225 $900 
0.82645  1.2100  175  175  175  175  700 
0.81301  1.2300  125  125  125  125  500 
0.80000  1.2500  75  75  75  75  300 
0.78740  1.2700  25  25  25  25  100 
0.77519  1.2900  -  -  -  -  - 
0.76336  1.3100  -  -  -  -  - 
0.75188  1.3300  -  -  -  -  - 
0.74074  1.3500  (36) (5) -  -  (41)
0.72993  1.3700  (84) (52) (29) (14) (180)
0.71942  1.3900  (132) (100) (77) (61) (369)
0.70922  1.4100  (180) (147) (124) (108) (559)
0.69930  1.4300  (228) (195) (171) (155) (748)
Trends for the Euro, Canadian Dollar and Cheinese Yuan are shown in the chart below:


Business Segment Review

Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker for purposes of assessing performance.

Film Products

Net Sales. Net sales in Film Products were $511.2 million in 2006, $460.3 million in 2005 and $413.3 million in 2004. The increases in net sales (sales less freight) in Film Products in the last two years is primarily due to growth in higher value-added products, including addingsurface protection films, elastic materials and new apertured materials. Selling price and net sales are also affected by the pass-through of changes in raw material costs and changes in currency exchange rates (see the qualitative and quantitative disclosures about market risks section beginning on page 28). Total volume was 253.5 million pounds in 2006, 261.1 million pounds in 2005 and 278.7 million pounds in 2004. Total volume related to the business in Argentina sold in the third quarter of 2004 was 9.4 million pounds in 2004. We estimate that the growth in net sales excluding the effects of the pass-through of resin price changes, foreign exchange rate changes and the business in Argentina sold was about 6% in 2006, 7% in 2005 and 9% in 2004. Volume declines in 2006 compared with 2005 were mainly due to lower sales of certain commodity barrier films that were dropped in conjunction with the shutdown of the plant in LaGrange, Georgia. The plant was shut down in the first half of 2006 and had sales of commodity barrier films of approximately $20 million in 2005.

Operating Profit. Operating profit from ongoing operations in Film Products was $57.6 million in 2006, $44.9 million in 2005 and $43.3 million in 2004. Operating profit from ongoing operations excluding the estimated effects of resin pass-through lag and year-end LIFO adjustments was $53.1 million in 2006, $48.9 million in 2005 and $45.8 million in 2004. The increase in operating profit in since 2004 excluding the impact of resin pass-through lag and LIFO adjustments has been driven by growth in the sale of higher value surface protection films, elastic materials and new apertured topsheets.

Identifiable Assets. Identifiable assets in Film Products increased to $499.0 million at December 31, 2006, from $479.3 million at December 31, 2005, due primarily to the effects of foreign exchange rate changes of $9.0 million, higher accounts receivable (up $6.5 million) due to higher sales and higher inventories (up $3.4 million) and asset impairments during the year totaling $1.2 million. See page 24 for further discussion on changes in assets and liabilities.

Identifiable assets in Film Products increased to $479.3 million at December 31, 2005, from $472.8 million at December 31, 2004, due primarily to capital expenditures in excess of depreciation of $24.0 million (see the depreciation, amortization and capital expenditures section below for more information) partially offset by lower accounts receivable (down $4.9 million) due to lower days sales outstanding (down about 5 days since the end of 2004), the effects of foreign exchange rate changes of $9.8 million and asset impairments and disposals during 2005 totaling $4.3 million.
Depreciation, Amortization and Capital Expenditures. Depreciation and amortization for Film Products was $31.7 million in 2006, $26.7 million in 2005 and $22.0 million in 2004. The increases in each year are due to the relatively high level of capital expenditures from 2003-2005. We expect depreciation and amortization expense for Film Products to increase to about $34 million in 2007.

Capital expenditures declined to $33.2 million in 2006 compared with $50.5 million in 2005. Capital expenditures in 2007 are expected to be approximately $35 million. Approximately half of the capital expenditures in 2006 related to expanding the production capacity for the new apertured topsheet productsurface protection films. These films are primarily used to protect flat panel display components during fabrication, shipping and handling. Sales of surface protection films used primarily in this application totaled approximately $56 million in 2006, $30 million in 2005 and $16 million in 2004. Other capital expenditures in 2006 included capacity additions for P&G’s sanitary napkin business that is currently being introduced in Europe;

Expansion of capacity at our films plant in Shanghai, China;

Construction of a new films plant in Guangzhou, China;

Expansion of our polypropyleneelastic materials and masking film capacity at our plant in Pottsville, Pennsylvania; and

Commencing the implementation ofcontinued costs associated with a new information system, which was rolled out in U.S. locations.

        Capital expenditures are projected to be $40 million in 2004.

        Capital expenditures in Film Products in 2002 totaled $24


Capital expenditures in Film Products in 2005 totaled $50.5 million and reflect the normal replacement of machinery and equipment and:


Machinery and equipment to upgrade the lines at our plant in Kerkrade, The Netherlands;and:

Machinery and equipment purchased for a new production line at our plant in Kerkrade, The Netherlands;

Machinery and equipment for a new production line at our plant in Terre Haute, Indiana; and

Expansion of capacity at our plant in Shanghai, China.

Aluminum Extrusions

Net Sales.Net sales·

Expansion of production capacity at our films plant in Aluminum Extrusions declined 2%Kerkrade, The Netherlands, including capacity for an apertured topsheet product for P&G’s feminine hygiene business;
·Expansion of production capacity at our films plant in 2003Lake Zurich, Illinois, including capacity for elastic materials used in baby diapers and 5%adult incontinent products;
·Expansion of production capacity at our films plant in 2002. Annual volume was 228.2 million pounds in 2003, 234.3 million pounds in 2002 and 244.2 million pounds in 2001 (see our market segments in the table on page 2). See the executive summary on page 14 for outlook.

Operating Profit. Ongoing operating profit in Aluminum Extrusions declined by $12.2 million or 45% in 2003 due to appreciation of the Canadian Dollar against the U.S. Dollar (unfavorable impact of $3.8 million), higher energy costs (up $3.2 million), lower volume (unfavorable impact of $1.7 million) and higher insurance costs (up $1.6 million). See quantitative and qualitative disclosures about market risk on pages 25-28 for more information on energy and foreign exchange exposures,Guangzhou, China;

·Leasehold improvements and the executive summary on page 14 for outlook.

        Ongoing operating profitaddition of laminating capacity at our new films plant in Aluminum Extrusions was $27.3 million in 2002, an increaseRed Springs, North Carolina;

·Expansion of 7.5% over 2001 operating profit of $25.4 million. While volume had a negative impact on operating profit, this was more than offset by lower conversion costs, which were helped by the reduction of fixed costs from the shutdown of the El Campo Plant.

Identifiable Assets.Identifiable assets in Aluminum Extrusions increased to $185.3 million at December 31, 2003, from $176.6 million at December 31, 2002, due primarily to the appreciation of the Canadian Dollar relative to the U.S. Dollar (positive impact of $6.8 million on the U.S. Dollar reported carrying value of property, plant and equipment).

        Identifiable assets in Aluminum Extrusions were $176.6 million at December 31, 2002, versus $185.9 million at December 31, 2001. The decrease is primarily related to property, plant and equipment due to depreciation in excess of capital expenditures of $5.7 million.

Depreciation, Amortization and Capital Expenditures.Depreciation and amortization for Aluminum Extrusions was $10.9 million in 2003, up slightly from $10.5 million in 2002. Depreciation and amortization was $11.2 million in 2001. The required adoption of a new accounting standard (effective January 1, 2002) resulted in the elimination in 2002 of goodwill amortization of $312,000. Also contributing to the decline in depreciation expense in 2002 was the shutdown of the El Campo Plant.

33



        Capital expenditures in 2003 totaled $8.3 million and reflect the normal replacement of machinery and equipment and upgrades of our wastewater treatment systemproduction capacity at our plant in Newnan, Georgia. In addition, on November 21, 2003, we announced the acquisition of Apolo ToolPottsville, Pennsylvania, including capacity for polyethylene film used for packaging and Die Manufacturing Inc. (“Apolo”) of Woodbridge, Ontario. The purchase price consisted of cash consideration of $1.6 million (including transaction costs of $110,000 and net cash acquired of $343,000). Apolo’s key capabilities include bending, CNC machining, drilling, mitering, punching, riveting, sawing and welding of aluminum extrusions and other materials. The company also has in-house tool and die design and manufacturing capability to support its fabrication services.

        Capital expenditures are projected to be $10 million in 2004.

        Capital expenditures in 2002 totaled $4.8 million and reflect the normal replacement of machineryfilm used for surface protection;

·Leasehold improvements and equipment primarilyupgrades at our aluminum plantsnew R&D facility in Kentland, Indiana,Richmond, Virginia; and Carthage, Tennessee.

Therics

        On October 21, 2003, we announced the completion of a strategic assessment of Therics, which resulted in a decision to support the 2004 rollout of a new line of orthopaedic products. This decision is based on our belief that Therics’ technology has value. It also reflects our confidence in the new management team at Therics, which is highly focused on bringing the first product line to market and controlling expenses. Therics’ management expects the company to begin generating revenue in the first half of 2004. We will monitor Therics’ near-term progress against milestones that are clearly defined and measurable. See pages 2-3 for further description of Therics and its products.

        We expect near-term operating losses at Therics to remain around $3 million per quarter. Operating losses should decline assuming sales begin to ramp up in the second half of 2004. The operating loss from ongoing operations at Therics was $11.7 million in 2003, $13.1 million in 2002 and $12.9 million in 2001. There have been no substantial revenues to date.

Molecumetics

        Operations at Molecumetics were ceased on July 2, 2002, and results have been reported as discontinued operations. Cash flows relating to Molecumetics have not been separately disclosed in the consolidated statements of cash flows.

        For the years ended December 31, 2002 and 2001, the operating losses for Molecumetics were $5.9 million ($3.9 million after taxes) and $8.9 million ($5.8 million after taxes), respectively, while revenues were $515,000 and $4 million, respectively. In addition to the operating loss, discontinued operations include a gain from the sale of intellectual property of $1.4 million ($891,000 after taxes) in 2003 and a loss on the disposal of $7.5 million ($4.9 million after taxes) in 2002. This loss on disposal is comprised of an impairment loss for assets of $4.9 million, severance and other employee-related costs of $1.4 million for 45 employees and estimated miscellaneous disposal costs of $1.2 million. The tangible assets were sold during the fourth quarter of 2002 for proceeds of $800,000.

Venture Capital Investment Activities

        On March 7, 2003, Tredegar Investments reached definitive agreements to sell substantially all of its portfolio of private equity partnership interests to GS Vintage Funds II, which are investment partnerships managed by Goldman Sachs Asset Management’s Private Equity Group. On the same date and in a separate transaction, Tredegar Investments also agreed to sell to W Capital Partners, an independent private equity manager, the subsidiary funds that hold substantially all of Tredegar Investments’ direct venture capital investments. The sale of these fund interests included the assumption by the buyer of Tredegar Investments’ obligations to make additional capital contributions to those funds in the future.

34



        The sale to W Capital Partners of the subsidiary funds that hold the direct investments occurred on March 7, 2003. The sale of the private equity fund interests occurred in a series of closings.

        Net proceeds from the sales totaled approximately $21.5 million. Additional proceeds of approximately $55 million, to be received in the form of income tax recoveries, are expected in mid-2004 from the carry-back of 2003 capital losses generated by these sales against gains realized in 2000 by Tredegar Investments.

        The agreements governing these transactions contain customary contingent indemnification provisions that Tredegar believes will not have a material effect on its financial position or results of operations.

        The operating results from venture capital investment activities have been reported as discontinued operations and results for prior periods have been restated. Cash flows from venture capital investment activities have not been separately disclosed in the consolidated statements of cash flows.

·

A summary of venture capital investment activities from 2001 through disposal in 2003 is provided below:

new information system.


 (In Thousands) 
 2003 2002 2001 

 
Carrying value of venture capital investments,        
     beginning of period  $93,765 $155,084 $232,259 
Venture capital investment activity for period:  
     (pre-tax amounts):  
     New investments   2,807  20,373  24,504 
     Proceeds from the sale of investments, including  
        broker receivables at end of period   (21,504) (8,918) (49,185)
     Realized gains     4,454  33,104 
     Realized losses, write-offs and write-downs   (70,256) (65,154) (52,759)
     (Decrease) increase in unrealized gain on  
        available-for-sale securities   (917) (12,074) (32,839)
     Carrying value of public securities retained by  
        Tredegar Investments*   (3,895)    

Carrying value of venture capital investments,  
     end of period  $ $93,765 $155,084 

   
Summary of amounts reported as discontinued  
operations in the consolidated statements of  
income:  
     Pretax gains (losses), net  $(70,256)$(60,700)$(19,655)
     Operating expenses (primarily management fee  
        expenses)   (599) (5,594) (6,324)

     Loss before income taxes   (70,855) (66,294) (25,979)
     Income tax benefits   24,286  23,866  9,352 

     Loss from venture capital investment activities  $(46,569)$(42,428)$(16,627)

Aluminum Extrusions

Net Sales and Operating Profit. Net sales were $577.3 million in 2006, up 22.4% versus $471.7 million in 2005. Operating profit from ongoing operations was $22.0 million in 2006, up 14.0% compared to $19.3 million in 2005. Volume increased to 259.9 million pounds in 2006, up 5.5% compared to 246.4 million pounds in 2005. Growth in shipments in 2006 was driven by demand for extrusions used in commercial construction and hurricane protection products, partially offset by a decline in extrusions used in residential construction. The increase in operating profit during 2006 was primarily due to higher volume and selling prices and lower energy costs (energy costs were down $1.1 million), partially offset by appreciation of the Canadian Dollar ($2.8 million) and higher charges for possible uncollectible accounts ($1.4 million).

Net sales in Aluminum Extrusions were $471.7 million in 2005, up 11% from $425.1 million in 2004 primarily due to higher selling prices driven by higher raw material and energy costs. Annual volume increased to 246.4 million pounds in 2005 from 243.4 million pounds in 2004, as stronger shipments in commercial construction and hurricane protection products were offset by lower shipments in other end markets. Operating profit from ongoing operations declined 15% to $19.3 million in 2005 from $22.6 million in 2004 due mainly to higher energy costs (approximately $7 million) and strength of the Canadian Dollar (about $3.5 million), partially offset by price increases, higher volume and an energy surcharge.

See the qualitative and quantitative disclosures about market risks section beginning on page 28 for discussion on the volatility of aluminum costs, energy costs and currency exchange rates.

Identifiable Assets. Identifiable assets in Aluminum Extrusions were $209.4 million at December 31, 2006, $214.4 million at December 31, 2005 and $210.9 million at December 31, 2004, with changes in each year due primarily to sales-driven fluctuations in accounts receivable and inventory levels.
Depreciation, Amortization and Capital Expenditures. Depreciation and amortization for Aluminum Extrusions was $12.3 million in 2006, $11.5 million in 2005 and $10.9 million in 2004. The increases in 2006 and 2005 are primarily due to the start of depreciation in 2005 of capital expenditures associated with moving and upgrading the largest extrusions press at the facility shut down in Aurora, Ontario to the plant in Pickering, Ontario, and enlargement of the Pickering facility. We expect depreciation and amortization expense for Aluminum Extrusions to increase to about $12.8 million in 2007.

Capital expenditures totaled $7.4 million in 2006, $12.0 million in 2005 and $10.0 million in 2004, and reflect the normal replacement of machinery and equipment plus capital expenditures associated with the plant in Pickering, Ontario described above. Capital expenditures are expected to be approximately $14 million in 2007.


AFBS

On June 30, 2005, substantially all of the assets of AFBS, Inc. (formerly known as Therics, Inc.), a wholly-owned subsidiary of Tredegar, were sold or assigned to a newly-created limited liability company, Therics, LLC, which is controlled and managed by an individual not affiliated with Tredegar. AFBS received a 17.5% equity interest in Therics, LLC, valued at $170,000 and a 3.5% interest in Theken Spine, LLC, valued at $800,000, along with potential future payments based on the sale of certain products by Therics, LLC. AFBS retained substantially all of its liabilities in the transaction, which included customary indemnification provisions for pre-transaction liabilities. Tredegar has no obligation or intent to fund any future losses that may occur at Therics, LLC or Theken Spine, LLC. The ownership interest in Therics, LLC is accounted for under the equity method of accounting with losses limited to its initial carrying value of $170,000. The ownership interest in Theken Spine, LLC is accounted for under the cost method, with an impairment loss recognized and a new cost basis established for any write-down to estimated fair value, if necessary. The payments due from Therics, LLC that are based on the sale of certain products are recognized as income when earned. AFBS had operating losses of $3.5 million during the first six months of 2005 and $9.8 million in 2004. Results of operations for AFBS since June 30, 2005 are immaterial.

Venture Capital Investment Activities

On March 7, 2003, Tredegar Investments reached definitive agreements to sell substantially all of its portfolio of private equity partnership interests to GS Vintage Funds II, which are investment partnerships managed by Goldman Sachs Asset Management’s Private Equity Group. On the same date and in a separate transaction, Tredegar Investments also agreed to sell to W Capital Partners, an independent private equity manager, the subsidiary funds that hold substantially all of Tredegar Investments’ direct venture capital investments. The sale of these fund interests included the assumption by the buyer of Tredegar Investments’ obligations to make additional capital contributions to those funds in the future.

The sale to W Capital Partners of the subsidiary funds that hold the direct investments occurred on March 7, 2003. The sale of the private equity fund interests occurred in a series of closings.

Net proceeds from the sales totaled approximately $21.5 million. Additionally, in the first quarter of 2004 we received income tax recoveries of approximately $55 million from the carry-back of 2003 capital losses generated by these sales against gains realized in 2000 by Tredegar Investments.

The agreements governing these transactions contain customary contingent indemnification provisions that Tredegar believes will not have a material effect on its financial position or results of operations.

The operating results from venture capital investment activities have been reported as discontinued operations. Cash flows from venture capital investment activities have not been separately disclosed in the consolidated statements of cash flows. Discontinued operations in 2004 include an after-tax gain associated with venture capital investment activities of $2.9 million primarily related to the reversal of business and occupancy tax contingency accruals upon favorable resolution.


*
Item 7A.
At December 31, 2003, Tredegar Investments held 596,492 shares of Vascular Solutions, Inc. (NASDAQ: VASC) and 265,955 shares of Illumina, Inc. (NASDAQ: ILMN). These securities relate to Tredegar Investments’ earlier venture capital investment activities and are classified as available-for-sale securities. These holdings, which are included in the consolidated balance sheets in "Other assets and deferred charges" at December 31, 2003 ($5.4 million market value), and "Venture capital investments" at December 31, 2002 ($3.6 million market value), are stated at market value with unrealized gains reported directly in shareholders’ equity net of related deferred income taxes.

35



Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See discussion of quantitative and qualitative disclosures about market risk beginning on page 28 in Management’s Discussion and Analysis.

        See discussion of quantitative and qualitative disclosures about market risk beginning on page 25 in Management’s Discussion and Analysis.


Item 8.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the index on page 40 for references to the report of the independent registered public accounting firm, the consolidated financial statements and selected quarterly financial data.

        See the index on page 40 for references to the report of independent auditors, management’s report on the financial statements, the consolidated financial statements and selected quarterly financial data.


Item 9.9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

        None.


Item 9A.9A.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried out an evaluation, with the participation of our management, including ourprincipal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, ourprincipal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles in the United States of America and includes policies and procedures that:

·Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that our receipts and expenditures are being made only in accordance with authorization of our management including ourprincipal executive officer and principal financial officer,directors; and
·Provide reasonable assurance regarding prevention or timely detection of the effectivenessunauthorized acquisition, use or disposition of our disclosure controls and procedures (as defined under Rule 13a-15(e) underassets that could have a material effect on the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, ourprincipal executive officer and principalconsolidated financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to Tredegar required to be included in ourperiodic filings with the Securities and Exchange Commission.

        There has been no change in our internal control over financial reporting during the quarter ended December 31, 2003, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

36


statements.

Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices) and actions taken to correct deficiencies as identified.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on their evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included on pages 40-41.

Changes in Internal Control Over Financial Reporting

During the fourth quarter of 2006, we completed the installation of a new information system at U.S. locations in Film Products. This was the only change in our internal control over financial reporting during the quarter ended December 31, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART IIIItem 9B.

OTHER INFORMATION

None.


Item 10.10.
DIRECTORS, AND EXECUTIVE OFFICERS OF TREDEGARAND CORPORATE GOVERNANCE

The information concerning directors and persons nominated to become directors of Tredegar included in the Proxy Statement under the headings "Election of Directors" and “Tredegar’s Board of Directors” is incorporated herein by reference.

The information concerning corporate governance included in the Proxy Statement under the heading “Board Meetings, Meetings of Non-Management Directors and the Board Committees - Audit Committee Matters” is incorporated herein by reference.

The information included in the Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting Requirements” is incorporated herein by reference.


Set forth below are the names, ages and titles of our executive officers:

        The information concerning directors and persons nominated to become directors of Tredegar included in the Proxy Statement under the heading “Election of Directors” is incorporated herein by reference.

        The information included in the Proxy Statement under the headings “Stock Ownership” and “Audit Committee Matters” is incorporated herein by reference.

        Set forth below are the names, ages and titles of our executive officers:

Name

NameAgeTitle
 
Age
Title
John D. Gottwald 49Chairman of the Board of Directors
Norman A. Scher6652 President and Chief Executive Officer effective March 1, 2006
Douglas R. MonkNancy M. Taylor 5847 Executive Vice President and Chief Operating Officer; President of The William L. Bonnell Company, Inc.
Thomas G. Cochran42Vice President and President, Tredegar Film Products Corporation
Tammy H. Cummings40and Corporate Senior Vice President Human Resources
D. Andrew Edwards 4548 Vice President, Chief Financial Officer and Treasurer
Michael W. GiancasproMcAlister C. Marshall, II 48Vice President, Business Development
Larry J. Scott53Vice President, Audit
W. Hildebrandt Surgner, Jr3837 Vice President, General Counsel and Corporate Secretary
Nancy M. TaylorLarry J. Scott 4356 Vice President, and Managing Director, European Operations, Tredegar Film ProductsAudit

John D. Gottwald. On January 16, 2006, Mr. Gottwald was elected President and Chief Executive Officer effective March 1, 2006. Mr. Gottwald had served as Chairman of the Board of Directors since September 10, 2001. Mr. Gottwald served as President and Chief Executive Officer from July 10, 1989 until September 10, 2001.
Nancy M. Taylor. Ms. Taylor was elected President of Tredegar Film Products effective April 5, 2005. She was elected Senior Vice President effective November 1, 2004. Ms. Taylor served as Senior Vice President, Strategy and Special Projects from November 1, 2004 until April 5, 2005. Ms. Taylor served as Managing Director, European Operations, of Tredegar Film Products from January 1, 2003 until November 1, 2004. Ms. Taylor served as Vice President, Administration and Corporate Development from September 10, 2001 until February 12, 2003. Ms. Taylor served as Secretary from February 24, 1994 until February 12, 2003. She served as Vice President, Law, from November 18, 1998 until September 10, 2001, and served as General Counsel from May 22, 1997 until July 25, 2000.
D. Andrew Edwards. Mr. Edwards was elected Vice President, Chief Financial Officer and Treasurer on August 28, 2003. Mr. Edwards has served as Vice President, Finance since November 18, 1998. Mr. Edwards has served as Treasurer since May 22, 1997. From October 19, 1992 until July 10, 2000, Mr. Edwards served as Controller.
McAlister C. Marshall, II. Mr. Marshall was elected Vice President, General Counsel and Corporate Secretary on October 1, 2006, the date that he joined Tredegar. From July 2000 until September 2006, he served as Assistant General Counsel at The Brink’s Company. He was an Associate at the law firm of Hunton & Williams LLP from 1996 until 2000.
Larry J. Scott. Mr. Scott was elected Vice President, Audit, on May 24, 2000. Mr. Scott served as Director of Internal Audit from February 24, 1994 until May 24, 2000.
We have adopted a Code of Conduct that applies to all of our directors, officers and employees (including our Chief Executive Officer, Chief Financial Officer and principal accounting officer) and have posted the Code of Conduct on our web site. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K relating to amendments to or waivers from any provision of our Code of Conduct applicable to Chief Executive Officer, Chief Financial Officer and principal accounting officer by posting this information on our website. Our Internet address is www.tredegar.com. The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into other filings we make with the SEC.

Because our common stock is listed on the NYSE, our chief executive officer is required to make, and he has made, an annual certification to the NYSE stating that he was not aware of any violation by us of the corporate governance listing standards of the NYSE. Our chief executive officer made his annual certification to that effect to the NYSE as of May 26, 2006. In addition, we have filed, as exhibits to this Annual Report on Form 10-K, the certifications of our principal executive officer and principal financial officer required under Section 302 of the Sarbanes Oxley Act of 2002 to be filed with the SEC regarding the quality of our public disclosure.


John D. Gottwald. Mr. Gottwald was elected Chairman of the Board of Directors effective September 10, 2001. Mr. Gottwald served as President and Chief Executive Officer from July 10, 1989 until September 10, 2001.Item 11.

Norman A. Scher. Mr. Scher was elected President and Chief Executive Officer effective September 10, 2001. Mr. Scher served as Executive Vice President and Chief Financial Officer from July 10, 1989 until September 10, 2001. From July 10, 1989 until May 22, 1997, he served as Treasurer.EXECUTIVE COMPENSATION

Douglas R. Monk. Mr. Monk was elected Executive Vice President and Chief Operating Officer on November 18, 1998, and is responsible for our manufacturing operations. Mr. Monk has served as a Vice President since August 29, 1994, and served as President of Aluminum Extrusions from February 23, 1993 to December 1, 1998. Mr. Monk re-assumed direct management responsibilities for Aluminum Extrusions in August 2003 as President of The William L. Bonnell Company, Inc.

Thomas G. Cochran. Mr. Cochran was elected Vice President on November 28, 2001. Mr. Cochran has served as President of Tredegar Film Products since February 22, 2000. Mr. Cochran was the Managing Director of Tredegar Film Products’ European operations from January, 1998 until May, 1999, and Business Development Manager of those operations from September, 1996 until December, 1997. Mr. Cochran was President of Brudi, Inc., a former subsidiary of Tredegar, from January, 1995 until August, 1996.

37



The information included in the Proxy Statement under the headings "Compensation of Directors”, “Board Meetings of Non-Management Directors and Board Committees - Executive Compensation Committee Interlocks and Insider Participation”, “Compensation Discussion and Analysis”, “Executive Compensation Committee Report” and “Compensation of Executive Officers" is incorporated herein by reference.

Tammy H. Cummings. Ms. Cummings was elected Vice President, Human Resources, on August 28, 2003. Ms. Cummings served as Director of Human Resources from June 1, 2002 until August 28, 2003. Prior to her employment with Tredegar, she served as Vice President, Human Resources/Organization Development for Luck Stone Corporation from 1998 until 2002 and served as Human Resources Director of Luck Stone Corporation from 1996 until 1998.Item12.

D. Andrew Edwards. Mr. Edwards was elected Vice President, Chief Financial Officer and Treasurer on August 28, 2003. Mr. Edwards has served as Vice President, Finance since November 18, 1998. Mr. Edwards has served as Treasurer since May 22, 1997. From October 19, 1992 until July 10, 2000, Mr. Edwards served as Controller.

Michael W. Giancaspro. Mr. Giancaspro was elected Vice President, Business Development, effective September 1, 2003. Prior to his current employment with Tredegar, Mr. Giancaspro served as Director of Finance and Treasurer at the Association for the Preservation of Virginia Antiquities from September 2002 until July 2003, and as Executive Vice President of Aim Technologies from October 2000 until August 2002. Mr. Giancaspro served as Vice President, Corporate Development, of Tredegar from January 1998 until April 2000, and Vice President, Corporate Planning, of Tredegar from February 1992 to January 1998.

Larry J. Scott. Mr. Scott was elected Vice President, Audit, on May 24, 2000. Mr. Scott served as Director of Internal Audit from February 24, 1994 until May 24, 2000.

W. Hildebrandt Surgner, Jr. Mr. Surgner was elected Corporate Secretary on February 12, 2003. He was elected Vice President and General Counsel on December 16, 2002. Prior to his employment with Tredegar, he served as Senior Counsel to Philip Morris U.S.A. in 2002 and served as Counsel to Philip Morris U.S.A. from 1999 until 2001. In this capacity, Mr. Surgner was employed by Philip Morris Management Corporation. He was an Associate at the law firm of Hunton & Williams LLP from 1994 until 1999.

Nancy M. Taylor. Ms. Taylor was appointed Managing Director, European Operations, of Tredegar Film Products on January 1, 2003. She also serves as Vice President of Tredegar Corporation. Ms. Taylor served as Vice President, Administration and Corporate Development from September 10, 2001 until February 12, 2003. Ms. Taylor served as Secretary from February 24, 1994 until February 12, 2003. She served as Vice President, Law, from November 18, 1998 until September 10, 2001, and served as General Counsel from May 22, 1997 until July 25, 2000.

        We have adopted a Code of Conduct that applies to all of our directors, officers and employees (including our Chief Executive Officer, Chief Financial Officer and principal accounting officer) and have posted the Code of Conduct on our web site. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K relating to amendments to or waivers from any provision of our Code of Conduct applicable to Chief Executive Officer, Chief Financial Officer and principal accounting officer by posting this information on our web site. Our Internet address iswww.tredegar.com.


Item 11.
EXECUTIVE COMPENSATION

        The information included in the Proxy Statement under the headings “Compensation of Directors” and “Compensation of Executive Officers” is incorporated herein by reference.

38



Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information included in the Proxy Statement under the heading "Stock Ownership" is incorporated herein by reference. The following table summarizes information with respect to equity compensation plans under which securities are authorized for issuance as of December 31, 2006.
       
Column (a) Column (b) Column (c) Column (d)
Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans, Excluding Securities Reflected in Column (b)
Equity compensation plans approved by security holders* 1,247,173 $18.16 1,601,700
Equity compensation plans not approved by security holders - - -
Total 1,247,173 $18.16 1,601,700

* Includes shares issuable pursuant to options issued under both the 2004 Equity Incentive Plan and the Directors Stock Plan.

Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information included in the Proxy Statement under the headings "Certain Relationships and Related Transactions” and “Tredegar’s Board of Directors” is incorporated herein by reference.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The following is incorporated herein by reference:

·Information on accounting fees and services included in the Proxy Statement under the heading “Stock Ownership”"Audit Fees;" and “Equity Compensation Plan Table” is incorporated herein by reference.


Item 13.·CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSInformation on the Audit Committee’s procedures for pre-approving certain audit and non-audit services included in the Proxy Statement under the heading “Board Meetings, Meetings of Non-Management Directors and Board Committees - Audit Committee Matters”.

PART IV

        Thomas G. Slater, Jr., a member of our board of directors, is a partner of the law firm of Hunton & Williams LLP, which we engage for legal services.


Item 14.15.
PRINCIPAL ACCOUNTING FEESEXHIBITS AND SERVICES

        The following is incorporated herein by reference:


Information on accounting fees and services included in the Proxy Statement under the heading “Audit Fees;” and

Information on the Audit Committee’s procedures for pre-approving certain audit and non-audit services included in the Proxy Statement under the heading “Audit Committee Matters.”

39



PART IV


Item 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 (a)List of documents filed as a part of the report:

 (1)Financial statements:

Tredegar Corporation
Index to Financial Statements and Supplementary Data
Page

  Page
Report of Independent AuditorsRegistered Public Accounting Firm4140-41
Financial Statements:
  Management’s Report on the Financial Statements41

Financial Statements (Audited):

Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 200442
                  December 31, 2003, 2002 and 2001

Consolidated Balance Sheets as of December 31, 20032006 and 200543
                  and 2002

Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 200444
                  December 31, 2003, 2002 and 2001

Consolidated Statements of Shareholders’ Equity for the45
Years Ended December 31, 2003, 20022006, 2005 and 2001

2004 45
Notes to Financial Statements46-6946-72

Selected Quarterly Financial Data (Unaudited)70
 
73

 (2)Financial statement schedules:

None.
None.

 (3)Exhibits:

See Exhibit Index on pages 76-77.
See Exhibit Index on pages 80-81.
(b)Reports on Form 8-K

On October 21, 2003, we furnished a Form 8-K with respect to our third quarter 2003 earnings press release dated October 21, 2003. On January 21, 2004, we furnished a Form 8-K with respect to our fourth quarter 2003 earnings press release dated January 21, 2004.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


40


To the Board of Directors and Shareholders of
Tredegar Corporation

We have completed integrated audits of Tredegar Corporation’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated Financial Statements

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Tredegar Corporation and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


As discussed in Note 1 to the consolidated financial statements, the Company changed the method in which it accounts for its defined benefit and other postretirement plans and its share-based compensation in 2006.

Internal Control Over Financial Reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Richmond, Virginia
March 1, 2007


CONSOLIDATED STATEMENTS OF INCOME

Tredegar Corporation and Subsidiaries
Years Ended December 31 
2006
 
2005
 
2004 
(In Thousands, Except Per-Share Data)       
        
Revenues and other:
       
Sales 
$
1,116,525
 $956,969 $861,165 
Other income (expense), net  
1,444
  (544) 15,604 
   
1,117,969
  956,425  876,769 
           
Costs and expenses:
          
Cost of goods sold  
944,839
  810,621  717,120 
Freight  
28,096
  24,691  22,398 
Selling, general and administrative  
68,360
  64,723  60,030 
Research and development  
8,088
  8,982  15,265 
Amortization of intangibles  
149
  299  330 
Interest  
5,520
  4,573  3,171 
Asset impairments and costs associated with exit and disposal activities 
  
4,080
  16,334  22,973 
Total  
1,059,132
  930,223  841,287 
Income from continuing operations          
before income taxes  
58,837
  26,202  35,482 
Income taxes  
20,636
  9,973  9,222 
Income from continuing operations  
38,201
  16,229  26,260 
Discontinued operations:          
Gain from venture capital investment activities (including an after-tax gain on a tax-related item of $2,275 in 2004)  
-
  -  2,921 
Income from discontinued operations  
-
  -  2,921 
Net income
 
$
38,201
 $16,229 $29,181 
Earnings per share:
          
Basic:          
Continuing operations 
$
.99
 $.42 $.69 
Discontinued operations  
-
  -  .08 
Net income 
$
.99
 $.42 $.77 
Diluted:          
Continuing operations 
$
.98
 $.42 $.68 
Discontinued operations  
-
  -  .08 
Net income 
$
.98
 $.42 $.76 
           
See accompanying notes to financial statements.
          

Tredegar Corporation and Subsidiaries
December 31 
2006
 
2005 
(In Thousands, Except Share Data)     
      
Assets
     
Current assets:     
Cash and cash equivalents 
$
40,898
 $23,434 
Accounts and notes receivable, net of allowance for doubtful accounts and sales returns of $8,559 in 2006 and $5,423 in 2005  
121,834
  119,330 
Income taxes recoverable  
10,975
  7,163 
Inventories  
68,930
  62,438 
Deferred income taxes  
6,055
  7,778 
Prepaid expenses and other  
4,558
  4,224 
Total current assets  
253,250
  224,367 
Property, plant and equipment, at cost:       
Land and land improvements  
12,540
  12,496 
Buildings  
95,877
  91,400 
Machinery and equipment  
567,989
  528,821 
Total property, plant and equipment  
676,406
  632,717 
Less accumulated depreciation  
350,643
  309,841 
Net property, plant and equipment  
325,763
  322,876 
Other assets and deferred charges  
64,078
  96,527 
Goodwill and other intangibles (other intangibles of $581 in 2006 and $712 in 2005)  
138,696
  137,988 
Total assets 
$
781,787
 $781,758 
Liabilities and Shareholders' Equity
       
Current liabilities:       
Accounts payable $
69,426
 $61,731 
Accrued expenses  
41,906
  36,031 
Current portion of long-term debt  
678
  - 
Total current liabilities  
112,010
  97,762 
Long-term debt  
61,842
  113,050 
Deferred income taxes  
75,772
  74,287 
Other noncurrent liabilities  
15,568
  11,297 
Total liabilities  265,192  296,396 
Commitments and contingencies (Notes 13 and 16)       
Shareholders' equity:       
Common stock (no par value):       
Authorized 150,000,000 shares;       
Issued and outstanding - 39,286,079 shares in 2006 and 38,737,016 in 2005 (including restricted stock)  
120,508
  110,706 
Common stock held in trust for savings restoration plan (58,632 shares in 2006 and 58,156 in 2005)  
(1,291
)
 (1,284)
Unearned compensation on restricted stock (109,000 shares in 2005)  
-
  (966)
Accumulated other comprehensive income (loss):       
Unrealized gain on available-for-sale securities  
-
  23 
Foreign currency translation adjustment  
21,522
  14,114 
Gain on derivative financial instruments  
654
  776 
Pension and other postretirement benefit adjustments  
(21,211
)
 (2,434)
Retained earnings  
396,413
  364,427 
Total shareholders' equity  
516,595
  485,362 
Total liabilities and shareholders' equity 
$
781,787
 $781,758 

Tredegar Corporation and Subsidiaries
Years Ended December 31 
2006
 
2005
 
2004 
(In Thousands)        
         
Cash flows from operating activities:
        
Net income 
$
38,201
 $16,229 $29,181 
Adjustments for noncash items:          
Depreciation  
44,132
  38,490  34,092 
Amortization of intangibles  
149
  299  330 
Deferred income taxes  
10,155
  9,217  1,947 
Accrued pension income and postretirement benefits  
3,178
  (1,979) (3,999)
Stock option-based compensation expense  
970
  -  - 
Loss from write-down of investment in Novalux  
-
  5,000  - 
Gain on sale of assets  
(317
)
 (4,174) (7,560)
Loss on asset impairments and divestitures  
1,150
  9,378  13,811 
Changes in assets and liabilities, net of effects from acquisitions and divestitures:          
Accounts and notes receivable  
151
  (3,361) (31,711)
Inventories  
(5,080
)
 2,803  (13,962)
Income taxes recoverable  
1,991
  (12,966) 61,538 
Prepaid expenses and other  
(275
)
 530  (258)
Accounts payable and accrued expenses  
11,592
  (3,590) 12,269 
Other, net  
(1,392
)
 (2,173) (1,858)
Net cash provided by operating activities  
104,605
  53,703  93,820 
Cash flows from investing activities:
          
Capital expenditures  
(40,573
)
 (62,543) (55,651)
Acquisitions  
-
  -  (1,420)
Novalux investment  
(542
)
 (1,095) (5,000)
Proceeds from the sale of assets and property disposals  
475
  8,018  10,209 
Other, net  
-
  636  (310)
Net cash used in investing activities  
(40,640
)
 (54,984) (52,172)
Cash flows from financing activities:
          
Dividends paid  
(6,221
)
 (6,190) (6,154)
Debt principal payments and financing costs  
(54,530
)
 (147,846) (72,750)
Borrowings  
4,000
  156,500  36,573 
Proceeds from exercise of stock options  
9,702
  1,130  1,871 
Net cash (used in) provided by financing activities  
(47,049
)
 3,594  (40,460)
Effect of exchange rate changes on cash
  
548
  (1,873) 1,863 
Increase in cash and cash equivalents
  
17,464
  440  3,051 
Cash and cash equivalents at beginning of period
  
23,434
  22,994  19,943 
Cash and cash equivalents at end of period
 
$
40,898
 $23,434 $22,994 
           
Supplemental cash flow information:          
Interest payments (net of amount capitalized) 
$
5,734
 $4,388 $3,264 
Income tax payments (refunds), net 
$
7,828
 $14,915 $(50,006)
           
See accompanying notes to financial statements.

Tredegar Corporation and Subsidiaries

            Accumulated Other   
            Comprehensive Income (Loss)   
            Unrealized   Gain Pension &   
        Trust for Unearned Gain on Foreign (Loss) on Other Post- Total 
        Savings Restricted Available- Currency Derivative retirement Share- 
  Common Stock Retained Restora- Stock for-Sale Trans- Financial Benefit holders' 
  Shares Amount Earnings tion Plan Compensation Securities lation Instruments Adjust. Equity 
(In Thousands, Except Share and Per-Share Data)                     
                      
Balance December 31, 2003  38,176,821 $104,991 $331,289 $(1,212)$- $2,770 $9,997 $444 $(880)$447,399 
Comprehensive income (loss):                               
Net income  -  -  29,181  -  -  -  -  -  -  29,181 
Other comprehensive income (loss):                               
 Available-for-sale securities adjustment, net of reclassification adjustment (net of tax of $1,556)  -  -  -  -  -  (2,770) -  -  -  (2,770)
Foreign currency translation adjustment (net of tax of $4,500)
  -  -  -  -  -  -  8,404  -  -  8,404 
Reclassification of foreign currency translation loss realized on the sale of the films business in Argentina (net of tax of $625)  -  -  -  -  -  -  1,161  -  -  1,161 
Derivative financial instruments adjustment (net of tax of $247)
  -  -  -  -  -  -  -  440  -  440 
Minimum pension liability adjustment (net of tax of $149)  -  -  -  -  -  -  -  -  (276) (276)
Comprehensive income                             36,140 
Cash dividends declared ($.16 per share)  -  -  (6,154) -  -  -  -  -  -  (6,154)
Restricted stock grant, net of forfeitures  120,000  1,674  -  -  (1,674) -  -  -  -  - 
Restricted stock amortization  -  -  -  -  272  -  -  -  -  272 
Issued upon exercise of stock options (including related income tax benefits of $868) & other
  300,701  2,785  -  -  -  -  -  -  -  2,785 
Tredegar common stock purchased by trust for savings restoration plan
  -  -  62  (62) -  -  -  -  -  - 
Balance December 31, 2004  38,597,522  109,450  354,378  (1,274) (1,402) -  19,562  884  (1,156) 480,442 
Comprehensive income (loss):                               
Net income  -  -  16,229  -  -  -  -  -  -  16,229 
Other comprehensive income (loss):                               
Available-for-sale securities adjustment, net of reclassification adjustment  (net of tax of $13)
  -  -  -  -  -  23  -  -  -  23 
Foreign currency translation adjustment (net of tax of $2,933)  -  -  -  -  -  -  (5,448) -  -  (5,448)
Derivative financial instruments adjustment (net of tax of $60)  -  -  -  -  -  -  -  (108) -  (108)
Minimum pension liability adjustment (net of tax of $630)
  -  -  -  -  -  -  -  -  (1,278) (1,278)
Comprehensive income                             9,418 
Cash dividends declared ($.16 per share)  -  -  (6,190) -  -  -  -  -  -  (6,190)
Restricted stock grant, net of forfeitures and vested shares  (11,000) (49) -  -  49  -  -  -  -  - 
Restricted stock amortization  -  -  -  -  387  -  -  -  -  387 
Issued upon exercise of stock options (including  related income tax benefits of $175) & other
  150,494  1,305  -  -  -  -  -  -  -  1,305 
Tredegar common stock purchased by trust for savings restoration plan
  -  -  10  (10) -  -  -  -  -  - 
Balance December 31, 2005  38,737,016  110,706  364,427  (1,284) (966) 23  14,114  776  (2,434) 485,362 
Comprehensive income (loss):                               
Net income  -  -  38,201  -  -  -  -  -  -  38,201 
Other comprehensive income (loss):                               
 Available-for-sale securities adjustment,  net of reclassification adjustment (net of tax of $13)  -  -  -  -  -  (23) -  -  -  (23)
Foreign currency translation adjustment (net of tax of $3,921)
  -  -  -  -  -  -  7,408  -  -  7,408 
Derivative financial instruments adjustment (net of tax of $60)  -  -  -  -  -  -  -  (122) -  (122)
Minimum pension liability adjustment (net of tax of $422)
  -  -  -  -  -  -  -  -  821  821 
Comprehensive income                             46,285 
Cumulative adjustment for the adoption of  SFAS No. 158 relating to pension and other postretirement benefits (net of tax of $11,354)  -   -  -   -   -   -   -   -  (19,598 ) (19,598  )
Cash dividends declared ($.16 per share)  -  -  (6,221) -  -  -  -  -  -  (6,221)
Stock-based Compensation expense  (25,500) 1,066  -  -  -  -  -  -  -  1,066 
Restricted stock amortization  -  (966) -  -  966  -  -  -  -  - 
Issued upon exercise of stock options (including  related income tax benefits of $678) & other    574,563  9,702   -   -   -   -   -   -   -  9,702 
Tredegar common stock purchased by trust for savings restoration plan  -  -  6  (7) -  -  -  -  -  (1)
Balance December 31, 2006  39,286,079 $120,508 $396,413 $(1,291)$- $- $21,522 $654 $(21,211)$516,595 
                                
See accompanying notes to financial statements.
                

NOTES TO FINANCIAL STATEMENTS

Tredegar Corporation and Subsidiaries
(In thousands, except Tredegar share and per-share amounts and unless otherwise stated)

INDEPENDENT AUDITORS’ AND MANAGEMENT’S REPORTS


REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Shareholders
of Tredegar Corporation:

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and shareholders’ equity present fairly, in all material respects, the financial position of Tredegar Corporation and Subsidiaries (“Tredegar”) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Tredegar’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        As discussed in Note 1 to the financial statements, Tredegar changed its method of accounting for goodwill in 2002.

PricewaterhouseCoopers LLP
Richmond, Virginia
January 21, 2004


MANAGEMENT’S REPORT ON THE FINANCIAL STATEMENTS


        Tredegar’s management has prepared the financial statements and related notes appearing on pages 42-69 in conformity with accounting principles generally accepted in the U.S. In so doing, management makes informed judgments and estimates of the expected effects of events and transactions. Financial data appearing elsewhere in this report are consistent with these financial statements.

        Tredegar maintains a system of internal controls to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. The internal control system is supported by written policies and procedures, careful selection and training of qualified personnel and an extensive internal audit program.

        These financial statements have been audited by PricewaterhouseCoopers LLP, independent auditors. Their audit was made in accordance with auditing standards generally accepted in the U.S. and included a review of Tredegar’s internal accounting controls to the extent considered necessary to determine audit procedures.

        The Audit Committee of the Board of Directors, composed of independent directors only (Phyllis Cothran, Committee Chairperson, Donald T. Cowles and R. Gregory Williams), meets with management, internal auditors and the independent auditors to review accounting, auditing, internal control and financial reporting matters. The independent auditors are retained by the Audit Committee.

41




CONSOLIDATED STATEMENTS OF INCOME

Tredegar Corporation and Subsidiaries

Years Ended December 312003 2002 2001 

(In thousands, except per-share amounts)
 
Revenues:           
    Sales  $738,651 $753,724 $779,157 
    Other income (expense), net   7,853  546  1,255 

    746,504  754,270  780,412 

   
Costs and expenses:  
    Cost of goods sold   606,242  582,658  618,323 
    Freight   18,557  16,319  15,580 
    Selling, general and administrative   53,341  52,252  47,954 
    Research and development   18,774  20,346  20,305 
    Amortization of intangibles   268  100  4,914 
    Interest   6,785  9,352  12,671 
    Plant shutdowns, asset impairments  
      and restructurings   11,426  3,884  16,935 
    Unusual items   1,067  (6,147) (971)

      Total   716,460  678,764  735,711 

Income from continuing operations  
    before income taxes   30,044  75,506  44,701 
Income taxes   10,717  26,881  13,950 

Income from continuing operations   19,327  48,625  30,751 

Discontinued operations:  
    Loss from venture capital investment activities  
      (including an after-tax loss on the sale of the  
      venture capital investment portfolio of $46,269  
      in 2003)   (46,569) (42,428) (16,627)
    Income (loss) from operations of Molecumetics  
      (including loss on disposal of $4,875 in 2002)   891  (8,728) (5,768)
    Income from discontinued energy segment       1,396 

Loss from discontinued operations   (45,678) (51,156) (20,999)

Net income (loss)  $(26,351)$(2,531)$9,752 

Earnings (loss) per share:  
    Basic:  
      Continuing operations  $.51 $1.27 $.81 
      Discontinued operations   (1.20) (1.34) (.55)

      Net income (loss)  $(.69)$(.07)$.26 

    Diluted:  
      Continuing operations  $.50 $1.25 $.79 
      Discontinued operations   (1.19) (1.32) (.54)

      Net income (loss)  $(.69)$(.07)$.25 


See accompanying notes to financial statements.

42




CONSOLIDATED BALANCE SHEETS

Tredegar Corporation and Subsidiaries

December 312003 2002 

(In thousands, except share amounts)
 
Assets        
Current assets:  
    Cash and cash equivalents  $19,943 $109,928 
    Accounts and notes receivable   84,110  92,892 
    Income taxes recoverable   61,508  12,863 
    Inventories   49,572  43,969 
    Deferred income taxes   10,998  20,976 
    Prepaid expenses and other   5,015  3,962 

      Total current assets   231,146  284,590 

Property, plant and equipment, at cost:  
    Land and land improvements   12,739  12,935 
    Buildings   80,581  75,631 
    Machinery and equipment   486,767  416,527 

      Total property, plant and equipment   580,087  505,093 
    Less accumulated depreciation   282,611  254,490 

    Net property, plant and equipment   297,476  250,603 
Non-current assets of Therics held for sale     10,406 
Venture capital investments     93,765 
Other assets and deferred charges   83,855  66,316 
Goodwill and other intangibles (other intangibles  
    of $1,297 in 2003 and $168 in 2002)   140,548  132,282 

      Total assets  $753,025 $837,962 

   
Liabilities and Shareholders’ Equity  
Current liabilities:  
    Accounts payable  $46,706 $35,861 
    Accrued expenses   42,456  42,409 
    Current portion of long-term debt   8,750  55,000 

      Total current liabilities   97,912  133,270 
Long-term debt   130,879  204,280 
Deferred income taxes   66,276  27,443 
Other noncurrent liabilities   10,559  10,037 

      Total liabilities   305,626  375,030 

Commitments and contingencies (Notes 13 and 16)  
Shareholders’ equity:  
    Common stock (no par value):  
      Authorized 150,000,000 shares;  
      Issued and outstanding - 38,176,821 shares  
         in 2003 and 38,323,025 in 2002   104,991  108,389 
    Common stock held in trust for savings restoration  
      plan (53,871 shares in 2003 and 2002)   (1,212) (1,212)
    Accumulated other comprehensive income (loss):  
      Unrealized gain on available-for-sale securities   2,770  586 
      Foreign currency translation adjustment   9,997  (4,422)
      Gain (loss) on derivative financial instruments   444  (842)
      Minimum pension liability   (880) (3,310)
    Retained earnings   331,289  363,743 

      Total shareholders’ equity   447,399  462,932 

      Total liabilities and shareholders’ equity  $753,025 $837,962 


See accompanying notes to financial statements.

43




CONSOLIDATED STATEMENTS OF CASH FLOWS

Tredegar Corporation and Subsidiaries

Years Ended December 312003 2002 2001 

(In thousands)
 
Cash flows from operating activities:           
    Net income (loss)  $(26,351)$(2,531)$9,752 
    Adjustments for noncash items:  
      Depreciation   32,354  31,834  32,995 
      Amortization of intangibles   268  100  4,914 
      Deferred income taxes   37,370  7,690  (8,906)
      Accrued pension income and postretirement benefits   (4,812) (9,101) (10,821)
      Loss on venture capital investments   70,256  60,700  19,655 
      Gain on sale of corporate assets   (5,155)    
      Loss on equipment writedowns and divestitures   2,456  12,514  8,531 
      Allowance for doubtful accounts     1,207  3,143 
    Changes in assets and liabilities, net of  
      effects from acquisitions and divestitures:  
      Accounts and notes receivable   14,649  (15,718) 13,899 
      Inventories   (2,294) 1,641  1,249 
      Income taxes recoverable   (48,737) (7,453) (1,553)
      Prepaid expenses and other   (763) (1,579) (64)
      Accounts payable and accrued expenses   7,801  (12,686) 3,203 
    Other, net   (661) (1,345) (1,083)

      Net cash provided by operating activities   76,381  65,273  74,914 

Cash flows from investing activities:  
    Capital expenditures   (65,808) (31,336) (38,990)
    Acquisitions (net of cash acquired of $343 in 2003)   (1,579)   (1,918)
    Venture capital investments   (2,807) (20,373) (24,504)
    Proceeds from the sale of venture capital investments   21,504  8,918  49,477 
    Proceeds from the sale of corporate assets and  
      property disposals   9,602  2,020  2,458 
    Other, net   2,600  (1,317) 28 

      Net cash used in investing activities   (36,488) (42,088) (13,449)

Cash flows from financing activities:  
    Dividends paid   (6,103) (6,134) (6,098)
    Debt principal payments   (255,000) (5,218) (5,000)
    Borrowings   135,349    1,396 
    Repurchases of Tredegar common stock   (5,170) (1,429)  
    Proceeds from exercise of stock options   1,046  2,714  517 

      Net cash used in financing activities   (129,878) (10,067) (9,185)

(Decrease) increase in cash and cash equivalents   (89,985) 13,118  52,280 
Cash and cash equivalents at beginning of period   109,928  96,810  44,530 

Cash and cash equivalents at end of period  $19,943 $109,928 $96,810 

Supplemental cash flow information:  
    Interest payments (net of amount capitalized)  $6,709 $9,301 $12,884 
    Income tax payments (refunds), net  $(1,701)$(3,660)$8,267 


See accompanying notes to financial statements.

44



CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Tredegar Corporation and Subsidiaries

 Accumulated
Other Comprehensive
Income (Loss)

 
 Common Stock
 Retained Trust for
Savings
Restora-
 Unrealized
Gain on
Available-
for-Sale
 Foreign
Currency
Trans-
 Gain
(Loss) on
Derivative
Financial
 Minimum
Pension
 Total
Share-
holders’
 
 Shares Amount Earnings tion Plan Securities lation Instruments Liability Equity 

(In thousands, except share and per-share data)
 
Balance December 31, 2000   38,084,407 $106,587 $368,754 $(1,212)$29,331 $(5,732)$ $ $497,728 

Comprehensive income (loss):  
    Net income       9,752            9,752 
    Other comprehensive income (loss):  
      Available-for-sale securities adjustment,  
         net of reclassification adjustment  
         (net of tax of $11,822)           (21,017)       (21,017)
      Foreign currency translation adjustment  
         (net of tax of $148)             (275)     (275)
      Cumulative effect of accounting change  
         for derivative financial instruments  
         (net of tax of $170)               303    303 
      Derivative financial instruments  
         adjustment (net of tax of $1,657)               (3,011)   (3,011)
 
    Comprehensive loss                           (14,248)
Cash dividends declared ($.16 per share)       (6,098)           (6,098)
Issued upon exercise of stock options  
    (including related income tax benefits  
    of $64) and other   57,997  517              517 

Balance December 31, 2001   38,142,404  107,104  372,408  (1,212) 8,314  (6,007) (2,708)   477,899 

Comprehensive income (loss):  
    Net loss       (2,531)           (2,531)
    Other comprehensive income (loss):  
      Available-for-sale securities adjustment,  
         net of reclassification adjustment  
         (net of tax of $4,346)           (7,728)       (7,728)
      Foreign currency translation adjustment  
         (net of tax of $940)             1,585      1,585 
      Derivative financial instruments  
         adjustment (net of tax of $1,041)               1,866    1,866 
      Minimum pension liability adjustment  
         (net of tax of $1,821)                 (3,310) (3,310)
 
    Comprehensive loss                           (10,118)
Cash dividends declared ($.16 per share)       (6,134)           (6,134)
Repurchases of Tredegar common stock   (110,700) (1,429)             (1,429)
Issued upon exercise of stock options  
    (including related income tax benefits  
    of $1,250) and other   291,321  2,714              2,714 

Balance December 31, 2002   38,323,025  108,389  363,743  (1,212) 586  (4,422) (842) (3,310) 462,932 

Comprehensive income (loss):  
    Net loss       (26,351)           (26,351)
    Other comprehensive income (loss):  
      Available-for-sale securities adjustment,  
         net of reclassification adjustment  
         (net of tax of $1,228)           2,184        2,184 
      Foreign currency translation adjustment  
         (net of tax of $7,788)             14,419      14,419 
      Derivative financial instruments  
         adjustment (net of tax of $715)               1,286    1,286 
      Minimum pension liability adjustment  
         (net of tax of $1,347)                 2,430  2,430 
 
    Comprehensive loss                           (6,032)
Cash dividends declared ($.16 per share)       (6,103)           (6,103)
Repurchases of Tredegar common stock   (406,400) (5,170)             (5,170)
Issued upon exercise of stock options  
    (including related income tax benefits  
    of $726) and other   260,196  1,772              1,772 

Balance December 31, 2003   38,176,821 $104,991 $331,289 $(1,212)$2,770 $9,997 $444 $(880)$447,399 


See accompanying notes to financial statements.

45



NOTES TO FINANCIAL STATEMENTS

Tredegar Corporation and Subsidiaries
(In thousands, except Tredegar share and per-share amounts and unless otherwise stated)

1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Organization and Nature of Operations. Tredegar Corporation and subsidiaries (“Tredegar”) are engaged in the manufacture of plastic films and aluminum extrusions. See Note 15 regarding restructurings and Note 17 regarding discontinued operations.
Basis of Presentation. The consolidated financial statements include the accounts and operations of Tredegar and all of its majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

Foreign Currency Translation. The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. Dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from the translation of these financial statements are reflected as a separate component of shareholders’ equity. We have no foreign subsidiaries where the U.S. Dollar is the functional currency.

Transaction and remeasurement gains or losses included in income were not material in 2006, 2005 and 2004. These amounts do not include the effects between reporting periods that exchange rate changes have on income of our foreign locations that result from translation into U.S. Dollars.

Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand in excess of daily operating requirements and highly liquid investments with original maturities of three months or less. At December 31, 2006 and 2005, Tredegar had cash and cash equivalents of $40,898 and $23,434, respectively, including funds held in foreign locations of $19,118 and $14,890, respectively.

Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year. The primary objectives of the policy are safety of principal and liquidity.

Accounts and Notes Receivable. Accounts receivable are stated at the amount invoiced to customers less allowances for doubtful accounts and sales returns. Accounts receivable are non-interest bearing and arise from the sale of product to customers under typical industry trade terms. Notes receivable are not significant. Past due amounts are determined based on established terms and charged-off when deemed uncollectible. The allowance for doubtful accounts is determined based on our assessment of probable losses taking into account past due amounts, customer credit profile, historical experience and current economic conditions. Other receivables include insurance recoveries due within one year and value-added taxes related to certain foreign subsidiaries.

Inventories. Inventories are stated at the lower of cost or market, with cost determined on the last-in, first-out (“LIFO”) basis, the weighted average cost or the first-in, first-out basis. Cost elements included in work-in-process and finished goods inventories are raw materials, direct labor and manufacturing overhead.

Property, Plant and Equipment. Accounts include costs of assets constructed or purchased, related delivery and installation costs and interest incurred on significant capital projects during their construction periods. Expenditures for renewals and betterments also are capitalized, but expenditures for repairs and maintenance are expensed as incurred. The cost and accumulated depreciation applicable to assets retired or sold are removed from the respective accounts, and gains or losses thereon are included in income.


Property, plant and equipment include capitalized interest of $885 in 2006, $1,387 in 2005 and $762 in 2004.

Organization and Nature of Operations.Tredegar Corporation and subsidiaries (“Tredegar”) are engaged in the manufacture of plastic films and aluminum extrusions. We also operate Therics, which has developed and recently launched an initial family of products used in bone grafting procedures. See Note 17 regarding discontinued operations.

Basis of Presentation. The consolidated financial statements include the accounts and operations of Tredegar and all of its majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated.

        The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

        Certain previously reported amounts have been reclassified to conform to the current presentation.

Foreign Currency Translation.The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. Dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from the translation of these financial statements are reflected as a separate component of shareholders’ equity.

        The financial statements of foreign subsidiaries where the U.S. Dollar is the functional currency, and which have certain transactions in a local currency, are remeasured as if the functional currency were the U.S. Dollar. The remeasurement of local currencies into U.S. Dollars creates translation adjustments which are included in income.

        Transaction and remeasurement gains or losses included in income were not material in 2003, 2002 and 2001. These amounts do not include the effects between reporting periods that exchange rate changes have on income of our foreign locations that result from translation into U.S. Dollars (see quantitative and qualitative disclosures about market risk beginning on page 25 for more information).

Cash and Cash Equivalents.Cash and cash equivalents consist of cash on hand in excess of daily operating requirements and highly liquid investments with original maturities of three months or less. At December 31, 2003 and 2002, Tredegar had cash and cash equivalents of $19,943 and $109,928, respectively, including funds held in foreign locations of $16,188 and $16,550, respectively.

        Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year. The primary objectives of the policy are safety of principal and liquidity.

Inventories.Inventories are stated at the lower of cost or market, with cost determined on the last-in, first-out (“LIFO”) basis, the weighted average cost or the first-in, first-out basis. Cost elements included in work-in-process and finished goods inventories are raw materials, direct labor and manufacturing overhead.

Property, Plant and Equipment.Accounts include costs of assets constructed or purchased, related delivery and installation costs and interest incurred on significant capital projects during their construction periods. Expenditures for renewals and betterments also are capitalized, but expenditures for repairs and maintenance are expensed as incurred. The cost and accumulated depreciation applicable to assets retired or sold are removed from the respective accounts, and gains or losses thereon are included in income.

46



        Property, plant and equipment include capitalized interest of $593 in 2003, $674 in 2002 and $1,791 in 2001.

Depreciation is computed primarily by the straight-line method based on the estimated useful lives of the assets, which range from 15 to 40 years for buildings and land improvements and 3 to 25 years for machinery and equipment. The average depreciation period for machinery and equipment is approximately 13 years in Film Products and 15 years in Aluminum Extrusions.


Goodwill and Other Intangibles. The excess of the purchase price over the fair value of identifiable net assets of acquired companies is allocated to goodwill. We assess goodwill for impairment when events or circumstances indicate the carrying value may not be recoverable, or, at a minimum, on an annual basis as of December 1 of each year. Impairment reviews may result in recognition of losses. We have made determinations as to what our reporting units are and what amounts of goodwill, intangible assets, other assets and liabilities should be allocated to those reporting units.

The components of goodwill and other intangibles at December 31, 2006 and 2005, and related amortization periods are as follows:
        
December 31 
2006
 2005 Amortization Periods 
Carrying value of goodwill:       
Film Products 
$
103,562
 $102,732  Not amortized 
Aluminum Extrusions  
34,553
  34,544  Not amortized 
Total carrying value of goodwill   
138,115
  137,276    
Carrying value of other intangibles:         
Film Products (cost basis of $1,172 in 2006 and 2005)  
581
  712  Not more than 17 yrs. 
Total carrying value of other intangibles  
581
  712    
Total carrying value of goodwill and other intangibles 
$
138,696
 $137,988    
A reconciliation of the beginning and ending balances of goodwill and other intangibles for each of the three years in the period ended December 31, 2006 is as follows:
        
  
2006
 2005 2004 
Goodwill and other intangibles:       
Net carrying value, beginning of year 
$
137,988
 $142,983 $140,548 
Amortization  
(149
)
 (299) (330)
Decrease due to sale of AFBS (formerly Therics) assets  
-
  (4,329) - 
 Increase (decrease) due to foreign currency translation and other  
857
  (367) 2,765 
Total carrying value of goodwill and other intangibles 
$
138,696
 $137,988 $142,983 
Impairment of Long-Lived Assets. We review long-lived assets for possible impairment when events indicate that impairment may exist. For assets to be held and used in operations, if events indicate that an asset may be impaired, we estimate the future unlevered pre-tax cash flows expected to result from the use of the asset and its eventual disposition. Assets are grouped for this purpose at the lowest level for which there are identifiable and independent cash flows. If the sum of these undiscounted pre-tax cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of the impairment loss is based on the estimated fair value of the asset, generally determined on a discounted after-tax cash flow basis.
Assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell, with an impairment loss recognized for any writedown required.

Pension Costs and Postretirement Benefit Costs Other than Pensions. Pension costs and postretirement benefit costs other than pensions are accrued over the period employees provide service to the company. Our policy is to fund our pension plans at amounts not less than the minimum requirements of the Employee Retirement Income Security Act of 1974 and to fund postretirement benefits other than pensions when claims are incurred. In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No 87, 88, 106 and 132(R), effective forpublic companies for fiscal years ending after December 15, 2006. Accordingly, we were required to recognize the funded status of our pension and other postretirement plans in our December 31, 2006 financial statements, which resulted in a reduction of prepaid pension cost of $27,651 (included in “Other assets and deferred charges” in the consolidated balance sheets), an increase in related liabilities of $3,301 (included in “Other noncurrent liabilities” in the consolidated balance sheets), a decrease in noncurrent deferred income liabilities of $11,354 and a decrease in shareholders’ equity of $19,598. See Note 11 for more information.


Postemployment Benefits. We periodically provide certain postemployment benefits purely on a discretionary basis. Related costs for these programs are accrued when it is probable that benefits will be paid and amounts can be reasonably estimated. All other postemployment benefits are either accrued under current benefit plans or are not material to our financial position or results of operations.

Revenue Recognition. Revenue from the sale of products, which is shown net of estimated sales returns and allowances, is recognized when title has passed to the customer, the price of the product is fixed and determinable, and collectibility is reasonably assured. Amounts billed to customers related to freight have been classified as sales in the accompanying consolidated statements of income. The cost of freight has been classified as a separate line in the accompanying consolidated statements of income. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction between Tredegar and its customers (such as value-added taxes) are accounted for on a net basis and therefore excluded from revenues.

Research & Development (“R&D”) Costs. R&D costs are expensed as incurred and include primarily salaries, wages, employee benefits, equipment depreciation, facility costs and the cost of materials consumed relating to R&D efforts. R&D costs include a reasonable allocation of indirect costs.

Income Taxes. Income taxes are recognized during the period in which transactions enter into the determination of income for financial reporting purposes, with deferred income taxes being provided at enacted statutory tax rates on the differences between the financial reporting and tax bases of assets and liabilities (see Note 14). We accrue U.S. federal income taxes on unremitted earnings of our foreign subsidiaries.

Earnings Per Share. Basic earnings per share is computed using the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed using the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:
        
  
2006
 
2005
 
2004 
Weighted average shares outstanding used to compute basic earnings per share  
38,670,757
  38,471,348  38,294,996 
Incremental shares attributable to stock options and restricted stock  
260,305
  125,356  211,688 
Shares used to compute diluted earnings per share  
38,931,062
  38,596,704  38,506,684 
Incremental shares attributable to stock options and restricted stock are computed using the average market price during the related period. During 2006, 2005 and 2004, 1,128,393, 2,024,690 and 2,073,990 of average out-of-the-money options to purchase shares were excluded from the calculation of incremental shares attributable to stock options and restricted stock.

Stock-Based Employee Compensation Plans. Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (“SFAS 123(R)”). SFAS 123(R) requires us to record compensation expense for all share-based awards. Because we used the modified prospective method in adopting SFAS 123(R), prior periods have not been restated. In addition, the cumulative adjustment (estimated forfeitures) relating to the adoption of SFAS 123(R) in the first quarter of 2006 of $96,000 has not been separately shown in the income statement due to immateriality.


For periods presented prior to 2006, we applied Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provided the required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Stock options, stock appreciation rights (“SARs”) and restricted stock grants are accounted for using the intrinsic value method under APB Opinion No. 25 and related interpretations whereby:

·No compensation cost is recognized for fixed stock option or restricted stock grants unless the quoted market price of the stock at the measurement date (ordinarily the date of grant or award) is in excess of the amount the employee is required to pay; and
·Compensation cost for SARs is recognized and adjusted up through the date of exercise or forfeiture based on the estimated useful livesnumber of SARs expected to be exercised multiplied by the assets, which range from 15difference between the market price of our stock and the amount the employee is required to 40 years for buildings and land improvements and generally 2 to 20 years for machinery and equipment.

Assets Held for Sale. On March 22, 2002, we announced our intent to divest Therics. Accordingly, the depreciation and amortization of Therics’ assets was halted on that date and its long-lived assetspay (there were separately classified in the balance sheet as “Non-current assets of Therics held for sale” ($10,406no SARs outstanding at December 31, 2002)2005). During the first quarter of 2003, we suspended efforts to sell Therics. As a result, the long-lived assets of Therics are no longer classified as held for sale and an adjustment of $1,067 to catch up depreciation and amortization was recorded during the first quarter as an unusual item. On October 21, 2003, Tredegar announced the completion of a strategic assessment of Therics, which resulted in a decision to support the 2004 rollout of its new line of bone grafting products.

Goodwill and Other Intangibles.The excess of the purchase price over the fair value of identifiable net assets of acquired companies is allocated to goodwill. Effective January 1, 2002, we adopted the new accounting standard related to the accounting for goodwill and we discontinued amortization of goodwill. We assess goodwill for impairment when events or circumstances indicate the carrying value may not be recoverable, or, at a minimum, on an annual basis as of December 1 of each year. Impairment reviews may result in recognition of losses. In connection with the adoption of this standard, we have reclassified from intangible assets to goodwill approximately $396 related to Therics’ workforce, which no longer qualifies as a separately identifiable intangible asset. We have made determinations as to what our reporting units are and what amounts of goodwill, intangible assets, other assets and liabilities should be allocated to those reporting units.

        The components of goodwill and other intangibles at December 31, 2003 and 2002, and related amortization periods are as follows:



December 312003 2002 Amortization Periods

Carrying value of goodwill:          
    Film Products  $102,962 $101,354 Not amortized 
    Aluminum Extrusions   32,797  30,760 Not amortized 
    Therics   3,492  3,492 Not amortized 

    Total carrying value of goodwill   139,251  135,606   

Carrying value of other intangibles:  
    Film Products (cost basis of $603)   124  168 Not more than 17 yrs. 
    Therics (cost basis of $2,236)   1,173  1,565 10 years 

    Total carrying value of other intangibles   1,297  1,733   

Total carrying value of goodwill and other intangibles   140,548  137,339   
Goodwill and other intangibles related to Therics classified as  
    non-current assets held for sale in the consolidated balance  
    sheets     (5,057)  

    Net goodwill and other intangibles  $140,548 $132,282   


47



        A reconciliation of the beginning and ending balances of goodwill and other intangibles for each of the three years in the period ended December 31, 2003 is as follows:



 2003 2002 2001 

Goodwill and other intangibles:           
    Net carrying value, beginning of year  $137,339 $136,488 $139,578 
       Amortization   (268) (100) (4,914)
       Increase due to foreign currency translation and other   3,477  951  1,824 

    Net carrying value, end of year   140,548  137,339  136,488 
Goodwill and other intangibles related to Therics classified as  
    non-current assets held for sale in the consolidated balance  
    sheets     (5,057)  

    Net goodwill and other intangibles  $140,548 $132,282 $136,488 


        A reconciliation of previously reported net income (loss) and earnings (loss) per share to the amounts adjusted for the exclusion of goodwill amortization, net of related income taxes, is as follows:



 2003 2002 2001 

Reported net income (loss)  $(26,351)$(2,531)$9,752 
Goodwill amortization, net of tax       3,234 

Adjusted net income (loss)  $(26,351)$(2,531)$12,986 

Basic earnings (loss) per share as reported  $(.69)$(.07)$.26 
Adjustment to basic earnings (loss) per share       .08 

Adjusted basic earnings (loss) per share  $(.69)$(.07)$.34 

Diluted earnings (loss) per share as reported  $(.69)$(.07)$.25 
Adjustment to diluted earnings (loss) per share       .08 

Adjusted diluted earnings (loss) per share  $(.69)$(.07)$.33 


Impairment of Long-Lived Assets.We review long-lived assets for possible impairment when events indicate that impairment may exist. For assets to be held and used in operations, if events indicate that an asset may be impaired, we estimate the future unlevered pre-tax cash flows expected to result from the use of the asset and its eventual disposition. Assets are grouped for this purpose at the lowest level for which there are identifiable and independent cash flows. If the sum of these undiscounted pre-tax cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of the impairment loss is based on the estimated fair value of the asset, generally determined on a discounted after-tax cash flow basis.

        Assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell, with an impairment loss recognized for any writedown required.

Pension Costs and Postretirement Benefit Costs Other than Pensions.Pension costs and postretirement benefit costs other than pensions are accrued over the period employees provide service to the company. Our policy is to fund our pension plans at amounts not less than the minimum requirements of the Employee Retirement Income Security Act of 1974 and to fund postretirement benefits other than pensions when claims are incurred.

Postemployment Benefits.We periodically provide certain postemployment benefits purely on a discretionary basis. Related costs for these programs are accrued when it is probable that benefits will be paid. All other postemployment benefits are either accrued under current benefit plans or are not material to our financial position or results of operations.

Revenue Recognition.Revenue from the sale of products is recognized when delivery of product to the customer has occurred, the price of the product is fixed and determinable, and collectibility is reasonably assured. Amounts billed to customers related to freight have been classified as sales in the accompanying consolidated statements of income. The cost of freight has been classified as a separate line in the accompanying consolidated statements of income.

48



Income Taxes.Income taxes are recognized during the period in which transactions enter into the determination of income for financial reporting purposes, with deferred income taxes being provided at enacted statutory tax rates on the differences between the financial reporting and tax bases of assets and liabilities (see Note 14). We accrue U.S. federal income taxes on unremitted earnings of our foreign subsidiaries.

Earnings Per Share.Basic earnings per share is computed using the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed using the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:



 2003 2002 2001 

Weighted average shares outstanding used              
    to compute basic earnings (loss) per share   38,096,001  38,267,780  38,061,161    
Incremental shares issuable upon the              
    assumed exercise of stock options   345,009  601,452  762,967    

Shares used to compute diluted              
    earnings (loss) per share   38,441,010  38,869,232  38,824,128    


        Incremental shares issuable upon the assumed exercise of outstanding stock options are computed using the average market price during the related period. Options to purchase 2,425,575 shares in 2003, 2,052,610 shares in 2002 and 1,503,075 shares in 2001, were excluded from the calculation of incremental shares issuable upon the assumed exercise of stock options due to their anti-dilutive effect on earnings per share for the related period.

Stock-Based Employee Compensation Plans.Stock options, stock appreciation rights (“SARs”) and restricted stock grants are accounted for using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations whereby:


NoHad compensation cost is recognized for fixed stock option grants been determined in 2005 and 2004 based on the fair value at the grant dates, our income and diluted earnings per share from continuing operations would have been reduced to the pro forma amounts indicated below:
      
  2005
 
2004 
Income from continuing operations:     
As reported $16,229 $26,260 
Pro forma for stock option-based employee compensation cost, net of tax, based on the fair value method  (1,073) (2,133)
Pro forma income from continuing operations $15,156 $24,127 
Basic earnings per share from continuing operations:       
As reported $.42 $.69 
Pro forma  .39  .63 
Diluted earnings per share from continuing operations:       
As reported $.42 $.68 
Pro forma  .39  .63 
Stock option-based compensation expense included in determining net income in 2006 under SFAS 123(R) was $970 ($676 after taxes or 2 cents per share). Compensation cost related to restricted and phantom stock grants unless the quoted market priceawards included in determining net income from continuing operations was $188 in 2006, $386 in 2005 and $272 in 2004.

The fair value of each option was estimated as of the grant date using the Black-Scholes options-pricing model. The assumptions used in this model for valuing Tredegar stock options granted in 2006 and 2004 are as follows (there were no Tredegar stock options granted in 2005):
      
  
2006
 2004 
Dividend yield  
1.1
%
 1.2%
Weighted average volatility percentage  
38.3
%
 45.0%
Weighted average risk-free interest rate  
4.7
%
 3.1%
Holding period (years):       
Officers  
6.0
  n/a 
Management  
5.0
  5.0 
Other employees  
n/a
  3.0 
Weighted average excercise price at date of grant (also weighted average market price at date of grant):       
Officers 
$
15.22
  n/a 
Management  
15.32
 $13.97 
Other employees  
n/a
  13.95 

The dividend yield is the dividend yield on our common stock at the measurement date (ordinarily the date of grant, or award)which we believe is in excessa reasonable estimate of the amountexpected yield during the employeeholding period. We calculate expected volatility based on the historical volatility of our common stock using a sequential period of historical data equal to the expected holding period of the option. We have no reason to believe that future volatility is requiredlikely to pay;differ from the past. The assumed risk-free interest rate is based on observed interest rates (zero coupon U.S. Treasury debt securities) appropriate for the expected holding period. The expected holding period and

Compensation cost for SARs forfeiture assumptions are based on historical experience. Estimated forfeiture assumptions are reviewed through the vesting period. Adjustments are made if actual forfeitures differ from previous estimates. The cumulative effect of a change in estimated forfeitures is recognized in the period of the change.

Tredegar stock options granted during 2006 and adjusted up through2004 (there were no Tredegar stock options granted in 2005), and related estimated fair value at the date of exercise or forfeiture basedgrant, are as follows:
      
  
2006
 2004 
Stock options granted (number of shares):   
Officers  
107,500
  n/a 
Management  
342,300
  176,950 
Other employees  
n/a
  161,675 
Total  
449,800
  338,625 
Estimated weighted average fair value of options per share at date of grant:       
Officers 
$
6.26
  n/a 
Management  
5.69
 $5.54 
Other employees  
n/a
  4.32 
Total estimated fair value of stock options granted (in thousands)
 
$
2,620
 $
1,679
 
The table above excludes stock options granted to a consultant in 2004. The estimated fair value related to that grant of $50 was expensed in 2004 in conjunction with services rendered. Additional disclosure of Tredegar stock options is included in Note 10.

AFBS, Inc. (formerly known as Therics, Inc. - see Note 15 for additional information regarding its restructuring in 2005) stock options granted in 2004 and assumptions used in determining related pro forma compensation expense are as follows (there were no significant grants of AFBS stock options after 2004):
 
Assumptions Used in Determining Pro Forma Comp. Expense for AFBS Stock Options Granted in 2004 & Other Data
Assumptions used in Black-Scholes  Other assumptions and items: 
options-pricing model:  Vesting period (years)0.4 - 4
Dividend yield0.0% AFBS stock options granted: 
Volatility percentage (a)95% 3rd quarter 20047,906,149
Weighted average risk-free interest rate4.1% 1st quarter 200430,809,000
Holding period (years)7.0 Aggregate estimated fair value of options 
Weighted average estimated fair value per share  at date of grant: 
of underlying stock at date of grant (b)$ .090 3rd quarter 2004$ 584
Weighted average estimated fair value of  1st quarter 2004$ 2,271
options per share at date of grant$ .074   
(a) Volatility estimated for AFBS based on Orthovita, Inc. (NASDAQ: VITA), a comparable company.
(b) Estimated fair value of underlying stock equaled the stock option exercise price at date of grant.
Financial Instruments. We use derivative financial instruments for the purpose of hedging aluminum price volatility and interest rate and currency exchange rate exposures that exist as part of ongoing business operations. Our derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the balance sheet at fair value. A change in the fair value of the derivative that is highly effective as and that is designated and qualifies as a cash flow hedge is recorded in other comprehensive income. Gains and losses reported in other comprehensive income are reclassified to earnings in the periods in which earnings are affected by the variability of cash flows of the hedged transaction. Such gains and losses are reported on the estimated numbersame line as the underlying hedged item. Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of SARsthe derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current period earnings. The amount of gains and losses recognized for hedge ineffectiveness was immaterial in 2006, 2005 and 2004.

Our policy requires that we formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. We also formally assess (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting prospectively.

As a policy, we do not engage in speculative or leveraged transactions, nor do we hold or issue financial instruments for trading purposes.

The cash flows related to financial instruments are classified in the statements of cash flows in a manner consistent with those of the transactions being hedged.

Comprehensive Income. Comprehensive income, which is included in the consolidated statement of shareholders’ equity, is defined as net income and other comprehensive income. Other comprehensive income includes changes in unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses on derivative financial instruments and minimum pension liability adjustments, all recorded net of deferred income taxes directly in shareholders’ equity.
The available-for-sale securities adjustment included in the consolidated statement of shareholders’ equity is comprised of the following components:
        
  
2006
 
2005
 
2004 
Available-for-sale securities adjustment:       
Unrealized net holding gains (losses) arising during the period 
$
20
 $36 $1,872 
Income taxes  
(7
)
 (13) (655)
Reclassification adjustment for net losses (gains) realized in income  
(56
)
 -  (6,134)
Income taxes  
20
  -  2,147 
Available-for-sale securities adjustment 
$
(23
)
$23 $(2,770)

Recently Issued Accounting Standards. In September 2006, the FASB issued FASB Staff Position ("FSP") No. AUG AIR-1, Accounting for Planned Major Maintenance Activities. The FSP is effective for the first fiscal year beginning after December 15, 2006. The FSP eliminates the accrual method of accounting for major maintenance activities, but continues to permit the use of the direct expensing, built-in overhaul and deferral methods. The FSP also continues to require accruals or deferrals for interim periods of annual costs that clearly benefit two or more interim periods. We are evaluating the FSP and have not determined whether or not it will have a material effect on our financial position or results of operations.


In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, clarifying the accounting for uncertain tax positions. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be exercised multipliedtaken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006 with earlier application encouraged. We are evaluating the interpretation and have not determined if it will have a material effect on our financial position or results of operations.

2
ACQUISITIONS AND INVESTMENTS


On July 23, 2004, a subsidiary of Tredegar purchased the assets of Yaheng Perforated Film Material Co., Ltd. ("Yaheng") for approximately $1,420. Yaheng, based in Shanghai, China, had 21 employees at the acquisition date and manufactures apertured nonwovens used primarily in personal care markets. The purchase price was allocated to accounts receivable ($26), inventories ($45), property, plant and equipment ($288), patents ($822), employment agreements ($150), goodwill ($215), deferred income tax liabilities ($56) and accrued expenses ($70). Property, plant and equipment is being depreciated on a straight-line basis over approximately 10 years, patents are being amortized on a straight-line basis over approximately 7 years, and employment agreements are being amortized on a straight-line basis over approximately 3 years. The operating results for Yaheng have been included in the consolidated statements of income since the date acquired. Pro forma results for the acquisition are immaterial.
In August of 2004, we invested $5,000 in Novalux, Inc., a developer of laser technology for potential use in a variety of applications. In October 2005, we invested an additional $1,095 in a new convertible secured bridge financing for Novalux bringing our aggregate investment to $6,095 at December 31, 2005. As of December 31, 2005, the investment in Novalux was written down to estimated fair value of $1,095. The reduction in estimated fair value at the end of 2005 was due to longer than anticipated delays both in bringing the company’s technology to market and in obtaining key development partnerships as well as liquidity issues. The loss from the write-down in 2005 is included in “Other income (expense), net” in the consolidated statements of income and separately shown in the operating profit by segment table in Note 3. Subsequent to the first quarter of 2006, Novalux prospects improved and we invested an aggregate of $542 in May and September of 2006. As of December 31, 2006, our investment in Novalux was $6,637. Our carrying value in Novalux of $1,637 and $1,095 at December 31, 2006 and 2005, respectively, is included in “Other assets and deferred charges” in the consolidated balance sheet. Our voting ownership of Novalux as of December 31, 2006 is approximately 12% (11% on a fully diluted basis).

3
BUSINESS SEGMENTS


Information by business segment and geographic area for the last three years is provided below. There are no accounting transactions between segments and no allocations to segments. Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the difference betweenchief operating decision maker for purposes of assessing performance. Film Products’ net sales to The Procter & Gamble Company (“P&G”) totaled $255,414 in 2006, $236,554 in 2005 and $226,122 in 2004. These amounts include plastic film sold to others that convert the market price of our stock and the amount the employee is required to pay.film into materials used with products manufactured by P&G.
        
  
Net Sales
 
  
2006
 
2005
 
2004 
Film Products 
$
511,169
 $460,277 $413,257 
Aluminum Extrusions  
577,260
  471,749  425,130 
AFBS (formerly Therics)  
-
  252  380 
Total net sales  
1,088,429
  932,278  838,767 
Add back freight  
28,096
  24,691  22,398 
Sales as shown in consolidated statements of income 
$
1,116,525
 $956,969 $861,165 
           
   
Operating Profit
 
   
2006
 
 
2005
 
 
2004 
Film Products:          
Ongoing operations 
$
57,645
 $44,946 $43,259 
Plant shutdowns, asset impairments and restructurings, net of gains on the sale of assets (a)  
221
  (3,955) (10,438)
Aluminum Extrusions:       
Ongoing operations  
22,031
  19,302  22,637 
Plant shutdowns, asset impairments and restructurings, net of gains on the sale of assets (a)  
(1,434
)
 122  (10,553)
Other (a)  
-
  -  7,316 
AFBS (formerly Therics):       
Ongoing operations  
-
  (3,467) (9,763)
Loss on investment in Therics, LLC  
(25
)
 (145) - 
Restructurings (a)  
(637
)
 (10,318) (2,041)
Total  
77,801
  46,485  40,417 
Interest income  
1,240
  586  350 
Interest expense  
5,520
  4,573  3,171 
Gain on sale of corporate assets (a)  
56
  61  7,560 
Loss from write-down of investment in Novalux (a)  
-
  5,000  - 
Stock option-based compensation expense  
970
  -  - 
Corporate expenses, net (a)  
13,770
  11,357  9,674 
Income from continuing operations before income taxes  
58,837
  26,202  35,482 
Income taxes (a)  
20,636
  9,973  9,222 
Income from continuing operations  
38,201
  16,229  26,260 
Income from discontinued operations (a)  
-
  -  2,921 
Net income 
$
38,201
 $16,229 $29,181 

49



        Had compensation cost for our stock-based compensation plans been determined in 2003, 2002 and 2001 based on the fair value at the grant dates, our income and diluted earnings per share from continuing operations would have been reduced to the pro forma amounts indicated below:



 2003 2002 2001 

Income from continuing operations:              
    As reported  $19,327 $48,625 $30,751    
    Stock option-based employee              
      compensation cost, net of tax, based              
      on the fair value method   (2,194) (2,268) (2,385)   

Pro forma net income  $17,133 $46,357 $28,366    

Basic earnings per share from              
    continuing operations:              
    As reported  $.51 $1.27 $.81    
    Pro forma   .45  1.21  .75    

Diluted earnings per share from              
    continuing operations:              
    As reported  $.50 $1.25 $.79    
    Pro forma   .45  1.19  .73    


        Compensation cost related to stock-based compensation (restricted stock grants) included in determining net income from continuing operations was $95 in 2003, $203 in 2002 and $57 in 2001.

        The fair value of each option was estimated as of the grant date using the Black-Scholes options-pricing model. The assumptions used in this model for valuing stock options granted during 2003, 2002 and 2001 are as follows:



 2003 2002 2001 

Dividend yield   1.0% .9% .8%   
Volatility percentage   45.0% 45.0% 45.0%   
Weighted average risk-free interest rate   4.0% 4.7% 4.2%   
Holding period (years):              
    Officers   7.0  7.0  n/a    
    Management   5.0  5.0  5.0    
    Other employees   n/a  3.0  n/a    
Weighted average market prices at date of              
    grant (market price equals exercise price):              
    Officers and management   $  16.44  $  18.71  $  19.96    
    Other employees   n/a  18.90  n/a    


50



        Stock options granted during 2003, 2002 and 2001, and related estimated fair value at the date of grant, are as follows:



 2003 2002 2001 

Stock options granted (number of shares):              
    Officers   10,000  181,000  n/a    
    Management   5,000  345,200  26,000    
    Other employees   n/a  98,300  n/a    

    Total   15,000  624,500  26,000    

Estimated weighted average fair value of              
    options per share at date of grant (exercise              
    price equaled market price on date of grant)              
      Officers  $7.93 $9.14  n/a    
      Management   6.51  8.02 $8.42    
      Other employees   n/a  6.20  n/a    

Total estimated fair value of stock              
    options granted  $112 $5,033 $219    


        Additional disclosure of stock options is included in Note 10.

Financial Instruments.We use derivative financial instruments for the purpose of hedging aluminum price volatility and interest rate exposures that exist as part of ongoing business operations. Our derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the balance sheet at fair value. A change in the fair value of the derivative that is highly effective as and that is designated and qualifies as a cash flow hedge is recorded in other comprehensive income. Gains and losses reported in other comprehensive income are reclassified to earnings in the periods in which earnings are affected by the variability of cash flows of the hedged transaction. Such gains and losses are reported on the same line as the underlying hedged item. Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current period earnings. There was no hedge ineffectiveness recognized in earnings.

        Our policy requires that we formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. We also formally assess (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting prospectively.

        As a policy, we do not engage in speculative or leveraged transactions, nor do we hold or issue financial instruments for trading purposes.

        The cash flows related to financial instruments are classified in the statements of cash flows in a manner consistent with those of the transactions being hedged.

Comprehensive Income.Comprehensive income, which is included in the consolidated statement of shareholders’ equity, is defined as net income and other comprehensive income. Other comprehensive income includes changes in unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses on derivative financial instruments and minimum pension liability adjustments, all recorded net of deferred income taxes directly in shareholders’ equity.

        For 2001, other comprehensive income also includes income of $303 for the cumulative effect adjustment related to the adoption of the new accounting standard for derivative financial instruments.

51



        The available-for-sale securities adjustment included in the consolidated statement of shareholders’ equity is comprised of the following components:



 2003 2002 2001 

Available-for-sale securities adjustment:              
    Unrealized net holding gains (losses)              
      arising during the period  $7,294 $(9,419)$(3,859)   
    Income taxes   (2,626) 3,391  1,389    
    Reclassification adjustment for net              
      losses (gains) realized in income   (3,851) (2,656) (28,980)   
    Income taxes   1,367  956  10,433    

Available-for-sale securities adjustment  $2,184 $(7,728)$(21,017)   


2ACQUISITIONS


        On November 21, 2003, Tredegar announced that its aluminum extrusions subsidiary, the William L. Bonnell Company, had acquired Apolo Tool and Die Manufacturing Inc. (“Apolo”) of Woodbridge, Ontario. The purchase price consisted of cash consideration of $1,579 (including transaction costs of $110 and net cash acquired of $343). Apolo’s key capabilities include bending, CNC machining, drilling, mitering, punching, riveting, sawing and welding of aluminum extrusions and other materials. The company also has in-house tool and die design and manufacturing capability to support its fabrication services.

        On October 13, 2000, Tredegar acquired the stock of ADMA s.r.l. (“ADMA”) and Promea Engineering s.r.l. (“Promea”) for cash consideration of $3,082 (including transaction costs and debt assumed of $3,234 and net of cash acquired of $2,393). Additional contingent consideration in the amount of $1,918 was paid in 2001. ADMA manufactures films used primarily in personal hygiene markets while Promea manufactures equipment to produce hygienic films and laminates. Both companies are headquartered in Chieti, Italy, and share a manufacturing site in Roccamontepiano, Italy.

        These acquisitions were accounted for using the purchase method. There was no goodwill (the excess of the purchase price over the estimated fair value of identifiable net assets acquired) associated with the Apolo acquisition. Goodwill arising from the acquisition of ADMA and Promea was $5,455. The operating results for the acquired businesses have been included in the consolidated statements of income since the date acquired.

52



3BUSINESS SEGMENTS


        Information by business segment and geographic area for the last three years is provided below. There are no accounting transactions between segments and no allocations to segments. Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker of each segment for purposes of assessing performance. Film Products’ net sales to The Procter & Gamble Company (“P&G”) totaled $207,049 in 2003, $242,760 in 2002 and $235,356 in 2001. These amounts include plastic film sold to others that convert the film into materials used in products manufactured by P&G.



 Net Sales 
 2003 2002 2001 

Film Products  $365,501 $376,904 $382,740    
Aluminum Extrusions   354,593  360,293  380,387    
Therics     208  450    

     Total net sales   720,094  737,405  763,577    
Add back freight   18,557  16,319  15,580    

Sales as shown in consolidated              
     statements of income  $738,651 $753,724 $779,157    


 Operating Profit 
 2003 2002 2001 

Film Products:              
     Ongoing operations  $45,676 $72,307 $61,787    
     Plant shutdowns,              
       asset impairments and              
       restructurings (a)   (5,746) (3,397) (9,136)   
     Unusual items (a)     6,147      

Aluminum Extrusions:              
     Ongoing operations   15,117  27,304  25,407    
     Plant shutdowns,              
       asset impairments and              
       restructurings (a)   (644) (487) (7,799)   
     Gain on sale of land (a)   1,385        
     Unusual items (a)           

Therics:              
     Ongoing operations   (11,651) (13,116) (12,861)   
     Restructurings (a)   (3,855)       
     Unusual items (a)   (1,067)       

Total   39,215  88,758  57,398    
Interest income   1,183  1,934  2,720    
Interest expense   6,785  9,352  12,671    
Gain on sale of corporate assets (a)   5,155        
Corporate expenses, net (a)   8,724  5,834  2,746    

Income from continuing operations  
     before income taxes   30,044  75,506  44,701    
Income taxes (a)   10,717  26,881  13,950    

Income from continuing operations   19,327  48,625  30,751    
Loss from discontinued operations (a)   (45,678) (51,156) (20,999)   

Net income (loss)  $(26,351)$(2,531)$9,752    


(a)See NoteNotes 2 and 15 for more information on losses associated with plant shutdowns, asset impairments and restructurings, unusual items, and gains from sale of assets, investment write-down and other items, and Note 17 for more information on discontinued operations.

(b)
The difference between total consolidated sales as reported in the consolidated statements of income and segment and geographic net sales reported in this note is freight of $18,557$28,096 in 2003, $16,3192006, $24,691 in 20022005, and $15,580$22,398 in 2001.2004.

(c)Information on exports and foreign operations are provided on the next page. Cash and cash equivalents includes funds held in foreign locations of $16,188, $16,550$19,118, $14,890 and $13,560$21,410 at December 31, 2003, 20022006, 2005, and 2001,2004, respectively. Export sales relate almost entirely to Film Products. Foreign operations in The Netherlands, Hungary, China, Italy, Brazil and identifiable assetsArgentina (operations in Europe, Latin America and AsiaArgentina were sold in the third quarter of 2004) also relate to Film Products. Sales from our locations in The Netherlands, Hungary and Italy are primarily to customers located in Europe. Sales from our locations in China (Guangzhou and Shanghai) are primarily to customers located in China, but also include other customers in Asia. Foreign operations and identifiable assets in Canada relate to Aluminum Extrusions.

53





 Identifiable Assets       
December 312003 2002 2001       

Film Products  $422,321 $379,635 $367,291          
Aluminum Extrusions   185,336  176,631  185,927          
Therics   8,917  10,643  9,931          

     Subtotal   616,574  566,909  563,149          
General corporate   61,508  52,412  40,577          
Income taxes recoverable  
     from sale of venture  
     capital investment portfolio   55,000              
Cash and cash equivalents (c)   19,943  109,928  96,810          

     Continuing operations   753,025  729,249  700,536          
Discontinued operations:  
     Venture capital     108,713  158,887          
     Molecumetics       5,608          

     Total  $753,025 $837,962 $865,031          


 Depreciation and Amortization Capital Expenditures 
 2003 2002 2001 2003 2002 2001 

Film Products  $19,828 $20,085 $22,047 $57,203 $24,063 $24,775 
Aluminum Extrusions   10,883  10,506  11,216  8,293  4,799  8,506 
Therics   1,641  463  2,262  219  1,621  2,340 

     Subtotal   32,352  31,054  35,525  65,715  30,483  35,621 
General corporate   270  353  329  93  60  519 

     Continuing operations   32,622  31,407  35,854  65,808  30,543  36,140 
Discontinued operations:  
     Venture capital              
     Molecumetics     527  2,055    793  2,850 

     Total  $32,622 $31,934 $37,909 $65,808 $31,336 $38,990 


 Net Sales by Geographic Area (c)       
 2003 2002 2001       

United States  $383,204 $416,189 $476,015          
Exports from the United States to:  
     Canada   25,188  24,026  21,611          
     Latin America   17,915  20,711  23,752          
     Europe   25,157  22,720  11,342          
     Asia   21,510  27,480  25,906          
Foreign operations:  
     Canada   125,347  130,356  118,404          
     Europe   88,856  69,278  56,329          
     Latin America   15,491  12,443  19,148          
     Asia   17,426  14,202  11,070          

     Total (b)  $720,094 $737,405 $763,577          


 Identifiable Assets by
Geographic Area (c)
       
December 312003 2002 2001       

United States  $394,415 $515,542 $575,915  ��       
Canada   86,564  78,544  78,353          
Europe   95,575  57,351  43,025          
Latin America   10,787  8,620  14,776          
Asia   29,233  15,565  15,575          
General corporate   61,508  52,412  40,577          
Income taxes recoverable  
     from sale of venture  
     capital investment portfolio   55,000              
Cash and cash equivalents (c)   19,943  109,928  96,810          

     Total  $753,025 $837,962 $865,031          


See footnotes on prior page and a reconciliation of net sales Sales from our locations in Canada are primarily to sales as showncustomers located in the consolidated statements of income.

54


U.S. and Canada.
        
  
Identifiable Assets
 
December 31 
2006
 
2005
 
2004 
Film Products 
$
498,961
 $479,286 $472,810 
Aluminum Extrusions  
209,395
  214,374  210,894 
AFBS (formerly Therics)  
2,420
  2,759  8,613 
Subtotal  
710,776
  696,419  692,317 
General corporate  
30,113
  61,905  54,163 
Cash and cash equivalents (c)  
40,898
  23,434  22,994 
Total 
$
781,787
 $781,758 $769,474 

     
  
Depreciation and Amortization
Capital Expenditures
 
  
2006
 
2005
 
2004
 
2006
 
2005
 
2004 
Film Products 
$
31,847
 $26,673 $21,967 
$
33,168
 $50,466 $44,797 
Aluminum Extrusions  
12,323
  11,484  10,914  
7,381
  11,968  10,007 
AFBS (formerly Therics)  
-
  437  1,300  
-
  36  275 
Subtotal  
44,170
  38,594  34,181  
40,549
  62,470  55,079 
General corporate  
111
  195  241  
24
  73  572 
Total 
$
44,281
 $38,789 $34,422 
$
40,573
 $62,543 $55,651 

    
 
Net Sales by Geographic Area (c)
 
  
2006
 
2005
 
2004 
United States 
$
606,410
 $495,900 $441,891 
Exports from the United States to:          
Canada  
42,669
  44,870  27,663 
Latin America  
4,364
  9,428  16,668 
Europe  
8,944
  8,311  15,768 
Asia  
50,096
  40,476  31,617 
Foreign operations:          
Canada  
173,471
  144,090  147,145 
The Netherlands  
91,476
  83,649  66,856 
Hungary  
29,152
  33,573  34,721 
China  
42,460
  36,823  25,291 
Italy  
14,323
  15,866  12,423 
Brazil and Argentina (2004)  
25,064
  19,292  18,724 
Total (b) 
$
1,088,429
 $932,278 $838,767 

      
 
 
 Identifiable Assetsby Geographic Area (c)
 
Property, Plant & Equipment,Net by Geographic Area (c)
 
December 31 
2006
 
2005
 
2004
 
2006
 
2005
 
2004 
United States 
$
446,005
 $444,144 $427,240 
$
176,160
 $178,154 $163,383 
Foreign operations:                  
Canada  
89,354
  92,328  92,290  
38,151
  41,208  38,610 
The Netherlands  
70,609
  67,683  75,449  
53,905
  54,331  58,370 
Hungary  
20,039
  18,505  27,308  
12,475
  12,787  19,371 
China  
53,633
  40,599  38,713  
34,671
  26,104  25,684 
Italy  
16,734
  17,997  20,785  
3,565
  3,093  3,991 
Brazil  
14,402
  15,163  10,532  
4,892
  5,205  5,037 
General corporate  
30,113
  61,905  54,163  
1,944
  1,994  2,246 
Cash and cash equivalents (c)  
40,898
  23,434  22,994  
n/a
  n/a  n/a 
Total 
$
781,787
 $781,758 $769,474 
$
325,763
 $322,876 $316,692 
                    
See footnotes on prior page and a reconciliation of net sales to sales as shown in the consolidated statements of income.
4
ACCOUNTS AND NOTES RECEIVABLE



        Accounts and notes receivable consist of the following:

Accounts and notes receivable consist of the following:
      
 
2006
 2005 
      
Trade, less allowance for doubtful accounts and sales returns of $8,559 in 2006 and $5,423 in 2005 
$
116,943
 $112,968 
Other  
4,891
  6,362 
Total 
$
121,834
 $119,330 
The allowance for doubtful accounts and sales returns increased by $3,136 in 2006, $110 in 2005 and $865 in 2004. The changes in 2006, 2005 and 2004 were comprised of increases to the allowance for charges to expense of $3,911, $612 and $956, respectively, decreases in the allowance for income from recoveries of $57, $15 and $5, respectively, decreases in the allowance for write-offs of $696, $403 and $413, respectively, and foreign exchange and other adjustments to the allowance of minus $22, minus $84 and plus $327, respectively.


December 312003 2002 

Trade, less allowance for doubtful           
    accounts and sales returns of $4,448           
    in 2003 and $6,042 in 2002  $79,409 $73,827    
Volume shortfall payments, contract           
    terminations and revisions due from P&G     15,329    
Other   4,701  3,736    

    Total  $84,110 $92,892    


5
INVENTORIES


Inventories consist of the following:

        Inventories consist of the following:

      
 
2006
 2005 
Finished goods 
$
15,412
 $12,838 
Work-in-process  
4,540
  3,685 
Raw materials  
34,185
  33,043 
Stores, supplies and other  
14,793
  12,872 
Total 
$
68,930
 $62,438 
Inventories stated on the LIFO basis amounted to $17,230 at December 31, 2006 and $19,843 at December 31, 2005, which are below replacement costs by approximately $26,139 at December 31, 2006 and $29,164 at December 31, 2005. During 2006, inventories accounted for on a LIFO basis declined, which resulted in cost of goods sold being stated at below current replacement costs by approximately $5,400 ($5,300 in Film Products, including $2,900 associated with the shutdown of the films manufacturing facility in LaGrange, Georgia, and $100 in Aluminum Extrusions). During 2005, inventories accounted for on a LIFO basis declined, which resulted in cost of goods sold being stated at below current replacement costs by approximately $2,300 ($2,100 in Film Products and $200 in Aluminum Extrusions).


December 312003 2002 

Finished goods  $9,190 $7,841    
Work-in-process   3,294  3,905    
Raw materials   25,730  21,076    
Stores, supplies and other   11,358  11,147    

    Total  $49,572 $43,969    


        Inventories stated on the LIFO basis amounted to $18,030 at December 31, 2003 and $14,829 at December 31, 2002, which are below replacement costs by approximately $16,289 at December 31, 2003 and $12,473 at December 31, 2002.


6
FINANCIAL INSTRUMENTS


In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our exposure to aluminum price volatility under these fixed-price arrangements, which generally have a duration of not more than 12 months, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled deliveries. The futures contracts are designated as and accounted for as cash flow hedges. These contracts involve elements of credit and market risk that are not reflected on our balance sheet, including the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to our forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to our futures contracts are major financial institutions. Fixed-price forward sales contracts are only made available to our best and most credit-worthy customers. The notional amount of aluminum futures contracts that hedged fixed-price forward sales contracts was $15,865 (13,016 pounds of aluminum) at December 31, 2006 and $5,367 (6,393 pounds of aluminum) at December 31, 2005. Unrealized gains in excess of losses on aluminum futures contracts that hedge fixed-price forward sales contracts of $1,184 ($728 after taxes) and $1,213 ($776 after taxes) at December 31, 2006 and 2005, respectively, are included as a separate component of shareholders’ equity. The portion of aluminum futures contracts that was ineffective in hedging fixed-price forward sales contracts was immaterial in 2006, 2005 and 2004.

        In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our exposure to aluminum price volatility under these fixed-price arrangements, which generally have a duration of not more than 12 months, we enter into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled deliveries. The futures contracts are designated as and accounted for as cash flow hedges. These contracts involve elements of credit and market risk that are not reflected on our balance sheet, including the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to our forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to our futures contracts are major financial institutions. Fixed-price forward sales contracts are only made available to our best and most credit-worthy customers.

        We use interest rate swaps to manage interest rate exposure. There were no interest rate swaps outstanding at December 31, 2003. Interest rate swaps outstanding during 2003, 2002 and 2001 were designated as and accounted for as cash flow hedges (see Note 8). Counterparties to our interest rate swaps consisted of large major financial institutions.

        After-tax gains of $395 in 2003 and after-tax losses of $1,512 in 2002 and $1,460 in 2001,

In the past we have used interest rate swaps with large major financial institutions to manage interest rate exposure, but there have been no interest rate swaps outstanding since 2003.

We have partially hedged our exposure to the Canadian Dollar (“CAD”) and Euro (“EUR”) as shown in the following tables (accounted for as cash flow hedges):
(In Thousands Except Exchange Rates)                   
    Notional Amount as a % of Forecasted USD-Equiv. Net USD-Equivalent Strike Prices of Options Bought & Pretax Unrealized Gain (Loss) on Options at 
USD-Equiv.
Average
 
Cash (Paid to)
Recieved
from
 
Gain (Loss) on
Options Recognized
in Income for Period
 
  Notional CAD- Option Sold on CAD/USD 12/31/06 Reference Counter- Portion Portion 
Description of Currency Amount Related Premium Call Put Included in Price of party at Deemed Deemed 
Exposure, Options Hedging Strategy of Option Costs for (Paid) Options Options Shareholders' CAD for Expiration Effective Ineffective 
Used & Periods Covered Contracts Period Received Bought Sold Equity Period of Options as Hedge as Hedge 
Exposure: About 80% of sales of extrusions manufactured in facilities in Canada are denominated or economically priced in U.S. Dollars ("USD") while conversion costs are denominated or economically priced in Canadian Dollars ("CAD").
                     
Hedge Strategy: Bought average rate call options & sold average rate put options on CAD/USD.
                   
Periods Covered by Option Contracts:
                   
5/11/06 to end of second quarter 2006 $2,500  38%$- $0.9500 $0.8850  n/a $0.8995 $- $- $- 
Third quarter 2006  5,000  40% -  0.9500  0.8749  n/a  0.8919  -  -  - 
Fourth quarter 2006  6,500  53% -  0.9324  0.8650  n/a  0.8793  -  -  - 
First quarter 2007  3,500  28% -  0.9100  0.8380 $(3) n/a  n/a  n/a  - 
First quarter 2007  3,500  28% -  0.9000  0.8345  (2) n/a  n/a  n/a  - 
Second quarter 2007  3,500  28% -  0.9100  0.8430  (18) n/a  n/a  n/a  - 
Second quarter 2007  3,500  28% -  0.9000  0.8364  (8) n/a  n/a  n/a  - 
Third quarter 2007  3,500  28% -  0.9100  0.8473  (27) n/a  n/a  n/a  - 
Third quarter 2007  3,500  28% -  0.9000  0.8403  (11) n/a  n/a  n/a  - 
Fourth quarter 2007  3,500  28% -  0.9100  0.8516  (33) n/a  n/a  n/a  - 
Fourth quarter 2007  3,500  28% -  0.9000  0.8446  (14) n/a  n/a  n/a  - 
                 $(116)             

(In Thousands Except Exchange Rates)       
    Sensitivity Analysis of Amount Tredegar (Pays to) Receives 
Average Average from Counterparty in 2007 for Settlement of CAD/USD Options 
CAD Per USD Equiv. First Second Third Fourth   
USD of CAD Quarter Quarter Quarter Quarter Total 
1.21951 $0.8200 $(136)$(164)$(197)$(232)$(729)
1.20482  0.8300  (52) (81) (115) (149) (397)
1.19048  0.8400  -  (12) (32) (67) (111)
1.17647  0.8500  -  -  -  (7) (7)
1.16279  0.8600  -  -  -  -  - 
1.14943  0.8700  -  -  -  -  - 
1.13636  0.8800  -  -  -  -  - 
1.12360  0.8900  -  -  -  -  - 
1.11111  0.9000  -  -  -  -  - 
1.09890  0.9100  39  39  39  39  155 
1.08696  0.9200  116  116  116  116  465 
1.07527  0.9300  194  194  194  194  774 
1.06383  0.9400  271  271  271  271  1,084 
(In Thousands Except Exchange Rates)           
    Notional         
    Amount as       Pretax 
    a % of   USD-Equivalent Unrealized 
    Forecasted   Strike Prices of Gain (Loss) 
    USD-Equiv.   Options Bought & on Options at 
  Notional Royalty Net Option Sold on EUR/USD 12/31/06 
Description of Currency Amount from Premium Call Put Included in 
Exposure, Options Hedging Strategy of Option Nether- (Paid) Options Options Shareholders' 
Used & Periods Covered Contracts lands Sub Received Sold Bought Equity* 
Exposure: Significant royalty on sales from film technology licensed to subsidiary in the Netherlands is earned in Euros ("EUR").
           
Hedge Strategy: Sold average rate call options & bought average rate put options on EUR/USD.
           
Periods Covered by Option Contracts:
           
First quarter 2007 $3,200  74%$- $1.3350 $1.2800  n/a 
Second quarter 2007  3,200  82% -  1.3480  1.2800  n/a 
Third quarter 2007  3,200  75% -  1.3575  1.2800  n/a 
Fourth quarter 2007  3,200  76% -  1.3640  1.2800  n/a 
* Hedge transactions occurred on 1/4/07 and therefore there was no unrealized gain or loss at 12/31/06.   

(In Thousands Except Exchange Rates)       
    Sensitivity Analysis of Amount Tredegar (Pays to) Receives 
Average Average from Counterparty in 2007 for Settlement of EUR/USD Options 
EUR Per USD Equiv. First Second Third Fourth   
USD of EUR Quarter Quarter Quarter Quarter Total 
0.84034 $1.1900 $225 $225 $225 $225 $900 
0.82645  1.2100  175  175  175  175  700 
0.81301  1.2300  125  125  125  125  500 
0.80000  1.2500  75  75  75  75  300 
0.78740  1.2700  25  25  25  25  100 
0.77519  1.2900  -  -  -  -  - 
0.76336  1.3100  -  -  -  -  - 
0.75188  1.3300  -  -  -  -  - 
0.74074  1.3500  (36) (5) -  -  (41)
0.72993  1.3700  (84) (52) (29) (14) (180)
0.71942  1.3900  (132) (100) (77) (61) (369)
0.70922  1.4100  (180) (147) (124) (108) (559)
0.69930  1.4300  (228) (195) (171) (155) (748)

After-tax gains of $1,104 in 2006, $939 in 2005 and $1,230 in 2004 were reclassified from other comprehensive income to earnings and were offset by losses, or gains, respectively, from transactions relating to the underlying hedged item. As of December 31, 2006, we expect $654 of unrealized after-tax gains on derivative instruments reported in accumulated other comprehensive income to be reclassified to earnings within the next twelve months. We also expect that these gains will be offset by losses from transactions relating to the underlying hedged item.


7
ACCRUED EXPENSES


Accrued expenses consist of the following:
      
 
2006
 2005 
      
Payrolls, related taxes and medical and other benefits 
$
8,620
 $6,687 
Workmen's compensation and disabilities  
4,335
  4,226 
Vacation  
4,875
  4,488 
Plant shutdowns and divestitures  
5,058
  6,972 
Incentive compensation  
4,075
  383 
Other  
14,943
  13,275 
Total 
$
41,906
 $36,031 
A reconciliation of the beginning and ending balances of accrued expenses associated with plant shutdowns and divestitures for each of the three years in the period ended December 31, 2006 is as follows:
            
  Severance
 
Asset
Impairments
 
Accelerated
Depreciation (a)
 
Other (b)
 
Total 
Balance at December 31, 2003 $2,106 $- $- $3,086 $5,192 
2004:                
Charges  6,456  11,554  2,572  2,450  23,032 
Cash spent  (3,732) -  -  (2,112) (5,844)
Charged against assets  -  (11,554) (2,572) -  (14,126)
Foreign currency translation  261  -  -  -  261 
Reversed to income  -  -  -  (30) (30)
Balance at December 31, 2004  5,091  -  -  3,394  8,485 
2005:                
Charges  3,620  8,198  353  6,553  18,724 
Cash spent  (6,182) -  -  (4,290) (10,472)
Charged against assets  -  (8,198) (353) -  (8,551)
Foreign currency translation  (8) -  -  -  (8)
Reversed to income  (1,036) -  -  (170) (1,206)
Balance at December 31, 2005  1,485  -  -  5,487  6,972 
2006:                
Charges  1,371  1,150  -  1,607  4,128 
Cash spent  (2,420) -  -  (2,472) (4,892)
Charged against assets  -  (1,150) -  -  (1,150)
Foreign currency translation  -  -  -  -  - 
Reversed to income  -  -  -  -  - 
Balance at December 31, 2006 $436 $- $- $4,622 $5,058 
(a) Represents depreciation accelerated due to plant shutdowns based on a remaining useful life of less than one year.
(b) Other includes primarily accrued losses on a sub-lease at a facility in Princeton New, Jersey.
The amount reversed to income in 2005 relates primarily to changes in estimates for severance and shutdown-related costs at our aluminum extrusions facility in Aurora, Ontario and in connection with the restructuring of the research and development operations in Film Products. See Note 15 for more information on plant shutdowns, asset impairments and restructurings.


8
DEBT AND CREDIT AGREEMENTS


On December 15, 2005, we refinanced our debt with a new $300,000, five-year unsecured revolving credit agreement (the “Credit Agreement”). At December 31, 2006, available credit under the Credit Agreement was approximately $239,000. Total debt due and outstanding at December 31, 2006 is summarized below:
        
Debt Due and Outstanding at December 31, 2006 
Year
Due
 
Credit
Agreement
 Other 
Total Debt
Due
 
2007 $- $678 $678 
2008  -  484  484 
2009  -  495  495 
2010  60,000  415  60,415 
2011  -  221  221 
Remainder  -  227  227 
Total $60,000 $2,520 $62,520 
The credit spread over LIBOR and commitment fees charged on the unused amount under the Credit Agreement at various indebtedness-to-adjusted EBITDA levels are as follows:
      
Pricing Under Credit Agreement (Basis Points) 
  
Credit Spread
Over LIBOR
   
Indebtedness-to-
Adjusted EBITDA
Ratio
 
($60 Million
Outstanding
at 12/31/06)
 
Commitment
Fee
 
> 2.50x but <= 3x  125  25 
> 1.75x but <= 2.50x  100  20 
> 1x but <= 1.75x  87.5  17.5 
<= 1x  75  15 
At December 31, 2006, the interest cost on debt was priced at one-month LIBOR plus the applicable credit spread of 75 basis points.

The most restrictive covenants in the Credit Agreement include:

·Maximum aggregate dividends over the term of the Credit Agreement of $100,000 plus, beginning October 1, 2005, 50% of net income ($119,546 million as of December 31, 2003, we expect $444 of unrealized after-tax gains on derivative instruments reported in accumulated other comprehensive income to be reclassified to earnings within the next twelve months. We also expect that these gains will be offset by losses from transactions relating to the underlying hedged item.

55


2006);

7·ACCRUED EXPENSES


        Accrued expenses consistMinimum shareholders’ equity ($371,464 as of the following:



December 312003 2002 

Payrolls, related taxes and medical and��        
    other benefits  $12,830 $14,621    
Workmen’s compensation and disabilities   3,566  3,658    
Vacation   4,435  4,202    
Plant shutdowns and divestitures   5,192  1,408    
Derivative financial instruments:  
    Aluminum futures contracts for hedging  
      forward sales contracts (see Note 6)     316    
    Interest rate swaps (see Note 8)     992    
Other   16,433  17,212    

    Total  $42,456 $42,409    


        A reconciliation of the beginning and ending balances of accrued expenses associated with plant shutdowns and divestitures for each of the three years in the period ended December 31, 2003 is as follows:

2006);


 Severance Asset
Impairments
 Accelerated
Depreciation
 Other Total 

Balance at December 31, 2000  $ $ $ $391 $391 
2001:  
     Changes   2,422  8,915    5,598  16,935 
     Cash spent   (1,884)     (1,604) (3,488)
     Charged against assets     (8,915)     (8,915)
     Reversed to income            

Balance at December 31, 2001   538      4,385  4,923 
2002:  
     Changes   826  1,457    1,601  3,884 
     Cash spent   (893)     (4,952) (5,845)
     Charged against assets     (1,457)     (1,457)
     Reversed to income   (97)       (97)

Balance at December 31, 2002   374      1,034  1,408 
2003:  
     Changes   5,505  1,051  1,733  3,137  11,426 
     Cash spent   (3,773)     (1,085) (4,858)
     Charged against assets     (1,051) (1,733)   (2,784)
     Reversed to income            

Balance at December 31, 2003  $2,106 $ $ $3,086 $5,192 


        See Note 15 for more information on plant shutdowns, asset impairments and restructurings.

56



8·DEBT AND CREDIT AGREEMENTS


        On October 17, 2003, we refinanced our debt with a new $250,000 credit agreement (the “Credit Agreement”) consisting of a $175,000 three-year revolving credit facility and a $75,000 three-year term loan. The amount available under the revolving credit facility is reduced by $50,000 on the earlier of the receipt of the approximately $55,000 in income tax recoveries related to the sale of the venture capital portfolio (see Note 17) or September 15, 2004. Total debt due and outstanding atMaximum indebtedness-to-adjusted EBITDA through December 31, 2003 is summarized below:

2008 of 3x and 2.75x thereafter (2.5x on a pro forma basis for acquisitions); and


Debt Due and Outstanding at December 31, 2003 

 Credit Agreement
        
Year
Due
  Revolver Term
Loan
 Other Total Debt
Due
    

   2004   $ $8,750 $ $8,750    
   2005      13,125  4,276  17,401    
   2006    61,000  51,250  360  112,610    
   2007        270  270    
   2008        170  170    
 Remainder       428  428    

   Total  $61,000 $73,125 $5,504 $139,629    


        The credit spread over LIBOR and commitment fees charged on the unused amount under the credit agreement at various indebtedness-to-adjusted EBITDA levels are as follows:

·
Minimum adjusted EBIT-to-interest expense of 2.5x.


 
Pricing Under Credit Agreement (Basis Points) 

 
   Credit Spread Over LIBOR
    
Indebtedness-to-
Adjusted EBITDA
Ratio
Revolver
($61 Million
Outstanding
at 12/31/03)
 Term Loan
($73 Million
Outstanding
at 12/31/03)
 Commitment
Fee
  

 
> 2x but <= 3x   150  150  30  
> 1x but <= 2x   125  125  25  
<= 1x   100  100  20  

 

        At December 31, 2003, we had no interest rate swaps outstanding and the interest cost on debt was priced at one-month LIBOR plus the applicable credit spread of 125 basis points.

        The most restrictive covenants in the Credit Agreement include:


Maximum aggregate dividends over the termWe believe we were in compliance with all of the Credit Agreement of $100,000;

Minimum shareholders’ equity ($329,658our debt covenants as of December 31, 2003);

Maximum indebtedness-to-adjusted EBITDA2006. Noncompliance with any one or more of 3x (2.5xthe debt covenants may have a material adverse effect on financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a pro forma basis for acquisitions); and

Minimum adjusted EBIT-to-interest expensewaiver from the lenders. Renegotiation of 2.5x.the covenant through an amendment to the Credit Agreement may effectively cure the noncompliance, but may have an effect on financial condition or liquidity depending upon how the covenant is renegotiated.
In the past we have used interest rate swaps with large major financial institutions to manage interest rate exposure, but there have been no interest rate swaps outstanding since 2003.

        We believe we were in compliance with all of our debt covenants as of December 31, 2003. Noncompliance with any one or more of the debt covenants may have an adverse effect on financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a waiver from the lenders. Renegotiation of the covenant through an amendment to the credit agreement may effectively cure the noncompliance, but may have an effect on financial condition or liquidity depending upon how the covenant is renegotiated.

        On April 27, 2001, we entered into a two-year interest rate swap agreement, with a notional amount of $50,000, under which we paid to a counterparty a fixed interest rate of 4.85% and the counterparty paid us a variable interest rate based on one-month LIBOR reset each month. This swap was designated as and accounted for as a cash flow hedge. It effectively fixed the rate on $50,000 of our $250,000 term loan then outstanding at 4.85% plus the applicable credit spread (generally 62.5 basis points at that time).

57



        On June 22, 2001, we entered into another two-year interest rate swap agreement, with a notional amount of $25,000, under which we paid to a counterparty a fixed interest rate of 4.64% and the counterparty paid us a variable interest rate based on one-month LIBOR reset each month. This swap was designated as and accounted for as a cash flow hedge. It effectively fixed the rate on $25,000 of our $250,000 term loan then outstanding at 4.64% plus the applicable credit spread (generally 62.5 basis points at that time).


9
SHAREHOLDER RIGHTS AGREEMENT



        Pursuant to a Rights Agreement dated as of June 30, 1999 (as amended), between Tredegar and National City Bank as Rights Agent, one Right is attendant to each share of our common stock. Each Right entitles the registered holder to purchase from Tredegar one one-hundredth of a share of Participating Cumulative Preferred Stock, Series A (the “Preferred Stock”), at an exercise price of $150 (the “Purchase Price”). The Rights will become exercisable, if not earlier redeemed, only if a person or group acquires 10% or more of the outstanding shares of our common stock or announces a tender offer which would result in ownership by a person or group of 10% or more of our common stock. Any action by a person or group whose beneficial ownership is reported on Amendment No. 4 to the Schedule 13D filed with respect to Tredegar on May 20, 1997, cannot cause the Rights to become exercisable.

        Each holder of a Right, upon the occurrence of certain events, will become entitled to receive, upon exercise and payment of the Purchase Price, Preferred Stock (or in certain circumstances, cash, property or other securities of Tredegar or a potential acquirer) having a value equal to twice the amount of the Purchase Price.

        The Rights will expire on June 30, 2009.

58


Pursuant to a Rights Agreement dated as of June 30, 1999 (as amended), between Tredegar and National City Bank as Rights Agent, one Right is attendant to each share of our common stock. Each Right entitles the registered holder to purchase from Tredegar one one-hundredth of a share of Participating Cumulative Preferred Stock, Series A (the “Preferred Stock”), at an exercise price of $150 (the “Purchase Price”). The Rights will become exercisable, if not earlier redeemed, only if a person or group acquires 10% or more of the outstanding shares of our common stock or announces a tender offer which would result in ownership by a person or group of 10% or more of our common stock. Any action by a person or group whose beneficial ownership is reported on Amendment No. 4 to the Schedule 13D filed with respect to Tredegar on March 20, 1997, cannot cause the Rights to become exercisable.

Each holder of a Right, upon the occurrence of certain events, will become entitled to receive, upon exercise and payment of the Purchase Price, Preferred Stock (or in certain circumstances, cash, property or other securities of Tredegar or a potential acquirer) having a value equal to twice the amount of the Purchase Price.
The Rights will expire on June 30, 2009.

10
STOCK OPTION AND STOCK AWARD PLANS



        We have two stock option plans under which stock options may be granted to purchase a specified number of shares of common stock at a price no lower than the fair market value on the date of grant and for a term not to exceed 10 years. One of those option plans is a directors’ stock plan. In addition, we have two other stock option plans under which there are options that remain outstanding, but no future grants can be made. Employee options ordinarily vest one to two years from the date of grant. The outstanding options granted to directors vest over three years. The option plans also permit the grant of restricted stock. No SARs have been granted since 1992. All SARs outstanding at December 31, 2001, were exercised during 2002.

        A summary of our stock options outstanding at December 31, 2003, 2002 and 2001, and changes during those years, is presented below:

We have two stock option plans under which stock options may be granted to purchase a specified number of shares of common stock at a price no lower than the fair market value on the date of grant and for a term not to exceed 10 years. One of those option plans is a directors’ stock plan. In addition, we have three other stock option plans under which there are options that remain outstanding, but no future grants can be made. Employee options ordinarily vest one to two years from the date of grant. The outstanding options granted to directors vest over three years. The option plans also permit the grant of stock appreciation rights (“SARs”), stock, restricted stock, stock unit awards and incentive awards. No SARs have been granted since 1992. All SARs outstanding at December 31, 2001, were exercised during 2002.


   Option Exercise Price/Share
 
 Number of Shares
    Wgted.  
 Options SARs Range Ave.  

Outstanding at 12/31/00   2,951,490  117,835 $2.70  to $46.63 $18.76  
Granted in 2001   26,000    18.35  to  21.00  19.96  
Lapsed in 2001   (52,960)   19.75  to  25.65  21.61  
Exercised in 2001   (47,510) (13,735) 2.70  to  18.37  5.42  

Outstanding at 12/31/01   2,877,020  104,100  2.70  to  46.63  18.94  
Granted in 2002   624,500    14.56  to  18.90  18.74  
Lapsed in 2002   (57,150)   18.90  to  21.50  19.36  
Exercised in 2002   (283,490) (104,100) 2.70  to  23.13  4.87  

Outstanding at 12/31/02   3,160,880    3.37  to  46.63  20.16  
Granted in 2003   15,000    16.19  to  16.57  16.44  
Lapsed in 2003   (179,970)   16.55  to  46.63  24.75  
Exercised in 2003   (273,300)   3.37  to  8.38  4.68  

Outstanding at 12/31/03   2,722,610   $3.37  to $46.63 $21.39  

A summary of our stock options outstanding at December 31, 2006, 2005 and 2004, and changes during those years, is presented below:
            
    Option Exercise Price/Share 
  
Number of
Options
   Range   
Wgted.
Ave.
 
Outstanding at 12/31/03  2,722,610 $3.37  to  46.63 $21.39 
Granted  348,425  13.95  to  14.50  13.97 
Forfeited and Expired  (102,175) 7.38  to  46.63  23.28 
Exercised  (306,870) 3.37  to  19.75  6.99 
Outstanding at 12/31/04  2,661,990  4.17  to  46.63  22.01 
Granted  -  n/a  to  n/a  n/a 
Forfeited and Expired  (274,575) 13.95  to  46.63  21.90 
Exercised  (137,075) 4.17  to  16.55  7.51 
Outstanding at 12/31/05  2,250,340  7.38  to  46.63  22.90 
Granted  449,800  15.11  to  19.52  15.30 
Forfeited and Expired  (874,525) 7.38  to  46.63  29.73 
Exercised  (578,442) 7.38  to  19.75  16.47 
Outstanding at 12/31/06  1,247,173 $13.95  to $29.94 $18.16 

        The following table summarizes additional information about stock options outstanding and exercisable at December 31, 2003:



 Options Outstanding at
December 31, 2003

Options Exercisable at
December 31, 2003

   Weighted Average
    
Range of
Exercise Prices
 Shares  Remaining
Contract-
ual Life
(Years)
 Exercise
Price
  Shares Weighted
Average
Exercise
Price
  

$3.37        56,020  .2 $3.37  56,020 $3.37    
 3.87  to $5.34  193,275  1.0  4.33  193,275  4.33    
 7.38  to  9.67  204,360  2.1  8.59  204,360  8.59    
 14.56  to  17.88  302,650  3.8  16.46  257,650  16.56    
 18.21  to  19.75  902,100  4.2  19.21  352,100  19.70    
 20.44  to  25.65  435,950  2.8  22.99  435,950  22.99    
 28.61  to  34.97  356,255  2.6  31.53  356,255  31.53    
 40.80  to  46.63  272,000  2.0  43.72  272,000  43.72    

$3.37  to $46.63  2,722,610  3.1 $21.39  2,127,610 $22.15    

The following table summarizes additional information about stock options outstanding and exercisable and non-vested restricted stock outstanding at December 31, 2006:

        Stock options exercisable totaled 2,556,980 shares at December 31, 2002 and 2,281,670 shares at December 31, 2001. Stock options available for grant totaled 642,625 shares at December 31, 2003, 618,125 shares at December 31, 2002 and 1,192,475 shares at December 31, 2001.

59


                    
      Options Outstanding at Options Exercisable at 
      December 31, 2006 December 31, 2006 
        Weighted Average Aggregate     Aggregate 
        Remaining   Intrinsic   Weighted Intrinsic 
        Contract-   Value   Average Value 
Range of   ual Life Exercise (In   Exercise (In 
Exercise Prices Shares (Years) Price Thousands) Shares Price Thousands) 
$ 13.95 to $17.88  627,068  4.6 $15.18 $4,660  243,268 $15.14 $1,816 
  17.89 to  19.75  361,650  1.7  19.06  1,282  350,150  19.05  1,247 
  19.76 to  25.65  188,300  .2  21.98  131  188,300  21.98  131 
   25.66 to  29.94  70,155  1.4  29.84  -  70,155  29.84  - 
$ 13.95 to $29.94  1,247,173  2.9 $18.16 $6,073  851,873 $19.47 $3,194 
        
Non-vested Restricted Stock 
Number
of Shares
 
Wgtd. Ave.
Grant Date
Fair Value/Sh.
 
Grant Date
Fair Value (In
Thousands)
 
Outstanding at 12/31/03  - $- $- 
Granted  125,000  13.95  1,744 
Vested  -  -  - 
Forfeited  (5,000) 13.95  (70)
Outstanding at 12/30/04  120,000  13.95  1,674 
Granted  7,000  12.92  90 
Vested  (8,000) 13.95  (111)
Forfeited  (10,000) 13.95  (140)
Outstanding at 12/31/05  109,000  13.88  1,513 
Granted  2,000  16.31  33 
Vested  (17,333) 13.95  (242)
Forfeited  (24,167) 13.80  (333)
Outstanding at 12/31/06  69,500 $13.97 $971 

The total intrinsic value of stock options exercised during 2006 was $2,174. The grant-date fair value of stock option-based awards vested during 2006 was $1,323. As of December 31, 2006, there was $1,300 and $380 of unrecognized compensation cost related to stock option-based awards and non-vested restricted stock, respectively. This cost is expected to be recognized over the remaining weighted average period of 1.23 years for stock option-based awards and 2.3 years for non-vested restricted stock. Compensation costs for non-vested restricted stock is subject to accelerated vesting based on meeting certain financial targets.

Stock options exercisable totaled 1,983,440 shares at December 31, 2005 and 2,316,390 shares at December 31, 2004. Stock options available for grant totaled 1,601,700 shares at December 31, 2006, 1,998,300 shares at December 31, 2005 and 2,030,300 shares at December 31, 2004.
11
RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS



        We have noncontributory and contributory defined benefit (pension) plans covering most employees. The plans for salaried and hourly employees currently in effect are based on a formula using the participant’s years of service and compensation or using the participant’s years of service and a dollar amount.

        In addition to providing pension benefits, we provide postretirement life insurance and health care benefits for certain groups of employees. Tredegar and retirees share in the cost of postretirement health care benefits, with employees retiring after July 1, 1993, receiving a fixed subsidy to cover a portion of their health care premiums. On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was signed into law. We are evaluating how and when any federal subsidies would apply. The postretirement benefit obligation and net periodic benefit cost shown in the tables below do not reflect the possible effects of the Act on our benefit programs. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when published, could require us to change previously reported information.

        Assumptions used for financial reporting purposes to compute net benefit income or cost and benefit obligations, and the components of net periodic benefit income or cost, are as follows:

We have noncontributory and contributory defined benefit (pension) plans covering most employees. The plans for salaried and hourly employees currently in effect are based on a formula using the participant’s years of service and compensation or using the participant’s years of service and a dollar amount.


 Pension Benefits
Other Post-
Retirement Benefits

 2003 2002 2001 2003 2002 2001 

Weighted-average assumptions used                    
    to determine benefit obligations:  
    Discount rate   6.25% 6.75% 7.25% 6.25% 6.75% 7.25%
    Rate of compensation increases   4.00% 4.50% 5.00% 4.00% 4.50% 5.00%
Weighted-average assumptions used  
    to determine net periodic benefit  
    cost:  
    Discount rate   6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
    Rate of compensation increases   4.50% 5.00% 5.00% 4.50% 5.00% 5.00%
    Expected long-term return on  
       plan assets, during the year   8.60% 9.00% 9.00% n/a  n/a  n/a 
Rate of increase in per-capita cost  
    of covered health care benefits:  
    Indemnity plans, end of year   n/a  n/a  n/a  6.00% 6.00% 8.00%
    Managed care plans, end of year   n/a  n/a  n/a  6.00% 6.00% 6.60%
Components of net periodic benefit  
    income (cost):  
    Service cost  $(5,851)$(4,397)$(4,147)$(101)$(103)$(105)
    Interest cost   (11,842) (11,680) (11,065) (584) (578) (601)
    Employee contributions   323  220  225       
    Other   (98) (87) (96)      
    Expected return on plan assets   23,003  23,701  23,141       
    Amortization of:  
       Net transition asset   8  20  20       
       Prior service costs and gains  
          or losses   (89) 1,941  3,421  43  64  28 

    Net periodic benefit income (cost)  $5,454 $9,718 $11,499 $(642)$(617)$(678)

On October 26, 2006, we announced changes to our U.S. defined benefit (pension) and savings plans covering salaried and certain other employees. The changes had no impact on our net income or earnings per share in 2006. The changes relating to the pension plan reduced our projected benefit obligation by approximately $10,000 as of December 31, 2006. In 2007, the changes to the pension plan are expected to reduce our service cost, interest cost and amortization of prior service cost components of pension expense by approximately $600, $600 and $1,500, respectively, and the savings plan changes (see Note 12) are expected to increase charges for company matching contributions by approximately $700.

60



        The following tables reconcile the changes in benefit obligations and plan assets in 2003 and 2002, and reconcile the funded status to prepaid or accrued cost at December 31, 2003 and 2002:

In addition to providing pension benefits, we provide postretirement life insurance and health care benefits for certain groups of employees. Tredegar and retirees share in the cost of postretirement health care benefits, with employees hired on or before January 1, 1993, receiving a fixed subsidy to cover a portion of their health care premiums. On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was signed into law. We eliminated prescription drug coverage for Medicare-eligible retirees as of January 1, 2006. Consequently, we are not eligible for any federal subsidies.


 Pension Benefits
Other Post-
Retirement Benefits

 2003 2002 2003 2002 

Change in benefit obligation:              
    Benefit obligation, beginning of year  $179,118 $164,242 $8,994 $8,369 
    Service cost   5,851  4,397  101  103 
    Interest cost   11,842  11,680  584  578 
    Plan amendments   263  (587)    
    Effect of discount rate change   12,621  11,025  522  501 
    Employee contributions   323  220     
    Other   (4,368) (3,152) (318) (235)
    Benefits paid   (9,190) (8,707) (443) (322)

    Benefit obligation, end of year  $196,460 $179,118 $9,440 $8,994 

Change in plan assets:  
    Plan assets at fair value,  
      beginning of year  $208,473 $237,534 $ $ 
    Actual return on plan assets   32,270  (21,842)    
    Employee contributions   323  220     
    Employer contributions   1,982  1,355  443  321 
    Other   (99) (87)    
    Benefits paid   (9,190) (8,707) (443) (321)

    Plan assets at fair value, end of year  $233,759 $208,473 $ $ 

Reconciliation of prepaid (accrued) cost:  
    Funded status of the plans  $37,300 $29,355 $(9,440)$(8,994)
    Unrecognized net transition  
      (asset) obligation   (8) (15)    
    Unrecognized prior service cost   3,689  3,739     
    Unrecognized net (gain) loss   34,994  34,915  (448) (634)

    Prepaid (accrued) cost, end of year  $75,975 $67,994 $(9,888)$(9,628)

Amounts recognized in the consolidated  
    balance sheets:  
    Prepaid benefit cost  $75,975 $67,994 $ $ 
    Accrued benefit liability   (2,650) (7,396) (9,888) (9,628)
    Intangible asset   1,296  2,265     
    Deferred tax liability   474  1,821     
    Accumulated other comprehensive  
      loss   880  3,310     

Net amount recognized  $75,975 $67,994 $(9,888)$(9,628)

Assumptions used for financial reporting purposes to compute net benefit income or cost and benefit obligations, and the components of net periodic benefit income or cost, are as follows:
          
  Pension Benefits 
Other Post-
Retirement Benefits
 
  
2006
 
2005
 
2004
 
2006
 
2005
 
2004
 
Weighted-average assumptions used to determine benefit obligations:             
Discount rate  
5.70
%
 5.70% 6.00% 
5.70
%
 5.70% 6.00%
Rate of compensation increases  
4.00
%
 4.00% 4.00% 
4.00
%
 4.00% 4.00%
Weighted-average assumptions used to determine net periodic benefit cost:                  
Discount rate  
5.70
%
 6.00% 6.25% 
5.70
%
 6.00% 6.25%
Rate of compensation increases  
4.00
%
 4.00% 4.00% 
4.00
%
 4.00% 4.00%
Expected long-term return on plan assets, during the year
8.40 
%
8.40 %8.40 %
n/a 
 n/a  n/a 
Rate of increase in per-capita cost of covered health care benefits:                  
Indemnity plans, end of year  
n/a
  n/a  n/a  
6.00
%
 6.00% 6.00%
Managed care plans, end of year  
n/a
  n/a  n/a  
6.00
%
 6.00% 6.00%
Components of net periodic benefit income (cost):                  
Service cost 
$
(6,327
)
$(6,469)$(5,519)
$
(70
)
$(109)$(115)
Interest cost  
(13,497
)
 (12,661) (12,283) 
(535
)
 (576) (562)
Employee contributions  
517
  468  443  
-
  -  - 
Other  
(127
)
 12  (212) 
-
  -  - 
Expected return on plan assets  
21,583
  22,050  22,678  
-
  -  - 
Amortization of:                  
Net transition asset  
-
  -  7  
-
  -  - 
Prior service costs and gains or losses  
(4,746
)
 (738) (491) 
24
  2  53 
Net periodic benefit income (cost) 
$
(2,597
)
$2,662 $4,623 
$
(581
)
$(683)$(624)

        Net benefit income or cost is determined using assumptions at the beginning of each year. Funded status is determined using assumptions at the end of each year.

        At December 31, 2003, the effect of a 1% change in the health care cost trend rate assumptions would be immaterial.

        Prepaid pension cost of $75,975 at December 31, 2003 and $67,994 at December 31, 2002, is included in “Other assets and deferred charges” in the consolidated balance sheets. The accrued benefit liability of $2,650 and the intangible asset of $1,296 at December 31, 2003, and the accrued benefit liability of $7,396 and the intangible asset of $2,265 at December 31, 2002, are also included in “Other assets and deferred charges” in the consolidated balance sheets. Accrued postretirement benefit cost of $9,888 at December 31, 2003 and $9,628 at December 31, 2002, is included in “Other noncurrent liabilities” in the consolidated balance sheets.

61


The following tables reconcile the changes in benefit obligations and plan assets in 2006 and 2005, and reconcile the funded status to prepaid or accrued cost at December 31, 2006 and 2005:

        The percentage composition of assets held by pension plans at December 31, 2003 and 2002, and the current expected long-term return on assets are as follows:

      
  Pension Benefits 
Other Post-  
Retirement Benefits
 
  
2006
 
2005
 
2006
 
2005 
Change in benefit obligation:         
Benefit obligation, beginning of year 
$
238,533
 $214,037 
$
10,070
 $9,994 
Service cost  
6,327
  6,469  
70
  109 
Interest cost  
13,497
  12,661  
535
  576 
Plan amendments  
(10,039
)
 1,372  
-
  - 
Effect of discount rate change  
(985
)
 10,424  
(4
)
 326 
Employee contributions  
517
  468  
-
  - 
Other  
(3,615
)
 3,500  
(329
)
 (290)
Benefits paid  
(10,841
)
 (10,398) 
(920
)
 (645)
Benefit obligation, end of year 
$
233,394
 $238,533 
$
9,422
 $10,070 
Change in plan assets:            
Plan assets at fair value, beginning of year 
$
257,101
 $247,505 
$
-
 $- 
Actual return on plan assets  
36,086
  18,487  
-
  - 
Employee contributions  
517
  468  
-
  - 
Employer contributions  
1,074
  1,158  
920
  645 
Other  
(128
)
 (119) 
-
  - 
Benefits paid  
(10,841
)
 (10,398) 
(920
)
 (645)
Plan assets at fair value, end of year 
$
283,809
 $257,101 
$
-
 $- 
Reconciliation of prepaid (accrued) cost:          
Funded status of the plans 
$
50,415
 $18,568 
$
(9,422
)
$(10,070)
Unrecognized prior service cost  
-
  4,303  
-
  - 
Unrecognized net (gain) loss  
-
  62,776  
-
  (8)
Prepaid (accrued) cost, end of year 
$
50,415
 $85,647 
$
(9,422
)
$(10,078)
Amounts recognized in the consolidated balance sheets:             
Prepaid benefit cost 
$
54,034
 $85,647 
$
-
 $- 
Accrued benefit liability  
(3,619
)
 (4,832) 
(9,422
)
 (10,078)
Intangible asset  
-
  1,145  
-
  - 
Decrease in deferred income tax liabilities relating to accumulated other comprehensive loss  
-
  1,253  
-
  - 
Accumulated other comprehensive loss  
-
  2,434  -  - 
Net amount recognized 
$
50,415
 $85,647 
$
(9,422
)
$(10,078)


 % Composition
of Plan Assets

 Expected
Long-term
December 312003 2002 Return %

Pension plans related to operations in the U.S.:        
     Low-risk fixed income securities   23.3% 29.3% 5.5%

     Large capitalization equity securities   18.7  16.5  9.0 
     Mid-capitalization equity securities   6.6  5.6  9.8 
     Small-capitalization equity securities   3.4  2.7  10.5 
     International equity securities   17.6  14.3  9.0 

     Total equity securities   46.3  39.1  9.2 

     Hedge and private equity funds   20.1  21.5  9.7 
     Other assets   2.6  3.4  5.5 

     Total for pension plans related to operations in the U.S.   92.3  93.3  8.5 

Pension plans related to operations in Canada   7.7  6.7  7.0 

Total   100.0% 100.0% 8.4%

Net benefit income or cost is determined using assumptions at the beginning of each year. Funded status is determined using assumptions at the end of each year.

        Our targeted allocation percentage for pension plan assets is in the range of the percentage composition that existed at December 31, 2003. Expected long-term returns are estimated by asset class and generally are based on inflation-adjusted historical returns, volatilities and risk premiums. For pension plans related to operations in the U.S., the portfolio of fixed income securities is structured with maturities that generally match estimated benefit payments over the next five years. We believe that over the long term a diversified portfolio of equity securities, hedge funds and private equity funds have a better risk-return profile than fixed income securities. The average remaining time until retirement at age 65 for participants in our pension plans is about 20 years. We expect our required contributions to be less than $500 in 2004.

        The accumulated benefit obligation was $180,432 at December 31, 2003, and $162,401 at December 31, 2002. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets were $8,753, $8,753 and $6,409, respectively, at December 31, 2003, and $27,419, $27,290 and $21,400, respectively, at December 31, 2002.

        We also have a non-qualified supplemental pension plan covering certain employees. The plan is designed to restore all or a part of the pension benefits that would have been payable to designated participants from our principal pension plans if it were not for limitations imposed by income tax regulations. The projected benefit obligation relating to this unfunded plan was $2,197 at December 31, 2003 and $2,064 at December 31, 2002. Pension expense recognized was $249 in 2003, $255 in 2002 and $326 in 2001. This information has been included in the preceding pension benefit tables.

At December 31, 2006, the effect of a 1% change in the health care cost trend rate assumptions would be immaterial.


Expected benefit payments over the next five years and in the aggregate for 2012-2016 are as follows:
      
Years 
Pension
Benefits
 
Other
Post-
Retirement
Benefits
 
2007  11,027  496 
2008  11,885  534 
2009  12,418  572 
2010  12,781  615 
2011  13,363  642 
2012 - 2016  76,660  3,546 
The incremental impact of adopting SFAS No. 158 (see the pension costs and postretirement benefit costs other than pensions section of Note 1 for further information on this new standard) and recognizing an additional minimum liability (the “AML”) is shown in the table below:
          
As of December 31, 2006 
Prior to AML &
SFAS No. 158
Adjustments
 
AML
Adjustment
 
SFAS No. 158
Adjustment
 
Post AML
& SFAS No. 158
Adjustments
 
Prepaid pension costs $80,442 $1,243 $(27,651)$54,034 
Pension liabilities  -  -  3,619  3,619 
Postretirement liabilities  9,740  -  (318) 9,422 
Decrease (increase) in deferred income tax liabilities relating to accumulated other comprehensive loss  1,252  (422) 11,354  12,184 
Accumulated other comprehensive loss  2,434  (821) 19,598  21,211 
Prepaid pension costs included in the table above are included in “Other assets and deferred charges” in the consolidated balance sheet at December 31, 2006. Pension and postretirement liabilities in the table above are included in “Other noncurrent liabilities” in the consolidated balance sheet at December 31, 2006.

The amounts before related deferred income taxes in accumulated other comprehensive income that are expected to be recognized as components of net periodic benefit cost during 2007 are as follows:
        
  Pension 
Other Post-
Retirement
 Total 
Prior service cost $(967)$- $(967)
Net (gain) loss  2,855  (47) 2,808 
Amounts recognized before related deferred income taxes in accumulated other comprehensive income consist of:
      
  Pension 
Other Post-
Retirement
 
Prior service cost $(6,198)$- 
Net (gain) loss  39,910  (317)
Prepaid pension cost at December 31, 2005 of $85,647, are included in “Other assets and deferred charges” in the related consolidated balance sheet. The accrued benefit liability of $4,832 and the intangible asset of $1,145 at December 31, 2005, are also included in “Other assets and deferred charges” in the consolidated balance sheet at December 31, 2005. Accrued postretirement benefit cost at December 31, 2005 of $10,078 is included in “Other noncurrent liabilities” in the related consolidated balance sheet.


The percentage composition of assets held by pension plans at December 31, 2006 and 2005, and the current expected long-term return on assets are as follows:
      
  
% Composition
of Plan Assets
 
 Expected
Long-term
 
December 31 2006 2005Return % 
Pension plans related to operations in the U.S.:       
Low-risk fixed income securities    10.3% 14.1% 5.0%
Large capitalization equity securities    20.2  19.1  9.2 
Mid-capitalization equity securities    8.0  7.3  9.8 
Small-capitalization equity securities    4.6  4.3  10.4 
International equity securities    24.8  22.4  10.4 
Total equity securities    57.6  53.1  9.9 
Hedge and private equity funds    20.3  21.0  7.0 
Other assets    2.2  2.3  3.0 
Total for pension plans related to operations in the U.S.    90.4  90.5  8.5 
Pension plans related to operations in Canada  9.6  9.5  7.0 
Total  100.0% 100.0% 8.4%
Our targeted allocation percentage for pension plan assets is in the range of the percentage composition that existed at December 31, 2006. Expected long-term returns are estimated by asset class and generally are based on inflation-adjusted historical returns, volatilities, risk premiums and managed asset premiums. For pension plans related to operations in the U.S., the portfolio of fixed income securities is structured with maturities that generally match estimated benefit payments over the next 2-3 years. We believe that over the long term a diversified portfolio of equity securities, hedge funds and private equity funds have a better risk-return profile than fixed income securities. The average remaining duration of benefit payments for our pension plans is about 12 years. We expect our required contributions to approximate $1,100 in 2007.

The accumulated benefit obligation was $230,025 at December 31, 2006 and $223,821 at December 31, 2005. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets were $13,740, $13,740 and $12,658, respectively, at December 31, 2006, and $13,200, $13,200 and $10,607, respectively, at December 31, 2005.

We also have a non-qualified supplemental pension plan covering certain employees. Effective December 31, 2005, further participation in this plan was terminated and benefit accruals for existing participants were frozen. The plan was designed to restore all or a part of the pension benefits that would have been payable to designated participants from our principal pension plans if it were not for limitations imposed by income tax regulations. The projected benefit obligation relating to this unfunded plan was $2,537 at December 31, 2006 and $2,655 at December 31, 2005. Pension expense recognized was $355 in 2006, $256 in 2005 and $275 in 2004. This information has been included in the preceding pension benefit tables.

Approximately 136 employees at our films manufacturing facility in Kerkrade, The Netherlands are covered by a collective bargaining agreement that includes participation in a multi-employer pension plan. Pension expense recognized for participation in this plan, which is equal to required contributions, was $807 in 2006, $364 in 2005 and $281 in 2004. This information has been excluded from the preceding pension benefit tables.

12
SAVINGS PLAN



We have a savings plan that allows eligible employees to voluntarily contribute a percentage (generally up to 15%) of their compensation. Under the provisions of the plan on or before December 31, 2006, we matched a portion (generally 50 cents for every $1 of employee contribution, up to a maximum of 10% of base pay) of the employee’s contribution to the plan with shares of our common stock. Effective January 1, 2007, and in conjunction with certain pension plan changes (see Note 11), the following changes were made to the savings plan for salaried and certain hourly employees:

        We have a savings plan that allows eligible employees·

The company will make matching contributions to voluntarily contribute a percentage (generally 10%) of their compensation. Under the provisions of the plan, we match a portion (generally 50%) of the employee’s contribution to the plan with shares of our common stock. We also have a non-qualified plan that restores matching benefits for employees suspended from the savings plan due to certain limitations imposed by income tax regulations. Charges recognizedof $1 for these plans were $2,697 in 2003, $2,573 in 2002every $1 of employee contribution. The maximum matching contribution will be 6% of base pay for 2007 and $2,918 in 2001. Our liability under2008 and 5% of base pay for 2009 and thereafter.
·The savings plan will include immediate vesting for active employees of past matching contributions as well as future matching contributions when made (compared with the restoration plan was $1,057previous 5-year graded vesting) and automatic enrollment at December 31, 2003 (consisting3% of 68,068 phantom shares of common stock) and $993 at December 31, 2002 (consisting of 66,185 phantom shares of common stock) valued atbase pay unless the closing market price on those dates.

62


employee opts out or elects a different percentage.

        The Tredegar Corporation Benefits Plan Trust (the “Trust”) purchased 7,200 shares of our common stock in 1998 for $192 and 46,671 shares of our common stock in 1997 for $1,020, as a partial hedge against the phantom shares held in the restoration plan. There have been no shares purchased since 1997. The cost of the shares held by the Trust is shown as a reduction to shareholders’ equity in the consolidated balance sheets.

We also have a non-qualified plan that restores matching benefits for employees suspended from the savings plan due to certain limitations imposed by income tax regulations. Charges recognized for these plans were $2,770 in 2006, $1,889 in 2005 and $2,716 in 2004. The savings plan changes effective January 1, 2007 are expected to increase charges for company matching contributions by approximately $700. Our liability under the restoration plan was $1,332 at December 31, 2006 (consisting of 58,931 phantom shares of common stock) and $782 at December 31, 2005 (consisting of 60,674 phantom shares of common stock) valued at the closing market price on those dates.

The Tredegar Corporation Benefits Plan Trust (the “Trust”) purchased 7,200 shares of our common stock in 1998 for $192 and 46,671 shares of our common stock in 1997 for $1,020, as a partial hedge against the phantom shares held in the restoration plan. There have been no shares purchased since 1997 except for re-invested dividends. The cost of the shares held by the Trust is shown as a reduction to shareholders’ equity in the consolidated balance sheets.

13
RENTAL EXPENSE AND CONTRACTUAL COMMITMENTS



        Rental expense for continuing operations was $3,822 in 2003, $3,744 in 2002 and $3,864 in 2001. Rental commitments under all non-cancelable operating leases as of December 31, 2003, are as follows:

Rental expense for continuing operations was $4,302 in 2006, $4,316 in 2005 and $4,549 in 2004. Rental commitments under all non-cancelable operating leases as of December 31, 2006, are as follows:

YearAmount 

2004   $2,721 
2005    2,560 
2006    2,531 
2007    2,541 
2008    2,315 
Remainder   3,596 

  Total  $16,264 

    
 Amount 
2007 $3,652 
2008  3,165 
2009  2,123 
2010  2,120 
2011  701 
Remainder  818 
Total $12,579 
AFBS, Inc. (formerly known as Therics, Inc. - see Note 15 for additional information regarding its restructuring in 2005), a wholly-owned subsidiary of Tredegar, has future rental commitments under noncancelable operating leases through 2011 (most of which contain sublease options) totaling $6,800. These future rental commitments are included in the above table. Sublease rental commitments relating to excess space at AFBS total about $900 (excluded from the above table).

        Therics has future rental commitments under noncancelable operating leases through 2011 (most of which contain sublease options) totaling $11,100. These future rental commitments are included in the above table.

        Contractual obligations for plant construction and purchases of real property and equipment amounted to $7,726 at December 31, 2003 and $17,710 at December 31, 2002.

Contractual obligations for plant construction and purchases of real property and equipment amounted to $6,025 at December 31, 2006 and $14,628 at December 31, 2005.

14
INCOME TAXES



Income from continuing operations before income taxes and income taxes are as follows:
        
 
2006
 
2005
 
2004 
Income from continuing operations before income taxes:       
Domestic 
$
52,408
 $19,709 $27,875 
Foreign  
6,429
  6,493  7,607 
Total 
$
58,837
 $26,202 $35,482 
           
Current income taxes:          
Federal 
$
5,584
 $1,853 $(2)
State  
840
  811  1,105 
Foreign  
4,057
  (1,908) 6,996 
Total  
10,481
  756  8,099 
Deferred income taxes:          
Federal  
9,807
  7,900  3,385 
State  
687
  600  1,198 
Foreign  
(339
)
 717  (3,460)
Total  
10,155
  9,217  1,123 
Total income taxes 
$
20,636
 $9,973 $9,222 
The significant differences between the U.S. federal statutory rate and the effective income tax rate for continuing operations are as follows:
        
  
Percent of Income Before Income
Taxes for Continuing Operations
 
  
2006
 
2005
 
2004 
Income tax expense at federal statutory rate  
35.0
  35.0  35.0 
State taxes, net of federal income tax benefit  
1.7
  3.5  4.2 
Valuation allowance for foreign operating loss carry-forwards  
1.3
  1.6  1.7 
Unremitted earnings from foreign operations  
1.2
  2.3  (.1)
Non-deductible expenses  
.7
  .6  .8 
Foreign rate differences  
-
  -  1.0 
Tax-exempt income  
-
  (1.6) - 
Reversal of income tax contingency accruals  
-
  -  (11.3)
Research and development tax credit  
(.9
)
 (1.6) (1.9)
Valuation allowance for capital loss carry-forwards
  
(1.0
)
 2.2   - 
Extraterritorial Income Exclusion and          
Domestic Production Activities Deduction  
(1.7
)
 (2.4) (2.3)
Other  
(1.2
)
 (1.5) (1.1)
Effective income tax rate  
35.1
  
38.1
  26.0 


Deferred tax liabilities and deferred tax assets at December 31, 2006 and 2005, are as follows:
      
 
2006
 2005 
Deferred tax liabilities:     
Depreciation 
$
37,188
 $37,438 
Pensions  
19,384
  30,595 
Amortization of goodwill  
14,314
  11,627 
Foreign currency translation gain adjustment  
11,607
  7,686 
Unrealized gain on available-for-sale securities  
-
  12 
Derivative financial instruments  
497
  437 
Other  
1,315
  351 
Total deferred tax liabilities  
84,305
  88,146 
Deferred tax assets:       
Employee benefits  
5,987
  5,244 
Tax in excess of book basis for venture capital and other investments (net of valuation allowance of $577 in 2005)
  
2,372
  1,863 
Asset write-offs, divestitures and environmental accruals
  
1,251
  
2,602
 
Allowance for doubtful accounts and sales returns  
1,209
  1,086 
Tax benefit on U.S. foreign and R&D tax credits and       
NOL carryforwards  
731
  7,895 
Inventory  
640
  329 
Other (net of valuation allowance of $2,120 in 2006 and $1,020 in 2005)
  
2,398
  2,618 
Total deferred tax assets  
14,588
  21,637 
Net deferred tax liability 
$
69,717
 $66,509 
Included in the balance sheet:       
Noncurrent deferred tax liabilities in excess of assets 
$
75,772
 $74,287 
Current deferred tax assets in excess of liabilities  
6,055
  7,778 
Net deferred tax liability 
$
69,717
 $66,509 
During 2006, we realized substantially all of the tax benefits from tax credit and other carry-forwards existing at December 31, 2005. The remaining deferred tax asset associated with tax credit and other carry-forwards of $731 at December 31, 2006, relates to state income taxes and a net operating loss carry-forward for a foreign subsidiary that has no expiration. A valuation allowance at December 31, 2006 of approximately $2,120 is included in other deferred tax assets that offsets an amount included in that line item relating to possible future tax benefits on operating losses generated by another foreign subsidiary that may not be recoverable in its carry-forward period. In addition, a valuation allowance of $577 was established in 2005 in conjunction with the write-down of our investment in Novalux (see Note 2) for expected limitations on the utilization of assumed capital losses. In the fourth quarter of 2006, we reversed this valuation allowance and reduced our income tax provision by $577. Outside appraisal of the value of corporate assets, primarily real estate, performed in December 2006, indicates that realization of this deferred tax assets is more likely than not. We had current and non-current income taxes recoverable of $10,975 and zero, respectively, at December 31, 2006, and $7,163 and $5,803, respectively, at December 31, 2005.

        Income from continuing operations before income taxes and income taxes are as follows:



 2003 2002 2001 

Income from continuing operations              
    before income taxes:  
    Domestic  $16,605 $61,850 $36,241    
    Foreign   13,439  13,656  8,460    

      Total  $30,044 $75,506 $44,701    

Current income taxes:  
    Federal  $4,345 $(430)$6,797    
    State   368  1,318  2,104    
    Foreign   2,689  1,954  4,704    

      Total   7,402  2,842  13,605    

Deferred income taxes:  
    Federal   649  20,421  111    
    State   936  943  240    
    Foreign   1,730  2,675  (6)   

      Total   3,315  24,039  345    

      Total income taxes  $10,717 $26,881 $13,950    


63



        The significant differences between the U.S. federal statutory rate and the effective income tax rate for continuing operations are as follows:



 Percent of Income Before Income
Taxes for Continuing Operations

 
 2003 2002 2001 

Income tax expense at federal statutory rate   35.0  35.0  35.0    
State taxes, net of federal income tax benefit   2.8  1.9  3.4    
Unremitted earnings from foreign operations   1.5  (.6) .9    
Non-deductible expenses   1.0  .3  .6    
Research and development tax credit   (1.7) (.5) (1.4)   
Extraterritorial Income Exclusion   (2.8) (.8) (2.5)   
Reversal of income tax contingency accruals       (4.3)   
Foreign rate differences and other   (.1) .3  (.5)   

    Effective income tax rate   35.7  35.6  31.2    


        Deferred tax liabilities and deferred tax assets at December 31, 2003 and 2002, are as follows:



December 312003 2002 

Deferred tax liabilities:           
    Depreciation  $32,317 $28,780    
    Pensions   26,434  22,402    
    Foreign currency translation gain adjustment   5,494      
    Amortization of goodwill   3,750  4,818    
    Unrealized gain on available-for-sale securities   1,556  331    
    Income on derivative financial instruments   249      
    Inventory   194      
    Other   3,911  1,005    

      Total deferred tax liabilities   73,905  57,336    

Deferred tax assets:  
    Employee benefits   5,028  4,522    
    Tax benefit on foreign and R&D tax credits and  
      NOL carryforwards   7,052  436    
    Asset write-offs, divestitures and environmental  
      accruals   2,148  5,694    
    Allowance for doubtful accounts and sales returns   1,254  1,974    
    Tax in excess of book basis for venture capital  
      investments   902  35,151    
    Foreign currency translation loss adjustment     2,294    
    Loss on derivative financial instruments     466    
    Inventory     248    
    Other   2,243  84    

      Total deferred tax assets   18,627  50,869    

Net deferred tax liability  $55,278 $6,467    

Included in the balance sheet:  
    Noncurrent deferred tax liabilities in excess of assets  $66,276 $27,443    
    Current deferred tax assets in excess of liabilities   10,998  20,976    

      Net deferred tax liability  $55,278 $6,467    


64



        As of December 31, 2003, Tredegar had net operating loss, foreign tax credit and R&D tax credit carry-forwards that expire as follows:



Tax Carry-Forward Items at December 31, 2003 by Year of Expiration

 Deferred Income Tax Assets
 Estimated Minimum Future Taxable
Income Required to Realize Deferred
Income Tax Assets

Year of
Expiration
  Foreign
Tax
Credits
 R&D Tax
Credits
 Net
Operating
Losses
 Total Foreign
Tax
Credits
 R&D Tax
Credits
 Net
Operating
Losses
 Total 

 
2007   $1,724 $ $ $1,724 $4,926 $ $ $4,926 
2008    1,610      1,610  4,600      4,600 
2021      1,403    1,403    4,009    4,009 
2022      1,185    1,185    3,386    3,386 
2023      500  630  1,130    1,429  1,800  3,229 

Total  $3,334 $3,088 $630 $7,052 $9,526 $8,824 $1,800 $20,150 


        We believe that it is more likely than not that the timing of future taxable income will be sufficient to cover future tax deductible amounts related to deferred income tax assets. Accordingly, no valuation allowance has been recognized.


15
LOSSES ASSOCIATED WITH PLANT SHUTDOWNS, ASSET IMPAIRMENTS AND RESTRUCTURINGS, UNUSUAL ITEMS, AND GAINS FROM SALE OF ASSETS AND OTHER ITEMS



        On June 16, 2003, we announced plans to close our films plant in New Bern, North Carolina (the “New Bern Plant”) in mid-2004. As a result of the shutdown, we expect to recognize charges totaling approximately $6,500 ($4,160 after taxes). During 2003, we recognized charges associated with this shutdown of $2,336 ($1,495 after taxes — see details below), and expect to recognize additional charges of approximately $4,200 ($2,688 after taxes) in the first half of 2004. Except for the New Bern Plant, previously announced shutdowns were substantially complete at December 31, 2003, and substantially all shutdown costs have been paid and the remaining accrued liabilities are not material.

        In 2003, losses

Losses associated with plant shutdowns, asset impairments and restructurings totaling $11,426 ($7,350 after taxes) included:


A fourth-quarter charge of $875 ($560 after taxes) for asset impairments and restructurings, net of gains on sale of related assets, in the films business, including charges of $4662006 totaled $1,850 ($298 after taxes) relating to accelerated depreciation of assets at the New Bern Plant;

A fourth-quarter charge of $611 ($391 after taxes) for approximately 50% of the total severance costs expected for 65 people and other employee-related costs in connection with the shutdown of the New Bern Plant;

A third-quarter charge of $945 ($605 after taxes) relating to accelerated depreciation of assets at the New Bern Plant;

A third-quarter charge of $299, a second quarter charge of $53 and a first-quarter charge of $85 (collectively $280 after taxes) for additional costs incurred related to the shutdown of the films plants in Tacoma, Washington (the “Tacoma Plant”), Carbondale, Pennsylvania (the “Carbondale Plant”) and Manchester, Iowa (the “Manchester Plant”);

A third-quarter charge of $322 ($206 after taxes) for additional severance and other employee-related costs in connection with a previously announced restructuring in Film Products;

A third-quarter charge of $2,151 ($1,3981,441 after taxes) and a second-quarter charge of $549 ($357 after taxes) related to the estimated loss on the sub-lease of a portion of the Therics facility in Princeton, New Jersey;include:

A third-quarter charge of $256 ($163 after taxes) for severance for seven people and other employee-related costs in connection with restructurings in Aluminum Extrusions;

A second-quarter charge of $3,936 ($2,530 after taxes) for severance for 47 people and other employee-related costs in connection with restructurings in Film Products ($1,600 before taxes), corporate headquarters ($1,181 before taxes and included in “Corporate expenses, net” in the operating profit by segment table in Note 3) and Therics ($1,155 before taxes);

65


·

A second-quarter charge of $956 ($612 after taxes) for asset impairments in the films business, including charges of $312 ($200 after taxes) related to accelerated depreciation of assets at the New Bern Plant; and

A second-quarter charge of $388 ($248 after taxes) related to an early retirement program for 10 people in Aluminum Extrusions.

        The loss from unusual items in 2003A fourth quarter net gain of $1,067$14 ($6948 after taxes), a third-quarter net gain of $1,022 ($615 after taxes), a second-quarter net gain of $822 ($494 after taxes) relates toand a first-quarter pretax charge to adjust depreciation and amortization at Therics based on Tredegar’s decision to suspend divestiture efforts. Results for 2003 also includedof $404 ($243 after taxes) associated with the shutdown of the films manufacturing facility in LaGrange, Georgia, including a fourth-quarterpretax gain of $1,385 ($886 after taxes)$2,889 for related LIFO inventory liquidations (included in "Cost of goods sold" in the consolidated statements of income), severance and other costs of $1,566, asset impairment charges of $130 and a gain on the saledisposal of land at the facility in Richmond Hill, Ontario (total proceedsequipment of approximately $1,800), and gains totaling $5,155 ($3,325 after taxes) on the sale of corporate assets. The gains from the sale of corporate assets included:


A fourth-quarter gain of $2,554 ($1,647 after taxes) from the sale of 547,500 shares of Illumina, Inc. common stock (NASDAQ: ILMN) for total proceeds of $3,791;

A fourth-quarter gain of $355 ($229 after taxes) from the sale of 64,150 shares of Vascular Solutions, Inc. common stock (NASDAQ: VASC) for total proceeds of $403;

A third-quarter gain of $942 ($608 after taxes) from the sale of 200,000 shares of VASC for total proceeds of $1,092; and

A third-quarter gain of $1,289 and fourth-quarter gain of $15 (collectively $841 after taxes) from the sale of corporate real estate (total proceeds of approximately $1,800).

        The gains from the sale of land and corporate assets are included$261 (included in “Other income (expense), net” in the consolidated statements of incomeincome);



·A third-quarter charge of $920 ($566 after taxes) related to expected future environmental costs at the aluminum extrusions facility in Newnan, Georgia (included in "Cost of goods sold" in the consolidated statements of income);
·A fourth quarter charge of $143 ($93 after taxes) and separately showna third quarter charge of $494 ($321 after taxes) related to the estimated loss on the sub-lease of a portion of the AFBS facility in Princeton, New Jersey;
·Second-quarter charges of $459 ($289 after taxes) and first-quarter charges of $268 ($170 after taxes) for severance and other employee-related costs in connection with restructurings in Aluminum Extrusions ($514) and Film Products ($213); and
·First-quarter charges of $1,020 ($876 after taxes) for asset impairments relating to machinery & equipment in Film Products.
In 2006, a pretax gain on the sale of public equity securities of $56 (proceeds also of $56) is included in “Other income (expense), net” in the consolidated statements of income and “Gain on the sale of corporate assets” in the segment operating profit table in Note 3. Income taxes in 2006 include a reversal of a valuation allowance of $577 for deferred tax assets associated with capital loss carry-forwards recorded with the write-down of the investment in Novalux (see Notes 2 and 14). Outside appraisal of the value of corporate assets, primarily real estate, performed in December 2006, indicates that realization of related deferred tax assets is more likely than not.

Losses associated with plant shutdowns, asset impairments and restructurings, net of gains on sale of related assets, in 2005 totaled $14,606 ($9,372 after taxes) and include:

·A fourth-quarter charge of $269 ($174 after taxes) and a second-quarter charge of $10,049 ($6,532 after taxes) related to the sale or assignment of substantially all of the assets of AFBS, Inc. (formerly known as Therics, Inc. - see below for additional information regarding its restructuring in 2005), including asset impairment charges of $5,638, lease-related losses of $3,326 and severance (31 people) and other transaction-related costs of $1,354 (see below for additional information on the transaction);
·Fourth-quarter charges of $397 ($256 after taxes), third-quarter charges of $906 ($570 after taxes), second-quarter charges of $500 ($317 after taxes) and first-quarter charges of $418 ($266 after taxes) related to severance and other employee-related costs associated with restructurings in Film Products ($1,118 before taxes) and Aluminum Extrusions ($648 before taxes) and at corporate headquarters ($455 before taxes; included in “Corporate expenses, net” in the segment operating profit table in Note 3.

        At December 31, 2003, we held 265,955 shares3) (an aggregate of ILMN with21 people were affected by these restructurings);

·A fourth-quarter charge of $2,101 ($1,263 after taxes) related to the shutdown of the films manufacturing facility in LaGrange, Georgia, including asset impairment charges of $1,615 and severance (15 people) and other costs of $486;
·A fourth-quarter gain of $1,862 ($1,193 after taxes), a closing aggregate market valuethird-quarter charge of $1,875$198 ($601 adjusted cost basis)127 after taxes), a second-quarter net gain of $71 ($46 after taxes) and held 596,492 sharesa first-quarter charge of VASC with$470 ($301 after taxes) related to the shutdown of the aluminum extrusions facility in Aurora, Ontario, including a closing aggregate market value$1,667 gain on the sale of $3,501 ($447 adjusted cost basis). These holdings, which are includedthe facility (included in "Other income (expense), net" in the consolidated balance sheetsstatements of income) and $1,111 of shutdown-related costs partially offset by the reversal to income of certain accruals associated with severance and other costs of $709;
·A second-quarter charge of $27 ($16 after taxes) and a first-quarter gain of $1,618 ($973 after taxes) related to the shutdown of the films manufacturing facility in New Bern, North Carolina, including a $1,816 gain on the sale of the facility (included in "Other income (expense), net" in the consolidated statements of income), partially offset by shutdown-related expenses of $225;
·A first-quarter charge of $1,019 ($653 after taxes) for process reengineering costs associated with the implementation of an information system in Film Products (included in "Costs of goods sold" in the consolidated statements of income);
·Fourth-quarter charges of $118 ($72 after taxes), third-quarter charges of $595 ($359 after taxes), second-quarter charges of $250 ($150 after taxes) partially offset by a net first-quarter gain of $120 ($72 after taxes) related to severance and other employee-related accruals associated with the restructuring of the research and development operations in Film Products (of this amount, $1,366 in pretax charges for employee relocation and recruitment is included in SG&A expenses in the consolidated statements of income);


·A second-quarter gain of $653 ($392 after taxes) related to the shutdown of the films manufacturing facility in Carbondale, Pennsylvania, including a $630 gain on the sale of the facility (included in “Other assetsincome (expense), net” in the consolidated statements on income), and deferred charges” at December 31, 2003, and “Venture capital investments” at December 31, 2002the reversal to income of certain shutdown-related accruals of $23;
·Fourth-quarter charges of $583 ($3,611 market value), are stated at market value with unrealized gains reported directly in shareholders’ equity net of related deferred income taxes.

        In 2002, losses associated with plant shutdowns,351 after taxes) for asset impairments and restructurings totaling $3,884in Film Products;

·A net fourth-quarter charge of $495 ($2,486310 after taxes) primarily included:

in Aluminum Extrusions, including an asset impairment of $597, partially offset by the reversal to income of certain shutdown-related accruals of $102;

·Fourth-quarter charges of $31 ($19 after taxes), third-quarter charges of $117 ($70 after taxes), second-quarter charges of $105 ($63 after taxes) and first-quarter charges of $100 ($60 after taxes) for accelerated depreciation related to restructurings in Film Products; and
·A fourth-quarter charge of $182 ($119 after taxes) in Film Products related to the write-off of an investment.

On June 30, 2005, substantially all of $1,457 ($932 after taxes) for asset impairmentsthe assets of AFBS, Inc. (formerly known as Therics, Inc.), a wholly-owned subsidiary of Tredegar, were sold or assigned to a newly-created limited liability company, Therics, LLC, which is controlled and managed by an individual not affiliated with Tredegar. AFBS received a 17.5% equity interest in Therics, LLC, valued at $170 and a 3.5% interest in Theken Spine, LLC, valued at $800, along with potential future payments based on the sale of certain products by Therics, LLC. AFBS retained substantially all of its liabilities in the films business;

A fourth-quarter chargetransaction, which included customary indemnification provisions for pre-transaction liabilities. Tredegar has no obligation or intent to fund any future losses that may occur at Therics, LLC or Theken Spine, LLC. The ownership interest in Therics, LLC is accounted for under the equity method of $392 ($251 after taxes)accounting with losses limited to its initial carrying value of $170. The ownership interest in Theken Spine, LLC is accounted for additional costs incurred relatedunder the cost method, with an impairment loss recognized and a new cost basis established for any write-down to estimated fair value, if necessary. The payments due from Therics, LLC that are based on the 2000 shutdownsale of certain products are recognized as income when earned. AFBS had operating losses of $3,467 during the Manchester Plant;

A fourth-quarter chargefirst six months of $318 ($204 after taxes)2005 and $9,763 in 2004. Results of operations for additional costs incurred related toAFBS since June 30, 2005 are immaterial.

See Note 2 for information regarding the shutdownwrite-down in 2005 of the aluminum extrusions plantour investment in El Campo, Texas (the “El Campo Plant”);Novalux, Inc.

A fourth-quarter chargeGain on sale of $259 ($166 after taxes) for additional costs incurred related to the shutdown of the Tacoma Plant;

A third-quarter charge of $178 ($114 after taxes) primarily for relocation and employee-related costscorporate assets in connection with the shutdown of the Carbondale Plant;

A second-quarter charge of $268 ($172 after taxes) primarily for relocation and employee-related costs in connection with the shutdown of the Tacoma Plant;

A first-quarter charge of $800 ($512 after taxes) for severance for approximately 70 people and other employee-related costs in connection with the shutdown of the Carbondale Plant; and

A first-quarter charge of $196 ($125 after taxes) for costs incurred in the transfer of business related to the shutdown of the El Campo Plant.

66



        In 2002, the gain from unusual items (net) totaling $6,147 ($3,934 after taxes) included:


A fourth-quarter net2005 includes a pretax gain of $5,618 ($3,596 after taxes) for payments received from P&G related to terminations and revisions to contracts of $11,718 and related asset write-downs of $6,100; and

A fourth-quarter gain of $529 ($338 after taxes)$61 related to the sale of assets acquiredcorporate real estate. This gain is included in a prior acquisition.

        In 2001, losses associated with plant shutdowns, asset impairments and restructurings totaling $16,935 ($10,838 after taxes) primarily included:


A fourth-quarter charge of $2,877 ($1,841 after taxes) for the September 2002 shutdown of the Carbondale Plant, including an impairment loss for equipment of $1,824, excess working capital of $452, dismantling of equipment of $200 and other items of $401;

A fourth-quarter charge of $1,368 ($875 after taxes) for impairment of our films business in Argentina;

A fourth-quarter charge of $951 ($609 after taxes) for additional costs incurred for the shutdown of the El Campo Plant, including additional employee-related costs and expenses related to the transfer of business;

A fourth-quarter charge of $386 ($247 after taxes) for severance costs for approximately 45 people associated with the shutdown of the Tacoma Plant;

A third-quarter charge of $6,848 ($4,383 after taxes) for the shutdown of the El Campo Plant, including an impairment loss for building and equipment of $4,486, severance costs of $710 for approximately 125 people, excess working capital of $888 and other items of $764;

A third-quarter charge of $3,000 ($1,920 after taxes) for the April 2002 shutdown of the Tacoma Plant, including an impairment loss for equipment of $1,235, dismantling of equipment and restoration of the leased space of $700, excess working capital of $650 and other items of $415; and

A first-quarter charge of $1,600 ($1,024 after taxes) for severance costs related to further rationalization“Other income (expense), net” in the films businessconsolidated statements of income and a fourth-quarter reversal of $95 ($61 after taxes) related to this accrual due to revised estimates.

        In 2001, the gain from unusual items totaling $971 ($2,525 after taxes) included:


A second-quarter gain of $971 ($621 after taxes) for interest received on tax overpayments upon favorable conclusion of IRS examinations through 1997 (included in “Corporate expenses, net”separately shown in the operating profit by segment table in Note 3.

During the first quarter of 2005, we recognized a pretax gain for interest receivable on tax refund claims of $508 ($327 after taxes) (included in "Other income (expense), net" in the consolidated statements of income and "Corporate expenses, net" in the segment operating profit table in Note 3);.

Losses associated with plant shutdowns, asset impairments and restructurings in 2004 totaled $23,032 ($15,192 after taxes) and include:

·A fourth-quarter charge of $84 ($56 after taxes), a third-quarter charge of $828 ($537 after taxes), a second-quarter charge of $994 ($647 after taxes) and a first-quarter charge of $666 ($432 after taxes) related to accelerated depreciation from plant shutdowns and restructurings in Film Products;
·A fourth-quarter charge of $569 (of this amount, $59 for employee relocation is included in selling, general and administrative expenses in the consolidated statements of income) ($369 after taxes) and a third-quarter charge of $709 ($461 after taxes) related to severance for 30 people and other employee-related costs associated with the restructuring of the R&D operations in Film Products, including costs associated with relocating R&D functions to Richmond, Virginia;
·A fourth-quarter charge of $639 ($415 after taxes), a third-quarter charge of $617 ($401 after taxes), a second-quarter charge of $300 ($195 after taxes) and a first-quarter charge of $537 ($349 after taxes) primarily related to severance (63 people) and other employee-related costs associated with the shutdown of the films manufacturing facility in New Bern, North Carolina (the shut down was completed in the fourth quarter of 2004);
·A third-quarter charge of $357 ($329 after taxes) and a second-quarter charge of $2,665 ($1,858 after taxes) for the loss on the sale of the films business in Argentina (proceeds net of transaction costs were $803 ($401 net of cash included in business sold));


·A fourth-quarter charge of $352 ($228 after taxes), a third-quarter charge of $195 ($127 after taxes) and a first-quarter charge of $9,580 ($6,228 after taxes) related to the planned shutdown of an aluminum extrusions facility in Aurora, Ontario, including asset impairment charges of $7,130 and severance and other employee-related costs of $2,450 (these costs were contractually-related for about 100 people and have been immediately accrued);
·A third-quarter charge of $170 ($111 after taxes) for additional costs incurred related to a plant shutdown in Film Products;
·A second-quarter charge of $300 ($195 after taxes), partially offset by a fourth-quarter gain of $104 ($68 after taxes), related to the loss on the sale of the previously shutdown films manufacturing facility in Manchester, Iowa;
·A fourth-quarter charge of $427 ($277 after taxes) and a second-quarter charge of $879 ($571 after taxes) related to the estimated loss on the sub-lease of a portion of the AFBS facility in Princeton, New Jersey;
·Second-quarter charges of $575 ($374 after taxes) in Film Products and $146 ($95 after taxes) in Aluminum Extrusions related to asset impairments; and
·
Fourth-quarter charges of $1,402 ($912 after taxes) related to severance and other employee-related costs associated with restructurings in Therics ($590 before taxes), Film Products ($532 before taxes) and Aluminum Extrusions ($280 before taxes) and a second-quarter charge of $145 ($94 after taxes) related to severance at AFBS (an aggregate of 24 people were affected by these restructurings).

Gain on sale of corporate assets in 2004 includes a fourth-quarter gain on the sale of land of $1,013 ($649 after taxes and proceeds of $1,271), a second-quarter gain on the sale of land of $413 ($268 after taxes and proceeds of $647) and a first-quarter gain on the sale of public equity securities of $6,134 ($3,987 after taxes and proceeds of $7,182). These gains are included in “Other income (expense), net” in the consolidated statements of income and separately shown in the segment operating profit table in Note 3.

Income taxes in 2004 include a third-quarter tax benefit of $1,904$4,000 related to the reversal of income tax contingency accruals upon the favorable conclusion of IRS and state examinations through 1997 (included2000.

The other gain of $7,316 ($4,756 after taxes) included in “Income taxes”the Aluminum Extrusions section of the operating profit by segment table in Note 3 is comprised of the present value of an insurance settlement of $8,357 (future value of $8,455) associated with environmental matters related to prior years, partially offset by accruals for expected future environmental costs of $1,041. The company received $5,143 of the $8,455 insurance settlement in September of 2004 and recognized receivables at present value for future amounts due ($1,497 received in February of 2005 and $1,717 received in February 2006). The gain from the insurance settlement is included in "Other income (expense), net" in the consolidated statements of income).income, while the accruals for expected future environmental costs are included in "Cost of goods sold."

        As noted above, we recorded impairment losses on long-lived assets due to excess production capacity and operating inefficiencies. The losses recognized represent the differences between the carrying value of the assets and related goodwill (in 2001 only) and the estimated fair values of the assets.


16
CONTINGENCIES



        We are involved in various stages of investigation and remediation relating to environmental matters at certain plant locations. Where we have determined the nature and scope of any required environmental remediation activity, estimates of cleanup costs have been obtained and accrued. As we continue efforts to maintain compliance with applicable environmental laws and regulations, additional contingencies may be identified. If additional contingencies are identified, our practice is to determine the nature and scope of those contingencies, obtain and accrue estimates of the cost of remediation, and perform remediation. We do not believe that additional costs that could arise from those activities will have a material adverse effect on our financial position. However, those costs could have a material adverse effect on quarterly or annual operating results at that time.

        We are involved in various other legal actions arising in the normal course of business. After taking into consideration legal counsels’ evaluation of these actions, we believe that we have sufficiently accrued for probable losses and that the actions will not have a material adverse effect on our financial position. However, the resolution of the actions in a future period could have a material adverse effect on quarterly or annual operating results at that time.

67


We are involved in various stages of investigation and remediation relating to environmental matters at certain current and former plant locations. Where we have determined the nature and scope of any required environmental remediation activity, estimates of cleanup costs have been obtained and accrued. As we continue efforts to maintain compliance with applicable environmental laws and regulations, additional contingencies may be identified. If additional contingencies are identified, our practice is to determine the nature and scope of those contingencies, obtain and accrue estimates of the cost of remediation, and perform remediation. We do not believe that additional costs that could arise from those activities will have a material adverse effect on our financial position. However, those costs could have a material adverse effect on quarterly or annual operating results at that time.

        From time to time, we enter into transactions with third parties in connection with the sale of assets or businesses in which we agree to indemnify the buyers or third parties involved in the sale for certain liabilities or risks related to the assets or business. Also, in the ordinary course of our business, we may enter into agreements with third parties for the sale of goods or services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement. Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a deductible or basket. For these reasons, we are unable to estimate the maximum potential amount of the potential future liability under the indemnity provisions of these agreements. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. We disclose contingent liabilities if the probability of loss is reasonably possible and significant.

We are involved in various other legal actions arising in the normal course of business. After taking into consideration legal counsels’ evaluation of these actions, we believe that we have sufficiently accrued for probable losses and that the actions will not have a material adverse effect on our financial position. However, the resolution of the actions in a future period could have a material adverse effect on quarterly or annual operating results at that time.

From time to time, we enter into transactions with third parties in connection with the sale of assets or businesses in which we agree to indemnify the buyers or third parties involved in the sale for certain liabilities or risks related to the assets or business. Also, in the ordinary course of our business, we may enter into agreements with third parties for the sale of goods or services that may contain indemnification provisions. In the event that an indemnification claim is asserted, liability for indemnification would be subject to an assessment of the underlying facts and circumstances under the terms of the applicable agreement. Further, any indemnification payments may be limited or barred by a monetary cap, a time limitation, or a deductible or basket. For these reasons, we are unable to estimate the maximum potential amount of the potential future liability under the indemnity provisions of these agreements. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. We disclose contingent liabilities if the probability of loss is reasonably possible and significant.

17
DISCONTINUED OPERATIONS



On March 7, 2003, Tredegar Investments, Inc. (“Tredegar Investments”) reached definitive agreements to sell substantially all of its portfolio of private equity partnership interests to GS Vintage Funds II, which are investment partnerships managed by Goldman Sachs Asset Management’s Private Equity Group. On the same date and in a separate transaction, Tredegar Investments also agreed to sell to W Capital Partners, an independent private equity manager, the subsidiary funds that hold substantially all of Tredegar Investments’ direct venture capital investments. The sale of these fund interests included the assumption by the buyer of Tredegar Investments’ obligations to make additional capital contributions to those funds in the future.

The sale to W Capital Partners of the subsidiary funds that hold the direct investments occurred on March 7, 2003. The sale of the private equity fund interests occurred in a series of closings. Net proceeds from the sales totaled $21,504. Additionally, in the first quarter of 2004 we received income tax recoveries of approximately $55,000 from the carry-back of 2003 capital losses generated by these sales against gains realized in 2000 by Tredegar Investments.

The agreements governing these transactions contain customary contingent indemnification provisions that Tredegar believes will not have a material effect on its financial position or results of operations.

Discontinued operations in 2004 include an after-tax gain associated with venture capital investment activities of $2,921 primarily related to the reversal of business and occupancy tax contingency accruals upon favorable resolution. Cash flows for discontinued operations have not been separately disclosed in the accompanying statement of cash flows.


SELECTED QUARTERLY FINANCIAL DATA

Tredegar Corporation and Subsidiaries
(In thousands, except per-share amounts)
(Unaudited)
            
  
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 Year 
2006           
Sales $267,964 $282,491 $296,256 $269,814 $1,116,525 
Gross profit  34,852  35,550  36,143  37,045  143,590 
Net income  8,215  9,250  9,690  11,046  38,201 
Earnings per share:                
Basic  .21  .24  .25  .28  .99 
Diluted  .21  .24  .25  .28  .98 
Shares used to compute earnings per share:                
Basic  38,602  38,632  38,654  38,793  38,671 
Diluted  38,664  38,837  39,123  39,092  38,931 
2005                 
Sales $232,757 $243,724 $240,716 $239,772 $956,969 
Gross profit  28,462  33,245  32,518  27,432  121,657 
Net income  5,550  2,132  7,657  890  16,229 
Earnings per share:                
Basic  .14  .05  .20  .02  .42 
Diluted  .14  .05  .20  .02  .42 
Shares used to compute earnings per share:                
Basic  38,440  38,453  38,465  38,527  38,471 
Diluted  38,636  38,592  38,565  38,594  38,597 


SIGNATURES

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

        On March 7, 2003, Tredegar Investments, Inc. (“Tredegar Investments”) reached definitive agreements to sell substantially all of its portfolio of private equity partnership interests to GS Vintage Funds II, which are investment partnerships managed by Goldman Sachs Asset Management’s Private Equity Group. On the same date and in a separate transaction, Tredegar Investments also agreed to sell to W Capital Partners, an independent private equity manager, the subsidiary funds that hold substantially all of Tredegar Investments’ direct venture capital investments. The sale of these fund interests included the assumption by the buyer of Tredegar Investments’ obligations to make additional capital contributions to those funds in the future.

        The sale to W Capital Partners of the subsidiary funds that hold the direct investments occurred on March 7, 2003. The sale of the private equity fund interests occurred in a series of closings.

        Net proceeds from the sales totaled $21,504. Additional proceeds of approximately $55,000, to be received in the form of income tax recoveries, are expected in mid-2004 from the carry-back of 2003 capital losses generated by these sales against gains realized in 2000 by Tredegar Investments.

        The agreements governing these transactions contain customary contingent indemnification provisions that Tredegar believes will not have a material effect on its financial position or results of operations.

        The operating results associated with venture capital investment activities have been reported as discontinued operations and results for prior periods have been restated.

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        A summary of venture capital investment activities from 2001 through disposal in 2003 is provided below:



 2003 2002 2001 

Carrying value of venture capital investments,           
     beginning of period  $93,765 $155,084 $232,259 
Venture capital investment activity for period:  
     (pre-tax amounts):  
     New investments   2,807  20,373  24,504 
     Proceeds from the sale of investments, including  
         broker receivables at end of period   (21,504) (8,918) (49,185)
     Realized gains     4,454  33,104 
     Realized losses, write-offs and write-downs   (70,256) (65,154) (52,759)
     (Decrease) increase in unrealized gain on  
         available-for-sale securities   (917) (12,074) (32,839)
     Carrying value of public securities retained by  
         Tredegar Investments*   (3,895)    

Carrying value of venture capital investments,  
     end of period  $ $93,765 $155,084 

Summary of amounts reported as discontinued  
operations in the consolidated statements of  
income:  
     Pretax gains (losses), net  $(70,256)$(60,700)$(19,655)
     Operating expenses (primarily management fee  
         expenses)   (599) (5,594) (6,324)

     Loss before income taxes   (70,855) (66,294) (25,979)
     Income tax benefits   24,286  23,866  9,352 

     Loss from venture capital investment activities  $(46,569)$(42,428)$(16,627)


*At December 31, 2003, Tredegar Investments held 596,492 shares of VASC and 265,955 shares of ILMN. See Note 15 for more information.

        Loss from venture capital investment activities in 2003 of $70,855 ($46,569 after taxes) includes a loss on the sale of $70,256 ($46,269 after taxes).

        On July 2, 2002, the operations at Molecumetics ceased. The operating results of Molecumetics have been reported as discontinued operations. For the years ended December 31, 2002 and 2001, operating losses for Molecumetics were $5,928 ($3,853 after taxes) and $8,876 ($5,768 after taxes), respectively, while revenues were $515 and $3,991, respectively. Discontinued operations also include a gain of $1,393 ($891 after taxes) in 2003 on the sale of intellectual property of Molecumetics and a charge of $7,500 ($4,875 after taxes) in 2002 for the loss on the disposal of Molecumetics. This charge is comprised of an impairment loss for assets of $4,860, severance and other employee related costs of $1,390 and miscellaneous disposal costs of $1,250. The tangible assets were sold during the fourth quarter of 2002 for proceeds of $800.

        On August 16, 1994, The Elk Horn Coal Corporation (“Elk Horn”), our former 97% owned coal subsidiary, was acquired by Pen Holdings, Inc. At the time of the sale, we recorded an income tax contingency accrual. In the second quarter of 2001, we recognized an after-tax gain of $1,396 related to the reversal of this income tax contingency accrual upon favorable conclusion of IRS examinations through 1997. This gain was reported in discontinued operations in the accompanying income statement consistent with the treatment of Elk Horn when sold.

        Cash flows for discontinued operations have not been separately disclosed in the accompanying statement of cash flows.

69



SELECTED QUARTERLY FINANCIAL DATA

Tredegar Corporation and Subsidiaries
(In thousands, except per-share amounts)
(Unaudited)


 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 Year 

2003           

Sales  $182,045 $181,574 $193,125 $181,907 $738,651 
Gross profit   28,356  27,206  30,798  27,492  113,852 
Income from continuing operations   4,859  1,681  6,419  6,368  19,327 
Income (loss) from discontinued operations   (49,516) 891    2,947  (45,678)

Net income (loss)   (44,657) 2,572  6,419  9,315  (26,351)
Earnings (loss) per share:  
    Basic:  
      Continuing operations   .13  .04  .17  .17  .51 
      Discontinued operations   (1.30) .02    .08  (1.20)

      Net income (loss)   (1.17) .06  .17  .25  (.69)
    Diluted:  
      Continuing operations   .12  .04  .17  .17  .50 
      Discontinued operations   (1.28) .02    .07  (1.19)

      Net income (loss)   (1.16) .06  .17  .24  (.69)
Shares used to compute earnings (loss) per share:  
    Basic   38,179  38,047  38,058  38,101  38,096 
    Diluted   38,578  38,418  38,383  38,389  38,441 

2002   

Sales  $177,452 $200,554 $194,621 $181,097 $753,724 
Gross profit   36,309  42,535  37,978  37,925  154,747 
Income from continuing operations   10,059  14,271  11,939  12,356  48,625 
Income (loss) from discontinued operations   (9,476) (17,606) (13,700) (10,374) (51,156)

Net income (loss)   583  (3,335) (1,761) 1,982  (2,531)
Earnings (loss) per share:  
    Basic:  
      Continuing operations   .26  .37  .31  .32  1.27 
      Discontinued operations   (.24) (.46) (.36) (.27) (1.34)

      Net income (loss)   .02  (.09) (.05) .05  (.07)
    Diluted:  
      Continuing operations   .26  .36  .30  .32  1.25 
      Discontinued operations   (.24) (.45) (.35) (.27) (1.32)

      Net income (loss)   .02  (.09) (.05) .05  (.07)
Shares used to compute earnings (loss) per share:  
    Basic   38,167  38,270  38,334  38,298  38,268 
    Diluted   38,855  39,111  38,927  38,775  38,869 


70



SIGNATURES

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


TREDEGAR CORPORATION
(Registrant)
 
Dated:  March 2, 2007
By/s/ John D. Gottwald
 
Dated: February 18, 2004By /s/ N. A. Scher
——————————————
Norman A. Scher
President

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 18, 2004.


SignatureTitleJohn D. Gottwald
 President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 2, 2007.

Signature
Title
 
/s/ John D. Gottwald
——————————————
     (John
President, Chief Executive Officer and Director
(John D. Gottwald) Chairman of the Board of Directors
/s/ N. A. Scher
——————————————
     (Norman A. Scher)
President and Director
(Principal Executive Officer)
 
 
/s/ D. Andrew Edwards
——————————————
     (D. Andrew Edwards)
 Vice President, Chief Financial Officer and Treasurer
(D. Andrew Edwards)(Principal Financial and Accounting Officer)
/s/ Richard L. MorrillChairman of the Board of Directors
(Richard L. Morrill) 
 
/s/ William M. GottwaldVice Chairman of the Board of Directors
(William M. Gottwald)
/s/ N. A. ScherVice Chairman of the Board of Directors
(Norman A. Scher)
/s/ Horst R. AdamDirector
(Horst R. Adam)
 
/s/ Austin Brockenbrough, III
——————————————
     (Austin
Director
(Austin Brockenbrough, III) Director 
 
 
/s/ Phyllis Cothran
——————————————
     (Phyllis Cothran)
Director
 
/s/ Donald T. Cowles
——————————————
     (Donald
Director
(Donald T. Cowles) Director

 
/s/ R. W. Goodrum
——————————————
     (R. W. Goodrum)
Director
/s/ Floyd D. Gottwald, Jr.
——————————————
     (Floyd D. Gottwald, Jr.)
Director
/s/ William M. Gottwald
——————————————
     (William M. Gottwald)
Director

71



/s/ Richard L. Morrill
——————————————
     (Richard L. Morrill)
Director
 
/s/ Thomas G. Slater, Jr.
——————————————
     (Thomas
Director
(Thomas G. Slater, Jr.) Director 
 
 
/s/ R. Gregory Williams
——————————————
     (R.
Director
(R. Gregory Williams) Director 

72


EXHIBIT INDEX

EXHIBIT INDEX


3.1Amended and Restated Articles of Incorporation of Tredegar (filed as Exhibit 3.1 to Tredegar’s QuarterlyTredegar's Annual Report on Form 10-Q10-K for the quarteryear ended June 30, 1989,December 31, 2004, and incorporated herein by reference)

3.2Amended By-laws of Tredegar (filed as Exhibit 33.01 to Tredegar’s QuarterlyTredegar's Current Report on Form 10-Q for the quarter ended June 30, 2003,8-K, filed January 17, 2006, and incorporated herein by reference)

3.3Articles of Amendment (filed as Exhibit 3.3 to Tredegar’sTredegar's Annual Report on Form 10-K for the year ended December 31, 1999,2004, and incorporated herein by reference)

4.1Form of Common Stock Certificate (filed as Exhibit 4.34.1 to Tredegar’sTredegar's Annual Report on Form 10-K for the year ended December 31, 1989,2004, and incorporated herein by reference)

4.2Rights Agreement, dated as of June 30, 1999, by and between Tredegar and American Stock Transfer & Trust Company, as Rights Agent (filed as Exhibit 99.14.2 to the Registration StatementTredegar's Annual Report on Form 8-A, filed June 16, 1999, as amended,10-K for the year ended December 31, 2004, and incorporated herein by reference)

4.2.1Amendment and Substitution Agreement (Rights Agreement) dated as of December 11, 2002, by and among Tredegar, American Stock Transfer and Trust Company and National City Bank (filed as Exhibit 4.2.1 to Tredegar’s Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference).

4.44.3Credit Agreement dated as of October 17, 2003, by and among Tredegar Corporation, as borrower, itsthe domestic subsidiaries of Tredegar that from time to time become parties thereto, as guarantors, the several banks and the lenders (Wachoviaother financial institutions as may from time to time become parties thereto, Wachovia Bank, National Association, as administrative agent, SunTrust Bank, as syndication agent, and Bank of America, N.A., KeyBank National Association, and JPMorgan Chase Bank, N.A., as documentation agent)agents, dated as of December 15, 2005 (filed as Exhibit 410.16 to Tredegar’s QuarterlyTredegar's Current Report on Form 10-Q for the quarter ended September 30, 2003,8-K, filed December 20, 2005, and incorporated herein by reference)

10.1Reorganization and Distribution Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.1 to Tredegar’sTredegar's Annual Report on Form 10-K for the year ended December 31, 1989,2004, and incorporated herein by reference)

*10.2Employee Benefits Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.2 to Tredegar’sTredegar's Annual Report on Form 10-K for the year ended December 31, 1989,2004, and incorporated herein by reference)

10.3Tax Sharing Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.3 to Tredegar’sTredegar's Annual Report on Form 10-K for the year ended December 31, 1989,2004, and incorporated herein by reference)

10.4Indemnification Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.510.4 to Tredegar’sTredegar's Annual Report on Form 10-K for the year ended December 31, 1989,2004, and incorporated herein by reference)

*10.5Tredegar 1989 Incentive Stock Option Plan (included(filed as Exhibit A10.5 to Tredegar's Annual Report on Form 10-K for the Prospectus contained in the Form S-8 Registration Statement No. 33-31047,year ended December 31, 2004, and incorporated herein by reference)

*10.5.1Amendment to the Tredegar 1989 Incentive Stock Option Plan (filed as Exhibit 10.5.1 to Tredegar’sTredegar's Annual Report on Form 10-K for the year ended December 31, 1998,2004, and incorporated herein by reference)

*10.6Tredegar Bonus1992 Omnibus Stock Incentive Plan (filed as Exhibit 10.6 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference)

*10.6.1Amendment to the Tredegar 1992 Omnibus Incentive Plan (filed as Exhibit 10.6.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference)

*10.7Tredegar Industries, Inc. Retirement Benefit Restoration Plan (filed as Exhibit 10.7 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference)

*10.7.1Amendment to the Tredegar Retirement Benefit Restoration Plan (filed as Exhibit 10.7.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference)

*10.8Tredegar Industries, Inc. Savings Plan Benefit Restoration Plan (filed as Exhibit 10.8 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference)

*10.8.1Resolutions of the Executive Committee of the Board of Directors of Tredegar Corporation adopted on December 28, 2004 (effective as of December 31, 2004) amending the Tredegar Corporation Retirement Savings Plan Benefit Restoration Plan (filed as Exhibit 10.9.1 to Tredegar’s Current Report on Form 8-K, filed on December 30, 2004, and incorporated herein by reference)


*10.9Tredegar Industries, Inc. Amended and Restated Incentive Plan (filed as Exhibit 10.9 to Tredegar’s Annual Report on Form 10-K for the year ended December 31, 1989,2005, and incorporated herein by reference)

*10.710.10Tredegar 1992 OmnibusIndustries, Inc. Directors’ Stock Incentive Plan (filed as Exhibit 10.1210.11 to Tredegar’sTredegar's Annual Report on Form 10-K for the year ended December 31, 1991,2004, and incorporated herein by reference)

*10.7.110.11Amendment to the Tredegar 1992 OmnibusCorporation’s 2004 Equity Incentive Plan (filed as Exhibit 10.7.1 to Tredegar’s Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference)

*10.8Tredegar Industries, Inc. Retirement Benefit Restoration Plan (filed as Exhibit 10.13 to Tredegar’s Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference)

*10.8.1Amendment to the Tredegar Retirement Benefit Restoration Plan (filed as Exhibit 10.8.1 to Tredegar’s Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference)

*10.9Tredegar Industries, Inc. Savings Plan Benefit Restoration Plan (filed as Exhibit 10.14 to Tredegar’s Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference)



*10.10Tredegar Industries, Inc. Amended and Restated Incentive Plan (included as Exhibit 99.2 to the Form S-8 Registration Statement No. 333-88177,333-115423, filed on May 12, 2004 (incorporating from the Annex to Tredegar Corporation’s Definitive Proxy Statement on Schedule 14A filed on March 4, 2004 (No. 1-10258) and incorporated herein by reference)

*10.1110.12ConsultingLeave of Absence, Separation and Non-Competition Agreement, made as of April 1, 2000dated May 16, 2005, between Tredegar Film Products Corporation and Richard W. GoodrumThomas G. Cochran (filed as Exhibit 10.16 to Tredegar's Current Report on Form 8-K, filed May 18, 2005, and incorporated herein by reference)

*10.13Transfer Agreement, by and between Old Therics and New Therics, dated as of June 30, 2005 (filed as Exhibit 10.17 to Tredegar's Current Report on Form 8-K, filed July 1, 2005, and incorporated herein by reference)

10.14Intellectual Property Transfer Agreement, by and between Old Therics and New Therics, dated as of June 30, 2005 (filed as Exhibit 10.18 to Tredegar's Current Report on Form 8-K, filed July 1, 2005, and incorporated herein by reference)

10.15Unit Purchase Agreement, by and between Old Therics, New Therics and Randall R. Theken, dated as of June 30, 2005 (filed as Exhibit 10.19 to Tredegar's Current Report on Form 8-K, filed July 1, 2005, and incorporated herein by reference)

10.16Payment Agreement, by and between Old Therics and New Therics, dated as of June 30, 2005 (filed as Exhibit 10.20 to Tredegar's Current Report on Form 8-K, filed July 1, 2005, and incorporated herein by reference)

*10.17Form of Stock Award Agreement (filed as Exhibit 10.21 to Tredegar's Current Report on Form 8-K, filed September 1, 2005, and incorporated herein by reference)

*10.18Description of Cash Incentive Plans for fiscal 2006 (filed as Item 1.01 to Tredegar’s Current Report on Form 8-K, filed on February 22, 2006, and incorporated herein by reference)

*10.19Form of Notice of Nonstatutory Stock Option Grant and Nonstatutory Stock Option Terms and Conditions (filed as Item 1.01 to Tredegar’s Current Report on Form 8-K, filed on March 10, 2006, and incorporated herein by reference)

*10.20Form of Notice of Stock Award and Stock Award Terms and Conditions (filed as Exhibit 10.22 to Tredegar’s Quarterly Report on Form 10-Q, for the quarter ended June 30, 2000, and incorporated herein by reference)

*10.1210.21Tredegar Industries, Inc. Directors’Description of 2007 Long-Term Incentive Award for Chief Executive Officer and Form of Notice of Stock PlanUnit Award (filed as Item 5.02 and Exhibit 10.1210.21, respectively, to Tredegar’s AnnualCurrent Report on Form 10-K for the year ended December 31, 1998,8-K, filed on February 28, 2007, and incorporated herein by reference)

Summary of Director Compensation for Fiscal 2007

Subsidiaries of Tredegar

Consent of Independent AccountantsRegistered Public Accounting Firm

Section 302 Certification of Principal Executive Officer

Section 302 Certification of Principal Financial Officer

32Section 906 CertificationsCertification of Principal Executive andOfficer

Section 906 Certification of Principal Financial OfficersOfficer

* The marked items are management contracts or compensatory plans, contracts or arrangements required to be filed as exhibits to this Form 10-K.


* Denotes compensatory plans or arrangements or management contracts.
77