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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 (No Fee Required)

For the fiscal year ended June 30, 2004

Commission file number 1-5828

CARPENTER TECHNOLOGY CORPORATION

(Exact name of Registrant as specified in its Charter)

610-208-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.    Yes  x.    No  ¨.

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.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act).    Yes  x    No  ¨

As of August 27, 2004, 23,782,899 shares of Common Stock of Carpenter Technology Corporation were outstanding. The aggregate market value of Common Stock held only by non-affiliates was $1,043,458,475 (based upon its closing transaction price on the Composite Tape on August 27, 2004).

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference certain information from the 2004 definitive Proxy Statement, dated September 22, 2004.

The Exhibit Index appears on pages E-1 to E-5.

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PART I

Item 1. Business

Carpenter Technology Corporation (“Carpenter”), incorporated in 1904, is engaged in the manufacturing, fabrication, and distribution of specialty metals and engineered products. We made no significant changes in the form of our organization or mode of conducting business during the year ended June 30, 2004.

We are organized in the following business units: Specialty Alloys Operations, Dynamet, Carpenter Powder Products, and Engineered Products. For segment reporting, the Specialty Alloys Operations, Dynamet, and Carpenter Powder Products segments have been aggregated into one reportable segment, Specialty Metals, because of the similarities in products, processes, customers, distribution methods and economic characteristics. See note 20 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” for additional segment reporting information.

We primarily process basic raw materials such as chromium, nickel, titanium, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire, narrow strip, special shapes, and hollow forms in many sizes and finishes. We also produce certain metal powders and fabricated metal products. In addition, ceramic products are produced from various raw materials using molding, heating and other processes.

Our Specialty Metals segment includes the manufacturing and distribution of stainless steels, titanium, high temperature alloys, electronic alloys, tool steels and other alloys in billet, bar, wire, rod, strip and powder forms. Specialty Metals sales are distributed directly from our production plants and distribution network as well as through independent distributors.

Our Engineered Products segment includes the manufacture and sale of structural ceramic products, ceramic cores for the investment casting industry, tubular metal products for nuclear and aerospace applications and custom shaped bar.

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Our major classes of products are:

Stainless steels –

A broad range of corrosion resistant alloys including conventional stainless steels and many proprietary grades for special applications.

Special alloys –

Other special purpose alloys used in critical components such as bearings and fasteners. Heat resistant alloys that range from slight modifications of the stainless steels to complex nickel and cobalt base alloys. Alloys for electronic, magnetic and electrical applications with controlled thermal expansion characteristics, or high electrical resistivity or special magnetic characteristics. Fabrication of special stainless steels and zirconium base alloys into tubular products for the aircraft industry and nuclear reactors.

Ceramics and other materials –

Certain engineered products, including ceramic cores for investment castings ranging from small simple configurations to large complex shapes and structural ceramic components, precision welded tubular products, as well as drawn solid tubular shapes.

Titanium products –

A corrosion resistant, highly specialized metal with a combination of high strength and low density. Most common uses are in aircraft, medical devices, sporting equipment and chemical and petroleum processing.

Tool and other steels –

Tool and die steels, which are extremely hard metal alloys, used for tooling and other wear-resisting components in metalworking operations such as stamping, extrusion and machining. Other steels include carbon and alloy steels purchased for distribution and other miscellaneous products.

The amounts and percentages of our net sales contributed by our major classes of products for the last three fiscal years are summarized in the following table:

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Our Specialty Metals segment depends on continued delivery of critical raw materials for its day-to-day operations. These raw materials include nickel, ferrochrome, cobalt, molybdenum, titanium, manganese and scrap. Some of these raw materials sources could be subject to potential interruptions of supply as a result of political events, labor unrest or other reasons. These potential interruptions could cause material shortages and affect availability and price.

We have long-term relationships with major suppliers who provide availability of material at competitive prices.

We own a number of United States and foreign patents and have granted licenses under some of them. Certain of our products are covered by patents held or owned by other companies from whom licenses have been obtained. We do not consider our business to be materially dependent upon any patent or patent rights.

Our sales are normally influenced by seasonal factors. The first fiscal quarter (three months ending September 30) is typically the lowest – principally because of annual plant vacation and maintenance shutdowns in this period by us as well as by many of our customers. The second half of the fiscal year is typically stronger than the first half. However, the timing of major changes in the general economy or the markets for certain products can alter this pattern. Over the longer time frame, the historical patterns generally prevail.

The chart below summarizes the percent of net sales by quarter for the past three fiscal years:

On a consolidated basis, we are not dependent upon a single customer, or a very few customers, to the extent that the loss of any one or more would have a materially adverse effect on our consolidated statement of operations. In our Engineered Products segment (see note 20 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” for further segment discussion), approximately 18 percent of segment sales

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were to one customer in fiscal 2004, and approximately 14 percent of segment sales were to one customer and 12 percent of segment sales were to a second customer in fiscal 2003. There were no other significant individual customer sales volumes during fiscal years 2004, 2003 or 2002.

As of June 30, 2004 we had a backlog of orders, believed to be firm, of approximately $324 million, substantially all of which is expected to be shipped within the current fiscal year. Our backlog as of June 30, 2003 was approximately $165 million. Our backlogs have become less indicative of future sales levels due to shifting product mixes and changing customer re-ordering practices.

Our business is highly competitive. We supply materials to a wide variety of end-use market sectors, none of which consumes more than 30 percent of our output, and compete with various companies depending on end-use market, product or geography.

There are approximately ten domestic companies producing one or more similar specialty metal products that are considered to be major competitors to the specialty metals operations in one or more end-use markets. There are several dozen smaller producing companies and converting companies in the United States that are competitors. We also compete directly with several hundred independent distributors of products similar to those distributed by us. Additionally, numerous foreign producers export into the United States various specialty metal products similar to those produced by us. Furthermore, a number of different products may, in certain instances, be substituted for our finished product.

Imports of foreign specialty steels, particularly stainless steels, have long been a concern to the domestic steel industry because of the potential for unfair pricing by foreign producers. Foreign governments through direct and indirect subsidies have usually supported such pricing practices. These unfair trade practices have resulted in high import penetration into the U.S. stainless steel markets, with calendar year 2003 levels at approximately 35 percent for stainless bar, 55 percent for stainless rod and 75 percent for stainless wire.

Because of the unfair trade practices and the resulting injury, we joined with other domestic producers in the filing of trade actions against foreign producers who dumped their stainless steel products into the United States. As a result of these actions, in March 1995, the U.S. Department of Commerce issued antidumping orders for the collection of dumping duties on imports of stainless bar from Brazil, India, Japan and Spain at rates ranging up to 63 percent of their value. These orders will remain in effect until January 2006. New antidumping orders were issued in March 2002 against imports of stainless bar from France, Germany, Italy, Korea and the United Kingdom and will continue in effect until March 2007.

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In December 1993, the U.S. Department of Commerce issued antidumping orders on imports of stainless rod from Brazil, France and India at rates ranging up to 49 percent of their value. These orders will continue in effect until July 2005. Additionally, in September 1998, antidumping orders were put in place with regard to imports of stainless rod from Italy, Japan, Korea, Spain, Sweden and Taiwan at rates ranging up to 34 percent of their value. A sunset review was completed in June 2004 by the International Trade Commission (ITC) recommending continuation of these orders for another five years.

In a related matter, President George W. Bush announced in March 2002 the implementation of a three-part multilateral initiative on steel. The first part consisted of the initiation with the ITC of a Section 201 trade action against imports of selected steel products, including several specialty steel products. This action led to the imposition of additional tariffs for a period of three years against imports of stainless bar, rod and wire from most of the steel producing countries of the world. The other two parts included the initiation of multilateral negotiations to reduce excess world steel capacity and to eliminate government subsidies.

As part of the Section 201 trade relief, a midterm review was conducted by the ITC between July and September 2003 which evaluated developments made by the domestic industry to import competition. After taking the ITC’s midterm review into account, the President terminated the Section 201 tariffs on December 5, 2003. The remaining two legs of the President’s program remain in effect.

Our expenditures for company-sponsored research and development were $10.8 million, $11.7 million and $12.9 million in fiscal 2004, 2003 and 2002, respectively.

We are subject to various stringent federal, state, local and foreign environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Management evaluates the liability for future environmental remediation costs on a quarterly basis. We accrue amounts for environmental remediation costs representing management’s best estimate of the probable and reasonably estimable costs relating to environmental remediation. For further information on environmental remediation, see the Contingencies section included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 13 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

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Our costs of maintaining and operating environmental control equipment were $4.7 million, $5.4 million and $5.1 million for fiscal 2004, 2003 and 2002, respectively. The capital expenditures for environmental control equipment were $0.2 million, $0.3 million and $0.4 million for fiscal 2004, 2003 and 2002, respectively. We anticipate spending approximately $0.2 million on major domestic environmental capital projects over the next five fiscal years. This includes approximately $0.1 million in fiscal 2005 and $0.1 million in fiscal 2006. Due to the possibility of future regulatory developments, the amount of future capital expenditures may vary from these estimates.

As of June 30, 2004, our total workforce was 4,193 employees, including 143 on indefinite furlough.

Sales outside of the United States, including export sales, were $276.3 million, $217.9 million and $249.1 million in fiscal 2004, 2003 and 2002, respectively.

For further information on domestic and foreign sales, see note 20 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Item 2. Properties

The primary locations of our specialty metals manufacturing plants are: Reading, Pennsylvania; Hartsville, South Carolina; Washington, Pennsylvania; Orangeburg, South Carolina; Bridgeville, Pennsylvania; Orwigsburg, Pennsylvania; Clearwater, Florida and Crawley, England. The Reading, Hartsville, Washington, Orangeburg, Bridgeville, Orwigsburg and Crawley plants are owned. The Clearwater plant is owned, but the land is leased.

The primary locations of our engineered products manufacturing operations are: Wood-Ridge, New Jersey; Wilkes-Barre, Pennsylvania; Twinsburg, Ohio; Auburn, California; El Cajon, California; Palmer, Massachusetts; Corby, England; Quertaro, Mexico and Monash, Australia. The El Cajon, Corby and Quertaro plants are owned, while the other locations are leased. The land at the El Cajon plant is leased.

The Reading plant has an annual practical melting capacity of approximately 231,000 ingot tons of its normal product mix. The annual tons shipped will be considerably less than the tons melted due to processing losses and finishing operations. During the years ended June 30, 2004 and 2003, the plant operated at approximately 72 percent and 69 percent, respectively, of its melting capacity.

The Talley Metals plant in Hartsville, South Carolina has an annual hot rolling capacity of approximately 78,500 tons. The annual tons shipped will be less than the tons hot rolled due to processing losses and finishing operations. During the years ended June 30, 2004 and 2003, the plant operated at approximately 53 percent and 63 percent, respectively, of its hot rolling capacity.

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We also operate regional customer service and distribution centers, most of which are leased, at various locations in several states and foreign countries.

Our plants, customer service centers, and distribution centers were acquired or leased at various times over several years. There is an active maintenance program to keep facilities in good condition. In addition, we have had an active capital spending program to replace equipment as needed to keep it technologically competitive on a world-wide-basis. We believe our facilities are in good condition and suitable for our business needs.

Item 3. Legal Proceedings

Pending legal proceedings involve ordinary routine litigation incidental to our business. There are no material proceedings to which any of our Directors, Officers, or affiliates, or any owners of more than five percent of any class of our voting securities, or any associate of any of our Directors, Officers, affiliates, or security holders, is a party adverse to us or has a material interest adverse to our interests or those of our subsidiaries. There is no administrative or judicial proceeding arising under any Federal, State or local provisions regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment that (1) is material to our business or financial condition, (2) involves a claim for damages, potential monetary sanctions or capital expenditures exceeding ten percent of our current assets, or (3) includes a governmental authority as a party and involves potential monetary sanctions in excess of $100,000.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our stockholders during the fourth quarter of fiscal 2004.

Item 4a. Executive Officers of the Registrant

Listed below are the names of our corporate executive officers as of June 30, 2004, including those required to be listed as executive officers for Securities and Exchange Commission purposes, each of whom assumes office after the annual organization meeting of the Board of Directors which immediately follows the Annual Meeting of Stockholders. All of the corporate officers listed below have held responsible positions with the registrant for more than five years except for John E. Thames, who joined Carpenter May 24, 2004; Dennis M. Oates, who joined Carpenter September 30, 2003; and Terrence E. Geremski, who joined Carpenter January 29, 2001.

Robert J. Torcolini, previously President and Chief Operating Officer, succeeded Dennis M. Draeger as Chairman, President and Chief Executive Officer effective July 1, 2003. Mr. Torcolini had been President and Chief Operating Officer and Director, since July 1, 2002, Senior Vice President – Engineered Products Operations, since January 31, 2002, President of Dynamet, Incorporated, a subsidiary of Carpenter since February 28, 1997 and was Vice President – Manufacturing Operations – Specialty Alloys Operations from January 29, 1993 through February 27, 1997. Mr. Draeger retired after seven years of service on June 30, 2003.

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The transition was pursuant to Carpenter’s previously announced Chief Executive Officer succession plan.

Terrence E. Geremski was elected Senior Vice President – Finance and Chief Financial Officer effective January 29, 2001. Mr. Geremski previously served as Executive Vice President and Chief Financial Officer and as a director of Guilford Mills, Inc., Greensboro, NC. He was employed by Guilford Mills in various financial positions from 1992 through August 2000, with the most current position held being Executive Vice President and Chief Financial Officer. Mr. Geremski’s experience also includes Dayton Walther Corp., Dayton, Ohio; Varity Corp. (formerly Massey-Ferguson), Toronto, Ontario and Buffalo, NY; and Morris Bean & Co., Yellow Springs, Ohio. He began his career with Price Waterhouse in Chicago. Guilford Mills filed for reorganization under Chapter 11 of the federal bankruptcy laws on March 13, 2002, and emerged from its bankruptcy proceeding on October 4, 2002.

David A. Christiansen was elected Vice President, General Counsel and Secretary effective November 1, 2002. Prior to that, Mr. Christiansen held the following positions within Carpenter: associate general counsel and assistant secretary from April, 1996 through November 1, 2002; senior staff attorney and assistant secretary from April, 1993 through April, 1996.

Robert W. Lodge served as Vice President – Human Resources from September 23, 1991 through May 2004. In May 2004, Mr. Lodge was elected Vice President. Mr. Lodge retired from Carpenter effective August 1, 2004. Mr. Lodge previously served as Vice President, Human Resources – North America at Johnson Matthey, Inc. from 1988 through 1991.

Michael L. Shor was elected Senior Vice President – Specialty Alloys Operations, effective January 31, 2000. Prior to that, Mr. Shor held the following positions within Specialty Alloys Operations: Vice President – Manufacturing Operations from March 3, 1997 through January 30, 2000; General Manager – Global Marketing and Product Services from July 13, 1995 through March 2, 1997; and General Manager – Marketing from October 1, 1994 through July 12, 1995.

Dennis M. Oates was elected Senior Vice President - Engineered Products Operations effective September 30, 2003. From July 2002 until September 2003, Mr. Oates operated Oates & Associates, a consulting organization specializing in strategic evaluations and reorganizations of U.S.-based manufacturing companies. From 1997 until July 2002, Mr. Oates served as President and Chief Executive Officer of TW Metals, a privately held $500 million metals distribution and processing company with 1,350 employees and 44 facilities worldwide. Mr. Oates was also President and Chief Operating Officer from December 1995 through March 1997 for Connell Limited Partnership, a $1.4 billion privately held company that operated six metals businesses. From 1974 through 1995 Mr. Oates held various positions of increasing responsibility with Lukens Steel Company, a $700 million producer of steel plates and a subsidiary of $1.1 billion Lukens Inc., a NYSE company with various steel and specialty metals products. Mr. Oates’ last position with Lukens Steel was as President and Chief Operating Officer.

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John E. Thames was elected Vice President – Human Resources, effective May 24, 2004. Mr. Thames previously served from 1989 until September 2003 as the Vice President – Human Resources and Communications for Donaldson Co., Inc., a $1.3 billion worldwide NYSE manufacturer of filtration products with 8,500 employees.

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PART II

Item 5. Market for the Registrant’s Common Stock and Related Stockholder Matters

Our common stock is listed on the New York Stock Exchange (“NYSE”) and traded under the symbol “CRS”. The following table sets forth, for the periods indicated, the high and low sale prices for our common stock as reported by the New York Stock Exchange.

The range of our common stock price on the NYSE from July 1, 2004 to August 31, 2004 was $31.30 to $45.06. The closing price of the common stock was $43.98 on August 31, 2004.

We have paid quarterly cash dividends on our common stock for 98 consecutive years. We paid a quarterly dividend of $0.0825 per share of common stock during fiscal 2004. In October 2002, the Board of Directors reduced the quarterly dividend paid on shares of our common stock from $0.33 per share to $0.0825 per share. We paid a quarterly dividend of $0.33 per share of common stock during the first quarter of fiscal 2003 and a dividend of $0.0825 per share of common stock during the second, third and fourth quarters. The quarterly dividend rate was $0.33 per share for the 2002 fiscal year.

As of August 27, 2004, there were 4,523 common stockholders of record. Information relating to certain common stock purchase rights issued by us is disclosed in note 15 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Certain information relating to securities authorized for issuance under our equity compensation plans is disclosed in note 16 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

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Item 6. Selected Financial Data

Five-Year Financial Summary

Dollar amounts in millions, except per share data

(years ended June 30)

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See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion of factors that affect the comparability of the “Selected Financial Data”.

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

The critical accounting policies affecting our more significant judgments and estimates used in the preparation of our consolidated financial statements are shown on pages 26 and 27.

Management’s Discussion of Operations

Net sales and earnings trends for the past three fiscal years are summarized below:

Adoption of Statement of Financial Accounting Standards (SFAS) No. 142 in Fiscal 2002

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, “Goodwill and Other Intangible Assets” which primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, and are tested for impairment at least annually. We adopted SFAS 142 in fiscal 2002, and recognized an impairment charge.

The $112.3 million impairment charge or $5.06 per diluted share was recognized in the Specialty Metals segment. This non-cash, non-operating charge was recognized as a cumulative effect of an accounting change as of the beginning of fiscal 2002. The fair value of the reporting units was estimated on July 1, 2001 based upon discounted cash flow analyses and the use of market multiples. This charge was necessary because the fair value of certain reporting units was less than their carrying value. The goodwill stemmed from our acquisitions of several specialty metals companies between 1993 and 1998. During the 18-24 months prior to July 1, 2001, sales by the acquired companies to several end-use markets had experienced downturns due to general economic conditions and some were further impacted by the continuing high level of low priced imports.

We conducted our annual impairment review of goodwill during the fourth quarter of fiscal 2004, 2003 and 2002 and determined that there was no additional goodwill impairment. See Note 7 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Special Charges Recorded in Fiscal 2004 and 2003

During the second quarter of fiscal 2004, we incurred a special charge of $2.3 million before taxes. This special charge was a result of a $20 million open market purchase of certain medium term notes previously issued by the company and the termination of interest rate swaps associated with the partial repayment of foreign currency loans.

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During fiscal 2003, we incurred a special charge of $30.6 million before taxes. Of this amount, $14.2 million was incurred during the first fiscal quarter, $12.8 million was incurred during the second fiscal quarter and $3.6 million was incurred during the fourth fiscal quarter. The first half actions were taken as part of our strategy to reduce costs and improve operational effectiveness. The fourth quarter charge was related primarily to the early redemption of debt.

See Note 3 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Comparative Information for Fiscal 2004, 2003 and 2002

The chart below shows our net sales by major product class for the past three fiscal years:

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Results of Operations – Fiscal 2004 compared to Fiscal 2003

Overview

Our net income for fiscal 2004 was $36.0 million or $1.49 per diluted share versus a net loss of $10.9 million or $.56 per diluted share for fiscal 2003.

Sales and profits recovered significantly in fiscal 2004, especially in the second half of the year. Strong sales growth across all our key markets, increased productivity and cost reduction attributed to our continued focus on lean and variation reduction were the primary contributors to the improvement. This year included $16.1 million of non-cash pension and retiree medical expenses. Last year benefited from non-cash net pension income of $3.4 million.

Free cash flow (see page 25 for Carpenter’s definition) was $88.4 million in fiscal 2004. This amount was after our decision to make a $25 million voluntary contribution to a VEBA trust that funds post-retirement medical expenses. At June 30, 2004, total debt net of cash was $249.7 million or 31.7 percent of capital.

Net Sales

Net sales for fiscal 2004 were $1.0 billion or an increase of 16.7 percent from $871.1 million in fiscal 2003. The $145.6 million increase in net sales was due to improved demand across our end-use markets, the effect of recent price actions including the pass through of escalating raw material and energy costs, an improved product mix and selective market share gains. Fiscal 2003 sales included $12.9 million from companies that were subsequently divested.

International sales increased 27 percent to $276.3 million from the prior year as a result of the favorable effects of a weaker U.S. dollar, market share gains and stronger demand from most end-use markets. Details of sales by geographical region for the past three fiscal years are presented in note 20 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Our stainless steel sales were 14 percent higher than a year ago. Stronger demand from the automotive and industrial markets benefited sales and selective market share gains. The increase also reflected higher selling prices and surcharges to cover the rising costs of raw materials and energy. The increase in sales of stainless products was partially offset by reduced volume of lower value rod products, which declined as a result of our decision to exit marginally profitable businesses.

Sales of our special alloys were 27 percent above the prior year. Stronger demand from the aerospace, power generation, medical and automotive markets and higher selling prices were the major contributors.

Titanium alloy sales were 10 percent more than a year ago due to increased sales to the medical market as a result of stronger demand and market share gains.

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By end-use markets, sales to the aerospace and power generation markets increased 19 percent from fiscal 2003. The increase in aerospace sales was driven primarily by materials used in the manufacturing of commercial and military aircraft engines and airframes. Indications are that the production of commercial jet aircraft is increasing at a higher rate than previously forecasted. Our increased sales to the power generation market were driven by scheduled maintenance projects and the sale of new industrial gas turbine capacity.

Sales to the automotive market were 28 percent above the prior year. The increase was partly due to strong demand for higher value specialty alloys and ceramic materials used in engine components. These materials are enjoying particularly strong demand due to requirements for trucks to run higher exhaust gas temperatures in order to meet more stringent emission requirements. Sales to the automotive market also benefited from a weak dollar, which caused a shift in the production of certain automotive components from Europe to the U.S.

Sales to the medical market were 33 percent above a year ago reflecting strong demand and market share gains.

Sales to the industrial sector, which includes materials used in equipment and other capital goods applications, increased 16 percent in fiscal 2004 from a year ago. This reflected selective market share gains and increased capital investments by the U.S. manufacturing sector as a result of the strengthening economy. In addition, infrastructure projects in developing countries resulted in increased demand for the industrial sector.

Gross Profit

Gross profit in fiscal 2004 improved to $185.5 million or 18.2 percent of sales from $153.7 million or 17.6 percent of sales a year ago. Our gross profit in fiscal 2004 included non-cash pension and retiree medical expenses of $11.3 million or 1.1 percent of sales. In fiscal 2003, our gross profit reflected pension income of $4.4 million or 0.5 percent of sales.

Our improvement in gross profit is due to strong sales growth, product mix improvement, increased productivity and cost reduction attributed to our continued focus on lean and variation reduction. This operating performance was strong enough to offset the lag effect between the immediate recognition of increased raw material and energy costs due to our LIFO inventory accounting method, and the recovery of these costs through price increases. The gross profit as a percentage of sales was impacted from the dilution caused by the direct pass through of the increased raw material prices.

Selling and Administrative Expenses

Selling and administrative expenses in fiscal 2004 were $118.7 million or 11.7 percent of net sales compared to $118.8 million or 13.6 percent of net sales in fiscal 2003. Selling and administrative expenses included non-cash pension and retiree medical expenses of $4.8 million in the current year versus $1.0 million in the prior year. Additionally, a reduction in base salary expense and benefits, lower depreciation ($4.9 million) and reduced professional fees ($3.3 million) were partially offset by higher employee variable compensation costs.

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Interest Expense

Fiscal 2004 interest expense of $23.7 million was lower than fiscal 2003 by $7.3 million due to reduced debt levels and lower interest rates.

Other Income, Net

Other income, net was $8.9 million in fiscal 2004 versus $3.8 million in fiscal 2003. Fiscal 2004 included the receipt of $5.2 million of tariffs from the U.S. Customs Department under the “Dumping and Subsidy Offset Act of 2001”, $1.9 million of interest income, and a $0.3 million loss on writedowns and disposals of property, plant and equipment. Fiscal 2003 included the receipt of $2.8 million of tariffs under the Act, $1.8 million of interest income, a $1.1 million loss on writedowns and disposals of property, plant and equipment, and $0.7 million in reserves related to former Talley Industries subsidiaries.

Income Taxes

Our effective tax rate (income tax expense or benefit as a percent of income or loss before taxes) for fiscal 2004 was of 27.7 percent as compared to a benefit of 52.4 percent last year. The current year rate is more favorable than our statutory rate of 35 percent due to resolution of an outstanding state tax matter that resulted in the reversal of $2.4 million of income taxes payable. The prior year rate included a $2.3 million favorable adjustment relating to research and development credits. See note 18 to the consolidated financial statements in Item 8. “Financial Statements and Supplementary Data” for a reconciliation of the statutory federal tax rate to the effective tax rates.

Business Segment Results (See note 20 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”):

Specialty Metals Segment

Fiscal 2004 net sales for this segment, which aggregates the Specialty Alloys Operations (SAO), Dynamet, and Carpenter Powder Products (CPP), of $909.1 million were $148.9 million (19.6 percent) higher than the $760.2 million for fiscal 2003. SAO sales increased 21 percent from a year ago due to stronger demand, selective market share gains and pricing actions. Throughout most of fiscal 2004, SAO focused on operational excellence through complexity reduction and on eliminating the sale of less profitable products. As a result, SAO had a 3 percent increase in volume from a year ago. In fiscal 2004, Dynamet’s sales increased 14 percent from a year ago. The increase was due primarily to higher volumes sold to the medical market and pricing actions. CPP’s sales were 15 percent higher than a year ago due to increased demand from the industrial market and pricing actions.

Fiscal 2004 income for the Specialty Metals segment was $86.8 million compared to $38.8 million a year ago. Increased sales combined with lower costs through realized operating efficiencies, including better yields and improved productivity, were the primary contributors to the improvement in income.

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Engineered Products Segment

Net sales for this segment in fiscal 2004 were $110.0 million as compared to $113.3 million for fiscal 2003. The previous fiscal year included $12.9 million from businesses that were subsequently divested. This group of companies benefited from stronger demand from the automotive, medical, aerospace and power generation markets.

Income for the Engineered Products segment for fiscal 2004 was $15.2 million versus $10.9 million for fiscal 2003. The increase in income was primarily due to increased volumes and cost savings from lean and variation reduction initiatives.

Net Pension Credit:

For fiscal 2004, non-cash pension and retiree medical expenses were $16.1 million or $.42 per diluted share. For the same period a year ago, we had non-cash net pension income of $3.4 million or $.09 per diluted share.

The net pension amount is actuarially determined as of each June 30 and typically held constant throughout the fiscal year. Certain events such as legislative actions may result in changes to the pension amounts during the fiscal year.

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into legislation. This Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans, like Carpenter, that provide benefits that are equal to or better than those under Medicare Part D.

In May 2004 the Financial Accounting Standards Board issued a staff position on accounting for the effects of the new Act. Accordingly, we reduced our non-cash pension and retiree medical expenses in the fourth quarter by $0.8 million or $.03 per diluted share.

In addition to the fourth quarter adjustment, we also recognized a retroactive reduction to our third quarter non-cash pension and retiree medical expenses in the amount of $0.8 million or $.03 per diluted share as a result of the new Act, which is reflected in fiscal 2004 net income.

Results of Operations – Fiscal 2003 compared to Fiscal 2002

Overview

Our net loss for fiscal 2003 was $10.9 million or $0.56 per diluted share versus a net loss of $118.3 million or $5.41 per diluted share for fiscal 2002. The fiscal 2002 net loss before the cumulative effect of the accounting change for goodwill (which was $112.3 million or $5.06 per diluted share and is discussed in note 7 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”) was $6.0 million or $0.35 per diluted share.

We improved profitability in fiscal 2003 through cost reduction efforts, productivity and manufacturing improvements and continued to generate significant free cash flow, despite challenging economic conditions in many of the markets that we serve, including two of our key markets – aerospace and power generation.

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In fiscal 2003, we generated $80.2 million of free cash flow in addition to the $79.6 million generated during fiscal 2002. Our efforts to improve working capital management by reducing inventories by $8.2 million and accelerate the collection of accounts receivable, the reduction in capital spending to $8.5 million, a decrease in our dividend and the receipt of $8.5 million cash from the sales of two small business units contributed to the high level of cash generated and the corresponding improved liquidity.

Net Sales

Net sales for fiscal 2003 were $871.1 million or a decrease of 10.8 percent from $977.1 million in fiscal 2002. The $106.0 million decrease in net sales was chiefly due to reduced demand for certain high temperature alloys, titanium alloys and ceramic products primarily due to lower build rates of commercial aircraft and industrial gas turbines. Demand for these materials was further affected by inventory adjustments within their respective supply chains. Partially offsetting the decline in these markets were volume increases for stainless steel sold to customers serving several consumer and industrial markets. Despite increased stainless volumes from a year ago, sales were adversely affected by a shift in product mix towards lower value materials. In addition, sales were adversely effected by excess global stainless steel capacity which continued to place downward pressure on pricing.

International sales decreased 13 percent to $217.9 million from the prior year. Details of sales by geographical region for the past three fiscal years are presented in note 20 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Gross Profit

The gross profit of 17.6 percent for fiscal 2003 was better than the fiscal 2002 gross profit of 16.7 percent. This increase was primarily due to better manufacturing efficiencies and lower costs. In addition, fiscal 2002 was negatively impacted by higher LIFO inventory layer liquidations at increased costs and inefficiencies caused by operating at lower levels. These factors were partially offset by the reduced shipment levels of higher value products sold to the aerospace and power generation markets, increased sales of lower valued stainless wire and rod products, sustained pricing pressures on stainless products and a reduced net pension credit.

Selling and Administrative Expenses

Selling and administrative expenses in fiscal 2003 decreased to $118.8 million or 13.6 percent of net sales versus $142.1 million or 14.5 percent of net sales in fiscal 2002. The $23.3 million, or 16.4 percent, decrease was primarily due to a reduction in salary expense and benefits ($9.8 million), lower professional fees and outside services ($4.9 million) and lower depreciation and amortization expense ($2.5 million), partially offset by the reduced net pension credit ($5.7 million).

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Interest Expense

Fiscal 2003 interest expense of $31.0 million was lower than fiscal 2002 by $3.6 million due to reduced debt levels and lower interest rates.

Other Income, Net

Other income, net was $3.8 million in fiscal 2003 versus $0.5 million in fiscal 2002. Fiscal 2003 included the receipt of $2.8 million of tariffs from the U.S. Customs Department under the “Dumping and Subsidy Offset Act of 2001”, $1.8 million of interest income, a $1.1 million loss on writedowns and disposals of property, plant and equipment and $0.7 million in reserves related to former Talley Industries subsidiaries. Fiscal 2002 included a $4.4 million loss on writedowns and disposals of property, plant and equipment, the receipt of $3.5 million of tariffs and $2.0 million of interest income.

Income Taxes

Our effective tax rate (income tax expense or benefit as a percent of income or loss before taxes) for fiscal 2003 was a benefit of 52.4 percent as compared to a benefit of 54.9 percent last year. The current year rate is more favorable than our statutory rate of 35 percent principally because it includes a $2.3 million favorable adjustment relating to research and development credits. The fiscal 2002 rate was favorably impacted by $1.6 million in research and development credits.

Business Segment Results

Specialty Metals Segment

Net sales for fiscal 2003 for this segment, which aggregates the Specialty Alloys Operations (SAO), Dynamet, and Carpenter Powder Products (CPP), were $760.2 million or $90.6 million (10.6 percent) lower than the $850.8 million for fiscal 2002. SAO sales decreased 10 percent from a year ago due to a weaker sales mix and reduced selling prices. Decreased shipment levels of higher value special alloys and sustained pricing pressures caused by the availability of low priced stainless steel products adversely impacted sales. Volume was marginally higher than fiscal 2002 due mainly to increased sales of lower value stainless wire and rod products. Dynamet’s sales decreased 22 percent in fiscal 2003 versus 2002. The decline in sales was due primarily to lower volumes sold to the aerospace market. CPP’s sales were eight percent higher than fiscal 2002 due primarily to new customer sales and increased sales in Europe.

Income for the Specialty Metals segment was $38.8 million for fiscal 2003, which was $25.9 million higher than fiscal 2002. The increase reflected improved operating efficiencies, lower costs and the effects on segment income of a more modest level of inventory reduction versus a year ago.

Engineered Products Segment

Net sales for this segment for fiscal 2003 were $113.3 million as compared to $128.5 million for fiscal 2002. This group of companies was largely affected by the slowdown in the aerospace and power generation markets. Approximately $10 million of the decline in sales was due to the divestiture of certain businesses.

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Income for the Engineered Products segment for fiscal 2003 was $10.9 million versus $10.5 million in fiscal 2002. The increase in segment income, despite the lower sales volume and increased quality and environmental reserves, primarily reflects the benefit of cost savings initiatives.

Net Pension Credit:

The net pension credit represents income relating to our overfunded defined benefit pension plan (“GRP”) less an expense for other post retirement benefit plans and other underfunded defined benefit pension plans. The net pension credit was $3.4 million for fiscal 2003 versus $17.1 million for fiscal 2002. The lower level of the net pension credit was due primarily to the equity markets’ investment losses on the pension and post retirement plan assets. The excess of plan assets over the projected benefit obligation of the GRP Plan was $28.5 million at June 30, 2003.

Management’s Discussion of Liquidity and Capital Resources

We have maintained the ability to generate cash to meet our needs through cash flow from operations, management of working capital and the flexibility to use outside sources of financing to supplement internally generated funds.

Free cash flow, defined as net cash provided before financing activities but after dividends and excluding the purchases and sales of marketable securities, was $88.4 million in fiscal 2004 versus $80.2 million a year ago. Free cash flow in the current year was after a $25 million voluntary contribution to a VEBA trust that funds post-retirement medical expenses.

Our cash flow from operations was $94.1 million for fiscal 2004 and $92.2 million a year ago. Accounts receivable, after adjusting for the effects of the receivables purchase facility, were $40.5 million higher than a year ago due to the increased level of sales. However, days sales outstanding were reduced to 49 days from 54 days a year ago. Inventories of $185.0 million were $4.3 million higher than a year ago also due to the increased level of sales. Capital expenditures for plant, equipment and software were $8.0 million during fiscal 2004 versus $8.5 million and $26.7 million for fiscal 2003 and 2002, respectively. Included in the prior year cash flow was an $18.3 million tax refund and $8.5 million proceeds on the sale of businesses.

In May 2003, we issued $100 million of 10-year senior unsecured notes with a coupon of 6.625 percent. Proceeds from the sale of the notes were used to redeem approximately $90 million of our 9 percent debentures due 2022. The refinancing eliminated a mandatory sinking fund requirement of $5 million annually between 2004 and 2021. The debentures were callable at a price of 103.82 percent plus accrued interest through the redemption date. The remaining proceeds were used for general corporate purposes. In connection with the early redemption, a special charge of $4.5 million was recorded, including the price paid above par, unamortized discount and debt issuance costs. In addition, we paid $0.9 million in fees associated with the debt issuance.

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In December 2003, we purchased $20 million of previously issued, 6.95 percent Series A Medium Term Notes due June 2005 on the open market. In connection with the early redemption, a special charge of $1.5 million was recorded, including unamortized issue costs associated with these Notes.

In September 2003, we increased the commitments under our unsecured revolving credit facility from $125 million to $150 million. The revolving credit facility, which had an initial term of five years, will expire in November 2006.

Also in September 2003, we decided not to renew our $75 million, 364-day unsecured credit facility. The decision was made in conjunction with the decision to increase our revolving credit.

On September 3, 2002, our lenders and we amended the credit facility. The amendment reduced the minimum coverage under the EBITDA-to-interest covenant for the trailing four quarterly periods ended September 30, 2002, December 31, 2002 and March 31, 2003. Thereafter, the covenant reverted to the original terms under the credit facility.

In addition to the EBITDA-to-interest covenant, we are required to maintain a total debt to total capital ratio below 55 percent. As of June 30, 2004, we are in compliance with all covenants.

At June 30, 2004, we had approximately $2.2 million in outstanding foreign currency loans and $10.8 million of issued letters of credit under the revolving credit facility. The balance of the revolving credit facility ($137 million) was available to us. In addition to this facility, we had $50 million available to us under an Accounts Receivable Purchase Facility.

In December 2001, Carpenter and CRS Funding Corp., a wholly owned consolidated Special Purpose Entity, entered into a $75 million three-year accounts receivable purchase facility (“Purchase Facility”) with an independent financial institution. In March 2003, we reduced this facility to $50 million. As of June 30, 2004, there is no utilization of the facility.

For the years ended June 30, 2004, 2003 and 2002, interest cost totaled $23.8 million, $31.1 million, and $34.9 million, of which $0.1 million, $0.1 million, and $0.3 million, respectively, were capitalized as part of the cost of plant, equipment and software.

A component of our debt refinancing strategy is to maintain a certain level of floating rate debt relative to our fixed rate debt. In order to achieve this targeted level, we use interest rate swaps. These instruments will obligate us to pay a swap counterparty either a floating rate of interest in return for us receiving a fixed rate of interest or obligate us to pay a fixed rate of interest in return for us receiving a floating rate of interest. At June 30, 2004, and 2003, we had entered into interest rate swaps with a notional principal amount of $100 million and $86.0 million, respectively.

Net debt (see page 25 for Carpenter’s definition), defined as total debt net of cash and marketable securities and including amounts outstanding under our Purchase Facility, was reduced to $249.7 million at June 30, 2004 or 31.7 percent of capital. This net debt level was $106.6 million lower than a year ago. Cash and marketable securities at June 30, 2004 was $105.4 million versus $53.5 million a year ago.

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We believe that our current financial resources, both from internal and external sources, will be more than adequate to meet our foreseeable needs. At June 30, 2004, we had approximately $187 million available under our credit facilities.

Non-GAAP Financial Measures

The following tables provide additional information regarding certain non-GAAP financial measures. Our definitions and calculations of these items may not necessarily be the same as those used by other companies.

FREE CASH FLOW

Management believes that the presentation of free cash flow provides useful information to investors regarding our financial condition because it is a measure of cash generated which management evaluates for alternative uses. It is management’s current intention to apply excess cash to the repayment of debt when economically feasible.

Net cash provided from operations includes the addition of depreciation and amortization to net income. The level of purchases of property, equipment and software was considerably lower than the level of depreciation and amortization in fiscal years 2002 through 2004, due primarily to the significant level of capital expenditures in fiscal years 1997 through 2001. The current level may not be indicative of future purchase levels.

NET DEBT

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Management believes that the presentation of net debt provides useful information to investors regarding our financial condition because accumulated cash is expected to be used for debt repayment until a targeted debt to capital ratio is achieved.

Critical Accounting Policies and Estimates:

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to bad debts, customer claims, inventories, goodwill, intangible assets, income taxes, restructuring, pensions and other postretirement benefits, contingencies and litigation, environmental liabilities, and derivative instruments and hedging activities.

We believe the following are the critical accounting policies impacting the preparation of our consolidated financial statements:

We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. We perform ongoing credit evaluation on our customers. Should the financial condition of our customers deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories are stated at the lower of cost or market. The cost of inventories is determined primarily using the last-in, first-out (LIFO) method. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between our cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory writedowns may be required.

Our prepaid pension asset on the balance sheet is primarily a result of the overfunded status of Carpenter’s General Retirement Plan and the historical recording of pension credits on our consolidated statement of operations. The amount of the pension credit or expense, which is determined annually, is based upon the value of the assets in the pension trust at the beginning of the fiscal year as well as actuarial assumptions, such as discount rate and long-term rate of return on plan assets. The assumed long-term rate of return on pension plan assets is reviewed at each year end based on the plan’s investment policies, an analysis of the historical returns of the capital markets, and current interest rates. The plan’s current allocation policy is to have approximately 60 percent U.S. and international equities and 40 percent fixed income. The discount rate for the U.S. plan is determined by reference to Moody’s AA corporate bond index. The fluctuations in stock and bond markets could cause actual investment results to be significantly different from those assumed, and therefore, significantly impact the valuation of the assets in our pension trust. Changes in actuarial assumptions could significantly impact the accounting for the pension assets and liabilities. If the assumed long-term rate of return on plan assets was changed by 1 percent, the net pension expense would change by approximately $7.0 million. If the discount rate was changed by 0.25 percent, the net pension expense would change by approximately $1.9 million.

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Long-lived assets are reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable through estimated future undiscounted cash flows. The amount of the impairment loss is the excess of the carrying amount of the impaired assets over the fair value of the assets based upon estimated future discounted cash flows. We evaluate long-lived assets for impairment by individual business unit. Changes in estimated cash flows could have a significant impact on whether or not an asset is impaired and the amount of the impairment.

Goodwill is not amortized, but instead is tested for impairment, at least annually. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value, including goodwill. The fair value is estimated based upon discounted cash flow analysis and the use of market multiples. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting unit’s goodwill to its implied fair value.

Environmental expenditures that pertain to current operations or to future revenues are expensed or capitalized consistent with Carpenter’s capitalization policy for property, plant and equipment. Expenditures that result from the remediation of an existing condition caused by past operations and that do not contribute to current or future revenues are expensed. Liabilities are recognized for remedial activities when the remediation is probable and the cost can be reasonably estimated. Recoveries of expenditures for environmental remediation are recognized as assets only when recovery is deemed probable. Estimated liabilities are not discounted to present value, but estimated assets are measured on a discounted basis.

Our current risk management strategies include the use of derivative instruments to reduce certain risks. The critical strategies include: (1) the use of commodity options to fix the price of a portion of anticipated future purchases of certain raw materials and energy to offset the effects of changes in the costs of those commodities, and (2) the use of foreign currency forwards and options to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates. These derivatives have been designated as cash flow hedges and unrealized net gains and losses are recorded in the accumulated other comprehensive income (loss) component of stockholders’ equity. We evaluate all derivative instruments each quarter to determine that they are highly effective. Any ineffectiveness is recorded in our consolidated statement of operations. If the anticipated future transactions are no longer expected to occur, unrealized gains and losses on the related hedges would be reclassified to the consolidated statement of operations.

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Contractual Cash Obligations

At June 30, 2004, we had the following contractual cash obligations and other commercial commitments and contingencies:

We have entered into purchase commitments primarily for various key raw materials at market related prices, all made in the normal course of business. The purchase commitments covered by these agreements aggregate approximately $233.2 million, substantially all of which relates to fiscal 2005.

In addition, we had $10.8 million of outstanding letters of credit as of June 30, 2004.

Market Sensitive Instruments and Risk Management

We use derivative financial instruments to reduce certain types of financial risk. Raw material cost fluctuations for our Specialty Metals Segment are normally offset by selling price adjustments, primarily through the use of surcharge mechanisms and base price adjustments. Firm price sales contracts involve a risk of profit margin decline in the event of raw material increases. We reduce this risk on certain raw materials by entering into commodity forward contracts on a portion of our requirements, which are effective hedges of the risk.

We use forwards and options to fix the price of a portion of anticipated future purchases of certain energy to offset the effects of changes in the costs of these commodities.

Fluctuations in foreign currency exchange rates could subject us to risk of losses on anticipated future cash flows from our foreign operations. Foreign currency forward contracts are used to hedge certain foreign exchange risk.

All hedging strategies are reviewed and approved by senior financial management before being implemented. Senior financial management has established policies regarding the use of derivative instruments that prohibit the use of speculative or leveraged derivatives. Market valuations are performed at least quarterly to monitor the effectiveness of our risk management programs.

The status of our financial instruments as of June 30, 2004, is provided in note 10 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”. Assuming on June 30, 2004 (a) an instantaneous 10 percent decrease in the price of raw materials and energy for which we have commodity forward contracts, our

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results of operations would not have been materially affected, (b) a 10 percent strengthening of the U.S. dollar versus foreign currencies for which foreign exchange forward contracts existed, our results of operations would not have been materially affected, (c) a 10 percent increase in our annual interest rate on short-term debt, our results of operations would not have been materially affected, and (d) a 10 percent decrease in the market value of investments in corporate-owned life insurance, our results of operations would not have been materially affected.

Contingencies

Environmental

We are subject to various federal, state, local and foreign environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect our costs of operations, compliance costs to date have not been material. We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a potentially responsible party (“PRP”) with respect to certain third-party Superfund waste disposal sites and other third party owned sites. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRPs at these Superfund sites have been determined. The liability for future environmental remediation costs is evaluated by management on a quarterly basis. We accrue amounts for environmental remediation costs that represent management’s best estimate of the probable and reasonably estimable costs related to environmental remediation. During fiscal 2004, an additional $0.6 million was accrued related to three of our Superfund sites. During fiscal 2003, an additional $1.75 million was accrued for one of our current operating facilities and for a manufacturing site of a former subsidiary of Talley Industries, Inc. Also related to the former Talley subsidiary site, $2.25 million was established as the fair value of land received as part of the settlement in a bankruptcy proceeding of a claim under an indemnification agreement. This amount was included in other assets on the Consolidated Balance Sheet. The liabilities recorded for environmental remediation costs at Superfund sites, at other third party-owned sites and at Carpenter-owned current or former operating facilities remaining at June 30, 2004, 2003 and 2002, were $6.7 million, $6.8 million and $5.8 million, respectively. The estimated range at June 30, 2004 of the reasonably possible future costs of remediation at Superfund sites, at other third party-owned sites and at Carpenter-owned current or former operating facilities is between $6.7 million and $11.1 million.

Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRPs. Based upon information currently available, such future costs are not expected to have a material effect on our financial position, results of operations or cash flows. However, such costs could be material to our financial position, results of operations or cash flows in a particular future quarter or year.

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Other

We are also defending various claims and legal actions, and are subject to contingencies that are common to our operations, including those pertaining to product claims, commercial disputes, employment actions, employee benefits, personal injury claims and tax issues. We provide for costs relating to these matters when a loss is probable and the amount is reasonably estimable. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, management believes that the total ultimate liability will not have a material effect on our financial position, results of operations or cash flows. However, such costs could be material to our financial position, results of operations or cash flows in a particular future quarter or year.

Future Outlook

We expect to build on the momentum generated in fiscal 2004 by intensifying our efforts in lean and variation reduction. We also expect additional benefits from our strategy to price products and services for the value delivered to our customers and from our initiative to reduce complexity by eliminating less profitable products. We anticipate that our fiscal 2005 operating performance will also benefit from strong demand across our major end-use markets, including aerospace.

In fiscal 2005, we expect that our net pension expense will be reduced to $2.4 million or $.01 per diluted share. This compares to an adjusted full year net pension expense of $16.1 million or $.42 per diluted share in fiscal 2004. The reduction in expense from fiscal 2004 reflects several factors including higher returns on assets in our largest pension plan, an increase in the discount rate to 6.25 percent from 6.0 percent as a result of a higher interest rate environment and the full-year favorable effects of Medicare Part D. Our largest pension plan remains well funded, and as in prior years, we are not required to make a cash contribution to the plan.

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Forward-looking Statements

This Form 10-K contains various “Forward-looking Statements” pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements, which represent our expectations or beliefs concerning various future events, include statements concerning future revenues and continued growth in various market segments. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected, anticipated or implied. The most significant of these uncertainties are described in this Form 10-K. They include but are not limited to: 1) the cyclical nature of the specialty materials business and certain end-use markets, including aerospace, power generation, automotive, industrial and consumer, all of which are subject to changes in general economic and financial market conditions; 2) our ability to ensure adequate supplies of raw materials and to recoup increased costs of electricity, natural gas, and raw materials, such as nickel, through increased prices and surcharges; 3) domestic and foreign excess manufacturing capacity for certain alloys that we produce; 4) fluctuations in currency exchange rates, resulting in increased competition and downward pricing pressure on certain of our products; 5) the degree of success of government trade actions; 6) fluctuations in capital markets that could impact the valuation of the assets in our pension trusts and the accounting for pension assets; 7) the potential cost advantages that new competitors or competitors who have reorganized through bankruptcy may have; 8) the transfer of manufacturing capacity from the United States to foreign countries; 9) the consolidation of customers and suppliers; and 10) the potential that our customers may substitute alternate materials or adopt different manufacturing practices that replace or limit the suitability of our products. Any of these factors could have an adverse and/or fluctuating effect on our results of operations. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We undertake no obligation to update or revise any forward-looking statements.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

The information required by this item is incorporated herein by reference to Item 7 of this Annual Report on Form 10-K under the caption “Market Sensitive Instruments and Risk Management”.

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements and Supplementary Data

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Responsibilities for Financial Reporting and Internal Control

Carpenter’s financial statements included in this Annual Report on Form 10-K were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles in the United States of America and, as such, include amounts based on management’s best judgments and estimates. Financial information elsewhere in this Annual Report is consistent with that in the financial statements.

Carpenter maintains a strong system of internal controls, supported by a code of conduct, designed to provide reasonable assurance that assets are safeguarded and transactions are properly executed and recorded for the preparation of financial information. There are limits in all systems of internal controls, based on recognition that the cost of the system should not exceed the benefits to be derived. We believe Carpenter’s system of internal controls provides this appropriate balance. The system of internal controls and compliance is continually monitored by Carpenter’s internal audit staff.

The consolidated financial statements in this annual report have been audited by PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, engaged by the Audit/Finance Committee of the Board of Directors. Their report appears on the next page.

The Audit/Finance Committee of the Board of Directors, composed of independent directors who are neither current nor former employees of Carpenter, meets regularly with management, Carpenter’s internal auditors and our independent registered public accounting firm to consider audit results and to discuss significant internal control, auditing and financial reporting matters. Both the independent registered public accounting firm and internal auditors have unrestricted access to the Audit/Finance Committee.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of Carpenter Technology Corporation:

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of comprehensive income (loss), of changes in stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Carpenter Technology Corporation and its subsidiaries at June 30, 2004 and June 30, 2003, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in note 1 to the consolidated financial statements, on July 1, 2001, Carpenter adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

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Consolidated Statement of Income

Carpenter Technology Corporation

For the years ended June 30, 2004, 2003 and 2002

See accompanying notes to consolidated financial statements.

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Consolidated Statement of Cash Flows

Carpenter Technology Corporation

For the years ended June 30, 2004, 2003 and 2002