Management’s Discussion and Analysis of Financial Condition and Results of Operations Allegheny Technologies Incorporated is one of the largest and most diversified producers of specialty materials in the world. We use innovative technologies to offer global markets a wide range of specialty materials. High-value products include super stainless steel, nickel-based and cobalt-based alloys and superalloys, titanium and titanium alloys, specialty steels, tungsten materials, exotic alloys, which include zirconium, hafnium and niobium, and highly engineered strip and Precision Rolled Strip ® products. In addition, we produce commodity specialty materials such as stainless steel sheet and plate, silicon electrical and tool steels, and forgings and castings. Unless the content requires otherwise, “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. Business conditions remained very difficult in 2003 resulting in a net loss before the cumulative effect of a change in accounting principle for 2003 of $313.3 million, or $3.87 per share, which included after-tax restructuring, litigation and tax charges of $190.5 million. Sales increased 2% to $1,937.4 million for 2003 as higher selling prices, primarily due to the effect of raw material surcharges, offset lower shipments for most of our major products resulting from the continued weakness in many of the markets we serve. Operating results were significantly negatively impacted by higher raw material and energy costs, and increased retirement benefit expenses, which offset $117 million in cost reductions. Operating results included $62.4 million of pretax restructuring charges and a $138.5 million charge to record a valuation allowance for a major portion of our net deferred tax assets. Additionally, on March 10, 2004, we received an unfavorable jury verdict concerning a lease of property in San Diego, CA, and recognized litigation expense of $22.5 million in our 2003 operating results. Demand for commodity stainless steel products remained depressed for most of 2003 due to the continued weakness in the U.S. industrial economy, especially in the non-residential construction and most capital goods markets. This weak demand and pricing environment for products of the Flat-Rolled Products segment, the negative effects of rapidly rising raw material costs on our last-in, first-out (“LIFO”) inventory accounting methodology and higher energy costs offset the positive effects of cost reductions and resulted in an operating loss of $14.1 million. Sales for the High Performance Metals segment improved 2% primarily due to strong demand for our exotic materials, especially from the government and chemical processing markets. However, operating profit for the High Performance Metals segment declined 16% to $26.2 million due primarily to continued weak demand for products used in commercial aerospace and land-based turbines for power generation, two key markets for our nickel-based alloys and superalloys and titanium alloys, and rising raw material and energy costs, which offset the positive effects of our cost reduction efforts. Results for the Engineered Products segment improved, as sales increased 6%, and operating profit increased 66% to $7.8 million due to improved demand from the oil and gas markets, plus cost reduction initiatives. Retirement benefit expenses increased $112.6 million in 2003 to $134.4 million due to the severe decline in the equity markets for 2000 through 2002, a lower expected return on benefit plan investments, and a lower discount rate assumption for determining liabilities. Substantially all of the increase in expense was non-cash as we were not required to make a contribution to our pension plan in 2003, and we do not expect to be required to make cash contributions to the defined benefit pension plan for at least the next several years. During 2003, we continued to focus on enhancing our leading market positions, reducing costs, and improving liquidity. Our accomplishments from these important efforts included: Overview ATI Annual Report 2003 9 • Significant progress toward the completion in 2004 of our two major strategic capital investments, both of which began in 2002. The first of two new electric arc furnaces for our flat-rolled products melt shop located in Brackenridge, PA began operation in November 2003 and the second furnace is scheduled to be completed in the second half of 2004. The second project is a major upgrade and expansion of our high performance metals long products rolling mill facility located in Richburg, SC, which is expected to begin producing product in the second quarter of 2004. We believe these projects will provide state-of-the-art operating capabilities, increased efficiencies, lower operating costs, and expanded capacity. • Introduction of a number of new alloys to better serve our customers’ needs, demonstrating our ongoing commitment to technology and product development. • Creation of a new joint venture, Uniti LLC, to accelerate growth and expand our participation in global markets for industrial titanium ingot and mill products. • Realization of $117 million in gross cost reductions, before the effects of inflation, exceeding our initial 2003 goal of $90 million. A significant portion of these cost reductions resulted from our continuing efforts to streamline processes and improve productivity. During 2003, we reduced our salaried workforce across all of our operations, including the corporate office, by approximately 16%. Overall employment was reduced by 9% in 2003.