Steel is one of the most important, multi-functional and adaptable materials in use today, and is considered to be the backbone of industrial development. Steel’s versatility is attributable to the fact that it is hot and cold formable, weldable, hard, resistant to corrosion, water and heat, 100% recyclable and has good machinability.

Following the collapse of the Soviet Union, the Russian steel industry suffered a substantial decline in production from over 77 million tonnes in 1991 to 44 million tonnes in 1998. Since then, output has increased by nearly 39%, and in 2003, Russia produced 61 million tonnes of raw steel, or 7% of world production, making it the world’s fourth largest producer of crude steel. Russia also produced nearly 52 million tonnes of rolled products in 2003, operating at about 90% of installed capacity. Of this amount, 27 million tonnes (or 51% of the total output of rolled steel) were exported, comprising 8% of all global exports for semi-finished and finished steel products, making Russia the number three exporter of such products after Japan and Germany. Semi-finished products comprised 43% of exports. Overall, the Russian steel industry sells over 51% of its output abroad and benefits from healthy global markets, particularly in Asia, which is the most important market for Russian producers.

Domestic consumption is also on the rise, driven by both upstream and downstream industries. Steel consumption in the Russian economy in 2003 remained relatively low at 229 kilograms per capita, down from nearly 398 kilograms in 1992 and substantially less than in such countries as Japan, which consumed 571 kilograms per capita, the United States, which consumed 318 kilograms per capita, and countries in Western Europe, which consumed on average 462 kilograms per capita.

The Company’s steel business comprises the production and sale of semi-finished steel products, carbon and specialty long products, carbon and stainless flat products and value-added downstream metal products including hardware, stampings and forgings. The Company’s steel business also produces significant amounts of coke, both for internal use and for sales to third parties.

The Company has substantial coal, iron ore and nickel mining interests in Russia and Kazakhstan, with the flexibility to supply the Company’s own steel production or sell to third parties depending on price differentials between purchases from local suppliers and sales to foreign and domestic customers. The Company is capable of internally sourcing all of the coking coal, 92% of the iron ore and 55% of the nickel requirements of its steel segment, assuming in the case of iron ore that third parties process certain quantities of the Company’s iron ore concentrate into sinter and pellets. In addition, the Company is the only specialty steel manufacturer in the world capable of internally sourcing all three of these raw materials. The Company was the second largest producer of coking coal in Russia in 2003, with a 12% market share. The Company also controls 24% of the coking coal washing capacity in Russia.

Additionally, the Company owns 17.1% of the common shares of Magnitogorsk Iron and Steel Works OAO, or MMK, Russia’s largest producer of flat products, with reported revenues of $3.05 billion and $2.17 billion in 2003 and in the first half of 2004, respectively, under International Financial Reporting Standards.

Consolidated cost of goods sold was 60.4% of consolidated revenues in the six months ended June 30, 2004, as compared to 69.6% of consolidated revenues in the six months ended June 30, 2003.

Selling, distribution and operating expenses increased by $102.2 million, or 52.8%, to $295.6 million in the six months ended June 30, 2004, from $193.4 million in the six months ended June 30, 2003.

Operating income increased by $259.8 million, or 290.7%, to $349.1 million in the six months ended June 30, 2004, from $89.4 million in the six months ended June 30, 2003.

Income tax expense increased by $51.0 million to $74.1 million in the six months ended June 30, 2004, from $23.1 million in the six months ended June 30, 2003, and effective tax rate decreased to 22.0% from 27.7%.