UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1O-K

(Mark One)

þ		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2005

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 1-12001

ALLEGHENY TECHNOLOGIES INCORPORATED

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (412) 394-2800

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

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

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

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

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

     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.

     Large accelerated filer þ Accelerated filer o Non-accelerated filer o

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     On February 10, 2006, the Registrant had outstanding 99,374,316 shares of its Common Stock.

The aggregate market value of the Registrant’s voting stock held by non-affiliates at June 30, 2005 was approximately $2.06 billion, based on the closing price per share of Common Stock on that date of $22.06 as reported on the New York Stock Exchange, and at February 10, 2006 was approximately $4.66 billion, based on the closing price per share of Common Stock on that date of $47.88 as reported on the New York Stock Exchange. Shares of Common Stock known by the Registrant to be beneficially owned by directors of the Registrant and officers of the Registrant subject to the reporting and other requirements of Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are not included in the computation. The Registrant, however, has made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Exchange Act.

Documents Incorporated By Reference

Selected portions of the Proxy Statement for 2006 Annual Meeting of Stockholders — Part III of this Report. The information included in the Proxy Statement as required by paragraphs (a) and (b) of Item 306 of Regulation S-K and paragraphs (k) and (l) of Item 402 of Regulation S-K is not incorporated by reference in this Form 10-K.

 

 

INDEX

				Page
				Number
PART I				3
Item 1.		Business		3
Item 1A.		Risk Factors		8
Item 1B.		Unresolved Staff Comments		12
Item 2.		Properties		12
Item 3.		Legal Proceedings		13
Item 4.		Submission of Matters to a Vote of Security Holders		13
PART II				13
Item 5.		Market for the Registrant’s Common Equity and Related Stockholder Matters		13
Item 6.		Selected Financial Data		14
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk		36
Item 8.		Financial Statements and Supplementary Data		37
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		72
Item 9A.		Controls and Procedures		72
Item 9B.		Other Information		75
PART III				75
Item 10.		Directors and Executive Officers of the Registrant		75
Item 11.		Executive Compensation		75
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		76
Item 13.		Certain Relationships and Related Transactions		76
Item 14.		Principal Accountant Fees and Services		76
PART IV				76
Item 15.		Exhibits and Financial Statement Schedules		76
SIGNATURES				79
EX-10.9
EX-10.22
EX-10.23
EX-10.24
EX-10.25
EX-10.26
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1

PART I

Flat-Rolled Products Segment

Our Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys, and titanium and titanium-based alloys, in a variety of product forms, including plate, sheet, engineered strip, and Precision Rolled Strip ^® products, as well as grain-oriented silicon electrical steel, and tool steels. The major end markets for our flat-rolled products are construction and mining, automotive, electrical energy, food processing equipment and appliances, machine and cutting tools, chemical processing, oil and gas, electronics, communication equipment and computers. The operations in this segment are ATI Allegheny Ludlum, our 60% interest in the Chinese joint venture company known as Shanghai STAL Precision Stainless Steel Company Limited (STAL), and our 50% interest in the industrial titanium joint venture known as Uniti LLC. The remaining 40% interest in STAL is owned by the Baosteel Group, a state authorized investment company whose equity securities are publicly traded in the People’s Republic of China. The remaining 50% interest in Uniti LLC is held by Verkhnaya Salda Metallurgical Production Association (VSMPO), a Russian producer of titanium, aluminum, and specialty steel products.

     On June 1, 2004, we completed the acquisition of substantially all of the assets of J&L Specialty Steel, LLC, a producer of flat-rolled stainless steel products with operations in Midland, Pennsylvania and Louisville, Ohio, for $69 million in total consideration, including the assumption of certain current liabilities, and which is subject to final adjustment. In connection with the acquisition, we reached a new progressive labor agreement with the United Steelworkers of America, which represents employees at Allegheny Ludlum and the former J&L facilities. The agreement provided for a workforce restructuring, including a reduction in the number of job classifications and the implementation of flexible work rules. In addition, the number of production and maintenance employees at the pre-acquisition Allegheny Ludlum facilities is being reduced.

     Stainless steel, nickel-based alloys and titanium sheet products are used in a wide variety of industrial and consumer applications. In 2005, approximately 50% by volume of our sheet products were sold to independent service centers, which have slitting, cutting or other processing facilities, with the remainder sold directly to end-use customers.

     Engineered strip and very thin Precision Rolled Strip ^® are used by customers to fabricate a variety of products primarily in the automotive, construction and electronics markets. In 2005, approximately 90% by volume of our engineered strip and Precision Rolled Strip products were sold directly to end-use customers or through our own distribution network, with the remainder sold to independent service centers.

     Stainless steel, nickel-based alloys and titanium plate products are primarily used in industrial markets. In 2005, approximately 60% by volume of our plate products were sold to independent service centers, with the remainder sold directly to end-use customers.

     Grain-oriented silicon electrical steel is used in power transformers where electrical conductivity and magnetic properties are important. Nearly all of our grain-oriented silicon electrical steel products are sold directly to end-use customers. Tool steels are used for hand tools and for cutting, shaping, forming, blanking, and drilling of materials. Included in this category are our armor materials, which are designed to resist penetration by ballistic projectiles and to resist blasts.

Engineered Products Segment

The principal business of our Engineered Products segment includes the production of tungsten powder, tungsten heavy alloys, tungsten carbide materials and carbide cutting tools. The segment also produces carbon alloy steel impression die forgings, large grey and ductile iron castings, and provides precision metals processing services. The operations in this segment are ATI Metalworking Products, ATI Portland Forge, ATI Casting Service and Rome Metals.

     On April 5, 2005, we acquired U.K.-based Garryson Limited, a leading producer of tungsten carbide burrs, rotary tooling and specialty abrasive wheels and discs, for approximately $18 million in cash. This business was integrated into our Metalworking Products operation in 2005.

     We produce a line of sintered tungsten carbide products that approach diamond hardness for industrial markets including automotive, chemical processing, oil and gas, machine and cutting tools, construction and mining, and other markets requiring tools with extra hardness. Technical developments related to ceramics, coatings and other disciplines are incorporated in these products. We also produce tungsten and tungsten carbide powders.

     We forge carbon alloy steels into finished forms that are used primarily in the transportation and construction equipment markets. We also cast grey and ductile iron metals used in the transportation, wind power generation and automotive markets. We have precision metals processing capabilities that enable us to provide process services for most high-value metals from ingots to finished product forms. Such services include grinding, polishing, blasting, cutting, flattening, and ultrasonic testing.

Competition

Markets for our products and services in each of our three business segments are highly competitive. We compete with many producers and distributors who, depending on the product involved, range from large diversified enterprises to smaller companies specializing in particular products. Factors that affect our competitive position are manufacturing costs, industry manufacturing capacity, the quality of our products, services and delivery capabilities, our capabilities to produce a wide range of specialty materials in various alloys and product forms, our technological capabilities including our research and development efforts, our marketing strategies, and the prices for our products and services.

     We face competition from both domestic and foreign companies, some of which are government subsidized. In 1999, the United States imposed antidumping and countervailing duties on dumped and subsidized imports of stainless steel sheet and strip in coils and stainless steel plate in coils from companies in ten foreign countries. These duties were reviewed by the U.S. Commerce Department in 2005 and generally remain in effect. We continue to monitor unfairly traded imports from foreign producers for appropriate action.

High Performance Metals segment — Major Competitors

Nickel-based alloys and superalloys and specialty steel alloys

•		Carpenter Technology Corporation
•		Special Metals Corporation
•		ThyssenKrupp VDM GmbH, a company of ThyssenKrupp Stainless (Germany)

Titanium and titanium-based alloys

•		Titanium Metals Corporation
•		RMI Titanium, an RTI International Metals Company
•		VSMPO — AVISMA (Russia)

Exotic alloys

•		Cezus, a group member of AREVA (France)
•		HC Stark, a division of the Bayer Group (Germany)
•		Western Zirconium Plant of Westinghouse Electric Company, part of the Nuclear Utilities Business Group of British Nuclear Fuels (BNFL)

Flat-Rolled Products segment — Major Competitors

Stainless steel

•		AK Steel Corporation
•		North American Stainless (NAS), owned by Acerinox S.A. (Spain)
•		Outokumpu Stainless Plate Products, owned by Outokumpu Oyj (Finland)
•		Imports from

	–		Arcelor S.A. (France, Belgium and Germany)
	–		ThyssenKrupp Mexinox S.A. de C.V., group member of ThyssenKrupp AG
	–		ThyssenKrupp AG (Germany)
	–		Ta Chen International Corporation (Taiwan)

Engineered Products segment— Major Competitors

Tungsten and tungsten carbide products

•		Kennametal Inc.
•		Iscar (Israel)
•		Sandvik AB (Sweden)
•		Seco Tools AB (Sweden), owned by Sandvik A.B.

Raw Materials and Supplies

Substantially all raw materials and supplies required in the manufacture of our products are available from more than one supplier and the sources and availability of raw materials essential to our businesses are adequate. The principal raw materials we use in the production of our specialty metals are scrap (including iron-, nickel-, chromium-, titanium-, molybdenum-, and tungsten-bearing scrap), nickel, titanium sponge, zirconium sand and sponge, ferrochromium, ferrosilicon, molybdenum and molybdenum alloys, ammonium paratungstate, manganese and manganese alloys, cobalt, niobium, vanadium and other alloying materials.

     Purchase prices of certain principal raw materials have been volatile. As a result, our operating results may be subject to significant fluctuation. We use raw materials surcharge and index mechanisms to offset the impact of increased raw material costs; however, competitive factors in the marketplace can limit our ability to institute such mechanisms, and there can be a delay between the increase in the price of raw materials and the realization of the benefit of such mechanisms. For example, since we generally use in excess of 85 million pounds of nickel each year, a hypothetical increase of $1.00 per pound in nickel prices would result in increased costs of approximately $85 million. We also use in excess of 800 million pounds of ferrous scrap in the production of our flat-rolled products so that a hypothetical increase of $0.01 per pound in ferrous scrap prices would result in increased costs of approximately $8 million.

     In addition, certain of these raw materials, such as nickel, cobalt, ferrochromium and titanium sponge, can be acquired by us and our specialty metals industry competitors, in large part, only from foreign sources. Some of these foreign sources are located in countries that may be subject to unstable political and economic conditions, which might disrupt supplies or affect the price of these materials.

     We purchase our nickel requirements principally from producers in Australia, Canada, Norway, Russia, and the Dominican Republic. Zirconium sponge is purchased from a source in France, while zirconium sand is purchased from both U.S. and Australian sources. Cobalt is purchased primarily from producers in Canada. More than 80% of the world’s reserves of ferrochromium are located in South Africa, Zimbabwe, Albania, and Kazakhstan. We also purchase titanium sponge from sources in Kazakhstan, Japan and Russia.

Export Sales and Foreign Operations

International sales represented approximately 25% of our total annual sales in 2005, 20% of our total sales in 2004, and approximately 23% of our total sales in 2003. These figures include export sales by our U.S.-based operations to customers in foreign countries, which accounted for approximately 16%, 12%, and 14%, of our total sales in 2005, 2004, and 2003, respectively. Our overseas sales, marketing and distribution efforts are aided by our international marketing offices or by independent representatives located at various locations throughout the world.

     For 2005, our sales in the United States and Canada represented 75% and 2%, respectively, of total 2005 sales. Within Europe, our sales to the United Kingdom, Germany, and France represented 5%, 4% and 3%, respectively, of total 2005 sales. Within Asia, our 2005 sales to China and Japan represented 4% and 1%, respectively, of total sales.

     Our Allvac Ltd business has manufacturing capabilities in the United Kingdom and enhances service and responsiveness to customers by providing a sales and distribution network for our Allvac-US produced nickel-based, specialty steel and titanium-based alloys. Our Metalworking Products business, which has manufacturing capabilities in the United Kingdom and Switzerland, sells high precision threading, milling, boring and drilling components, tungsten carbide burrs, rotary tooling and specialty abrasive wheels and discs for the European market from locations in the United Kingdom, Switzerland, Germany, France, Italy and Spain. Our STAL joint venture in the People’s Republic of China produces Precision Rolled Strip products, which enables us to offer these products more effectively to markets in China and other Asian countries. Our Uniti LLC joint venture allows us to offer titanium products to industrial markets more effectively worldwide.

Backlog, Seasonality and Cyclicality

Our backlog of confirmed orders was approximately $972 million at December 31, 2005 and $556 million at December 31, 2004. We expect that approximately 98% of confirmed orders on hand at December 31, 2005 will be filled during the year ending December 31, 2006. Backlog of confirmed orders of our High Performance Metals segment was approximately $615 million at December 31, 2005 and $380 million at December 31, 2004. We expect that approximately 96% of the confirmed orders on hand at December 31, 2005 for this segment will be filled during the year ending December 31, 2006. Backlog of confirmed orders of our Flat-Rolled Products segment was approximately $245 million at December 31, 2005 and $70 million at December 31, 2004. We expect that all of the confirmed orders on hand at December 31, 2005 for this segment will be filled during the year ending December 31, 2006.

     Generally, our sales and operations are not seasonal. However, demand for our products are cyclical over longer periods because specialty metals customers operate in cyclical industries and are subject to changes in general economic conditions and other factors both external and internal to those industries.

Research, Development and Technical Services

We believe that our research and development capabilities give ATI an advantage in developing new products and manufacturing processes that contribute to the profitable growth potential of our businesses on a long-term basis. We conduct research and development at our various operating locations both for our own account and, on a limited basis, for customers on a contract basis. Research and development expenditures for each of our three segments for the years ended December 31, 2005, 2004, and 2003 included the following:

     With respect to our High Performance Metals and Flat-Rolled Products segments, our research, development and technical service activities are closely interrelated and are directed toward cost reduction, process improvement, process control, quality assurance and control, system development, the development of new manufacturing methods, the improvement of existing manufacturing methods, the improvement of existing products, and the development of new products.

     We own several hundred United States patents, many of which are also filed under the patent laws of other nations. Although these patents, as well as our numerous trademarks, technical information, license agreements, and other intellectual property, have been and are expected to be of value, we believe that the loss of any single such item or technically related group of such items would not materially affect the conduct of our business.

Environmental, Health and Safety Matters

We are subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants, and disposal of wastes, and which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. We could incur substantial cleanup costs, fines, civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party sites.

Employees

We have approximately 9,300 full-time employees. A portion of our workforce is covered by various collective bargaining agreements, principally with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (“USW”), including: approximately 2,900 Allegheny Ludlum production, office and maintenance employees covered by collective bargaining agreements that are effective through June 2007, approximately 240 Allvac Albany, Oregon (Oremet) employees covered by a collective bargaining agreement that is effective through June 2007, approximately 590 Wah Chang employees covered by a collective bargaining agreement that continues through March 2008, approximately 270 employees at our Casting Service facility in LaPorte, Indiana, covered by a collective bargaining agreement that is effective through December 2007, and approximately 200 employees at our Portland Forge facility in Portland, Indiana, covered by collective bargaining agreements with three unions that are effective through April 2008.

Available Information

Our Internet website address is http://www.alleghenytechnologies.com. 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 well as proxy and information statements and other information that we file, are available free of charge through our Internet website as soon as reasonably practicable after we electronically file such

material with, or furnish such material to, the United States Securities and Exchange Commission. Our Internet website and the content contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. You may read and copy materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website at http://www.sec.gov which contains reports, proxy and information statements and other information that we file electronically with the SEC.

Principal Officers of the Registrant*

Principal officers of the Company as of February 10, 2006 are as follows:

Set forth below are descriptions of the business background for the past five years of the principal officers of the Company.

      L .  Patrick Hassey has been President and Chief Executive Officer since October 1, 2003. He was elected to the Company’s Board of Directors in July 2003 and has served as Chairman since May 2004. Mr. Hassey was Executive Vice President and a member of the corporate executive committee of Alcoa, Inc. at the time of his early retirement in February 2003. He had served as Executive Vice President of Alcoa and Group President of Alcoa Industrial Components from May 2000 to October 2002. Prior to May 2000, he served as Executive Vice President of Alcoa and President of Alcoa Europe, Inc.

      Richard J. Harshman has served as Executive Vice President, Finance since October 2003 and Chief Financial Officer since December 2000. Mr. Harshman was Senior Vice President, Finance from December 2001 to October 2003 and Vice President, Finance from December 2000 to December 2001. Previously, he had served in a number of financial management roles for ATI and Teledyne, Inc.

      Douglas A. Kittenbrink has served as Executive Vice President, ATI Business System and Group President, Engineered Products Segment since October 2003. Mr. Kittenbrink was Executive Vice President and Chief Operating Officer from July 2001 to October 2003 and served as President of Allegheny Ludlum from April 2000 to November 2002.

      Jack W. Shilling has served as Executive Vice President, Corporate Development and Chief Technical Officer since October 2003. Dr. Shilling was Executive Vice President, Strategic Initiatives and Technology and Chief Technology Officer from July 2001 to October 2003. He served as President of the High Performance Metals Segment from April 2000 to July 2001.

      Jon D. Walton has been Executive Vice President, Human Resources, Chief Legal and Compliance Officer, General Counsel and Corporate Secretary since October 2003. Mr. Walton was Senior Vice President, Chief Legal and Administrative Officer from July 2001 to October 2003. Previously, he was Senior Vice President, General Counsel and Secretary.

      Dale G. Reid has served as Vice President, Controller, Chief Accounting Officer and Treasurer since December 2003. Mr. Reid was Vice President, Controller and Chief Accounting Officer from December 2000 through November 2003.

Item 1A. Risk Factors

There are inherent risks and uncertainties associated with our business that could adversely affect our operating performance and financial condition. Set forth below are descriptions of those risks and uncertainties that we believe to be material, but the risks and uncertainties described are not the only risks and uncertainties that could affect our business. See the discussion under “Forward Looking Statements” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.

      Availability of Energy Resources. We rely upon third parties for our supply of energy resources consumed in the manufacture of our products. The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions in the supply of energy resources could temporarily impair the ability to manufacture products for customers. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, has and may continue to adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition.

      Risks Associated with Retirement Benefits. Our U.S. defined benefit pension plan was funded in accordance with ERISA as of December 31, 2005. Based upon current actuarial analyses and forecasts, we do not expect to be required to make contributions to the defined benefit pension plan for at least the next several years. However, a significant decline in the value of plan investments in the future or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding. Depending on the timing and amount, a requirement that we fund our defined benefit pension plan could have a material adverse effect on our results of operations and financial condition.

      Risks Associated with Accessing the Credit Markets. Our ability to access the credit markets in the future to obtain additional financing, if needed, may be influenced by the Company’s credit rating. However, changes in our credit rating do not impact our access to our existing credit facilities.

      Credit Agreement Covenant. The agreement governing our secured bank credit facility imposes a number of covenants on us. For example, it contains covenants that create limitations on our ability to, among other things, effect acquisitions or dispositions or incur additional debt, and require us to, among other things, maintain a financial ratio when our available borrowing capacity measured under the credit agreement decreases below $75 million. Our ability to comply with the financial covenant may be affected by events beyond our control and, as a result, we may be unable to comply with the covenant, which may adversely affect our ability to borrow under our secured credit facility if the availability level is below $75 million.

      Risks Associated with Environmental Matters. We are subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants, and disposal of wastes, and which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. We could incur substantial cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party sites.

     With respect to proceedings brought under the federal Superfund laws, or similar state statutes, we have been identified as a potentially responsible party (“PRP”) at approximately 28 of such sites, excluding those at which we believe we have no future liability. Our involvement is limited or de minimis at approximately 21 of these sites, and the potential loss exposure with respect to any of the remaining 7 individual sites is not considered to be material.

     We are a party to various cost-sharing arrangements with other PRPs at the sites. The terms of the cost-sharing arrangements are subject to non-disclosure agreements as confidential information. Nevertheless, the cost-sharing arrangements generally require all PRPs to post financial assurance of the performance of the obligations or to pre-pay into an escrow or trust account their share of anticipated site-related costs. In addition, the Federal government, through various agencies, is a party to several such arrangements.

     We believe that we operate our businesses in compliance in all material respects with applicable environmental laws and regulations. However, from time-to-time, we are a party to lawsuits and other proceedings involving alleged violations of, or liabilities arising from environmental laws. When our liability is probable and we can reasonably estimate our costs, we record environmental liabilities in our financial statements. In many cases, we are not able to determine whether we are liable, or if liability is probable, to reasonably estimate the loss or range of loss. Estimates of our liability remain subject to additional uncertainties, including the nature and extent of site contamination, available remediation alternatives, the extent of corrective actions that may be required, and the participation number and financial condition of other PRPs, as well as the extent of their responsibility for the remediation. We intend to adjust our accruals to reflect new information as appropriate. Future adjustments could have a material adverse effect on our results of operations in a given period, but we cannot reliably predict the amounts of such future adjustments. At December 31, 2005, our reserves for environmental matters totaled approximately $29 million. Based on currently available information, we do not believe that there is a reasonable possibility that a loss exceeding the amount already accrued for any of the sites with which we are currently associated (either individually or in the aggregate) will be an amount that would be material to a decision to buy or sell our securities. Future developments, administrative actions or liabilities relating to environmental matters, however, could have a material adverse effect on our financial condition or results of operations.

      Risks Associated with Current or Future Litigation and Claims. A number of lawsuits, claims and proceedings have been or may be asserted against us relating to the conduct of our currently and formerly owned businesses, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, taxes, environmental, health and safety and occupational disease, and stockholder matters. Due to the uncertainties of litigation, we can give no assurance that we will prevail on all claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to us, we do not believe that the disposition of any such pending matters is likely to have a material adverse effect on our financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on our results of operations for that period. Also, we can give no assurance that any other matters brought in the future will not have a material effect on our financial condition, liquidity or results of operations.

      Labor Matters. We have approximately 9,300 full-time employees. A portion of our workforce is covered by various collective bargaining agreements, principally with the USW, including: approximately 2,900 Allegheny Ludlum production, office and maintenance employees covered by collective bargaining agreements, which are effective through June 2007; approximately 240 Allvac Albany, Oregon (Oremet) employees covered by a collective bargaining agreement, which is effective through June 2007; approximately 590 Wah Chang employees covered by a collective bargaining agreement, which continues through March 2008, approximately 270 employees at the Casting Service facility in LaPorte, Indiana, covered by a collective bargaining agreement, which is effective through December 2007, and approximately 200 employees at our Portland Forge facility in Portland, Indiana, covered by collective bargaining agreements with three unions that are effective through April 2008.

     Generally, agreements that expire may be terminated after notice by the union. After termination, the union may authorize a strike. A strike by the employees covered by one or more of the collective bargaining agreements could have a materially adverse affect on our operating results. There can be no assurance that we will succeed in concluding collective bargaining agreements with the unions to replace those that expire.

      Risks Associated with Strategic Capital Projects. From time-to-time, we undertake strategic capital projects in order to expand and upgrade our facilities and operational capabilities. For instance, in 2005 we announced major expansions of our titanium and premium-melt nickel-based alloy, superalloy and specialty alloy production capabilities. We intend to invest approximately $130 million in the aggregate through the end of 2006 to complete these strategic capital projects, and we expect to achieve an aggregate of more than $270 million of potential annual revenue growth from these projects when they are fully implemented. Our ability to achieve the anticipated increased revenues or otherwise realize acceptable returns on these investments or other strategic capital projects that we may undertake is subject to a number of risks, many of which are beyond our control, including a variety of market, operational, permitting, and labor related factors. In addition, the cost to implement any given strategic capital project ultimately may prove to be greater than originally anticipated. If we are not able to achieve the anticipated results from the implementation of any of our strategic capital projects, or if we incur unanticipated implementation costs, our results of operations and financial position may be materially adversely effected.

      Risks Associated with Acquisition and Disposition Strategies. We intend to continue to strategically position our businesses in order to improve our ability to compete. We plan to do this by seeking specialty niches, expanding our global presence, acquiring businesses complementary to existing strengths and continually evaluating the performance and strategic fit of existing business units. We consider acquisition, joint ventures, and other business combination opportunities as well as possible business unit dispositions. From time-to-time, management holds discussions with management of other companies to explore such opportunities. As a result, the relative makeup of the businesses comprising our Company is subject to change. Acquisitions, joint ventures, and other business combinations involve various inherent risks, such as: assessing accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates; the potential loss of key personnel of an acquired business; our ability to achieve identified financial and operating synergies anticipated to result from an acquisition or other transaction; and unanticipated changes in business and economic conditions affecting an acquisition or other transaction. International acquisitions and other transactions could be affected by export controls, exchange rate fluctuations, domestic and foreign political conditions and a deterioration in domestic and foreign economic conditions.

      Internal Controls Over Financial Reporting. 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.

      Insurance. We have maintained various forms of insurance, including insurance covering claims related to our properties and risks associated with our operations. Our existing property and liability insurance coverages contain exclusions and limitations on coverage. From time-to-time, in connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage, larger self-insured retentions and deductibles and significantly higher premiums. As a result, in the future our insurance coverage may not cover claims to the extent that it has in the past and the costs that we incur to procure insurance may increase significantly, either of which could have an adverse effect on our results of operations.

      Political and Social Turmoil. The war on terrorism and recent political and social turmoil, including terrorist and military actions and the implications of the military actions in Iraq, could put pressure on economic conditions in the United States and worldwide. These political, social and economic conditions could make it difficult for us, our suppliers and our customers to forecast accurately and plan future business activities, and could adversely affect the financial condition of our suppliers and customers and affect customer decisions as to the amount and timing of purchases from us. As a result, our business, financial condition and results of operations could be materially adversely affected.

      Export Sales. We believe that export sales will continue to account for a significant percentage of our future revenues. Risks associated with export sales include: political and economic instability, including weak conditions in the world’s economies; accounts receivable collection; export controls; changes in legal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws and tariffs; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on export sales when converted into dollars). Any of these factors could materially adversely effect our results for the period in which they occur.

      Risks Associated with Government Contracts. Some of our operating companies directly perform contractual work for the U.S. Government. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) could be asserted against us related to our U.S. Government contract work. Depending on the circumstances and the outcome, such proceedings could result in fines, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal domestic melting facilities for our high performance metals are located in Monroe, NC and Lockport, NY (vacuum induction melting, vacuum arc re-melt, electro-slag re-melt, plasma melting); Richland, WA (electron beam); and Albany, OR (vacuum arc re-melt). Production of high performance metals, most of which are in long product form, takes place at our domestic facilities in Monroe, NC, Lockport, NY, Richburg, SC and Albany, OR. In 2005, we announced an upgrading and restarting of approximately one-half of the capacity of our idled titanium sponge facility in Albany, OR. We expect this facility to begin production in the first half of 2006. In 2004, we completed a major upgrade and expansion of our long products rolling mill facility located in Richburg, SC. Our production of exotic alloys takes place at facilities located in Albany, OR, Huntsville, AL and Frackville, PA.

     Our principal domestic locations for melting stainless steel and other flat-rolled specialty metals are located in Brackenridge, Midland, Natrona and Latrobe, PA. In 2004, we completed the installation of the second of two new high-powered electric arc furnaces in our Brackenridge, PA melt shop, the first furnace having begun operation in November 2003. Hot rolling of material is performed at our domestic facilities in Brackenridge and Houston, PA. Finishing of our flat-rolled products takes place at our domestic facilities located in Brackenridge, Bagdad, Vandergrift, Midland and Washington, PA, and in Wallingford and Waterbury, CT, New Castle, IN, New Bedford, MA, and Louisville, OH.

     Our principal domestic facilities for the production of our engineered products are located in Nashville, TN, Huntsville, Grant and Gurley, AL, Houston, TX, and Waynesboro, PA (tungsten powder, tungsten carbide materials and carbide cutting tools and threading systems). Other domestic facilities in this segment are located in Portland, IN and Lebanon, KY (carbon alloy steel forgings); LaPorte, IN (grey and ductile iron castings); and southwestern Pennsylvania (precision metals conversion services).

     Substantially all of our properties are owned, and four of our properties are subject to mortgages or similar encumbrances securing borrowings under certain industrial development authority financings.

     We also own or lease facilities in a number of foreign countries, including France, Germany, Switzerland, United Kingdom, and the People’s Republic of China. We own and/or lease and operate facilities for melting and re-melting, machining and bar mill operations, laboratories and offices located in Sheffield, England. Through our STAL joint venture, we operate a facility for finishing Precision Rolled Strip products in the Xin-Zhuang Industrial Zone, Shanghai, China.

     Our executive offices, located in PPG Place in Pittsburgh, PA are leased.

     Although our facilities vary in terms of age and condition, we believe that they have been well maintained and are in sufficient condition for us to carry on our activities.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Set forth below is information regarding the Company’s stock repurchases during the fourth quarter of the fiscal year ended December 31, 2005.

														(d) Maximum Number
										(c) Total Number of				(or Approximate Dollar
										Shares (or Units)				Value) of Shares (or
		(a) Total Number				(b) Average				Purchased as Part of				Units) that May Yet Be
		of Shares (or				Price Paid per				Publicly Announced				Purchased Under the
Period		Units) Purchased (1)				Share (or Unit)				Plans or Programs				Plans or Programs
Month 10 (10/1—10/31)			—				—				—				—
Month 11 (11/1—11/30)			—				—				—				—
Month 12 (12/1—12/31)			201			$	33.975				—				—
Total			201			$	33.975				—				—

(1)		Shares withheld to satisfy employee owed taxes.

     Net income for 2005 included a $20.9 million net special gain, which included the tax benefit associated with the reversal of the Company’s remaining valuation allowance for U.S. Federal net deferred tax assets of $44.9 million, partially offset by asset impairments and charges related to legal matters of $22.0 million, and a $2.0 million charge, reported as a cumulative effect accounting change, net of tax, for conditional asset retirement obligations. Net income in 2004 was favorably impacted by a curtailment gain, net of restructuring costs, of $40.4 million. We did not recognize an income tax provision or benefit in 2004 primarily as a result of the uncertainty regarding full utilization of the net deferred tax asset and available operating loss carryforwards. Net income (loss) in 2003 was adversely affected by restructuring and litigation charges of $84.9 million and a $138.5 million charge to record a valuation allowance for the majority of the Company’s net deferred tax assets, and restructuring charges of $42.8 million in 2002, and $74.2 million in 2001.

     Stockholders’ equity for 2005 includes a $36 million reduction to adjust the minimum pension liability, and a $25 million increase for the tax benefit on stock-based compensation. Stockholders’ equity for 2004 includes $229.7 million in net proceeds from a common stock offering, and a $2 million increase to adjust the minimum pension liability. Stockholders’ equity for 2003 includes the effect of recognizing a $138.5 million valuation allowance on net deferred tax assets and a $47 million increase to adjust the minimum pension liability, net of related tax effects. Stockholders’ equity for 2002 includes the effect of recognizing a minimum pension liability of $406 million, net of related tax effects.

     Results from June 1, 2004 include the additional production capacity related to the acquisition of substantially all of the assets of J&L Specialty Steel, LLC.

     The Company adopted Financial Accounting Standards Board Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), an interpretation of Statement of Financial Accounting Standards No. 143, “Asset Retirement Obligations” (“SFAS 143”) in the 2005 fourth quarter. The cumulative effect of adoption of FIN 47 was $2.0 million net of related tax effects, or $0.02 per share. The Company adopted SFAS 143 on January 1, 2003. The cumulative effect of adoption of SFAS 143 was $1.3 million net of related tax effects, or $0.02 per share. The effects on prior years’ financial information were not material.

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

Allegheny Technologies Incorporated (ATI) uses innovative technologies to produce a wide range of specialty metals for global markets. Our specialty metals are produced in a variety of alloys and forms, and are selected for use in environments that demand materials having exceptional hardness, toughness, strength, resistance to heat, corrosion or abrasion, or a combination of these characteristics. Major end markets of our products include aerospace, defense, chemical processing, oil and gas, electrical energy, construction and mining, automotive, food processing equipment and appliances, machine and cutting tools, transportation, and medical industries. Unless the context requires otherwise, “ATI,” “we,” “our,” “us” and similar terms refer to Allegheny Technologies Incorporated and its subsidiaries.

     Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. Actual results or performance could differ materially from those encompassed within such forward-looking statements as a result of various factors, including those described below.

Overview

In 2005, we focused on accelerating ATI’s profitability. Net income for the full year 2005 was $359.8 million, or $3.57 per share, compared to $19.8 million, or $0.22 per share for 2004. Sales increased 30% to $3.54 billion for 2005 as higher base-selling prices, the effect of raw material surcharges, and higher shipments for most of our major products resulted from improved business conditions in most of the major markets we serve.

     Sales for our High Performance Metals segment improved 57% to a record level of $1.25 billion primarily due to continuing strong demand from the aerospace and medical markets for our titanium alloys, nickel-based superalloys and vacuum melted specialty alloys, and continued strong demand for our exotic materials, especially from the defense and chemical processing markets. Operating profit for the High Performance Metals segment improved to $335.3 million, a 295% increase compared to 2004, due primarily to the improved pricing and increased shipments resulting from the increase in demand and the benefits from our cost reduction efforts, partially offset by the impact on the LIFO inventory accounting methodology from rising raw material costs. In our Flat-Rolled Products segment, demand for our commodity stainless steel sheet products was soft in the second half of 2005, following a strong first half, as a result of inventory management actions at service centers and elsewhere in the supply chain. Overall for 2005, sales for our Flat-Rolled Products segment increased 16% to $1.90 billion due to the improvement in the U.S. industrial economy, especially in most capital goods markets. This improvement in demand for the year and higher base-prices for most of the products of our Flat-Rolled Products segment, along with our acquisition of certain manufacturing assets of J&L Specialty Steel LLC (“J&L”) in mid-2004, and the benefits of cost reductions and lower costs for certain raw materials, offset the negative effects of higher energy costs, resulting in an operating profit for this segment of $149.9 million for 2005 compared to $61.5 million in 2004. Results for our Engineered Products segment also improved, as sales increased to $393 million, or 33% compared to 2004, and operating profit increased to $47.5 million, a 128% increase, due to improved demand from the oil and gas, construction and transportation markets, plus the benefits from our cost reduction actions, which offset the impact of rising raw material costs under the LIFO inventory accounting methodology.

     Segment operating profit increased by $365.6 million, compared to 2004. This significant improvement in segment profitability was achieved despite the negative impact from LIFO inventory reserve charges of $45.8 million, due to higher overall raw material costs, and higher energy costs of $45 million, which partially offset the benefits of $125 million in gross cost reductions.

     Retirement benefit expenses decreased in 2005 to $77.6 million, compared to $119.8 million in 2004, primarily as a result of higher than expected returns on pension assets during 2004, actions taken in the second quarter 2004 to control retiree medical costs, and the favorable effect of the Medicare prescription drug legislation, partially offset by the use of a lower discount rate assumption for determining benefit plan liabilities.

     During 2005, we continued to enhance our leading market positions, reduce costs, and improve our balance sheet. We also realized continued success in implementing the ATI Business System, which is driving lean manufacturing throughout our operations. Our accomplishments during 2005 from these important efforts included the following:

•		We continued to grow our global market presence as international sales reached a record $870 million, or 25% of total sales, an increase of $314 million compared to 2004.
•		In July 2005, we announced a major expansion of our titanium production capabilities. We intend to invest approximately $100 million through the end of 2006 to significantly increase our capacity to produce titanium and titanium alloys used for aero-engine rotating parts, airframe applications, and in other global markets. We expect more than $200 million of annual revenue growth potential when these projects are fully implemented in 2007. We expect to fund these capital expenditures through internal cash flow. Strategic capital projects associated with expanding our titanium production capabilities include:

	—		Upgrading and restarting approximately one-half of the capacity of our idled titanium sponge facility in Albany, Oregon. We expect an annual production rate of 7.5 million pounds of titanium sponge from this facility beginning in the first half of 2006. Titanium sponge is an important raw material used to produce our titanium mill products.
	—		Constructing a third plasma arc melt cold-hearth furnace at ATI Allvac’s North Carolina operations. We expect this new furnace to be qualified for production by late 2006. Plasma arc melting is a superior cold-hearth melt process for making alloyed titanium products for aero-engine rotating parts and biomedical applications.
	—		Expanding high-value plate products capacity by 25%, primarily through investments at our plate products facilities in western Pennsylvania.
	—		Continued upgrading of our cold-rolling assets used in producing titanium sheet and strip products.

•

In September 2005, we announced an expansion of our premium-melt nickel-based alloy, superalloy, and specialty alloy production capabilities. These investments are aimed at increasing our capacity to produce these high performance alloys used for aero-engine rotating parts, airframe applications, oil and gas exploration, extraction and refining, power generation land-based turbines and flue gas desulfurization pollution control units. These incremental capital investments of approximately $30 million through the end of 2006 are expected to be funded from internal cash flow. We expect approximately $70 million of annual revenue from these projects when they are implemented. Major projects of this expansion, which is expected to increase our premium-melt capacity by approximately 20%, include:

	—		Upgrading and expanding vacuum induction melt (VIM) capacity. VIM is a melting process designed for premium grades with high alloy content that require more precise chemistry control and lower impurity levels.
	—		Installation of two new electro-slag re-melt (ESR) furnaces and three new vacuum arc re-melt (VAR) furnaces. ESR and VAR furnaces are consumable electrode re-melting processes used to improve both the cleanliness and metallurgical structure of alloys.

•

In April 2005, we continued to grow our Engineered Products segment by acquiring Garryson Limited, a leading U.K.-based producer of tungsten carbide burrs, rotary tooling and specialty abrasive wheels and discs, for approximately $18 million in cash. Garryson had sales of over $30 million in 2004. The acquired operations were integrated into ATI’s Metalworking Products operation.

•		We realized gross cost reductions, before the effects of inflation, of $125 million in 2005, substantially exceeding our goal of $100 million. Over the past four years, we have reduced our salaried staffing levels by approximately 20% and our hourly staffing levels by 15%, including businesses acquired.
•		We continued to realize significant improvement in safety. As a result of our continuing focus on and commitment to safety, in 2005 our OSHA Total Recordable Incident Rate improved by 30% and our Lost Time Case Rate improved by 40%, both compared to our 2002 baseline.
•		We continued to strengthen our balance sheet as the significant improvement in operating results allowed us to internally fund our capital needs, invest an additional $188 million in managed working capital, and make a $100 million voluntary cash contribution to our U.S. defined benefit pension plan to improve its funded position. Cash on-hand at the end of 2005 was $363 million, an increase of $112 million from year-end 2004. Our net debt to total capitalization improved to 19.8% at December 31, 2005, compared to 43.8% and 72.1% at year-end 2004 and 2003, respectively.
•		We enhanced our financial liquidity by amending our $325 million secured domestic revolving credit facility in August 2005 to extend the term of the credit facility to August 2010, add flexibility to execute various corporate actions without the prior consent of the bank group, reduce the costs of the credit facility, and incorporate a feature that would permit us to increase the size of the credit facility by up to $150 million, assuming we had sufficient collateral. We have not borrowed under this credit facility or its predecessor since it was established in 2003, although a portion of the facility has been utilized to support the issuance of letters of credit.
•		With the continuing strength in our major end markets and confidence in ATI’s ability to continue to generate strong cash flow over the next several years, the Board of Directors increased the quarterly dividend by 67% to $0.10 per share in December 2005.

     As a result of these accomplishments, we believe that ATI should benefit from continuing strong business conditions in 2006 in most of our major markets: aerospace, defense, chemical process industry, oil and gas, electrical energy, and medical. Our investments in high-value titanium products and nickel-based alloys and superalloys are on schedule and are expected to impact results during the second half of 2006. We expect 2006 to improve on the profitable growth achieved in 2005. We expect cash flow to be strong in 2006 enabling us to continue to make strategic investments and improve the balance sheet. We have targeted $225 million of capital investments in 2006 in a self-funded growth strategy. We remain focused on cost reductions and have established a 2006 cost reduction goal of $100 million, before the effects of inflation. We remain dedicated to our disciplined plan and vision as we move to the profitable growth phase of Building the World’s Best Specialty Metals Company .

Results of Operations

Sales were $3.54 billion in 2005, $2.73 billion in 2004 and $1.94 billion in 2003. International sales represented approximately 25% of 2005 total sales, 20% of 2004 total sales and 23% of total sales for 2003.

     Segment operating profit was $532.7 million in 2005, $167.1 million in 2004, and $19.9 million in 2003. Our measure of segment operating profit, which we use to analyze the performance and results of our business segments, excludes income taxes, corporate expenses, net interest expense, retirement benefit expense, other costs net of gains on asset sales, and curtailment gains, management transition and restructuring costs, if any. We believe segment operating profit, as defined, provides an appropriate measure of controllable operating results at the business segment level.

     Income before tax and the cumulative effect of change in accounting principle was $307.1 million in 2005 and $19.8 million in 2004, and was a loss before tax of $280.2 million for 2003. For 2005, income before tax included a restructuring charge of $23.9 million for asset impairments and a charge of $12.6 million for legal matters. Income before tax for 2004 included a curtailment gain, net of restructuring charges, of $40.4 million. Loss before tax for 2003 included restructuring charges and litigation expense of $84.9 million. Retirement benefit expenses declined to $77.6 million in 2005 from $119.8 million in 2004, and $134.4 million in 2003 due to actions taken in mid-2004 to control retiree medical costs, favorable investment returns from improving equity markets, and the favorable impact of the Medicare prescription drug legislation, partially offset by the use of progressively lower discount rate assumptions for determining benefit plan liabilities.

     Net income before the cumulative effect of change in accounting principle was $361.8 million for 2005 and $19.8 million for 2004, and was a loss of $313.3 million for 2003. Net income for 2005 included a $20.9 million net special gain, which included a tax benefit associated with the reversal of the Company’s remaining valuation allowance for U.S. Federal net deferred tax assets, partially offset by asset impairments charges in the Flat-Rolled Products segment, charges for legal matters, and the cumulative effect of adopting a new accounting principle for conditional asset retirement obligations. Results for 2004 did not include an income tax provision or benefit for current or deferred taxes primarily as a result of the uncertainty regarding full utilization of our net deferred tax assets and available operating loss carryforwards. Net income for 2004 included a curtailment gain, net of restructuring costs of $40.4 million, related to the elimination of retiree medical benefits for certain non-collectively bargained employees beginning in 2010, and costs associated with the acquisition of the J&L assets and the new labor agreement. The net loss for 2003 included a $138.5 million charge for a valuation allowance on the majority of our net deferred tax assets, pretax restructuring charges of $62.4 million relating to asset impairments in the Flat-Rolled Products segment and workforce reductions across all operating segments and the corporate office, and $22.5 million for litigation expense. As a result of recording the deferred tax valuation allowance, results for 2003 include an income tax provision of $33.1 million.

     We operate in three business segments: High Performance Metals, Flat-Rolled Products and Engineered Products. These segments represented the following percentages of our total revenues for the years indicated:

     Information with respect to our business segments is presented below and in Note 10 of the Notes to Consolidated Financial Statements.

     Our High Performance Metals segment produces, converts and distributes a wide range of high performance alloys, including nickel- and cobalt-based alloys and superalloys, titanium and titanium-based alloys, exotic alloys such as zirconium, hafnium, niobium, nickel-titanium, and their related alloys, and other specialty metals, primarily in long product forms such as ingot, billet, bar, rod, wire, and seamless tube. These products are designed for the high performance requirements of such major markets as aerospace jet engines and airframes, chemical processing, oil and gas, medical, power generation, defense, transportation, nuclear power, marine, and high-energy physics markets. The operations in this segment are ATI Allvac, ATI Allvac Ltd (U.K.) and ATI Wah Chang.

2005 Compared to 2004

Sales for the High Performance Metals segment increased 57% to $1,246.0 million in 2005 primarily due to continuing strong demand from the aerospace, defense, oil and gas, medical, and power generation markets. Our exotic alloys business continued to benefit from demand from the aerospace, defense, chemical processing, and medical markets. Operating profit for the High Performance Metals segment improved significantly to $335.3 million as a result of increased shipments for most of our products, higher selling prices, and the benefits of gross cost reductions. Comparative information on the segment’s products for the years ended December 31, 2005 and 2004 was:

     Shipments of nickel-based and specialty steel alloys increased 16% and average prices increased 31%. Titanium mill products shipments increased 13% and average prices increased 84%. Shipments for exotic alloys decreased 7% and average prices decreased 1%, primarily due to product mix. Backlog of confirmed orders for the segment increased 62% to approximately $615 million at December 31, 2005, compared to approximately $380 million at December 31, 2004.

     Aerospace represents a significant market for our High Performance Metals segment, especially for premium quality specialty metals used in the manufacture of jet engines for the original equipment and spare parts market segments. In addition, we are becoming a larger supplier of specialty metals used in airframe construction. The demand from the aerospace market has recovered from the decline after the effect of the tragedy of September 11, 2001. Annually, revenue passenger miles and freight miles have increased 9.3% and 2.5%, respectively, since 2003, according to the International Civil Aviation Organization (ICAO). Commercial and military jet aircraft deliveries of new aircraft have increased 5.8% annually since 2003. Due to manufacturing cycle times, demand for our specialty metals leads the deliveries of new aircraft by 12 to 18 months. In addition, as our specialty metals are used in jet engines, demand for our products for spare parts is impacted by aircraft flight activity and resulting mandated engine refurbishment requirements.

Source:		International Civil Aviation Organization

96		97				98				99				00				01				02				03				04				05
580			841				1,134				1,282				1,225				1,276				1,136				1,088				1,180				1,217

Source:		Airline Monitor, Forecast International

     Segment operating profit for 2005 and 2004 was adversely affected by higher raw material costs, which increased significantly in the past three years. These higher costs, while largely recovered in product selling prices through raw material indices, had a negative effect on cost of sales as a result of our LIFO inventory accounting methodology, resulting in LIFO inventory valuation reserve charges of $46.0 million in 2005, and $16.2 million in 2004.

     We continued to aggressively reduce costs in 2005. Gross cost reductions, before the effects of inflation, for 2005 totaled approximately $34 million. Major areas of gross cost reductions included $20 million from operating efficiencies, $11 million from procurement, and $2 million from salaried and hourly labor cost savings.

     In 2005, we announced strategic capital investments to expand our titanium and nickel-based alloy and specialty alloy production capabilities, which include:

•

Upgrading and restarting approximately one-half of the capacity of our idled titanium sponge facility in Albany, Oregon. We expect an annual production rate of 7.5 million pounds of titanium sponge from this facility beginning in the first half of 2006. Titanium sponge is a key raw material used to produce our titanium mill products.

•

Constructing a third plasma arc melt cold-hearth furnace at ATI Allvac’s North Carolina operations. We expect this new furnace to be qualified for production by late 2006. Plasma arc melting is a superior cold-hearth melt process for making alloyed titanium products for aero-engine rotating parts and biomedical applications.

•

Upgrading and expanding vacuum induction melt (VIM) capacity. VIM is a melting process designed for premium grades of nickel-based alloys and superalloys that require more precise chemistry control and lower impurity levels.

•

Installation of new electro-slag re-melt (ESR) and new vacuum arc re-melt (VAR) furnaces. ESR and VAR furnaces are consumable electrode re-melting processes used to improve both the cleanliness and metallurgical structure of alloys.

These projects are expected to cost approximately $110 million and be fully implemented in 2007.

2004 Compared to 2003

Sales for the High Performance Metals segment increased 24% to $794.1 million in 2004 primarily due to improved demand from the aerospace, medical, defense, chemical processing, and oil and gas markets. Our exotic alloys business continued to benefit from sustained demand from defense and medical markets, and from corrosion markets particularly in Asia. Operating profit for the High Performance Metals segment improved significantly to $84.8 million as a result of increased shipments for most of our products, higher selling prices, and the benefits of cost reductions.

     Shipments of nickel-based and specialty steel alloys decreased 2%, while average prices increased 31%. Titanium mill products shipments increased 19% and average prices increased 7%. Shipments for exotic alloys increased 2% and average prices increased 9%. Backlog of confirmed orders for the segment increased 41% to approximately $380 million at December 31, 2004, compared to approximately $270 million at December 31, 2003.

     Operating profit for 2004 and 2003 was adversely affected by higher raw material costs, which increased significantly in the past two years. These higher costs, while largely recovered in product selling prices through raw material indices, had a negative effect on cost of sales as a result of our LIFO inventory accounting methodology, resulting in LIFO inventory valuation reserve charges of $16.2 million in 2004 and $11.7 million in 2003.

     Gross cost reductions, before the effects of inflation, for 2004 totaled approximately $48 million. Major areas of gross cost reductions included $21 million from operating efficiencies, $13 million from procurement, and $14 million from hourly and salary labor cost savings. During 2003, we implemented workforce reductions, which affected approximately 200 employees, or 19% of the salaried workforce. In connection with these reductions, which were substantially completed by the end of 2003, we recorded charges of $3 million for the related severance costs. These expenses are presented as restructuring costs on the statement of operations and are not included in the results for the segment.

     We continued to invest to enhance our specialty metals capabilities, increase efficiencies and reduce costs. Our strategic capital investment to enhance the capabilities of our long products rolling mill facility located in Richburg, SC, which cost approximately $48 million, began construction in 2002 and commenced production in the second quarter of 2004. The project included mutual conversion agreements with Outokumpu Oyj’s U.S. subsidiary, Outokumpu Stainless, giving us access to process our products at Outokumpu Stainless’ facility and Outokumpu Stainless access to process their stainless steel long products at our Richburg facility.

     Our Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys, and titanium and titanium-based alloys, in a variety of product forms including plate, sheet, strip, engineered strip, and Precision Rolled Strip ^® products, as well as grain-oriented silicon electrical steel sheet, and tool steels. The major end markets for our flat-rolled products are construction and mining, automotive, electrical energy, food processing equipment and appliances, machine and

cutting tools, chemical processing, oil and gas, electronics, communication equipment and computers. The operations in this segment are ATI Allegheny Ludlum, our 60% interest in the Chinese joint venture company known as Shanghai STAL Precision Stainless Steel Company Limited (STAL), and our 50% interest in the industrial titanium joint venture known as Uniti LLC. The remaining 40% interest in STAL is owned by the Baosteel Group, a state authorized investment company whose equity securities are publicly traded in the People’s Republic of China. The financial results of STAL are consolidated into the segment’s operating results with the 40% interest of our minority partner recognized in the consolidated statement of operations as other income or expense. The remaining 50% interest in Uniti LLC is held by VSMPO, a Russian producer of titanium, aluminum, and specialty steel products. We account for the results of the Uniti joint venture using the equity method since we do not have a controlling interest.

Acquisition of J&L Specialty Steel LLC Assets

On June 1, 2004, we completed the acquisition of substantially all of the assets of J&L Specialty Steel LLC, a producer of flat-rolled stainless steel products with operations in Midland, Pennsylvania and Louisville, Ohio, for $69.0 million in total consideration, including the assumption of certain current liabilities. The purchase price included $7.5 million cash paid at closing, the issuance to the seller of a non-interest bearing $7.5 million promissory note paid on June 1, 2005, and the issuance to the seller of a promissory note in the principal amount of $54.0 million, which is subject to final adjustment, and secured by the property, plant and equipment acquired, payable in installments in 2007 through 2011, which bears interest at a London Inter-bank Offered Rate plus a 1% margin, with a maximum interest rate of 6%.

     In connection with the J&L asset acquisition, we reached a new labor agreement with the USW, which represents employees at Allegheny Ludlum and at the former J&L facilities. The agreement provided for a workforce restructuring through which we expect to achieve significant productivity improvements. Through a reduction in the number of job classifications and the implementation of flexible work rules, employees are being given broader responsibilities and the opportunity to become more involved in the business. The number of production and maintenance employees at the pre-acquisition Allegheny Ludlum facilities is being reduced by 650 employees, or approximately 25%, through an early retirement program over two and a half years pursuant to which the employees are being offered transition incentives. Approximately 40% of these retirements occurred in second half of 2004, with over 70% of these retirements having taken place by the end of 2005, and 100% of these retirements to be effective by June 2006.

     The acquisition of the J&L assets and the negotiation of the new progressive labor agreement with the USW are expected to improve the performance of our Allegheny Ludlum business. We expect the new labor agreement, combined with the integration of the former J&L operations, to generate annual cost structure improvements relative to the combined performance of the former J&L and pre-acquisition Allegheny Ludlum operations of approximately $200 million when workforce restructuring and synergies are fully implemented in the second half of 2006. We anticipate these cost structure improvements to come from reduced labor costs, operating synergies, improved product mix, and reduced fixed costs. In the aggregate, we expect these initiatives to result in a competitive cost structure for our flat-rolled stainless steel business. During the second half of 2004, the former J&L operations were successfully integrated into Allegheny Ludlum with the improvement in cost structure realized to date reflected in our operating results. Cost savings realized from the J&L asset acquisition and the new labor agreement are included as part of our continuing overall cost reduction programs.

2005 Compared to 2004

Sales for the Flat-Rolled Products segment for 2005 were $1.90 billion, or 16% higher than 2004, due primarily to higher average base-selling prices and higher average raw material surcharges, partially offset by a decrease in demand in the second half of 2005. Comparative information on the segment’s products for the years ended December 31, 2005 and 2004 was:

     Shipments in 2005 decreased by 2% to 1,149 million pounds compared to shipments of 1,176 million pounds for 2004. The average transaction prices to customers, which includes the effect of higher average raw material surcharges and higher average base-selling prices, increased by 18% to $1.64 per pound in 2005. Shipments of commodity products (including stainless steel hot roll and cold roll sheet, and stainless steel plate, among other products) decreased 2% and average transaction prices for these products increased 7%. The decrease in shipments was primarily attributable to inventory adjustments in the second half of 2005 by service center customers primarily for stainless steel sheet. In 2005, consumption in the U.S. of stainless steel strip, sheet and plate products decreased approximately 10%, compared to 2004 consumption, according to the Specialty Steel Institute of North America (SSINA). Demand from the capital goods markets such as chemical processing, oil and gas, and power generation markets remained strong throughout 2005. We experienced a weakening in demand from the automotive, construction and mining, and appliances markets.

Apparent Domestic Consumption
Stainless Sheet and Strip
(Millions of tons)

		00				01				02				03				04				05
Millions/Tons			1.88				1.55				1.58				1.57				1.81				1.62

Source: SSINA

The majority of our flat-rolled products are sold at prices that include surcharges for raw materials, including purchased scrap, that are required to manufacture our products. These raw materials include iron, nickel, chromium, and molybdenum.

Iron Scrap Prices
($/Gross Ton)

97		98				99				00				01				02				03				04				05
135			146				92				133				88				79				117				204				223

Nickel Prices
($/lb)

97		98				99				00				01				02				03				04				05
3.21			2.49				1.94				3.77				3.18				2.74				3.64				6.96				6.58

Source: London Metal Exchange

Chromium Prices
($/lb)

97		98				99				00				01				02				03				04				05
0.429			0.490				0.365				0.441				0.400				0.280				0.349				0.564				0.705

Source: Platts Metals Week

Molybdenum Oxide
($/lb)

97		98				99				00				01				02				03				04				05
4.42			3.75				2.64				2.53				2.21				2.65				3.65				7.94				31.93

Source: Platts Metals Week

     Our Flat-Rolled Products segment high-value product shipments, which include engineered strip, Precision Rolled Strip, super stainless steel, nickel alloy, titanium, grain-oriented silicon electrical steel, and tool steel products, decreased 3%, while average transaction prices for our high-value products increased 29%, primarily due to product mix. We now classify grain-oriented silicon electrical steel and tool steel as high-value products. Shipments declined primarily due to softness in automotive markets partially offset by strong capital goods and power generation markets, especially in Asia. Our international sales, which were primarily comprised of high value products, increased $138.6 million to $350.9 million, and represented a record 18.5% of sales for the Flat-Rolled Products segment.

     Operating income increased to $149.9 million for 2005 compared to $61.5 million in the 2004 period. The benefits of higher average base-selling prices, cost reduction initiatives, additional surcharges, and a change in the LIFO inventory valuation reserve due to lower raw material costs, were partially offset by lower shipments and higher energy costs. During 2005, the average cost of our raw materials in our Flat-Rolled products segment decreased approximately 9% compared to the 2004 average cost. This compares to an increase of approximately 50% in 2004, compared to 2003. As a result, for 2005 we recognized a benefit of $8.9 million under the LIFO inventory costing methodology. In 2004, we recorded a LIFO inventory valuation reserve charge of approximately $86.5 million as a result of the higher raw material costs. Natural gas and electricity costs, net of benefits from natural gas hedges, for 2005 were approximately $39.5 million higher than 2004.

     We continued to aggressively reduce costs and streamline our operations. In 2005, we achieved gross cost reductions, before the effects of inflation, of approximately $85 million in our Flat-Rolled Products segment. Major areas of gross cost reductions included $24 million from operating efficiencies, $49 million from procurement, and $12 million from lower compensation and fringe benefit expenses. At the end of 2005, we decided to indefinitely idle the West Leechburg, PA flat-rolled products finishing facility. This idling is expected to occur in stages during 2006. We expect the facility consolidation to result in annual cost reductions of approximately $10 million beginning in 2007. These restructuring charges of $17.5 million, plus charges of $8.5 million for fair market value adjustments of previously recognized asset impairments, are excluded from 2005 segment operating profit.

     In 2005, we announced strategic capital programs to expand our titanium and nickel-based alloy and specialty alloy production capabilities which include expanding high-value plate products capacity by 25%, upgrading our flat-rolled cold-rolling assets used to produce titanium sheet and strip products, and expanding premium product re-melting capacity. These projects are expected to cost approximately $16 million and be fully implemented in 2007.

2004 Compared to 2003

Sales for the Flat-Rolled Products segment for 2004 were $1.64 billion, or 58% higher than 2003, due primarily to improved demand, higher base-selling prices, higher raw material surcharges, and higher shipments resulting from the Midland, PA and Louisville, OH facilities acquired as part of the acquisition of the J&L assets in June 2004.

     Shipments in 2004 increased by 23% to 1,176 million pounds compared to shipments of 957 million pounds for 2003. The average transaction prices to customers, which includes the effect of higher raw material surcharges and higher base-selling prices, increased by 28% to $1.39 per pound in 2004. Shipments of commodity products (including stainless steel hot roll and cold roll sheet, and stainless steel plate, among other products) increased 37% and average transaction prices for these products increased 42%. The increase in shipments was primarily attributable to improving demand from the residential construction and remodeling markets, and capital goods markets such as chemical processing, oil and gas, and power generation markets, and the benefit of additional capacity resulting from the Midland, PA and Louisville, OH facilities acquired in June 2004. Demand remained good from the automotive and appliance markets. The increase in average transaction prices was primarily due to higher base-selling prices and higher raw material surcharges.

     The cost of raw materials increased significantly in 2004, which resulted in substantially higher raw material surcharges. In addition, a raw material surcharge for iron scrap was instituted in the first half of 2004 as a result of the cost of iron scrap increasing approximately 70% in 2004 compared to the average cost for 2003. The average base-selling price in December 2004 for Type 304 commodity stainless steel cold-rolled sheet increased approximately 28% compared to the same period in 2003. In 2004, consumption in the U.S. of stainless steel strip, sheet and plate products increased approximately 15%, compared to 2003 consumption, according to the SSINA. Our high-value product shipments in the segment (including strip, Precision Rolled Strip, super stainless steel, grain-oriented silicon electrical steel, nickel alloy and titanium products) increased 8%, and average transaction prices for high-value products increased 23%. Certain of these high-value products are used in the consumer durables and capital goods markets, both of which benefited from an improving U.S. economy in the markets we serve, which positively affected shipments and base-selling prices. In addition, shipments of Precision Rolled Strip products increased in Europe and Asia due primarily to strong demand from the automotive and electronics markets, partially aided by the weaker U.S. currency.

     As a result of the improving business conditions, operating income increased to $61.5 million for 2004 compared to an operating loss of $14.1 million in the 2003 period. The benefits of increased shipment volumes, higher base-selling prices, and cost reduction initiatives were partially offset by higher raw material and energy costs. During 2004 the average cost of our raw materials in our Flat-Rolled products segment increased approximately 50%. For 2004, we incurred approximately $94 million of expense for these cost increases, including LIFO inventory valuation reserve charges of $86.5 million, and cost increases of $7.5 million for certain raw materials which were not subject to surcharges for the full year. In addition, natural gas and electricity costs for 2004 were approximately $5 million higher than 2003.

     We continued to aggressively reduce costs and streamline our operations. In 2004, we achieved gross cost reductions, before the effects of inflation, of $80 million in our Flat-Rolled Products segment. Major areas of cost reductions, before the effects of inflation, included $26 million from operating efficiencies, $28 million from procurement, $24 million from lower compensation and fringe benefit expenses, and $2 million from other fixed cost savings. During the second half of 2004, we began reducing our hourly workforce at our Allegheny Ludlum plants by 650 employees, which represented approximately 25% of the pre-J&L acquisition hourly workforce, in accordance with the new labor agreement with the USW. This agreement resulted in a pension termination benefits charge of $25.3 million in the second quarter 2004. The pension termination benefits charge is presented in restructuring costs on the statement of operations and is not included in the results for the segment. During 2003, we implemented workforce reductions of approximately 140 salaried employees representing approximately 13% of the salaried workforce. These workforce reductions were substantially complete by the end of 2003 and resulted in a pretax severance charge of $5 million in 2003. In addition, we indefinitely idled our Washington Flat-Rolled coil facility located in Washington, PA and recorded an asset impairment charge related to the remaining assets located at Houston, PA reflecting projected utilization. These actions resulted in a total pretax, non-cash asset impairment charge of $47.5 million in the 2003 fourth quarter. These expenses are presented as restructuring costs on the statement of operations and are not included in the results for the segment. From 2000 to 2003, the salaried workforce was reduced by approximately 41%.

     We continued to invest to enhance our flat-rolled specialty metals capabilities, increase efficiencies and reduce costs. Our strategic capital investment to upgrade the Brackenridge, PA melt shop, which commenced in 2002 and cost approximately $40 million, was successfully completed. The first of the two new electric arc furnaces began operation in November 2003 and the second furnace began operation in September 2004.

     Our Engineered Products segment includes the production of tungsten powder, tungsten heavy alloys, tungsten carbide materials and carbide cutting tools. The segment also produces carbon alloy steel impression die forgings, and large grey and ductile iron castings, and provides precision metals processing services. The operations in this segment are ATI Metalworking Products, ATI Portland Forge, ATI Casting Service and Rome Metals. On April 5, 2005, we acquired U.K.-based Garryson Limited (“Garryson”), a leading producer of tungsten carbide burrs, rotary tooling and specialty abrasive wheels and discs. The acquisition was accounted for as a purchase, and our results include Garryson’s sales and earnings from the acquisition date.

     The major markets served by our products of the Engineered Products Segment include a wide variety of industrial markets including automotive, chemical processing, oil and gas, machine and cutting tools, construction and mining, aerospace, transportation, and wind power generation.

2005 Compared to 2004

Sales for the Engineered Products segment in 2005 increased 33%, to $393.4 million, and operating profit increased 128%, to $47.5 million, both compared to 2004. Demand for our tungsten products was strong from the oil and gas, mining, and automotive markets. Demand remained strong for forgings from the Class 8 truck, and construction and mining markets. Demand for our cast products was strong from the transportation and wind energy markets. Demand was very strong for our titanium precision metal processing conversion services.

     The improvement in segment sales was primarily due to higher selling prices and increased volume, including shipments from our U.K.-based ATI Garryson Limited cutting tool operations acquired in April 2005. Segment operating profit improved to $47.5 million in 2005, principally as a result of improved pricing and the benefits of cost reductions, which totaled $6.9 million. Operating profit included a LIFO inventory valuation reserve charge of $8.7 million in 2005 and a charge of $9.5 million in 2004 as a result of higher raw material costs and inventory levels.

     In 2005, we continued to invest to enhance our manufacturing capabilities and reduce costs. In the 2005 fourth quarter, we began an $8 million capital investment to expand our capacity to manufacture feedstock material for our production of tungsten power. When the capital investment is complete in late 2006, we expect to have the capability to internally produce all of our requirements of ammonium paratungstate (APT) under current market conditions at a cost significantly below the market price at the end of 2005. In addition, in the 2005 fourth quarter we began a $4 million expansion of our titanium precision metal conversion services operation as part our strategic program to increase our overall titanium production capacity to better meet growing global demand.

2004 Compared to 2003

Sales for the Engineered Products segment in 2004 increased 17%, to $295.0 million and operating profit increased 168% to $20.8 million, both compared to 2003. Demand for our tungsten products was strong from general manufacturing, and the oil and gas and medical markets. Demand improved for forgings from the Class 8 truck, and construction and mining markets. Demand for castings was strong from the transportation and wind energy markets. The improvement in segment operating profit was primarily due to higher sales volumes, improved pricing, and the impact of cost reductions, which totaled $9 million in 2004. The improvement in profitability was partially offset by higher raw material costs, which resulted in a LIFO inventory valuation reserve charge of $9.5 million in 2004, compared to a benefit of $1.9 million in 2003.

Corporate Expenses

Corporate expenses were $51.7 million in 2005 compared to $34.9 million in 2004, and $20.5 million in 2003. The increase in corporate expenses in 2005 and 2004 was primarily the result of expenses associated with annual and long-term performance-based incentive compensation programs, partially offset by cost controls and reductions in the number of corporate employees over this period.

Interest Expense, net

Interest expense, net of interest income, was $38.6 million for 2005 compared to $35.5 million for 2004 and $27.7 million for 2003. The effect of “receive fixed, pay floating” interest rate swap contracts of $150 million, related to our $300 million, 8.375% 10-year Notes issued in December 2001, decreased interest expense by $1.5 million in 2005, $4.4 million in 2004, and $6.7 million in 2003, compared to the fixed interest expense of the Notes. These swap agreements were terminated in 2003 and 2004. Interest expense in 2005, 2004 and 2003 was reduced by $0.2 million, $0.9 million and $2.1 million, respectively, related to interest capitalization on capital projects.

     Interest expense is presented net of interest income of $8.4 million for 2005, $2.9 million for 2004, and $6.2 million for 2003. The increase in interest income for 2005 primarily results from higher cash balances. For 2003, the higher interest income primarily relates to interest on settlements of prior years’ tax liabilities.

Restructuring Costs and Curtailment Gain

We recorded restructuring costs of $23.9 million in 2005, a curtailment gain, net of restructuring costs, of $40.4 million in 2004, and restructuring costs of $62.4 million in 2003.

     In 2005, we recorded a restructuring charge of $23.9 million primarily related to recognizing an asset impairment charge for certain long-lived assets in the Flat-Rolled Products segment. At the end of 2005, we decided to indefinitely idle Allegheny Ludlum’s West Leechburg, PA flat-rolled products finishing facility. There are approximately 45 hourly production and maintenance employees, and 25 laboratory employees at the West Leechburg plant. These employees are being provided positions at nearby Allegheny Ludlum facilities. The cost of indefinitely idling the facility was $17.3 million, and is expected to result in future cash expenditures of less than $2 million. We expect the consolidation to result in annual cost reductions of approximately $10 million in our Flat-Rolled Products segment beginning in 2007. The 2005 restructuring charge also included adjustments of previously recognized asset impairment charges for changes in estimated fair market values. We recorded $8.5 million of asset impairment charges associated with previously idled assets in the Flat-Rolled Products segment at the Washington Flat-Roll coil facility located in Washington, PA, and at the stainless steel plate facility located in Massillon, OH, partially offset by a $1.9 million reversal of lease termination charges recorded in 2003.

     In 2004, the curtailment gain, net of restructuring costs, of $40.4 million, includes the $71.5 million curtailment and settlement gain and the $25.3 million pension termination benefit charge discussed in Retirement Benefit Expense, below, and $5.8 million of restructuring charges. The restructuring charges related to the new labor agreement at our Allegheny Ludlum operations and the J&L asset acquisition, and included labor agreement costs of $4.6 million, severance costs of $0.7 million related to approximately 30 salaried employees, and $0.5 million for asset impairment charges for redundant equipment following the J&L asset acquisition.

     In 2003, we recorded restructuring charges of $62.4 million, including $47.5 million for impairment of long-lived assets in the Flat-Rolled Products segment, $11.1 million for workforce reductions across all business segments and the corporate office, and $3.8 million for facility closure charges including present-valued lease termination costs, net of forecasted sublease rental income, at the corporate office. In the 2003 fourth quarter, based on existing and projected operating levels at our remaining operations in Houston, PA, and at our Washington Flat Roll coil facility located in Washington, PA, we determined that the net book values of these facilities were in excess of their estimated fair market values based on expected future cash flows. Charges for the Houston facility and the Washington Flat Roll coil facility were recorded to write down the net book values of these facilities to their estimated fair market values. These asset impairment charges did not impact current operations at these facilities. The workforce reductions affected approximately 375 employees across all segments and the corporate office. Approximately $5 million of the severance charges was paid from the Company’s pension plan, and at December 31, 2005, approximately $2 million of these prior year workforce reduction and facility closure charges are future cash costs that will be paid over the next several years.

     Cash to meet these obligations is expected to be paid from internally generated funds from operations.

Other Expenses, Net of Gains on Asset Sales

Other expenses, net of gains on asset sales, includes charges incurred in connection with closed operations, pretax gains and losses on the sale of surplus real estate, non-strategic investments and other assets, operating results from equity-method investees, minority interest, and other non-operating income or expense. These items are presented primarily in selling and administrative expenses, and in other income (expense) in the statement of operations and resulted in a net charge of $33.8 million in 2005, other income of $2.5 million in 2004, and a net charge of $47.7 million in 2003.

     Other expenses for 2005 included $26.8 million for legal matters and $7.0 million for environmental and other closed company costs. The charges for legal matters included the settlement of the Kaiser Aerospace & Electronics matter, the unfavorable court judgment rendered in April 2005 concerning a commercial dispute with a raw materials supplier, and other matters associated with closed companies, and are classified in selling and administrative expenses in the consolidated statement of operations. See additional discussion in Note 14, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements.

     In 2003, other expenses for closed companies included a charge of $22.5 million related to litigation with the San Diego Unified Port District, as more fully described in Note 14, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements, and which is included in selling and administrative expenses in the consolidated statement of operations, and changes in our estimates of our liability for environmental closure costs and for liabilities under retrospectively-rated insurance programs.

Retirement Benefit Expense

Retirement benefit expense, which primarily includes pension and postretirement medical benefits, declined in 2005 and 2004 primarily as a result of higher than expected returns on pension assets during 2004 and 2003, actions taken in the second quarter 2004 to control retiree medical costs, and the favorable impact of the Medicare prescription drug legislation, partially offset by the use of progressively lower discount rate assumptions for determining benefit plan liabilities. Retirement benefit expense, excluding the effect of curtailment gains and termination benefit charges, was $77.6 million for 2005, $119.8 million for 2004, and $134.4 million for 2003. The effect of the Medicare prescription drug legislation, which provides for a Federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the benefit established by law, is recognized in the financial statements over a number of years. Retirement benefit expenses are included in both cost of sales and selling and administrative expenses. Retirement benefit expense included in cost of sales and selling and administrative expenses for the years ended 2005, 2004 and 2003 was as follows:

     The 2004 retirement benefit expense shown above does not include the effects of the $71.5 million curtailment and settlement gain related to the elimination of retiree medical benefits for certain non-collectively bargained employees beginning in 2010, nor does this expense include the $25.3 million charge related to the Transition Assistance Program (“TAP”) incentives associated with the new labor agreement at Allegheny Ludlum, which was paid from our U.S. defined benefit pension plan.

     Retirement benefit expenses for 2006 are expected to be approximately $83 million, with effects on cost of sales and selling and administrative expenses similar to the percentages in 2005. Pension expense for 2006 is expected to be approximately $64 million compared to $63 million in 2005 as the positive benefits of the voluntary $100 million 2005 pension contribution and higher than expected returns on pension assets in 2005 are offset by the use of a lower assumed discount rate to value pension liabilities. Postretirement medical expense for 2006 is expected to increase to approximately $19 million from $15 million in 2005 due primarily to a lower expected return on plan assets as a result of lower plan asset levels, and the use of a lower assumed discount rate to value obligations.

Income Taxes

Results of operations for 2005 included an income tax benefit of $54.7 million principally caused by the reversal of the remaining valuation allowance for our U.S. Federal net deferred tax assets, partially offset by accruals for U.S. Federal, foreign and state income taxes. Results of operations for 2004 did not include an income tax provision or benefit for current or deferred taxes primarily as a result of the uncertainty regarding full utilization of the net deferred tax asset and available operating loss carryforwards. From the 2003 fourth quarter through the third quarter of 2005, we maintained a valuation allowance for a major portion of our U.S. Federal deferred tax assets in accordance with SFAS No. 109, “Accounting for Income Taxes”, due to uncertainty regarding full utilization of our net deferred tax asset, including the 2003 and 2004 unutilized net operating losses of approximately $140 million. In the 2003 fourth quarter we had recorded a $138.5 million valuation allowance for the majority of our net deferred tax asset, based upon the results of our quarterly evaluation concerning the estimated probability that the net deferred tax asset would be realizable in light of our history of annual reported losses in the years 2001 through 2003. In 2005, we generated taxable income which exceeded the 2003 and 2004 net operating losses allowing us to fully realize these tax benefits. This realization of tax benefits, together with our improved profitability, allowed us to reverse the remaining valuation allowance for U.S. Federal income taxes in the 2005 fourth quarter. Our income tax provision for 2003 was $33.1 million. In 2004 and 2003, we received $7.2 million and $65.6 million, respectively, in income tax refunds related to carrying back the previous year’s taxable loss to earlier years in which we had paid taxes.

     Deferred taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, and differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse. At December 31, 2005, we had a net deferred tax asset of $178.1 million. A significant portion of our deferred tax assets relates to the postretirement benefit obligations, which have been recorded in the accompanying financial statements but which are not recognized for income tax reporting purposes until the benefits are paid. These benefit payments are expected to occur over an extended period of years.

Financial Condition and Liquidity

We believe that internally generated funds, current cash on hand and available borrowings under existing secured credit lines will be adequate to meet foreseeable liquidity needs. We did not borrow funds under our domestic secured credit facility during 2005, 2004 or 2003. However, a portion of this secured credit facility is utilized to support letters of credit.

     Our ability to access the credit markets in the future to obtain additional financing, if needed, may be influenced by our credit rating. As of December 31, 2005, Standard & Poor’s Ratings Services corporate credit rating for our Company was BB with a stable outlook and our senior unsecured debt was rated BB-. As of December 31, 2005, Moody’s Investor Service’s corporate family rating for our Company was Ba2 with a stable outlook, and our senior unsecured note rating was Ba3. Changes in our credit rating do not impact our access to, or the cost of, our existing credit facilities.

     We have no off-balance sheet financing relationships with variable interest or structured finance entities.

Cash Flow and Working Capital

In 2005, cash generated by operations of $322.6 million, the proceeds from exercises of stock options of $26.1 million and tax benefits on share-based compensation of $25.2 million were used to invest $90.1 million in capital equipment, fund a $100 million voluntary contribution to our U.S. defined benefit pension plan, pay $18.3 million for the acquisition of the Garryson Limited operation, repay debt of $25.7 million, pay dividends of $27.1 million, and increase cash balances by $111.9 million, to $362.7 million at December 31, 2005. In 2004, cash generated from operations of $74.1 million, proceeds from sale of common stock of $229.7 million, proceeds from asset sales of $6.6 million, and proceeds from exercises of stock options of $7.6 million, were used to invest $49.9 in capital equipment, fund a $50 million voluntary contribution to our U.S. defined benefit pension plan, pay $7.5 million of the purchase price for the J&L assets, repay debt of $15.9 million, pay dividends of $21.2 million, and increase cash balances by $171.2 million, to $250.8 million at December 31, 2004. We use cash flow from operations before voluntary pension plan contributions in order to evaluate and compare fiscal periods that do not include these contributions, and to make resource allocation decisions among operational requirements, investing and financing alternatives.

Managed Working Capital
($ millions)

		00				01				02				03				04				05
Millions/$			853				719				564				576				853				1048
% of Revenue			36.3	%			36.8	%			32.4	%			30.7	%			29.5	%			30.3	%

     The impact of improved operating results in 2005 on cash flow from operations was offset by continuing investment in managed working capital to support the higher business levels and the impact of higher costs for certain raw materials. As part of managing the liquidity of the business, we focus on controlling inventory, accounts receivable and accounts payable. In measuring performance in controlling this managed working capital, we exclude the effects of the LIFO inventory valuation reserves, excess and obsolete inventory reserves, and reserves for uncollectible accounts receivable which, due to their nature, are managed separately. During 2005, managed working capital, which we define as gross inventory plus accounts receivable less accounts payable, increased by $187.8 million, excluding working capital acquired as part of the Garryson Limited acquisition. This increase in managed working capital resulted from a $80.9 million increase in accounts receivable due to a higher level of sales in the 2005 fourth quarter compared to the fourth quarter of 2004, and a $145.6 million increase in inventory mostly as a result of higher costs for certain raw materials and increased business volumes, partially offset by a $38.7 million increase in accounts payable. Most of the increase in raw materials is expected to be recovered through surcharge and index pricing mechanisms. Managed working capital has increased $484 million over the past three years as our level of business activity has improved and raw material costs have increased. This increase in managed working capital is expected to represent a future source of cash if the level of business activity were to decline. Managed working capital as a percent of annualized sales was 30.3%, at the end of 2005, 29.5% in 2004, and 30.7% in 2003. The increase in 2005 of managed working capital as a percentage of sales was primarily due to higher business activity in the High Performance Metals segment, which has a longer manufacturing cycle. While inventory and accounts receivable balances increased during 2005, 2004 and 2003, both gross inventory turns, which exclude the effect of LIFO inventory valuation reserves, and days sales outstanding, which measures actual collection timing for accounts receivable, have improved over the past three years.

     The components of managed working capital were as follows:

     Capital expenditures for 2005 were $90.1 million, compared to $49.9 million for 2004 and $74.4 million for 2003.

     In July 2005, we announced a major expansion of our titanium production capabilities. We intend to invest approximately $100 million through the end of 2006 to significantly increase our capacity to produce titanium and titanium alloys used for aero-engine rotating parts, airframe applications and in other global markets. We expect over $200 million of annual revenue growth potential when these projects are fully implemented in 2007. We expect to fund these capital expenditures through internal cash flow. Strategic capital projects associated with expanding our titanium production capabilities include:

	–		Upgrading and restarting approximately one-half of the capacity of our idled titanium sponge facility in Albany, Oregon. We expect an annual production rate of 7.5 million pounds of titanium sponge from this facility beginning in the first half of 2006. Titanium sponge is a critical material used to produce titanium mill products.
	–		Constructing a third plasma arc melt cold-hearth furnace at ATI Allvac’s North Carolina operations. We expect this new furnace to be qualified for production by late 2006. Plasma arc melting is a superior cold-hearth melt process for making alloyed titanium products for aero-engine rotating parts and biomedical applications.
	–		Expanding high-value plate products capacity by 25%, primarily through investments at our plate products facilities in western Pennsylvania.
	–		Continued upgrading of our flat-rolled cold-rolling assets used in producing titanium sheet and strip products.

     In September 2005, we announced an expansion of our premium-melt nickel-based alloy, superalloy, and specialty alloy production capabilities. These investments are aimed at increasing our capacity to produce these high performance alloys used for aero-engine rotating parts, airframe applications, oil and gas exploration, extraction and refining, power generation land-based turbines and flue gas desulfurization pollution control units. These incremental capital investments of approximately $30 million through the end of 2006 are expected to be funded from internal cash flow. We expect approximately $70 million of annual revenue from these projects when they are implemented. Major projects of this expansion, which is expected to increase our premium-melt capacity by approximately 20%, include:

	–		Upgrading and expanding vacuum induction melt (VIM) capacity. VIM is a melting process designed for premium grades with high alloy content that require more precise chemistry control and lower impurity levels.
	–		Installation of two new electro-slag re-melt (ESR) furnaces and three new vacuum arc re-melt (VAR) furnaces. ESR and VAR furnaces are consumable electrode re-melting processes used to improve both the cleanliness and metallurgical structure of alloys.

     In 2004, we completed our two major strategic capital projects begun in 2002: two new electric arc furnaces at our flat-rolled products melt shop located in Brackenridge, PA, and investments to enhance the capabilities at our high performance metals long products rolling mill facility located in Richburg, SC. The second electric arc furnace in the Flat-Rolled Products segment commenced operations in the 2004 third quarter, with the first new furnace having commenced production in the 2003 fourth quarter. The high performance metals long products facility commenced operations in the 2004 second quarter.

     Capital expenditures for 2006 are expected to approximate $225 million.

Debt

Total debt outstanding decreased $22.3 million, to $560.4 million at December 31, 2005, from $582.7 million at December 31, 2004. The decrease was primarily related to a payment for the J&L asset acquisition and a reduction in our foreign borrowings. In managing our overall capital structure, one of the measures on which we focus is net debt to total capitalization, which is the percentage of our debt, net of cash on hand, to our total invested and borrowed capital. In determining this measure, debt and total capitalization are net of cash on hand which may be available to reduce borrowings. Our net debt to total capitalization ratio improved to 19.8% at December 31, 2005, from 43.8% at December 31, 2004, and from 72.1% at the end of 2003. The lower ratio in 2005 results primarily from an increase in cash on hand and stockholders’ equity resulting from the improvement in results of operations, plus the reduction in outstanding debt. The ratio declined in 2004 primarily due to an increase in cash on hand and stockholders’ equity resulting from the common stock offering and the improvement in results of operations, partially offset by an increase in debt due primarily to the seller financing for the J&L asset acquisition.

     On August 4, 2005, we amended our senior secured domestic revolving credit facility to (1) extend the facility term to August 2010 from its original maturity date of June 2007, (2) enable us to execute various corporate actions without the prior consent of the lending group, so long as, after giving effect to such corporate action, we maintain a minimum undrawn availability (as described in the facility) of $75 million, (3) reduce the borrowing costs under the facility, and (4) incorporate a feature that would permit us to increase the size of the facility, assuming we had sufficient collateral, by up to $150 million. Under the amended facility, if undrawn availability as described in the facility were to decline below $75 million, corporate actions that could be undertaken without the prior consent of the lending group, including capital expenditures, acquisitions, sales of assets, dividends, investments in, or loans to, corporations, partnerships, joint ventures and subsidiaries, issuance of unsecured indebtedness, leases, and prepayment of indebtedness, would be limited. The amended facility contains a financial covenant, which is not measured unless our undrawn availability is less than $75 million. This financial covenant, when measured, requires us to prospectively maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization (as defined in the credit facility) to fixed charges of at least 1.0 to 1.0 from the date the covenant is measured. Our ability to borrow under the amended secured credit facility in the future could be adversely affected if we fail to maintain the applicable covenants under the agreement governing the facility. At December 31, 2005, we had the ability to access the entire $325 million undrawn availability under the facility.

     Interest rate swap contracts are used from time-to-time to manage our exposure to interest rate risks. In 2002, we entered into interest rate swap contracts with respect to a $150 million notional amount related to our 8.375% Notes due 2011 (“Notes”), which involved the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the contracts without an exchange of the underlying principal amount. These “receive fixed, pay floating” arrangements were designated as fair value hedges, and effectively converted $150 million of the Notes to variable rate debt. As a result, changes in the fair value of the swap contracts and the notional amount of the underlying fixed rate debt are recognized in the statement of operations. In 2003, we terminated the majority of these interest rate swap contracts and received $15.3 million in cash. Subsequent to the interest rate swap terminations, in 2003 we entered into new “receive fixed, pay floating” interest rate swap arrangements related to the Notes which re-established, in total, a $150 million notional amount that effectively converted this portion of the Notes to variable rate debt. In the 2004 third quarter in light of the prospect of increasing short-term interest rates, we terminated all remaining interest rate swap contracts still outstanding, and realized net cash proceeds of $1.5 million. These gains on settlement realized in 2004 and 2003 remain a component of the reported balance of the Notes, and are ratably recognized as a reduction to interest expense over the remaining life of the Notes, which is approximately six years. At December 31, 2005, the deferred settlement gain was $12.2 million. The result of the “receive fixed, pay floating” arrangements was a decrease in interest expense of $4.4 million and $6.7 million for the years ended December 31, 2004 and 2003, respectively, compared to the fixed interest expense of the ten-year Notes.

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     A summary of required payments under financial instruments (excluding accrued interest) and other commitments are presented below.

     (A) Other long-term liabilities exclude pension liabilities and accrued postretirement benefits.

     (B) We have contracted for physical delivery for certain of our raw materials to meet a portion of our needs. These contracts are based upon fixed or variable price provisions. We used current market prices as of December 31, 2005 for raw material obligations with variable pricing.

     (C) We have various contractual obligations that extend through 2015 for services involving production facilities and administrative operations. Our purchase obligation as disclosed represents the estimated termination fees payable if we were to exit these contracts.

     (D) Drawn amounts are included in total debt. Includes $127.2 million utilized under the $325 million domestic secured credit facility for standby letters of credit, which renew annually and are used to support: $44.3 million of financing outside of the domestic secured credit facility, primarily for our foreign based operations; $36.1 million in workers compensation and general insurance arrangements; $46.8 million related to legal, environmental and other matters.

Retirement Benefits

As of November 30, 2005, our measurement date for pension accounting, the value of the accumulated pension benefit obligation (ABO) for our defined benefit pension plans exceeded the value of pension investments by approximately $247 million. A minimum pension liability was recognized in 2002 as a result of a severe decline in the equity markets from 2000 through 2002, higher benefit liabilities from long-term labor contracts negotiated in 2001, and a lower assumed discount rate for valuing the pension liabilities. Accounting standards require that a minimum pension liability be recorded if the value of pension investments is less than the ABO at the annual measurement date.

     Accordingly, in the 2002 fourth quarter, we recorded a charge against stockholders’ equity of $406 million, net of deferred taxes, to write off our prepaid pension cost representing the previous overfunded portion of the pension plan, and to record a deferred pension asset for unamortized prior service cost relating to prior benefit enhancements. In the fourth quarter of 2005, 2004 and 2003, our adjustments of the minimum pension liability resulted in a reduction to stockholders’ equity of $36 million for 2005, and increases to stockholders’ equity of $2 million for 2004 and $47 million for 2003. These minimum pension liability adjustments are presented as other comprehensive income (loss). The recognition of the minimum pension liability in 2002, and the adjustments of the minimum pension liability in 2005, 2004 and 2003 do not affect our reported results of operations and do not have a cash impact. In accordance with current accounting standards, the full charge against stockholders’ equity would be reversed in subsequent years if the value of pension plan investments returns to a level that exceeds the ABO as of a future annual measurement date. As of the 2005 annual measurement date, the value of pension investments was $1.96 billion and the ABO was $2.20 billion. Based upon current actuarial analyses and forecasts, the ABO is projected to be approximately $2.20 billion at the 2006 annual measurement date, assuming no changes in the discount rate used to value benefit obligations.

     We were not required to make cash contributions to our U.S. defined benefit pension plan for 2005 or 2004. During the fourth quarter 2005 and the third quarter 2004, we made voluntary contributions to this defined benefit pension plan of $100 million and $50 million, respectively, to improve the plan’s funded position. Based on current regulations and actuarial studies, we do not expect to be required to make cash contributions to our U.S. defined benefit pension plan during the next several years. However, a significant decline in the value of plan investments in the future, or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding. Depending on the timing and amount, a requirement that we fund our defined benefit pension plan could have a material adverse effect on our results of operations and financial condition. We may elect, depending upon investment performance of the pension plan assets and other factors, to make additional voluntary cash contributions to this pension plan in the future.

     We fund certain retiree health care benefits for Allegheny Ludlum using investments held in a Voluntary Employee Benefit Association (VEBA) trust. This allows us to recover a portion of the retiree medical costs. In accordance with our labor agreements, during 2005, 2004 and 2003, we funded $24.7 million, $18.2 million and $14.2 million, respectively, of retiree medical costs using the investments of the VEBA trust. We may continue to fund certain retiree medical benefits utilizing the investments held in the VEBA if the value of these investments exceeds $25 million. The value of the investments held in the VEBA was approximately $86 million as of November 30, 2005.

Dividends

We paid a quarterly dividend of $0.06 per share of common stock for each of the quarters of 2004 and for the first three quarters of 2005. In the fourth quarter of 2005, our Board of Directors increased the cash dividend paid on our common stock to $0.10 per share. The payment of dividends and the amount of such dividends depends upon matters deemed relevant by our Board of Directors, such as our results of operations, financial condition, cash requirements, future prospects, any limitations imposed by credit agreements or senior securities, and other factors deemed relevant and appropriate.

Critical Accounting Policies

The accompanying consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in our specific circumstances. Application of these accounting principles requires our management to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality.

Revenue Recognition and Accounts Receivable

Revenue is recognized when title passes or as services are rendered. We have no significant unusual sale arrangements with any of our customers.

     We market our products to a diverse customer base, principally throughout the United States. Trade credit is extended based upon evaluations of each customer’s ability to perform its obligations, which are updated periodically. Accounts receivable reserves are based upon an aging of accounts and a review for collectibility of specific accounts. Accounts receivable are presented net of a reserve for doubtful accounts of $8.1 million at December 31, 2005 and $8.4 million at December 31, 2004, which represented 1.8% and 2.3%, respectively, of total gross accounts receivable. During 2005, we recognized expense of $1.7 million to increase the reserve for doubtful accounts and wrote off $2.0 million of uncollectible accounts, which reduced the reserve. During 2004, we made no increases for doubtful accounts and wrote off $1.8 million of uncollectible accounts, which reduced the reserve.

Inventories

At December 31, 2005, we had net inventory of $607.1 million. Inventories are stated at the lower of cost (last-in, first-out (LIFO), first-in, first-out (FIFO) and average cost methods) or market, less progress payments. Costs include direct material, direct labor and applicable manufacturing and engineering overhead, and other direct costs. Most of our inventory is valued utilizing the LIFO costing methodology. Inventory of our non-U.S. operations is valued using average cost or FIFO methods. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these material and other costs may have been incurred at significantly different values due to the length of time of our production cycle. The prices for many of the raw materials we use have been extremely volatile, especially during 2005 and 2004 when certain raw material prices rose rapidly, compared to the previous year. Since we value most of our inventory utilizing the LIFO inventory costing methodology, a rapid rise in raw material costs has a negative effect on our operating results. For example in 2005 and in 2004, the effect of the increase in raw material costs on our LIFO inventory valuation method resulted in cost of sales which was $45.8 million and $112.2 million higher, respectively, than would have been recognized if we utilized the FIFO methodology to value our inventory. In a period of rising prices,

cost of sales expense recognized under LIFO is generally higher than the cash costs incurred to acquire the inventory sold. Conversely, in a period of declining raw material prices, cost of sales recognized under LIFO is generally lower than cash costs incurred to acquire the inventory sold.

     We evaluate product lines on a quarterly basis to identify inventory values that exceed estimated net realizable value. The calculation of a resulting reserve, if any, is recognized as an expense in the period that the need for the reserve is identified. At December 31, 2005, no such reserves were required. It is our general policy to write-down to scrap value any inventory that is identified as obsolete and any inventory that has aged or has not moved in more than twelve months. In some instances this criterion is up to twenty-four months due to the longer manufacturing and distribution process for such products.

Asset Impairment

We monitor the recoverability of the carrying value of our long-lived assets. An impairment charge is recognized when the expected net undiscounted future cash flows from an asset’s use (including any proceeds from disposition) are less than the asset’s carrying value, and the asset’s carrying value exceeds its fair value. Changes in the expected use of a long-lived asset group, and the financial performance of the long-lived asset group and its operating segment, are evaluated as indicators of possible impairment. Future cash flow value may include appraisals for property, plant and equipment, land and improvements, future cash flow estimates from operating the long-lived assets, and other operating considerations.

     At December 31, 2005, we had $200 million of goodwill on our balance sheet. Changes in the goodwill balance from 2004 are due to foreign currency translation. Of the total, $112 million related to the Flat-Rolled Products segment, $62 million related to the High Performance Metals segment, and $26 million related to the Engineered Products segment. Goodwill is required to be reviewed annually, or more frequently if impairment indicators arise. The impairment test for goodwill is a two-step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this comparison reflects impairment, then the loss would be measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of the fair value of the reporting unit over the fair value of all recognized and unrecognized assets and liabilities.

     We perform our annual evaluation of goodwill for possible impairment during the fourth quarter. Our evaluation of goodwill for possible impairment includes estimating the fair market value of each of the reporting units that have goodwill associated with their operations using discounted cash flow and multiples of cash earnings valuation techniques, plus valuation comparisons to recent public sale transactions of similar businesses, if any. These valuation methods require us to make estimates and assumptions regarding future operating results, cash flows including changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Although we believe that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions. No goodwill impairment was determined to exist for the years ended December 31, 2005, 2004 or 2003.

Income Taxes

Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, or differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits (assets) or costs (liabilities) to be recognized when those temporary differences reverse. We evaluate on a quarterly basis whether, based on all available evidence, we believe that our deferred income tax assets will be realizable. Valuation allowances are established when it is estimated that it is probable (more likely than not) that the tax benefit of the deferred tax assets will not be realized. The evaluation, as prescribed by Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Future realization of deferred income tax assets ultimately depends upon the existence of sufficient taxable income within the carryback, carryforward period available under tax law.

     The recognition, or reversal, of a valuation allowance is recorded as a non-cash charge or benefit to the income tax provision with an offsetting adjustment against the deferred income tax asset.

Contingencies

When it is probable that a liability has been incurred or an asset has been impaired, we recognize a loss if the amount of the loss can be reasonably estimated.

     We are subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants, and disposal of wastes, and which may require that we investigate and remediate the effects of the release or

disposal of materials at sites associated with past and present operations. We could incur substantial cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities. We are currently involved in the investigation and remediation of a number of our current and former sites as well as third party sites.

     With respect to proceedings brought under the Federal Superfund laws, or similar state statutes, we have been identified as a potentially responsible party (“PRP”) at approximately 28 of such sites, excluding those at which we believe we have no future liability. Our involvement is limited or de minimis at approximately 21 of these sites, and the potential loss exposure with respect to any of the remaining 7 individual sites is not considered to be material.

     We are a party to various cost-sharing arrangements with other PRPs at the sites. The terms of the cost-sharing arrangements are subject to non-disclosure agreements as confidential information. Nevertheless, the cost-sharing arrangements generally require all PRPs to post financial assurance of the performance of the obligations or to pre-pay into an escrow or trust account their share of anticipated site-related costs. In addition, the Federal government, through various agencies, is a party to several such arrangements.

     Environmental liabilities are recorded when our liability is probable and the costs are reasonably estimable. In many cases, we are not able to determine whether we are liable or, if liability is probable, to reasonably estimate the loss or range of loss. Estimates of our liability are further subject to additional uncertainties including the nature and extent of site contamination, available remediation alternatives, the extent of corrective actions that may be required, and the participation, number and financial condition of other PRPs. We intend to adjust our accruals to reflect new information as appropriate. Future adjustments could have a material adverse effect on our results of operations in a given period, but we cannot reliably predict the amounts of such future adjustments. At December 31, 2005, our reserves for environmental matters totaled approximately $29 million.

     Accruals for losses from environmental remediation obligations do not take into account the effects of inflation, and anticipated expenditures are not discounted to their present value. The accruals are not reduced by possible recoveries from insurance carriers or other third parties, but do reflect allocations among PRPs at Federal Superfund sites or similar state-managed sites after an assessment is made of the likelihood that such parties will fulfill their obligations at such sites and after appropriate cost-sharing or other agreements are entered. Our measurement of environmental liabilities is based on currently available facts, present laws and regulations, and current technology. Such estimates take into consideration our prior experience in site investigation and remediation, the data concerning cleanup costs available from other companies and regulatory authorities, and the professional judgment of our environmental experts in consultation with outside environmental specialists, when necessary.

     Based on currently available information, we do not believe that there is a reasonable possibility that a loss exceeding the amount already accrued for any of the matters with which we are currently associated (either individually or in the aggregate) will be an amount that would be material to a decision to buy or sell our securities. Future developments, administrative actions or liabilities relating to environmental matters, however, could have a material adverse effect on our financial condition or results of operations.

Retirement Benefits

We have defined benefit pension plans and defined contribution plans covering substantially all of our employees. In the fourth quarter 2005 and in third quarter 2004, we made voluntary cash contributions of $100 million and $50 million, respectively, to our U.S. defined benefit pension plan to improve the plan’s funded position. We are not required to make a contribution to the U.S. defined benefit pension plan for 2006, and, based upon current regulations and actuarial analyses, we do not expect to be required to make cash contributions to the U.S. defined benefit pension plan for at least the next several years. However, we may elect, depending upon the investment performance of the pension plan assets and other factors, to make additional voluntary cash contributions to this pension plan in the future.

     We account for our defined benefit pension plans in accordance with SFAS 87, which requires that amounts recognized in financial statements be determined on an actuarial basis, rather than as contributions are made to the plan. A significant element in determining our pension (expense) income in accordance with SFAS 87 is the expected investment return on plan assets. In establishing the expected return on plan investments, which is reviewed annually in the fourth quarter, we take into consideration input from our third party pension plan asset managers and actuaries regarding the types of securities the plan investments are invested in, how those investments have performed historically, and expectations for how those investments will perform in the future. For 2003, in light of the declines in the equity markets in 2000 through 2002, which comprise a significant portion of our pension plan investments, we lowered our expected return on pension plan investments to 8.75%, from a 9% expected return on pension plan investments which was used in 2002. We apply this assumed rate to the market value of plan assets at the end of the previous year. This produces the expected return on plan assets that is included in annual pension (expense) income for the current year. The actual return on pension plan assets was 9.7% for 2005, 11.7% for 2004, and 13.1% for 2003. While the actual return on pension plan investments has exceeded the expected return on pension plan

investments for each of the past three years, our expected return on pension plan investments for 2006 remains at 8.75%. The effect of increasing, or lowering, the expected return on pension plan investments by 0.25% results in additional annual income, or expense, of approximately $5 million. The cumulative difference between this expected return and the actual return on plan assets is deferred and amortized into pension income or expense over future periods. The amount of expected return on plan assets can vary significantly from year-to-year since the calculation is dependent on the market value of plan assets as of the end of the preceding year. U.S. generally accepted accounting principles allow companies to calculate the expected return on pension assets using either an average of fair market values of pension assets over a period not to exceed five years, which reduces the volatility in reported pension income or expense, or their fair market value at the end of the previous year. However, the Securities and Exchange Commission currently does not permit companies to change from the fair market value at the end of the previous year methodology, which is the methodology that we use, to an averaging of fair market values of plan assets methodology. As a result, our results of operations and those of other companies, including companies with which we compete, may not be comparable due to these different methodologies in calculating the expected return on pension investments. If we had used the five-year average of the fair market values of plan assets to calculate retirement benefit costs, we estimate that retirement benefit expense for 2005 would have been approximately $30 million less than the $78 million expense recognized using the fair market value approach.

     At the end of November of each year, we determine the discount rate to be used to value pension plan liabilities. In accordance with SFAS 87, the discount rate reflects the current rate at which the pension liabilities could be effectively settled. In estimating this rate, we receive input from our actuaries regarding the rates of return on high quality, fixed-income investments with maturities matched to the expected future retirement benefit payments. Based on this assessment at the end of November 2005, we established a discount rate of 5.9% for valuing the pension liabilities as of the end of 2005, and for determining the pension expense for 2006. We had previously assumed a discount rate of 6.1% for 2004, which determined the 2005 expense, and 6.5% for 2003, which determined the 2004 expense. The effect of lowering the discount rate to 5.9% increased pension liabilities by approximately $47 million at 2005 year-end, and is expected to increase pension expense by approximately $2 million in 2006. The effect on pension liabilities for changes to the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, are deferred and amortized over future periods in accordance with SFAS 87.

     Accounting standards require a minimum pension liability be recorded when the value of pension assets is less than the accumulated benefit obligation (“ABO”) at the annual measurement date. As of November 30, 2005, our measurement date for pension accounting, the value of the accumulated pension benefit obligation (ABO) exceeded the value of pension investments by approximately $247 million. In the 2002 fourth quarter, as a result of a severe decline in the equity markets in 2000 through 2002, higher benefit liabilities from long-term labor contracts negotiated in 2001, and a lower assumed discount rate for valuing the pension liabilities, we recorded a non-cash charge against stockholders’ equity of $406 million, net of deferred taxes, to write off our prepaid pension cost representing the previous overfunded portion of the pension plan, and to record a deferred pension asset of $165 million for the unamortized prior service cost relating to prior benefit enhancements. In the fourth quarter of 2005, 2004 and 2003, our adjustments of the minimum pension liability resulted in a reduction to stockholders’ equity of $36 million for 2005, and increases to stockholders’ equity of $2 million for 2004 and $47 million for 2003. These minimum pension liability adjustments are presented as other comprehensive income (loss). The recognition of the minimum pension liability in 2002, and the adjustments of the minimum pension liability in 2005, 2004 and 2003 do not affect our reported results of operations and do not have a cash impact. In accordance with accounting standards, the charge against stockholders’ equity will be adjusted in the fourth quarter of subsequent years to reflect the value of pension assets compared to the ABO as of the end of November. If the level of pension assets exceeds the ABO as of a future measurement date, the full charge against stockholders’ equity would be reversed. In the 2006 first quarter, the Financial Accounting Standards Board (FASB) announced that they were considering changes to accounting for retirement benefits. One of the proposals being considered by the FASB would require companies to recognize the minimum pension liability using the projected benefit obligation (PBO) rather than the ABO, the difference being that the PBO includes estimates for future salary increases. The effect of this proposal, if adopted as described, is not expected to have a material effect on the Company’s stockholders’ equity, and would have no effect on reported retirement benefit expense.

     We also sponsor several postretirement plans covering certain hourly and salaried employees and retirees. These plans provide health care and life insurance benefits for eligible employees. Under most of the plans, our contributions towards premiums are capped based upon the cost as of a certain date, thereby creating a defined contribution. For the non-collectively bargained plans, we maintain the right to amend or terminate the plans in the future. We account for these benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“SFAS 106”), which requires that amounts recognized in financial statements be determined on an actuarial basis, rather than as benefits are paid. We use actuarial assumptions, including the discount rate and the expected trend in health care costs, to estimate the costs and benefit obligations for the plans. The discount rate, which is determined annually at the end of November of each year, is developed based upon rates of return on high quality, fixed-income investments. At the end of

2005, we determined this rate to be 5.9%, a reduction from a 6.1% discount rate in 2004 and 6.50% in 2003. The effect of lowering the discount rate to 5.9% from 6.1% increased 2005 postretirement benefit liabilities by approximately $9 million, and 2006 expenses are expected to increase by approximately $0.3 million. Based upon predictions of continued significant medical cost inflation in future years, the annual assumed rate of increase in the per capita cost of covered benefits for health care plans is 10.3% for 2006 and is assumed to gradually decrease to 5.0% in the year 2014 and remain level thereafter.

     The Medicare Prescription Drug, Improvement and Modernization Act (“Medicare Act”), was signed into law on December 8, 2003. The Medicare Act provides for a federal subsidy, with tax-free payments commencing in 2006, to sponsors of retiree health care benefits plans that provide a benefit that is at least actuarially equivalent to the benefit established by the law. The federal subsidy included in the law resulted in a reduction of our other postretirement benefits obligation of approximately $70 million, and a corresponding reduction in our 2005 postretirement benefit expense of approximately $10 million. This reduction in the other postretirement benefits obligation is recognized in the financial statements over a number of years as an actuarial experience gain.

     Certain of these postretirement benefits are funded using plan investments held in a VEBA trust. The expected return on plan investments is a significant element in determining postretirement benefits expenses in accordance with SFAS 106. In establishing the expected return on plan investments, which is reviewed annually in the fourth quarter, we take into consideration the types of securities the plan investments are invested in, how those investments have performed historically, and expectations for how those investments will perform in the future. For 2005, our expected return on investments held in the VEBA trust was 9%. This assumed long-term rate of return on investments is applied to the market value of plan investments at the end of the previous year. This produces the expected return on plan investments that is included in annual postretirement benefits expenses for the current year. While the actual return on investments held in the VEBA trust was 11.6% in both 2005 and 2004, and 9.3% for 2003, our expected return on investments in the VEBA trust remains 9% for 2006. The expected return on investments held in the VEBA trust is expected to exceed the return on pension plan investments due to a higher percentage of private equity investments held by the VEBA trust.

New Accounting Pronouncements

In the fourth quarter 2005, we adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“Fin 47”), an interpretation of FASB Statement No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). FIN 47 clarifies that the term “conditional asset retirement obligation” as used in SFAS 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated, even if conditional on a future event. For existing asset retirement obligations which are determined to be recognizable under FIN 47, the effect of applying FIN 47 is recognized as a cumulative effect of a change in accounting principle. Our adoption of FIN 47 resulted in recognizing a charge of $2.0 million, net of income taxes, or $0.02 per share, principally for estimable asset retirement obligations related to remediation costs which would be incurred if we were to cease certain manufacturing activities which utilize what may be categorized as potentially hazardous materials.

     In the first quarter 2005, we adopted FASB Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”). Under this revised standard, companies may no longer account for share-based compensation transactions, such as stock options, restricted stock, and potential payments under programs such as our Total Shareholder Return Program (“TSRP”) awards, using the intrinsic value method as defined in APB Opinion No. 25. Instead, companies are required to account for such equity transactions using an approach in which the fair value of an award is estimated at the date of grant and recognized as an expense over the requisite service period. Compensation expense is adjusted for equity awards that do not vest because service or performance conditions are not satisfied. However, compensation expense already recognized is not adjusted if market conditions are not met, such as our total shareholder return performance relative to a peer group under our TSRP awards, or for stock options expiring “out-of-the-money.” We adopted the new standard using the modified prospective method, in which the effect of the standard is recognized in the period of adoption and in future periods. Prior periods are not restated to reflect the impact of adopting the new standard at earlier dates.

     In 2001, the FASB issued SFAS 143. Under SFAS 143, obligations associated with the retirement of tangible long-lived assets, such as landfill and other facility closure costs, are capitalized and amortized to expense over an asset’s useful life using a systematic and rational allocation method. This standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 on January 1, 2003 resulted in a charge of $1.3 million, net of tax, or $0.02 per share, which was recognized in our first quarter 2003 statement of operations as a cumulative change in accounting principle, primarily for asset retirement obligations related to landfills.

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Forward-Looking Statements

From time-to-time, the Company has made and may continue to make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements in this report relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements include those containing such words as “anticipates,” “believes,” “estimates,” “expects,” “would,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects,” and similar expressions. Such forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause our actual results or performance to materially differ from any future results or performance expressed or implied by such statements. Various of these factors are described in Item 1A, Risk Factors, of this Annual Report on Form 10-K and will be described from time-to-time in the Company filings with the Securities and Exchange Commission (“SEC”), including the Company’s Annual Reports on Form 10-K and the Company’s subsequent reports filed with the SEC on Form 10-Q and Form 8-K, which are available on the SEC’s website at http://www.sec.gov and on the Company’s website at http://www.alleghenytechnologies.com. We assume no duty to update our forward-looking statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk. We attempt to maintain a reasonable balance between fixed- and floating-rate debt to keep financing costs as low as possible. At December 31, 2005, we had approximately $77 million of floating rate debt outstanding with a weighted average interest rate of approximately 5.6%. Since the interest rate on this debt floats with the short-term market rate of interest, we are exposed to the risk that these interest rates may increase. For example, a hypothetical 1% in rate of interest on $77 million of outstanding floating rate debt would result in increased annual financing costs of $0.8 million. Approximately $54 million of this floating rate debt is capped at a 6% maximum interest rate.

Volatility of Energy Prices. Energy resources markets are subject to conditions that create uncertainty in the prices and availability of energy resources. The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Increases in energy costs, or changes in costs relative to energy costs paid by competitors, have and may continue to adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition. We use approximately 10 to 12 million MMBtu’s of natural gas annually, depending upon business conditions, in the manufacture of our products. These purchases of natural gas expose us to risk of higher gas prices. For example, a hypothetical $1.00 per MMBtu increase in the price of natural gas would result in increased annual energy costs of approximately $10 to $12 million.

Volatility of Raw Material Prices. We use raw materials surcharge and index mechanisms to offset the impact of increased raw material costs; however, competitive factors in the marketplace can limit our ability to institute such mechanisms, and there can be a delay between the increase in the price of raw materials and the realization of the benefit of such mechanisms. For example, since we generally use in excess of 85 million pounds of nickel each year, a hypothetical change of $1.00 per pound in nickel prices would result in increased costs of approximately $85 million. In addition, we also use in excess of 800 million pounds of ferrous scrap in the production of our products and a hypothetical change of $0.01 per pound would result in increased costs of approximately $8 million. While we enter into raw materials futures contracts from time-to-time to hedge exposure to price fluctuations, such as for nickel, we cannot be certain that our hedge position adequately reduces exposure. We believe that we have adequate controls to monitor these contracts, but we may not be able to accurately assess exposure to price volatility in the markets for critical raw materials.

36

The accompanying notes are an integral part of these statements.

Allegheny Technologies Incorporated and Subsidiaries
Consolidated Balance Sheets

		December 31,				December 31,
(In millions except share and per share amounts)		2005				2004
Assets
Cash and cash equivalents		$	362.7			$	250.8
Accounts receivable, net			442.1				357.9
Inventories, net			607.1				513.0
Deferred income taxes			22.8				—
Prepaid expenses and other current assets			49.3				38.5
Total Current Assets			1,484.0				1,160.2
Property, plant and equipment, net			704.9				718.3
Cost in excess of net assets acquired			199.7				205.3
Deferred income taxes			155.3				53.0
Deferred pension asset			100.6				122.3
Other assets			87.1				56.6
Total Assets		$	2,731.6			$	2,315.7
Liabilities and Stockholders’ Equity
Accounts payable		$	312.9			$	271.2
Accrued liabilities			234.6				192.2
Short-term debt and current portion of long-term debt			13.4				29.4
Total Current Liabilities			560.9				492.8
Long-term debt			547.0				553.3
Accrued postretirement benefits			461.5				472.7
Pension liabilities			242.9				240.9
Other long-term liabilities			119.4				130.1
Total Liabilities			1,931.7				1,889.8
Stockholders’ Equity:
Preferred stock, par value $0.10: authorized - 50,000,000 shares; issued - none			—				—
Common stock, par value $0.10: authorized - 500,000,000 shares; issued 98,951,490 at 2005 and 2004; outstanding - 98,200,561 shares at 2005 and 95,782,011 shares at 2004			9.9				9.9
Additional paid-in capital			535.6				481.2
Retained earnings			642.6				345.5
Treasury stock: 750,929 shares at 2005 and 3,169,479 shares at 2004			(18.8	)			(79.4	)
Accumulated other comprehensive loss, net of tax			(369.4	)			(331.3	)
Total Stockholders’ Equity			799.9				425.9
Total Liabilities and Stockholders’ Equity		$	2,731.6			$	2,315.7

The accompanying notes are an integral part of these statements.

Allegheny Technologies Incorporated and Subsidiaries
Consolidated Statements of Cash Flows

(In millions)
For the Years Ended December 31,		2005				2004				2003
Operating Activities:
Net income (loss)		$	359.8			$	19.8			$	(314.6	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cumulative effect of change in accounting principle			2.0				—				1.3
Depreciation and amortization			77.3				76.1				74.6
Non-cash restructuring costs and curtailment (gain), net			22.4				(45.6	)			52.6
Deferred income taxes			(92.0	)			(0.4	)			72.7
Change in operating assets and liabilities:
Inventories			(87.9	)			(96.8	)			32.6
Accounts receivable			(78.7	)			(78.4	)			(9.5	)
Pension assets and liabilities (a)			(42.3	)			18.2				67.7
Accounts payable			39.0				83.7				2.9
Accrued liabilities			38.7				11.0				31.4
Accrued income taxes			18.5				7.2				44.7
Postretirement benefits			(11.1	)			18.9				10.9
Other			(23.1	)			10.4				14.7
Cash provided by operating activities			222.6				24.1				82.0
Investing Activities:
Purchases of property, plant and equipment			(90.1	)			(49.9	)			(74.4	)
Purchase of businesses and investments in ventures, net of cash acquired			(18.3	)			(7.5	)			(0.8	)
Disposals of property, plant and equipment			0.6				6.6				9.8
Proceeds from sales of businesses and investments and other			(1.4	)			(3.8	)			(4.9	)
Cash used in investing activities			(109.2	)			(54.6	)			(70.3	)
Financing Activities:
Payments of long-term debt and capital leases			(38.5	)			(27.1	)			(14.6	)
Borrowings of long-term debt			11.0				11.7				28.5
Net borrowings (repayments) under credit facilities			1.8				(0.5	)			(1.5	)
Net borrowings (repayments)			(25.7	)			(15.9	)			12.4
Dividends paid			(27.1	)			(21.2	)			(19.4	)
Exercises of stock options			26.1				7.6				0.2
Tax benefit on share-based compensation			25.2				—				—
Issuance of common stock			—				229.7				—
Proceeds from interest rate swap settlement			—				1.5				15.3
Cash provided by (used in) financing activities			(1.5	)			201.7				8.5
Increase in cash and cash equivalents			111.9				171.2				20.2
Cash and cash equivalents at beginning of year			250.8				79.6				59.4
Cash and cash equivalents at end of year		$	362.7			$	250.8			$	79.6