Financial Strength

Corporate Objective

Financial Highlights

Letter to Stockholders

1996 Annual Report

Letter To Stockholders

On August 15, 1996 our new corporation, Allegheny Teledyne Incorporated was born, the result of the strategic combination of two outstanding companies, Allegheny Ludlum and Teledyne.

Each stockholder of Teledyne received 1.925 shares of stock in Allegheny Teledyne for each share of Teledyne stock, and each shareholder of Allegheny Ludlum received one share in Allegheny Teledyne for each share of Allegheny Ludlum, resulting in 174.2 million shares outstanding.

At year-end 1996 Allegheny Teledyne had a market capitalization of roughly $4 billion, total assets of $2.6 billion, and stockholders' equity of $872 million. Sales totaled $3.8 billion in 1996, which means that Allegheny Teledyne ranks as one of the top 400 corporations in the United States.

Before unusual items, earnings in 1996 of the new corporation were $236.5 million, or $1.34 per common share. This represents a return on equity of 28.3% and a return on average capital employed of 18.9%. After unusual items, earnings were $211.0 million, or $1.20 per common share.

Our new corporation has the potential for sustained profitable growth in many areas. We are a group of technology-based manufacturing businesses with concentration in specialty metals complemented by aerospace and electronics, industrial, and consumer products. The combination of Allegheny Ludlum and the Teledyne specialty metals businesses creates significant cost reductions and new market opportunities and further strengthens Allegheny Teledyne as one of the world's leading manufacturers of specialty materials.

Diversification within our metals segment provides a buffer to offset weakness in one area with strength in others. We have already experienced this dynamic as the effects of the worldwide downturn in stainless steel prices have been partially counter-balanced by strong performance from our commercial aerospace specialty materials businesses.

We believe there is more to come. Forecasts indicate that the global aviation industry is in the early stages of a strong growth cycle. New aircraft will be required to replace existing aircraft and to handle increases in air travel. Upgrades of existing engines will be necessary to comply with more stringent noise regulations in the future. The result is increased demand for airframes and engines and the titanium alloys and nickel-based superalloys needed for their manufacture

As soon as the combination was effective, we moved quickly to capitalize on the opportunities for financial and operating synergies. Many of these synergies were already in place going into 1997. Annual synergies and cost savings totaling $85 million pretax were identified prior to the combination, and as this report is written in early 1997 the outlook is for substantially more. The new total of projected synergies and cost savings is at least $108 million.

The operational integration of Rodney Metals and Allegheny Ludlum is a prime example of how these synergies are being accomplished. The combination has enhanced our worldwide position in ultra-thin materials through better production asset utilization, lower raw materials costs, wider global market coverage, and improved channels of distribution. We expect to realize more benefits from these synergies as the year progresses.

A significant favorable result of the transaction was the ability of our new corporation to merge overfunded Teledyne pension plans with the underfunded Allegheny Ludlum pension plans which resulted in a significant funding surplus. In addition, retiree medical benefits for both companies can be paid from a portion of the excess pension funding. The pension excess is expected to improve annual cash flow by $35 million.

In recognition of Allegheny Teledyne's strong financial position and growth prospects, the board of directors recently authorized a stock repurchase program. The program provides for the acquisition of up to 12 million shares of Allegheny Teledyne common stock, funded from internally generated cash sources. We believe the stock repurchase program is another way we can create value for stockholders as well as provide stock for issuance under the company's stock-based compensation plans.

Our organization is in place, and the consolidation of corporate headquarters in Pittsburgh will be accomplished during 1997. I assumed the additional offices of president and chief executive officer after William P. Rutledge, former chairman and chief executive officer of Teledyne, announced his decision to resign earlier this year. I appreciated Bill's counsel, contributions and dedication during the early months of the business combination, and I respect his decision to step down for family reasons.

Robert P. Bozzone is vice chairman, a role he formerly held with Allegheny Ludlum. Arthur H. Aronson, former president and chief executive officer of Allegheny Ludlum, serves as executive vice president of Allegheny Teledyne and segment executive of our largest segment, Specialty Metals. Hudson B. Drake continues as vice president and segment executive of Aerospace and Electronics. Gary L. Riley continues as vice president and segment executive of the Consumer and Industrial segments.

James L. Murdy, former senior vice president and chief financial officer of Allegheny Ludlum, has been named executive vice president, finance and administration and chief financial officer. Jon D. Walton, former vice president, general counsel and secretary of Allegheny Ludlum, has been named vice president, general counsel and secretary. Robert S. Park, former vice president, treasurer of Allegheny Ludlum, has been named vice president, treasurer.

We sadly note the death of Dr. Bernhard Kieffer, president of the Advanced Materials business unit, who suffered a fatal heart attack on December 27, 1996. Bernie Kieffer was recognized and admired as a world expert in tungsten and tungsten carbide materials. He will be sorely missed.

As a result of the combination, our dependence on defense sales was reduced to 12% of total revenue in 1996. International sales represented 17% of revenue, assisted by the acquisition of the Stellram Group, a significant European-based manufacturer of tungsten carbide-based cutting tool systems. Stellram should greatly strengthen the competitive position of our Advanced Materials operating company, a major producer of tungsten and tungsten carbide materials.

The joint venture to manufacture precision stainless steel strip in China with Shanghai No. 10 Steel Limited Company has been finalized. Much of the equipment has already been purchased and construction of the plant, to be located in Shanghai, China, will begin in 1997. Completion of the plant is anticipated in 1998. This venture should enable both Allegheny Ludlum and Rodney Metals to participate more effectively in the Asian market.

The objective of Allegheny Teledyne is to continue to increase stockholder value by earning an attractive premium on our total invested capital. To achieve this objective, we will continuously identify and capitalize on profitable growth opportunities. Sustaining superior financial performance requires constant improvement in operational effectiveness, which includes all of the ways we utilize systems and practices to provide customer value. In addition, we reaffirm our strong commitment to conducting our business with the highest level of ethics and integrity throughout the corporation.

Competition is constantly raising the bar for operational effectiveness, and we cannot and will not rest on past performance. We must also strategically position our businesses to out-perform our rivals. This will be accomplished by seeking specialty niches where we have a competitive advantage; expanding our global activities; developing commercial products from defense technologies; and acquiring businesses highly complementary to existing strengths. We will focus our concentration in those areas where we have special strategic strengths.

We thank our new board of directors for its advice and counsel in this year of transition and change. We believe that we have an outstanding board, and we are pleased that Dr. Henry Singleton, who created Teledyne, and Dr. George Roberts, who worked with Henry for so many years, have served as directors during this crucial initial period.

Henry Singleton and Tom Marshall have announced their intentions to retire from the board on May 1. We will miss their counsel.

Henry Singleton is one of America's legendary businessmen. He founded Teledyne in 1960 and built a highly successful multi-industry corporation. Henry's management innovations created substantial value for Teledyne stockholders. Our relationship has grown during the events of the past year and I admire his insight and wisdom.

Tom Marshall joined the Allegheny Ludlum board shortly after the company went public. His broad experience in the metals and chemical industries have been invaluable to the company over that period. His advice and counsel will be sorely missed.

A note of thanks goes to Bert Delano who retired as our director of corporate communications. Bert has been my friend for nearly 30 years, beginning when we worked together in the early days of the specialty steel industry trade association. He joined Allegheny Ludlum in 1987 when we became a publicly held company.

To our stockholders we say, "Thanks for being stockholders." We will continue to make every effort to warrant your confidence. We are particularly pleased that stockholdings by directors and executive officers of Allegheny Teledyne are 23% of total shares outstanding.

We are proud of the way our management has worked together to help make this combination a success. We have already had several meetings where all of the operating company presidents jointly explored ways to realize additional profitable growth available to our new company.

Initiatives for 1997 include an information system at all operating companies to measure progress towards cost reduction and quality improvement goals. We will also examine our businesses with a fresh look to assess their competitiveness, ability to grow, and strategic worth. Our objective is to produce consistently high returns on capital employed.

There is no "silver bullet" to create stockholder value. Rather, stockholder value grows as a result of hundreds of changes which collectively yield improvement. We have already seen the benefits of this combination in its early months and are very optimistic that future results will validate the wisdom of the strategic combination which has created Allegheny Teledyne.

Richard P. Simmons Chairman, President and Chief Executive Officer

March 20, 1997