The following discussion should be read in conjunction with our consolidated financial statements and notes to those consolidated financial statements, incorporated by reference into this prospectus supplement.

OVERVIEW

We believe that we are one of the largest and most diversified producers of specialty materials in the world. Unless the context requires otherwise, "we", "our" and "us" refer to Allegheny Technologies Incorporated and its subsidiaries.

RESULTS OF OPERATIONS

Our three business segments accounted for the following percentages of total external sales for the first three months of 2003 and 2004:

                                                               THREE MONTHS
                                                              ENDED MARCH 31,
                                                              ---------------
                                                              2003       2004
                                                              ----       ----
Flat-Rolled Products........................................   54%        57%
High Performance Metals.....................................   34%        31%
Engineered Products.........................................   12%        12%

For the first three months of 2004, operating profit decreased to $0.6 million compared to $8.8 million for the same 2003 period, primarily due to higher raw material costs. Results included a LIFO inventory valuation reserve increase of $48.1 million, primarily due to the effects of rapidly rising raw materials costs, which increased approximately 30% in the first quarter 2004 compared to the fourth quarter 2003. The higher raw material costs more than offset the benefits of additional surcharges, higher base selling prices and cost reduction initiatives. Cost reductions, before the effects of inflation, totaled $26.6 million in the first quarter 2004. First quarter 2003 results included a LIFO inventory valuation reserve increase of $3.0 million. Sales increased 20% to $577.8 million for the first three months of 2004 compared to $480.5 million for the same 2003 period. During the first quarter 2004, we increased base selling prices for most of our products and implemented additional surcharges for certain raw materials for many of our products.

Business conditions in most of our end markets reflected increased demand for many of our products during the first quarter of 2004. These improved market conditions were offset by higher raw material and retirement benefit expenses, which resulted in a net loss of $50.4 million, or $0.63 per diluted share, for the first three months of 2004 compared to a net loss before cumulative effect of a change in accounting principle of $25.8 million, or $0.32 per diluted share, for the first three months of 2003. First quarter 2004 results do not include an income tax benefit as a result of a deferred tax valuation allowance recorded in the fourth quarter 2003. First quarter 2003 results included an income tax benefit of $14.2 million, or $0.18 per share. Retirement benefit expense was $36.0 million in the first quarter of 2004, compared to $34.8 million in the comparable 2003 period. Essentially all of this $1.2 million increase in expense is non-cash.

On January 1, 2003, we adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). The adoption of SFAS 143 resulted in an after-tax charge of $1.3 million or $0.02 per diluted share. This charge is reported as a cumulative effect of a change in accounting principle.

Sales and operating profit (loss) for our three business segments are discussed below.

Sales increased 28% to $329.6 million in the 2004 first quarter, compared to the prior year period, primarily due to improved demand from capital goods markets, and the impact of higher raw material surcharges and base selling price increases. Higher raw material and energy costs more than offset the benefits of additional surcharges, higher base selling prices and cost reduction initiatives, resulting in an operating loss of $11.0 million for the quarter, compared to an operating loss of $1.3 million in the comparable 2003 period. Higher raw material costs resulted in a LIFO inventory valuation reserve increase of $37.6 million in the first quarter 2004 compared to a LIFO inventory valuation reserve increase of $3.9 million in the comparable 2003 period. Energy costs increased by $2.4 million compared to 2003, net of approximately $0.4 million in gains from natural gas derivatives, as a result of higher natural gas and electricity prices. Results for 2004 benefited from $13 million in gross cost reductions, before the effects of inflation.

For the first quarter of 2004, total tons shipped increased 5% compared to the same period of 2003. For the comparable periods, shipments of commodity products increased 4% and shipments of high-value products increased 7%. Average transaction prices for the comparable periods, which include raw material surcharges, were 22% higher. Average base selling prices for the first quarter of 2004, which exclude surcharges, increased by approximately 3% compared to the first quarter of 2003.

Comparative information on the segment's products is provided in the following table (unaudited):

                                                           THREE MONTHS ENDED
                                                                MARCH 31,
                                                           -------------------     %
                                                             2003       2004     CHANGE
                                                           --------   --------   ------
Volume (finished tons):
  Commodity..............................................   83,492     87,016       4%
  High Value.............................................   35,472     37,971       7%
                                                           -------    -------
  Total..................................................  118,964    124,987       5%
                                                           =======    =======
Average prices (per finished ton):
  Commodity..............................................   $1,563     $2,006      28%
  High Value.............................................   $3,557     $4,081      15%
  Combined Average.......................................   $2,158     $2,636      22%

Sales increased 11% to $178.7 million primarily due to improved demand from the commercial aerospace market for nickel-based superalloys and titanium alloys. Our exotic alloys business continued to benefit from sustained high demand from government and high energy physics markets and corrosion markets, particularly in Asia. Operating profit declined to $7.8 million compared to $8.3 million in the year-ago period because the impact of higher raw material costs offset increased sales and the benefits of cost reduction initiatives. The rise in raw material costs resulted in a LIFO inventory valuation reserve increase of $8.6 million in 2004, compared to $1.0 million in the first quarter 2003. Results for 2004 benefited from $10 million of gross cost reductions, before the effects of inflation.

Shipments were up 3% for nickel-based and specialty steel alloys, 9% for titanium alloys, and 27% for exotic alloys compared to the same period of 2003.

                                                              THREE MONTHS
                                                             ENDED MARCH 31,
                                                             ---------------     %
                                                              2003     2004    CHANGE
                                                             ------   ------   ------
Volume (000's pounds):
  Nickel-based and specialty steel alloys..................   8,692    8,944      3 %
  Titanium mill products...................................   4,615    5,023      9 %
  Exotic alloys............................................     932    1,185     27 %
Average prices (per pound):
  Nickel-based and specialty steel alloys..................  $ 6.73   $ 7.73     15 %
  Titanium mill products...................................  $12.85   $11.41    (11)%
  Exotic alloys............................................  $37.75   $36.32     (4)%

Sales improved 12% to $69.5 million. Operating profit improved to $3.8 million for the first quarter of 2004 compared to $1.8 million in the prior year quarter. Higher sales volumes, improved pricing, and the benefits from cost reductions offset higher raw material costs. The rise in raw material costs resulted in an increase to the LIFO inventory valuation reserve of $1.9 million in 2004, compared to a decrease of $1.9 million in 2003. Gross cost reductions, before the effects of inflation, totaled $2 million in the first quarter 2004. Demand for tungsten products in our Metalworking Products operation remained strong from the oil and gas market and demand improved for tungsten carbide products and cutting tools due to a pickup in overall manufacturing activity. Demand improved considerably for forged products from the Class 8 truck market and for cast products from the improving manufacturing sector and transportation and wind energy markets.

Corporate expenses increased to $5.6 million for the first quarter of 2004 compared to $4.8 million for the first quarter of 2003. This increase is due primarily to non-cash expenses associated with our stock-based long-term incentive compensation programs, which offset savings associated with reductions in staffing and other efforts to control costs at the corporate office. Net interest expense increased to $8.2 million for the first quarter of 2004 from $7.4 million for the same period last year. The increase was primarily due to higher costs associated with the secured credit facility we entered into in June 2003. Our "receive fixed, pay floating" interest rate swap contracts for $150 million related to the $300 million, 8.375%, ten-year Notes, which effectively convert this portion of the Notes to variable rate debt, decreased interest expense by $1.7 million in both periods, compared to the fixed interest expense of the Notes that would otherwise be applicable.

Retirement benefit expense was $36.0 million in the first quarter 2004, compared to $34.8 million in the first quarter 2003. Pension expense decreased to $19.0 million for the 2004 first quarter from $23.4 million for same period of last year as actual returns on pension assets in 2003 were higher than expected, partially offset by the use in 2004 of a lower assumed discount rate to value pension benefit liabilities. However, other postretirement benefit expense increased for the 2004 first quarter to $17.0 million from $11.4 million in the comparable 2003 period as a result of a projected rise in medical cost inflation and a lower assumed discount rate. Approximately $29.7 million of the first quarter 2004 retirement benefit expense was non-cash. The 2004 retirement benefit expense does not include the expected favorable impact on our postretirement medical expense from the enactment of the Federal Medicare prescription drug benefit program in December 2003, pending final authoritative accounting guidance regarding how the benefit is to be recognized in the financial statements. For the first quarter 2004, retirement benefit expense increased cost of sales by $27.6 million, and selling and administrative expenses by $8.4 million. For the first quarter 2003, retirement benefit expense increased cost of sales by $24.4 million, and selling and administrative expenses by $10.4 million.

First quarter 2004 results do not include an income tax benefit as a result of a deferred tax valuation allowance recorded in the fourth quarter 2003. The valuation allowance was recorded in accordance with SFAS No. 109, "Accounting for Income Taxes", based upon the results of our quarterly evaluation concerning the estimated probability that the net deferred tax asset would be realizable. We are required to maintain a valuation allowance until a realization event occurs to support reversal of all or a portion of the allowance. Our effective tax rate was a benefit of 35.5% for the 2003 first quarter. We received federal income tax refunds of $6.9 million and $48.3 million in the 2004 and 2003 first quarters, respectively. Under current tax laws we are substantially unable to carry-back any current year or future year tax losses to prior periods to obtain cash refunds of taxes paid during those periods. Current year tax losses, if any, can be carried forward for up to 20 years and applied against any taxes owed in those future years.

Effective January 1, 2003, as required, we adopted 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.

Our adoption of SFAS 143 resulted in recognizing a charge of $1.3 million, net of income taxes of $0.7 million, or $0.02 per share, principally for asset retirement obligations related to landfills in our Flat-Rolled Products segment. This charge is reported in the statement of operations for the quarter ended March 31, 2003, as a cumulative effect of a change in accounting principle.

Our three business segments accounted for the following percentages of total external sales for 2003 and 2002:

                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                              -------------
                                                              2002     2003
                                                              ----     ----
Flat-Rolled Products........................................   55%      54%
High Performance Metals.....................................   33%      33%
Engineered Products.........................................   12%      13%

Sales were $1.94 billion in 2003 and $1.91 billion in 2002. International sales represented approximately 23% of total sales for both years.

Operating profit was $19.9 million in 2003 and $27.3 million in 2002. Losses before taxes were $280.2 million and $103.8 million, respectively. These results included restructuring charges and litigation expense in 2003 of $84.9 million, and restructuring charges of $42.8 million in 2002.

Net losses, before the cumulative effect of change in accounting principle, were $313.3 million and $65.8 million for 2003 and 2002, respectively. The net loss for 2003 included a $138.5 million charge for a valuation allowance on 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, whereas 2002 pretax losses were reduced by income tax benefits of $38.0 million. Charges of $42.8 million in 2002 related to the indefinite idling of our Massillon, Ohio stainless steel plate facility in the Flat-Rolled Products segment and workforce reductions.

                                                            YEAR ENDED
                                                           DECEMBER 31,
                                                        -------------------
                                                          2002       2003     % CHANGE
                                                        --------   --------   --------
                                                            (DOLLARS IN MILLIONS)
Sales to external customers...........................  $1,040.3   $1,043.5      0.3 %
Operating loss........................................      (8.6)     (14.1)   (64.0)%
Operating loss as a percentage of sales...............      (0.8)%     (1.4)%
International sales as a percentage of sales..........      11.8%      13.5 %

Sales for the Flat-Rolled Products segment for 2003 were $1,043.5 million, essentially the same as 2002, which was due primarily to the effect of raw material surcharges offsetting lower volumes and base selling prices. Weak demand and base pricing for products of the Flat-Rolled Products segment, especially commodity stainless steel, which persisted for most of 2003, plus the negative effects of rapidly rising raw material costs and higher energy costs resulted in an operating loss of $14.1 million for 2003 compared to an operating loss of $8.6 million in 2002.

Finished tons shipped in 2003 declined by 2% to 478,353 tons compared to shipments of 487,335 tons for 2002. The average transaction prices to customers increased by 2% to $2,178 per ton in 2003 due primarily to higher raw materials surcharges, which offset a 4% decline in average base selling prices, which exclude the affect of surcharges. Shipments of commodity products (including stainless steel hot roll and cold roll sheet, stainless steel plate and silicon electrical steel, among other products) decreased 2% while average prices for these products increased 3%. The decline in shipments was primarily attributable to continued depressed demand for commodity stainless steel sheet and plate due to the continued weakness in the U.S. industrial economy, especially in the non-residential construction and most capital goods markets. The increase in average prices was primarily due to higher raw material surcharges, principally for nickel. Commodity stainless steel base selling prices, which exclude surcharges, declined 4% in 2003 compared to 2002. During the same period, consumption in the U.S. of stainless steel strip, sheet and plate products was flat according to the Specialty Steel Institute of North America ("SSINA"). High-value product shipments in the segment (including strip, Precision Rolled Strip(R), super stainless steel, nickel alloy and titanium products) decreased 1%, while average prices for high-value products were flat. Increased shipments of Precision Rolled Strip(R) products in Europe and Asia were partially offset by the overall decline in shipments of other high-value products. Certain of these high-value products are used in the consumer durables and capital goods markets, both of which continued to be impacted by the weak U.S. economy in the markets we serve, which negatively affected shipments.

Operating results for 2003 were adversely affected by higher raw material costs, which increased significantly in 2003, especially during the second half of the year. For example, the cost of nickel, a major raw material in the production of many stainless steel alloys, increased 97% in 2003 from an average cost of $3.26 per pound for the month of December 2002 to an average cost of $6.43 per pound for December 2003, as priced on the London Metals Exchange. While we were able to offset a significant portion of the increase through raw material surcharges in the pricing of our products, these higher costs had a negative effect on cost of sales as a result of our LIFO inventory accounting methodology. For 2003, we incurred approximately $36 million of expense for these cost increases, including LIFO inventory charges of $27 million and cost increases of $9 million for certain raw materials which are not subject to our surcharges. In addition, natural gas and electricity costs for 2003 were approximately $12 million higher than for 2002.

We continued to aggressively reduce costs and streamline our operations. In 2003, we achieved gross cost reductions, before the effects of inflation, of $60 million. Major areas of cost reductions, before the effects of inflation, included $19 million from operating efficiencies, $18 million from procurement, $13 million from lower compensation and fringe benefit expenses, and $10 million from reduced depreciation expense and other fixed cost savings. During 2003, we implemented further 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, Pennsylvania and recorded an asset impairment charge related to the remaining assets located at Houston, Pennsylvania 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. These cost reduction actions are expected to result in annual pretax cost savings of approximately $10 million. Since 2000, the salaried workforce has been reduced by approximately 41%.

We continued to invest to enhance our specialty metals capabilities, increase efficiencies and reduce costs. Our strategic capital investment to upgrade the Brackenridge, Pennsylvania melt shop, which commenced in 2002 and is expected to cost approximately $35 million, is on schedule. The first of the two new electric arc furnaces began operation in November 2003 and the second furnace is scheduled to be completed in the second half of 2004. Cost savings are estimated to be over $20 million annually after completion of the project.

                                                          YEAR ENDED
                                                         DECEMBER 31,
                                                       -----------------
                                                        2002       2003      % CHANGE
                                                       ------     ------     --------
                                                           (DOLLARS IN MILLIONS)
Sales to external customers..........................  $630.0     $641.7        1.9 %
Operating profit.....................................    31.2       26.2      (16.0)%
Operating profit as a percentage of sales............     5.0%       4.1%
International sales as a percentage of sales.........    39.3%      34.8%

Sales for the High Performance Metals segment increased 1.9% to $641.7 million in 2003 primarily due to strong demand for our exotic materials, especially for the government and chemical processing markets, which offset continued weakness in the commercial aerospace and land-based turbine power generation markets. However, operating profit for the High Performance Metals segment declined 16% to $26.2 million because of lower demand and prices for nickel-based alloys and superalloys, specialty steel alloys and titanium-based alloys, which represent approximately 70% of the segment's sales. In addition, rising raw material costs offset cost reduction efforts.

Shipments of nickel-based and specialty steel alloys decreased 2%, while average prices increased 3% primarily due to product mix. Titanium mill products shipments decreased 3% and average prices decreased 3%. Shipments for exotic alloys increased 14% and average prices increased 4%. Backlog of confirmed orders for the segment was approximately $270 million at December 31, 2003 and approximately $300 million at December 31, 2002.

Operating profit for 2003 was adversely affected by higher raw material costs, which increased significantly in 2003, especially during the second half of the year. These higher costs had a negative effect on cost of sales as a result of our LIFO inventory accounting methodology, resulting in $11.7 million of expense for 2003, compared to $7.4 million of LIFO income in 2002. Operating profit in 2002 was adversely impacted by the effects of a seven month labor strike settled in March 2002 at our Wah Chang operation, which produces our exotic alloys.

We continued to aggressively reduce costs in 2003. Gross cost reductions, before the effects of inflation, for 2003 totaled approximately $45 million. Major areas of cost reductions, before the effects of inflation, included $23 million from operating efficiencies, $13 million from procurement, and $9 million from hourly and salary labor cost savings. During 2003, we implemented further 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 the year, 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. These cost reduction actions are expected to result in annual pretax cost savings of approximately $10 million.

Sales for the Engineered Products segment increased 6.2%, to $252.2 million in 2003, compared to 2002, and operating profit increased 65.5%, to $7.8 million. Demand for our tungsten products from the oil and gas, medical and automotive markets improved during 2003. Demand also improved for forgings and castings. Segment operating profit improved primarily due to higher sales and the impact of cost reductions, which totaled $9 million in 2003.

In the second half of 2003, we announced an additional restructuring of the European operations of Metalworking Products. Restructuring charges of approximately $3 million associated with this consolidation are presented as restructuring costs on the 2003 statement of operations and are not included in segment results. These cost reductions are expected to result in $2 million in annual pretax cost savings.

Corporate expenses

Corporate expenses were $20.5 million in 2003 compared to $20.6 million in 2002. Cost controls and reductions in the number of corporate employees that were implemented over this period were offset in 2003 by increased compensation expense associated with our long-term, stock-based compensation plan due to the significant increase in our stock price in the 2003 fourth quarter.

Interest expense, net

Interest expense, net of interest income, was $27.7 million for 2003, compared to $34.3 million for 2002. The effect of "receive fixed, pay floating" interest rate swap contracts of $150 million, related to our $300 million of 8.375% ten-year Notes issued in December 2001, decreased interest expense by $6.7 million in 2003 and $4.9 million in 2002, compared to the fixed interest expense of the Notes. Interest expense in 2003 was reduced by $2.1 million from interest capitalization on capital projects.

Interest expense is presented net of interest income of $6.2 million for 2003 and $3.0 million for 2002. The increases in interest income for 2003 and 2002 primarily relate to interest on settlements of prior years' tax liabilities.

Restructuring costs

Restructuring costs were $62.4 million and $42.8 million in 2003 and 2002, respectively.

In 2003, we recorded 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, Pennsylvania and at our Washington Flat Roll coil facility located in Washington, Pennsylvania, 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 do 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 will be paid from the Company's pension plan, and at December 31, 2003, approximately $9 million of the workforce reduction and facility closure charges are future cash costs that will be paid over the next ten years. Cash to meet these obligations is expected to be generated from one or more of the following sources: internally generated funds from operations, current cash on hand, or borrowings under existing credit lines.

In 2002, we recorded total charges of $42.8 million related to the indefinite idling of our Massillon, Ohio stainless steel plate facility, due to continuing poor demand for wide, continuous, mill plate products, and further workforce reductions across all of our operations. The Massillon, Ohio stainless steel plate facility was indefinitely idled in the 2002 fourth quarter, and resulted in a pretax non-cash asset impairment charge of $34.4 million, representing the excess of the book value of the facility over its estimated fair market value. In addition, during the second half of 2002, and in light of continuing weak demand in the markets we serve, we announced workforce reductions of approximately 665 employees. These workforce reductions were substantially complete by the end of the first half of 2003, and resulted in a pretax, primarily cash, severance charge of $8.4 million, net of a retirement benefits curtailment gain. These expenses are presented as restructuring costs on the statement of operations and are not included in segment results. Of the $42.8 million restructuring charge recorded in 2002, $8.4 million resulted in expenditures of cash.

At December 31, 2003, substantially all cash expenditures related to the 2002 restructuring charges had been paid.

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 net charges of $47.7 million and $11.6 million in 2003 and 2002, respectively.

In 2003, charges for closed companies related to legal, environmental, insurance and other matters were approximately $30 million higher than in 2002. These charges include $22.5 million related to litigation, 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. In 2002, we recognized a pretax charge of $6.5 million for our approximate 30% share of the net losses in New Piper Aircraft and for the write-off of the carrying value of this investment.

Retirement benefit (expense) income

Retirement benefit expenses have increased significantly over the past three years due to lower pension investments as a result of severe declines in the equity markets in 2000 through 2002, and higher benefit liabilities from long-term labor contracts negotiated in 2001. Retirement benefit expense was $134.4 million for 2003 and $21.8 million for 2002, compared to pretax retirement benefit income of $53.1 million for 2001. The increases in retirement benefit expenses have negatively affected both cost of sales and selling and administrative expenses. The effect of retirement benefit (expense) income on cost of sales and selling and administrative expenses for the years ended 2003, 2002 and 2001 were as follows:

                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                              2001     2002     2003
                                                              -----   ------   -------
                                                               (DOLLARS IN MILLIONS)
Cost of sales...............................................  $45.9   $  9.9   $ (94.6)
Selling and administrative expenses.........................    7.2    (11.9)    (39.8)
                                                              -----   ------   -------
Total retirement benefit expense............................  $53.1   $(21.8)  $(134.4)
                                                              =====   ======   =======

Retirement benefit expenses for 2004 are expected to be approximately $143 million, with effects on cost of sales and selling and administrative expenses similar to 2003. Pension expense is expected to decline to approximately $75 million pretax for 2004 from $92 million for 2003 as actual returns on pension assets in 2003 were higher than expected, partially offset by a lower assumed discount rate to value pension benefit liabilities. The projected rise in medical benefit inflation and lower assumed discount rate is expected to result in postretirement medical expenses of approximately $68 million for 2004 compared to $42 million of 2003. The projected 2004 postretirement medical expense does not include the expected favorable impact of the Medicare Prescription Drug, Improvement and Modernization Act (the "Medicare Act"), which 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. Based upon estimates from our actuaries, we expect that the federal subsidy included in the law will result in a reduction in the Other Postretirement Benefits obligation of up to $70 million. This reduction has not been reflected in the 2003 financial statements or in the 2004 estimated expense because authoritative accounting guidance regarding how the reduction in the obligation is to be recognized in the financial statements is pending. Approximately 76%, or $109 million, of the estimated 2004 retirement benefit expense is expected to be non-cash.

In the 2003 fourth quarter we recorded a $138.5 million valuation allowance on 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. This charge did not affect cash or our ability to utilize any of our deferred tax assets on future tax returns. Our income tax provision (benefit) for 2003, 2002, and 2001 was $33.1 million, $(38.0) million and $(11.2) million, respectively. The income tax benefits recognized in 2002 and 2001 include the effects of cash refunds of income taxes paid in prior years. In 2003 and 2002, we received $65.6 million and $45.6 million, respectively, in income tax refunds, and we recognized $7.2 million of income taxes receivable at December 31, 2003, which we expect to receive in the first half of 2004. Under current tax laws we are limited in our ability to carryback any current year or future tax losses to prior periods to obtain cash refunds of taxes paid during those periods. Current year federal tax losses, if any, can be carried forward for up to 20 years and applied against taxes owed in those future years. As of December 31, 2003, we had a federal income tax net operating loss carryforward deferred tax asset of approximately $29 million, which we are able to carryforward until 2023.

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, 2003, we had a net deferred tax asset of $34.3 million, net of a valuation allowance of $178.8 million, including the $138.5 million 2003 fourth quarter deferred tax valuation allowance and previously recorded deferred tax valuation allowances on state income tax net operating loss carryforwards. A significant portion of our deferred tax asset, prior to the valuation allowance, relates to postretirement employee benefit obligations, which have been recorded in the accompanying financial statements but are not recognized for income tax reporting until the benefits are paid. These benefit payments are expected to occur over an extended period of years. No valuation allowance was required on $34.3 million of net deferred tax assets based upon our ability to utilize these assets within the carryback, carryforward period, including consideration of tax planning strategies that we would undertake to prevent an operating loss or tax credit carryforward from expiring unutilized. We intend to maintain a valuation allowance on the net deferred tax assets until a realization event occurs to support the reversal of all or a portion of the reserve.

FINANCIAL CONDITION AND LIQUIDITY

During the three months ended March 31, 2004, cash used by operations was $0.2 million, due primarily to a $75.4 million increase in managed working capital in the quarter, partially offset by the receipt of a $6.9 million Federal income tax refund pertaining to our 2003 tax return. Capital expenditures of $12.1 million, and $3.1 million of net debt repayments were the principal investing and financing activities, respectively. At March 31, 2004, cash and cash equivalents totaled $67.3 million, a decrease of $12.3 million from December 31, 2003.

The components of managed working capital were as follows:

                                             YEAR ENDED DECEMBER 31,        THREE MONTHS
                                          ------------------------------        ENDED
                                            2001       2002       2003     MARCH 31, 2004
                                          --------   --------   --------   ---------------
                                              (DOLLARS IN MILLIONS)
Accounts receivable.....................  $  274.6   $  239.3   $  248.8      $  311.0
Inventory...............................     488.9      392.3      359.7         366.9
Accounts payable........................    (155.3)    (171.3)    (172.3)       (219.4)
                                          --------   --------   --------      --------
Subtotal................................     608.2      460.3      436.2         458.5
Allowance for doubtful accounts.........      12.3       10.1       10.2          11.0
LIFO reserve............................      77.2       74.7      111.7         159.8
Corporate and other.....................      21.0       18.6       17.4          21.6
                                          --------   --------   --------      --------
Managed working capital.................  $  718.7   $  562.7   $  575.5      $  650.9
                                          ========   ========   ========      ========
Annualized prior 2 months sales.........  $1,956.0   $1,741.0   $1,874.0      $2,463.0
                                          ========   ========   ========      ========
Managed working capital as a % of
  sales.................................      36.7%      32.4%      30.7%         26.4%

Capital expenditures for 2004 are expected to be between $60 and $70 million, of which $12.1 million had been expended in the 2004 first quarter. Capital expenditures primarily relate to the upgrade of our flat-rolled products melt shop located in Brackenridge, Pennsylvania and investments to enhance the high performance metals capabilities of our high performance metals long products rolling mill facility located in Richburg, South Carolina.

A regular quarterly dividend of $0.06 per share of common stock was declared on March 11, 2004, payable to stockholders of record at the close of business on March 22, 2004. 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 law, credit agreements or senior securities, and other factors deemed relevant and appropriate. No assurance can be given that we will continue to pay dividends on your common stock in a manner and amount consistent with our historic practices, or at all, in the future.

At March 31, 2004, we had $534.2 million in total outstanding debt, largely unchanged from the $532.1 million at December 31, 2003. The increase in debt was due to fair value adjustments related to interest rate swap contracts on our $300 million, 8.375% ten-year Notes, due December 15, 2011, which offset a net decrease in other debt of $3.1 million. We repaid $9.5 million in industrial revenue bonds, and borrowed $6.5 million, net, at our STAL joint venture.

Interest rate swap contracts are used from time to time to manage our exposure to interest rate risks. At the end of the 2002 first quarter, we entered into interest rate swap contracts with respect to a $150 million notional amount related to our 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 contracts were designated as fair value hedges. As a result, changes in the fair value of the swap contracts and the underlying fixed rate debt are recognized in the statement of operations. In the 2003 first quarter, we terminated the majority of these interest rate swap contracts and received $14.6 million in cash. The gain on settlement remains a component of the reported balance of the Notes ($313.1 million at March 31, 2004, including fair value adjustments), and is being ratably recognized as a reduction to interest expense over the remaining life of the Notes, which is approximately eight years.

In the 2003 first quarter, we entered into new "receive fixed, pay floating" interest rate swap arrangements related to the Notes that re-established, in total, the $150 million notional amount that effectively converted this portion of the Notes to variable rate debt. Including accretion of the gain on termination of the swap contracts described above, the result of the "receive fixed, pay floating" arrangements was a decrease in interest expense of $1.7 million for both the 2004 and 2003 first quarters, compared to the fixed interest expense of the Notes that would otherwise have been realized. At March 31, 2004, the adjustment of these swap contracts to fair market value resulted in the recognition of an asset of $5.4 million on the balance sheet, included in other assets, with an offsetting increase in long-term debt.

We did not borrow funds under our domestic credit facilities during the 2004 first quarter, or during all of 2003 or 2002. We have a $325 million four-year senior secured domestic revolving credit facility (the "facility"), which expires in June 2007, and which is secured by all accounts receivable and inventory of our U.S. operations, and includes capacity for up to $150 million in letters of credit. Outstanding letters of credit issued under the facility at March 31, 2004 were approximately $94 million. The secured credit facility limits capital expenditures, investments and acquisitions of businesses, new indebtedness, asset divestitures, payment of dividends, and common stock repurchases which we may incur or undertake during the term of the facility without obtaining permission of the lending group. In addition, the secured credit facility contains a financial covenant, which is not measured unless our undrawn availability under the facility is less than $150 million. This financial covenant, when measured, requires us to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") to fixed charges of at least 1.0 to 1.0. EBITDA is adjusted for non-cash items such as income/loss on investments accounted for under the equity method of accounting, non-cash pension expense/income, and that portion of retiree medical and life insurance expenses paid from our Voluntary Employment Benefit Association (VEBA) trust. EBITDA is reduced by capital expenditures and cash taxes paid, and increased for cash tax refunds. Fixed charges include gross interest expense, dividends paid and scheduled debt payments. Our ability to borrow under the 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 March 31, 2004, our undrawn availability under the facility, which is calculated including outstanding letters of credit and domestic cash on hand, was $259 million, and the amount that we could borrow at that date prior to requiring the application of a financial covenant test was $109 million. We expect our undrawn availability will decrease by up to $33 million in connection with the planned appeal of an unfavorable jury verdict received on March 10, 2004, concerning litigation between our wholly-owned subsidiary TDY Industries, Inc. and the San Diego Unified Port District involving a lease of property. This matter is more fully described in our Annual Report on Form 10-K for the year ended December 31, 2003.

During the next several months, due to rising raw material prices and improving business volumes, we expect to maintain a lower domestic cash balance from 2003 year end levels, and we may borrow funds from the secured facility from time-to-time to support working capital requirements or investment opportunities. We believe that internally generated funds, current cash on hand and capacity provided from our secured credit facility will be adequate to meet our foreseeable liquidity needs.

CRITICAL ACCOUNTING POLICIES

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. In a period when raw material or other costs are extremely volatile, the use of the LIFO inventory method may result in cost of sales expense which is not indicative of cash costs during that period. In a period of rising prices, cost of sales expense is typically higher than the cash costs, and inventory as presented on the balance sheet is typically lower than it would be under most alternative costing methods.

Selling prices for the majority of our stainless products include surcharges for raw materials. These surcharges have been effective in helping to offset the impact of increased raw material costs we have experienced in the 2004 first quarter on a cash basis. The majority of raw material surcharges, which prevail throughout the stainless steel industry, are structured to recover cash costs for the raw materials incurred to produce the products shipped. For example, the surcharge for nickel, which is a significant raw material used in the production of stainless steel, is included in current month's selling price based upon the average cost for nickel as priced on the London Metals Exchange (plus a margin for handling and delivery) for the period two months prior to shipment. This two-month lag convention is used to align the cost of the raw material melted to the transaction price to the customer. While the surcharge formula is effective in recovering the cash costs for raw materials, it by design approximates the production cycle.

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. 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.

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 asset 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 of a valuation allowance is recorded as a non-cash charge to the income tax provision with an offsetting reserve against the deferred income tax asset. Should we generate pretax losses in future periods, a tax benefit would not be recorded and the valuation allowance recorded would increase. Under these circumstances the net loss recognized and net loss per share for that period would be larger than a comparable period when a favorable tax benefit was recorded. However, tax provisions or benefits would continue to be recognized, as appropriate, on state and local taxes, and taxes related to foreign jurisdictions. The recognition of a valuation allowance does not affect our ability to utilize the deferred tax asset in the future. The valuation allowance could be reduced or increased in future years if the estimated realizability of the deferred income tax asset changes, based upon consideration of all available evidence, including changes in the carryback period available under tax law.

We have defined benefit pension plans and defined contribution plans covering substantially all of our employees. We have not made contributions to the U.S. defined benefit pension plan in the past several years. We are not required to make a contribution to the U.S. defined benefit pension plan for 2004, and, based upon current actuarial analyses and forecasts, 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.

We account for our defined benefit pension plans in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" ("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 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 2004 and 2003, our expected return on pension plan investments is 8.75%. 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 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. Accounting principles generally accepted in the United States 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.

At the end of November 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 2003, we established a discount rate of 6.5% for valuing the pension liabilities as of the end of 2003, and for determining the pension expense for 2004. We had previously assumed a discount rate of 6.75% for 2002, which determined the 2003 expense. The effect of lowering the discount rate will increase annual pension expense by approximately $4 million in 2004. 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, 2003, our measurement date for pension accounting, the value of the ABO exceeded the value of pension investments by approximately $195 million. In accordance with accounting standards, the charge against stockholders' equity is adjusted in the fourth quarter 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.

The OPEB obligation, and postretirement benefit expense recognized through March 31, 2004, does not include the expected favorable impact of the Medicare Act, which was enacted 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. Based upon estimates from our actuaries, we expect that the federal subsidy included in the law will result in a reduction in the OPEB obligation of up to $70 million. This reduction is not reflected in the financial statements or in estimates of 2004 expense because final authoritative accounting guidance regarding how the benefit is to be recognized in the financial statements is pending.

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 2003, as a result of a reduction in the percentage of the VEBA's private equity investments, we lowered our expected return on investments held in the VEBA trust to 9%. A 15% return on investments was assumed in prior years. 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. The effect of lowering the expected return on plan investments resulted in an increase in annual postretirement benefits expense of approximately $7 million for 2003. Our expected return on investments in the VEBA trust remains 9% for 2004.

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.

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.

A summary of other significant accounting policies is discussed in Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2003.

The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires us to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities. Significant areas of uncertainty that require judgments, estimates and assumptions include the accounting for derivatives, retirement plans, income taxes, environmental and other contingencies as well as asset impairment, inventory valuation and collectibility of accounts receivable. We use historical and other information that we consider to be relevant to make these judgments and estimates. However, actual results may differ from those estimates and assumptions that are used to prepare our financial statements.

OTHER MATTERS

Intense competition and excess manufacturing capacity in the commodity stainless steel industry have resulted in reduced prices over the last few years, excluding raw material surcharges, for many of our stainless steel products. As a result of these factors, our revenues, operating results and financial condition have been and may continue to be adversely affected.

Although inflationary trends in recent years have been moderate, during the same period certain critical raw material costs, such as nickel and scrap containing iron and nickel, have been volatile. While we are able to mitigate some of the adverse impact of rising raw material costs through surcharges to customers, rapid increases in raw material costs adversely affect our results