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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 þ   ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT       OF 1934 For the Fiscal Year Ended December 31, 2004 OR  ̈  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE       ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 1-31926 International Steel Group Inc. (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    71-0871875(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)4020 Kinross Lakes Parkway, Richfield, Ohio
    
    44286-9000(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (330) 659-9100
Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock par value $0.01
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:
None Indicate by check mark 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 such filing requirements for the past 90 days. þ  ̈
 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. Yes þ      No  ̈ Indicate by check mark whether the registrant is an accelerated filer (as defined in rule
12b-2 of the Exchange Act. Yes þ      No  ̈ Aggregate market value of common equity held by non-affiliates as of June 30, 2004:
$2,714 million. For purposes of this calculation only, ISG
common stock beneficially owned by directors and officers of ISG has
been treated as held by affiliates. Number of common shares outstanding as of February 28, 2005: 100,035,950




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TABLE OF CONTENTS PART IITEM 1. BUSINESS
    
    
    1ITEM 2. PROPERTIES
    
    
    21ITEM 3. LEGAL PROCEEDINGS
    
    
    24ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    24PART IIITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
    
    
    24ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
    
    
    26ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    27ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    38ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    39ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    39ITEM 9A. CONTROLS AND PROCEDURES
    
    
    39PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    46ITEM 11. EXECUTIVE COMPENSATION
    
    
    50ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    55ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    58ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
    
    
    59PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    60SIGNATURES
    
    
    66Report
of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Statements of Operations
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Stockholders Equity
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6List of Subsidiaries
    
    
    3Consent
of Independent Registered Public Accounting Firm
    
    
    4Power of Attorney
    
    
    5CEO 302 Certification
    
    
    6CFO 302 Certification
    
    
    7906 Certifications
    
    
    8Exhibit 10.12 1st Amend to Pellet Sale and Purchase AgreementExhibit 10.34 ISG Managers Incentive PlanExhibit 10.35 ISG Stock Appreciation Rights SummaryExhibit 14.1 ISG Code of Business ConductExhibit 21.1 SubsidiariesExhibit 23.1 ConsentExhibit 24.1 Power of AttorneyExhibit 31.1 CertificationExhibit 31.2 CertificationExhibit 32.1 Certification




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PART I 
 ITEM 1. BUSINESS Our Company International Steel Group Inc. (ISG) was formed in early 2002 by WL Ross & Co. LLC (WLR) to
acquire and operate globally competitive steel facilities. Since formation, we have grown to
become one of the largest integrated steel producers in North America with annual raw steel
production capability of about 23 million net tons. We ship a variety of steel products from 13
major steel producing and finishing facilities in eight states. ISG has grown by acquiring out of
bankruptcy the steelmaking assets of LTV Corporation (LTV), Acme Steel Corporation (Acme),
Bethlehem Steel Corporation (Bethlehem), Weirton Steel Corporation (Weirton) and Georgetown Steel
Corporation (Georgetown). We operate principally in one segment of business, carbon steel, and
substantially all of our operations are in the United States. In October 2004, Ispat International N.V. (Ispat), LNM Holdings N.V. (LNM) and ISG agreed to
merge in a two-step transaction. The first step, the acquisition of privately held LNM by Ispat
for 100% stock consideration, was completed in December 2004. The new entity, renamed Mittal Steel
N.V. (Mittal), will then acquire ISG for a combination of $21 per share in cash and a number of
Mittal shares equal to $21 divided by the average closing price of Mittal for the 20 trading days
prior to closing, up to a maximum of .6087 shares and a minimum of .4793 shares. The value in the
merger will be $42 per ISG share if the average closing price of Mittal shares for the 20 trading
days prior to the merger is between $34.50 and $43.81 per share. ISG received early termination of
the waiting period under Hart-Scott-Rodino Act in December 2004. The merger of ISG and Mittal is
subject to approval by the shareholders of ISG and Mittal at meetings scheduled on April 12, 2005
and satisfaction of other customary closing conditions. The transaction is expected to be
completed on or around April 13, 2005. In April 2002, ISG acquired out of bankruptcy the principal steelmaking and steel finishing
assets of LTV, including the Cleveland, Indiana Harbor and Hennepin facilities, for $83.4 million
in cash plus certain assumed liabilities. These assets were idle when acquired. In addition, in May
2002, ISG purchased semi-finished and raw material inventories from LTV for $52.4 million in cash. In October 2002, ISG acquired out of bankruptcy Acmes sheet strip mill and basic oxygen
furnace in Riverdale, Illinois for $60.9 million in cash, plus debt and certain assumed
liabilities. These assets were idle when acquired. ISG supplies Riverdales basic oxygen furnace
with hot metal from blast furnaces at its Indiana Harbor and Burns Harbor facilities. In May 2003, ISG acquired out of bankruptcy substantially all of the assets of Bethlehem and
its subsidiaries for $822.6 million in cash plus certain assumed liabilities. This amount is net
of cash acquired and $41.1 million in cash received subsequent to the closing from Bethlehem as
required in the acquisition agreements for working capital adjustments and amounts not needed for
secured, priority and administrative claims. Also, this amount includes payments of $81.6 million
related to the transition assistance program for United Steelworkers of America (USWA) represented
former Bethlehem employees. In the Bethlehem asset acquisition, ISG acquired, among other things,
steelmaking and finishing facilities at Burns Harbor, Indiana; Sparrows Point, Maryland;
Coatesville, Pennsylvania; and Steelton, Pennsylvania, and rolling and finishing facilities, at
Conshohocken, Pennsylvania; Lackawanna, New York; and Columbus, Ohio. The Bethlehem asset
acquisition broadened ISGs product offerings and expanded its geographic presence. In May 2004, ISG acquired out of bankruptcy substantially all of the assets of Weirton, based
in Weirton, West Virginia for approximately $187 million cash plus certain assumed liabilities.
Weirton is a significant producer of hot rolled, coated and tin mill products. In June 2004, ISG acquired out of bankruptcy substantially all of the assets of Georgetown,
located in Georgetown, South Carolina for approximately $18 million cash plus certain assumed
liabilities. Georgetown was idle when acquired, restarted in the third quarter 2004 and has the
capability to produce high-quality wire rod products, which are used to make low carbon fine wire
drawing, wire rope, tire cord, high-carbon machinery, and upholstery springs. 1




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In July 2004, ISG acquired a hot briquetted iron (HBI) facility in Point Lisas, Trinidad and
Tobago for approximately $18 million in cash, including payment at the closing of certain assumed
liabilities. The facility was idle when acquired and restarted in November 2004. Steel Production Steel is produced either by integrated steel facilities or electric arc furnaces. Integrated
mills use blast furnaces to produce hot metal typically from iron ore, limestone and coke. Coke is
a refined carbon product produced by firing coal in large coke ovens. Hot metal is then converted
through the basic oxygen process into liquid steel where it can be metallurgically refined. For
flat rolled steel products, liquid steel is either teemed into ingots for later processing or cast
into slabs in a continuous caster machine. The slabs are further shaped or rolled at a plate mill
or hot strip mill. In the production of sheet products, the hot strip mill process may be followed
by various finishing processes, including pickling, cold-rolling, annealing, tempering or coating
processes, including galvanizing (zinc coating). These various processes are often distinct steps
undertaken at different times rather than during a continuous process and may take place in
separate facilities. Steel produced by integrated mills tends to be cleaner or purer than steel
produced by electric arc furnaces since less scrap is used in the production process and scrap
contains non-ferrous tramp elements. These purer products are more often required for value-added
applications. A mini-mill uses an electric arc furnace to melt steel scrap or scrap substitutes, which for
flat rolled products is then cast into slabs in a continuous casting process. The slabs are then
rolled into finished product. Mini-mills are designed to accommodate shorter production runs with
relatively fast product change-over time. Mini-mills generally produce a narrower range of steel
products than integrated producers and their products tend to be more commodity in nature; however,
mini-mills have historically enjoyed certain competitive advantages as compared to integrated
mills, including lower required capital investment and lower labor costs per ton shipped. ISGs Products ISGs principal products include a broad range of hot-rolled, cold-rolled and
coated sheets, tin mill products, carbon and alloy plates, wire rod, rail products and
semi-finished shapes to serve the automotive, construction, pipe and tube, appliance, container and
machinery markets. All of these products are available in standard carbon grades as well as high
strength, low alloy grades for more demanding applications. The following chart sets forth ISGs
respective product mixes based on shipments for 2004, 2003 and 2002 as well as on a pro forma basis
as if the Bethlehem and Weirton acquisitions had been consummated on January 1, 2003. Actual
    
    
    Pro Forma2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003Hot Rolled
    
    
    41
    %
    
    
    46
    %
    
    
    71
    %
    
    
    41
    %
    
    
    41
    %Cold Rolled
    
    
    19
    %
    
    
    19
    %
    
    
    22
    %
    
    
    18
    %
    
    
    17
    %Coated
    
    
    21
    %
    
    
    20
    %
    
    
    7
    %
    
    
    21
    %
    
    
    21
    %Plate
    
    
    10
    %
    
    
    8
    %
    
    
    
    
    
    
    9
    %
    
    
    8
    %Tin Plate
    
    
    5
    %
    
    
    3
    %
    
    
    
    
    
    
    7
    %
    
    
    9
    %Rail and other
    
    
    4
    %
    
    
    4
    %
    
    
    
    
    
    
    4
    %
    
    
    4
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Hot-Rolled Products.All coiled flat-rolled steel is initially hot-rolled by passing a slab
through a multistand rolling mill to reduce its thickness to less than 5/8 inch. Hot-rolled steel
destined for the sheet market can be either shipped as black band, or cleaned in an acid bath and
sold as pickled band. These products are used in non-critical surface applications such as
automotive frames and wheels, construction products, pipe, off-highway equipment and guardrails. Cold-Rolled Products.Cold-rolled sheet is hot-rolled coil that has been further processed
through a pickler and then passed through a rolling mill without reheating until the desired gauge,
or thickness, and other physical 2




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properties have been achieved. Cold-rolling reduces gauge and hardens the steel. Further processing
through an annealing furnace and a temper mill improves ductility and formability. Cold-rolling can
also impart various surface finishes and textures. Cold-rolled sheet is used in among other things
steel applications that demand higher surface quality, such as exposed automobile and appliance
panels. Cold-rolled sheet prices are usually higher than hot-rolled steel prices. For certain
applications, cold-rolled sheet is coated or painted. Coated Products.Either hot-rolled or cold-rolled coil may be coated with zinc, aluminum or a
combination thereof to render it corrosion resistant and to improve its paintability. Hot-dipped
galvanized, galvannealed, GalvalumeTM, electrogalvanized and aluminized products are
types of coated steel. These are also the highest value-added sheet products because they require
the greatest degree of processing and usually have the strictest quality requirements. Coated
steel products are generally used in applications such as automobiles, household appliances,
roofing and siding, heating and air conditioning equipment, air ducts, switch boxes, chimney flues,
awnings and grain bins. Plate.Plate is steel that is generally more than 3/16 inch thick. It can be made on either a
coiled plate mill up to 1-inch thick or a discrete plate mill. The coiled plate or discrete mill
plate is then cut into sections for specific end uses. Commodity steel plate is used in a variety
of applications such as storage tanks, ships and railcars, large diameter pipe and machinery parts.
More specialized steel plate, such as high-strength-low alloy, heat-treated, or alloy plate, can
have superior strength and performance characteristics for particular applications such as the
manufacture of construction, mining and logging equipment; pressure vessels and oil and gas
transmission lines; and the fabrication of bridges and buildings. Quenched and tempered plate is
harder and stronger and can be used in products such as military armor and hard rock mining
equipment. Tin Mill.Tin mill sheet steel is used to produce food and other containers. It is available
as black plate, tin plate and tin-free steel. Black plate is an uncoated thin gauge cold rolled
steel, tin plate is black plate electrolytically plated with metallic tin and tin-free steel is
black plate that has been electrolytically plated with metallic chromium and chromium oxides. Both
tin plate and tin-free steel undergo a plating process whereby the molecules from the positively
charged tin or chromium anode attach to the negatively charged sheet steel. The thickness of the
coating is readily controlled through regulation of the voltage and speed of the sheet through the
plating area. Rail.Billets and blooms are fed through rollers that form rail. Rail is available in a
number of sections determined by their weight per yard and relative strengths. Rail is sold to
railroad companies and regional transit authorities for new track projects as well as the repair of
existing track. Wire Rod.Billets are fed through rolls that form wire rod. Wire rod is available in a variety
of grades and dimensions for further processing into wire products or fabricated to make fasteners. Customers ISG sells its products to a highly diversified customer base representing all major
steel-consuming markets as well as to third-party processors and service centers. Its customers are
primarily in the Midwest and along the eastern seaboard of the United States. No single customer
represented more than 10% of ISGs total consolidated revenues in 2003 and 2004. Direct Sales to End-Users.ISG sells directly to end-users representing a wide range of
consuming markets, including automotive, construction, appliance, transportation, container,
machinery and equipment. Its sales, technical and engineering staff are organized with both a
specific product (plate, flat rolled, tinplate and rail products) and geographic market focus. Sales to Intermediate Processors and Steel Service Centers.A significant portion of ISGs
sales are to intermediate processors and steel service centers. These processors and steel service
centers typically act as intermediaries between steel producers and various end-user manufacturers
that require further processing or inventory programs. The additional services performed by steel
service centers and processors include pickling, galvanizing, cutting to length, slitting to size,
leveling, blanking, shape correcting, edge rolling, shearing and stamping. Contract and Spot Sales. A significant percentage of ISGs sales in 2003 were sold on the spot
market with price 3




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terms of three months or less. In 2004, a shift towards more contract business was achieved, with
over half of sales for 2004 being through longer-term customer contracts. International Sales.Historically, the opportunities for sales outside the United States of
steel products have been intermittent and highly competitive. ISGs export sales were $337.9
million in 2004, $165.1 million in 2003 and $2.7 million in 2002. Sales, Customer Service and Product Development To service ISGs customer base, ISG has a dedicated sales force of approximately 90 employees,
who are principally aligned with its business units. Each of ISGs major businesses has a dedicated
sales and customer service staff on site that is responsible for the products produced by that
particular facility. Although each sales group reports to a specific facility, it has
responsibility to represent products and services produced by other divisions to increase customer
convenience and maximize cross-selling opportunities. ISGs overall sales strategy is directed by
management at its corporate office and implemented by the division sales groups at each of its
businesses. Technical resources exist within each division sales group, supported by plant technical
personnel to help customers specify the proper material for each end-use. ISG has created an
automotive sales group at its Burns Harbor facility to act as the focal point for ISGs automotive
sales, service and development effort. In connection with the Bethlehem acquisition, ISG acquired a research and product development
facility and staff in Bethlehem, Pennsylvania. During 2004 and 2003, ISG spent approximately $9
million and $5 million, respectively, for research and development. In 2002, ISG did not have
spending for research and development. Backlog ISG had approximately $1.7 billion and $1.3 billion of backlog orders on December 31, 2004 and
2003, respectively. These backlogs consist of customer commitments that generally can be modified
or terminated at any time prior to production. Typically, customers will modify or cancel orders
due to major shifts in their inventory levels or market conditions that change their need for the
product. ISG estimates that substantially all of its backlog will be shipped during the current
year. ISG does not believe that its backlog data and comparisons of that data as of different dates
are reliable indicators of future sales or future shipments. Competition Competition within the steel industry, both in the United States and globally, is
intense and expected to remain so. ISGs primary U.S. competitors are United States Steel
Corporation, Nucor Corporation, AK Steel Holding Corporation, Ispat Inland Inc. and IPSCO Inc. The
steel market in the United States is also served by a number of non-U.S. sources and U.S. supply is
subject to changes in worldwide demand and currency fluctuations, among other factors. More than 35 U.S. companies in the steel industry have declared bankruptcy since 1997 and have
either ceased production or more often continued to operate after being acquired or reorganized. In
addition, many non-U.S. steel producers are owned and subsidized by their governments and their
decisions with respect to production and sales may be influenced by political and economic policy
considerations rather than by prevailing market conditions. The steel industry is highly cyclical
in nature and subject to significant fluctuations in demand as a result of macroeconomic changes in
global economies, including those resulting from currency volatility. The global steel industry is
also generally characterized by overcapacity, which can result in downward pressure on steel prices
and gross margins. ISG competes with other flat-rolled steel producers (both integrated steel mills and
mini-mills) and producers of plastics, aluminum, ceramics, carbon fiber, concrete, glass, plastic
and wood that can be used in lieu of flat-rolled 4




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steels in manufactured products. Mini-mills generally offer a narrower range of products than
integrated steel mills but can have some cost advantages as a result of their different production
processes. The competition in the discreet plate business, both carbon and alloy, is somewhat fragmented
with ISG having the largest capability and the widest product range domestically. Price, quality, delivery and service are the primary competitive factors in all markets that
ISG serves and vary in relative importance according to the product category and specific customer. Raw Materials ISGs business depends on continued access to reliable supplies of various raw materials,
principally, iron ore, coal, coke, scrap, energy and industrial gases. ISG believes there will be
adequate sources of its principal raw materials to meet its near term needs, although probably at
higher prices than in the past. Iron Ore For an integrated steelmaker, iron ore is an essential element in the production of steel. In
2004, ISG consumed approximately 16.5 million net tons of iron ore pellets and 4.1 million net tons
of iron ore fines and other iron ore materials. In 2005, ISG expects to consume about 18.9 million
net tons of pellets and about 4.2 million net tons of iron ore fines. Substantially all of our
2005 ore requirements are under contract or supplied by entities in which ISG maintains an
ownership interest. During 2004, ISG signed a five-year agreement to purchase 1.7 million net tons of iron ore
pellets annually, plus or minus 10% at ISGs option, for its Sparrows Point plant. This agreement
will renew on an annual basis after 2008, unless either party gives one years notice. Price is to
be determined annually based on that years European market price. Cleveland-Cliffs
Inc (see PART III, ITEM 13, CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS) is under a
noncancellable contract to supply all our requirements for iron ore pellets through 2016 for our
Cleveland and Indiana Harbor facilities. This agreement will renew on an annual basis after 2016,
unless either party gives at least two years advance notice of termination. The agreement
specifies product quality requirements and provides ISG with the right to negotiate price
adjustments or to refuse to accept shipments of products in some circumstances. The prices ISG pays
for iron ore pellets under the agreement are subject to annual adjustments for changes in certain
price indices and selling prices for certain steel products. With the Weirton acquisition, ISG
assumed Weirtons agreement with Cleveland-Cliffs Inc and agreed to certain amendments as part of
the assignment. Cleveland-Cliffs will supply all of Weirtons iron ore pellets for the period 2006
to 2018 and partial requirements for 2004 and 2005. The other terms of the agreement are similar to
ISGs other iron ore pellet contract with Cleveland-Cliffs Inc but only require a one year advance
notice of termination. United States Steel Corporation also supplied a portion of the requirements
for iron ore pellets at the Weirton facility in 2004 and will supply a portion in 2005. ISGs share of estimated recoverable reserves in the Hibbing Taconite (for additional
information, see ITEM II, BUSINESS PROPERTIES  Principal Operating Facilities  Joint Ventures
in this Annual Report) iron ore mine joint venture at December 31, 2004 is 186 million net tons of
iron ore pellets. This mine and its processing facilities supply substantially all of Burns
Harbors current annual iron ore pellet requirements and are operated by Cleveland-Cliffs Inc,
which also owns 23% of the joint venture. ISG has contracts with three international iron ore producers to supply approximately three
quarters of its iron ore fines and lump ore requirements at prices determined annually based on the
European or Japanese market settlement prices. The balance is purchased in the open market. 5




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Coal and Coke Coke, a refined carbon product produced by baking coal to drive off volatile matter, is the
principal fuel used to produce hot metal in ISGs blast furnaces. There has been a significant
increase in global coke demand in recent years driven by higher blast furnace production. From
1999 to 2004, global blast furnace iron production increased by about 190 million net tons with
almost three-fourths of this growth occurring in China. Coke supply has not kept up with this
increased demand. Coke capacity has declined during this same period by about 5.5 million net tons
in the U.S., principally due to the increased cost of complying with environmental regulations
creating a demand for merchant coke and driving domestic coke prices higher. In 2004, ISG consumed about 5.9 million dry net tons of coke and expects to consume about 6.1
million dry net tons of coke in 2005. ISGs coke batteries in Warren, Ohio and Burns Harbor,
Indiana are expected to supply approximately 2.2 million net tons in 2005. ISG also has contracts
through 2005 for 0.3 million net tons per year, a contract through 2006 for 0.3 million net tons
per year and a contract through 2020 for 0.7 million net tons per year. In 2003, ISG signed an
agreement to purchase 0.55 million net tons annually beginning in 2005 from a coke oven currently
being constructed. In July 2004, ISG signed a letter of intent to double the size of that coke
oven, which is expected to supply ISG an additional 0.55 million net tons annually beginning in
2006. The agreement is contingent on execution of related transportation agreements, granting of
certain local and state incentives, permits from various agencies and receipt of corporate
approvals. In 2004, ISG consummated a long-term coke supply agreement with a subsidiary of DTE
Energy Services for 0.7 million net tons in 2005 and almost 1.0 million net tons annually through
2015. With the acquisition of Weirton, ISG continued Weirtons supply agreement with United States
Steel Corporation for most of its coke requirements through 2005. Within certain limits, ISG has
the ability to optimize fuel costs at its blast furnaces by switching among the fuels of coke,
natural gas, oil and, at the Burns Harbor and Sparrows Point facilities, injected coal, depending
on their relative costs. 2004 short-term coke prices have surged because of strong international demand and rising
ocean freight rates. ISGs 2004 coke costs averaged approximately $75 per net ton higher than the
fourth quarter of 2003. ISG and other domestic steel producers were able to raise prices in 2004,
including surcharges relating to higher costs of coke and other raw materials, to recover some or
all of these cost increases. However, adequate supplies of coke may not be available to ISG in the
future causing potential production disruption, or prices of these supplies may continue to
increase significantly. If ISG is unable to obtain an adequate supply of coke in the future it may
have to use more costly alternative sources of energy or reduce production, both of which actions
would have a negative impact on its earnings and cash flow from operations. ISG used about 4.2 million net tons of coal in 2004 and expects to consume about 4.2 million
net tons in 2005. ISG has contracts for substantially all of its 2005 coal requirements for its
coke oven batteries and coal injection systems at prices about $30 per ton higher than those in
2004. ISG does, however, periodically buy small amounts of coal in the spot market for specific
needs. Scrap Historically, ISG uses hot metal for approximately 75% of its basic oxygen furnace charge and
scrap for approximately 25%. These percentages can change plus or minus 5 percentage points
depending on the relative costs, availability and other factors. Approximately half of such scrap
used by ISG is generated at its own facilities. ISGs electric arc furnaces use scrap for 100% of
their production, of which only a small portion is internally generated. ISG consumed 4.0 million
net tons of purchased scrap during 2004. Scrap prices surged in late 2003 and, while volatile,
have remained high. ISGs 2004 scrap costs averaged approximately $100 per net ton higher than the
fourth quarter of 2003. ISG expects to consume 4.1 million net tons of purchased scrap in 2005.
There are no long-term scrap contracts available as all purchases are in a short-term open market.
Electric arc furnaces use approximately five times more scrap per ton of liquid steel and,
therefore, higher scrap cost is a competitive disadvantage for electric arc furnace steelmakers.
ISG expects scrap to continue to be in sufficient supply in 2005 to satisfy its needs, although at
higher prices than in recent history. ISG and other U.S. steel producers were able to raise prices, including surcharges related to
coke, scrap and other raw materials, to recover some or all of these cost increases. 6




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Energy and Industrial Gases ISGs steel operations consume large amounts of electricity, natural gas, oxygen and other
industrial gases. ISG purchases its electrical power requirements from various suppliers. In
addition, ISG operates cogeneration facilities on certain of its sites that utilize waste gases
from the blast furnaces to supplement its electrical power requirements and control its energy
costs. ISG purchases natural gas under short-term supply contracts with a common group of
suppliers. ISG uses financial instruments to hedge such purchases when appropriate. Various service
providers provide transportation of the natural gas to ISGs facilities. ISG also has several
long-term contracts to supply its oxygen, hydrogen, argon and nitrogen gas requirements. Employees As of December 31, 2004, ISG had approximately 15,500 employees. Since December 15, 2002,
substantially all of the hourly employees at ISGs steelmaking facilities are under collective
bargaining agreements with the USWA or the Independent Steelworkers Union (ISU), which expire in
late 2008 or early 2009. These agreements were ratified in February 2003 at the acquired LTV and
Acme facilities, in June 2003 at the acquired Bethlehem facilities, in April 2004 at Weirton and
May 2004 at Georgetown. The terms of ISGs USWA collective bargaining agreement will also apply,
subject to approval by the USWA and ratification by the covered workers, to any facilities with
USWA-represented employees that ISG may acquire in the future. ISGs collective bargaining
agreements are substantially different from those historically in effect in the U.S. steel
industry. ISGs collective bargaining agreements provide for:  
    five or six-year term;
    five job classifications with broad job descriptions;
    increased work force flexibility;
    base wages that increased 3% on March 31, 2004 and increase every 18 months
thereafter through 2008 for the USWA;
    base wages that increase approximately 5% in May 2005 and every 18 months
thereafter through 2008 for the ISU at Weirton;
    incentive compensation tied to productivity and profits per ton shipped;
    benefit costs that are shared by ISG and its employees;
    a partnership involving both the union and management;
    flexibility to hire contractors for non-core, capital and surge work;
    defined benefit plan for future USWA retirees under the current agreement;
    defined contributions to current retiree healthcare benefits based principally
upon profits per ton shipped; and
    defined contributions to pensions based on the number of employees hired and
hours paid. These features provide greater flexibility and increased productivity as compared to
historical agreements at integrated steel mills. The absence of significant defined benefit pension
and retiree health care plans makes ISGs cost structure significantly more variable than most of
its U.S. integrated competitors. ISG also paid substantially all of its hourly employees and
frontline supervisors production bonuses during every pay period in 2004. Total variable
compensation, (including production bonuses, profit sharing and contributions to pension and
retiree healthcare/life insurance trusts) paid to or on behalf of union employees was about $432
million in 2004. ISGs relations with its hourly-represented
employees, the ISU and the USWA continue to be
positive. Regulatory Environment Unfair Trade Practices and Trade Remedies Under international agreement and U.S. law, remedies are available to domestic industries
where imports are dumped or subsidized and such imports cause material injury to a domestic
industry. Dumping involves selling for export a product at a price lower than the same or similar
product is sold in the home market of the exporter or where the export prices are lower than a
value that typically must be at or above the full cost of production. Subsidies from governments
(including, among other things, grants and loans at artificially low interest rates) under certain
circumstances are similarly actionable. The remedy available is an antidumping duty order or
suspension agreement where injurious dumping is found and a countervailing duty order or suspension
agreement where injurious subsidization is found. When dumping or subsidies continue after the
issuance of an order, a duty equal to 7




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the amount of dumping or subsidization is imposed on the importer of the product. Such orders
and suspension agreements do not prevent the importation of product, but rather require either that
the product be priced at an undumped level or without the benefit of subsidies or that the importer
pay the difference between such undumped or unsubsidized price and the actual price to the U.S.
government as a duty. Globally, there have been a large number of trade remedy actions in many countries to address
what has been fairly massive government subsidization of producers and swings in capacity
utilization of various markets. Near the end of 2004, there were some 71 orders or suspension
agreements in place in the United States on imported steel mill products from various foreign
countries that compete with ISGs domestically produced product including on cut-to-length plate
(31 orders or suspension agreements), clad plate (1), hot-rolled steel (20), corrosion resistant
steel (8), tin mill products (1), wire rod (8) and rails (2). Such orders and suspension agreements
are subject to periodic reviews under U.S. law both as to the amount of dumping or subsidization
that may be continuing (in the case of suspension agreements where the terms of the suspension
agreements are being honored) and to whether such orders or suspension agreements will be continued
or revoked. Section 201 Tariffs On March 20, 2002, in response to an investigation initiated by the office of the President of
the United States under Section 201 of the Trade Act of 1974, the President of the United States
imposed a remedy to address the serious injury to the domestic steel industry that was found. The
remedy was an additional tariff on specific products up to 30% (as low as 9%) in the first year and
subject to reductions each year. The remedy provided was potentially for three years and a day,
subject to an interim review after 18 months as to continued need. On December 4, 2003 by
Proclamation 7741, the President of the United States terminated the import relief provided under
this law pursuant to Section 204(b) (1) (A) of the Trade Act of 1974 on the basis that the
effectiveness of the action taken under Section 203 has been impaired by changed economic
circumstances based upon a report from the U.S. International Trade Commission and the advice from
the Secretary of Commerce and the Secretary of Labor. Thus, no relief under this law was
provided to domestic producers during 2004. Environmental Matters ISGs operations are subject to a broad range of laws and regulations relating to the
protection of human health and the environment. The prior owners of ISGs facilities expended in
the past, and ISG expects to expend in the future, substantial amounts to achieve or maintain
ongoing compliance with U.S. federal, state, and local laws and regulations, including the Resource
Conservation and Recovery Act (RCRA), the Clean Air Act, and the Clean Water Act. These
environmental expenditures are not projected to have a material adverse effect on ISGs
consolidated financial position or on ISGs competitive position with respect to other similarly
situated U.S. steelmakers subject to the same environmental requirements. RCRA Under RCRA and similar U.S. state programs, the owners of certain facilities that manage
hazardous wastes are required to investigate and, if appropriate, remediate historic environmental
contamination found at such facilities. All of ISGs major operating and inactive facilities are or
may be subject to a corrective action program or other laws and regulations relating to
environmental remediation, including projects relating to the reclamation of industrial properties,
also known as brownfield projects. At ISGs properties in Lackawanna, New York, a RCRA Facility Investigation (RFI) is complete.
A report was submitted to the U.S. Environmental Protection Agency (EPA), and the New York State
Department of Environmental Conservation (NYDEC), for approval on December 17, 2004. NYDEC and ISG
executed an order on consent to perform interim corrective measures at the former benzol storage
tank area. This order was executed on November 26, 2004. ISG and NYDEC will be discussing
additional corrective measures following the agencys review of the site RFI. ISG has estimated
that the undiscounted future cost of performing anticipated remediation and post remediation
activities will be about $67 million and will be completed over a period of 15 years or more. The
estimate is based on the extent of soil and groundwater contamination identified by the RFI and
likely remedial alternative, including excavation and consolidation of containments in an on-site
landfill and continuation of a benzol groundwater pump and treat system. 8




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Bethlehem, the U.S. EPA and the Maryland Department of the Environment agreed to a phased RFI
as part of a comprehensive multimedia pollution consent decree with respect to ISGs Sparrows
Point, Maryland facility, which was entered by the U.S. District Court for Maryland on October 8,
1997. ISG has assumed Bethlehems ongoing obligations under the consent decree. The consent decree
requires ISG to address compliance, closure and post-closure care matters and implement corrective
measures associated with two onsite landfills (Grays Landfill and Coke Point Landfill), perform a
site-wide investigation required by Section 3008(h) of RCRA, continue the operation and maintenance
of a remediation system at an idle rod and wire mill, and address several pollution prevention
items, such as, reducing the generation of iron kish, and recycling blast furnace water treatment
slurry and an onsite wastewater treatment plant sludge. The potential costs, as well as the time
frame for the complete implementation of possible remediation activities at Sparrows Point, cannot
be reasonably estimated until more of the investigations required by the decree have been completed
and the data analyzed. Notwithstanding the above, it is probable, based on currently available
data, that remediation will be required at the former coke plant. In addition, pursuant to the
order of the U.S. District Court for Maryland, ISG also must implement corrective measures at the
Grays Landfill and Coke Point Landfill and post-closure care at the former Rod and Wire Mill Area.
The total undiscounted cost of these related matters is estimated to be approximately $43 million. ISG is required to prevent acid mine drainage from discharging to surface waters at closed
mining operations in southwestern Pennsylvania. ISG entered into a Consent Order and Agreement with
the Pennsylvania Department of Environmental Protection (PaDEP) in May 2003 addressing the transfer
of required permits from Bethlehem to ISG and financial assurance for long-term operation and
maintenance of the wastewater treatment facilities associated with these mines. As required by this
Consent Order and Agreement, ISG submitted an Operational Improvement Plan to improve treatment
facility operations and lower long-term wastewater treatment costs. The Consent Order and Agreement
also required ISG to propose a long-term financial assurance mechanism. PaDEP approved ISGs cost
reduction plan. On May 9, 2004, ISG entered into a revised Consent Order and Agreement outlining a
schedule for implementation of capital improvements and requiring the establishment of a treatment
trust that the PaDEP has estimated to be the net present value of all future treatment cost. ISG
expects to fund the treatment trust over a period of up to 10 years at a current target value of
approximately $20 million. Until the improvements are made and the treatment trust is fully funded,
ISG expects to spend about $1 to $2 million per year for the operation of treatment plants for acid
mine drainage from these closed mines. After the treatment trust is fully funded, the treatment
trust will then be utilized to fund the cost of treatment of acid mine drainage. Although remote,
ISG could be required to make up any deficiency in the treatment trust in the future. ISG owns a large former integrated steelmaking site in Johnstown, Pennsylvania. The site has
been razed and there are a number of historic waste disposal units, including solid and hazardous
waste landfills located at the site that are subject to closure and other regulation by PaDEP.
There are also historic steel and coke-making operating locations at the Johnstown site that may
have caused groundwater contamination. Although potentially subject to RCRA corrective action or
similar state authority, no comprehensive environmental investigations have been performed at this
site to date. ISG estimates that the undiscounted costs associated with future landfill closure,
site investigations and probable remediation at this facility that presently can be estimated to be
approximately $22 million. ISGs facility at Indiana Harbor, Indiana is subject to a U.S. EPA 3013 Administrative Order
investigation plan to assess soil and groundwater conditions associated with 14 solid waste
management units approved on January 12, 2005. Although localized remediation activities have been
conducted at this facility, additional remediation may be required after the investigation of these
solid waste management units has been completed. It is not possible to estimate the cost of
required remediation or monitoring, if any, that may result from this investigation at this time.
An area of subsurface fuel oil contamination exists and is currently the subject of remediation
actions. The U.S. EPA and ISG are discussing a draft administrative order with respect to the oil
issue. In addition, a solid waste landfill at Indiana Harbor will require closure via an engineered
capping system and post-closure care including groundwater monitoring. The total estimated
undiscounted cost related to these matters that can presently be estimated is approximately $18
million. At ISGs Burns Harbor, Indiana facility, an RFI was completed in accordance with a U.S. EPA
approved work plan. Based on the results of the investigation, ISG does not believe there will be
any substantial remediation required to complete the corrective action process at the facility;
however, it is likely that ISG will incur future costs primarily related to long term post-closure
care including groundwater monitoring. In addition, Bethlehem managed 9




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approximately one million net tons of air pollution control dusts and sludges in piles on the
ground at the Burns Harbor site. While an alternative means of handling this material continues to
be evaluated, it is probable that ISG will incur future costs to manage this material. ISG
also has a continuing obligation pursuant to a consent order issued by the U.S. District Court in
Indiana to operate a collection and treatment system to control contaminated groundwater seeps from
the face of a dock wall at the site. The total undiscounted costs related to these matters are
estimated to be approximately $22 million. ISGs Cleveland, Ohio facilities may be subject to RCRA corrective action or remediation under
other environmental statutes. An integrated steel facility has operated on the property since the
early part of the 20th century. As a result, soil and groundwater contamination may exist that
might require remediation pursuant to the RCRA corrective action program or similar state programs.
No RCRA corrective action has been demanded at any of the Cleveland facilities by either U.S.
federal or state authorities and no comprehensive investigation of any of the facilities has been
performed. However, certain limited and localized remediation activities have been or will be
conducted at these sites. These remediation activities include a large permitted solid waste
landfill at the site that will require installation of an engineered capping system for closure and
post-closure care including groundwater monitoring in the future. The undiscounted cost of closure
and post-closure care for this landfill is estimated to be approximately $13 million. ISGs recently acquired Weirton, West Virginia facility has been subject to a RCRA corrective
action related consent decree since 1996. The Order requires the facility to conduct investigative
activities to determine the nature and extent of hazardous substances that may be located on the
facilitys property and to evaluate and propose corrective measures needed to abate unacceptable
risks. Areas within the facilitys property have been prioritized. Investigation of the two highest
priority areas has been completed. Investigation of the remaining areas is underway. In addition,
ISG is required to excavate and dispose off-site contaminates as closure of a surface impoundment
pursuant to the RCRA corrective action and a 1996 consent decree. The undiscounted cost of
investigative and closure activities at the site are estimated to be about $13 million. At a site of the former steelmaking facilities in Bethlehem, Pennsylvania, a remedial
investigation is being performed pursuant to the Pennsylvania Land Recycling (Brownfield) Program
in conjunction with comprehensive redevelopment plans. These investigations are continuing to be
performed with input and oversight from both the PaDEP, and the EPA Region III corrective action
staff to ensure that the actions taken are acceptable to both state and federal regulatory
authorities. The majority of the site was sold by ISG during 2004. Under the sales agreement, the
buyers assumed financial responsibility for environmental obligations associated with the acquired
property and purchased an insurance policy sufficient to cover the estimated cost of reclamation
with ISG as a beneficiary. The undiscounted cost associated with anticipated environmental
remediation actions on property ISG continues to own is estimated to be about $4 million. ISGs facility at Riverdale, Illinois may be subject to RCRA corrective action or remediation
under other environmental statutes. The facility has produced steel since the early part of the
20th century. As a result, soil and groundwater contamination may exist that might require
remediation under the RCRA corrective action program or similar state programs. Certain localized
remediation activities have been conducted at this facility; however, there is no present U.S.
federal or state demand for a RCRA corrective action program at the facility. No comprehensive
environmental investigation of the facility has been performed. Clean Air Act ISGs facilities are subject to a variety of permitting requirements under the Clean Air Act
that restricts the type and amount of air pollutants that may be emitted from regulated emission
sources. On February 28, 2003, the U.S. EPA issued a final rule to reduce hazardous air pollutant
(HAP) emissions from integrated iron and steel manufacturing facilities. The final rule will
require affected facilities to meet standards reflecting the application of maximum achievable
control technology (MACT), standards. Many of ISGs facilities are subject to the new MACT
standards, and compliance with such standards will be required by May 20, 2006. ISG anticipates
installing controls at facilities to comply with the new MACT standards with capital expenditures
of about $120 million through 2007. Other Clean Air Act requirements, such as revisions to national ambient air quality standards
for ozone and particulate matter, may have significant impacts on ISG in the future, although
whether and how it will be affected 10




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will not be determined for many years. ISG also may be affected if the U.S. federal government or
the states in which it operates begin to regulate emissions of greenhouse gases such as carbon
dioxide. However, because ISG cannot predict what requirements will be imposed on it or the timing
of such requirements, it is unable to evaluate the ultimate future cost of compliance with respect
to these potential developments. Clean Water Act ISGs facilities also are subject to a variety of permitting requirements under the Clean
Water Act, which restricts the type and amount of pollutants that may be discharged from regulatory
sources into receiving bodies of waters, such as rivers, lakes and oceans. On October 17, 2002, the
U.S. EPA issued regulations that require existing wastewater dischargers to comply with new
effluent limitations. Several of ISGs facilities are subject to the new regulations, and
compliance with such regulations will be required as new discharge permits are issued for continued
operation. ISGs Weirton facility may be subject to stipulated penalties for national pollution discharge
elimination system permit excursions under a 1997 Multimedia Consent Decree. At December 31, 2004,
ISG has accrued $314,000 for probable penalties related to such excursions in 2004 since the
facility was acquired. Other ISG anticipates spending approximately $51 million over the next 40 years, including $10
million during 2005, to address the removal and disposal of PCB equipment and asbestos material
encountered during the operation of our facilities. There are a number of other facilities and properties, which ISG owns across the United
States, which may present incidental environmental liabilities. The majority of these sites were
formed pipe coating operations which may have impacted soils or groundwater. The estimated cost of
future investigations and probable remediation at these sites is estimated to be about $12 million. In addition to the above matters, ISG receives notices of violation relating to minor
environmental matters from time to time in the ordinary course of business. ISG does not expect
any material unrecorded reclamation requirements, fines or penalties to arise from these items and
none of these involve potential individual monetary sanctions in excess of $100,000. ISG
spent approximately $132 million in 2004 for recurring costs to manage hazardous
substances and pollution in ongoing operations. Spending for environmental compliance related
capital expenditures to limit or monitor pollutants was $20 million in 2004. We expect to spend
about $100 million in 2005 and an average of about $20 million per year for capital expenditures
from 2006 through 2009 to meet environmental standards. Intellectual Property ISG owns a number of U.S. and non-U.S. patents that relate to a wide variety of products and
processes, has filed pending patent applications and is licensed under a number of patents.
However, ISG believes no single patent or license or group of patents or licenses is of material
importance to ISGs overall business. ISG also owns registered trademarks for certain of its
products and service marks for certain of its services, which, unlike patents and licenses, are
renewable so long as they are continued in use and properly protected. Available Information ISG files annual, quarterly, and special reports, proxy statements, and other information with
the Securities and Exchange Commission (SEC). You may read and copy any of the documents we file
at the SECs Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. You also may
obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. SEC filings are also available to the public from the SECs Internet website at
www.sec.gov. 11




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ISG also makes available free of charge on
or through our Internet website our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to
those reports as soon as reasonably practicable after such material is electronically filed with or
furnished to the SEC. Our Internet address is www.intlsteel.com. FORWARD-LOOKING STATEMENTS ISG and its representatives may from time to time make forward-looking statements in reports
filed with the Securities and Exchange Commission, reports to stockholders, news releases, other
written documents and oral presentations. These forward-looking statements may be identified by the
use of predictive, future-tense or forward-looking terminology, such as believes, anticipates,
expects, estimates, intends, may, will or similar terms. These statements speak only as
of the date of such statements and ISG will undertake no ongoing obligation, other than that
imposed by law, to update these statements. These statements appear in a number of places in this
report and include statements regarding ISGs intent, belief or current expectations of its
directors, officers or advisors with respect to, among other things:  
    trends affecting ISGs financial condition, results of operations or future prospects;
    business and growth strategies;
    operating culture and philosophy;
    financing plans and forecasts; and
    the integration of the Weirton, Georgetown and HBI assets into our business. Any such forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and actual results may differ materially from those contained
in the forward-looking statements as a result of various factors, some of which are unknown. The
factors that could adversely affect ISGs actual results and performance include, without
limitation:  
    negative overall economic conditions or conditions in the markets served;
    competition within the steel industry;
    changes in U.S. or foreign trade policy affecting steel imports or exports;
    changes in foreign currencies affecting the strength of the U.S. dollar;
    actions by domestic and foreign competitors;
    the inability to achieve our anticipated growth objectives;
    changes in availability or cost of raw materials, energy or other supplies;
    labor issues affecting ISGs workforce or the steel industry generally; and
    the inability to implement our operating culture and philosophy at the acquired facilities;
    the proposed merger with Mittal Steel Company N.V. may not be consummated. Factors that could affect our results or performance include the following: Risks Related to the Steel Industry Excess global capacity and the availability of competitive substitute materials have, at times,
resulted in intense competition and may, in the future, cause downward pressure on prices. Competition within the steel industry, both domestic and worldwide, is intense and is expected
to remain so. We compete primarily on the basis of price, quality and the ability to meet
customers product needs and delivery schedules. Our primary competitors are other integrated steel
producers and mini-mills, some of which may be larger than us and have substantially greater
capital resources than we do. The highly competitive nature of the steel industry periodically
exerts downward pressure on prices for our products. In the case of certain product applications,
we and other steel manufacturers compete with manufacturers of other materials, including plastic,
aluminum, graphite composites, ceramics, glass, wood and concrete. The global steel industry is
generally characterized by overcapacity, which can have a negative impact on domestic steel prices.
This overcapacity has sometimes resulted in high levels of steel imports into the United States,
exerting downward pressure on domestic steel prices and resulting in, at times, a dramatic
reduction in, or, in the case of many steel producers, the elimination of gross margins. 12




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Increased imports of steel into the United States could adversely impact domestic steel prices,
which could adversely affect our sales, margins and profitability. Based on the American Iron and Steel Institutes apparent steel supply (excluding
semi-finished products), imports of steel into the United States constituted 21.4%, 15.8%, 20.4% of
the domestic steel market supply for 2004, 2003 and 2002, respectively. Significant imports of
steel into the United States have at times exerted downward pressure on domestic steel prices and
substantially reduced sales, margins and profitability. We and other domestic steel producers
compete with many foreign producers. Weakening of certain foreign economies, particularly in
Eastern Europe, Asia and Latin America, has at times resulted in lower local demand for steel
products and greater steel exports to the United States at depressed prices. Foreign producers
have also at times benefited from a strong U.S. dollar improving the prices of the steel they
export to the U.S. Risks Relating to the Proposed Merger of ISG and Mittal Steel Company N.V. On
October 25, 2004, we entered into a definitive agreement with
Mittal Steel Company N.V. (f/k/a
Ispat International N.V.) under which we agreed to merge with a subsidiary of Mittal Steel. We
refer to this transaction as the Merger. There are a number of risks and uncertainties relating
to the Merger, including the following: ISGs business could be adversely impacted
by the uncertainty and demands on ISGs senior
management related to the Merger. Uncertainty about whether and when the
Merger will be completed and how the business of ISG
will be operated after the Merger could adversely affect the business of ISG, whether or not the
Merger is completed. These adverse effects could include damage to
relationships with ISGs customers, suppliers, employees and other constituencies. Among other things, it is possible that competitors
of ISG will seek to encourage ISGs customers, suppliers, and employees to terminate or otherwise
alter their relationships with ISG in ways that would be detrimental to ISGs financial condition and
results of operations. ISGs senior management has devoted significant
time and attention to taking the steps
required to complete the Merger, including the preparation of documents required to be filed
with the SEC and other regulators, the presentation of information to investors relating to the
Merger, and the preparatory steps required to provide for a smooth transition in the event that the
Merger is completed. It is expected that the demands on ISGs senior managements time relating to
the Merger will be as great, or even greater, as Mittal Steel and ISG move closer to completing the
Merger. This may have an adverse effect on the results of operations of ISG, as ISGs senior
management will have less time available to devote to overseeing ISGs business. Failure to complete the Merger could negatively impact the stock prices and the future business and
financial results of ISG. Although Mittal
Steel and ISG have agreed, in general, to use their reasonable best efforts to
take all necessary actions required to complete the Merger, it is possible that the conditions to
the parties obligations to complete the Merger may not be fulfilled. If the Merger is not
completed for any reason, ISG will be subject to many risks, including among other things:  
    having incurred certain costs relating to the Merger that are payable whether or not the
Merger is completed, including legal, accounting, financial advisor and printing fees;
    having had the focus of its management directed toward
completing the Merger and transition
planning instead of on ISGs core business and other opportunities that could have been
beneficial to ISG;
    having a negative response from ISGs customers, suppliers, employees, security analysts and
other constituencies; and
    being required, in certain circumstances, to pay Mittal Steel a termination fee of $130
million and, in certain circumstances, to reimburse Mittal Steel for up to $10 million of
its expenses incurred in connection with the Merger. In addition, if the Merger is not completed, ISG would not realize any of the expected
benefits from the Merger.
All of these risks could have a material adverse effect on ISGs business, stock price, financial
condition and results of operations. 13




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If the Merger is completed, the expected benefits may not be realized. Assuming that the Merger is completed, and taking into account the recent acquisition by
Mittal Steel of LNM Holdings N.V. (LNM Holdings), Mittal Steel will be integrating three
companies that have previously operated independently. Integrating Mittal Steels operations and
personnel with ISG and LNM Holdings will be a complex process. Mittal Steel may not be able to
integrate the operations of ISG and LNM Holdings with its operations rapidly or without
encountering difficulties. The successful integration of Mittal Steel with ISG and LNM Holdings
will require, among other things, integration of ISGs, LNM Holdings and Mittal Steels products,
sales and marketing operations, information and software systems, coordination of employee
retention, hiring and training operations and coordination of future research and development
efforts. The diversion of the attention of the combined companys management to the integration
effort and any difficulties encountered in combining operations could adversely affect the combined
companys businesses. Further, the process of combining Mittal Steel, ISG and LNM Holdings could
negatively impact employee morale and the ability of Mittal Steel to retain some of its, ISGs and
LNM Holdings key personnel after the completion of the Merger. Risks Related to Our Business Our level of production and our sales and earnings are subject to significant fluctuations as
a result of the cyclical nature of the industries we serve. The price of steel and steel products may fluctuate significantly due to many factors beyond
our control. This fluctuation would directly affect our levels of production and sales and
earnings. The domestic steel industry has been highly cyclical in nature, influenced by a
combination of factors, including periods of economic growth or recession, strength or weakness of
the U.S. dollar, worldwide production capacity, levels of steel imports and applicable tariffs. The
demand for steel products is generally affected by macroeconomic fluctuations in the United States
and the global economies in which steel companies sell their products. For example, future economic
downturns, stagnant economies or currency fluctuations in the United States or globally could
decrease the demand for products or increase the amount of imports of steel into the United States,
which could negatively impact our sales, margins and profitability. A prolonged weakness in the U.S. automotive industry would reduce the demand for our products,
could reduce our sales and could increase our exposure to accounts receivable bad debts. A
significant portion of our sales are currently sold directly to automotive customers and to
intermediate steel processor and service center markets where some of our products are further
processed and resold to various companies in the automotive industry. The cyclical nature of the
automotive industry is caused by factors such as the level of consumer spending, the strength or
weakness of the U.S. dollar and the impact of international trade and various other factors,
including labor unrest and the availability of raw materials, which affect the ability of the
automotive industry to build cars. Any decrease in automotive manufacturing will reduce our
shipments, increase our operating costs and reduce our earnings. In addition, if automobile
manufacturers choose to substitute steel with more plastics, aluminum and other steel substitutes
in their automobiles, such substitutes could further reduce demand for our products. In addition, a disruption or downturn in the oil and gas, gas transmission, construction,
commercial equipment, rail transportation, appliance, agricultural and durable goods industries,
all of which are significant markets for our products and are highly cyclical, could negatively
impact our sales volumes, pricing, margins and earnings. Because of our limited operating history, and our recent acquisitions of various steelmaking
assets, we believe that historical information regarding the acquired assets is of limited
relevance in understanding our business as currently conducted and our prospects for the future. We have a limited operating history. We did not have any operations until we consummated our
acquisition of the idled steelmaking assets of LTV in April 2002 and we did not begin producing
steel until May 2002. We completed the acquisition of the idled steelmaking assets of Acme in
October 2002 and did not generate significant revenues from those assets during 2002. We completed
the acquisition of the Bethlehem steelmaking assets in May 2003 and Weirton in May 2004. We also
completed the acquisition of the idled steelmaking assets of Georgetown in 14




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June 2004 and the Trinidad Facility in July 2004. As a result, we believe the historical financial
results of the acquired assets are of limited relevance in understanding our business as currently
conducted. We may not be able to integrate effectively our new employees and the operations of the various
assets we acquired or achieve the level of efficiencies we intend. We are subject to the risks, expenses, uncertainties and problems encountered by companies in
the early stages of operations and associated with the integration of new businesses. Our workforce
may not be able to readily adapt to the new work rules, job consolidations, software systems and
unique business culture of the combined companies. The dramatic changes in individual
responsibilities, communication structure and software systems may result in operating
inefficiencies and increased expenses until the changes are fully incorporated into our workforces
daily routines. Additionally, the expansion of duties may require additional training and skill
development before we realize the full extent of the planned efficiencies. We may not be able to realize the anticipated federal income tax benefits of acquiring the
Bethlehem assets. Our acquisition of the Bethlehem assets was structured for federal income tax purposes to
allow us to acquire Bethlehems historical tax attributes, including its basis in its assets and
net operating loss carryforwards, subject to certain limitations. We have not, however, obtained a
ruling from the Internal Revenue Service (IRS), to that effect, nor have we undergone an IRS
examination, and the IRS or courts could disagree with our position. If we do not meet certain
profitability thresholds, we will not be able to realize the expected federal income tax savings
related to Bethlehems net operating loss carryforwards and depreciable basis of plant and
equipment. Our business requires substantial capital investment and maintenance expenditures, which we may be
unable to provide. Our business strategy will require additional substantial capital investment. We require
capital for, among other purposes, managing acquired assets, acquiring new equipment, maintaining
the condition of our existing equipment, completing future acquisitions and maintaining compliance
with environmental laws and regulations. To the extent that cash generated internally and cash
available under our senior credit facilities is not sufficient to fund capital requirements, we
will require additional debt and/or equity financing. However, this type of financing may not be
available or, if available, may not be on satisfactory terms. Future debt financings, if available,
may result in increased interest and amortization expense, increased leverage and decreased income
available to fund further acquisitions and expansion. In addition, future debt financings may limit
our ability to withstand competitive pressures and render us more vulnerable to economic downturns.
If we fail to generate or obtain sufficient additional capital in the future, we could be forced to
reduce or delay capital expenditures and acquisitions, sell assets or restructure or refinance our
indebtedness. Unexpected equipment failures may lead to production curtailments or shutdowns. Interruptions in production capabilities will inevitably increase production costs and reduce
our sales and earnings. In addition to equipment failures, our facilities are also subject to the
risk of catastrophic loss due to unanticipated events such as fires, explosions or adverse weather
conditions. Our manufacturing processes depend on critical pieces of steelmaking equipment, such as
furnaces, continuous casters and rolling equipment, as well as electrical equipment, such as
transformers, and this equipment may, on occasion, be out of service as a result of unanticipated
failures. In the future, we may experience material plant shutdowns or periods of reduced
production as a result of any equipment failures. Furthermore, any interruption in production
capability may require us to make large capital expenditures to remedy the situation, which could
have a negative effect on our profitability and cash flows. Although we maintain business
interruption insurance, any recovery under this insurance policy may not offset the lost revenues
or increased costs that we experience during the disruption of our operations. In addition to the
revenue losses, which may not be recoverable under the policy, longer-term business disruption
could result in a loss of customers. If this were to occur, our future sales levels, and therefore
our profitability, could be adversely affected. Environmental regulations impose substantial costs and limitations on operations. 15




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We have environmental liability risks and limitations on operations brought about by the
requirements of environmental laws and regulations. We are subject to various federal, state and
local environmental, health and safety laws and regulations, and are required to maintain numerous
permits and governmental approvals required for operation, concerning issues such as air emissions,
wastewater discharges, solid and hazardous waste management and disposal and the investigation and
remediation of contamination. These laws and regulations are becoming increasingly stringent. While
we believe that our facilities are in material compliance with all permits, governmental approvals,
applicable environmental laws and regulations, the risks of substantial unanticipated costs and
liabilities related to compliance with these permits, governmental approvals, laws and regulations
are an inherent part of our business. It is possible that future conditions may develop, arise or
be discovered that create new environmental compliance or remediation liabilities and costs. While
we believe that we can comply with environmental legislation and regulatory requirements and that
the costs of compliance have been included within budgeted cost estimates, compliance may prove to
be more limiting and costly than anticipated. There can also be no assurance that the facilities
will continue to operate in accordance with the conditions and restrictions established by the
permits or approvals. Similarly, we cannot assure you that the requirements contained in such
permits will not change or that the facilities will be able to renew or to maintain all permits and
approvals required for continued operation of the facilities. If any substances are found at the facilities that are classified by applicable environmental
laws, ordinances or regulations as hazardous materials, we could become liable for the
investigation and removal of those substances, regardless of their source. Failure to comply with
these laws, ordinances or regulations, or any change in the requirements of these laws, ordinances
or regulations could result in liabilities, imposition of cleanup liens and fines and large
expenditures to bring the facilities into compliance. We may also be subject from time to time to
legal proceedings brought by private parties or governmental agencies with respect to environmental
matters, including matters involving alleged property damage or personal injury. We may also be
subject to future claims with respect to historic asbestos exposure relating to our acquired
assets. Any decrease in the availability, or increase in the cost, of raw materials and energy could
materially affect our earnings. Our operations depend heavily on the availability of various raw materials and energy
resources, including iron ore, coke, scrap, electricity and natural gas. The availability of raw
materials and energy resources may decrease and their prices are likely to be volatile as a result
of, among other things, changes in overall supply and demand levels and new laws or regulations.
Disruption in the supply of our raw materials or energy resources could temporarily impair our
ability to manufacture some of our products or require us to pay higher prices in order to obtain
these raw materials or energy resources from other sources. In the event our raw material and
energy costs increase, we may not be able to pass these higher costs on to our customers in full or
at all. Any increase in the prices for raw materials or energy resources could materially increase
our costs and therefore lower our earnings. We currently obtain most of our iron ore pellet needs for our Cleveland, Indiana Harbor and
Weirton facilities from one supplier, Cleveland-Cliffs Inc, pursuant to long-term supply contracts.
Additionally, as part of the Bethlehem asset acquisition, we acquired a 62.3% interest in Hibbing
Taconite. Excluding tonnage applicable to interests owned by others, Hibbing Taconite is estimated
to contain recoverable reserves at December 31, 2004 sufficient to produce at least 186 million net
tons of iron ore pellets. This mine is operated by Cleveland-Cliffs Inc, which also owns 23% of the
mine. Hibbing Taconite has mining and processing facilities, which can supply a majority of our
current annual iron ore requirements for Burns Harbor. We expect these two sources will supply
approximately 85% of our iron ore pellet needs in 2005. Should Cleveland-Cliffs Inc or the Hibbing
Taconite mine be unable to meet our iron ore pellet needs, or should the Cleveland-Cliffs Inc
contracts be terminated, we may be unable to meet our iron ore pellet needs or may be forced to
obtain iron ore pellets at higher prices. Both the domestic and foreign supply of coke has decreased significantly over the last decade
as coke suppliers have ceased operations primarily due to age of facilities and environmental
issues. Global demand for coke is higher due to increased global steel demand. These supply and
demand dynamics have supported higher global coke costs, which surged in early 2004. In addition to
the coke we produce in our coke facilities, which amounts to about 35% of our estimated needs in
2005, we have contracts for the purchase of about 50% of our estimated future coke 16




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requirements in 2005. However, adequate supplies of coke may not be available to us in the future,
or, if available, only at higher prices than the prices we currently pay. If we are unable to
obtain an adequate supply of coke in the future we would have to use alternative and more costly
sources of energy or reduce production, both of which actions would have a negative impact on our
earnings and cash flow. ISG furnaces for iron making, steel making and reheating, use a variety of fuels such as
natural gas, electrical power, coke, coal, and fuel oil. Flexibility exists in many applications
to alternate between fuels to prioritize lower cost fuels versus higher cost fuels, and adjustments
are made on a regular basis. However, this flexibility is limited to approximately 10% of fuel
intake. Process requirements for natural gas and coke still require a high level of these base
fuels. While we continue to evaluate additional incremental alternatives to increase flexibility
beyond 10%, the opportunities are limited due to processes as well as capital return. Although we
continue to evaluate our energy costs and consider ways to factor energy costs into our pricing,
energy prices may increase further, which could adversely affect our production costs, competitive
position, and results of operations. A substantial or prolonged increase in energy costs would
have an adverse effect on our margins, earnings and cash flow. A significant portion of our flat-rolled products are currently sold on the spot market, and
therefore, our sales, margins and earnings are negatively affected by decreases in domestic spot
flat-rolled steel prices. Because a significant portion of our flat-rolled products are sold on the spot market under
contracts with terms of 12 months or less, our sales, margins and earnings are negatively impacted
by decreases in domestic flat-rolled steel prices. As a result, downturns in the domestic
flat-rolled steel market could have an adverse effect on our sales, margins and earnings. Senior management may be difficult to replace if they leave. The loss of the services of one or more members of our senior management team or the inability
to attract, retain and maintain additional senior management personnel could harm our business,
financial condition, results of operations and future prospects. Our operations and prospects
depend in large part on the performance of our senior management team, including our chief
executive officer, Rodney B. Mott, our chief operating officer, V. John Goodwin, and the other
members of the senior management team. We may not be able to find qualified replacements for any of
these individuals if their services are no longer available. Implementation of our strategy to pursue additional acquisition opportunities has certain
risks. We intend to continue to pursue value-adding acquisition opportunities in the steel industry.
As part of this strategy, we may expand existing facilities, build additional plants, acquire other
steel assets, enter into joint ventures or form strategic alliances that we believe will expand or
complement our existing business. These transactions will likely involve some or all of the
following risks:  
    the potential disruption of our ongoing business;
    the diversion of resources and managements time;
    the inability of management to maintain uniform standards, controls, procedures and policies;
    the difficulty of managing the operations of a larger company;
    the risk of becoming involved in labor, commercial or regulatory disputes or
litigation related to the new enterprise;
    the risk of contractual or operational liability to joint venture participants
or to third parties as a result of our participation;
    the difficulty of competing for acquisitions and other growth opportunities
with companies having greater financial resources than us; and
    the difficulty of integrating the acquired operations and personnel into our
existing business. Pursuing our growth strategy may be required for us to remain competitive, but we may not be
able to complete any such transactions or obtain financing, if necessary, for such transactions on
favorable terms. Future transactions 17




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may not improve the competitive position and business prospects as anticipated, and could reduce
sales or profit margins, and, therefore, earnings if they are not successful. Our level of indebtedness and other demands on our cash resources could materially adversely affect
our ability to execute our business strategy. As of December 31, 2004, we had liquidity of $848.1 million consisting of cash and cash
equivalents of $606.7 million and available borrowing capacity of $241.4 million under our
revolving credit facility and total consolidated debt, including current maturities and capital
lease obligations, of approximately $864.4 million. Subject to the limits contained in our senior
credit facilities we may also incur additional debt in the future. In addition to the principal
repayments on our outstanding debt, we have other demands on our cash resources, including, among
others, capital expenditures and operating expenses. Our levels of indebtedness could have material effects on our operations and our ability to
execute our business strategy. For example, they could:  
    require us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing the amount of our cash flow available for
working capital, capital expenditures, payment of dividends on our common stock,
acquisitions and other general corporate purposes;
    require us to raise additional capital through the issuance of equity, which may
have a dilutive impact to existing stockholders;
    limit our flexibility in planning for, or reacting to, changes in the industries
in which we compete;
    place us at a competitive disadvantage compared to our competitors, some of
which have less debt service obligations and greater financial resources than we
do;
    limit our ability to borrow additional funds;
    increase our vulnerability to general adverse economic and industry conditions; and
    result in our failure to satisfy the financial covenants contained in our senior
credit facilities or in other agreements governing our indebtedness, which could
result in an event of default that, if not cured or waived, could restrict or
eliminate our ability to finance the cash requirements of our business. We may still incur significantly more debt, which could exacerbate the risks described above. The terms of the indenture governing our outstanding notes and our revolving credit facilities
permit us and our subsidiaries to incur significant additional indebtedness in the future. As of
December 31, 2004, we had approximately $241.4 million available for additional borrowing under our
revolving credit facility, subject to certain conditions. All borrowings under our revolving credit
facility are effectively senior to the notes to the extent of the value of the assets securing such
borrowings. To service our indebtedness, we will require a significant amount of cash. Our ability to generate
cash depends on many factors beyond our control. Our ability to make payments on and to refinance our indebtedness, and to fund planned capital
expenditures will depend on our ability to generate cash in the future. This, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory and other factors
that are beyond our control. Based on our current level of operations and anticipated cost savings and operating
improvements, we believe our cash flow from operations, available cash and available borrowing
under our senior credit facilities will be adequate to meet our future liquidity needs. We cannot
assure you, however, that our business will generate sufficient cash flow from operations that
currently anticipated cost savings and operating improvements will be 18




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realized on schedule, or that future borrowing will be available to us under our credit facilities
in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs.
We may need to refinance all or a portion of our indebtedness, on or before maturity. We cannot
assure you that we will be able to refinance any of our indebtedness, including our senior credit
facilities, on commercially reasonable terms or at all. We may incur variable rate indebtedness that subjects us to interest rate risk, which could cause
our annual debt service obligations to increase significantly. Some of our future borrowings, including borrowings under our revolving credit facilities, may
be at variable rates of interest and expose us to interest rate risk. If interest rates increase,
our debt service obligations on our variable rate indebtedness would increase even if the amount
borrowed remained the same, resulting in a decrease in our net income. Our ability and the ability of some of our subsidiaries to engage in some business transactions may
be limited by the terms of our debt. Our revolving credit facility contains a number of financial covenants requiring us to meet
financial ratios and financial condition tests, as well as covenants restricting our and our
subsidiaries ability to:  
    incur additional debt and capital leases;
    in the case of ISG only, pay dividends on, redeem or repurchase capital stock;
    allow our subsidiaries to issue new stock to any person other than us or any of our other
subsidiaries;
    make investments;
    incur or permit to exist liens;
    enter into transactions with affiliates;
    guarantee the debt of other entities, including joint ventures;
    merge or consolidate or otherwise combine with another company; and
    transfer or sell our assets. The indenture governing the outstanding notes contains covenants that limit our ability and
the ability of certain of our subsidiaries to:  
    create liens on our assets to secure debt;
    enter into sale and leaseback transactions; and
    consolidate, merge or transfer all or substantially all of our assets. Our ability to borrow under our revolving credit facility will depend upon our ability to
comply with certain covenants and our borrowing base requirements. Our ability to meet these
covenants and requirements may be affected by events beyond our control and we may not meet these
obligations. Our failure to comply with these covenants and requirements could result in an event
of default under our revolving credit facility that, if not cured or waived, could terminate our
ability to borrow further, permit acceleration of the relevant debt and permit foreclosure on any
collateral granted as security under our revolving credit facility, as well as result in a default
under the indenture governing the outstanding notes. If the lenders under our revolving credit
facility require immediate repayment, we may not be able to repay them and also repay the
outstanding notes in full. Risks Related to our Common Stock 19




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Anti-takeover provisions in our charter documents and Delaware corporate law may make it difficult
for our stockholders to replace or remove our current board of directors and could deter or delay
third parties from acquiring us, which may adversely affect the marketability and market price of
our common stock. Provisions in our certificate of incorporation and bylaws and in Delaware corporate law may
make it difficult for stockholders to change the composition of our board of directors in any one
year, and thus prevent them from changing the composition of management. In addition, the same
provisions may make it difficult and expensive for a third party to pursue a tender offer, change
in control or takeover attempt that is opposed by our management and board of directors. Public
stockholders who might desire to participate in this type of transaction may not have an
opportunity to do so. These anti-takeover provisions could substantially impede the ability of
public stockholders to benefit from a change in control or change our management and board of
directors and, as a result, may adversely affect the marketability and market price of our common
stock. There may be circumstances in which the interests of our major stockholders could be in conflict
with your interests as a stockholder. Circumstances may occur in which major investors in ISG may have an interest in pursuing
acquisitions, divestitures or other transactions, including, among other things, taking advantage
of certain corporate opportunities that, in their judgment, could enhance their investment in us or
another company in which they invest. These transactions might involve risks to our other holders
of common stock or adversely affect us or other investors. We may from time to time engage in
transactions with related parties and affiliates that include, among other things, business
arrangements, lease arrangements for certain manufacturing facilities and offices and the payment
of fees or commissions for the transfer of manufacturing by one operating company to another. These
transactions, if any, may adversely affect our sales volumes, margins, and earnings. We may not pay dividends for the foreseeable future. We may retain any future earnings to support the development and expansion of our business or
make additional payments under our credit facilities and, as a result, we may not pay cash
dividends in the foreseeable future. Our payment of any future dividends will be at the discretion
of our board of directors after taking into account various factors, including our financial
condition, operating results, cash needs, growth plans and the terms of any credit agreements that
we may be a party to at the time. Our credit facilities limit us from paying cash dividends or
other payments or distributions with respect to our capital stock in excess of certain limitations.
In addition, the terms of any future credit agreement may contain similar restrictions on our
ability to pay any dividends or make any distributions or payments with respect to our capital
stock. Accordingly, investors must rely on sales of their common stock after price appreciation,
which may never occur, as the only way to realize their investment. 20




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ITEM 2. PROPERTIES Principal Operating Facilities Our steel operations consist of five integrated steelmaking plants, one basic oxygen
furnace/compact strip mill, three electric arc furnace plants with raw steel production capability
of 23 million net tons and four finishing plants. We own all or substantially all of each plant.
We also own interests in various joint ventures that support these facilities, as well as numerous
raw material, railroad and transportation assets. Integrated Steelmaking Facilities Burns Harbor: Our Burns Harbor facility is located on approximately 3,300 acres in Indiana on
Lake Michigan, about 50 miles southeast of Chicago, Illinois. Burns Harbor is an integrated mill
capable of producing hot-rolled sheet, cold-rolled sheet, hot dip galvanized sheet and steel plate
for use in automotive, appliance, service center, construction, and ship building applications.
Burns Harbors iron producing facilities include a sintering plant, two coke oven batteries (one of
which is under a capital lease that we expect to purchase in 2005) and, two blast furnaces
with granularized coal injection capable of producing approximately 4.8 million net tons of hot
metal per year. The steel producing shop consists of three basic oxygen furnaces, one degasser,
two ladle treatment stations, two continuous slab casters (an 84-inch two strand and a 76-inch two
strand) capable of producing approximately 4.7 million net tons of raw steel per year. Finishing
facilities include an 80-inch hot-strip mill, two 80-inch continuous pickling lines, an 80-inch
five-stand tandem mill, batch annealing facilities, a continuous anneal line, an 80-inch five stand
temper mill, a 72-inch hot dip galvanizing line, which is capable of producing both galvanized and
galvannealed sheets, and two plate mills (160-inch and 110-inch). Indiana Harbor: Our Indiana Harbor facility is located on approximately 1,200 acres in
Indiana, 20 miles southeast of Chicago, Illinois on Lake Michigan. Indiana Harbor is an integrated
mill capable of producing hot-rolled sheet, cold-rolled sheet, and hot dip galvanized sheet for use
in automotive, appliance, service center, tubular, strip converters, and contractor applications.
Indiana Harbors iron producing facilities include a sintering plant and two blast furnaces capable
of producing approximately 3.6 million net tons of hot metal per year. The steel producing shop
consists of two basic oxygen furnaces, 2 ladle metallurgy stations, a vacuum degasser and two
continuous slab casters (88-inch one strand and 80-inch one strand) capable of producing 4.0
million net tons of raw steel per year. Finishing facilities include an 84-inch hot-strip mill, a
76-inch pickle line, an 80-inch five-stand tandem mill, batch annealing facilities, a two-stand
temper mill, 72-inch and 60-inch hot dip galvanizing lines. Cleveland: Our Cleveland facility is located on approximately 1,200 acres on opposite banks of
the Cuyahoga River, near Lake Erie in Cleveland, Ohio. Cleveland is an integrated mill capable of
producing hot-rolled sheet, cold-rolled sheet, and electro-galvanized sheet for automotive, strip
converter, service center and tubular applications. Its iron producing facilities includes a coke
oven battery located in Warren, Ohio and two blast furnaces that are capable of producing
approximately 3.1 million net tons of hot metal per year. Cleveland has two steel producing shops.
The west side shop consists of two basic oxygen furnaces, a ladle metallurgy station and a 63-inch
two strand caster. The east side shop includes two basic oxygen furnaces, a ladle metallurgy
station, a degasser and a 73-inch two strand caster. The two shops combined are capable of
producing approximately 3.8 million net tons of raw steel per year. Finishing facilities include
an 84-inch hot strip mill, an 84-inch continuous pickling line, an 84-inch five stand tandem mill,
batch annealing facilities, an 84-inch one stand temper mill and a hot dip galvanize line,
currently under construction and scheduled to begin production in late 2005. Sparrows Point: Our Sparrows Point facility is located on approximately 3,100 acres on the
Chesapeake Bay near Baltimore, Maryland. Sparrows Point is an integrated mill capable of producing
hot-rolled sheet, cold-rolled sheet, galvanized and Galvalume sheets, and tin plate products for
use in the construction, service center, container, and export markets. The iron producing
facilities include a sintering plant, a blast furnace with pulverized coal injection capable of
producing approximately 4.0 million net tons of hot metal per year. The steel producing shop
includes two vessel basic oxygen furnaces, two ladle metallurgy stations and two continuous slab
casters (104-inch single strand and 89-inch single strand) capable of producing 3.9 million net
tons of raw steel per year. Finishing facilities include a 68-inch hot-strip mill, a 61-inch
continuous pickling line, a 67-inch continuous pickling and five stand tandem mill, a 48-inch five
strand tin tandem mill, batch annealing facilities, and one continuous anneal line, a 67-inch one
stand temper mill, a 48-inch hot dip galvanizing line, two 48-inch galvanize / Galvalume lines,
tin mill facilities (one 48-inch two stand tin temper mill, a 48-inch two stand double cold
reducing mill, and three 38-inch electrolytic tin plating lines). Sparrows Points location on the
Chesapeake Bay makes it the only domestic integrated steel mill with direct ocean access and
provides us with a deep-water port and the capability to ship products and receive raw materials by
ship, thereby reducing our freight costs. 21




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Weirton: Our Weirton, West Virginia facility is located on approximately 2,700 acres near the
Ohio River. Weirton is an integrated mill capable of producing hot-rolled sheet, cold-rolled
sheet, galvanized, electro-galvanized, and tin plate products for use in construction, service
center, container and tubular markets. The iron producing shop includes two blast furnaces capable
of producing approximately 2.5 million net tons of hot metal per year. The steel producing shop
includes two vessel basic oxygen furnaces with two ladle treatment stations and two vacuum
degassing facilities, and a 48-inch four strand continuous caster capable of producing
approximately 3.0 million tons of raw steel per year. Finishing facilities include a 54-inch hot
strip mill, 54-inch and 48-inch continuous picklers, two 48-inch five stand and one 48-inch four
stand tandem cold mills, batch anneal, three continuous anneal lines, three temper mills, (48-inch
one stand for sheet products, a 40-inch two stand and 45-inch two stand for tin products), two
double cold reducing mills, two-48 inch and one 42-inch hot dip galvanizing lines, one 38-inch
electro-galvanizing line, four tin plate lines. Riverdale: Our Riverdale, Illinois facility is located on 165 acres approximately 14 miles
west of our Indiana Harbor facility. Riverdale produces hot rolled sheet for strip converter and
service center applications. Hot metal is supplied from our Indiana Harbor and Burns Harbor blast
furnaces to Riverdales basic oxygen furnaces. Principal facilities include a steel producing shop
with two basic oxygen furnaces, two ladle metallurgy facilities and a 63-inch one strand continuous
slab caster which uses a compact strip process capable of producing approximately 750,000 net tons
of raw steel per year. This caster directly feeds a 62-inch wide tunnel furnace and a seven-stand
hot-strip rolling mill. The Riverdale compact strip mill incorporates the latest casting and
rolling technology designs. Electric Arc Furnaces Georgetown: Our Georgetown, South Carolina facility is located on 60 acres on Winyah Bay.
Georgetown produces wire rod for use by converters and original equipment manufacturers. Steel
producing facilities consist of two alternating current electric arc furnaces capable of producing
approximately 1.0 million net tons of liquid steel per year, with two ladle metallurgy stations, a
six strand continuous billet caster capable of producing approximately 1.0 million net tons of raw
steel per year. Finishing operations include a wire rod rolling mill capable of producing 750,000
net tons of wire rod per year. At Georgetown, we also have a Direct Reduced Iron plant that is
capable of producing about 550,000 metric tons annually. Georgetowns location provides deep water
access and the capability to ship products and receive raw materials by ship. Trinidad and Tobago: In late 2004, we restarted a Hot Briquette Iron plant in Trinidad and
Tobago capable of producing at least 300,000 metric tons annually. Coatesville: Our Coatesville facility is located in Coatesville, Pennsylvania, about 45 miles
west of Philadelphia, Pennsylvania. Coatesville is capable of producing over 450 different
chemistries including a wide range of carbon and alloy discreet plate products (including carbon,
high-strength, low alloy, commercial alloy, military alloy, flame-cut and clad) for use in
infrastructure, chemical process facilities and shipbuilding applications. Steel producing
facilities consist of an alternating current electric arc furnace capable of producing
approximately 0.9 million tons of liquid steel per year, a vacuum degasser, an ingot teaming
facility, and an 85-inch strand slab caster capable of producing approximately 0.8 million net tons
of raw steel per year. Finishing facilities include two plate mills (a 140-inch and a 206-inch)
and heat-treating facilities. An additional finishing facility in Piedmont, North Carolina
provides plasma arc cutting capabilities. Steelton: Our Steelton facility is located in Steelton, Pennsylvania, about 100 miles west of
Philadelphia, Pennsylvania. Steelton produces railroad rails, specialty blooms, and flat bars for
use in railroad and forging markets. Steeltons steel producing facilities consist of a direct
current electric arc furnace capable of producing approximately 1.1 million net tons of liquid
steel per year, a ladle arc reheating furnace, a vacuum degasser, a three strand continuous bloom
caster and an ingot teaming facility capable of producing approximately 1.0 million net tons of raw
steel per year. Finishing operations include a 44-inch blooming mill, a 28-inch rail mill, in-line
rail head-hardening facilities, rail finishing and a 20-inch bar mill. Rolling and Finishing Facilities Hennepin: Our Hennepin, Illinois finishing facility is located on 861 acres on the Illinois
River, about 100 miles west of Chicago, Illinois. Hennepin produces cold rolled sheet and hot dip
galvanized sheet for the electrical, appliance, and construction markets. Hot band substrate is
supplied from our Burns Harbor and Indiana Harbor facilities. Principal operating facilities
include an 84-inch continuous pickling line, an 84 inch five strand tandem mill, batch annealing,
an 84-inch temper mill and an 84-inch hot dip galvanizing line. Hennepins location on the
Illinois River makes it capable of shipping and receiving by barge. 22




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Columbus Coatings: Our Columbus Coatings facility is located in Columbus, Ohio. Columbus
produces hot dip galvanized sheet for the automotive market. Our Burns Harbor facility supplies
cold-rolled coils and is responsible for marketing the finished product. The principal operating
facility includes a 72-inch hot dip galvanizing line. We also operate a steel slitter and
warehousing facility at our Columbus facility through Columbus Processing Company. Conshohocken: Our Conshohocken facility is located in Conshohocken, Pennsylvania, about 15
miles north of Philadelphia, Pennsylvania. Conshohocken produces both coil and discreet plate for
use in construction and military applications. Slabs are provided by our Sparrows Point and
Coatesville facilities. Principal facilities consist of a 110-inch Steckel mill, and heat
facilities. Lackawanna: Our Lackawanna facility is located in Lackawanna, New York, about 5 miles south of
Buffalo. Lackawanna produces cold-rolled sheet and hot dip galvanized sheet for use in the
automotive and OEM markets. Hot-band substrate is supplied principally from our Burns Harbor and
Cleveland facilities. Principal facilities include a 75-inch continuous pickling, a 75-inch
4-stand tandem mill, batch annealing, a temper mill, and a 72-inch galvanizing line. Railroad and Transportation We own the assets of seven short-line railroads, having sold three that were acquired from
Bethlehem, that transport raw materials and semi-finished steel products within our various
facilities, and an interstate truck broker that serves our facilities. We also operate, under long-term charters, two 1,000-foot self-unloading ore vessels that are
used for the transportation of iron ore on the Great Lakes. ISG  Homer Research Facility As part of our acquisition of Bethlehems assets, we acquired the Homer Research Facility, a
research and product development facility in Bethlehem, Pennsylvania. Our research efforts are
focused on process and product technologies that will benefit our customers manufacturing
operations. Joint Ventures Hibbing Taconite: We own a total 62.3% direct and indirect interest in Hibbing Taconite
Company, located in Hibbing, Minnesota, that owns iron ore reserves and operates mines and a
pelletizing plant. Hibbing Taconite has mining and processing facilities that can supply all of
Burns Harbors iron ore pellet expected needs. We own a 90% interest in Ontario Iron Company, which
is located in Hibbing, Minnesota, that owns surface, land and mineral leases used by Hibbing
Taconite. Bethlehem Roll Technologies LLC: We own a 50% interest in Bethlehem Roll Technologies LLC,
which is located in Sparrows Point, Maryland and operates a facility for grinding steel mill rolls
for us and others. Chesapeake Heavy Machine Services, LLC: We own a 50% interest in Chesapeake Heavy Machine
Services, L.L.C., which is located in Sparrows Point, Maryland and manages and markets the services
of a machine shop. Double G Coatings Company, LP: We own a 50% interest in Double G Coatings Company, L.P., or
Double G, which is located near Jackson, Mississippi. This company operates a 270,000-ton-per year
sheet coating line that produces galvanized and Galvalume coated sheets primarily for the
construction market. Sparrows Point provides cold-rolled coils for our share of production and is
responsible for marketing its share of the finished product. WeBCo International, LLC: We own a 50% interest in WeBCo International LLC, which buys and
markets non-prime steel material, principally for our Weirton operation. Steel Health Resources, LLC: We own a 47.5% interest in Steel Health Resources, L.L.C., which
is located in Chesterton, Indiana and operates a healthcare clinic. Steel Construction Systems: We own a 45% interest in Steel Construction Systems, which is
located in Orlando, Florida and manufactures steel studs and roll-formed trusses for residential
and light commercial buildings. AK-ISG Metal Coatings Co: We own a 40% interest in a joint venture which operates an
electro-galvanizing facility, located on the east side of our Cleveland facility. Indiana Pickling and Processing Company: We own a 20% interest in Indiana Pickling and
Processing Company, which is located in Portage, Indiana and operates a pickling line. We account for all these joint ventures on the equity method except Hibbing Taconite, which is
pro-rata consolidated. 23




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##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS See Environmental Matters under PART I, ITEM 1, BUSINESS of this Annual Report for a
discussion of environmental litigation and governmental proceedings. In the ordinary course of business, we are involved in various pending or threatened legal
proceedings. We cannot predict with certainty the outcome of any legal or environmental proceedings
to which we are a party. In our opinion, however, adequate liabilities have been recorded for
losses that are probable to result from legal proceedings and environmental remediation
requirements. If such liabilities prove to be inadequate, however, it is reasonably possible that
we could be required to record a charge to earnings that could be material to the results of
operations and cash flows in a particular future quarterly or annual period. We believe that any
ultimate additional liability arising from these actions, that is reasonably possible over what has
been recorded, will not be material to our consolidated financial condition and sufficient
liquidity will be available for required payments. As described elsewhere, we purchased only specified assets of Georgetown, Weirton, Bethlehem,
Acme and LTV through sales in bankruptcy proceedings. The sellers in those transactions retained
liability for certain claims related to the assets that we purchased, including personal injury
claims. The sale orders issued by the U.S. Bankruptcy Courts having jurisdiction over each
respective transaction entered orders barring assertion of claims (other than those in respect of
certain specifically assumed liabilities, which did not include asbestos-related liabilities)
against us related to the assets in question, and confirming that neither we nor our subsidiaries
shall be responsible for any liabilities related to the assets (other than those in respect of
certain specifically assumed liabilities which did not include asbestos-related liabilities). The
sale orders issued by the U.S. Bankruptcy Courts also found that under no circumstances could we be
deemed a successor to any of the sellers for purposes of any liabilities. We believe the manner
through which our facilities were purchased in conjunction with the attendant orders of the U.S.
Bankruptcy Court places us in a better position than other steelmakers with substantial exposure to
asbestos-related liability or off-site environmental liability. Despite the foregoing it is
possible that future claims with respect to historic asbestos exposure could be directed at us. The
risk of incurring liability as the result of such claims is considered remote. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to security holders for a vote during the fourth quarter 2004. 
 PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK, RELATED SECURITY HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ISGs common stock is listed on the New York Stock Exchange under the stock symbol ISG and has
been so listed since December 12, 2003, when it first was listed in connection with the Companys
initial public offering. The approximate number of stockholders of record of ISGs common stock is
45 as of February 28, 2005. The price of ISGs common stock on February 28, 2005 was $41.75. The quarterly high
and low price for ISG common stock during 2004 follows: Quarter
    
    
    High
    
    
    
    Low1st quarter
    
    
    $
    43.50
    
    
    
    $
    33.702nd quarter
    
    
    $
    41.50
    
    
    
    $
    25.453rd quarter
    
    
    $
    35.50
    
    
    
    $
    27.984th quarter
    
    
    $
    41.25
    
    
    
    $
    27.86
 24




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##### Table of Contents



Between December 12, 2003 and December 31, 2003, inclusive, the highest sales price of ISGs
common stock was $42.14 per share, and the lowest sales price of ISGs common stock was $31.04 per
share. No cash dividends have been declared since ISGs inception. Our credit facilities permit us to
pay cash dividends only under limited circumstances. In general, we are permitted to pay cash
dividends so long as we are not in default under the credit facilities and the amount of the
dividend, when taken together with any other restricted payments and dividends made previously,
does not exceed:  
    the sum of:  
    $10 million,
    20% of our aggregate consolidated net income for full fiscal years ending on or after
December 31, 2003 but before the date of the dividend, but only for those years where
our consolidated net income is positive, and
    50% of the net cash proceeds received by us from an issuance of our equity that
remain after full repayment of our tranche A term loan, and 100% of the net cash
proceeds received by us from an issuance of our equity that remain after full repayment
of both our tranche A and tranche B term loans minus:  
    the sum of:  
    all dividends and other restricted payments made by us and our subsidiaries under
the relevant terms of our credit facilities, and
    for full fiscal years ending on or after December 31, 2003 but before the date of
the dividend in which our consolidated net income is negative, 100% of the absolute
value of that negative amount, capped in any year at the then-current maximum permitted
dividend amount. At December 31, 2004, the maximum available for these payments was about $260 million. We are
permitted to pay cash dividends in connection with or under the terms of our employee benefit plans
and stock option plans. The terms of any future credit arrangement that we enter may contain
similar restrictions on our ability to pay dividends or make payments or distributions with respect
to our capital stock. Transfer Agent and Registrar The transfer agent and registrar for our common stock is the Registrar and Transfer Company,
10 Commerce Drive, Cranford, New Jersey 07016, (800) 866-1340. 25




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##### Table of Contents



ITEM 6. SELECTED HISTORICAL FINANCIAL DATA The following selected historical consolidated financial data as of and for the year ended
December 31, 2004 and 2003 and for the period from inception, February 22, 2002, through December
31, 2002 is derived from ISGs audited consolidated financial statements. See PART 1, ITEM 7,
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in this
Annual Report for a description of acquisitions and other factors affecting the comparability of
these amounts. Financial and Operating Summaries (Dollars in millions, except per share data)
    
    2004
    
    
    2003
    
    
    2002Statement of Operations DataNet sales
    
    $
    9,015.9
    
    
    $
    4,070.0
    
    
    $
    933.1Costs and expenses
    
    
    8,200.6
    
    
    
    4,066.5
    
    
    
    816.5Interest and financing expense, net
    
    
    59.6
    
    
    
    50.9
    
    
    
    2.6Income (loss) before income taxes
    
    
    755.7
    
    
    
    (47.4
    )
    
    
    114.0(Benefit) provision for income taxes
    
    
    (271.7
    )
    
    
    (23.9
    )
    
    
    45.9Net income (loss)
    
    
    1,027.4
    
    
    
    (23.5
    )
    
    
    68.1Deemed dividend on conversion of Class B common stock
    
    
    
    
    
    
    (73.6
    )
    
    
    Net income (loss) applicable to common stock
    
    $
    1,027.4
    
    
    $
    (97.1
    )
    
    $
    68.1Income (loss) per shareBasic
    
    $
    10.41
    
    
    $
    (1.26
    )
    
    $
    1.02Diluted
    
    $
    9.99
    
    
    $
    (1.26
    )
    
    $
    0.99Balance Sheet DataCash and cash equivalents
    
    $
    606.7
    
    
    $
    193.6
    
    
    $
    9.8Receivables, inventories and other current assets
    
    
    2,323.8
    
    
    
    1515.0
    
    
    
    384.5Current liabilities
    
    
    (1,381.0
    )
    
    
    (826.5
    )
    
    
    (234.1
    )Working capital
    
    $
    1,549.5
    
    
    $
    882.1
    
    
    $
    160.2Property, plant and equipment, net
    
    $
    1,104.9
    
    
    $
    861.9
    
    
    $
    244.8Total assets
    
    
    4,488.6
    
    
    
    2,636.2
    
    
    
    668.1Total long-term debt and capital lease obligations
    
    
    806.8
    
    
    
    575.5
    
    
    
    68.4Total liabilities
    
    
    2,484.5
    
    
    
    1,680.8
    
    
    
    363.9Stockholders equity
    
    
    2,004.1
    
    
    
    955.4
    
    
    
    304.2Other DataCapital expenditures
    
    $
    267.2
    
    
    $
    96.9
    
    
    $
    55.7Raw steel production capability at year end (net tons in thousands)
    
    
    23,000
    
    
    
    18,000
    
    
    
    7,000Raw steel production (net tons in thousands)
    
    
    17,758
    
    
    
    11,274
    
    
    
    3,081Steel products shipped (net tons in thousands)
    
    
    15,545
    
    
    
    10,406
    
    
    
    2,602Employees at year end
    
    
    15,500
    
    
    
    12,000
    
    
    
    3,400Common stock outstanding at year end (shares in thousands)
    
    
    100,036
    
    
    
    97,471
    
    
    
    69,663
 26




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview ISG has become one of the largest integrated steel producers in North America with annual raw
steel production capability of about 23 million net tons in less than three years from its
inception in February, 2002. ISG ships a variety of steel products from 13 major steel producing
and finishing facilities in eight states. The Company has grown by acquiring out of bankruptcy the
steelmaking assets of LTV, Acme, Bethlehem, Weirton and Georgetown (see
note 3 Acquisitionsin the Notes to Consolidated Financial Statements). In October 2004, Ispat International N.V. (Ispat), LNM Holdings N.V. (LNM) and ISG agreed to
merge in a two-step transaction. The first step, the acquisition of privately held LNM by Ispat
for 100% stock consideration, was completed in December 2004. The new entity, renamed Mittal Steel
N.V. (Mittal), will acquire ISG for a combination of cash and stock expected to total about $4.25
billion creating the largest steel company in the world with a combined annual raw steel production
capability of about 70 million net tons. The proposed merger of ISG and Mittal received early
termination of the waiting period under the Hart-Scott-Rodino Act in December 2004. The merger is
subject to approval by ISG and Mittal shareholders at meetings scheduled on April 12, 2005 and
satisfaction of other customary closing conditions. The transaction is expected to be completed
soon after the shareholders meetings. Historically, global steel supply exceeds demand, except in the United States where imports of
steel are required to meet demand. Accordingly, when the U. S. dollar has been strong, substantial
steel imports have flowed to the United States intensifying competition and placing downward
pressure on domestic steel prices. The recent significant global growth in both production of and
demand for steel, particularly in the Peoples Republic of China, and decline in the U.S. dollar
reduced imports into the domestic market. In addition, ocean going freight vessels and raw
materials such as coke, iron ore and steel scrap have been in short supply, driving up prices for
these commodities. Higher international raw material costs and a relatively weak U.S. dollar
cause imports of foreign steel to be more expensive than domestically produced products, reducing
the availability of steel imports into the domestic market. When worldwide demand is strong, there
is also less incentive for foreign steel producers to ship products into the domestic market. As a
result, domestic steel producers were able to raise steel prices to unprecedented levels in 2004.
With a weak U. S. dollar, and continuing growth in major economies around the world, the domestic
steel market conditions are generally expected to remain good for 2005. However, these favorable
steel market conditions could reverse just as rapidly as they arose. The U.S. economy has been improving with relatively strong growth in Gross Domestic Product
(GDP) in the second half of 2003 and in 2004. The consolidation within the domestic steel industry
has reduced the number of competitors, mainly by financially sound producers acquiring facilities
from competitors who have gone through the bankruptcy process. Consolidation and selective
rationalization of some capacity could continue as evidenced by our merger announcement with
Mittal. Nevertheless, competition in the industry remains strong. Consolidated Results of Operations The discussion below relates to the results of ISG for each of the years ended December 31,
2004 and 2003 as well as the period from inception, February 22, 2002, through December 31, 2002.
Prior to the acquisition of assets from LTV in April 2002, we had no operations. In May 2003, we
acquired the assets from Bethlehem, which more than doubled our shipping capacity. In 2004, we
acquired Weirton and Georgetown adding additional shipping capacity. Sales have grown 10 times
from $900 million in 2002 to $9 billion in 2004. As a result of this rapid growth, our financial
results for the years ended December 31, 2004 and 2003 and the period from inception, February 22,
2002, through December 31, 2002 are not comparable. 27




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##### Table of Contents



Consolidated Results of Operations for the Year Ended December 31, 2004 For 2004, we reported net income of about $1.0 billion ($9.99 per diluted share) that included
an unusual income tax benefit of about $390 million ($3.78 per diluted share). Net income
excluding this tax benefit which is more indicative of ISGs results of operation was about $638
million ($6.20 per diluted share). This unusual income tax benefit resulted from recognizing in the
fourth quarter 2004 a portion of the net deferred tax asset acquired when we purchased the
Bethlehem assets in 2003 in a tax-free reorganization. At December 31, 2003 we had incurred a
cumulative tax loss from inception and, therefore, the estimated $1 billion deferred tax asset
acquired from Bethlehem was fully offset by a valuation allowance. In 2004, ISGs $756 million
income before income taxes on net sales of about $9 billion and shipments of 15.5 million net tons,
the strong global steel market, assumptions about expected future taxable income and available and
prudent tax planning strategies made it more likely than not that ISG would realize benefits from
deferred taxes. Therefore, the valuation allowance was adjusted by $390 million (see Income taxes
below) in the fourth quarter. Our net sales per ton shipped averaged $580 for 2004 compared to $391 for 2003. Strong demand
for steel products globally allowed the domestic industry to implement price increases, including
surcharges to offset higher raw material costs. We also improved our product mix from a higher
percent of shipments of value added coated, plate and tin plate products as well as lower percent
of shipments of hot rolled products. Steel prices rose in 2004 to unprecedented levels in the
third quarter but declined somewhat during the seasonally slow fourth quarter. The hot rolled spot
price, a good proxy for steel pricing, was approximately $300 per ton at the end of 2003 and rose
to approximately $670 per ton at the end of 2004. The table below shows shipments by product and certain other data for the periods shown. Pro
forma information reflects the acquisitions of the Bethlehem and Weirton assets as if they had
occurred on January 1, 2003. The pro forma information does not include any information related to
the Georgetown asset acquisition because those assets had not operated for some period prior to our
acquiring them. Actual
    
    
    
    
    
    
    Pro Forma2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003Hot Rolled
    
    
    41
    %
    
    
    46
    %
    
    
    71
    %
    
    
    41
    %
    
    
    41
    %Cold Rolled
    
    
    19
    %
    
    
    19
    %
    
    
    22
    %
    
    
    18
    %
    
    
    17
    %Coated
    
    
    21
    %
    
    
    20
    %
    
    
    7
    %
    
    
    21
    %
    
    
    21
    %Plate
    
    
    10
    %
    
    
    8
    %
    
    
    
    
    
    
    9
    %
    
    
    8
    %Tin Plate
    
    
    5
    %
    
    
    3
    %
    
    
    
    
    
    
    7
    %
    
    
    9
    %Other
    
    
    4
    %
    
    
    4
    %
    
    
    
    
    
    
    4
    %
    
    
    4
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Net sales ($ millions)
    
    $
    9,015.9
    
    
    $
    4,070.0
    
    
    $
    933.1
    
    
    $
    9,472.6
    
    
    $
    6,366.6Average net sales per ton shipped
    
    $
    580
    
    
    $
    391
    
    
    $
    359
    
    
    $
    578
    
    
    $
    413Shipments (000 net tons)
    
    
    15,545
    
    
    
    10,406
    
    
    
    2,602
    
    
    
    16,398
    
    
    
    15,433Raw steel production (000 net tons)
    
    
    17,758
    
    
    
    11,274
    
    
    
    3,081
    
    
    
    18,468
    
    
    
    16,861Income (loss) before income taxes
    
    
    755.7
    
    
    
    (47.4
    )
    
    
    114.0
    
    
    
    799.6
    
    
    
    109.5Net income (loss) applicable to common ($ millions)
    
    $
    1,027.4
    
    
    $
    (97.1
    )
    
    $
    68.1
    
    
    $
    1,052.5
    
    
    $
    (1.7
    )Diluted income (loss) per common share
    
    $
    9.99
    
    
    $
    (1.26
    )
    
    $
    0.99
    
    
    $
    10.22
    
    
    $
    (0.02
    )
 28




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##### Table of Contents



Costs and expenses Cost of sales was about 87% of sales for 2004 compared to 94% in 2003. Price increases offset
higher raw material and employment related costs. During 2004, our average costs per ton for coke
increased about 55%, scrap about 85% and iron ore about 30%. Higher operating rates due to
improved market conditions allowed us to spread fixed costs over more tons improving our margins.
Employment costs were higher as a 3% wage increase for our USWA represented employees was effective
at the beginning of the second quarter 2004 and production bonus payments were higher. Our total
variable compensation for profit sharing for all employees and contributions to the USWA welfare
benefit trust was about $267 million in 2004 compared to $9 million in 2003. We did not adopt LIFO for the inventories acquired in the Bethlehem acquisition in 2003. On
January 1, 2004, we adopted the LIFO cost method of accounting for substantially all existing
inventories. We also reduced the number of inventory pools from a pool for each manufacturing facility to a
single pool. We believe that the LIFO method of valuing inventories is preferable because it more
closely matches current costs and revenues in periods of increasing costs. We believe that a
single method and a single pool for substantially all inventories is preferable because, in order
to further achieve the operating synergies from our acquisitions, we continue to reallocate the
supply of semi-finished materials to our finishing facilities among our steel producing facilities
and to reallocate the sources of certain raw materials among our steel producing facilities in
order to improve operating efficiencies. Having a single LIFO pool for substantially all
inventories eliminates the potential for changes in inventory value solely because of this movement
of inventory among manufacturing facilities. Consistent with the policy adopted for inventories in
the Bethlehem acquisition, we accounted for the inventories at the Weirton and Georgetown
acquisitions under FIFO or average cost method during 2004. We expect to include these inventories
which totaled about $295 million at December 31, 2004, in the single LIFO pool beginning in January
2005. The LIFO provision for 2004 was $362 million compared to only $15 million during 2003. This
increase was driven principally by the significant increases in (1) the inventories included in
LIFO and (2) the cost of purchased coke, scrap, iron ore and other metallics. Selling, general and administrative expenses increased in 2004 to $261 million, about 2.9% of
sales, compared to $154 million or 3.8% of sales for 2003. Depreciation expense in 2004 of $129 million increased from $76.0 in 2003, principally as a
result of acquisitions. Net financing expense was $60 million in 2004 compared to $51 million in
2003. Miscellaneous income of $17 million in 2004 resulted from our share of tariffs that the United
States government collected under antidumping laws for unfairly traded imports. The Continued
Dumping and Subsidy Offset Act enables affected producers to receive the proceeds from those
tariffs. Income taxes The acquisition of the Bethlehem assets in 2003 was structured as a tax-free reorganization
under Internal Revenue Code (IRC) Section 368(a) (1) (G). As a result, the historical tax
attributes of Bethlehem, principally net operating loss carryforward and depreciable basis in
property as limited by IRC Section 382, are carried forward to ISGs consolidated income tax
returns. We estimate the net deferred tax asset as limited by Section 382 acquired from Bethlehem
was about $1.0 billion. The ultimate realization of these tax benefits depends on our ability to
generate sufficient future taxable income and agreement by the Internal Revenue Service. Generally
accepted accounting principles allow deferred tax assets to be recorded only if based on
managements judgment sufficient evidence exists to support that it is more likely than not
(greater than a 50% likelihood) that the tax benefits will be realized. At December 31, 2003, based
on ISGs limited two year existence and cumulative tax loss from inception, management decided that
the available evidence was insufficient to conclude that it was more likely than not that the
deferred tax asset would be realized. Accordingly, a full valuation allowance was established for
the total net deferred tax asset in 2003. 29




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##### Table of Contents



In a period of less than three years, ISG has grown from inception to become one of the
largest steel producers in North America and is soon expected to become a significant portion of
the largest steel company in the world. The global steel market improved significantly during
2004. ISGs strong financial performance in 2004 confirms the benefits of its consolidation and
restructuring strategy. Based on ISGs 2004 financial results, the significant improvement in the
global steel industry, assumptions about expected future taxable income and available and prudent
tax planning strategies, ISG recorded an adjustment to the valuation allowance of about $390
million in the fourth quarter of 2004 on the basis that it is more likely than not (greater than
a 50% likelihood) that a portion of ISGs deferred tax asset would be realized. ISGs effective
tax would have been about 15% for 2004 if the valuation allowance had not been adjusted in the
fourth quarter and would have been about a more typical 37% if the valuation allowance had never
been recorded. The 15% effective rate for 2004 is the combined effect of the temporary differences
that arose or reversed during 2004, the benefit of the NOL and IRC Section 382 depreciation limit
carryforwards from 2003 and, as required by generally accepted accounting principles, the benefit
of temporary differences, principally depreciation, that are expected to be available in 2005 and
2006 to carryback against the current income taxes paid for 2004 without the adjustment to the
valuation allowance. While there are numerous scenarios under which ISG could generate sufficient
income before income taxes in the future to realize the recorded net deferred tax asset of $430
million, ISG would need to generate about $225 million of income before income taxes per year from
2005 through 2009 or about $12 to $14 per ton shipped based on annual shipments of 16 to 18 million
net tons to realize that asset. If in the future, based on the then available positive and negative evidence, it is
determined that the valuation allowance needs to be adjusted using the more likely than not
criterion, we will adjust the valuation allowance through a provision or benefit for income taxes
in the income statement in that period. Consolidated Results of Operations for the Year Ended December 31, 2003 In 2003, we had a net loss of $23.5 million ($1.26 per diluted share after the deemed dividend
related to converting our class B common to common stock) on net sales of about $4.1 billion and
shipments of 10.4 million net tons. In early May 2003, we completed the acquisition of
substantially all of the assets of Bethlehem and its subsidiaries. We accounted for this
acquisition as a business combination and the results of these former Bethlehem facilities are
included in our consolidated financial statements since the date of the acquisition. The Bethlehem
acquisition more than doubled our shipping capacity. Sales of these former Bethlehem operations
represented about 55% of our 2003 sales. The addition of the Bethlehem facilities substantially
broadened our product mix with the addition of plate, tin and rail products. It also improved our
product mix by increasing the percentage of higher value-added cold rolled and coated products. The $32 increase in our net sales per ton from 2002 to 2003 resulted from the Bethlehem
acquisition. Excluding the effect of Bethlehems product mix, the average price for 2003 was about
$40 per ton below the 2002 price. Prices were lower, principally as a result of additional industry
capacity being restarted in late 2002 that was fully operational during all of 2003, as total
demand for steel remained about the same. Costs and expenses Cost of sales in 2003 was about 94% of sales per ton compared to 81% in 2002. As mentioned
previously, excluding the effect of the Bethlehem acquisition, average price per ton was down $40.
Excluding the effect of a higher value added product mix, costs per ton shipped were higher in 2003
than in 2002 due to reduced raw steel production for the second and third quarters causing fixed
costs to be absorbed over fewer net tons. In addition, 2002 results included certain low cost slabs
and coils purchased initially from LTV. Our 2003 results also included $51.8 million of non-cash
charges in connection with the acquisition of Bethlehem assets. Under business combination
accounting, inventory acquired is recorded at a fair value that allows for a reasonable margin for
costs to complete processing and selling efforts. As a result, the cost of sales was recorded at an
amount greater than our costs to produce by $40.8 million. Also, Bethlehem had certain supply
contracts for electricity, natural gas and coke at prices below current market rates at the
acquisition date. We recognized the value of these below market contracts as an asset and were
expensing this asset over the life of the associated contracts. Consequently, we recognized a
non-cash charge of $11.0 million in 2003 related to these contracts. In the fourth quarter of 2003,
we wrote off about $15.2 million of these intangible assets as a provision for deferred income
taxes. For more information, see the discussion 30




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##### Table of Contents



below on federal income tax provision. During 2003, liquidation of LIFO inventory quantities
reduced cost of sales by about $9.0 million. In 2003, our costs increased for natural gas, coke and employment. Natural gas spot prices for
facilities that were part of ISG in 2002 increased about 50% to average $5.81 per MMBTU during 2003
as compared to approximately $4 per MMBTU for 2002, or $46 million for the year. Coke costs for the
facilities that were part of ISG in 2002 increased for the coke ovens and purchased coke,
increasing costs about $42 million in 2003 as compared to 2002. Our employment costs were higher in
2003 as compared to 2002, principally from higher required contributions to the Steelworkers
Pension Trust under our labor agreements. An expense of $2,800 per steelworker employed on the
dates the labor agreements were ratified was recognized for the Bethlehem facilities in 2003 and
the LTV and Acme facilities in 2002. The resulting expense was about $19.1 million and $7.6
million, respectively. In addition, 2003 includes expense of $1.50 per hour paid for steelworkers
pension for a total of about $25.9 million. Selling, general and administrative expenses increased in 2003 on an absolute basis from 2002
levels as a result of the acquisition of Bethlehem assets but decreased from 5.4% of sales for the
period ended December 31, 2002, to 3.8% of sales for the year ended December 31, 2003. Depreciation expense was $76.0 million and increased from 2002 as a result of the Bethlehem
acquisition. Interest and other financing expense  net Interest costs increased from $2.6 million in 2002 to $50.9 million in 2003 as a result of our
borrowing under our new credit facility entered into in May 2003 to finance the acquisition of
Bethlehem assets and as a result of our assumption of capital leases and certain debt of Bethlehem. Income taxes The acquisition of Bethlehem assets was structured as a tax-free reorganization. Accordingly,
the historical tax attributes of Bethlehem as limited by IRC Section 382 are carried forward to
ISGs consolidated federal income tax return. These tax attributes include Bethlehems net
operating loss carry forward and depreciable basis in property, plant and equipment. At the date of
acquisition, the net deferred tax assets acquired were not recognized because there were a number
of required actions related to, among other matters, Bethlehems plan of liquidation under federal
bankruptcy law. During the fourth quarter of 2003, the Bankruptcy Court confirmed Bethlehems plan
of liquidation, which subsequently became effective on December 31, 2003. Accordingly, in the
fourth quarter of 2003, we determined it was appropriate to recognize the acquired net deferred tax
assets and any related valuation allowance. We estimated the net deferred tax assets as limited by
Section 382 acquired from Bethlehem to be about $1.0 billion. The ultimate realization of these tax
benefits depends on our ability to generate future taxable income and agreement by the Internal
Revenue Service to the transaction structure. Generally accepted accounting principles allow
deferred tax assets to be recorded only if based on managements judgment sufficient evidence
exists to support that it is more likely than not (greater than a 50% likelihood) that the asset
will be realized. Based on ISGs two year limited existence and cumulative tax loss from inception,
management concluded that the available evidence was insufficient to support that it was more
likely than not that the deferred tax asset will be realized. Accordingly, a full valuation
allowance was established for the Bethlehem and ISG deferred tax asset in the fourth quarter of
2003 resulting in a provision for federal income taxes of $5.3 million. In addition, generally
accepted accounting principles require that we recognize any tax benefits of the Bethlehem
acquisition realized in 2003 through the income statement only after writing off any remaining
intangible assets acquired from Bethlehem. Accordingly, in the fourth quarter of 2003, we wrote off
$15.2 million of intangible assets as a provision for deferred income taxes. These adjustments
combined with carrying back a portion of our 2003 tax loss to obtain a federal income tax refund
resulted in an unusually high tax benefit in 2003. Consolidated Results of Operations for the Period from February 22 (inception) through December 31,
2002 In 2002, our first period of operation, we had net income of $68.1 million on net sales of
$933.1 million and shipments of 2.6 million net tons. The substantial majority of these products
were sold to third-party processors and service centers on the spot market. Our Hennepin and
Riverdale facilities commenced operations in the fourth quarter of 2002. However, these facilities
did not achieve their production capacities or contribute significantly to our net sales in 2002. 31




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Prices at the start of 2002 were at their lowest level in many years, but rapidly increased
through the first nine months driven by significant domestic capacity reduction, the impact of
Section 201 tariffs and inventory replacement by service centers. Fueled by these factors, spot
market prices increased by as much as 80% during 2002. During the majority of 2002, as we
established our market presence, we priced our products below the spot market price until the
fourth quarter when we began to price at the prevailing market price. Sales throughout 2002
steadily increased as we restarted idled facilities and built our customer base. During this
restart period, our net sales were positively impacted by the relatively high prices in the spot
market. Cost of sales was 81% of sales in 2002. Labor costs in 2002 were incurred under an interim
collective bargaining agreement, which remained in place until our new collective bargaining
agreement became effective on December 15, 2002. Our new agreement had a minimal impact on our
results of operations for 2002, but did result in higher future costs. Our energy requirements for
2002 were purchased at both market rates and under future contracts throughout 2002. In late 2002,
natural gas prices began to escalate from a price of approximately $3 per MMBTU to approximately $4
per MMBTU; however, due to forward contracts purchased at earlier prices covering approximately 70%
of our requirements, there was no significant effect on our results of operations in 2002. In addition, cost of sales for 2002 includes $21.4 million of non-recurring costs related to
the start-up of previously idled LTV and Acme assets and a non-cash charge of $21.6 million due to
the adoption of the LIFO method for inventory valuation. Cost of sales in 2002 also included a
charge of $10.6 million relating to USWA contract-related expenses as well as the initial
contribution to the USWAs multiemployer pension plan for the employees covered by our collective
bargaining agreement. Finally, our cost of sales for 2002 was in part influenced by our initial
purchase of slabs and raw materials from LTV at spot market prices, which were at historically low
levels. Subsequently in the second half of 2002, spot market steel prices rose significantly. As a
result, we were able to convert the slabs and raw materials acquired from LTV to finished products
which were sold at favorable prices. Selling, general and administrative expenses were $50.2 million during 2002. These expenses
consisted primarily of salaries and expenses for sales and marketing functions both at our
corporate headquarters and each of our operating facilities, legal and professional fees and
information system development costs. Depreciation of $11.0 million in 2002 was calculated on a straight-line basis over estimated
useful lives from three to 20 years. The depreciation recorded in 2002 and to be recorded
thereafter results from the advantageous purchase prices paid for the idled LTV and Acme assets
that were only a fraction of the selling entities prior book value for the assets. Total net interest expense of $2.6 million includes $1.6 million of interest expense on credit
facilities, $1.4 million of amortization of deferred debt fees and was reduced by $250,000 of
capitalized interest and $173,000 of interest income in 2002. During 2002, our income tax expense was $45.9 million. Our effective tax rate was 40.3%.
Current deferred tax assets relate primarily to differences between financial and tax reporting for
inventories and accrued expenses. Liquidity and Capital Resources Our business is capital intensive and requires substantial capital expenditures for upgrading
and maintaining our equipment and remaining in compliance with environmental laws and regulations.
Our short-term liquidity needs arise primarily from capital expenditures, working capital
requirements and principal and interest payments related to our outstanding debt. In 2004, we met
these liquidity requirements with cash provided by operations and additional net debt. We define liquidity as our cash position and remaining availability under our revolving credit
facility. As of December 31, 2004, we had liquidity of $848.1 million consisting of cash of $606.7
million and available borrowing capacity of $241.4 million under our revolving credit facility. As
of December 31, 2003 and 2002, we had liquidity of $432.7 million and $102.9 million. Cash provided by operating activities for 2004 was $695.2 million. Net income was $1,027.4
million and the benefit for deferred income taxes was $429.9 million. Receivables increased as a
result of higher fourth quarter 32




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sales due principally to significantly higher prices. Inventory quantities for coke, ore and
scrap increased during 2004 to support our planned higher shipments during 2005. We also made
advances to secure certain coke in the international market, increasing our prepaid and other
current assets. Higher prices for raw materials resulted in higher accounts payable at year-end.
Our fourth quarter employment cost accruals for profit sharing and VEBA are expected to be paid in
early 2005. Accrued income taxes provided cash during the year as we received a refund in early
2004 for carrying back our 2003 net operating loss and we are not required to pay all our estimated
2004 income taxes until 2005. Cash provided by operations for 2003 was $288.9 million. Cash from
operating activities was positive despite incurring a pre-tax loss because of $112.7 million in
non-cash charges to income, principally for depreciation and deferred income taxes and reducing
working capital and other items by $199.7 million. During 2002, cash used by operating activities
was $104.0 million and was primarily for building working capital related to accounts receivable
and inventory during the start-up of our operations. Cash used by investing activities was $472.7 million during 2004 largely due to acquisitions.
We acquired a hot briquetted iron (HBI) facility in Point Lisas, Trinidad and Tobago and
substantially all of the assets of Weirton and Georgetown for a total of about $224 million cash
plus certain assumed liabilities. The amounts include $13 million paid to ISU- represented former
Weirton employees. We made capital expenditures of $267 million including approximately $165
million for base maintaining and the balance for strategic investments including a caster rebuild
at Burns Harbor and conversion of Clevelands idled continuous anneal line to an automotive quality
hot dip galvanizing line. We anticipate making capital expenditures in 2005 of about $425 million
including approximately $100 million for required environmental improvements largely associated
with the new maximum available control technology air quality standards or MACT. Cash used by investing activities was $885.2 million for 2003 as we paid $822.6 million (net
of cash acquired) to purchase substantially all of the assets of Bethlehem. This amount is net of
cash of $41.1 million received subsequent to the closing from Bethlehem as required in the
acquisition agreements for working capital adjustments and amounts not needed for secured, priority
and administrative claims. Also, this amount includes payments of $81.6 million related to the
transition assistance program for USWA- represented former Bethlehem employees. We made capital
expenditures of $96.9 million in 2003 including rebuilding the hearth at the Indiana Harbor H-4
blast furnace that was damaged from a hot metal leak. The blast furnace is now expected to operate
for at least eight to ten years before needing a major rebuild. Cash used in investing activities in 2002 was $185.7 million. This included $144.3 million for
the acquisition of assets from LTV and Acme. Capital expenditures were $55.7 million, principally
for the start-up of the previously idled LTV and Acme facilities. Proceeds from asset sales were $18.4 million in 2004, $34.3 million in 2003 and $14.3 million
in 2002 principally for surplus non-operating assets acquired from Bethlehem and LTV. We expect
such proceeds of about $30 million in 2005. Cash provided by financing activities for 2004 was $190.6 million. In April 2004, we issued
$600 million aggregate principal amount of 6.5% Senior Notes due 2014 (the Notes) that were sold
at 99.096% of par resulting in an effective yield to maturity of 6.625%. A portion of the
proceeds from the Notes were used to repay outstanding debt totaling $323.1 million. Cash provided by financing activities for 2003 was $780.1 million. In May 2003, a private
equity offering provided $156.7 million. In connection with the Bethlehem asset acquisition, we
entered into new credit facilities, which, among other things, replaced our prior secured revolving
line of credit. The new credit facilities permit borrowings up to $1.0 billion and consist of a
$350.0 million revolving credit facility and $650 million term loan facilities. In December 2003,
we completed our initial public offering that provided
$491.6 million of net proceeds. Some of these proceeds were
used to repay the term loan as required in our credit facilities. These amounts may not be
reborrowed under the agreements. Cash provided by financing activities was $299.5 million in 2002
from equity offerings and net borrowings. No borrowings were outstanding under our revolving credit facility at December 31, 2004. The
facility contains customary affirmative and negative covenants for credit facilities of this type,
and customary events of default. If an event of default occurs under the facility, the lenders
under the facility will be entitled to take various actions, including demanding payment for any
amounts outstanding and foreclosing on any collateral. Under the facility, our 33




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pending merger is a change of control that will terminate the facility unless amended. The
Notes issued in 2004 contain covenants typical of investment grade debt. At December 31, 2004, we
were in compliance with all of our covenants in respect of the Notes. ISG expects to have sufficient liquidity to finance its operating needs for the year 2005. Environmental Matters See PART 1, ITEM 1, BUSINESS  ENVIRONMENTAL MATTERS of this Annual Report for a discussion
of ISG environmental matters. The table below represents the discounted amounts recorded for environmental liabilities and
related changes during the years: 2004
    
    
    2003
    
    
    2002($ millions)Beginning balance
    
    $
    208.4
    
    
    $
    56.4
    
    
    $
    Liabilities recognized at acquisition
    
    
    12.1
    
    
    
    159.0
    
    
    
    57.2Accretion and changes in estimates and
timing of spending
    
    
    15.1
    
    
    
    1.0
    
    
    
    3.5Liabilities relating to properties sold
    
    
    (13.2
    )
    
    
    
    
    
    
    Spending for remediation
    
    
    (17.1
    )
    
    
    (8.0
    )
    
    
    (4.3
    )Ending balance
    
    $
    205.3
    
    
    $
    208.4
    
    
    $
    56.4
 Undiscounted environmental expenditures related to these liabilities for the next five years
and thereafter are expected to be: 2005
    
    $
    41.02006
    
    
    35.72007
    
    
    29.02008
    
    
    23.92009
    
    
    23.3Thereafter
    
    
    218.9Totalundiscounted.
    
    $
    371.8
 In
2004, the Company spent about $132 million for recurring costs to manage hazardous
substances and pollution in ongoing operations. Environmental compliance related capital
expenditures to limit or monitor pollutants were $20 million in 2004 and the Company expects to
spend an average of $35 million per year for capital expenditures through 2009 to meet
environmental standards. Contractual Obligations The following table sets forth our contractual obligations at December 31, 2004, and the
effect such obligations are expected to have on our liquidity and cash flow in future periods. Payments due by PeriodOne-
    
    
    Three-(dollars in millions)
    
    
    
    
    
    Less than
    
    
    Three
    
    
    Five
    
    
    BeyondAt December 31, 2004
    
    Total
    
    
    one year
    
    
    Years
    
    
    Years
    
    
    Five YearsDebt
    
    $
    643.8
    
    
    $
    1.5
    
    
    $
    38.1
    
    
    $
    0.6
    
    
    $
    603.6Guarantee of joint venture leases
    
    
    10.8
    
    
    
    2.6
    
    
    
    5.3
    
    
    
    2.9
    
    
    
    0.0Operating leases
    
    
    234.6
    
    
    
    46.8
    
    
    
    61.2
    
    
    
    48.0
    
    
    
    78.6Capital leases
    
    
    225.7
    
    
    
    56.1
    
    
    
    10.1
    
    
    
    11.6
    
    
    
    147.9Other long-term liabilities
    
    
    387.3
    
    
    
    52.7
    
    
    
    65.8
    
    
    
    47.4
    
    
    
    221.4Pensions and other retiree benefits
    
    
    221.5
    
    
    
    11.4
    
    
    
    32.7
    
    
    
    55.1
    
    
    
    122.3Purchase obligations
    
    
    18,627.4
    
    
    
    2,206.1
    
    
    
    3,193.3
    
    
    
    2,861.0
    
    
    
    10,367.0$
    20,351.1
    
    
    $
    2,377.2
    
    
    $
    3,406.5
    
    
    $
    3,026.6
    
    
    $
    11,540.8
 34




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Purchase obligations include long-term contracts for our requirements of certain
commodities at current prices and others on a take or pay basis but exclude purchase orders issued
in the ordinary course of business, because they generally are cancelable if our needs change. We
expect to purchase goods and services on such ordinary course purchase orders of about $6 to 7 billion per year over the next few years. Our ability to meet our debt service obligations and
reduce our total debt will depend upon our future performance, which in turn, will depend upon
general economic, financial and business conditions, along with competition, legislation and
regulation  factors that are largely beyond our control. We believe that cash flow from
operations, together with other available sources of funds including additional borrowings under
our credit facilities will be adequate for at least the next twelve months for making required
payments of principal and interest on our indebtedness and for funding anticipated capital
expenditures and working capital requirements, including purchase obligations. However, we cannot
assure that our operating results, cash flow and capital resources will be sufficient for repayment
of our debt in the future. Recent Accounting Pronouncements The Financial Accounting Standards Board has recently issued the following Statement of Financial
Accounting Standards (SFAS) that ISG had not adopted as of December 31, 2004:  
    SFAS No. 151, Inventory Costs.This statement amends the guidance to require abnormal
amounts for idle facility expense, freight, handling costs, and wasted material to be
treated as current period expense. ISG was already accounting for these items as current
period expense, so this statement will not impact our financial statements.
    SFAS No. 152, Accounting for Real Estate Time-Sharing Transactions.ISG has had no
transactions that are covered by this statement; so this statement should not impact our
financial statements.
    SFAS No. 153, Exchanges of Nonmonetary Assets.This statement amends the guidance that
provided an exception to the principle that exchanges of nonmonetary assets should be based
on the fair values exchanged, unless the transaction does not result in a culmination of
the earnings process. Now, all nonmonetary exchanges must be recorded at fair value,
unless the exchange has no commercial substance. This statement applies prospectively to
exchanges that occur after fiscal periods beginning after June 15, 2005 but application is
permitted to exchanges occurring in fiscal periods after this statement was issued. The
nonmonetary asset exchange described in Note (11) Commitmentsoccurred in 2003 before this
statement was issued so this statement does not impact our current financial statements but
will affect accounting for future similar transactions.
    SFAS No. 123 (revised 2003), Share-Based Payment.This statement amends the guidance to
require the use of the fair value based measurement in accounting for share based payment
arrangements and eliminates the use of the intrinsic value method previously allowed. ISG
was already accounting for share based compensation under the fair value method so this
statement will not impact our financial statements.
    Recent consensuses of the Emerging Issues Task Force were not material to ISGs
financial statements. New accounting standards required to be adopted during 2004 were not material to ISGs financial
statements. Critical Accounting Policies and Estimates ISGs consolidated financial statements require management to select accounting principles
where alternatives exist and make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and in required disclosures. Future results may differ
from these amounts because outcomes may differ from those on which management based their
estimates. We believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements. Purchase Accounting.Accounting for acquisitions requires us to allocate the cost of the
enterprise to the specific assets acquired and liabilities assumed based on their estimated fair
value at the date of acquisition. Accounting principles allow us up to one year to acquire all
necessary valuation information for the allocation. Subsequent changes in fair value estimates
after the one year period are not recognized until a transaction occurs or an impairment of a
long-lived asset is required. While independent appraisals and other valuations are used to
allocate the cost of acquisitions, management is still required to make significant estimates and
assumptions, for example, regarding the timing of the sale of certain surplus assets acquired that
are not expected to be used in our business. In 35




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addition, when the fair value of the assets acquired exceeds their cost, we are required to
pro rate that excess to reduce non-current assets making the amount assigned to all assets and
liabilities more important. Revenue Recognition.Sales are recognized upon shipment in accordance with specific customer
instructions and all substantial risks of ownership are transferred to the customer. Shipments are
made only under a valid contract or purchase order where the sales price is fixed or determinable
and collectability of the resulting receivable is reasonably assured. Sales are made with no rights
to return product, other than for defective materials. ISG provides a full allowance for estimated
claims for products that have been shipped that may not meet customer specifications and other
adjustments. The allowance is calculated based on claims that have been submitted but not resolved
and anticipated future claims based on historical experience. The allowance for claims and other
adjustments is a component of the accounts receivable allowances disclosed on the balance sheet and
the provision for claims and other adjustments is a component of net sales. The adequacy of the
allowance is periodically reviewed by comparison to actual experience. Claims and other adjustments
in any future period arising from sales in 2004 could differ from our current estimates. Allowances for Bad Debts.We evaluate the collectability of our receivables on a regular basis
based on a combination of factors. When we become aware that it is likely that a customer may not
meet its financial obligations to us, such as in the case of bankruptcy or deterioration in the
customers financial performance, we record a specific allowance for bad debts to reduce the
related receivable to the amount we reasonably expect to collect. We also record allowances for
accounts receivable for all other customers based on a variety of factors, including the length of
time the receivables are past due and historical experience. If circumstances related to specific
customers change, our estimates of the recoverability of receivables are adjusted. Bad debts have
not been significant since inception. The allowance for bad debts is included as a component of
accounts receivable allowances disclosed on the balance sheet and could change if our estimates at
December 31, 2004, prove excessive or inadequate. Inventories.We have used LIFO inventory accounting for about 80% of our inventories at
December 31, 2004. Consistent with our prior practice for acquisitions, we did not adopt LIFO for
the inventories at the Weirton and Georgetown acquisitions during 2004, but expect to include that
inventory in our single LIFO pool beginning January 2005. We also periodically evaluate our
inventory carrying value to provide reasonable assurance that the amounts are stated at the lower
of cost or market. If actual market conditions are less favorable than those projected by
management, inventory write-downs may be required. Such lower of cost or market write-downs are
typically infrequent under LIFO inventory accounting. Impairment of Long-Lived Assets.We evaluate the recoverability of the carrying value of
long-lived assets used in operations, consisting of property, plant and equipment and intangible
assets, regularly and when specific indicators of impairment, such as reductions in demand or
significant economic factors are present. Our policy is to determine whether the carrying value of
an asset is impaired based on a comparison to the undiscounted estimated future cash flows from the
asset. If such a comparison indicated that there is impairment, the impaired asset would be written
down to fair value, which is typically calculated using estimated future cash flows and a discount
rate based upon our weighted average cost of capital. Significant management judgment is required
in the forecast of future operating results that is used in the preparation of estimated future
cash flows and others may reasonably arrive at different conclusions. It is reasonably possible
that actual future net sales and the remaining estimated economic life of the assets could differ
from the estimates used to assess the recoverability. In that event, impairment charges or
shortened useful lives of certain long-lived assets could be required. To date, no material
impairments have been recognized. Deferred Income Taxes.Our acquisition of the assets of Bethlehem was structured under the
federal Internal Revenue Code to allow us to acquire the historical tax attributes of Bethlehems
assets and net operating loss carryforwards within certain limitations. Generally accepted
accounting principles allow us to record such deferred tax assets only when based on available
positive and negative evidence it is more likely than not (a likelihood of more than 50%) that
we will realize these tax benefits. At December 31, 2003, ISG had less than two years of operations
and those resulted in a cumulative tax loss. Accordingly, there was insufficient evidence to
support recognizing the asset at that date and we established a full valuation allowance at
December 31, 2003, for our net deferred tax asset acquired from Bethlehem and those generated by
ISG. Because the fair value of the Bethlehem net assets acquired exceeds our cost, we are required
to reduce the fair value assigned to noncurrent assets other than deferred taxes. If we had
determined that it was more likely than not that we would realize these deferred tax 36




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assets based on available evidence at December 31, 2003, it was possible that we could have
recognized an extraordinary gain in 2003 after reducing all of the Bethlehem noncurrent assets to
zero. In the fourth quarter of 2003, we realized certain tax benefits from the Bethlehem
acquisition. Generally accepted accounting principles required that we reduce any long-term
intangible assets acquired from Bethlehem before recognizing any benefit for income taxes in the
income statement. Accordingly, we wrote off $15.2 million of intangible assets through the
provision for deferred income taxes in 2003. As previously discussed, the global and domestic steel industry has been undergoing
significant consolidation and restructuring. In a period of less than three years, ISG has grown
from inception to one of the largest steel producers in North America with 2004 sales of about $9
billion and income before income taxes of about $756 million. After the planned merger with Mittal
in April 2005, ISG will become a significant portion of the largest steel company in the world.
ISGs strong financial performance in 2004 confirms the benefits of its consolidation and
restructuring strategy. Because of these 2004 financial results, combined with the significant
improvements that occurred in the global steel industry during 2004, assumptions about expected
future taxable income and available and prudent tax planning strategies, ISG concluded that it is
more likely than not (a likelihood of more than 50%) that a portion of ISGs deferred tax asset
will be realized. Accordingly, ISG adjusted the valuation allowance in the fourth quarter of 2004
through a benefit for income taxes in the income statement. While there are numerous scenarios
under which ISG could generate sufficient income before income taxes in the future to realize the
recorded net deferred tax asset of $430 million, ISG would need to generate about $225 million of
income before income taxes per year from 2005 through 2009 or about $12 to $14 per ton shipped
based on annual shipments of 16 to 18 million net tons to realize that asset. Significant judgment is required in determining the appropriate valuation allowance, if any,
under the more likely than not criterion and others could come to different conclusions. If in
the future, based on the then available positive and negative evidence, it is deemed that the
valuation allowance needs to be adjusted using the more likely than not criterion, we will adjust
the valuation allowance through a provision or benefit for income taxes in the income statement in
that period. Our income tax returns are subject to audits by the Internal Revenue Service and state tax
authorities. To date, we have not been audited by any of these authorities. Because of
uncertainties in interpretations of certain IRC Section 382 regulations, ISG has not recorded
potential deferred tax assets related to the tax basis of certain depreciable assets acquired from
Bethlehem in excess of the values assigned to those assets under generally accepted accounting
principles that are not probable of being realized. These uncertainties will be resolved through
the Internal Revenue Service audit process. We believe that the outcome of any future audits would
not have a material adverse impact on the Companys financial position, cash flows or results of
operations. Environmental and Other Contingencies.We are currently engaged in the investigation and
remediation of environmental contamination at a number of our facilities pursuant to both federal
and state environmental laws. For a more detailed site-by-site discussion, see "PART 1, ITEM 1,
BUSINESS  ENVIRONMENTAL MATTERS in this Annual Report. We are subject to changing and
increasingly stringent environmental laws and regulations concerning air emissions, water
discharges and waste disposal, as well as certain remediation activities that involve the clean up
of soils and groundwater. We recognize a liability for environmental remediation costs when it is
probable that such remediation will be required and we can estimate the amount. Environmental
liabilities assumed in connection with the acquisition of steel facilities and other assets are
recorded based on engineering estimates performed by independent consultants at fair value based on
the present value of the estimated future cash payments discounted at 8%. Environmental liabilities
that are not recorded as part of a business combination are not discounted. There are numerous
uncertainties over both the timing and the ultimate costs that we expect to incur with respect to
this work. Significant judgment is required in making these estimates and it is reasonable that
others may come to different conclusions. If, in the future, we are required to investigate and
remediate any currently unknown contamination and waste on properties we own, we may record
significant additional liabilities. Also, if our estimates of the cost to remediate currently known
contamination and waste change, we will reduce or increase the recorded liabilities through credits
or charges in our income statement. Pensions and Other Postemployment Benefits. Accounting for defined benefit pensions and other
postemployment benefits requires the use of actuarial techniques and assumptions including, among
others, assumptions about employees future retirement decisions, mortality of participants, future
increases in wages and 37




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health care costs, discount and interest rates and plan continuation. These assumptions have a
material impact on the net obligation disclosed in the notes to the consolidated financial
statements and the amount recognized as expense for a year. For example, we do not plan to continue
to provide retiree medical benefits after the expiration of the current labor agreement with the
United Steelworkers of America in 2008. Accordingly, we assume that only those who are eligible and
choose to retire under the current labor agreement will receive retiree medical benefits. We are
also assuming that the elimination of this retirement benefit in 2008 will not significantly affect
the ages at which our employees choose to retire. In addition, the current retiree medical benefit
plan requires that plan beneficiaries pay premiums in 2011 to cover any costs per capita increases
after 2008. Changing these assumptions would have a significant impact on our disclosed obligation
and annual expense for other postemployment benefits. A one-percentage-point increase or decrease in assumed health care cost trend rates would have
the following effect (dollars in millions): Increase
    
    
    DecreaseEffect on total annual service and interest cost components
    
    $
    0.6
    
    
    $
    (0.6
    )Effect on accumulated postretirement benefit obligation
    
    
    8.5
    
    
    
    (7.9
    )
 As a result of the Bethlehem and Weirton acquisitions, ISG is required to provide lifetime
medical coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) to the
Bethlehem and Weirton retirees and their surviving spouses. Upon a retirees death, his or her
surviving spouse and dependent children may elect coverage up to an additional 36 months. ISG
charges the participants a premium to participate in this program, and individuals who leave the
program may not re-enter. Persons with ongoing illnesses or a high expectation of using healthcare
services are more likely to enroll in this program than others. COBRA regulations preclude the use
of a factor to reflect this phenomenon in establishing premiums. Therefore, ISG is likely to incur
healthcare costs in excess of the premium amounts received from the participants. Accordingly, we
recorded an actuarial liability in connection with these acquisitions based on assumptions
regarding the number of participants who will remain in the COBRA plan and their health status.
Differences between our future experience and the actuarially expected amounts will be amortized
over the expected remaining lives of the participants. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to certain risks associated with the fluctuation in interest rates and prices
of consumable commodities, including natural gas, heating oil, coal, coke, steel scrap and certain
non-ferrous metals. We seek to minimize the potential adverse impact of those market risks through
the use of appropriate management techniques that could include derivative financial instruments.
At December 31, 2004, we held cash flow hedges with respect to natural gas and zinc with the
effective portion of such instruments reflected in accumulated other comprehensive income. We
conduct the majority of our business in the United States and all of our revenues and expenses are
transacted in U.S. dollars. As a result, our results of operations are not directly materially
affected by fluctuations in the foreign currencies. We currently have no financial instruments in
place for managing the exposure for foreign currency exchange rates. Therefore, a hypothetical
change in the exchange rate of the U.S. dollar versus other major currencies would impact our
future earnings, fair values or cash flows only to the extent it affects domestic imports of,
demand for and price of raw materials and steel products. Energy costs expose us to cost volatility particularly on natural gas requirements. Based on
combined pro forma 2004 production, a $1 per MMBTU change in natural gas prices would have changed
production costs by approximately $7.6 million per month. In an effort to manage the risks
associated with price fluctuations on natural gas and other commodities, from time to time, we use
a variety of hedging instruments including forward contracts, futures, swaps and options. At any
point in time, we may utilize some or all of these hedging instruments in our portfolio. We are
also exposed to interest rate risk arising from the variable rate financing on any future
borrowings against our revolving credit facility. There were no borrowings on this facility in
2004. On December 31, 2004, all of ISGs outstanding debt was at fixed interest rates. Also, see previous discussion of coal, coke and steel scrap in PART 1, ITEM 1. BUSINESS 
RAW MATERIALS. 38




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ISGs Financial Statements and the accompanying Notes that are filed as part of this Report
are listed under PART IV, ITEM 15. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K and are
set forth on pages F-1 through F-28 immediately following the signature pages of this Annual
Report.




ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None




ITEM 9A. CONTROLS AND PROCEDURESEVALUATION OF DISCLOSURE CONTROLS

(a) Managements Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining a system of internal control over
financial reporting for ISG. Internal control over financial reporting includes those policies and
procedures that pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements
for external purposes in accordance with accounting principles generally accepted in the United
States of America, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the Companys assets that could have a material effect on the financial statements. Because of its inherent limitations, a system of internal control over financial reporting can
provide only reasonable assurance and may not prevent or detect misstatements. Further, because of
changes in conditions, effectiveness of internal controls over financial reporting may vary over
time. Under the supervision and with the participation of our management, we conducted an evaluation
of the effectiveness of ISGs system of internal control over financial reporting based on the
framework in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, we identified three material
weaknesses in internal control over financial reporting as of December 31, 2004, as follows:  
    Deficiencies in policies and procedures relating to the inadequate review
of information associated with the accumulation of various costs incurred 39




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for raw material, semi-finished and finished inventories, including the
accounting for inter-company profit and inclusion of all appropriate costs
in ending inventory balances. These deficiencies could result in
material errors in the Companys accounting for inventories and cost of sales.  
    Deficiencies in policies and procedures
associated with a lack of access controls and
security of certain computer systems, including
electronic spreadsheets used in the compilation and
presentation of the Companys financial information,
which could result in material errors in a
significant number of account balances and
disclosures due to a lack of integrity of the data
used in preparing the Companys consolidated
financial statements.
    Deficiencies in policies and procedures
associated with the Companys fraud risk prevention
controls related to adequate segregation of duties in
the recording of revenue and the related accounts
receivable, including verification of customer
invoice pricing and approval of credit memos, which
could result in material errors in the Companys
accounting for revenue transactions and related
accounts receivable. As a result of the aforementioned material weaknesses, the Company concluded that ISGs system
of internal control over financial reporting was not effective as of December 31, 2004. Our
assessment of the effectiveness of ISGs internal control over financial reporting has been audited
by KPMG LLP, an independent registered public accounting firm, as
stated in their report, which is
included herein. (b) Changes in Internal Control Over Financial Reporting During the Fourth Quarter of 2004 During the fourth quarter 2004, we continued to implement a new general ledger/consolidation
system and continued to improve documentation of our accounting policies and procedures. There
were no other changes in our internal controls over financial reporting that occurred during the
fourth quarter 2004 that have materially affected or are reasonably likely to materially affect our
internal controls over financial reporting. 40




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(c) Managements Report on Disclosure Controls Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (Exchange Act) as of December
31, 2004 (Evaluation Date). In preparing our Exchange Act filings, we utilized processes and procedures to provide
reasonable assurance that information relating to ISG that was required to be disclosed in such
filings was recorded, processed, summarized and reported within the time periods specified by
applicable SEC rules and was accumulated and communicated to ISGs management as appropriate to
allow timely decisions regarding required disclosure. These processes and procedures are designed
to, among other things, mitigate the effect of the aforementioned material weaknesses in our
internal control over financial reporting on information relating to ISG that was required to be
disclosed in our Exchange Act filings. We have expended substantial financial resources, and our
senior management and accounting staff has devoted significant time and attention, in support of
these efforts. Some of the specific steps that we took to mitigate the effect on our disclosure controls of
each material weakness disclosed above that could have potentially affected our Exchange Act
filings include, for example: we issued instructions to all of our locations that they should
consistently use in 2004 the methods used to determine the audited costs for inventory at December
31, 2003, and reviewed in detail our cost 41




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accounting and related valuation of our inventories at all of our locations as part of our year-
end LIFO accounting procedures; undertook substantial additional review and verification of account
balances at year-end to detect any potential misstatements that may have resulted from lack of
adequate controls over end user computing; and undertook substantial additional reviews at year-end
to detect any potential misstatements that may have resulted from inadequate segregation of duties
over revenue and the related accounts receivable activities. We believe that these extraordinary processes and procedures, which are encompassed in our
current disclosure controls, mitigated the potential effect of the identified material weaknesses
in internal control over financial reporting on the disclosure that was ultimately included in our
Exchange Act filings. As a result of these rigorous disclosure controls, we believe, and our chief
executive officer and chief financial officer have certified to their knowledge that, this annual
report on form 10-K does not contain any untrue statements of material fact or omit to state any
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered in this report. There may be deemed to be an inconsistency between our conclusion as to material weaknesses in
our internal control over reporting and our view as to our disclosure controls. However, as
explained below, based on their evaluation of our disclosure controls and procedures, our Chief
Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our
disclosure controls and procedures were effective such that the information relating to ISG and its
consolidated subsidiaries required to be disclosed in Exchange Act filings is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms, and is
accumulated and communicated to ISG management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding this disclosure. Our Chief
Executive Officer and Chief Financial Officer reached this conclusion notwithstanding the existence
of material weaknesses in ISGs internal control over financial reporting, because they believe
that the extraordinary processes and procedures described above mitigated the potential effect of
the identified material weaknesses in internal control over financial reporting on ISGs disclosure
controls and procedures. We note that the scope of, and interrelation between, disclosure controls
and internal control over financial reporting is not yet well defined by law, regulation or
interpretation. We believe, however, that there are significant differences between disclosure
controls and procedures and internal control over financial reporting. If, on the other hand,
disclosure controls and procedures and internal control over financial reporting are ultimately
determined to effect substantially the same standard under these circumstances, then in such case,
ISGs disclosure controls and procedures also would have been ineffective as of the Evaluation Date
for precisely the same reasons that we have concluded that ISGs system of internal control over
financial reporting was not effective as of the Evaluation Date. (d) Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
International Steel Group Inc.: We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting (see Item 9A (a)), that International Steel Group Inc.
and subsidiaries (ISG, Company) did not maintain effective internal control over financial
reporting as of December 31, 2004, because of the effect of
material weaknesses identified in
managements assessment, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). ISGs
management is responsible for maintaining effective internal control over financial reporting and
for its 42




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assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of 43




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changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The following material weaknesses have been
identified and included in managements assessment as of
December 31, 2004:  
    Management identified deficiencies in the Companys policies
and procedures relating to the inadequate review of information associated with the accumulation of
various costs incurred for raw material, semi-finished and
finished inventories, including the accounting for
inter-company profit and inclusion of all appropriate costs
in ending inventory balances, which could result
in material errors in the Companys accounting for
inventories and cost of sales.
    Management identified deficiencies in the Companys policies
and procedures associated with a lack of access controls and
security of certain computer systems, including electronic
spreadsheets used in the compilation and presentation of the
Companys financial information, which could result in
material errors in a significant number of account balances
and disclosures due to a lack of integrity of the data used
in preparing the Companys consolidated financial statements.
    Management identified deficiencies in the Companys policies
and procedures associated with the Companys fraud risk
prevention controls related to adequate segregation of duties
in the recording of revenue and the related accounts
receivable, including verification of customer invoice
pricing and approval of credit memos, which could result in
material errors in the Companys accounting for revenue
transactions and related accounts receivable. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of ISG as of
December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the years in the two-year
period ended December 31, 2004, and
for the period from inception, February 22, 2002, through December 31, 2002. The aforementioned
material weaknesses were considered in determining the nature, timing, and extent of audit tests
applied in our audit of the 2004 consolidated financial statements, and this report does not affect
our report dated March 15, 2005, which expressed an unqualified opinion on those consolidated
financial statements. In our opinion, managements assessment that the Company did not maintain effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on criteria established in Internal
ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion,
because of the effect of the material weaknesses described above on the achievement of the
objectives of the control criteria, ISG has not maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). 44




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Managements Report on Disclosure Controls (Item 9A (c))
discloses conclusions of the Companys Chief Executive Officer
and Chief Financial Officer that, as of December 31, 2004, the
Companys disclosure controls and procedures were effective.
Such information is inconsistent with the information disclosing
managements conclusion in Managements Report on Internal
Control over Financial Reporting (Item 9A(a)) that, due to the
existence of material weaknesses as of December 31, 2004, the
Companys system of internal control over financial reporting
was not effective. /s/ KPMG
LLP Cleveland, Ohio
March 15, 2005 45




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Directors and Executive Officers of the Registrant The directors and executive officers of International Steel Group Inc. as of February 28,
2005 are as follows: Name
    
    Age
    
    PositionWilbur L. Ross
    
    
    67
    
    
    Chairman of the Board of DirectorsRodney B. Mott
    
    
    53
    
    
    President, Chief Executive Officer and DirectorV. John Goodwin
    
    
    61
    
    
    Chief Operating OfficerLeonard M. Anthony
    
    
    50
    
    
    Chief Financial OfficerLonnie A. Arnett
    
    
    59
    
    
    Vice President, Controller and Chief Accounting OfficerJerome V. Nelson
    
    
    44
    
    
    Vice President, Sales & MarketingGordon C. Spelich
    
    
    46
    
    
    Vice President, Business DevelopmentKaren A. Smith
    
    
    50
    
    
    Vice President, Human ResourcesCarlos M. Hernandez
    
    
    50
    
    
    General Counsel and SecretaryRand V. Araskog
    
    
    73
    
    
    DirectorWilliam C. Bartholomay
    
    
    76
    
    
    DirectorJames C. Boland
    
    
    65
    
    
    DirectorPeter J. Powers
    
    
    60
    
    
    Director
 Wilbur L. Ross, Jr. has served as the Chairman of the ISG board of directors since
ISGs inception. Mr. Ross is the Chairman and Chief Executive Officer of WL Ross & Co. LLC, a merchant
banking firm, a position he has held since April 2000. Mr. Ross is also the Chairman and Chief
Executive Officer of WLR Recovery Fund L.P., WLR Recovery Fund II L.P., Asia Recovery Fund, Asia
Recovery Fund, Asia Recovery Fund Co-Investment, Nippon Investment
Partners and Absolute Recovery Hedge Fund. Mr. Ross is also the
general partner of WLR Recovery Fund L.P., WLR Recovery Fund II L.P.,
Asia Recovery Fund, and Absolute Recovery Hedge Fund. Mr. Ross
is also Chairman of International Coal Group, Inc., International
Textiles Group, Inc. and Nano-Tex, LLC in the United States. Mr. Ross is a board member of
Insuratex, Ltd. in Bermuda, Nikko Electric Co. and Ohizumi Manufacturing Company in Japan, Tong Yang Life Insurance Co. in Korea, and of Syms Corp., Clarent Hospital Corp. and News Communications Inc. in the
United States. Mr. Ross is also a
member of the Business Roundtable. Previously, Mr. Ross served as the Executive Managing Director
at Rothschild Inc., an investment banking firm, from October 1974 to March 2000. Mr. Ross was also
formerly Chairman of the Smithsonian Institution National Board. Rodney B. Mott has served as ISGs President and Chief Executive Officer and a member of the ISG
board of directors since April 2002. Mr. Mott has over 30 years of management experience in the metals industry. He
served as President and Chief Executive Officer of Pechiney Rolled Products, an aluminum rolling
company and a division of Pechiney SA from January 2000 to August 2001. From 1987 to 2000 Mr. Mott
held various positions with Nucor Corporation, a mini-mill steel producer, including Vice
President/General Manager of Nucor Steel, a division of Nucor Corporation, at the Blytheville,
Arkansas and Berkley, South Carolina facilities. Prior to joining Nucor, Mr. Mott was
Superintendent of Operations at Lone Star Steel from 1986 to 1987. He began his metals management
career at U.S. Steels Fairless Hills operation, where he held positions of increasing
responsibility during a 14-year career from 1971 to 1986. Mr. Mott is also a board member of the American Iron and Steel
Institute and the National Association of Manufacturers. V. John Goodwinhas been our Chief Operating Officer since March 2003. Prior to that, he
served as Chairman and Chief Executive Officer of Steel Consultants from 2000 to February 2003. Mr.
Goodwin has 35 years of leadership experience in the American steel industry including 27 years
with U.S. Steel, an integrated steel producer. During his service with U.S. Steel, Mr. Goodwin held
positions of increasing responsibility including serving as General Manager of Gary Works from 1987
to 1994, General Manager of Mon Valley Works from 1984 46




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to 1987 and various supervisory and management positions at Fairless Works from 1967 to 1984.
After leaving U.S. Steel, Mr. Goodwin assumed the position of CEO/COO of National Steel from 1994
to 1996. Mr. Goodwin was also the former President and General Manager of Beta Steel Corp. from
1998 to 2000. Leonard M. Anthonyhas been our Chief Financial Officer since May 2003. He has over 25 years
of financial management experience. He joined Bethlehem Steel Corporation, an integrated steel
producer, in 1979 and advanced through increasingly responsible financial management positions. He
served as Corporate Credit Manager from October 1985 to October 1986, Director of Financial
Services from November 1986 to November 1990, Director Risk Management from December 1990 to
February 1993, Manager Financial Planning from March 1993 to March 1995, Assistant Treasurer from
March 1995 to March 1998, Vice President and Treasurer from October 1999 to September 2001 and
Senior Vice President Finance and Chief Financial Officer from October 2001 to May 2003. Lonnie A. Arnettjoined ISG in November 2003 and currently serves as our Vice President,
Controller and Chief Accounting Officer. He worked at Bethlehem from 1984 until October 2003, most
recently in a similar capacity. Mr. Arnett has 35 years of experience in accounting and finance
with over 25 years being in the steel industry. Jerome V. Nelsonhas served as our Vice President, Sales & Marketing since April 2002. Prior
to that, he was employed with Birmingham Steel Corporation, a mini-mill steel producer, where he
served as Vice President, Sales & Marketing from December 2001 to March 2002 and General Sales
Manager from August 2000 to December 2001. Previously Mr. Nelson was employed with Nucor Steel
Corporation, a mini-mill steel producer, as Sales Manager from November 1992 to August 2000. Mr.
Nelson began his sales career in the metals industry at LTV Steel in July 1983, worked for
Bethlehem Steel Corporation from July 1988 to July 1992, and worked for Armco Advanced Materials
from July 1992 to November 1992. Gordon C. Spelichhas been our Vice President, Business Development since April 2002. Prior to
joining ISG, Mr. Spelich worked as an independent consultant serving the steel industry from
September 2001 until April 2002. Prior to that, Mr. Spelich served as Vice President of Operations
at Pechiney Rolled Products, an aluminum rolling company and a Division of Pechiney S.A. from March
2000 to September 2001 and Manager, Operations at Nucor Steel, a mini-mill steel producer, from
October 1991 to March 2000. Karen A. Smithhas been our Vice President, Human Resources since January 2004 and previously
served as Assistant Vice President & Corporate Manager Human Resources since April 2002. Prior to
that, she held various positions in Human Resources and Benefits at Pechiney Rolled Products, LLC,
an aluminum rolling company and a Division of Pechiney S.A., from October 1992 to March 2002,
including Benefits Administrator, Benefits Manager, and Manager Benefits and Compensation. Carlos M. Hernandezhas served as General Counsel and Secretary of the Company since September
2004. From March 2000 until August 2004, Mr. Hernandez served in various positions in the law
department of Fleming Companies, Inc., including as Executive Vice President, General Counsel and
Secretary. Fleming Companies, Inc. filed for bankruptcy protection under Chapter 11 of the US
Bankruptcy Code on April 1, 2003. From 1981 until 1999, Mr. Hernandez held various positions of
increasing responsibility in the law department of Armco Inc. and subsidiaries, and from October to
December of 1999 he was an attorney with AK Steel. Rand V. Araskoghas served as a director since March 2004. Mr. Araskog is the retired chairman
and chief executive officer of ITT Corporation, a diverse, global engineering company, and served
as chairman of the National Security Telecommunications Advisory Committee from 1982 to 1984. For
the past five years, Mr. Araskog has been self-employed as a private investor. He currently is a
member of the boards of ITT Industries, ITT Educational Services and Rayonier, Inc. William C. Bartholomayhas served as a director of ISG since April 2002. Mr. Bartholomay
currently serves as Vice Chairman of Willis Group Holdings, Inc., an insurance brokerage and
financial services company, which he joined in August 2003. Prior to that time he served as the
President of Near North National Group, an insurance brokerage and financial services company, a
position which he had held for more than five years. Mr. 47




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Bartholomay also serves as the Chairman Emeritus of the Atlanta Braves baseball team and as a
director of both WMS Industries Inc., a gaming manufacturer, and Midway Games Inc., a publisher of
entertainment software. James C. Bolandhas served as a director since March 2004. Mr. Boland was President and CEO of
the Cleveland Cavaliers, a professional basketball team and the Gund Arena Company, a professional
sports and entertainment management company, from 1998 to 2002 and has served as the Vice Chairman
from 2003 to the present. Mr. Boland is also a 34-year veteran of Ernst & Young, where he served in
numerous capacities, including vice chairman and regional managing partner. He is currently a
member of the boards of Invacare Corporation, The Sherwin-Williams Company and Goodyear Tire &
Rubber Company. Peter J. Powershas served as a director since March 2004. Mr. Powers founded Powers Global
Strategies, LLC, a consulting firm, in 1998, where he currently serves as President and Chief
Executive Officer. Mr. Powers has also served as First Deputy Mayor of the City of New York. Mr.
Powers has also had a 25-year career as an attorney, certified public accountant and consultant. He
is currently a member of the boards of Fox Entertainment Group and NDS Group, Plc. On October 15, 2001, Bethlehem and 22 of its subsidiaries filed separate petitions for
reorganization under Chapter 11 of the Code in bankruptcy court. As described above, some of our
officers were employed by Bethlehem at the time it filed for bankruptcy. Code of Ethics; Committee Charters; Corporate Governance Guidelines Independence of Directors To assist it in making its independence determinations, the Board has adopted categorical
standards to identify relationships that are deemed to impair a directors independence. If none
of the relationships enumerated in the categorical standards are present, a director will be deemed
to be independent. These categorical standards are attached as an annex to our Guidelines on
Significant Corporate Governance Issues, a copy of which is posted on our website at
www.intlsteel.com and a printed copy will be furnished upon request to: Investor Relations,
International Steel Group Inc., 4020 Kinross Lakes Parkway, Richfield, Ohio 44286. These
categorical standards, which are consistent with the general requirements of independence under the
New York Stock Exchange (NYSE) rules, provide as follows:  1.
    A director who is an employee or whose immediate family member is an executive
officer, of ISG or any of its controlled affiliates is not independent until three
years after the end of such employment relationship.2.
    A director who receives, or whose immediate family member receives, more than
$100,000 per year in direct compensation from ISG, other than the normal compensation
and benefits for service as a director (provided such compensation is not contingent in
any way on continued service), is not independent until three years after he or she
ceases to receive more than $100,000 in such compensation. Compensation received by an
immediate family member for service as a non-executive employee of ISG need not be
considered in determining independence under this test.3.
    A director who is affiliated with or employed by, or whose immediate family
member is affiliated with or employed in a professional capacity by, a present or
former internal or external auditor of ISG is not independent until three years after
the end of either the affiliation or the auditing relationship.4.
    A director who is employed, or whose immediate family member is employed, as an
executive officer of another company where any of ISGs present executives serves on
that companys compensation committee is not independent until three years after the
end of such service or employment relationship.5.
    A director who is an executive officer or an employee, or whose immediate
family member is an executive officer, of another company that makes payments to, or
receives payments from, ISG for property or services in an amount which in any single
fiscal year exceeds the greater of $1 million 48




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or 2% of such other companys consolidated gross revenues, is not independent until
three years after falling below such threshold.6.
    A director who serves as an executive officer of a charitable organization that
receives contributions from ISG in any single fiscal year in excess of the greater of
$1 million or 2% of such charitable organizations consolidated gross revenues is not
independent until three years after falling below such threshold.7.
    A director who has any other material ongoing relationship with ISG will not be
considered independent for as long as such relationship is ongoing. The Board has determined that Messrs. Araskog, Bartholomay, Boland and Powers all qualify as
independent under these categorical standards of independence and under the rules of the NYSE. The
non-management directors will meet in regularly scheduled executive sessions, outside of the
presence of management. The Board has selected Mr. Ross to preside at these executive sessions.
The independent directors will also meet alone as a group on at least an annual basis. Committees of the Board of Directors Our Board currently has standing Audit, Compensation, and Nominating and Corporate Governance
Committees. Audit Committee Our Audit Committee currently consists of Messrs. Araskog, Bartholomay and Boland (Chairman).
The Board has determined that all members of the Audit Committee satisfy ISGs categorical
standards of independence as well as the applicable independence requirements for Audit Committee
members under NYSE listing standards and federal securities laws, and that all members of the Audit
Committee are financially literate as required by the NYSE listing standards. The Board has also
determined that Messrs. Araskog and Boland are audit committee financial experts as defined by
the SEC and that each has accounting or related financial management expertise as required by the
NYSE listing standards. For more information on the relevant work experience of Messrs. Araskog
and Boland supporting this determination, see the biographical information presented under
Directors and Executive Officers of the Registranton page 40. Mr. Boland currently serves on the
audit committee of three other public companies and Mr. Bartholomay serves on the audit committee
of two other public companies. The Board has determined, after considering the extensive
experience in accounting and service on public company audit committees of Messrs. Boland and
Bartholomay, respectively, and taking into account their respective other work commitments, that
their service on these other audit committees does not undermine their ability to serve on our
Audit Committee. The Audit Committee has adopted a charter to govern its activities, a copy of
which is posted on our website at www.intlsteel.com and a printed copy will be furnished upon
request to: Investor Relations, International Steel Group, Inc., 4020 Kinross Lakes Parkway,
Richfield, Ohio 44286. Compensation Committee Our Compensation Committee currently consists of Messrs. Araskog, Bartholomay (Chairman) and
Powers. The Compensation Committee reviews, approves and makes recommendations to the Board
concerning our compensation practices, policies and procedures for our executive officers. The
Compensation Committees duties also include, among other things, establishing executive
compensation policies and programs, reviewing and approving executive officer compensation,
recommending incentive compensation plans and equity-based plans, administering compensation plans,
overseeing regulatory compliance with respect to compensation matters, reviewing employment and
severance agreements with our executive officers, and reviewing director compensation. The Audit
Committee has adopted a charter to govern its activities, a copy of which is posted on our website
at www.intlsteel.com and a printed copy will be furnished upon request to: Investor Relations,
International Steel Group, Inc., 4020 Kinross Lakes Parkway, Richfield, Ohio 44286. Nominating and Corporate Governance Committee Our Nominating and Corporate Governance Committee currently consists of Messrs. Araskog
(Chairman), Bartholomay and Powers. The duties of the Nominating and Corporate Governance
Committee include, among other things, identifying individuals qualified to become members of our
Board, recommending candidates to fill vacancies and newly-created positions on our Board,
recommending whether incumbent directors should be 49




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nominated for re-election to our Board, and developing and recommending corporate governance
principles applicable to our Board and our employees. The Nominating and Corporate Governance
Committee has adopted a charter to govern its activities, a copy of which is posted on our website
at www.intlsteel.com and a printed copy will be furnished upon request to: Investor Relations,
International Steel Group, Inc., 4020 Kinross Lakes Parkway, Richfield, Ohio 44286. Communications With The Board Interested parties, including stockholders, may communicate with the Board by sending a
written communication addressed to: Board of Directors  Stockholder Communication
Attention: Investor Relations
International Steel Group Inc.
4020 Kinross Lakes Parkway
Richfield, Ohio 44286 Communications that are intended specifically for any individual director, including the
non-management directors as a group or the director presiding over the meeting of non-management
directors (currently Mr. Ross), should clearly state the name of the individual director or group
of directors that is the intended recipient of the communication, which will be forwarded to the
designated person. We reserve the right not to forward materials that are clearly of a marketing
or otherwise extraneous nature. Agreements Regarding Board Representation Under our collective bargaining agreement with the USWA has the right to nominate one
individual to serve as a member of our Board. The individual must be acceptable to the Chairman of
the Board, which acceptance may not be unreasonably withheld. If the size of the Board increases
to more than 14 members, the USWA has the right to nominate one additional director. Any nominated
individual who is elected as a director will be subject to all fiduciary responsibilities to us and
our stockholders. No current member of the Board is a nominee of the USWA. Code of Business Conduct and Ethics All of our employees, including our Chief Executive Officer, Chief Financial Officer, Chief
Accounting Officer, and other executive officers, are required to comply with our Code of Business
Conduct and Ethics. The purpose of these corporate policies is to ensure to the greatest possible
extent that our business is conducted in a consistently legal and ethical manner, and the Audit
Committee has oversight responsibility with respect to compliance. The text of our Code of
Business Conduct and Ethics is available on our website at www.intlsteel.com and a printed copy
will be furnished upon request to: Investor Relations, International Steel Group, Inc., 4020
Kinross Lakes Parkway, Richfield, Ohio 44286. We will also post on our web site any amendment to, or waiver from, a provision of our
policies as required by law. Section 16(a) Beneficial Ownership Reporting Compliance Based solely on a review of reports of ownership, reports of changes of ownership and written
representations under Section 16(a) of the Securities Exchange Act of 1934 which were furnished to
ISG during or with respect to 2004 by persons who were, directors or officers of ISG or beneficial
owners of more than 10% of the outstanding shares of common stock, no such person failed to file on
a timely basis any report required by such section during 2004. 
 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table 50




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Annual compensation paid to ISGs named executive officers consists of salary and cash bonus
awards. Unless otherwise indicated, the following table sets forth the cash compensation, as well
as other compensation paid or accrued by ISG, since its inception, to its chief executive officer
and each of the next five most highly compensated executive officers, serving as such as of
December 31, 2004. SUMMARY COMPENSATION TABLE Annual Compensation
    
    
    
    
    
    
    Long-Term CompensationOther
    
    
    
    
    
    
    SecuritiesAnnual
    
    
    
    
    
    
    Underlying
    
    
    SAR
    
    
    All OtherName
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    Comp.
    
    
    
    
    
    
    Options
    
    
    Awards
    
    
    Comp.Mott, Rodney B. (1)
    
    
    2004
    
    
    $
    650,000
    
    
    $
    1,950,000
    
    
    $
    37,182
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    $President & Chief Executive Officer
    
    
    2003
    
    
    $
    533,000
    
    
    $
    500,000
    
    
    $
    
    
    
    
    
    
    
    
    115,840
    
    
    
    
    
    
    $2002
    
    
    $
    333,333
    
    
    $
    632,867
    
    
    $
    52,836
    
    
    
    (3
    )
    
    
    2,968,400
    
    
    
    
    
    
    $
    962,481
    (4)Goodwin, Vincent J. (5)
    
    
    2004
    
    
    $
    360,416
    
    
    $
    1,081,248
    
    
    $
    65,922
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    $Chief Operating Officer
    
    
    2003
    
    
    $
    291,667
    
    
    $
    175,000
    
    
    $
    24,399
    
    
    
    (7
    )
    
    
    144,800
    
    
    
    
    
    
    $Anthony, Leonard M. (8)
    
    
    2004
    
    
    $
    320,833
    
    
    $
    962,500
    
    
    $
    42,494
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    $Chief Financial Officer
    
    
    2003
    
    
    $
    200,000
    
    
    $
    135,000
    
    
    $
    20,163
    
    
    
    (7
    )
    
    
    144,800
    
    
    
    
    
    
    $Mang, John C, III (9)
    
    
    2004
    
    
    $
    250,000
    
    
    $
    750,000
    
    
    $
    24,938
    
    
    
    (10
    )
    
    
    
    
    
    
    14,972
    (11)
    
    $Vice President  General Manager
    
    
    2003
    
    
    $
    237,334
    
    
    $
    150,000
    
    
    $
    111,236
    
    
    
    (3
    )
    
    
    36,200
    
    
    
    
    
    
    $ISG Burns Harbor
    
    
    2002
    
    
    $
    150,000
    
    
    $
    284,790
    
    
    $
    
    
    
    
    
    
    
    
    296,840
    
    
    
    
    
    
    $Nelson, Jerome V. (12)
    
    
    2004
    
    
    $
    242,400
    
    
    $
    727,200
    
    
    $
    26,762
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    $Vice President  Sales and Marketing
    
    
    2003
    
    
    $
    226,000
    
    
    $
    150,000
    
    
    $
    121,255
    
    
    
    (3
    )
    
    
    72,400
    
    
    
    
    
    
    $2002
    
    
    $
    165,000
    
    
    $
    313,269
    
    
    $
    77,487
    
    
    
    (3
    )
    
    
    557,480
    
    
    
    
    
    
    $Spelich, Gordon C. (13)
    
    
    2004
    
    
    $
    234,000
    
    
    $
    702,000
    
    
    $
    24,978
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    $Vice President  Business
    
    
    2003
    
    
    $
    212,000
    
    
    $
    150,000
    
    
    $
    97,213
    
    
    
    (3
    )
    
    
    54,300
    
    
    
    
    
    
    $Development
    
    
    2002
    
    
    $
    150,000
    
    
    $
    284,790
    
    
    $
    80,309
    
    
    
    (3
    )
    
    
    742,100
    
    
    
    
    
    
    $
    1.
    Mr. Motts employment with ISG commenced in March 2002.2.
    Represents tax gross up payments for Ayco Financial Services and Long-Term Disability
imputed wages.3.
    Represents gross up payment made with respect to taxable relocation/temporary living
benefits.4.
    Represents a one-time special bonus.5.
    Mr. Goodwins employment with ISG commenced in March 2003. Mr. Goodwins annual salary
rate for 2003 was $350,000.6.
    Represents gross up payments for Ayco Financial Services and temporary living benefits
in lieu of relocation.7.
    Represents gross up payments for temporary living benefits in lieu of relocation.8.
    Mr. Anthonys employment with ISG commenced in May 2003. Mr. Anthonys annual salary
rate for 2003 was $300,000. 51




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9.
    Mr. Mangs employment with ISG commenced in April 2002.10.
    Represents gross up payments for Ayco Financial Services.11.
    SARs granted on October 1, 2004 with an exercise price of $33.4012.
    Mr. Nelsons employment with ISG commenced in April 2002.13.
    Mr. Spelichs employment with ISG commenced in April 2002. Stock Option / SAR Grants In Last Fiscal Year The following tables set forth information regarding options we granted during the fiscal year
ended December 31, 2004 to the named executive officers. Option/SARs Grants in Last Fiscal Year Individual GrantsPotential RealizablePercent of Total
    
    
    
    
    
    
    
    
    
    
    Value at Assumed AnnualOptions/SARs
    
    
    
    
    
    
    
    
    
    
    Rates of Stock PriceNumber of
    
    
    Granted to
    
    
    
    
    
    
    
    
    
    
    Appreciation for OptionSecurities
    
    
    Employees During
    
    
    
    
    
    
    
    
    
    
    Term(3)Underlying
    
    
    the Fiscal
    
    
    ExerciseOptions/SARs
    
    
    Year Ended
    
    
    Price
    
    
    ExpirationName
    
    Granted(1)
    
    
    December 31, 2004(2)
    
    
    ($/Share)
    
    
    Date
    
    
    5%
    
    
    10%Rodney B. Mott
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    V. John Goodwin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Leonard M. Anthony
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Jerome V. Nelson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gordon C. Spelich
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    John C. Mang III
    
    
    14,972
    (4)
    
    
    2.95
    %
    
    $
    33.40
    
    
    
    9/30/09
    
    
    $
    138,159
    
    
    $
    305,295
   1.
    In 2004, there were no options awarded to any of the named executive
officers and only Mr. Mang was awarded SARs.2.
    The percentage of total options/SARs granted is based on an aggregate
amount of 407,248 SARs and 100,000 options awarded in 2004 to our employees.3.
    There is no assurance provided to any executive officer or any other
holder of company securities that the actual stock price appreciation over the
option term will be at the assumed 5% or 10% annual rate of compound stock price
appreciation or at any other defined level. Unless the market price of the common
stock appreciates over the term of the SARs, no value will be realized from the
SAR grants made to the executive officers. Under the SAR Plan, the maximum realizable
value is 100% of the base price for the SAR.4.
    Represents SARs granted on October 1, 2004. Twenty-five percent of
SARs vest on each anniversary of the grant date and the SARs expire 5 years after
grant date. Each SAR is linked to the value of one share of common stock. Option/SAR Exercises and Year-End Values 52




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The following table sets forth information with respect to exercises of options/SARs during
2004 by the executive officers named in the Summary Compensation Table and the values of
unexercised options held by them as of December 31, 2004. Aggregated Option/SAR Exercises in 2004 and Year-End Option/SAR Values Number of Securities
    
    
    Value of Unexercised In-the-Underlying Unexercised
    
    
    Money Options/SARs atShares
    
    
    
    
    
    
    Options/SARs at Year-End(#)
    
    
    Year-EndAcquired onName
    
    Exercise(#)
    
    
    Value Realized
    
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableRodney B. Mott
    
    
    1,448,000
    
    
    $
    40,109,600
    
    
    
    28,960
    
    
    
    1,571,080
    
    
    $
    434,620
    
    
    $
    57,403,058V. John Goodwin
    
    
    0
    
    
    
    0
    
    
    
    36,200
    
    
    
    108,600
    
    
    $
    543,275
    
    
    $
    1,629,825Leonard M. Anthony
    
    
    0
    
    
    
    0
    
    
    
    36,200
    
    
    
    108,600
    
    
    $
    543,275
    
    
    $
    1,629,825Jerome V. Nelson
    
    
    161,000
    
    
    $
    4,280,990
    
    
    
    135,840
    
    
    
    333,040
    
    
    $
    4,721,927
    
    
    $
    11,350,616Gordon C. Spelich
    
    
    371,050
    
    
    $
    10,849,502
    
    
    
    13,575
    
    
    
    411,775
    
    
    $
    203,728
    
    
    $
    14,635,984John C. Mang III
    
    
    112,220
    
    
    $
    3,281,313
    
    
    
    9,050
    
    
    
    175,570
    
    
    $
    135,819
    
    
    $
    6,017,376
 Employment Agreements We have entered into employment agreements with Messrs. Anthony, Goodwin, Mott, Nelson and
Spelich, or the Executives. The agreements for Messrs. Anthony, Goodwin and Nelson have an
initial term that expires on December 31, 2005 and, following the initial term, will automatically
be extended by one year on each December 31 unless either party to the agreement provides notice of
the intent not to renew the agreement by September 30 of such year. Mr. Motts agreement has an
initial term that expires on December 31, 2006, and will also be automatically extended by one year
on each December 31 unless either party to the agreement provides notice of the intent not to renew
the agreement by September 30 of such year. The agreements originally provided for an annual base salary of
$600,000 for Mr. Mott, $350,000 for Mr. Goodwin, $300,000 for Mr. Anthony, and $242,000 for Mr.
Nelson. Effective as of August 1, 2004, the base salaries for Mr. Mott, Mr. Goodwin and Mr. Anthony
were increased to $720,000, $375,000, and $350,000, respectively. In addition to base salary, the
agreements also provide that the Executives will (a) receive an annual bonus in accordance with
ISGs Officer Cash and Stock and Bonus Plan, (b) be eligible to participate in our 401(k) plan, (c)
be entitled to participate in our disability program, (d) be eligible to participate in such
hospitalization, life insurance, and other employee benefit plans and programs, if any, as may be
adopted by us from time to time and (e) be eligible to receive awards under any stock option plan
as in effect from time to time. Mr. Motts agreement also provides that he is entitled to receive
executive life insurance in the amount of $1,000,000, and indemnification from ISG in respect of
claims brought against Mr. Mott by former employers subject to certain conditions. The agreements will automatically terminate upon the applicable Executives death, disability
or retirement. We may terminate the agreements and any Executives employment (i) without cause
(as described in such Executives agreement) upon 90 days prior written notice and (ii) immediately
for cause. Each Executive may terminate his agreement and employment with us with 90 days
written notice to us. Upon termination of employment (a) by reason of death, disability or by ISG
for cause, (b) by an Executive other than for good reason (as defined in such Executives
agreement) or (c) upon the expiration of the agreement, such Executive will be entitled only to the
base salary to which the Executive was entitled through the date of termination, any accrued and
unpaid bonus compensation (calculated on a pro rata basis) due to the Executive with respect to the
calendar 53




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year prior to and the calendar year in which the date of termination occurs, and such other
benefits as may be available through our other benefit plans and policies. In the case of a termination of employment by us without cause or by an Executive for good
reason, such Executive is entitled to a severance payment equal to two times his usual base salary
and bonus compensation (using the average bonus over the past three years or if he was employed for
less than three years, such shorter period), or three times his usual base salary and bonus in the
case of Mr. Mott. The Executive is also entitled to health care and major medical coverage for two
years, in the case of Messrs. Anthony, Goodwin, and Nelson, or for three years, in the case of Mr.
Mott, following termination. We have also agreed to make a gross-up payment to Mr. Mott in the
event that payments made under his agreement trigger excise taxes imposed under Section 4999 of the
Internal Revenue Code. Upon any termination of an Executives employment, in the case of Messrs. Nelson and Mott, for
any reason, and in the case of Messrs. Anthony and Goodwin, for any reason other than cause, or
by any Executive for good reason, any stock options granted to the Executive prior to the
termination date will automatically vest and be exercisable. Notwithstanding the preceding
sentence, however, if Messrs. Mott or Nelsons employment is terminated by us for cause arising
out of the commission by Messrs. Mott or Nelson of certain crimes or an uncured breach by Messrs.
Mott or Nelson of his obligations under his employment agreement, only those stock options granted
to Messrs. Mott or Nelson, as the case may be, on April 12, 2002 will immediately vest and be
exercisable. If an Executive terminates his employment without good reason, only those options
that have vested on the date of termination will be exercisable. Payments made to any Executive upon a termination by us without cause or by the Executive
for good reason are conditioned on the execution of a mutual release of any claims arising out of
the Executives employment. The agreements also include non-competition, non-solicitation and
confidentiality obligations on the part of the Executives. Involvement in Certain Legal Proceedings ISG has grown by acquiring out of bankruptcy the steelmaking assets of, among others, LTV,
Bethlehem and Weirton. On December 29, 2000, LTV and substantially all of its domestic
subsidiaries filed separate petitions for reorganization under Chapter 11 of the Code in bankruptcy
court, on October 15, 2001, Bethlehem and 22 of its subsidiaries filed separate petitions for
reorganization under Chapter 11 of the Code in bankruptcy court and on May 19, 2003, Weirton and
its subsidiaries filed separate petitions for reorganization under Chapter 11 of the Code in
bankruptcy court. Many of our employees, including some of our officers, were formerly employed by
LTV, Bethlehem or Weirton at or shortly prior to the time those companies filed for bankruptcy.
Executive officers of ISG who served as executive officers of Bethlehem include Leonard Anthony,
our Chief Financial Officer; and Lonnie Arnett, our Vice President, Controller and Chief Accounting
Officer. Board Compensation We pay our non-employee directors an annual retainer of $50,000 per year. Each non-employee
director is also paid $15,000 per year for each standing committee of the Board of which he is
chairman, $10,000 per year for each standing committee of the Board of which he is a member but not
chairman, and $2,000 for each meeting of the Board or of any standing Board committee of which he
is a member that he attends (provided that only a single $2,000 fee is paid for attendance at
meetings all held on the same date). Each director of ISG is also reimbursed by ISG for
out-of-pocket expenses incurred in attending Board and Board committee meetings. Compensation Committee Interlocks and Insider Participation The following people served on our Compensation Committee during 2004: Messrs. Araskog,
Bartholomay (Chairman) and Powers. None of these people has ever been an officer or employee of
ours or any of our subsidiaries. None of our executive officers serve or have served as a member
of the board of directors, 54




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compensation committee or other board committee performing equivalent functions of any entity that
has one or more executive officers serving as one of our directors or on our Compensation
Committee. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Equity Compensation Plan Information The information in the table below is presented as of December 31, 2004. Number of securitiesremaining available forNumber of securities to be
    
    
    Weighted-average
    
    
    future issuance underissued upon exercise of
    
    
    exercise price of
    
    
    equity compensation plansoutstanding options,
    
    
    outstanding options,
    
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))(2)(a)
    
    
    (b)
    
    
    (c)Equity compensation plans
approved by security
holders
    
    
    4,267,510
    (1)
    
    
    $ 8.68
    
    
    
    660,200Equity compensation plans
not approved by security
holders
    
    
    407,248
    (3)
    
    
    $ 33.40
    
    
    
    Total
    
    
    4,674,758
    
    
    
    
    
    
    
    660,200
   (1)
    
    Represents outstanding options under the 2002 Stock Option Plan, which was approved by
our stockholders on April 12, 2002. In general, the options vest 25% each year
commencing on the first anniversary of the grant date.(2)
    
    Includes 660,200 shares available for issuance under the 2002 Stock Option Plan. This
total also includes 1,107,720 shares that are available under the ISG Officer Cash and
Stock Bonus Plan, which was approved by our stockholders on April 12, 2002. This plan
provides that any shares to be issued there under must be purchased by ISG in the open
market. No stock awards have been made under this plan in 2004.(3)
    
    Represents SARs granted on October 1, 2004. Twenty-five percent of SARs vest on each
anniversary date and expire 5 years after grant date. Each SAR is equivalent to one
share of common stock. Security Ownership of Management and Certain Beneficial Owners Except as otherwise indicated below, the following table sets forth certain information known
to us, based on publicly available information and in some cases affirmations made to us by the
subject parties, regarding the beneficial ownership of our common stock as of February 28, 2005,
for:  
    each person known by us to beneficially own more than 5% of our common stock;  
    each of our directors;  
    each of our executive officers named in the summary compensation table; and  
    all of our directors and executive officers as a group. We have determined beneficial ownership in accordance with the rules of the SEC. We believe
that each stockholder named in the table has sole voting and investment power for the shares shown
as beneficially owned by them. 55




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Percent ofNumber of Shares of
    
    
    Outstanding SharesCommon
    
    
    of CommonName and Address
    
    Stock(1)
    
    
    Stock(2)Franklin Mutual Advisors, LLC(3)
    
    
    16,339,780
    
    
    
    16.3
    %51 John F. Kennedy ParkwayShort Hills, NJ 07078Wilbur L. Ross, Jr.(4)
    
    
    6,936,788
    
    
    
    6.9
    %Manhattan Tower (19th Floor)101 East 52nd StreetNew York, NY 10022Paulson & Co. Inc.(5)
    
    
    6,656,600
    
    
    
    6.7
    %590 Madison AvenueNew York, New York 10022Georgia Financial, LLC(6)
    
    
    5,356,198
    
    
    
    5.4
    %6200 Riverside DriveCleveland, Ohio 44135Wellington Management Company, LLP(7)
    
    
    5,086,975
    
    
    
    5.1
    %75 State StreetBoston, MA 02109Rodney B. Mott(8)
    
    
    2,152,119
    
    
    
    2.2
    %Rand V. Araskog
    
    
    25,000
    
    
    
    *William C. Bartholomay(9)
    
    
    121,337
    
    
    
    *James C. Boland
    
    
    2,000
    
    
    
    *Peter J. Powers
    
    
    
    
    
    
    *V. John Goodwin(10)
    
    
    36,200
    
    
    
    *Leonard M. Anthony(11)
    
    
    36,200
    
    
    
    *Gordon C. Spelich(12)
    
    
    471,847
    
    
    
    *Jerome V. Nelson(13)
    
    
    296,210
    
    
    
    *John C. Mang III(14)
    
    
    119,460
    
    
    
    *All executive officers and directors as a group (13 persons)
    
    
    10,238,791
    
    
    
    10.2
    %
   *
    
    Less than one percent1.
    
    Except as otherwise indicated below, beneficial ownership means the sole power to vote and
dispose of shares. 56




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##### Table of Contents



2.
    
    Calculated assuming 100,035,950 outstanding shares, the number of shares of common stock
outstanding as of February 28, 2005. This number excludes the number of shares of common
stock for which any options to purchase common stock held by directors and executive officers
are exercisable.3.
    
    Based on a Schedule 13G/A filing by Franklin Mutual Advisors, LLC on February 3, 2005.
Includes shares beneficially owned by advisory clients of Franklin Mutual Advisers, LLC, or
FMA: 6,143,191 shares of common stock beneficially owned by Mutual Shares Fund, 2,855,428
shares of common stock beneficially owned by Mutual Qualified Fund, 3,546,660 shares of common
stock beneficially owned by Mutual Beacon Fund, 2,689,230 shares of common stock beneficially
owned by Mutual Discovery Fund, 639,453 shares of common stock beneficially owned by Mutual
Shares Securities Fund, 128,899 shares of common stock beneficially owned by Mutual Discovery
Securities Fund, and 66,259 shares of common stock beneficially owned by Mutual Beacon Fund
(Canada), all of which shares are held of record by Bosworth & Co. c/o Franklin Mutual
Advisers, LLC, and 264,260 shares of common stock beneficially owned by Franklin Mutual Beacon
Fund, all of which shares are held of record by Kane & Co. c/o Franklin Mutual Advisers, LLC,
and 6,400 shares of common stock beneficially owned by Franklin Mutual Shares Fund, all of
which are held of record by Cede & Co. Pursuant to advisory contracts with its clients, FMA
has voting and investment discretion over these securities beneficially owned by its clients.
FMA disclaims beneficial ownership of these shares owned by its advisory clients.4.
    
    Represents 152,889 shares of common stock beneficially owned by Mr. Ross individually and
6,783,899 shares of common stock deemed to be beneficially owned by Mr. Ross as a result of
his position as a principal of WLR, which is also deemed to be a beneficial owner of such
shares. The address of WLR is Manhattan Tower (19th Floor), 101 West 52nd Street, New York,
New York 10022. To the extent that Mr. Ross is deemed to beneficially own any shares as a
result of his position as a principal of WLR, Mr. Ross disclaims beneficial ownership of such
shares.5.
    
    Based on a Schedule 13 G/A filed by Paulson & Co. Inc. with the SEC on February 15, 2005.6.
    
    Georgia Financial, LLC is the wholly-owned subsidiary of Park Corporation, whose principal
executive offices are at 6200 Riverside Drive, Cleveland, Ohio 44135.7.
    
    Based on a Schedule 13G filed by Wellington Management Company, LLP on February 14, 2005.8.
    
    Includes options to purchase 28,960 shares of our common stock, which were currently
exercisable as of February 28, 2005, and options to purchase 742,100 shares of ISG common
stock that become exercisable within 60 days of February 28, 2005.9.
    
    Represents the 23,596 shares of our common stock held of record by Mr. Bartholomay and 97,740
shares of common stock held of record by Bartholomay Interest, L.P. Mr. Bartholomay is the
general partner in Bartholomay Interest, L.P. To the extent Mr. Bartholomay is deemed to
beneficially own these shares as a result of his position as general partner of Bartholomay
Interest, L.P., Mr. Bartholomay disclaims beneficial ownership of these shares.10.
    
    Represents options to purchase 36,200 shares of our common stock, which were currently
exercisable as of February 28, 2005.11.
    
    Represents options to purchase 36,200 shares of our common stock, which were currently
exercisable as of February 28, 2005.12.
    
    Includes options to purchase 13,575 shares of ISG common stock, which were exercisable as of
February 28, 2005, 200,347 shares which have been pledged under a forward sales contract, and
options to purchase 185,525 shares of ISG common stock that become exercisable within 60 days
of February 28, 2005.13.
    
    Includes options to purchase 135,840 shares of our common stock, which were currently
exercisable as of February 28, 2005, and options to purchase 139,370 shares of ISG common
stock that become exercisable within 60 days of February 28, 2005. 57




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14.
    
    Includes options to purchase 9,050 shares of our common stock, which were currently
exercisable as of February 28, 2005, and options to purchase 74,210 shares of ISG common stock
that become exercisable within 60 days of February 28, 2005. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Related Party Transactions Wilbur L. Ross, Jr., the Chairman of our board of directors and a director of the company, is
the chairman and chief executive officer of WL Ross & Co., LLC (WLR), which manages two funds, WLR
Recovery Fund L.P. and WLR Recovery Fund II, L.P. that until June 9, 2004, beneficially owned
approximately 32.9% of our common stock. These two funds distributed an amount of our shares equal
to approximately 25.7 % of our common stock to their unaffiliated limited partners and an amount
equal to 5.1 % of our common stock to (WLR), Mr. Ross or entities affiliated with them. Mr. Ross
beneficially owned 6,936,788, or 6.9%, of our currently outstanding shares as of February 28, 2005.
WLR receives no other compensation from us other than ongoing actual out-of-pocket expenses and
certain fees for serving as our financial advisor. WLR acted as our financial advisor in
connection with our formation and the acquisition of the Bethlehem assets. We paid WLR a total of
$0.1 million in respect of services rendered to us in 2004 in its capacity as our financial advisor
and for out-of-pocket expenses. We believe that all of the transactions in which we have engaged
with WLR were on terms at least as favorable to us as we would have expected to receive in
comparable transactions with unrelated third parties. Until the third quarter, 2004 Cleveland-Cliffs Inc was a beneficial owner of more than 5.0% of
our common stock and the Chairman and Chief Executive Officer was a director of ISG from ISGs
inception until February 2004. The Company has a supply agreement with Cleveland-Cliffs to
purchase all of its iron ore pellet requirements for use in its Cleveland and Indiana Harbor
facilities. Cleveland-Cliffs Inc owns approximately 23% of, and operates our, Hibbing iron ore mine,
Hibbing Taconite Company. Stelco Inc. owns approximately 14.7% and
ISG owns 62.3% of Hibbing Taconite Company. See previous discussion of iron ore in PART 1, ITEM
1, BUSINESSRAW MATERIALS. During the year ended December 31, 2004, we purchased
iron ore pellets for $391.7 million under this agreement. With the Weirton acquisition, ISG
assumed Weirtons agreement with Cleveland-Cliffs Inc and as part of the assignment agreed to
certain amendments. See previous discussion of iron ore in PART 1, ITEM 1, BUSINESSRAW MATERIALS. During the year ended December 31, 2004, we purchased iron ore pellets for $95.5 million under this agreement. We sold
iron ore pellets to Cleveland-Cliffs for approximately $7.2
million during 2004. In July 2004, we purchased substantially all of the assets, and assumed certain of the liabilities, of the Trinidad Facility
for approximately $18 million in cash, including the payment of certain liabilities at closing. The Trinidad Facility is a part of a joint
venture that began in the mid-1990s as a joint venture between Cleveland Cliffs Inc., Lurgi Metallurgie (now known as Outokumpu Technology
GmbH), and LTV Steel. Production began in 2000 at the Trinidad Facility but ceased a year later as a result of depressed global scrap iron and hot briquetted
iron prices, changes in the makeup of the joint venture, and other factors. Georgia Financial LLC, a
significant stockholder of ISG, provides mill rolls to us through its affiliate, Park Corporation.
Georgia Financial, LLC beneficially owned 5.4% of ISGs common stock of our currently outstanding
shares as of February 28, 2005. The Park Corporation provided $19.5 million of supplies and
services to ISG during 2004. Under the Bethlehem acquisition, we assumed an agreement that
resulted in approximately $10.8 million of ingot sales to Park Corporation during 2004. All
transactions with the Park Corporation were at market prices. At December 31, 2004, we had a $39.9 million account payable to Cleveland-Cliffs, a $1.6
million account receivable from Park Corporation, and a $0.2 million account payable to Park
Corporation. 
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Accounting Fees and Services Fees Fees paid to KPMG for services rendered during the years ended December 31, 2004 and 2003 were as
follows: 2004
    
    
    2003Audit Fees(1)
    
    $
    7,936,000
    
    
    $
    3,483,000Audit-Related Fees(2)
    
    
    334,000
    
    
    
    786,000Tax Fees(3)
    
    
    1,367,000
    
    
    
    1,453,000All Other Fees(4)
    
    
    58,000
    
    
    
    394,000Total
    
    $
    9,695,000
    
    
    $
    6,116,000
   1.
    
    Audit fees include fees for the audit of our annual consolidated financial statements for the
years ended December 31, 2004 and 2003 and the limited reviews of the unaudited condensed
consolidated interim financial statements included in our quarterly public filings.2.
    
    Audit-related fees include assurance and related services primarily consisting of reviews of
the information included in the Prospectuses utilized by us in connection with our issuance
and exchange of Senior Notes for the year ended December 31, 2004 and the Prospectus for our
initial public offering for the year ended December 31, 2003.3.
    
    Tax fees are for tax services rendered consisting of services relating to tax compliance, tax
advice and tax planning.4.
    
    All other fees for services rendered primarily consisted of employee benefit plan audits,
certain agreed upon procedures and advisory services related to labor negotiations. Audit Committee Pre-Approval Procedures The Audit Committee has adopted a policy for the pre-approval of audit and permitted non-audit
services by ISGs external auditor. The Audit Committee will consider annually and, if
appropriate, approve the provision of audit services by ISGs external auditor and consider and, if
appropriate, pre-approve the provision of certain defined audit and non-audit services. The Audit
Committee will also consider on a case-by-case basis and, if appropriate, approve, specific
engagements that are not otherwise pre-approved. Any proposed engagement that does not fit within
the definition of a pre-approved service may be presented to the Audit Committee for consideration
at its next regular meeting or, if earlier consideration is required, to the Audit Committee for
action by written consent. The Audit Committee has also delegated to the Chair of the Audit
Committee the authority to pre-approve audit-related and non-audit services not prohibited by law
to be performed by our independent auditors and associated fees up to a maximum for any one
non-audit service of $250,000, provided that the Chair shall report any decisions to pre-approve
such audit-related or non-audit services and fees to the full Audit Committee at its next regular
meeting. 59




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES (a) Documents filed as part of this Report:  The following is an index of the financial statements, schedules and exhibits included in
this Report or incorporated herein by reference. (1) Financial Statements and SchedulesReport of Independent Registered Public Accounting Firm
    
    F-1Consolidated Statements of Operations, for the years ended December 31, 2004 and 2003
and for the period from inception,      February 22, 2002, through December 31, 2002.
    
    F-2Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    F-3Consolidated
Statements of Stockholders Equity for the period from
inception, February 22, 2002, through December 31, 2002      and the years ended December 31, 2003
and 2004.
    
    F-4Consolidated Statements of Cash Flows, for the years ended December 31, 2004 and 2003
and for the period from inception, 
     February 22, 2002, through December 31, 2002.
    
    F-5Notes to Consolidated Financial Statements.
    
    F-6(2) Consolidated Financial Statement SchedulesII  Valuation and Qualifying Accounts and Reserves, for the years ended
December 31, 2004 and 2003 and for the period from inception, February 22, 2002,
through December 31, 2002.
    
    F-28
 Schedules not included have been omitted because they are not applicable or the required
information is shown in the consolidated financial statement or notes. Separate financial statements of subsidiaries not consolidated and 50 percent or less owned
persons accounted for by the equity method have been omitted because, considered in the aggregate
as a single subsidiary, they do not constitute a significant subsidiary. (3) Exhibits ExhibitNumber
    
    Description of Document2.1
    
    Agreement and Plan of Merger and Reorganization, dated as of October
24, 2004, by and among Ispat International N.V., Park Acquisition Corp.
and ISG (incorporated by reference to Exhibit 2.1 to the Registrants
Current Report on Form 8-K filed with the Commission on October 28,
2004).3.1
    
    Third Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to the Registrants Registration Statement
on Form S-1 (Reg. No. 333-107524), as amended).3.2
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
to the Registrants Registration Statement on Form S-1 (Reg. No.
333-107524), as amended).
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ExhibitNumber
    
    Description of Document4.1
    
    Specimen certificate for shares of common stock (incorporated by
reference to Exhibit 4.1 to the Registrants Registration Statement on
Form S-1 (Reg. No. 333-107524), as amended).4.2
    
    Form of Registration Rights Agreement by and among ISG and the
investors party thereto (incorporated by reference to Exhibit 4.2 to
the Registrants Registration Statement on Form S-1 (Reg. No.
333-107524), as amended).4.3
    
    Registration Rights Agreement, dated as of May 6, 2003, by and between
ISG and the Pension Benefit Guaranty Corporation (incorporated by
reference to Exhibit 4.3 to the Registrants Registration Statement on
Form S-1 (Reg. No. 333-107524), as amended).4.4
    
    Convertible Subordinated Promissory Note, dated as of May 6, 2003, by
ISG, as Maker and the Pension Benefit Guaranty Corporation, as Payee
(incorporated by reference to Exhibit 4.4 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-107524), as amended).4.5
    
    Exchange and Registration Rights Agreement, dated as of April 14, 2004,
by and among ISG, certain subsidiaries of ISG, Goldman, Sachs & Co.,
UBS Securities LLC, Citigroup Global Markets Inc., and J.P. Morgan
Securities Inc. (incorporated by reference to Exhibit 4.5 of the
Registrants Quarterly Report on Form 10-Q for the period ended March
31, 2004).4.6
    
    Indenture, dated as of April 14, 2004, by and among ISG, certain
subsidiaries of ISG and The Bank of New York, as trustee, including the
Form of ISGs 6.50% Senior Notes due 2014. (incorporated by reference
to Exhibit 4.6 of the Registrants Quarterly Report on Form 10-Q for
the period ended March 31, 2004).4.7
    
    First Supplemental Indenture, dated as of August 23, 2004, by and among
ISG, certain subsidiaries of ISG, and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.3 of the Registrants
Registration Statement on Form S-4 (Reg. No. 333-115912), as amended).10.1
    
    Credit and Guaranty Agreement, dated as of May 7, 2003, by and among
International Steel Group Inc., as a Guarantor, ISG Acquisition Inc.,
ISG Cleveland Inc., ISG Hennepin Inc., ISG Indiana Harbor Inc., ISG
Warren Inc., ISG Riverdale Inc., ISG Plate Inc., ISG Piedmont Inc., ISG
Burns Harbor, Inc., ISG Sparrows Point Inc., ISG Steelton Inc., and ISG
Lackawanna Inc., as Borrowers, certain subsidiaries of the company, as
Guarantors, the Lenders party thereto from time to time, UBS Securities
LLC, as Joint Lead Arranger and Joint Bookrunner, UBS AG, Stamford
Branch, as Administrative Agent, Goldman Sachs Credit Partners L.P., as
Joint Lead Arranger, Joint Bookrunner and Syndication Agent, The CIT
Group/Business Credit, Inc., as Collateral Agent, Fleet Capital
Corporation, as Co-Documentation Agent and LaSalle Bank National
Association, as Co-Documentation Agent (incorporated by reference to
Exhibit 10.1 to the Registrants Registration Statement on Form S-1
(Reg. No. 333-107524), as amended).10.2
    
    First Amendment to Credit and Guaranty Agreement, dated as of August
6, 2003, by and among International Steel Group Inc., as a Guarantor,
ISG Acquisition Inc., ISG Cleveland Inc., ISG Riverdale Inc., ISG Plate
Inc., ISG Piedmont Inc., ISG Burns Harbor, Inc., ISG Sparrows Point
Inc., ISG Steelton Inc., and ISG Lackawanna Inc., as Borrowers, certain
subsidiaries of the company, as Guarantors, the Lenders party thereto
from time to time, UBS Securities LLC, as Joint Lead Arranger and Joint
Bookrunner, UBS AG, Stamford Branch, as Administrative Agent, Goldman
Sachs Credit Partners L.P., as Joint Lead Arranger, Joint Bookrunner
and Syndication Agent, The CIT Group/Business Credit, Inc., as
Collateral Agent, Fleet Capital Corporation, as Co-Documentation Agent
and LaSalle Bank National Association, as Co-Documentation Agent
(incorporated by reference to Exhibit 10.2 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-107524), as amended).
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ExhibitNumber
    
    Description of Document10.3
    
    Second Amendment and Limited Waiver to Credit and Guaranty Agreement,
dated as of September 30, 2003, by and among International Steel Group
Inc., as a Guarantor, ISG Acquisition Inc., ISG Cleveland Inc., ISG
Hennepin Inc., ISG Indiana Harbor Inc., ISG Warren Inc., ISG Riverdale
Inc., ISG Plate Inc., ISG Piedmont Inc., ISG Burns Harbor, Inc., ISG
Sparrows Point Inc., ISG Steelton Inc., and ISG Lackawanna Inc., as
Borrowers, certain subsidiaries of the company, as Guarantors, the
Lenders party thereto from time to time, UBS Securities LLC, as Joint
Lead Arranger and Joint Bookrunner, UBS AG, Stamford Branch, as
Administrative Agent, Goldman Sachs Credit Partners L.P., as Joint Lead
Arranger, Joint Bookrunner and Syndication Agent, The CIT
Group/Business Credit, Inc., as Collateral Agent, Fleet Capital
Corporation, as Co-Documentation Agent and LaSalle Bank National
Association, as Co-Documentation Agent (incorporated by reference to
Exhibit 10.3 to the Registrants Registration Statement on Form S-1
(Reg. No. 333-107524), as amended).10.4
    
    Third Amendment to Credit and Guaranty Agreement, dated as of March 21,
2004, by and among International Steel Group Inc., as a Guarantor, ISG
Acquisition Inc., ISG Cleveland Inc., ISG Hennepin Inc., ISG Indiana
Harbor Inc., ISG Warren Inc., ISG Riverdale Inc., ISG Plate LLC (f/k/a
ISG Plate Inc.), ISG Piedmont LLC (f/k/a ISG Piedmont Inc.), ISG Burns
Harbor LLC (f/k/a ISG Burns Harbor Inc.), ISG Sparrows Point LLC (f/k/a
ISG Sparrows Point Inc.), ISG Steelton LLC (f/k/a ISG Steelton Inc.),
and ISG Lackawanna LLC (f/k/a ISG Lackawanna Inc.), as Borrowers,
certain subsidiaries of the Registrant, as Guarantors, the Lenders
party thereto from time to time, UBS Securities LLC, as Joint Lead
Arranger and Joint Book runner, UBS AG, Stamford Branch, as
Administrative Agent, Goldman Sachs Credit Partners L.P., as Joint Lead
Arranger, Joint Book runner and Syndication Agent, The CIT Group/Business
Credit, Inc., as Collateral Agent, Fleet Capital Corporation,
as Co-Documentation Agent, and LaSalle Bank National Association, as
Co-Documentation Agent (incorporated by reference to Exhibit 10.1 of
the Registrants Quarterly Report on Form 10-Q for the period ended
March 31, 2004).10.5
    
    Fourth Amendment to Credit and Guaranty Agreement, dated as of April
27, 2004, by and among ISG, as a Guarantor, ISG Acquisition Inc., ISG
Cleveland Inc., ISG Hennepin Inc., ISG Indiana Harbor Inc., ISG Warren
Inc., ISG Riverdale Inc., ISG Plate LLC (f/k/a ISG Plate Inc.), ISG
Piedmont LLC (f/k/a ISG Piedmont Inc.), ISG Burns Harbor LLC (f/k/a ISG
Burns Harbor Inc.), ISG Sparrows Point LLC (f/k/a ISG Sparrows Point
Inc.), ISG Steelton LLC (f/k/a ISG Steelton Inc.), and ISG Lackawanna
LLC (f/k/a ISG Lackawanna Inc.), as Borrowers, certain subsidiaries of
ISG, as Guarantors, the Lenders party thereto from time to time, UBS
Securities LLC, as Joint Lead Arranger and Joint Book runner, UBS AG,
Stamford Branch, as Administrative Agent, Goldman Sachs Credit Partners
L.P., as Joint Lead Arranger, Joint Book runner and Syndication Agent,
The CIT Group/Business Credit, Inc., as Collateral Agent, Fleet Capital
Corporation, as Co-Documentation Agent, and LaSalle Bank National
Association, as Co-Documentation Agent. (incorporated by reference to
Exhibit 10.2 of the Registrants Quarterly Report on Form 10-Q for the
period ended March 31, 2004).10.6
    
    Fifth Amendment to Credit and Guaranty Agreement, dated as of June 21,
2004, by and among International Steel Group Inc., ISG Acquisition
Inc., ISG Cleveland Inc., ISG Hennepin Inc., ISG Indiana Harbor Inc.,
ISG Warren Inc., ISG Riverdale Inc., ISG Plate LLC (f/k/a ISG Plate
Inc.), ISG Piedmont LLC (f/k/a ISG Piedmont Inc.), ISG Burns Harbor LLC
(f/k/a ISG Burns Harbor Inc.), ISG Sparrows Point LLC (f/k/a ISG
Sparrows Point Inc.), ISG Steelton LLC (f/k/a ISG Steelton Inc.), and
ISG Lackawanna LLC (f/k/a ISG Lackawanna Inc.), as Borrowers, certain
subsidiaries of the Registrant, as Guarantors, the Lenders party
thereto from time to time, UBS AG, Stamford Branch, as Administrative
Agent, Goldman Sachs Credit Partners L.P., as Syndication Agent, The
CIT Group/Business Credit, Inc., as Collateral Agent, Fleet Capital
Corporation, as Co-Documentation Agent and Lasalle Bank National
Association, as Co-Documentation Agent (incorporated by reference to
Exhibit 10.28 of the Registrants Registration Statement on Form S-4
(Reg. No. 333-115912), as amended).
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ExhibitNumber
    
    Description of Document10.7
    
    Amended and Restated International Steel Group Inc. Officer Cash and
Stock Bonus Plan dated as of July 16, 2003 (incorporated by reference
to Exhibit 10.4 to the Registrants Registration Statement on Form S-1
(Reg. No. 333-107524), as amended).10.8
    
    2002 Stock Option Plan of International Steel Group Inc. dated as of
June 28, 2002 (incorporated by reference to Exhibit 10.5 to the
Registrants Registration Statement on Form S-1
(Reg. No. 333-107524), as amended).10.9
    
    Release and Settlement Agreement, dated April 22, 2003, by and between
International Steel Group Inc. and the Pension Benefit Guaranty
Corporation (incorporated by reference to Exhibit 10.6 to the
Registrants Registration Statement on Form S-1 (Reg. No. 333-107524),
as amended).10.10*
    
    Pellet Sale and Purchase Agreement, dated as of April 10, 2002 by and
among Cleveland-Cliffs Iron Company, Cliffs Mining Company, Northshore
Mining Company, Northshore Sales Company, ISG Cleveland Inc. and ISG
Indiana Harbor, Inc. (incorporated by reference to Exhibit 10.7 to the
Registrants Registration Statement on Form S-1 (Reg. No. 333-107524),
as amended).10.11
    
    Asset Purchase Agreement, dated as of February 26, 2002, by and among
WLR Acquisition Corp., LTV Steel Company, Inc., The River Terminal
Railway Company, The Chicago Short Line Railway Company, and Cuyahoga
Valley Railway (incorporated by reference to Exhibit 10.8 to the
Registrants Registration Statement on Form S-1 (Reg. No. 333-107524),
as amended).10.12**
    
    First Amendment to Pellet Sale and
Purchase Agreement, dated as of December 16, 2004, by and among The
Cleveland- Cliffs Iron Company, Cliffs Mining Company, Northshore
Mining Company, Cliffs Sales Company, International Steel Group Inc., ISG Cleveland Inc., and
ISG Indiana Harbor Inc.10.13
    
    First Amendment to the Asset Purchase Agreement, dated as of April 11,
2002, by and among WLR Acquisition Corp., LTV Steel Company, Inc., The
River Terminal Railway Company, The Chicago Short Line Railway Company,
and Cuyahoga Valley Railway (incorporated by reference to Exhibit 10.9
to the Registrants Registration Statement on Form S-1 (Reg. No.
333-107524), as amended).10.14
    
    Second Amendment to the Asset Purchase Agreement, dated as of June 4,
2002, by and among WLR Acquisition Corp., LTV Steel Company, Inc., The
River Terminal Railway Company, The Chicago Short Line Railway Company,
and Cuyahoga Valley Railway (incorporated by reference to Exhibit 10.10
to the Registrants Registration Statement on Form S-1 (Reg. No.
333-107524), as amended).10.15
    
    Third Amendment to the Asset Purchase Agreement, dated as of July 8,
2002, by and among WLR Acquisition Corp., LTV Steel Company, Inc., The
River Terminal Railway Company, The Chicago Short Line Railway Company,
and Cuyahoga Valley Railway (incorporated by reference to Exhibit 10.11
to the Registrants Registration Statement on Form S-1 (Reg. No.
333-107524), as amended).10.16
    
    Asset Purchase Agreement, dated as of March 12, 2003, by and among ISG,
ISG Acquisition, Inc., Bethlehem, and the other sellers named therein
(incorporated by reference to Exhibit 10.12 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-107524), as amended).10.17
    
    Amendment No. 1 to Asset Purchase Agreement, dated as of April 22,
2003, by and among ISG, ISG Acquisition, Inc., Bethlehem, and the other
sellers named therein (incorporated by reference to Exhibit 10.13 to
the Registrants Registration Statement on Form S-1 (Reg. No.
333-107524), as amended).10.18
    
    Amendment No. 2 to Asset Purchase Agreement, dated as of May 6, 2003,
by and among ISG, ISG Acquisition, Inc., Bethlehem, and the other
sellers named therein (incorporated by reference to Exhibit 10.14 to
the Registrants Registration Statement on Form S-1 (Reg. No.
333-107524), as amended).
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ExhibitNumber
    
    Description of Document10.19
    
    Form of Indemnification Agreement with directors of ISG (incorporated
by reference to Exhibit 10.17 to the Registrants Registration
Statement on Form S-1 (Reg. No. 333-107524), as amended).10.20
    
    Form of Indemnification Agreement with officers of ISG (incorporated by
reference to Exhibit 10.18 to the Registrants Registration Statement
on Form S-1 (Reg. No. 333-107524), as amended).10.21
    
    Form of Indemnification Agreement with a person who is both an officer
and director of ISG (incorporated by reference to Exhibit 10.19 to the
Registrants Registration Statement on Form S-1 (Reg. No. 333-107524),
as amended).10.22
    
    Amended and Restated Asset Purchase Agreement, dated as of February 25,
2004, by and among Weirton Steel Corporation, FW Holdings Inc., Weirton
Venture Holdings Corporation, ISG Weirton Inc., and International Steel
Group Inc. (incorporated by reference to Exhibit 10.3 of the
Registrants Quarterly Report on Form 10-Q for the period ended March
31, 2004)10.23
    
    Amendment No. 1 to Amended and Restated Asset Purchase Agreement, dated
as of March 8, 2004, by and among Weirton Steel Corporation, FW
Holdings Inc., Weirton Venture Holdings Corporation, ISG Weirton Inc.,
and International Steel Group Inc. (incorporated by reference to
Exhibit 10.4 of the Registrants Quarterly Report on Form 10-Q for the
period ended March 31, 2004)10.24
    
    Amendment No. 2 to Amended and Restated Asset Purchase Agreement, dated
as of April 21, 2004, by and among Weirton Steel Corporation, FW
Holdings Inc., Weirton Venture Holdings Corporation, ISG Weirton Inc.,
and ISG (incorporated by reference to Exhibit 10.5 of the Registrants
Quarterly Report on Form 10-Q for the period ended March 31, 2004).10.25
    
    Amendment No. 3 to Amended and Restated Asset Purchase Agreement, dated
as of May 5, 2004, by and among Weirton Steel Corporation, FW Holdings
Inc., Weirton Venture Holdings Corporation, ISG Weirton Inc., and ISG
(incorporated by reference to Exhibit 10.3 of the Registrants Report
on Form 10-Q for the quarter ended June 30, 2004, filed with the
Commission July 30, 2004) (incorporated by reference to Exhibit 10.6
of the Registrants Quarterly Report on Form 10-Q for the period ended
March 31, 2004).10.26
    
    Employment Agreement, by and between Rodney B. Mott and ISG, dated as
of February 25, 2004 (incorporated by reference to Exhibit 10.7 to the
Registrants Quarterly Report on Form 10-Q for the period ended March
31, 2004).10.27
    
    Employment Agreement, by and between Jerome V. Nelson and ISG, dated as
of February 26, 2004 (incorporated by reference to Exhibit 10.8 to the
Registrants Quarterly Report on Form 10-Q for the period ended March
31, 2004).10.28
    
    Employment Agreement, by and between V. John Goodwin and ISG, dated as
of March 31, 2004 (incorporated by reference to Exhibit 10.9 to the
Registrants Quarterly Report on Form 10-Q for the period ended March
31, 2004).10.29
    
    Employment Agreement, by and between Leonard M. Anthony and ISG, dated
as of March 31, 2004 (incorporated by reference to Exhibit 10.10 to the
Registrants Quarterly Report on Form 10-Q for the period ended March
31, 2004).
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ExhibitNumber
    
    Description of Document10.30
    
    Parent Shareholder Support Agreement, dated as of October 24, 2004, by
and between ISG and Ispat International Investments, S.L. (incorporated
by reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K filed with the Commission on October 28, 2004).10.31
    
    Letter Agreement, dated as of October 24, 2004, by and between Richmond
Investment Holdings Limited and ISG (incorporated by reference to
Exhibit 10.2 to the Registrants Current Report on Form 8-K filed with
the Commission on October 28, 2004).10.32
    
    Company Shareholder Support Agreement, dated as of October 24, 2004, by
and among Ispat International N.V. and each of the stockholders of ISG
whose names appear on the signature pages thereto (incorporated by
reference to Exhibit 99.1 to the Registrants Current Report on Form
8-K filed with the Commission on October 28, 2004).10.33
    
    280G Gross-Up Agreement , dated as of January 31, 2005 by and between
ISG and Carlos M. Hernandez, ISGs General Counsel and Secretary
(incorporated by reference to Exhibit 99.1 to the Registrants Current
Report on Form 8-K filed with the Commission on February 1, 2005).10.34**
    
    ISG Managers Incentive Plan10.35**
    
    ISG Stock Appreciation Rights Summary Plan Document14.1**
    
    ISG Code of Business Conduct18.1
    
    Letter from the independent auditors, KPMG, regarding the preferability
of the change in accounting principle from the First-in, First-out
(FIFO) method of accounting for inventories to the Last-in, First-out
(LIFO) method (incorporated by reference to Exhibit 18.1 to the
Registrants Quarterly Report on Form 10-Q for the period ended March
31, 2004).21.1
    
    List of Subsidiaries.23.1
    
    Consent of Independent Registered Public Accounting Firm.24.1
    
    Power of Attorney.31.1
    
    Certification by the Chief Executive Officer pursuant to Rules
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.31.2
    
    Certification by the Chief Financial Officer pursuant to Rules
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Confidential treatment granted as to certain portions, which portions have been omitted and
filed separately with the Commission.**
    
    Filed herewith. 65




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. INTERNATIONAL STEEL GROUP INC. By: /s/ LEONARD M. ANTHONY
Leonard M. AnthonyChief Financial Officer

March 15, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities and on the dates
indicated: Signature
    
    Title
    
    Date*

Rodney B. Mott
    
    President, Chief Executive
Officer and Director
(Principal Executive
Officer)
    
    March 15, 2005/s/ LEONARD M. ANTHONY

Leonard M. Anthony
    
    Chief Financial Officer
(Principal Financial
Officer)
    
    March 15, 2005*

Lonnie A. Arnett
    
    Vice President, Corporate
Controller and Chief
Accounting Officer
(Principal Accounting
Officer)
    
    March 15, 2005*

Wilbur L. Ross, Jr.
    
    Chairman of the Board of
Directors and Director
    
    March 15, 2005
 66




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##### Table of Contents



*

William C. Bartholomay
    
    Director
    
    March 15, 2005*

Rand V. Araskog
    
    Director
    
    March 15, 2005*

James C. Boland
    
    Director
    
    March 15, 2005*

Peter J. Powers
    
    Director
    
    March 15, 2005
  *
    
    The undersigned, pursuant to a power of attorney, executed by each of the officers and
directors above and filed with the SEC herewith, by signing his name hereto, does hereby sign
this report on behalf of each of the persons noted above in the capacities indicated. By:
    
    /s/ LEONARD M. ANTHONYName: Leonard M. Anthony
Title: Attorney-in-Fact
         67




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##### Table of Contents








Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
International Steel Group Inc.:

We have audited the accompanying consolidated balance sheets of International Steel Group Inc. and
subsidiaries (Company) as of December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the years in the two-year period ended
December 31, 2004, and for the period from inception, February 22, 2002, through December 31, 2002.
In connection with our audits of the consolidated financial statements, we also have audited
financial statement schedule II  Valuation and Qualifying Accounts. The consolidated financial
statements and financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on the consolidated financial statements and financial
statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of International Steel Group Inc. and subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of
the years in the two-year period ended December 31, 2004, and for the period from inception,
February 22, 2002, through December 31, 2002, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein. As discussed in Note 2(i) to
the consolidated financial statements, the Company changed its method
of accounting for inventories on the last-in, first-out basis
effective January 1, 2004. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 15, 2005 expressed an unqualified opinion on managements assessment of, and an
adverse opinion on the effective operation of, internal control over financial reporting. Cleveland, Ohio
March 15, 2005 /s/ KPMG LLP F-1




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC.
Consolidated Statements of Operations
(Dollars in millions, except per share data) For the periodfrom inceptionYear Ended
    
    
    Year Ended
    
    
    February 22throughDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Net sales
    
    $
    9,015.9
    
    
    $
    4,070.0
    
    
    $
    933.1Costs and expenses:Cost of sales
    
    
    7,827.9
    
    
    
    3,836.9
    
    
    
    755.3Selling, general and administrative
    
    
    260.6
    
    
    
    153.6
    
    
    
    50.2Depreciation and amortization
    
    
    129.1
    
    
    
    76.0
    
    
    
    11.0Miscellaneous (income)
    
    
    (17.0
    )
    
    
    
    
    
    
    Total costs and expenses
    
    
    8,200.6
    
    
    
    4,066.5
    
    
    
    816.5Income from operations
    
    
    815.3
    
    
    
    3.5
    
    
    
    116.6Interest and other financing expense, net
    
    
    59.6
    
    
    
    50.9
    
    
    
    2.6Income (loss) before income taxes
    
    
    755.7
    
    
    
    (47.4
    )
    
    
    114.0(Benefit) provision for income taxes
    
    
    (271.7
    )
    
    
    (23.9
    )
    
    
    45.9Net income (loss)
    
    
    1,027.4
    
    
    
    (23.5
    )
    
    
    68.1Deemed dividend on conversion of Class B common stock
    
    
    
    
    
    
    (73.6
    )
    
    
    Net income (loss) applicable to common stock
    
    $
    1,027.4
    
    
    $
    (97.1
    )
    
    $
    68.1Income (loss) per common share:Basic
    
    $
    10.41
    
    
    $
    (1.26
    )
    
    $
    1.02Diluted
    
    $
    9.99
    
    
    $
    (1.26
    )
    
    $
    0.99
 See accompanying notes to consolidated financial statements. F-2




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC.
Consolidated Balance Sheets
December 31, 2004 and 2003
(Dollars in millions, except per share data) 2004
    
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    606.7
    
    
    $
    193.6Receivables, less allowances of $50.1 and $33.8
    
    
    830.7
    
    
    
    555.1Inventories
    
    
    1,320.4
    
    
    
    866.8Assets held for sale
    
    
    39.6
    
    
    
    68.6Deferred income taxes
    
    
    75.1
    
    
    
    Prepaid and other current assets
    
    
    58.0
    
    
    
    24.5Total current assets
    
    
    2,930.5
    
    
    
    1,708.6Property, plant and equipment, net
    
    
    1,104.9
    
    
    
    861.9Deferred income taxes
    
    
    354.8
    
    
    
    Investments in joint ventures
    
    
    27.9
    
    
    
    27.0Other assets
    
    
    70.5
    
    
    
    38.7Total assets
    
    $
    4,488.6
    
    
    $
    2,636.2Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term debt and capital leases
    
    $
    57.6
    
    
    $
    46.8Accounts payable
    
    
    753.3
    
    
    
    439.5Accrued compensation and benefits
    
    
    285.3
    
    
    
    206.7Accrued taxes
    
    
    157.7
    
    
    
    47.0Other current liabilities
    
    
    127.1
    
    
    
    86.5Total current liabilities
    
    
    1,381.0
    
    
    
    826.5Long term liabilities:Debt
    
    
    637.2
    
    
    
    362.8Capital leases
    
    
    169.6
    
    
    
    212.7Environmental liabilities
    
    
    164.3
    
    
    
    161.2Pensions and other retiree benefits
    
    
    123.0
    
    
    
    101.0Other obligations
    
    
    9.4
    
    
    
    16.6Total liabilities
    
    
    2,484.5
    
    
    
    1680.8Stockholders equity:Preferred
Stock, $0.01 par value per share,
authorized 5,000 shares, none issued
    
    
    
    
    
    
    Common
Stock, $0.01 par value per share, authorized 108,600,000 shares,
100,035,950 and 97,470,609 issued and outstanding
    
    
    1.0
    
    
    
    1.0Additional paid-in capital
    
    
    1,023.3
    
    
    
    978.4Retained earnings (deficit)
    
    
    998.4
    
    
    
    (29.0
    )Accumulated other comprehensive income
    
    
    1.0
    
    
    
    5.0Treasury stock, 641,089 shares at cost
    
    
    (19.6
    )
    
    
    Total stockholders equity
    
    
    2,004.1
    
    
    
    955.4Total liabilities and stockholders equity
    
    $
    4,488.6
    
    
    $
    2,636.2
 See accompanying notes to consolidated financial statements. F-3




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC.
Consolidated Statements of Stockholders Equity
from inception, February 22, 2002,
through December 31, 2002 and the years ended
December 31, 2003 and 2004
(Dollars in millions) Class BCommon
    
    
    Additional
    
    
    Retained
    
    
    Accumulated other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Stock
    
    
    paid-in
    
    
    earnings
    
    
    comprehensive
    
    
    Treasury
    
    
    stockholdersAmount
    
    
    Amount
    
    
    capital
    
    
    (deficit)
    
    
    income
    
    
    Stock
    
    
    equityBalance, February 22, 2002
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Proceeds from private equity offerings
    
    
    0.7
    
    
    
    
    
    
    
    235.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236.1Stock compensation plan
    
    
    
    
    
    
    
    
    
    
    2.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.9Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68.1
    
    
    
    
    
    
    
    
    
    
    
    68.1Balance, December 31, 2002
    
    
    0.7
    
    
    
    
    
    
    
    238.3
    
    
    
    68.1
    
    
    
    
    
    
    
    
    
    
    
    307.1Proceeds
from Class B Common
Stock equity offering
    
    
    
    
    
    
    0.1
    
    
    
    156.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156.7Class B Common Stock issued upon
Bethlehem acquisition
    
    
    
    
    
    
    
    
    
    
    15.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.0Proceeds from initial public
equity offering
    
    
    0.2
    
    
    
    
    
    
    
    491.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    491.6Conversion of Class B Common
Stock to Common Stock with initial public
equity offering
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deemed
dividend on Class B  Common Stock
    
    
    
    
    
    
    
    
    
    
    73.6
    
    
    
    (73.6
    )
    
    
    
    
    
    
    
    
    
    
    Cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    5.0Stock compensation plan
    
    
    
    
    
    
    
    
    
    
    3.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.5Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23.5
    )
    
    
    
    
    
    
    
    
    
    
    (23.5
    )Balance, December 31, 2003
    
    
    1.0
    
    
    
    
    
    
    
    978.4
    
    
    
    (29.0
    )
    
    
    5.0
    
    
    
    
    
    
    
    955.4Stock compensation plan
    
    
    
    
    
    
    
    
    
    
    11.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.6Cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.0
    )
    
    
    
    
    
    
    (4.0
    )Purchase of treasury stock, at cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19.6
    )
    
    
    (19.6
    )Tax benefit on non-qualifying stock options.
    
    
    
    
    
    
    
    
    
    
    33.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33.0Other
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,027.4
    
    
    
    
    
    
    
    
    
    
    
    1,027.4Balance, December 31, 2004
    
    $
    1.0
    
    
    $
    
    
    
    $
    1,023.3
    
    
    $
    998.4
    
    
    $
    1.0
    
    
    $
    (19.6
    )
    
    $
    2,004.1
 Share Activity Class BCommon Stock
    
    
    Common StockBalance, February 22, 2002
    
    
    
    
    
    
    Initial equity offerings
    
    
    69,663,280
    
    
    
    Balance, December 31, 2002
    
    
    69,663,280Class B equity offering
    
    
    
    
    
    
    7,994,623Class B equity issued upon Bethlehem acquisition
    
    
    
    
    
    
    765,306Stock compensation plan
    
    
    72,400
    
    
    
    Initial public offering
    
    
    18,975,000
    
    
    
    Conversion of Class B with initial public offering
    
    
    8,759,929
    
    
    
    (8,759,929
    )Balance, December 31, 2003
    
    
    97,470,609
    
    
    
    Stock compensation plan
    
    
    3,206,430
    
    
    
    Treasury shares purchased
    
    
    (641,089
    )
    
    
    Balance, December 31, 2004
    
    
    100,035,950
    
    
    
    
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC.
Consolidated Statements of Cash Flows
(Dollars in millions) For the periodfrom inceptionYear Ended
    
    
    Year Ended
    
    
    February 22,2002 throughDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net (loss) income
    
    $
    1,027.4
    
    
    $
    (23.5
    )
    
    $
    68.1Adjustments for items not affecting cash from operating
activities:Deferred income taxes
    
    
    (429.9
    )
    
    
    20.5
    
    
    
    (5.3
    )Depreciation and amortization
    
    
    129.1
    
    
    
    76.0
    
    
    
    11.0Other
    
    
    19.4
    
    
    
    15.9
    
    
    
    (.2
    )Changes in working capital and other items:Receivables
    
    
    (185.8
    )
    
    
    11.2
    
    
    
    (145.4
    )Inventories
    
    
    (365.7
    )
    
    
    67.5
    
    
    
    (151.4
    )Prepaid and other assets
    
    
    (37.1
    )
    
    
    (12.8
    )
    
    
    (6.6
    )Accounts payable
    
    
    273.7
    
    
    
    58.7
    
    
    
    56.3Accrued income taxes
    
    
    170.7
    
    
    
    (74.0
    )
    
    
    30.1Accrued compensation and benefits
    
    
    62.5
    
    
    
    131.1
    
    
    
    30.9Other
    
    
    30.9
    
    
    
    18.3
    
    
    
    8.5Net cash provided by (used in) operating activities
    
    
    695.2
    
    
    
    288.9
    
    
    
    (104.0
    )Cash flows from investing activities:Capital expenditures and investments
    
    
    (267.2
    )
    
    
    (96.9
    )
    
    
    (55.7
    )Acquisitions, net of cash received
    
    
    (223.9
    )
    
    
    (822.6
    )
    
    
    (144.3
    )Proceeds from sales of assets
    
    
    18.4
    
    
    
    34.3
    
    
    
    14.3Net cash used in investing activities
    
    
    (472.7
    )
    
    
    (885.2
    )
    
    
    (185.7
    )Cash flows from financing activities:Borrowings under revolving credit facility
    
    
    
    
    
    
    941.6
    
    
    
    867.9Payments under revolving credit facility
    
    
    
    
    
    
    (1,002.3
    )
    
    
    (807.2
    )Proceeds from long-term debt
    
    
    594.6
    
    
    
    710.0
    
    
    
    8.8Payments on long-term debt
    
    
    (348.3
    )
    
    
    (469.3
    )
    
    
    Payments on capital leases
    
    
    (36.0
    )
    
    
    (23.7
    )
    
    
    Issuance of common stock, net
    
    
    11.9
    
    
    
    648.5
    
    
    
    236.2Purchase of treasury stock
    
    
    (19.6
    )
    
    
    
    
    
    
    Deferred financing fees
    
    
    (12.0
    )
    
    
    (24.7
    )
    
    
    (6.2
    )Net cash provided by financing activities
    
    
    190.6
    
    
    
    780.1
    
    
    
    299.5Increase in cash and cash equivalents
    
    
    413.1
    
    
    
    183.8
    
    
    
    9.8Cash and
cash equivalents  beginning of period
    
    
    193.6
    
    
    
    9.8
    
    
    
    Cash and
cash equivalents  end of period
    
    $
    606.7
    
    
    $
    193.6
    
    
    $
    9.8Other information:Interest paid
    
    $
    38.6
    
    
    $
    34.3
    
    
    $
    1.4Interest capitalized
    
    
    1.3
    
    
    
    0.4
    
    
    
    0.3Income taxes (received) paid
    
    
    (12.4
    )
    
    
    30.0
    
    
    
    21.2Capital lease obligation incurred
    
    
    7.9
    
    
    
    0.2
    
    
    
    
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) (1) Pending Merger In October 2004, Ispat International N.V. (Ispat), LNM Holdings N.V. (LNM) and International
Steel Group (ISG) agreed to merge in a two-step transaction. The first step, the acquisition of
privately held LNM by Ispat for 100% stock consideration, was completed in December 2004. The new
entity, renamed Mittal Steel N.V. (Mittal), will then acquire ISG for a combination of $21 per
share in cash and a number of Mittal shares equal to $21 divided by the average closing price of
Mittal for the 20 trading days prior to closing, up to a maximum of .6087 shares and a minimum of
..4793 shares. The value in the merger will be $42 per ISG share if the average price of Mittal
shares for the 20 trading days prior to the merger is between $34.50 and $43.81 per share. ISG
received early termination of the waiting period under Hart-Scott-Rodino Act in December 2004. The
merger of ISG and Mittal is subject to approval by the shareholders of ISG and Mittal at meetings
scheduled on April 12, 2005 and satisfaction of other customary closing conditions. The
transaction is expected to be completed soon after the shareholders meetings. (2) Summary of Significant Accounting Policies (a) Basis of Presentation These consolidated financial statements include the accounts of International Steel Group
Inc., the parent company, and its consolidated subsidiaries (ISG or the Company). All significant
intercompany accounts and transactions have been eliminated in consolidation. Investments in joint
ventures are accounted for under the equity method of accounting, except an iron ore-mining
venture, which is pro rata consolidated. Certain prior period amounts have been reclassified to
conform to the current period presentation. ISG has grown in less than three years from inception in February 2002 to about $9 billion
sales in 2004 through acquisitions. Accordingly, the 2004 financial statements are not comparable
to prior years. (b) Nature of Operations ISG was organized in February 2002 and began operations in April 2002. ISG is a domestic
manufacturer of light flat-rolled, plate, wire rod and rail steel products whose customers are
located primarily in the United States of America. ISG reports its activities as a single segment
and serves the automotive, appliance, transportation, machinery and construction markets, either
directly or through steel service centers. No single customer represented more than 10% of ISGs
total consolidated revenues in 2004, 2003 and 2002. ISGs export sales were $337.9 for 2004,
$165.1 in 2003 and $2.7 in 2002. The table below shows ISGs shipments by product for the 2004,
2003, and 2002 periods. 2004
    
    
    2003
    
    
    2002Hot Rolled
    
    
    41
    %
    
    
    46
    %
    
    
    71
    %Cold Rolled
    
    
    19
    %
    
    
    19
    %
    
    
    22
    %Coated
    
    
    21
    %
    
    
    20
    %
    
    
    7
    %Plate
    
    
    10
    %
    
    
    8
    %
    
    
    Tin Plate
    
    
    5
    %
    
    
    3
    %
    
    
    Rail and other
    
    
    4
    %
    
    
    4
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 (c) Revenue Recognition F-6




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##### Table of Contents



INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) Revenue is recognized at the time products are shipped in accordance with customer
instructions and when all substantial risks of ownership are transferred to the customer. ISG
provides a full allowance for estimated claims for products that have been shipped that may not
meet customer specifications. ISG tests its steel products before shipment to provide assurance
that they meet customer specifications. ISGs sales agreements do not contain acceptance or
right of return clauses. The allowance is calculated based on claims that have been submitted
but not resolved and anticipated future claims based on historical experience. The allowance for
claims is a component of the accounts receivable allowances disclosed on the balance sheet and the
provision for claims is a component of net sales. (d) Stock Based Compensation We account for stock based compensation under the fair value method as permitted under
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation. (e) Amortization of Debt Issue Costs We capitalize certain debt issuance costs and amortize them on a straight-line basis over the
expected term of the debt which approximates the effective yield method. In the event of an early
termination of debt, the unamortized amounts are expensed in the period of termination. (f) Income Taxes Income taxes are accounted for under the asset and liability method that requires deferred
income taxes to reflect the future tax consequences attributable to differences between the tax and
financial reporting bases of assets and liabilities. Deferred tax assets and liabilities recognized
are based on the tax rates in effect in the year in which differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance when, based on available positive and
negative evidence, it is more likely than not (greater than a 50% likelihood) that some or all of
the net deferred tax assets will not be realized. (g) Earnings per Share Basic earnings per share are computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per common share include the net incremental shares
issuable upon the assumed exercise of stock options and conversion of convertible debt as if the
conversion occurred at the beginning of the period. (h) Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid instruments with an original maturity of
three months or less and are carried at cost, which approximates market value. (i) Inventories Inventories are stated at the lower of cost or market. On
January 1, 2004, we adopted the LIFO cost method of accounting for substantially all existing
inventories. We also reduced the number of inventory pools from a pool for each manufacturing facility to a
single pool. We believe that the LIFO method of valuing inventories is preferable because it more
closely matches current costs and revenues in periods of increasing costs. We believe that a
single method and a single pool for substantially all inventories is preferable because, in order
to further achieve the operating synergies from our acquisitions, we continue to reallocate the
supply of semi-finished materials to our finishing facilities among our steel producing facilities
and to reallocate the sources of certain raw materials among our steel producing facilities in
order to improve operating efficiencies. Having a single LIFO pool for substantially all
inventories eliminates the potential for changes in inventory value solely because of this movement
of inventory among manufacturing facilities. Consistent with the policy adopted for inventories in
the Bethlehem acquisition, we accounted for the inventories at the Weirton and Georgetown
acquisitions under FIFO or average cost method during 2004. We expect to include these inventories
which totaled about $295 million at December 31, 2004, in the single LIFO pool beginning in January
2005. The components of inventories follow: F-7




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) December 31,2004
    
    
    2003FIFO or average cost:Raw materials
    
    $
    1,156.8
    
    
    $
    291.0Finished and semi-finished goods
    
    
    562.2
    
    
    
    612.01,719.0
    
    
    
    903.0LIFO reserve
    
    
    (398.6
    )
    
    
    (36.2
    )Total
    
    $
    1,320.4
    
    
    $
    866.8
 During 2003, liquidation of LIFO inventory quantities reduced cost of sales by about $9.0.
Inventories acquired in a business combination were valued at fair market value less, for
in-process and finished goods, costs to complete processing and a reasonable profit for selling
efforts. As a result, the value assigned to inventory acquired from Weirton and Bethlehem, see Note
3, Acquisitions, and cost of sales were $5.0 lower for 2004 and $40.8 higher for 2003 than
production costs. (j) Assets Held for Sale Surplus assets that are not being operated and expected to be sold within one year are
recorded as assets held for sale at the lower of the carrying value or fair value, less costs to
sell. These assets are not depreciated while classified as held for sale. The net expenses relating
to all assets classified as held for sale were $4.5, $7.0 and $0.6 in each of last three years. (k) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided on a straight-line
basis over the estimated useful lives of the assets. The estimated useful lives are 20 years for
buildings and range from 3 to 10 years for machinery and equipment. Repairs and maintenance that do
not significantly improve or extend the lives of the respective assets are expensed as incurred
throughout the year. The components of Property, plant and equipment, net follow: December 31,2004
    
    
    2003Land and land improvements
    
    $
    41.1
    
    
    $
    31.5Buildings
    
    
    103.9
    
    
    
    70.0Machinery and equipment
    
    
    1,050.3
    
    
    
    796.6Construction in progress
    
    
    119.6
    
    
    
    50.2Total
    
    
    1,314.9
    
    
    
    948.3Accumulated depreciation and amortization
    
    
    (210.0
    )
    
    
    (86.4
    )Total property, plant and equipment, net.
    
    $
    1,104.9
    
    
    $
    861.9
 (l) Long-lived Assets Long-lived assets are subject to an impairment assessment if there are circumstances that
indicate the carrying amount may no longer be recoverable from future operations or sale. The
amount of the impairment recognized, if any, is the difference between the carrying amount and the
fair value of the asset. F-8




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) (m) Contingencies Liabilities for loss contingencies, including environmental remediation costs, arising from
claims, assessments, litigation, fines and penalties and other sources are recorded when it is
probable that a loss has been incurred and the amount can be reasonably estimated. The Companys estimates of environmental remediation liabilities are based on current
technology and existing laws and regulations and site-specific estimated costs developed by
independent engineering consultants. The liabilities recognized under business combination
accounting were recorded at their fair value based on the net present value of estimated future
cash payments. These amounts are adjusted for accretion of the discount and when the effects of new
information or changes in law or technology can be reasonably estimated. Required future
recognition of any environmental liabilities unrelated to a business combination will not be
discounted. (n) Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires that management make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. (o) Market Risk ISG is exposed to fluctuations in interest rates and the prices of certain commodities such as
natural gas, fuel oil, coke, steel scrap, iron ore and various non-ferrous metals. Management is
authorized to use various financial instruments where available to manage the exposures associated
with these fluctuations. ISG may employ the use of futures, forwards, collars, options and swaps to
manage certain exposures when practical. By policy, ISG does not enter into such contracts for the
purpose of speculation. ISGs policies include establishing a risk management philosophy and
objectives, providing guidelines for derivative usage and establishing procedures for control and
reporting of derivative activity. The change in value of the effective portion of financial
instruments used to hedge certain exposures is reported as a component of other comprehensive
income and is reclassified into earnings in the same period during which the hedged transactions
affect earnings. (p) Recent Accounting Pronouncements Adopted by ISG During 2004 New accounting standards that ISG was required to adopt in 2004 did not have a material effect
on these financial statements. (3) Acquisitions ISG acquired substantially all the assets and assumed certain liabilities of a hot briquetted
iron (HBI) facility located in Point Lisas, Trinidad and Tobago in July 2004, of Georgetown Steel
Company (Georgetown) in June 2004, Weirton Steel Corporation (Weirton) in May 2004, Bethlehem Steel
Corporation (Bethlehem) in May 2003, Acme Steel Corporation (Acme) in October 2002, and The LTV
Corporation (LTV) in April 2002. The results of their operations have been included in our
consolidated financial statements since the dates of acquisition. The following unaudited pro forma data for ISG includes the results of operations of the
Bethlehem and Weirton acquisitions as if they had been consummated on January 1, 2003. The HBI and
Georgetown facilities were not operating at the time we acquired them, so are not included. The
pro forma adjustments include the effects of the new labor agreements and the financings incurred
to fund the acquisition of Bethlehem. This pro forma data is based on historical information and
does not necessarily reflect the actual results that would have occurred, nor is it indicative of
future results of operations. F-9




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) 2004
    
    
    2003(unaudited)Net sales
    
    $
    9,472.6
    
    
    $
    6,366.6Net income
    
    
    1,052.5
    
    
    
    71.9Net income applicable to common stock
    
    
    1,052.5
    
    
    
    (1.7
    )Income per shareBasic
    
    $
    10.66
    
    
    $
    (0.02
    )Diluted
    
    $
    10.22
    
    
    $
    (0.02
    )
 The fair value of the net assets of all acquisitions was in excess of the purchase price,
resulting in negative goodwill. In accordance with SFAS No. 141, Business Combinations, the
negative goodwill was allocated as a pro rata reduction of the amounts that would have otherwise
been assigned to the acquired non-current assets, primarily property, plant and equipment and
intangible assets, based on their relative fair values. The amounts recorded for the net assets acquired follows: HBI
    
    
    Georgetown
    
    
    Weirton
    
    
    Bethlehem
    
    
    Acme
    
    
    LTVAcquired assets:Receivables, net
    
    $
    2.5
    
    
    $
    
    
    
    $
    126.8
    
    
    $
    379.2
    
    
    $
    
    
    
    $
    Inventories
    
    
    2.5
    
    
    
    
    
    
    
    85.4
    
    
    
    730.3
    
    
    
    
    
    
    
    52.4Prepaids and other current assets
    
    
    
    
    
    
    
    
    
    
    .3
    
    
    
    5.1
    
    
    
    
    
    
    
    3.2Assets held for sale
    
    
    
    
    
    
    
    
    
    
    .2
    
    
    
    91.2
    
    
    
    
    
    
    
    30.4Intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26.5
    
    
    
    
    
    
    
    Property, plant and equipment
    
    
    16.8
    
    
    
    19.6
    
    
    
    83.7
    
    
    
    585.4
    
    
    
    67.9
    
    
    
    135.2Other noncurrent assets
    
    
    
    
    
    
    
    
    
    
    4.7
    
    
    
    23.4
    
    
    
    
    
    
    
    13.621.8
    
    
    
    19.6
    
    
    
    301.1
    
    
    
    1,841.1
    
    
    
    67.9
    
    
    
    234.8Acquired liabilities:Current portion of long term debt and
capital lease obligations
    
    
    
    
    
    
    
    
    
    
    .7
    
    
    
    32.7
    
    
    
    
    
    
    
    Accounts payable
    
    
    3.6
    
    
    
    .7
    
    
    
    36.1
    
    
    
    251.3
    
    
    
    
    
    
    
    Accrued expenses and other current
liabilities
    
    
    
    
    
    
    .3
    
    
    
    40.3
    
    
    
    125.9
    
    
    
    3.9
    
    
    
    64.8Long term debt and capital lease
obligations
    
    
    
    
    
    
    
    
    
    
    17.1
    
    
    
    358.9
    
    
    
    
    
    
    
    Long term environmental liabilities
    
    
    
    
    
    
    .2
    
    
    
    16.1
    
    
    
    144.0
    
    
    
    3.1
    
    
    
    86.6Long term pension and retiree benefits
    
    
    
    
    
    
    
    
    
    
    3.5
    
    
    
    82.9
    
    
    
    
    
    
    
    Other long term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.8
    
    
    
    
    
    
    
    3.6
    
    
    
    1.2
    
    
    
    113.8
    
    
    
    1,003.5
    
    
    
    7.0
    
    
    
    151.4Net assets recorded
    
    
    18.2
    
    
    
    18.4
    
    
    
    187.3
    
    
    
    837.6
    
    
    
    60.9
    
    
    
    83.4Value of stock issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15.0
    )
    
    
    
    
    
    
    Cash paid, net
    
    $
    18.2
    
    
    $
    18.4
    
    
    $
    187.3
    
    
    $
    822.6
    
    
    $
    60.9
    
    
    $
    83.4
 See Note 5, Income Taxes,regarding federal income tax issues related to the acquisition of the
Bethlehem assets. Intangible assets consist of $5.5 assigned to patents with an estimated useful life of 16
years and $21.0 assigned to favorable supply contracts that were being amortized over the term of
the associated contracts ranging from one F-10




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) to four years. ISG recognized $11.3 of expense during 2003 related to these intangibles. At
December 31, 2003, the remaining balance of these intangible assets was reduced to zero through a
provision for deferred federal income taxes. (4) Stock Compensation ISG recognizes compensation expense for its stock compensation program based on the fair
value, determined by using the Black-Scholes option pricing model, of the award on the measurement
date under SFAS No. 123, Accounting for Stock-Based Compensation, ISGs Key Employees Incentive Stock Option Plan (Plan) provides that common stock options may
be granted to key employees and officers with exercise prices at no less than the market value on
the grant date. Outstanding options vest in four equal annual installments and expire six years
after date of grant. If there is a change of control of 50% or more of the voting stock of the
Company, all remaining unvested options will vest immediately. Upon
consummation of the merger with Mittal Steel (see Note 1,
Pending Merger), all ISG stock options will be cancelled and holders of ISG options will receive an amount in cash equal to the
difference between $42 per share and the applicable per share exercise price of the option.
Immediately prior to consummation, ISG will pay about $145 to cancel the options. The fair value of the options granted in 2004 was $1.0, in 2003 was zero (the option price
exceeded fair value at the grant date) and in 2002 was $9.4. Assumptions to value options used in each year were: 2004
    
    2003
    
    2002Expected volatility
    
    29.4%
    
    N/A
    
    N/ARisk free interest rate
    
    3.22-3.63%
    
    3.04%
    
    3.04%Dividend yield
    
    0%
    
    0%
    
    0%Expected term
    
    4-5.5 years
    
    1-4 years
    
    1-4 years
 We recognized compensation expense of $1.4 in 2004, $3.3 in 2003 and $2.9 in 2002. As of
December 31, 2004, there was $1.7 in total unrecognized compensation cost related to nonvested
options granted under the Plan. That cost is expected to be recognized over a weighted-average
period of 1.5 years. 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOptions outstanding
Beginning of the year
    
    
    7,373,940
    
    
    $
    5.97
    
    
    
    7,167,600
    
    
    $
    2.76
    
    
    
    
    
    
    $
    Granted
    
    
    100,000
    
    
    
    31.59
    
    
    
    1,038,940
    
    
    
    25.55
    
    
    
    7,464,440
    
    
    
    2.76Exercised
    
    
    (3,206,430
    )
    
    
    3.17
    
    
    
    (72,400
    )
    
    
    2.76
    
    
    
    
    
    
    
    Canceled/forfeited
    
    
    
    
    
    
    
    
    
    
    (760,200
    )
    
    
    2.76
    
    
    
    (296,840
    )
    
    
    2.76End of year
    
    
    4,267,510
    
    
    $
    8.68
    
    
    
    7,373,940
    
    
    $
    5.97
    
    
    
    7,167,600
    
    
    $
    2.76Options exercisable
at end of year
    
    
    454,295
    
    
    $
    12.88
    
    
    
    2,619,975
    
    
    $
    2.76
    
    
    
    
    
    
    $
    
 F-11




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) ISG has a Stock Appreciation Rights Plan (stock rights) for certain key employees that
provides employees a cash payment after vesting for the difference between the stock rights price
and the market value of the stock on the date of exercise, with the award limited to 200% of the
stock rights price. Stock rights vest in four substantially equal installments and expire five
years after grant. We recognized compensation expense of $2.5, $2.5 and $0.5 during 2004, 2003
and 2002. Upon consummation of the merger with Mittal Steel (see Note 1, Pending Merger), these
ISG stock rights will be converted in similar rights in Mittal Steel stock determined by the
exchange ratio and the ISG stock rights price. 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageRights
    
    
    Price
    
    
    Rights
    
    
    Price
    
    
    Rights
    
    
    PriceStock Rights outstanding
Beginning of the year
    
    
    941,440
    
    
    $
    8.36
    
    
    
    1,234,420
    
    
    $
    3.82Granted
    
    
    406,948
    
    
    
    33.40
    
    
    
    188,480
    
    
    
    25.55
    
    
    
    1,248,900
    
    
    $
    3.92Exercised
    
    
    (295,132
    )
    
    
    5.97
    
    
    
    (340,280
    )
    
    
    3.72Canceled/forfeited
    
    
    ( 8,533
    )
    
    
    25.55
    
    
    
    (141,180
    )
    
    
    2.76
    
    
    
    (14,480
    )
    
    
    12.78End of year
    
    
    1,044,723
    
    
    $
    18.65
    
    
    
    941,440
    
    
    $
    8.36
    
    
    
    1,234,420
    
    
    $
    3.82Stock Rights exercisable
at end of year
    
    
    18,175
    
    
    $
    25.55
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 (5) Income Taxes The U.S. and foreign components of income (loss) before income taxes consist of the following: 2004
    
    
    2003
    
    
    2002United States
    
    $
    763.5
    
    
    $
    (47.4
    )
    
    $
    114.0Foreign
    
    
    (7.8
    )
    
    
    
    
    
    
    Total
    
    $
    755.7
    
    
    $
    (47.4
    )
    
    $
    114.0
 The components of the (benefit) provision for income taxes follows: 2004
    
    
    2003
    
    
    2002(Benefit) provision:CurrentFederal
    
    $
    142.2
    
    
    $
    (42.5
    )
    
    $
    42.5Foreign
    
    
    
    
    
    
    
    
    
    
    State
    
    
    16.0
    
    
    
    (1.9
    )
    
    
    8.7Deferred
    
    
    (429.9
    )
    
    
    20.5
    
    
    
    (5.3
    )Total
    
    $
    (271.7
    )
    
    $
    (23.9
    )
    
    $
    45.9
 F-12




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) A reconciliation of income taxes at the statutory U.S. tax rate of 35% to the recorded
(benefit) provision follows: 2004
    
    
    2003
    
    
    2002Taxes at statutory rate
    
    $
    264.5
    
    
    $
    (16.6
    )
    
    $
    39.9State and local income taxes net of federal effect
    
    
    20.5
    
    
    
    (0.7
    )
    
    
    5.2Valuation allowance adjustment.
    
    
    (389.8
    )
    
    
    5.3
    
    
    
    Utilization of NOL and certain temporary
differences
    
    
    (162.9
    )
    
    
    (26.0
    )
    
    
    Intangible assets written off
    
    
    
    
    
    
    15.2
    
    
    
    Depletion
    
    
    (5.4
    )
    
    
    (1.3
    )
    
    
    Other
    
    
    1.4
    
    
    
    0.2
    
    
    
    0.8(Benefit) provision
    
    $
    (271.7
    )
    
    $
    (23.9
    )
    
    $
    45.9
 Significant components of deferred income tax assets and (liabilities) follow: December 31,2004
    
    
    2003Temporary differences  assets (liabilities):Plant and equipment
    
    $
    149.3
    
    
    $
    233.0State deferred income taxes
    
    
    91.0
    
    
    
    101.2Compensation and benefits
    
    
    80.1
    
    
    
    51.9Environmental liabilities
    
    
    74.3
    
    
    
    72.9Capitalized leases
    
    
    71.2
    
    
    
    77.7Vacation accruals
    
    
    25.8
    
    
    
    17.3Inventories
    
    
    20.8
    
    
    
    6.2Accruals and reserves
    
    
    13.9
    
    
    
    29.0Joint ventures
    
    
    12.4
    
    
    
    14.9Other
    
    
    15.5
    
    
    
    18.4Total assets
    
    
    554.3
    
    
    
    622.5Prepaid expenses
    
    
    (2.8
    )
    
    
    (2.2
    )Other
    
    
    (0.4
    )
    
    
    0.1Total liabilities
    
    
    (3.2
    )
    
    
    (2.1
    )Net operating loss carryforwards
    
    
    269.8
    
    
    
    321.4AMT credit carryfoward
    
    
    25.8
    
    
    
    25.8Valuation allowance
    
    
    (416.8
    )
    
    
    (967.6
    )Net deferred tax asset
    
    $
    429.9
    
    
    $
    
 Temporary differences represent the cumulative taxable or deductible amounts recorded in the
consolidated financial statements in different years than recognized in the income tax returns. The acquisition of the Bethlehem assets in 2003 was structured as a tax-free reorganization
under Internal Revenue Code (IRC) Section 368 (a) (1) (G). The historic tax attributes of Bethlehem
as limited by IRC Section 382, therefore, carry over to the ISG consolidated federal income tax
return. These tax attributes are composed principally of net operating loss (NOL) carryforwards,
alternative minimum tax (AMT) credit carryforwards and temporary differences related to the tax
basis of property, plant and equipment. The net deferred tax assets acquired related to these tax
attributes were not recognized at the date of acquisition because there were a number of required F-13




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) actions related to, among other matters, Bethlehems plan of liquidation under federal bankruptcy
law. During the fourth quarter of 2003, among other events, the Bankruptcy Court confirmed
Bethlehems plan of liquidation, which subsequently became effective on December 31, 2003.
Accordingly, in the fourth quarter of 2003, we determined that it was appropriate to recognize the
acquired net deferred tax assets and any related valuation allowance. In the first five years after the acquisition, IRC Section 382 limits ISGs combined annual
tax depreciation for the property acquired from Bethlehem in excess of that based on the fair value
of specific assets acquired and ability to utilize the NOL carryforward acquired from Bethlehem to
an amount calculated by multiplying the tax free rate published by the IRS for the month the
acquisition occurred by the entity value of the net assets acquired. The excess of any available
tax depreciation over that allowed by Section 382 in these first five years becomes an NOL
carryforward. There is no depreciation limitation after the first five years but the annual NOL
utilization continues to be limited to the same amount. As a result, certain Bethlehem tax
depreciation is converted to an ISG NOL and certain acquired Bethlehem NOL carryforwards cannot be
used by ISG. After taking the above limits into consideration, ISG estimates the net deferred tax
asset acquired from Bethlehem to be about $1,000. At December 31, 2004, ISG had United States regular tax NOL loss carryforwards as limited by
IRC Section 382 of about $765, comprised of about $564 acquired from Bethlehem and about $201 from
excess available tax depreciation, and AMT credit carryforwards acquired from Bethlehem of about
$25. Any amount of the annual available depreciation or NOL as limited by IRC Section 382 acquired
from Bethlehem that is not used in the tax return can be carried forward to use in future years as
long as sufficient original Bethlehem NOL amounts have not expired. The Bethlehem NOL loss
carryforward before the limits imposed by IRC Section 382 total about $968 and expire in varying
amounts from 2008 through 2022 if we are unable to generate sufficient amounts of taxable income in
the future. The NOLs from excess depreciation expire in equal amounts from 2023 to 2027. AMT
credits can be carried forward indefinitely. SFAS No. 109, Accounting for Income Taxes, requires that we record a valuation allowance for a
deferred tax asset when it is more likely than not (a likelihood of more than 50%) that some
portion or all of the deferred tax asset will not be realized based on available positive and
negative evidence. The realization of the deferred tax asset is ultimately dependent upon ISGs
generation of sufficient future taxable income during periods in which those net temporary
differences become deductible and before the expiration of the NOL carryforwards. Because ISG had
been in existence for less than two years and those resulted in a net cumulative tax loss, the
available negative evidence could not be overcome and a full valuation allowance was required for
the deferred tax asset at December 31, 2003. In addition, generally accepted accounting principles
require that we recognize any tax benefits of the Bethlehem acquisition realized in 2003 through
the income statement only after writing off any remaining intangible assets acquired from
Bethlehem. Accordingly, in the fourth quarter of 2003, we wrote off $15.2 of intangible assets as a
provision for deferred income taxes. ISG is now one of the largest steel producers in North America with 2004 net sales of over $9
billion and income before income taxes of about $756. The global steel market improved
significantly in 2004 and the current outlook remains positive. Based on ISGs 2004 financial
results, the significant improvement in the global steel industry, assumptions about expected
future taxable income and all available and prudent tax planning strategies, ISG concluded that
there is sufficient positive evidence to determine that it is more likely than not (a likelihood
of greater than 50%) that a portion of ISGs deferred tax asset will be realized. Accordingly, ISG
recorded an adjustment to the valuation allowance of about $390 million in the fourth quarter of
2004. While there are numerous future scenarios under which ISG could generate sufficient income
before income taxes through 2027 to realize the recorded net deferred tax asset of $430, ISG would
need to generate about $225 of income before income taxes per year from 2005 through 2009 or about
$12 to $14 per ton shipped based on annual shipments of 16 to 18 million net tons to realize that
asset. If based on then available evidence in the future, it is determined that the valuation
allowance needs to be adjusted using the more likely than not criterion, such adjustment will be
through a provision or benefit for income taxes in the income statement in that period. F-14




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) ISGs 2004 provision for income taxes was about $118 before the benefit of the valuation
allowance adjustment or effective rate of about 15%. This provision takes into consideration the
temporary differences that arose or reversed during 2004, the benefit of the NOL and IRC Section
382 depreciation limit carryforwards from 2003, and, as required by generally accepted accounting
principles, the benefit of temporary differences, principally depreciation, that are expected to be
available in 2005 and 2006 to carryback against the current income taxes paid for 2004. Our income tax returns are subject to audits by the Internal Revenue Service and state tax
authorities. To date, we have not been audited by any of these. Because of uncertainties in
interpretations of certain IRC Section 382 regulations, ISG has not recorded potential deferred tax
assets related to the tax basis of certain depreciable assets acquired from Bethlehem in excess of
the values assigned to those assets under generally accepted accounting principles that are not
probable of being realized. These uncertainties will be resolved through the Internal Revenue
Service audit process. We believe that the outcome of any future audits would not have a material
adverse impact on the Companys financial position, cash flows or results of operations. (6) Income (loss) per Share The following table presents calculations of income (loss) per share of common stock: 2004
    
    
    2003
    
    
    2002Net income (loss)
    
    $
    1,027.4
    
    
    $
    (23.5
    )
    
    $
    68.1Deemed dividend on the conversion of Class B common Stock
    
    
    
    
    
    
    (73.6
    )
    
    
    Net income (loss) applicable for basic earnings per common share
    
    
    1,027.4
    
    
    
    (97.1
    )
    
    
    68.1Adjustment for interest on convertible debt
    
    
    1.3
    
    
    
    
    
    
    
    Net income (loss) applicable for diluted earnings per common share
    
    $
    1,028.7
    
    
    $
    (97.1
    )
    
    $
    68.1Weighted average number of shares of common stock outstanding 
Basic
    
    
    98.7
    
    
    
    77.1
    
    
    
    66.5Incremental shares issuable upon assumed conversion and exercise
of stock options
    
    
    4.3
    
    
    
    
    
    
    
    2.4Total shares -Diluted
    
    
    103.0
    
    
    
    77.1
    
    
    
    68.9Income (loss) per share:Basic
    
    $
    10.41
    
    
    $
    (1.26
    )
    
    $
    1.02Diluted
    
    $
    9.99
    
    
    $
    (1.26
    )
    
    $
    0.99
 The basic and diluted loss per share are the same for 2003 because incremental shares issuable
upon conversion are anti-dilutive. The Class B common stock was issued in 2003 for cash and in connection with the acquisition of
the Bethlehem assets. It was identical in all respects to common stock, except that it contained an
automatic conversion to common stock upon ISGs initial public offering at a conversion ratio per
share equal to (1) $92,500, divided by (2) the product of (a) the price per share paid by the
public in the initial public offering multiplied by (b) 0.7, divided by (3) 3,620. Upon the
completion of the offering on December 12, 2003, the Class B common stock automatically converted
into 8,759,929 shares of common stock at the $28 per share price of the public offering. The
conversion of the Class B common stock resulted in a one-time deemed dividend to the holders of
the Class B common stock of $73.6. The deemed dividend was recognized on the balance sheet as a
reclassification from retained earnings to paid in capital in excess of par value. This transaction
had no impact on cash flows or net income. The deemed dividend, however, is required to be
treated similar to a preferred stock dividend in the calculation of loss per share of common stock
by deducting it from net loss to arrive at net loss applicable to common stock, increasing the 2003
loss per common share by $0.95 from $0.31 to $1.26. (7) Comprehensive Income (Loss) F-15




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) We have financial instruments that are designated as cash flow hedges for natural
gas and for zinc, the effective portion of the change in value of these financial instruments is
reported as a component of other comprehensive income and is reclassified into earnings in the same
period during which the hedged transactions affect earnings. At December 31, 2004, we recognized
$3.7 in prepaid expenses and $2.7 in accrued liabilities with a corresponding $1.0 in other
comprehensive income related to the cash flow hedges. The following table presents calculations of comprehensive income (loss): 2004
    
    
    2003
    
    
    2002Other comprehensive income (loss):Derivative financial instruments:Changes in value during the period
    
    $
    (8.0
    )
    
    $
    5.0
    
    
    
    Recognized in net income
    
    
    4.0
    
    
    
    
    
    
    
    Total other comprehensive income (loss)
    
    
    (4.0
    )
    
    
    5.0
    
    
    
    Net income (loss)
    
    
    1,027.4
    
    
    
    (23.5
    )
    
    
    68.1Total comprehensive income (loss)
    
    $
    1,023.4
    
    
    $
    (18.5
    )
    
    $
    68.1
 (8) Long-term Debt and Capital Lease Obligations Components of long-term debt and capital leases follow: December 31,2004
    
    
    2003Debt  Notes and loans:Senior Notes, 6.5%, Due
            2014
    
    $
    600.0
    
    
    $
    Credit Facilities, Tranche B, LIBOR plus 3.5%, Due May 2007
    
    
    
    
    
    
    266.8Columbus Coatings financing, Variable, Due August 2008
    
    
    
    
    
    
    57.8PBGC convertible note, 6%, Due May 2007
    
    
    35.0
    
    
    
    35.0Coal Act Subordinated Note, 9%, Due September 2005
    
    
    
    
    
    
    7.0MABCO Note, 5%, Due 2019
    
    
    5.0
    
    
    
    Industrial Revenue Bonds, 5.8%, Due May 2007
    
    
    3.8
    
    
    
    4.9Acme Steel Promissory Note, 7.75%, Due October 2007
    
    
    
    
    
    
    2.8Unamortized debt discount
    
    
    (5.1
    )
    
    
    Total debt
    
    
    638.7
    
    
    
    374.3Current portion
    
    
    (1.5
    )
    
    
    (11.5
    )Total long-term debt
    
    $
    637.2
    
    
    $
    362.8Capital lease obligations:Coke oven battery, approximately 5%, payable 2005-2014
    
    $
    159.5
    
    
    $
    174.2Wide slab caster, 9.86%, payable 2005
    
    
    32.8
    
    
    
    39.2Iron ore vessel, 13%, payable 2005-2009
    
    
    19.2
    
    
    
    21.9Other
    
    
    14.2
    
    
    
    12.7Total capital lease obligations
    
    
    225.7
    
    
    
    248.0Current portion
    
    
    (56.1
    )
    
    
    (35.3
    )Total long-term capital lease obligations
    
    $
    169.6
    
    
    $
    212.7
 F-16




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) The maturities of long-term debt and required capital lease payments at December 31, 2004
follows: 2005
    
    $
    57.62006
    
    
    6.62007
    
    
    41.72008
    
    
    10.42009
    
    
    1.8Thereafter
    
    
    751.4Total
    
    $
    869.5
 On April 14, 2004, the Company issued $600 of senior, unsecured debt securities due 2014 in a
private placement to a limited number of qualified institutional buyers as defined under the
Securities Act. The debt securities bear interest at a rate of 6.5% and were sold at an original
issue discount of $5.4, which is amortized as interest expense over the life of the issue. These
debt securities have a principal at maturity of $600 and an effective annual cost of 6.625%. In
October 2004, ISG exchanged the original debt securities with the terms of the new debt securities
(the Notes) being substantially identical in all respects to the terms of the securities for which
they were exchanged except that the Notes were registered under the Securities Act of 1933, as
amended. Interest on the Notes is payable semi-annually beginning in October 2004. We are not required
to make mandatory redemption or sinking fund payments prior to maturity. However, we may redeem
the Notes, in whole or in part, at our option, at any time at a redemption price equal to the
greater of 100% of the principal amount of the debentures to be redeemed or the sum of the present
value of the remaining scheduled payments. Or, at any time prior to April 15, 2007, we may redeem
on one or more occasions up to 35% of the aggregate principal amount of the Notes at a redemption
price of 106.50% of the principal amount, plus accrued interest and Special Interest (as defined in
the Indenture), if any, to the redemption date, with the net cash proceeds of one or more equity
offerings, provided that at least 65% of the aggregate principal amount of Notes issued (excluding
Notes held by the Company or its Subsidiaries) remains outstanding immediately after the redemption
and the redemption occurs within 90 days after the consummation of the equity offering. The associated indenture governing the Notes contains certain covenants that are typical of
investment grade debt. At December 31, 2004, the Company was in compliance with these covenants. Certain of ISGs domestic wholly owned subsidiaries guarantee the Notes on a full,
unconditional and joint and several basis. The parent company has no independent assets or
operations and non-guarantor subsidiaries are minor. Financing costs of $12.0 were incurred with the placement of the debt securities and Notes. These
costs are included in other assets on the consolidated balance sheet and are being amortized to
earnings on a straight-line basis over the life of the issue which approximates the effective yield
method. In 2003, the Company entered into credit facilities (Credit Facilities) that are
collateralized by inventory, accounts receivable, real property and capital stock. The Credit
Facilities consisted of a three-year $350.0 revolving credit facility, a two-year $250.0 tranche A
term loan facility and a four-year $400.0 tranche B term loan facility. The tranche A term loan
was repaid in full during 2003. The $266.8 outstanding on the tranche B term loan at December 31,
2003 was paid in full in April 2004. The amounts repaid are not eligible to be borrowed again. At
December 31, 2004, we had no borrowings and $8.6 in letters of credit outstanding under the
revolving credit facility. Commitment fees are payable quarterly for the unused portion of the
total loan commitment with the rates ranging from 0.25% to 0.50% per annum. Letter of credit fees
are 3.5% of the issued amount. F-17




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) Advances under the revolving credit facility are subject to our compliance at all times with a
borrowing base that permits borrowings in an amount not to exceed certain percentages of our
receivables and inventory. At December 31, 2004, the Company had an $8.6 letter of credit outstanding and $241.4 available borrowing
capacity under the revolving credit facility. Under the facility, the pending merger (see Note 1,
Pending Merger) would be a change of control and would terminate the facility unless amended. The
interest rate on any borrowings under the revolving credit facility are subject to our overall
leverage ratios and bear interest, at the option of ISG, at either LIBOR plus a margin ranging from
2.50% to 4.00% per annum or the prime rate plus a margin ranging from 1.50% to 3.00% per annum. At
December 31, 2003, the weighted average interest rate on all outstanding borrowings under the
Credit Facilities was 5.178%. Payments of dividends are restricted by a calculation that includes
dividend payments and other restricted payments. At December 31, 2004, the maximum available for
these payments was about $260. The Company is subject to various financial covenants including a minimum borrowing
availability, limitations on capital expenditures, minimum fixed charges coverage, maximum leverage
ratios, minimum net worth and minimum earnings before interest, taxes, depreciation and
amortization (EBITDA) as defined in the agreement governing the Credit Facilities. The revolving
credit facility may be withdrawn if a material adverse effect or event of default has occurred and
the Company is unable to remedy the event in a timely manner as defined in the agreement. At
December 31, 2004, the Company was in compliance with all covenants under the Credit Facilities. The Pension Benefit Guaranty Corporation (PBGC) convertible note bears interest at 6.0% and
requires semi-annual interest payments, and the principal is due in full on May 6, 2007. The PBGC
note is subordinated to all of our senior indebtedness, including the Credit Facilities and the
Notes. The PBGC note is convertible, at the PBGCs option, into 29,240.55 shares of our common
stock for each $1 million in principal and interest outstanding at any time. In connection with the Bethlehem acquisition, ISG assumed a credit facility from Columbus
Coatings Corporation, a subsidiary of Bethlehem. This credit facility was repaid during 2003 with
proceeds from a new $60.0 loan agreement from GE Capital Corporation. GE Capital was repaid in
full during April 2004. The Coal Act subordinated note to the United Mine Workers of America 1992 Benefit Plan and the
UMWA Combined Benefit Fund was paid in full in January 2004. In connection with the Weirton asset acquisition, ISG issued a $5.0 promissory note due 2019.
The note bears interest at 5.0% with principal and interest payments due annually beginning in May
2005. The Industrial Revenue Bonds bear interest at 5.8% and require monthly sinking fund payments
of $0.1 for principal and interest. Bondholders receive principal and interest payments from the
sinking fund trustee semi-annually. These bonds are secured by the Cleveland plant facilities. The promissory note payable to Acme was paid in full in January 2004. The amounts included in property, plant and equipment for capital leases were $169.1 (net of
$32.7 of accumulated amortization) at December 31, 2004. The capital lease on a coke oven battery
at the Burns Harbor facility required payments of $24.7 in 2004 based on the cost and amount of
coke production. In February 2005, ISG took ownership of the battery as required in the lease and
began minimum monthly payments of $0.5 with additional payments based on coke production through
2014. The capital lease on the slab caster at the Sparrows Point facility requires quarterly
payments of $2.3 with the balance due in July 2005. The capital lease on an ore vessel requires
monthly payments of $0.5. Based on quoted market values, the borrowing rates currently available to the Corporation and
other available information, the Company believes that the fair market value of its long-term debt
is about $700 at December 31, 2004 and approximates the carrying value at December 31, 2003. F-18




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) (9) Contingencies ISG is subject to various legal actions and contingencies in the normal course of conducting
business. ISG recognizes liabilities for such matters when a loss is probable and the amount can be
reasonably estimated. The effect of the ultimate outcome of these matters on future results of
operations and liquidity cannot be predicted with any certainty. While the resolution of these
matters may have a material effect on the results of operations and cash flows of a particular
quarter or year, the Company believes that the ultimate resolution of such matters in excess of
liabilities recorded will not have a material adverse effect on its competitive position in the
steel industry or financial position. ISG is subject to changing and increasingly stringent environmental laws and regulations
concerning air emissions, water discharges and waste disposal, as well as certain remediation
activities that involve the clean up of environmental media such as soils and groundwater. If, in
the future, we are required to investigate and remediate any currently unknown contamination and
wastes or new information is obtained about required remediation activities at our plant sites, ISG
could be required to record additional liabilities. The table below represents the amounts recorded for environmental liabilities discounted at
8%: 2004
    
    
    2003Beginning balance
    
    $
    208.4
    
    
    $
    56.4Liabilities recognized at acquisitions
    
    
    12.1
    *
    
    
    159.0Accretion and changes in estimates and timing of spending
    
    
    15.1
    
    
    
    1.0Liabilities related to properties sold
    
    
    (13.2
    )
    
    
    Spending for remediation
    
    
    (17.1
    )
    
    
    (8.0
    )Total
    
    
    205.3
    
    
    
    208.4Total current portion included in other current liabilities
    
    
    (41.0
    )
    
    
    (47.2
    )Long term balance at year end
    
    $
    164.3
    
    
    $
    161.2
 * Includes a $6.9 reduction in the first quarter of 2004 to amounts previously recorded for the
Bethlehem acquisition as a result of additional information and analysis obtained during that
period. The 2003 current portion includes $13.5 related to assets sold during 2004. Undiscounted environmental expenditures related to these liabilities for the next five years and
thereafter are expected to be: 2005
    
    $
    41.02006
    
    
    35.72007
    
    
    29.02008
    
    
    23.92009
    
    
    23.3Thereafter
    
    
    218.9Total  undiscounted
    
    $
    371.8
 The accrued environmental liabilities are estimates. The significant assumptions that underlie
our estimates may be impacted by changing circumstances that affect the reasonableness of such
estimates including the following: F-19




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data)   the legal analysis applied to determining the existence of an
        obligation,
 the nature and scope of the obligation,
 the technical data utilized to evaluate engineering or other actionable solutions,
 the financial data utilized to calculate a range of cost estimates to effect engineering or other solutions,
 the appropriateness and technical feasibility of selected engineering or other actions,
 regulations and other governmental requirements applicable to the liability or obligation will remain constant, and
 the financial obligation to address the obligation is solely that of the Company. Changing circumstances that may impact the reasonableness of the estimates include:   the validity of the assumptions underlying the estimate,
 a change in factors or laws that may affect the nature and scope of the liability or obligation,
 new information that may impact the range of engineering or
other actions that are appropriate and feasible to address the
liability or  obligation, and
 change in applicable markets and economies that impact costs. The Companys accrued environmental liabilities are based on engineering estimates and are
described below in the context of applicable environmental regulation by relative locations. Under the Resource Conservation and Recovery Act (RCRA) and similar U.S. state programs, the
owners of certain facilities that manage hazardous wastes are required to investigate and, if
appropriate, remediate historic environmental contamination found at such facilities. All of ISGs
major operating and inactive facilities are or may be subject to a corrective action program or
other laws and regulations relating to environmental remediation, including projects relating to
the reclamation of industrial properties, also known as brownfield projects. At ISGs properties in Lackawanna, New York, a RCRA Facility Investigation (RFI) is complete.
A report was submitted to U.S. Environmental Protection Agency, or EPA, and the New York State
Department of Environmental Conservation, or NYDEC, for approval on December 17, 2004. NYDEC and
ISG executed an order on consent to perform interim corrective measures at a former owners benzol
storage tank area. This order was executed on November 26, 2004. ISG and NYDEC will be discussing
additional corrective measures following the agencys review of the site RFI. ISG has estimated
that the undiscounted future cost of performing anticipated remediation and post remediation
activities will be about $67 and will be completed over a period of 15 years or more. The estimate
is based on the the extent of soil and groundwater contamination identified by the RFI and likely
remedial alternative, including excavation and consolidation of contaminates in an on-site landfill
and continuation of a benzol groundwater pump and treat system. ISG has agreed with the U.S. EPA and the Maryland Department of the Environment to a phased
RFI as part of a comprehensive multimedia pollution consent decree with respect to ISGs Sparrows
Point, Maryland facility, which was entered by the U.S. District Court for Maryland on October 8,
1997. The consent decree requires ISG to address compliance, closure and post-closure care matters
and implement corrective measures associated with two onsite landfills (Grays Landfill and Coke
Point Landfill), perform a site-wide investigation required by Section 3008(h) of RCRA, continue
the operation and maintenance of a remediation system at an idle rod and wire mill, and address
several pollution prevention items, such as, reducing the generation of iron kish, and recycling
blast furnace water treatment slurry and an onsite wastewater treatment plant sludge. The potential
costs, as well as the time frame for the complete implementation of possible remediation activities
at Sparrows Point, cannot be reasonably estimated until more of the investigations required by the
decree have been completed and the data analyzed. Notwithstanding the above, it is probable, based
on currently available data, that remediation will be required at the former coke plant. In
addition, pursuant to the order of the U.S. District Court for Maryland, ISG also must implement
corrective measures at the Grays Landfill and Coke Point Landfill and post-closure care at the
former Rod and Wire Mill Area. The total undiscounted cost of these related matters is estimated to be approximately $43. F-20




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) ISG is required to prevent acid mine drainage from discharging to surface waters at closed
mining operations in southwestern Pennsylvania. ISG entered into a Consent Order and Agreement with
the Pennsylvania Department of Environmental Protection (PaDEP) in May 2003 addressing the transfer
of required permits from Bethlehem to ISG and financial assurance for long-term operation and
maintenance of the wastewater treatment facilities associated with these mines. As required by this
Consent Order and Agreement, ISG submitted an Operational Improvement Plan to improve treatment
facility operations and lower long-term wastewater treatment costs. The Consent Order and Agreement
also required ISG to propose a long-term financial assurance mechanism. PaDEP approved ISGs cost
reduction plan. On May 9, 2004, ISG entered into a revised Consent Order and Agreement outlining a
schedule for implementation of capital improvements and requiring the establishment of a treatment
trust that the PaDEP has estimated to be the net present value of all future treatment cost. ISG
expects to fund the treatment trust over a period of up to 10 years at a current target value of
approximately $20. Until the improvements are made and the treatment trust is fully funded, ISG
expects to spend about $1 to $2 per year for the operation of treatment plants for acid mine
drainage from these closed mines. After the treatment trust is fully funded, the treatment trust
will then be utilized to fund the cost of treatment of acid mine drainage. Although remote, ISG
could be required to make up any deficiency in the treatment trust in the future. ISG owns a large former integrated steelmaking site in Johnstown, Pennsylvania. The site has
been razed and there are a number of historic waste disposal units, including solid and hazardous
waste landfills located at the site that are subject to closure and other regulation by PaDEP.
There are also historic steel and coke-making operating locations at the Johnstown site that may
have caused groundwater contamination. Although potentially subject to RCRA corrective action or
similar state authority, no comprehensive environmental investigations have been performed at this
site to date. ISG estimates that the undiscounted costs associated with future landfill closure,
site investigations and probable remediation at this facility that presently can be estimated to be
approximately $22. ISGs facility at Indiana Harbor, Indiana is subject to a U.S. EPA 3013 Administrative Order
investigation plan to assess soil and groundwater conditions associated with 14 solid waste
management units approved on January 12, 2005. Although localized remediation activities have been
conducted at this facility, additional remediation may be required after the investigation of these
solid waste management units has been completed. It is not possible to estimate the cost of
required remediation or monitoring, if any, that may result from this investigation at this time.
An area of subsurface fuel oil contamination exists and is currently the subject of remediation
actions. The U.S. EPA and ISG are discussing a draft administrative order with respect to the oil
issue. In addition, a solid waste landfill at Indiana Harbor will require closure via an engineered
capping system and post-closure care including groundwater monitoring. The total estimated
undiscounted cost related to these matters that can presently be estimated is approximately $18. At ISGs Burns Harbor, Indiana facility, an RFI was completed in accordance with a U.S. EPA
approved work plan. Based on the results of the investigation, ISG does not believe there will be
any substantial remediation required to complete the corrective action process at the facility;
however, it is likely that ISG will incur future costs primarily related to long term post-closure
care including groundwater monitoring. In addition, Bethlehem managed approximately one million net
tons of air pollution control dusts and sludges in piles on the ground at the Burns Harbor site.
While an alternative means of handling this material continues to be evaluated, it is probable that
ISG will incur future costs to manage this material. ISG also has a continuing obligation
pursuant to a consent order issued by the U.S. District Court in Indiana to operate a collection
and treatment system to control contaminated groundwater seeps from the face of a dock wall at the
site. The total undiscounted costs related to these matters are estimated to be approximately $22. ISGs Cleveland, Ohio facilities may be subject to RCRA corrective action or remediation under
other environmental statutes. An integrated steel facility has operated on the property since the
early part of the 20th century. As a result, soil and groundwater contamination may exist that
might require remediation pursuant to the RCRA corrective action program or similar state programs.
No RCRA corrective action has been demanded at any F-21




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INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) of the Cleveland facilities by either U.S.
federal or state authorities and no comprehensive investigation of any of the facilities has been
performed. However, certain limited and localized remediation activities have been or will be
conducted at these sites. These remediation activities include a large permitted solid waste
landfill at the site that will require installation of an engineered capping system for closure and
post-closure care including groundwater monitoring in the future. The undiscounted cost of closure
and post-closure care for this landfill is estimated to be approximately $13. ISGs recently acquired Weirton, West Virginia facility has been subject to a RCRA corrective
action related consent decree since 1996. The Order requires the facility to conduct investigative
activities to determine the nature and extent of hazardous substances that may be located on the
facilitys property and to evaluate and propose corrective measures needed to abate unacceptable
risks. Areas within the facilitys property have been prioritized. Investigation of the two highest
priority areas has been completed. Investigation of the remaining areas is underway. In addition,
ISG is required to excavate and dispose off-site contaminates as closure of a surface impoundment
pursuant to the RCRA corrective action and a 1996 consent decree. The undiscounted cost of
investigative and closure activities at the site are estimated to be about $13. At a site of the former steelmaking facilities in Bethlehem, Pennsylvania, a remedial
investigation is being performed pursuant to the Pennsylvania Land Recycling (Brownfield) Program
in conjunction with comprehensive redevelopment plans. These investigations are continuing to be
performed with input and oversight from both the PaDEP, and the EPA Region III corrective action
staff to ensure that the actions taken are acceptable to both U.S. state and federal regulatory
authorities. The majority of the site was sold by ISG in April 2004 with an additional sale
occurring in September 2004. Under the sales agreement, the buyers assumed financial responsibility
for environmental obligations associated with the acquired property and acquired an insurance
policy with ISG as a beneficiary to cover the estimated future environmental reclamation costs. The
undiscounted cost associated with anticipated environmental remediation actions on property ISG
continues to own is estimated to be about $4. ISGs facility at Riverdale, Illinois may be subject to RCRA corrective action or remediation
under other environmental statutes. The facility has produced steel since the early part of the
20th century. As a result, soil and groundwater contamination may exist that might require
remediation under the RCRA corrective action program or similar state programs. Certain localized
remediation activities have been conducted at this facility; however, there is no present U.S.
federal or state demand for a RCRA corrective action program at the facility. No comprehensive
environmental investigation of the facility has been performed. ISG anticipates spending approximately $51 over the next 40 years, including $10 during 2005,
to address the removal and disposal of PCB equipment and asbestos material encountered during the
operation of our facilities. There are a number of other facilities and properties, which ISG owns across the United
States, which may present incidental environmental liabilities. The majority of these sites were
formed pipe coating operations which may have impacted soils or groundwater. The estimated
undiscounted cost of future investigations and probable remediation at these sites is about $12. In addition to the above matters, ISG receives notices of violation relating to minor
environmental matters from time to time in the ordinary course of business. ISG does not expect any
material unrecorded reclamation requirements, fines or penalties to arise from these items. ISG purchased only selected assets of Georgetown, Weirton, Bethlehem, Acme and LTV through
sales in bankruptcy proceedings. The sales orders issued by the U.S. Bankruptcy Courts having
jurisdiction over each transaction explicitly provide that the sellers retained certain historic
liabilities, including employee asbestos-related liability, and that ISG shall not be deemed as a
successor to any seller with respect to asbestos-related liabilities or any other matter. Despite
the foregoing, it is possible that future claims with respect to historic asbestos exposure might
be directed at us. The Company considers the risk of incurring liability as the result of such
claims extremely remote. F-22




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##### Table of Contents



INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) ISG
spent approximately $132 in 2004 for recurring costs to manage hazardous substances and
pollution in ongoing operations. Spending for environmental compliance related capital expenditures
to limit or monitor pollutants was $20 in 2004. We expect to spend about $100 in 2005 and an
average of about $20 per year for capital expenditures from 2006 through 2009 to meet environmental
standards. ISG has guaranteed a joint ventures operating lease with annual payments of $6.6 through 2008
and one monthly payment of $0.6 in 2009. Other contingent liabilities arise periodically in the normal course of business. In the
opinion of management, any such unrecognized matters that are reasonably possible at December 31,
2004, would not have a material effect on the Companys financial position, results of operations
or cash flows. (10) Pension and Other Postretirement Benefit Plans Under ISGs labor agreement with the United Steelworkers of America (USWA), the Company and
the USWA established defined contribution benefit trusts to fund pensions and retiree medical and
death benefits for retirees and dependents from certain USWA represented bargaining units. In
2004, we established a similar agreement with the Independent Steel Workers Union (ISU) at our
Weirton facility. Initial contributions to the pension trust are based on an amount per employee
and continuing contributions are based on $1.50 per hour paid. The related expense was $56.8 for
2004 ($53.2 based on hours paid and $3.6 based on number of employees), and $45.0 ($25.9 based on
hours paid and $19.1 based on number of employees) for 2003 and $7.6 (based on the number of
employees) for 2002. Contributions to the retiree medical and death benefits trust (VEBA) are based
on ISGs quarterly EBITDA and certain overtime hours worked as defined in the agreements. Expense
was $155.9 for 2004 and $4.3 for 2003. ISG maintains a qualified savings plan for salaried employees under Section 401k of the
Internal Revenue Code under which it matches a specified portion of any employee contributions to
the plan. Company contributions vest immediately and amounted to about $5.0 in 2004, $2.5 in 2003
and $0.4 in 2002. ISG also has a defined benefit retiree medical and death benefit plans covering USWA employees
who are eligible to retire under the current labor agreements. We do not intend to provide similar
retiree medical benefits for employees who retire after the current labor agreement expires. ISG is
not required to pre-fund any benefits and expects any benefits to be paid in 2005 to be minimal. ISG owns a 62.3% interest in Hibbing Taconite Company (Hibbing), an iron ore mining joint
venture that is pro rata consolidated in ISGs consolidated financial statements. Hibbing maintains
a noncontributory defined benefit pension plan for hourly and salary employees with benefits based
on years of service and compensation. Hibbing funds the pension plans within statutory guidelines.
Hibbing is considering various funding options, but ISGs share of the minimum funding requirement
in 2005 is $1.6. Hibbing also provides retiree medical and death benefits to most full-time
employees, hired before January 1, 1993, with 30 years of service or employees who are 60 years of
age with 15 years of service. A new labor agreement in 2004 capped the companys share of
healthcare costs at 2008 levels for the years 2009 and beyond. ISGs prorated required
contribution to the plan for other benefits based on net tons produced in 2004 and expected benefit
payments will be $6.7 in 2005. The amounts included below for the Hibbing plan reflect the effects
of the Medicare Prescription Drug Improvement and Modernization Act of 2003,the Act. Hibbing
applied the retroactive transition method under FASB Staff Position No. 106-2 in the second quarter
of 2004. The effect was not material to ISG. The amounts presented below for ISGs USWA employees do not reflect the effects of the Act.
Detailed regulations necessary to implement the Act were just recently issued. Accordingly, we
have not been able to F-23




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##### Table of Contents



INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) determine if the plan meets the actuarial equivalent requirement of the Act
or if we will modify the plan. However,
because the plan requires that the plan beneficiaries pay premiums beginning in 2011 to cover any
cost per capita increases after 2008, the Act is not likely to have any significant effect on our
accumulated postretirement benefit obligation nor our future net periodic benefit costs. In 2005,
ISG expects to contribute $1.4 to the plan based on forecasted benefit payments. ISGs consolidated pension, which is only related to Hibbing, and other postemployment
benefits information, at our measurement date of December 31, follows: **Pension**
        
        
        **Other
          Benefits****2004**
        
        
        **2003**
        
        
        **2004**
        
        
        **2003**Change in benefit
            obligation:Postretirement benefit
            obligation at Bethlehem purchase date / beginning of period
        
        $
        76.7
        
        
        $
        74.1
        
        
        $
        142.0
        
        
        $
        32.3Service cost
        
        
        2.3
        
        
        
        1.5
        
        
        
        4.0
        
        
        
        2.8Interest cost
        
        
        5.5
        
        
        
        3.0
        
        
        
        8.6
        
        
        
        5.9Benefits paid
        
        
        (3.2
        )
        
        
        (1.7
        )
        
        
        (1.4
        )
        
        
        (0.9
        )Plan changes (primarily
            additional employees from acquisition)
        
        
        6.5
        
        
        
        (2.7
        )
        
        
        (9.9
        )
        
        
        88.5Net actuarial losses
            / other
        
        
        10.5
        
        
        
        2.5
        
        
        
        19.1
        
        
        
        13.4Postretirement benefit
            obligation * at end of year
        
        
        98.3
        
        
        
        76.7
        
        
        
        162.4
        
        
        
        142.0Change in plan assets:Fair value of plan
            assets at beginning of year/ purchase date
        
        
        57.6
        
        
        
        51.1
        
        
        
        11.3
        
        
        
        10.1Actual return on
            plan assets
        
        
        7.2
        
        
        
        6.1
        
        
        
        1.4
        
        
        
        1.2Net company contributions
        
        
        7.8
        
        
        
        2.1
        
        
        
        5.9
        
        
        
        .6Benefits paid
        
        
        (3.2
        )
        
        
        (1.7
        )
        
        
        (1.6
        )
        
        
        (.6
        )Fair value of plan
            assets at end of year
        
        
        69.4
        
        
        
        57.6
        
        
        
        17.0
        
        
        
        11.3Funded status of
            plan:Unfunded obligation
        
        
        28.9
        
        
        
        19.1
        
        
        
        145.4
        
        
        
        130.7Unrecognized actuarial
            gain / (loss)
        
        
        (2.0
        )
        
        
        5.8
        
        
        
        (32.2
        )
        
        
        (12.5
        )Unrecognized prior
            service cost
        
        
        
        
        
        
        
        
        
        
        (45.8
        )
        
        
        (72.4
        )Net amount recognized
            in the balance sheet.
        
        $
        26.9
        
        
        $
        24.9
        
        
        $
        67.4
        
        
        $
        45.8
 * The
    accumulated benefit obligation for pensions was $91.7 at December 31,
    2004 and $68.7 at December 31, 2003. Pension
    
    
    Other Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2002Weighted average assumptions as of December 31
follow:Discount rate  ISG
    
    
    n/a
    
    
    
    n/a
    
    
    
    5.50
    %
    
    
    6.00
    %
    
    
    6.50
    %Discount rate  Hibbing
    
    
    5.75
    %
    
    
    6.25
    %
    
    
    5.75
    %
    
    
    6.25
    %
    
    
    n/aExpected long-term return on plan assets  Hibbing.
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    n/aAverage rate of compensation increase  Hibbing
    
    
    4.16
    %
    
    
    4.19
    %
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aProjected health care cost trend rate  ISG
    
    
    n/a
    
    
    
    n/a
    
    
    
    9.7-11.7
    %
    
    
    10.00
    %
    
    
    10.00
    %Projected
health care cost trend rate  Hibbing
    
    
    n/a
    
    
    
    n/a
    
    
    
    9.00
    %
    
    
    10.00
    %
    
    
    n/a
 F-24




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##### Table of Contents



INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) Ultimate trend rate  ISG
    
    
    n/a
    
    
    
    n/a
    
    
    
    5.50
    %
    
    
    5.50
    %
    
    
    5.50
    %Ultimate trend rate  Hibbing
    
    
    n/a
    
    
    
    n/a
    
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    n/aYear ultimate trend rate is achieved  ISG
    
    
    n/a
    
    
    
    n/a
    
    
    
    2014
    
    
    
    2013
    
    
    
    2012Year ultimate trend rate is achieved  Hibbing
    
    
    n/a
    
    
    
    n/a
    
    
    
    2009
    
    
    
    2009
    
    
    
    n/aNet periodic post retirement benefit cost:Service cost
    
    $
    2.3
    
    
    $
    1.5
    
    
    $
    4.0
    
    
    $
    2.8
    
    
    $
    Interest cost
    
    
    5.5
    
    
    
    3.0
    
    
    
    8.6
    
    
    
    6.0
    
    
    
    0.1Expected return on plan assets
    
    
    (5.3
    )
    
    
    (2.8
    )
    
    
    (1.1
    )
    
    
    (0.6
    )
    
    
    Amortization of unrecognized prior service cost
    
    
    (.2
    )
    
    
    0.5
    
    
    
    14.7
    
    
    
    11.4
    
    
    
    0.2Total net periodic postretirement benefit cost
    
    $
    2.3
    
    
    $
    2.2
    
    
    $
    26.2
    
    
    $
    19.6
    
    
    $
    0.3
 The plan asset allocations and target allocations are: **Pension
          Assets**
        
        
        **Other
          Benefits****2005**
        
        
        
        
        
        
        
        
        
        
        **2005****Target**
        
        
        **2004**
        
        
        **2003**
        
        
        **Target**
        
        
        **2004**
        
        
        **2003**Asset category:Equity securities
        
        
        64.0
        %
        
        
        63.8
        %
        
        
        72.0
        %
        
        
        65.0
        %
        
        
        66.0
        %
        
        
        67.1
        %Debt securities
        
        
        29.0
        
        
        
        28.4
        
        
        
        20.0
        
        
        
        35.0
        
        
        
        34.0
        
        
        
        32.9Real estate
        
        
        7.0
        
        
        
        7.8
        
        
        
        8.0
        
        
        
        
        
        
        
        
        
        
        
        Total
        
        
        100.0
        %
        
        
        100.0
        %
        
        
        100.0
        %
        
        
        100.0
        %
        
        
        100.0
        %
        
        
        100.0
        %
 The expected return on plan assets represents the weighted average expected returns for each asset
category. Expected returns are based on historical performance adjusted for current trends. A one-percentage-point increase or decrease in assumed health care cost trend rates would have the
following effects: Increase
    
    
    DecreaseEffect on total annual service and interest cost components
    
    $
    0.6
    
    
    $
    (0.6
    )Effect on accumulated postretirement benefit obligation
    
    
    8.5
    
    
    
    (7.9
    )
 As a result of the Bethlehem and Weirton acquisitions, ISG is required to provide lifetime
medical coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) to the
Bethlehem and Weirton retirees and their surviving spouses. Upon a retirees death, his or her
surviving spouse and dependent children may elect coverage up to an additional 36 months. ISG
charges the participants a premium to participate in this program, and individuals who leave the
program may not re-enter. Persons with ongoing illnesses or a high expectation of using healthcare
services are more likely to enroll in this program than others. COBRA regulations preclude the use
of a factor to reflect this phenomenon in establishing premiums. Therefore, ISG is likely to incur
healthcare costs in excess of the premium amounts received from the participants. Accordingly, we
recorded an actuarial liability in connection with these acquisitions based on assumptions
regarding the number of participants who will remain in the COBRA plan and their health status.
Differences between our future experience and the actuarially expected amounts will be amortized
over the expected remaining lives of the participants. F-25




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##### Table of Contents



INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) In connection with COBRA, the following amounts were recorded: 2004
    
    
    2003Beginning balance
    
    $
    54.4
    
    
    $
    Liability recognized at acquisition
    
    
    7.0
    
    
    
    50.9Interest accretion on the liability
    
    
    2.9
    
    
    
    2.0Premiums received in excess of (less than)
healthcare claims and expenses
    
    
    (13.5
    )
    
    
    1.5Ending Balance
    
    $
    50.8
    
    
    $
    54.4
 The amounts recorded in our balance sheet for pension, other postretirement benefits and COBRA are: 2004
    
    
    2003Pensions  defined benefit
    
    $
    26.9
    
    
    $
    24.9Pensions  defined contribution
    
    
    10.4
    
    
    
    47.5VEBA  defined contribution
    
    
    53.9
    
    
    
    4.4Other postretirement benefits
    
    
    67.4
    
    
    
    45.8COBRA
    
    
    50.8
    
    
    
    54.4Total
    
    $
    209.4
    
    
    
    177.0Current portion
    
    
    (86.4
    )
    
    
    (76.0
    )Long-term pension and other retiree benefits
    
    $
    123.0
    
    
    $
    101.0
 Estimated future benefit payments for defined benefit plans are: **Other****Pension**
        
        
        **Benefits**
        
        
        **Cobra**2005
        
        $
        3.3
        
        
        $
        3.1
        
        
        $
        5.02006
        
        
        3.7
        
        
        
        5.8
        
        
        
        4.42007
        
        
        4.6
        
        
        
        10.4
        
        
        
        3.82008
        
        
        5.3
        
        
        
        17.7
        
        
        
        3.22009
        
        
        6.0
        
        
        
        20.1
        
        
        
        2.82010 to 2014
        
        
        38.6
        
        
        
        75.5
        
        
        
        8.2
 (11) Commitments As part of the acquisition of the assets of LTV, ISG assumed a five-year supply contract to
provide hot rolled bands to United States Steel Corporation (U.S. Steel) at predetermined prices.
At inception, the U.S. Steel supply contract was scheduled to provide a total of 2,250,000 net tons
through March 2006. The contracted selling prices to U.S. Steel were below the current market
prices. Accordingly, ISG recorded a liability that was being amortized to income as the products
are shipped representing the net present value of the difference between the contract prices and
current market prices. In November 2003, the contract was modified as part of an asset swap
agreement with U.S. Steel that was accounted for as a nonmonetary transaction. The revised contract
is in effect until March 1, 2006 and requires ISG to provide U.S. Steel with up to 840,000 net tons
of hot rolled bands at prices below current market price. The recorded liability of $8.0 at
December 31, 2004 is being amortized into income as the products are shipped. F-26




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##### Table of Contents



INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data)  We have entered into various supply agreements for services, utilities, natural gas
transportation, industrial gases and certain raw materials that contain minimum annual
requirements. Based upon prices in effect at December 31, 2004, the following table presents firm
commitments relating to these agreements for the next five years and thereafter: 2005
    
    $
    1,167.22006
    
    
    653.72007
    
    
    665.42008
    
    
    643.42009
    
    
    448.3Thereafter
    
    
    2,763.8$
    6,341.8
 The Company leases certain manufacturing equipment, office space and computer equipment under
non-cancelable leases that expire at various dates through 2034. Rental expenses on operating
leases were $47.1 for 2004 and $23.8 for 2003 and $0.2 for the period ended December 31, 2002.
Future minimum operating lease payments under non-cancelable operating leases in effect at December
31, 2004 are as follows: 2005
    
    $
    46.82006
    
    
    33.82007
    
    
    27.42008
    
    
    24.72009
    
    
    23.3Thereafter
    
    
    78.6$
    234.6
 (12) Related Parties The Company has transactions in the normal course of business with various related parties.
Approval by a majority of ISGs disinterested directors is required to approve any transactions
between ISG and a 5% or greater stockholder. Wilbur L. Ross is a director of the Company and is a principal of WL Ross and Co., which
manages two funds that beneficially own 6.9% of ISGs common stock at December 31, 2004. During the
year ended December 31, 2004 and period ended December 31, 2003, the Company incurred $0.1 and $5.9
for fees and out-of-pocket expenses associated with financial advisory services provided to the
Company by WL Ross and Co. The Chairman and Chief Executive Officer of Cleveland-Cliffs Inc served as a director of ISG
from ISGs inception until February 2004. Cleveland-Cliffs Inc owned over 5.0% of our stock during
early 2004, but had disposed of all our stock by December 31, 2004. We have a 15-year supply
agreement with Cleveland-Cliffs to purchase all of our iron ore pellet requirements for use in
certain of our blast furnaces at prices that are adjusted annually for changes in certain price
indices and selling prices for certain steel products. The supply agreement can be extended beyond
the initial term with the consent of both parties or can be terminated at the end of the initial
term with a two-year advance termination notice. In
addition, with the Weirton acquisition, we assumed Weirtons agreement with Cleveland-Cliffs Inc,
and as part of the assignment agreed to certain amendments. The agreement will supply all of
Weirtons iron ore pellets for the period 2006 to 2018 and partial requirements for 2004 and 2005.
The other terms of the agreement are similar to our other contract with Cleveland-Cliffs Inc, but
only require an advance termination notice of one year. During the years ended December 31, 2004 and 2003,
we purchased iron ore pellets for $494.4 and $236.1, respectively,
from Cleveland-Cliffs. We also sold iron ore pellets to Cleveland-Cliffs for
$7.2 in 2004 and $20.7 in 2003. At December 31, 2004, ISG had a $39.9
account payable to Cleveland-Cliffs.


F-27





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##### Table of Contents



INTERNATIONAL STEEL GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002 (Dollars in millions, except per share data) In addition, in July 2004 we purchased substantially all of the assets, and assumed certain of
the liabilities, of the HBI Facility for approximately $18 in cash, including the payment of
certain liabilities at closing. The HBI Facility
is a part of a joint venture that began in the mid-1990s as a joint venture between Cleveland
Cliffs, Lurgi Metallurgie (now known as Outokumpu Technology GmbH), and LTV Steel. Production began
in 2000 at the HBI Facility but ceased a year later as a result of depressed global scrap iron and
hot briquetted iron prices, changes in the makeup of the joint venture, and other factors. ISG
restarted the facility in November 2004. Park Corporation, whose Chairman and Chief Executive Officer served as a director of ISG from
June 2002 to May 5, 2003, beneficially owned 5.4% of ISGs common stock as of December 31, 2004
through Georgia Financial LLC, its whollyowned subsidiary. The Park Corporation provided $19.5 and
$6.4 of supplies and services to ISG during 2004 and 2003, respectively. Under the Bethlehem
acquisition, ISG assumed an agreement that resulted in approximately $17.8 of ingot sales to Park
Corporation since the date of acquisition. All transactions with Park Corporation were at market
prices. (13) Quarterly Information (Unaudited) The following is a summary of the unaudited quarterly results of operations for the years
ended December 31, 2004 and 2003. Quarter Ended3/31/2004
    
    
    6/30/2004
    
    
    9/30/2004
    
    
    12/31/2004Net sales
    
    $
    1,770.3
    
    
    $
    2,083.8
    
    
    $
    2,608.3
    
    
    $
    2,553.5Cost of sales
    
    $
    1,601.1
    
    
    $
    1,859.5
    
    
    $
    2,164.6
    
    
    $
    2,202.7Income before income taxes
    
    $
    76.1
    
    
    $
    105.0
    
    
    $
    327.2
    
    
    $
    247.4Net income
    
    $
    70.9
    
    
    $
    94.1
    
    
    $
    256.4
    
    
    $
    606.0Income per share:Basic
    
    $
    0.73
    
    
    $
    0.96
    
    
    $
    2.59
    
    
    $
    6.06Diluted
    
    $
    0.68
    
    
    $
    0.92
    
    
    $
    2.51
    
    
    $
    5.87
 Quarter Ended3/29/2003
    
    
    6/28/2003
    
    
    9/27/2003
    
    
    12/31/2003Net sales
    
    $
    461.7
    
    
    $
    1,005.1
    
    
    $
    1,184.9
    
    
    $
    1,418.3Cost of sales
    
    $
    451.5
    
    
    $
    982.4
    
    
    $
    1,125.3
    
    
    $
    1,277.7Net (loss) income
    
    $
    (2.3
    )
    
    $
    (27.5
    )
    
    $
    (18.6
    )
    
    $
    24.9Net loss applicable to common stock
    
    $
    (2.3
    )
    
    $
    (27.5
    )
    
    $
    (18.6
    )
    
    $
    (48.7
    )Loss per share:Basic
    
    $
    (0.03
    )
    
    $
    (0.41
    )
    
    $
    (0.24
    )
    
    $
    (0.57
    )Diluted
    
    $
    (0.03
    )
    
    $
    (0.41
    )
    
    $
    (0.24
    )
    
    $
    (0.57
    )
 F-28




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##### Table of Contents



International Steel Group Inc. and Subsidiaries
Schedule II  Valuation and Qualifying Accounts
(Dollars in millions) Additions**Charged****(Credited)****Balance at**
        
        
        **to Sales,**
        
        
        
        
        
        
        
        
        
        
        **Balance at****Beginning**
        
        
        **Costs and**
        
        
        **Charges to**
        
        
        
        
        
        
        **End of**Classification
        
        **of
          Period**
        
        
        **Expenses**
        
        
        **Other**
        
        
        **Deductions**
        
        
        **Period**Allowances for receivables:
            (a)December 31,
            2002
        
        $
        
        
        
        
        16.2
        
        
        
        
        
        
        
        (8.9
        )
        
        $
        7.3December 31,
            2003
        
        $
        7.3
        
        
        
        77.3
        
        
        
        26.0
        (b)
        
        
        (76.8
        )
        
        $
        33.8December 31,
            2004
        
        $
        33.8
        
        
        
        88.8
        
        
        
        3.4
        (b)
        
        
        (75.9
        )
        
        $
        50.1Valuation allowance for deferred tax
            asset:December 31,
            2003
        
        $
        
        
        
        
        5.3
        
        
        
        962.3
        (b)
        
        
        
        
        
        $
        967.6December 31,
            2004
        
        $
        967.6
        
        
        
        (550.8
        )
        
        
        
        
        
        
        
        
        
        $
        416.8
  (a)
      Includes allowances for bad debts, customer claims, other customer adjustments
        and cash discounts.(b)
      Balances established as a result of Bethlehem and Weirton acquisitions. 2