<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                   FORM 10-K

(Mark One)

  X  Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
----
Act of 1934 for the Fiscal Year ended October 31, 1997.

                                      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 33-92496
                       ------------

                      GULF STATES STEEL, INC. OF ALABAMA
                      ----------------------------------
            (Exact name of registrant as specified in its charter)

<TABLE> 
<S>                                                              <C> 
Alabama                                                          63-114 1013
-----------------------------------------------------------      ---------------------------------
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

174 South 26th Street
Gadsden, Alabama                                                 35904-1935
-----------------------------------------------------------      ---------------------------------
(Address of principal executive offices)                         (Zip Code)
</TABLE> 

                                (205) 543-6100
             (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                          Yes    X       NO
                              ---------     ---------

Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
regulation S-K is not contained herein, and will not be contained, to the best
or 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                            [  ]

At the date of this filing, there were 3,610,000 shares of $.01 par value common
stock outstanding, all of which was owned by GSS Holding Corp. No voting stock
is held by nonaffiliates nor traded on an established public trading market.

Documents incorporated by reference:
1)  Schedule 14A - Proxy Statement dated January 23, 1998, incorporates by
    reference information required by Part III.
<PAGE>
 
                      GULF STATES STEEL, INC. OF ALABAMA
                                   FORM 10-K

                               TABLE OF CONTENTS

<TABLE> 
<CAPTION> 
Item                                                                                           Page
----                                                                                           ----
<S>                                                                                            <C> 
                                              Part I                                                   
                                                                                             
1.  Business ................................................................................... 1
2.  Properties.................................................................................. 9
3.  Legal Proceedings...........................................................................10
4.  Submission of Matters to a Vote of Security Holders.........................................10
                                                                                             
                                              Part II                                                 
                                                                                             
5.  Market for the Registrant's Common Equity and Related Stockholder Matters...................10
6.  Selected Financial Data.....................................................................11
7.  Management's Discussion and Analysis of Financial Condition                            
      and Results of Operations.................................................................12
8.  Financial Statements and Supplementary Data.................................................19
9.  Changes In and Disagreements with Accountants on                                       
      Accounting and Financial Disclosure.......................................................44
                                                                                             
                                             Part III                                                 
                                                                                             
10. Directors and Executive Officers of the Registrant..........................................44
11. Executive Compensation......................................................................44
12. Security Ownership of Certain Beneficial Owners and Management..............................44
13. Certain Relationships and Related Transactions..............................................44
                                                                                             
                                              Part IV                                                 
                                                                                             
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................45
</TABLE> 
<PAGE>
 
Forward - Looking Statements
----------------------------

     This Annual Report on Form 10-K may contain forward-looking statements as
that term is defined in the Private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectations and are subject
to a number of factors and uncertainties which could cause results to differ
materially from those described in the forward-looking statements. There can be
no assurance that actual results or business conditions will not differ
materially from those anticipated or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
following: the size and timing of significant orders, as well as deferral of
orders, over which the Company has little control; the variation in the
Company's sales cycles from customer to customer; increased competition posed by
other steel producers, both domestic and foreign; changes in pricing policies by
the Company and its competitors; the need to secure or build manufacturing
capacity in order to meet demand for the Company's products; the Company's
success in expanding its sales programs and its ability to gain increased market
acceptance for its existing product lines; the ability to complete its capital
investment program and successfully produce its products; the potential for
significant quarterly variations in the mix of sales among the Company's
products; the gain or loss of significant customers; shortages in the
availability of raw materials from the Company's suppliers; fluctuations in
price and availability of energy; the costs of environmental compliance and the
impact of government regulations; the Company's relationship with its work
force; the restrictive covenants and tests contained in the Company's debt
instruments, which could limit the Company's operating and financial
flexibility; and general economic conditions.



                                    PART I
                                    ------

ITEM 1.   BUSINESS
-------   --------

     Gulf States Steel, Inc. of Alabama (the "Company") owns and operates a
fully integrated steel mill in Gadsden, Alabama, which has been a leading
producer of steel products in the Southern United States since its inception in
1904. The Company manufactures a wide range of hot-rolled, cold-rolled and
galvanized steel sheet and plate products and has an annual finished steel
production capacity of approximately 1.0 million tons. For the fiscal year ended
October 31, 1997, the Company shipped approximately 331,000 tons of hot-rolled
sheet, 157,000 tons of cold-rolled sheet, 148,000 tons of galvanized sheet, and
378,000 tons of plate products, resulting in sales of approximately $436.5
million, and operating profit per ton shipped of approximately $10.

     During its over 90 years of service to the Southern market (consisting of
the states of Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North
Carolina, South Carolina, Tennessee and Texas), the Company has developed a
number of long-standing customer relationships by providing quality products and
excellent customer service. The Company's relationships with many of its
approximately 300 customers, the largest of which accounted for less than 10% of
sales in fiscal 1997, span more than 25 years. Unlike large steel companies
which often sell up to 20% of their output to a single national automotive or
appliance customer, the Company sells its products to a much more diversified
customer base. Representative end users of the Company's sheet products include
manufacturers of commercial and residential building products, water heaters,
lawn and garden equipment, liquid propane tanks, recreational equipment,
furniture and culvert pipe. End users of the 

                                                                               1
<PAGE>
 
Company's plate products include manufacturers of storage tanks, ships, railway
cars, highway and railroad bridges and other types of industrial and
construction equipment.

     Pursuant to an asset purchase agreement dated January 13, 1995, the Company
is the successor to the steelmaking business previously conducted by the
following entities: Gulf States Steel, Inc. of Alabama, Alabama Structural
Beams, Inc., DSC Equipment Associates, LTD, Will's Creek Associates and Villa II
Associates, (collectively the "Predecessor" company). On April 21, 1995, the
Company completed the acquisition of substantially all of the assets and certain
liabilities of the Predecessor company (the "Acquisition").

     The Company's principal executive offices are located at 174 South 26th
Street in Gadsden, Alabama and its telephone number is (205) 543-6100.

Manufacturing Process

     The Gadsden mill is a fully-integrated steel mill, i.e., the steel-making
process begins with iron ore and ends with a finished or semi-finished steel
product. To begin the process, the Company purchases iron ore pellets, limestone
and coal. The coal is subsequently processed into metallurgical coke in the
Company's multi-oven, oxygen-free coke batteries. Then, iron ore pellets and
limestone are added to the coke and are smelted together in the Company's blast
furnace resulting in the manufacture of molten iron. The molten iron is placed
into one of the Company's basic oxygen furnace ("BOF") vessels, together with
steel scrap, where it is refined with oxygen to produce molten steel to the
chemical specifications of a particular customer. In the ladle metallurgy
facility ("LMF"), certain metallic alloys, which impart their own particular
metallurgical qualities, are added to the molten steel. The molten steel is then
poured into the continuous caster for casting into steel slabs. These slabs are
later reheated and hot-rolled into coiled sheet products in the hot strip mill,
or into flat plates in the plate mill. Coiled hot-rolled sheets may be further
processed by a variety of finishing steps, which include cold rolling,
annealing, temper rolling and galvanizing. Substantially all of the cold rolled
and galvanized products are processed through the annealing and cold temper
rolling finishing steps.

Customers and Markets

     The Company produces quality products in smaller volumes, narrower widths,
and lighter gauges than its larger competitors. The Company believes that it is
the largest supplier of steel plate and a major supplier of steel sheet products
to steel service centers and original equipment manufacturers in the Southern
market. The Company has developed a base of approximately 300 customers, the
largest of which accounted for less than 10% of total shipments in fiscal 1997.
The Company's relationships with many of its customers span more than 25 years.

     Although competitive pricing is a key factor in all customers' purchasing
decisions, the Company believes that many customers regard the Company as their
preferred supplier due to the levels of service and quality the Company
provides. Lower freight costs, short lead times, timely deliveries, close
proximity to certain key markets and an understanding of local markets
contribute to the Company's competitive strength and its reputation for service.
As one of only five steel sheet producers and two steel plate producers in the
Southern market, the Company believes that it enjoys a significant competitive
advantage compared to its more distant competitors which typically must absorb
between $15 and $25 per ton of extra freight costs in order to compete in the
Southern market.

                                                                               2
<PAGE>
 
     The Company believes that the Southern market offers substantial long-term
prospects for steel manufacturers due to its favorable growth characteristics.
The populations of seven of the ten states in the Southern market are projected
by the U.S. Bureau of the Census to grow by more than 10% for the decade ending
in the year 1999, which would place each of them above the U.S. average. States
in the Southern market also generally maintain a lower cost of living and lower
tax burdens than the rest of the United States. The Company believes that all of
these factors will serve to attract businesses and workers to the region,
increase consumption and help to maintain the region's strong growth
characteristics.

     Several major car manufacturers have recently opened automobile plants in
the Southern market, while others are planning to do so. These include Nissan
and General Motors in Tennessee, BMW in South Carolina and Mercedes-Benz in
Alabama. Tennessee and Georgia now rank third and fifth, respectively, in terms
of United States car production. Although the Company does not directly sell its
products to automobile manufacturers, the automobile plants in the Southern
market contribute dramatically to regional steel demand, including the steel
products of original equipment manufacturers and other light industrial
manufacturers which the Company supplies.

Capital Investments

     Since 1986, the Predecessor and the Company have made significant capital
expenditures to modernize facilities, increase manufacturing capacity, improve
operating efficiencies, and maintain environmental compliance. The most
important of these improvements were the installation of the single strand
continuous caster and the LMF in 1990 and a major blast furnace upgrade and
reline in 1989. These investments have allowed the Company to increase its
production and shipping rates from 864,000 tons in fiscal 1989 to 1,014,000 tons
in fiscal 1997. During fiscal 1997, the Company completed modernization of its
hot strip mill and modification of its continuous caster at a cost of
approximately $14.4 million.

     Management has identified several capital investment opportunities which it
believes will allow the Company to further reduce production costs, increase
production and shipping capacity, and improve product quality. The most
significant investment opportunities include: (i) installation of additional
galvanizing capacity, (ii) new bosh technology at its blast furnace and (iii)
other projects including the upgrading of the plate mill to improve plate
product quality and increase production capability. The Company estimates that
the foregoing investments will cost in excess of $40 million and will be
initiated at various times during fiscal 1998 and 1999. The Company is in the
process of trying to obtain the financing for these projects and, if successful,
is targeting completion by fiscal year 2000. As a result of these investments,
the Company believes it will be able to increase its annual production and
shipping capacity, further reduce costs, enhance product quality, improve its
product mix and, thereby, increase profitability (assuming other factors remain
constant).


Raw Materials, Energy and Related Services

     The Company is an ore-based integrated steel producer that purchases its
raw materials in the open market from multiple sources through competitively bid
contracts.


Iron Ore. The Company uses iron ore pellets and lump iron ore to produce the
iron used in its steel-making operations. The Company currently obtains
virtually all of its iron ore from two suppliers (one 

                                                                               3
<PAGE>
 
Canadian and one Venezuelan) at or below prevailing world market prices. The
iron ore is shipped to Mobile, Alabama by seagoing vessels, where it is unloaded
at the Alabama State Docks. The majority of the pellet and lump ore inventory is
held at this location until needed by the Company. The ore is then loaded into
dedicated unit trains and delivered to Gadsden by rail.

Coal. The Company's steel-making operations require a substantial amount of high
and medium volatile metallurgical grade coal. Over the years, the Company has
obtained its coal from several producers under negotiated annual supply
contracts. The Company believes that it has realized significant savings by
producing coke from coal in the Company's coke ovens as opposed to purchasing
coke directly from suppliers.

Limestone. The Company uses limestone to produce molten iron in the blast
furnace. The Company obtains its limestone, by truck, from three suppliers in
Alabama pursuant to short-term supply contracts or in spot buys. As limestone is
abundant in Alabama, the Company has not had, nor does it expect to have, any
availability problems in the future.

Oxygen. The Company's steel operations consume large amounts of oxygen. The
Company purchases its oxygen from an air separation plant located on the
Company's premises (the "Oxygen Facility") which is owned and operated by the
oxygen supplier. The Company's contract to purchase oxygen from the Oxygen
Facility expires in December 2012.

Scrap. The Company's basic oxygen furnace consumes up to 30% of its metallic
charge in the form of scrap steel. Approximately 40% of that charge is recycled
from the Company's internal operations. The remainder is purchased through
dealers in the open market. While the growth of electric arc furnace based
mini-mills has created pressures on the availability and cost of scrap, the
Company foresees no difficulty in obtaining sufficient scrap to support its
operations.

Energy. The Company purchases the majority of its electrical requirements from
Alabama Power Company under an open-ended contract. This contract provides for
price increases tied to the cost of fuels used by the utility to produce
electricity, which must be approved by the Public Service Commission of Alabama.
The Company co-generates approximately 20% of its electric power requirement.
Historically, the Company has been adequately supplied with electricity and does
not anticipate any curtailment in its operations resulting from energy
shortages.

     Natural gas, which the Company uses in its reheat operations, is purchased
at spot prices at the wellhead in the Southeastern United States and is
transported to the mill through local pipeline distribution networks pursuant to
transmission contracts. Historically, the Company has been adequately supplied
with natural gas. During the winter of 1997, however, the Company incurred
significantly higher prices for natural gas than had been experienced
historically, and these higher prices had an adverse impact on the Company's
financial results. The Southeast region of the United States has substantial
deposits of natural gas, and the Company expects an adequate supply of natural
gas to be available.

Transportation. Shipments of coal and iron ore pellets to the Gadsden mill are
made by both the Norfolk Southern and CSX railroads. The Company owns and
maintains railroad tracks on the Gadsden mill's property, on which such
shipments arrive.

                                                                               4
<PAGE>
 
Competition

     The Company competes with domestic and foreign steel producers on the basis
of price, proximity to market, quality and service. The Company's competitors
can be divided into four categories: (i) integrated steel mills located within
the Southern market, (ii) integrated steel mills located outside the Southern
market, (iii) mini-mills located in the Southern market and (iv) foreign steel
mills. To a lesser extent, the Company also competes with mini-mills located
outside the Southern market.

     The only other integrated mill in the Southern market is the Fairfield
Works, U.S.S. Division of USX Corporation, located in Fairfield, Alabama ("USX-
Fairfield"). This mill produces galvanized, cold-rolled and hot-rolled bands and
tubular products. USX-Fairfield produces over two million tons of steel per year
and specializes in wider galvanized and cold-rolled steel products than the
Company. USX-Fairfield does not currently produce any steel plate products.

     Integrated steel mills located outside the Southern market are primarily
Midwestern and Northern mills of the large domestic steel companies which are
high volume producers of wide sheet products primarily targeted at the
automotive and appliance industries. Only a small portion of the steel sheet
produced by these Midwestern and Northern mills has the same gauge and width as
the Company's sheet products. These mills compete in the Southern market to the
extent that they can offer steel products at competitive prices. However, the
Company believes that it enjoys a significant cost advantage relative to its
Midwestern and Northern competitors, which typically must absorb between $15 and
$25 per ton in freight costs in order to compete in the Southern market.
Furthermore, the Company believes that Southern customers prefer to purchase
from local producers assuming equivalent pricing.

     The three mini-mills located in the Southern market, Nucor Corporation
("Nucor"), located in Hickman, AK and Berkeley, SC and Tuscaloosa Steel Corp.
("Tuscaloosa") located in Tuscaloosa, AL generally do not compete directly with
the Company. Nucor's Hickman mill produces approximately 1.4 million tons of 
hot-rolled sheet products per year. Whereas the Company produces hot-rolled
sheet in gauges of .056 to .312 inches and with a maximum width of 48 inches,
Nucor's Hickman mill produces primarily hot-rolled sheet in gauges of .071 to
 .625 inches and in widths of 48 to 61 inches. Nucor's Hickman mill does not
currently produce any steel plate products or galvanized sheet products. Nucor-
Hickman is currently installing galvanizing and cold rolling facilities. When
online by the first quarter of 1999, Nucor-Hickman will have 500,000 to 600,000
tons of hot-dip galvanize and 700,000 to 800,000 tons of cold rolling capacity,
depending on product mix. Pickling facilities are also being added in this
expansion. Nucor will sell the 500,000 to 600,000 tons of galvanized to the
building and agricultural markets and will consume 100,000 to 150,000 tons of
cold roll in their own Vulcraft division.

     Nucor has also just completed its Berkeley mini-mill which is now
operational. This plant has 1.8 million tons of annual capacity with expansion
capability to 2.5 million tons. Nucor's stated plan is to sell 40% of this
output as hot band down to .053 inches thick and the balance as cold rolled plus
some pickled and oiled. Nucor-Berkeley expects to complete galvanizing
facilities by mid-1998.

     Tuscaloosa, owned by British Steel America Inc., has normally produced
approximately 500,000 tons of hot-rolled sheet and plate products per year.
Recent plans call for less production of hot roll and the production of discrete
plate up to 2.5 inches. The Company believes that its hot-rolled sheet and plate
products are of higher quality than Tuscaloosa's products as the rolling of both
hot-rolled and plate products as well as conversion of stainless steel are
performed on a single mill, Tuscaloosa is a relatively limited supplier. The
Tuscaloosa mill does not currently produce any galvanized or cold-rolled sheet
products. Tuscaloosa has recently completed a capital expenditure program
designed to allow it to 

                                                                               5
<PAGE>
 
produce its own slabs and increase its annual production capacity by a minimum
of 200,000 tons. This program will also allow Tuscaloosa to reduce costs and
increase capacity, however, product scope and quality will not be substantially
effected.

     A new mini-mill, known as Trico Steel Company ("Trico"), has been
constructed by a joint venture consisting of LTV, British Steel plc. and
Sumitomo Metal Industries, Ltd. This mill began operations during 1997, but
according to published reports, has been slow to come up to production capacity.
Unlike the existing mini-mills located in the Southern market, the Trico mill
has equipment capable of producing light-gauge hot-rolled products. The Trico
mini-mill is expected to have an annual capacity of 2.2 million tons. The
Company believes that this mini-mill will focus on a different product mix than
that which is currently produced by the Company.

     Since purchased steel scrap represents only 15% of the Company's raw
material, compared to 100% for its mini-mill competitors, and the Company's
blast furnace facility produces molten iron at a cost less than scrap, the
Company enjoys a cost advantage over mini-mills at the liquid steel stage of
each process. Management believes that, at current scrap steel price levels, the
Company's current cost structure will be competitive with its mini-mill
competitors in the Southern market.

     Historically, foreign steel producers were considerable competitors through
their aggressive pricing policies. Foreign steel producers currently provide
commodity products such as hot bands and a limited range of plate products. Most
of these products are routed to service centers. The Company differentiates
itself from its foreign competitors by offering shorter lead times and a broader
range of products; however, in 1996 actions by steel producers in Russia, the
Ukraine, South Africa and China prompted the Company and another domestic
producer to file anti-dumping actions with the International Trade Commission
against those nations. Those actions charged that steel plate is unfairly being
delivered to U.S ports at prices less than the cost to produce those products.
On December 2, 1997, the International Trade Commission ruled in favor of the
petitioners by a unanimous vote and limited the amount of foreign steel plate
that could be shipped into the United States from those countries. In addition,
the ruling regulated the prices of foreign steel plate from those countries. The
Company believes that this decision will reverse the negative impact which the
illegal dumping had on results of operations during fiscal 1997.


Employees

     The Company's approximately 200 operating managers have considerable
experience in the steel industry. Over half have more than 20 years of industry
experience with most of the remaining managers ranging in experience from five
to 20 years. The Company's 22 senior operating managers have an average of over
25 years of industry experience and an average of over 20 years at the Gadsden
mill itself.

     As of October 31, 1997, the Company had approximately 1,900 employees. .
Substantially all of the Company's hourly employees and 47 salaried office and
clerical employees are represented by the United Steel Workers of America (the
"USWA"). In April 1993, the Predecessor completed negotiation of a collective
bargaining agreement with the USWA which expired on April 1, 1996. This
collective bargaining agreement allowed the Company to reduce and redeploy its
hourly workforce and established a "gain-sharing" program that permits employees
to increase their compensation based upon productivity (as measured by man-hours
per ton). On April 1, 1996, the Company agreed upon a contract with the USWA
which replaced the previous contract expiring on that date. The new contract is
for a term of 54 

                                                                               6
<PAGE>
 
months expiring on October 1, 2000. It includes wage increases, certain benefit
increases including other postretirement benefits, changes to local work rules,
language restricting the Company from participation in non-represented
businesses and gives the USWA representation on the Company's strategic planning
committee. Although the Predecessor experienced a 1 1/2 day work stoppage in
1989, it has not experienced any work stoppages since, and the Company believes
that it has satisfactory relationships with its union-represented employees and
the USWA.

     In accordance with its collective bargaining agreement with the USWA, the
Company's profit sharing obligations are based on earnings before taxes,
extraordinary items and certain other defined adjustments. The Company is
required to contribute each year to the profit sharing pool 16.5% of earnings to
its hourly employees and 9.75% of earnings to its salaried employees. During
fiscal years 1996 and 1997, the Company granted profit sharing to employees of
its consolidated subsidiary, Alabama Structural Beams, Inc. ("ASBI"). During
fiscal year 1995, profit sharing payments were made to employees of both the
Company and ASBI. Profit sharing payment obligations for the years ended October
31, 1997, 1996 and 1995 approximated $10,000, $139,000 and $13,021,000,
respectively.

     The Company provides a defined contribution plan for its hourly employees
and a 401(k) savings and investment plan for both hourly and salaried employees.
The Company annually funds its obligations under the defined contribution and
401(k) plans. There are no other pension plans. Effective April 1, 1996, the
Company initiated and sponsors a defined benefit health care plan that provides
postretirement medical benefits to full-time employees who have worked 30 years,
or have reached the age of 60 with 15 years of service or have reached the age
of 65 while in service with the Company.

Environmental Compliance

     The Company is subject to a broad range of federal, state and local
environmental laws and regulations, including those governing discharges to the
air and water, the handling and disposal of solid and/or hazardous wastes, and
the remediation of contamination associated with releases of hazardous
substances. The Company conducts continuous environmental compliance and
monitoring programs and believes that it is currently in substantial compliance
with all known material and applicable environmental regulations except as
follows:

     During 1992, the U.S. Environmental Protection Agency ("EPA") asserted that
a waste water ditch system on the Company's property should be remediated and
closed. At October 31, 1994, the Predecessor had remediated a portion of the
ditch. The Company believes that the most probable course of action for the
remainder of the ditch will involve sampling soil and water and possibly
removing some contaminated soil at a nominal cost. The less likely, but more
expensive course of action would involve sampling soil and water, closing and
securing the ditch with the possibility of some contaminated soil remaining in
place, and monitoring for any migration of the contaminants. This remediation
would cost $1.1 million for closure with post-closure monitoring costs over
thirty years of $2.8 million. The Predecessor also agreed to a $1.1 million
civil penalty, of which $300,000 was to be offset by future capital
expenditures, related to this issue. As of October 31, 1996, the $800,000
penalty had been paid. Subsequently, the $300,000 of capital expenditures were
not approved by the EPA, and during fiscal year 1997 the Company made an
additional penalty payment of that amount plus interest.

     The Predecessor settled with the Alabama Department of Environmental
Management ("ADEM") during 1994 for all outstanding air and water violations,
and the Company believes that its facility now operates, as a general matter, in
substantial compliance with existing air emission regulations and its water
discharge permit, subject, however, to the matters set forth below.

                                                                               7
<PAGE>
 
     The Company faces an enforcement action under the Clean Water Act. The U.S.
Department of Justice notified the Company that it, at the request of the EPA,
was prepared to take "appropriate enforcement action in federal court" against
the Company for alleged violations of its water discharge permit, and invited
the Company to discuss a possible settlement prior to filing suit. The Company
opened discussions with the Justice Department in an attempt to settle these
claims. These discussions have resulted in substantial agreement as to certain
additional upgrades to the Company's waste water treatment system; however, no
agreement has been reached as to civil penalties for past violations. On August
28, 1997, while negotiations were ongoing with the Justice Department, a 60-day
notice of intent to file a citizen suit under the Clean Water Act was sent by
one Johnny Williams, a resident of Rainbow City, Alabama. Prior to expiration of
the 60-day period, the Justice Department filed its action under the Clean Water
Act, thus precluding the citizen suit (see United States v. Gulf States Steel.
Inc., CV 97-S-2755-M filed October 17, 1997). On October 27, 1997, Mr. Williams
moved to intervene in the government's action. Despite the filing, the Company
and the Justice Department are still exploring possible settlement of the civil
penalty. The Clean Water Act provides for civil penalties of up to $25,000 per
day for violations occurring before January 30, 1997 and $27,500 per day for
violations occurring on or after January 30, 1997. At this time it is not
possible to predict what level of civil penalties the Justice Department will
ultimately seek for these exceedances, or when agreement will be reached with
the Company.

     During negotiations with the Justice Department over the Clean Water Act
matter described above, the Justice Department raised remediation of Black Creek
as a possible issue. The EPA is now investigating Black Creek and has performed
sampling in Black Creek and Lake Gadsden. Sampling results thus far indicate
levels of metals, primarily lead and zinc, in the sediment of Black Creek and in
certain locations in Lake Gadsden. The levels of metals in the sediment
generally increase with depth, indicating historical discharges are a greater
contributor to the elevated levels. The EPA has made no determination of what
remediation, if any, will be necessary. The EPA has indicated another round of
sampling will be performed to define the scope of the potential remediation. The
Company has expressed its position to the EPA that its contribution, if any, to
the sediment findings is divisible, and that apportioned, rather than joint and
several liability, is appropriate. Additionally, the Company's relative
contribution, if any, to the sediment results must be further reduced to the
extent that it is the result of a federally permitted discharge. The combined
effect of the Company's analysis is that any potential liability that is
assignable to it is so small as to be de minimis. Given current information, it
is not possible to predict the scope or cost of any potentially required
remediation of Black Creek and/or Lake Gadsden, nor is it known whether the
Company's analysis regarding its potential liability will be accepted.

     On February 20, 1996, ADEM issued a Notice of Violation ("NOV") to the
Company for continuing violation of opacity limits from the combustion stacks of
the coke ovens, and included in the NOV a requirement that the Company install
continuous opacity monitors in the stacks. The Company appealed this
requirement, and it was subsequently withdrawn by ADEM on the condition that the
Company employ an independent contractor to conduct visible emission readings on
the stacks. The Company complied with this condition. While there has been no
renewed request by ADEM that the Company install opacity monitors, ADEM has, in
subsequent NOV's, identified such monitors as a possible future requirement. The
Company has taken the position, in its communications with ADEM, that the
installation of such monitors on its existing stacks is not feasible; however,
it is not currently possible to predict whether ADEM will again attempt to
require that continuous opacity monitors be installed in the coke oven
combustion stacks.

                                                                               8
<PAGE>
 
     For the fiscal years ended October 31, 1997 and 1996 and during the periods
from April 21, 1995 to October 31, 1995 and from November 1, 1994 to April 20,
1995, capital expenditures for environmental projects were $4.1 million, $6.4
million, $4.0 million and $2.9 million, respectively, and environmental
compliance expenses were $6.0 million, $5.8 million, $2.5 million and $3.1
million, respectively. The Company currently estimates that expenditures for
environmental capital projects in fiscal 1998 will be approximately $3.1
million. As of October 31, 1997, the Company has accrued $750,000 for unresolved
environmental matters.

     Though the Company believes that it has adequately provided for the cost of
all known environmental conditions, the applicable agencies could insist upon
different and possibly more costly remediative measures than those believed by
the Company to be adequate or required by existing law. The Company expects that
the resolution of these matters will not have a significant effect on the
Company's financial position, results of operations, or liquidity.


ITEM 2.   PROPERTIES
-------   ----------

     The mill is located on approximately 800 acres in Gadsden, Alabama, which
is approximately 120 miles west of Atlanta, Georgia and 60 miles northeast of
Birmingham, Alabama. The mill comprises an aggregate of approximately 3.1
million square feet of floor space and primarily consists of two batteries of 65
coke ovens each, a blast furnace, two BOF vessels, the LMF, the continuous
caster, a plate mill, a 54" hot strip mill, 54" and 58" temper mills, a 54"
tandem mill, and galvanizing and pickle lines. The Company's current iron
production capacity of 90,000 tons per month limits the Company's in-house slab
production to 96,000 tons per month ("TPM"), yielding an in-house capacity of
82,000 TPM of finished steel products. Since the finishing end of the Company's
operation has a higher relative capacity (96,000 TPM) than the caster (90,000
TPM), the Company has from time-to-time purchased steel slabs in the open market
at a higher cost than its internal production costs in order to increase product
shipments.

     Although the Company will be required to make the significant capital
expenditures discussed above, the Company believes that its facilities and
equipment are well-maintained, in good operating condition and, in general,
suitable for the Company's purposes and adequate for its present operations.


ITEM 3.   LEGAL PROCEEDINGS
-------   -----------------

     Other than the environmental proceedings described in Item 1 above, the
Company is not a party to any significant pending legal proceedings other than
litigation incidental to its normal business, including employee matters. The
Company believes that these proceedings will not have a significant effect on
its financial position, results of operations or liquidity. The majority of such
non-environmental claims against the Company are ordinarily covered by
insurance. There can be no assurance, however, that insurance will be available
in the future at reasonable rates.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------   ---------------------------------------------------

     Not Applicable.

                                                                               9
<PAGE>
 
                                    PART II
                                    -------

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-------   ---------------------------------------------------------------------

     The Company's Common Stock, par value $.01 per share, is not traded on an
established public trading market. As of the date of this filing, there was one
stockholder of record, GSS Holding Corp. ("Holdings"). Holdings has issued
Senior Subordinated Notes ("Notes") and, although the Company has no obligation
with respect to these Notes, the sole source of funds for the repayment of these
Notes are dividends from the Company. The Notes require Holdings to cause the
Company to pay dividends to Holdings to the maximum extent allowed. No dividends
were declared during fiscal 1997.

                                                                              10
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA
-------  -----------------------
         (dollars in millions except per share and per ton data)

<TABLE> 
<CAPTION>                                             
                                                              (Successor)                            (Predecessor)
                                         -----------------------------------------------------------------------------------------
                                                                        For the Period    For the Period
                                                Fiscal Year Ended       April 21, 1995     Nov. 1, 1994        Fiscal Year Ended
                                                   October 31,          to October 31,      to April 20,          October 31,
                                         ----------------------------   --------------    ---------------   ----------------------
                                               1997           1996           1995              1995            1994        1993
                                               ----           ----           ----              ----            ----        ----
<S>                                      <C>            <C>             <C>                <C>            <C>         <C> 
Income Statement Data:
  Net sales                              $    436.5     $    454.3      $   255.8          $  232.6       $   457.4   $   361.6
  Cost of goods sold, excluding                                                                          
    depreciation                              389.8          399.6          204.3             180.4           376.4       314.1
  Effect of inventory write-up                    -              -           13.2                 -               -           -
  Depreciation                                 18.4           15.3            7.3               8.7            17.7        15.9
  Selling, general and administrative                                                                    
    expenses                                   16.2           15.3           10.6              11.2            15.6        21.5
  Write-off of blooming mill                    1.8              -              -                 -               -           -
  Profit sharing(1)                               -             .1            5.8               7.2               -           -
                                         ----------     ----------      ---------          --------       ---------   ---------
  Operating profit                             10.3           24.0           14.6              25.1            47.7        10.1
  Net interest expense                         26.9           24.7           12.4               5.2            14.3        15.0
                                         ----------     ----------      ---------          --------       ---------   ---------
  Income (loss) before income taxes
    and cumulative effect of
    accounting change                         (16.6)           (.7)           2.2              19.9            33.4        (4.9)
  Provision (benefit) for income taxes          (.8)           (.3)           1.0               7.1            12.6        (0.8)
                                         ----------     ----------      ---------          --------       ---------   ---------
  Income (loss) before cumulative
    effect of accounting change(2)       $    (15.8)    $      (.4)     $     1.2          $   12.8       $    20.8   $    (4.1)
                                         ==========     ==========      =========          ========       =========   =========

  Net income (loss) per share            $    (5.12)    $    (0.10)     $    0.33
  Dividends paid and declared per
    share                                         -              -      $    1.87
Balance Sheet Data:
  Total assets                           $    305.4     $    304.3      $   287.9          $  220.5       $   217.4   $   242.9
  Long-term debt (including current     
    portion)                                  228.2          211.5          188.8              96.1            96.9       128.6
  Stockholders' equity and partners'    
    capital                                    19.5           38.0           38.3              58.6            45.8        25.3
Other Data:
  EBITDA(3)                              $     33.8     $     41.3      $    21.9          $   34.0       $    66.1   $    26.9
  Capital expenditures                         31.1           25.6           16.8              11.6            16.9         7.0
  Ratio of earnings to fixed            
    charges(4)                                   --             --            1.2x              4.5x            3.2x         --
  Net cash provided (used) by           
    operations                           $     12.5     $      5.7      $     5.8          $   12.4       $    50.1   $    (3.4)
  Net cash used in investing            
    activities                                (31.1)         (25.5)        (218.7)            (11.6)          (16.6)       (7.0)
  Net cash provided (used) by           
    financing activities                       16.4           22.3          214.8              (0.8)          (33.9)       10.3
Operating Data:
  Total tons shipped (000s)                    1014           1075            602               512            1059         928
  Average selling price per ton        
    shipped(5)                           $      423     $      417      $     420          $    448       $     421   $     385
  Average manufacturing cost per ton   
    shipped(5)                                  375            365            331               338             343         332
  Operating profit per ton shipped(6)            10             22             46                49              45          11
  Average rated capacity               
    utilization(7)                             95.4%          93.6%          98.7%             94.6%           95.9%       95.5%
</TABLE> 
(1)  Profit sharing payments are made quarterly, and total 26.25% of income
     before deduction for profit sharing and income tax expense. Profit sharing
     payments were not made in fiscal 1993, which was a loss year, and were not
     required in fiscal 1994 under the collective bargaining agreement. Profit
     sharing payment obligations resumed on November 1, 1994. Profit sharing
     expenses would have been $9.5 million and $0.3 million for fiscal 1994 and
     the first quarter of fiscal 1994, respectively, had payments been required.
(2)  Excludes $2.6 million of previously capitalized costs incurred for process
     reengineering which were written off in 1997 as the cumulative effect of an
     accounting change relating to the adoption of EITF 97-13. The effect of
     this accounting change was not material for years prior to 1997.
(3)  EBITDA is defined as operating profit plus depreciation and amortization.
     The Company believes that EBITDA provides additional information for
     determining its ability to meet debt service requirements. EBITDA does not
     represent and should not be considered as an alternative to net income or
     cash flow from operations as determined by generally accepted accounting
     principles, and EBITDA does not necessarily indicate whether cash flow will
     be sufficient for cash requirements.
(4)  Ratio of earnings to fixed charges is defined as income (loss) before
     income taxes and cumulative effect of accounting change plus amortization
     of debt issuance cost and interest expense divided by the sum of interest
     expense plus amortization of debt issuance costs. Earnings were
     insufficient to cover fixed charges in 1993, 1996 and 1997 by approximately
     $4.9 million, $0.7 million and $16.6 million, respectively.
(5)  Excludes sales of coke by-products and sales by affiliates (Predecessor) or
     subsidiary (Successor). Accordingly, average selling price and average
     manufacturing cost per ton shipped are based on sales of flat rolled
     products only.
(6)  Excluding non-recurring effect of inventory write-up.
(7)  Net tons of raw steel melted divided by the Company's estimated annual raw
     steel production capacity.


                                                                              11
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL       
-------  -------------------------------------------------
         CONDITIONS AND RESULTS OF OPERATIONS
         ------------------------------------

     The following discussion should be read in conjunction with the financial
statements of the Company and the notes thereto included elsewhere in this Form
10-K.

Results of Operations

     To facilitate a comparison of the Company's operations with the results of
the Predecessor, the following discussion and analysis as it relates to the
Predecessor is based on pro forma statements of income prepared under the
assumption that the Acquisition of the Predecessor and related issuance of the
First Mortgage Notes (the "Notes") occurred at the beginning of the fiscal 1995
period.

     The pro forma statement of income presented below is for discussion
purposes only and should not be construed to be indicative of the Company's
results of operations had the Acquisition of the Predecessor and issuance of the
Notes been consummated on the date assumed and does not project the Company's
results of operations for any future period.

     The pro forma statement of income differs from the historical statement of
income of the Predecessor due to the following adjustments: (i) inventory is
costed on a FIFO basis instead of LIFO (the basis used by the Predecessor); (ii)
a non-recurring cost of $13.2 million due to the write-up in inventory from the
Predecessor's historical cost to fair value; (iii) a change in depreciation
expense resulting from the increased cost basis of plant and equipment resulting
from the allocation of the purchase price of the Company; (iv) management fees
are adjusted to reflect the provisions of the Company's management agreement;
(v) additional amortization expense related to debt issuance cost of the First
Mortgage Notes less the reversal of certain Predecessor amortization expense;
(vi) additional net interest expense based on the Company's debt structure;
(vii) the effect on profit sharing expense of the above adjustments; and (viii)
the effect on tax expense of the above adjustments.


                                                                              12
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                                Pro-forma
                                                              Year Ended       Year Ended       year ended
                                                               Oct. 31,         Oct. 31,         Oct. 31, 
                                                                 1997             1996             1995
                                                           ---------------  --------------   --------------       
                                                                      (dollars in thousands)
<S>                                                        <C>               <C>             <C>  
Net sales............................................         $  436.5        $  454.3         $  488.4
Cost of goods sold, excluding depreciation...........            389.8           399.6            384.0
Effect of inventory write-up.........................                -               -             13.2
Depreciation.........................................             18.4            15.3             14.9
Selling, general and administrative expenses.........             16.2            15.3             19.5
Write-off of blooming mill assets                                  1.8               -                -
Profit sharing.......................................                -             0.1             12.2
                                                              --------        --------         --------  
Operating profit.....................................             10.3            24.0             44.6

Other (income) expense:
         Interest expense............................             27.0            24.7             25.1
         Interest income.............................             (0.1)              -             (0.3)
                                                              --------        --------         --------  
                                                                  26.9            24.7             24.8
                                                              --------        --------         --------  
Income (loss) before income taxes and cumu-
    lative effect of accounting change...............            (16.6)           (0.7)            19.8
Provision (benefit) for income taxes.................             (0.8)           (0.3)             7.2
                                                              --------        --------         --------  
Net income (loss) before cumulative effect
    of accounting change                                      $  (15.8)       $   (0.4)        $   12.6
                                                              =========       =========        ========
</TABLE> 


Fiscal Year Ended October 31, 1997 Compared to Fiscal Year Ended October 31,
1996

         Net Sales. Net sales decreased 3.9% to $436.5 million for the year 1997
from $454.3 million for the year 1996. This decrease was primarily caused by a
5.7% decrease in shipments of flat rolled products from 1,074,910 net tons in
fiscal year 1996 to 1,013,970 in fiscal 1997. Sales volume was lower due to
planned outages for upgrades at the Hot Strip Mill in April, May and June of
1997, as well as several unplanned outages at other production facilities. The
decrease in revenues due to lower sales volume was partially offset by an
increase in the average selling price for flat rolled steel from $417 per ton in
the 1996 period to $423 per ton in the 1997 period. This 1.4% increase in
average selling price resulted from an improved product mix as well as a slight
increase in transaction prices.

         Cost of Goods Sold. Cost of goods sold, excluding depreciation,
decreased 2.5% to $389.8 million for the year 1997 from $399.6 million for the
year 1996, however, as a percentage of net sales, cost of goods sold, excluding
depreciation, increased to 89.3% in 1997 compared to 88.0% in 1996. Most of this
increase resulted from the aforementioned planned and unplanned outages at the
mill, however, higher hourly labor costs, high natural gas prices, and higher
raw materials prices, especially zinc, were only partially offset by benefits
resulting from the Company's cost reduction programs. Average manufacturing
costs for flat rolled products rose $10 per ton shipped from $365 in 1996 to
$375 

                                                                              13
<PAGE>
 
in 1997. Depreciation expense was $18.4 million in the 1997 period compared to
$15.3 million in the 1996 period. This increase was primarily due to continuing
expenditures for the Company's capital improvement projects.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $16.2 million, or 3.7% of net sales in
1997, from $15.3 million, or 3.4% of net sales in 1996. This increase was
primarily due to higher staffing costs, increased employee benefit plan costs
and costs relating to the Company's Year 2000 project initiatives.

         Write-off of Blooming Mill Assets. During the third quarter of fiscal
1997, the Company closed its blooming mill operation as part of its capital
improvement program and upgrading of facilities. This closing resulted in a
non-recurring charge of $1.8 million for the write-off of non-salvageable fixed
assets associated with the blooming mill.

         Profit Sharing. Profit sharing amounted to $10,000 in 1997 compared to
$139,000 in 1996. This amount was paid to employees of the Company's
consolidated subsidiary, ASBI. No other profit sharing payments were required
due to the consolidated net loss of the Company.

         Operating Profit. As a result of the changes in net sales, cost of
goods sold, depreciation, selling, general and administrative expenses,
write-off of blooming mill assets and profit sharing discussed above, operating
profit decreased to $10.3 million, or 2.4% of net sales, in 1997, from $24.0
million, or 5.3% of net sales, in 1996. Excluding the non-recurring effect of
the write-off of blooming mill assets, operating profit for 1997 would have been
$12.1 million, or 2.8% of net sales.

         Interest Expense. Interest expense, net of interest income, increased
to $26.9 million in the 1997 period from $24.7 million in the 1996 period. This
was primarily due to an increase in the average revolving credit facility loan
balance in fiscal 1997.

         Income Taxes. The benefit for income taxes increased from $0.3 million
in fiscal 1996 to $0.8 million in fiscal 1997. This represents a drop in the
effective rate of the Company's tax benefit from 42.2%in 1996 to 4.6% in 1997.
This drop in the effective tax rate was primarily due to the establishment of a
valuation allowance for the Company's deferred tax assets which reduced the tax
benefit rate by 32.5%. The valuation allowance was established to recognize
uncertainties in the full realization of the recorded deferred tax assets.


Fiscal Year Ended October 31, 1996 Compared to Pro-Forma Fiscal Year Ended 
October 31, 1995

         Net Sales. Net sales decreased 7.0% to $454.3 million for the year 1996
from $488.4 million for the year 1995. This decrease was primarily caused by a
decrease in selling prices for flat rolled steel. The Company's average selling
price on flat rolled products was down 3.8% at $417 per ton in the 1996 period,
from $433 per ton in the 1995 period due to reduced transaction prices. Volume
was reduced due to several unplanned outages at the mill, primarily as a result
of the severe winter experienced in the Southeast resulting in natural gas
curtailments to the mill. Additionally, the Company had planned outages at the
Hot Strip Mill and Plate Mill during fiscal 1996 which further reduced
production. As a result, shipments fell 3.7% in flat roll products to 1,074,910
tons in 1996 compared to 1,114,180 tons in 1995.

                                                                              14
<PAGE>
 
         Cost of Goods Sold. Cost of goods sold, excluding depreciation,
increased 4.1% to $399.6 million for the year 1996 from $384.0 million for the
year 1995. As a percentage of net sales, cost of goods sold, excluding
depreciation, increased to 88.0% in 1996 from 78.6% in 1995. Approximately
one-third of this increase resulted from the aforementioned planned and
unplanned outages at the mill. Higher employment costs including the results of
the new labor agreement with the USWA, natural gas prices, and raw material
costs increased during fiscal 1996 resulting in average manufacturing costs for
flat rolled products increasing to $365 per ton in 1996 from $335 in 1995.
Depreciation costs were $15.3 million in 1996 and on a pro-forma basis $14.9
million in 1995.

         Effect of Inventory Write-up. At the time of the Acquisition, the
purchase price allocated to inventory resulted in a $13.2 million write-up from
the Predecessor's historical cost. The $13.2 million write-up was expensed as
the inventory was sold during the period from April 21, 1995 to July 31, 1995.
This is a non-recurring cost.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $15.3 million, or 3.4% of net sales in
1996, from $19.5 million, or 4.0% of net sales in 1995. This decrease was
primarily due to lower sales and use tax expense of approximately $3.2 million.
These reductions resulted from: (1) the Company's being awarded "Enterprise
Zone" status by the State of Alabama thereby eliminating state sales and use
taxes to the Company, (2) recovery of prior periods overpayments, and (3)
reduced liabilities to city and county taxing authorities.

         Profit Sharing. Profit sharing amounted to $0.1 million in 1996
compared to $ 12.2 million in 1995. This amount was paid to employees of the
Company's consolidated subsidiary, ASBI, who were not covered by a profit
sharing plan in 1995. No other profit sharing payments were required due to the
consolidated net loss of the Company.

         Operating Profit. As a result of the changes in net sales, cost of
goods sold, effect of inventory write-up, depreciation, selling, general and
administrative expenses, and profit sharing discussed above, operating profit
decreased to $24.0 million, or 5.3% of net sales, in 1996, from $44.6 million,
or 9.1% of net sales, in 1995. Excluding the effect of the above mentioned
inventory write-up on a pro-forma basis, operating profit would have been $57.8
million, or 11.8% of net sales, in the 1995 period.

         Interest Expense. Interest expense, net of interest income, decreased
to $24.7 million in the 1996 period from $24.8 million in the 1995 period. This
was largely due to an increase in capitalized interest in 1996.


Liquidity and Capital Resources

         The Company's primary capital requirements consist of capital
expenditures and debt service. The company makes capital expenditures for the
replacement of existing plant and equipment, compliance with environmental
regulations, and the upgrading and improvement of manufacturing facilities. The
Company's capital expenditures for the year ended October 31, 1997 were $31.1
million compared to $25.5 million for the year ended October 31, 1996. For
fiscal year 1997, the Company incurred capital expenditures, excluding
capitalized interest, totaling $4.1 million for environmental projects and
expenditures totaling $25.0 million for the replacement, upgrading and
improvement of facilities and equipment.

                                                                              15
<PAGE>
 
         On April 21, 1995 the Company completed the Acquisition (see page 2).
In connection with the Acquisition, $190 million in First Mortgage Notes were
issued, upon which the Company is required to make semi-annual cash interest
payments of approximately $12.8 million ($25.7 annually). Although the Company
will not be required to make principal payments on the First Mortgage Notes
until maturity, in the event of Excess Cash Flow, as defined by the first
Mortgage Note Indenture, the Company will be required to purchase First Mortgage
Notes with 50% of such Excess Cash Flow. The Notes are senior obligations of the
Company and are secured by substantially all the assets of the Company except
accounts receivable and inventories. The Notes impose certain limitations on the
Company including the ability to incur additional indebtedness, pay dividends,
make certain restricted payments, create liens or sell substantially all of the
Company's assets.

         Also, in connection with the Acquisition, the Company entered into an
agreement for a Revolving Credit Facility (the "Old Credit Facility") which
provided the Company with a credit facility of $70 million, subject to a
borrowing availability formula applied to eligible accounts receivable and
inventory of the Company and a requirement to maintain borrowing availability of
not less than $10 million at all times. The Revolving Credit Facility required
the Company to maintain a ratio of EBITDA (earnings before interest, taxes,
depreciation and amortization) to Cash Interest of 1.0 to 1.0 for the preceding
twelve month period measured at the end of each of the Company's fiscal quarters
and, under certain circumstances, to meet additional financial covenants.
At October 31, 1997, approximately $37.2 million was borrowed under this credit
facility.

         On November 13, 1997, the Company entered into a new $80 million
Revolving Credit and Capital Expenditure Facility (the "New Credit Facility").
This credit facility included a $70 million revolving credit line and a $10
million equipment financing facility, and it was first used to replace and pay
off the outstanding balance of the Old Credit Facility. Available borrowings are
subject to limits based on eligible accounts receivable and inventories. The New
Credit Facility has an original term of three years through November 13, 2000,
at which time the agreement will automatically renew itself for one-year terms,
unless terminated by either party. Obligations under the revolving credit
facility are secured by inventories and accounts receivable, and the Company is
required to maintain a defined amount of consolidated adjusted tangible net
worth at all times. During November 1997, the Company recorded an extraordinary
expense of $1.0 million in connection with the refinancing, however, $0.8
million was a noncash transaction consisting of the write-off of prior
unamortized debt issuance costs. The New Credit Facility provides the Company
with significant additional financial flexibility in terms of relaxed financial
covenants and reduced borrowing costs.

         At the time of the acquisition, Holdings issued certain promissory
notes to Capital Resource Lenders II, L.P. as a part of a related transaction.
Although the Company has no obligation with respect to the promissory notes,
Holdings is required to make payments thereon in accordance with the respective
terms thereof, for which the source of funds is expected to be dividend
distributions or loans from the Company. The promissory notes require Holdings
to cause the Company to pay dividends to Holdings to the maximum extent allowed
under the terms of the First Mortgage Notes indenture and applicable law until
the Holdings notes are repaid in full. No dividends were declared by the Company
during fiscal year 1997. In addition, in connection with the Acquisition,
Holdings issued a promissory note to the seller for which the source of funds
for repayment is also expected to be dividend distributions or loans from the
Company. There have been no cash payments required or made on the seller note
through October 31, 1997.

         The Company has incurred losses in the current and prior years. An
anticipated outage to rework the blast furnace is currently scheduled for fiscal
year 1999, and this outage will impact operating results 

                                                                              16
<PAGE>
 
at that time. Although the Company has initiated recent cost reduction measures
and expects to realize benefits in operating performance from its capital
improvement program, there can be no assurance that any of these measures and
improvements will result in the full realization of the Company's recorded
deferred tax assets. Considering these factors the Company has established a
valuation allowance of $5.4 million relating to the net deferred tax assets. The
Company will continue to evaluate the need for a change in the valuation
allowance on a quarterly basis.

         The Company believes that future cash flows from operations, together
with borrowings available under the New Credit Facility, will provide the
Company with sufficient liquidity and capital resources to conduct its business
activities (including its capital investments) and to meet its cash interest
payment requirements. Although the Company is continuously instituting cost
reduction initiatives and expects to benefit from improved operating performance
related to its capital investments, there can be no assurance that any or all of
these potential savings will be realized. Failure to achieve these cost
reduction initiatives or improve operating performance through these capital
investments, could adversely affect the financial results or liquidity of the
Company in the future. In addition, external factors affect the Company's market
and related transaction prices for its products as well as its cost structure
for outside purchases (i.e., ore, natural gas, electricity, etc.). Unfavorable
price movements in these items, among others, could adversely affect the
Company's financial results and its ability to maintain compliance with the
restrictive covenants in the Company's borrowing agreements. In the event that
the Company's financial results and/or borrowing availability under the New
Credit Facility were so affected, the Company's liquidity and capital resources
could be adversely effected which could also significantly limit the Company's
ability to withstand competitive pressures or adverse economic conditions.


Impact of the Year 2000 Issue

         The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.

         The Company has conducted an assessment of its exposure to disruption
associated with the Year 2000 issue. Many of its computer based transactional
business systems are subject to potential failure. The Company believes that it
could be materially affected by such failures. In addition, certain process
control systems are also exposed. The Company is also vulnerable to third-party
failures to correct their systems but believes that such exposure is minimal.
The Company believes that no material contingencies exist that would require it
to modify its products.

         The Company has recognized the serious nature of its exposure under the
Year 2000 Issue and has developed a modification plan that will minimize this
exposure. It has budgeted approximately $8.8 million (of which $6.2 million is
expected to be capitalized) for the purchase of Year 2000 compliant software and
consultant support all of which is expected to be funded through operating cash
flows. The primary purchased software is for an enterprise resource planning
system which will provide enhanced productivity and customer service benefits in
addition to mitigating potential consequences of the Year 2000. Through October
31, 1997, the Company has incurred capital expenditures for software of $2.3
million and has spent another $0.2 million for contractors to rewrite existing
systems. Those activities 

                                                                              17
<PAGE>
 
were initiated in late 1996 for all business systems. The Company has budgeted
an additional $0.4 million in expense for the rewrite of systems modules that
cannot be purchased as packages. The Company believes that these items, which
will be expensed as incurred, are not expected to have a material effect on its
results of operations. Approximately $2.6 million of previously capitalized
costs incurred for process reengineering were written off in fiscal year 1997 as
the Cumulative Effect of an Accounting Change relating to the adoption of EITF
97-13., Accounting for Costs Incurred in Connection with a Consulting Contract
or an Internal Project That Combines Business Process Reengineering and
Information Technology Transformation.

         The Company anticipates completing the Year 2000 project by October 31,
1998, which is prior to any anticipated impact on its operating systems. A team
of information systems personnel is evaluating the progress and is developing
contingency plans that ensure the continued operation of the business. The
Company has appointed a task force to further evaluate and develop action plans
for minimizing the impact of the Year 2000 Issue on its process control systems.

         The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause material differences include, but
are not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, and similar
uncertainties.

                                                                              18
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------  -------------------------------------------





                       Gulf States Steel, Inc. of Alabama

                        Consolidated Financial Statements

                      Years ended October 31, 1997 and 1996
             and for the periods from April 21, 1995 to October 31,
             1995 and from November 1, 1995 to April 20, 1995 with
                         Report of Independent Auditors



                                    Contents
<TABLE> 
<S>                                                                                                    <C> 
Report of Independent Auditors.........................................................................20

Audited Consolidated Financial Statements

Balance Sheets
   Consolidated as of October 31, 1997 and 1996 (Successor)............................................21
Statements of Income
   Consolidated for the years ended October 31, 1997 and 1996 and for the period
   from April 21, 1995 to October 31, 1995 (Successor), and
   combined for the period from November 1, 1994 to April 20, 1995 (Predecessor).......................22
Statements of Cash Flows
   Consolidated for the years ended October 31, 1997 and 1996 and for the period
   from April 21, 1995 to October 31, 1995 (Successor), and
   combined for the period from November 1, 1994 to April 20, 1995 (Predecessor).......................23
Notes to Financial Statements..........................................................................25
</TABLE> 

                                                                              19
<PAGE>
 
                         Report of Independent Auditors


The Board of Directors and Stockholder
Gulf States Steel, Inc. of Alabama

We have audited the accompanying consolidated balance sheets of Gulf States
Steel, Inc. of Alabama (Successor) as of October 31, 1997 and 1996, and the
related consolidated statements of income and cash flows for the years ended
October 31, 1997 and 1996, and for the period from April 21, 1995 to October 31,
1995, and the combined statements of income and cash flows of Gulf States Steel,
Inc. of Alabama (Predecessor) for the period from November 1, 1994 to April 20,
1995. Our audits also included the financial statement schedule listed in the
index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gulf States Steel,
Inc. of Alabama (Successor) at October 31, 1997 and 1996, and the related
consolidated results of its operations and its cash flows for the years ended
October 31, 1997 and 1996, and for the period from April 21, 1995 to October 31,
1995, and the combined results of operations and cash flows of Gulf States
Steel, Inc. of Alabama (Predecessor) for the period from November 1, 1994 to
April 20, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

As discussed in Note 4 to the  consolidated  financial  statements,  in 1997 the
Company  changed its method of accounting  for process  reengineering costs.



Birmingham, Alabama
December 5, 1997

                                                                              20
<PAGE>
 
                       Gulf States Steel, Inc. of Alabama

                           Consolidated Balance Sheets
                             (dollars in thousands)

<TABLE> 
<CAPTION> 
                                                                                        October 31,
                                                                                    1997            1996
                                                                              ------------------------------
<S>                                                                               <C>              <C>  
Assets
Current assets:
Cash and cash equivalents                                                         $   2,359        $   4,458
Accounts receivable, less allowance for doubtful
accounts of $390 in 1997 and $1,050 in 1996                                          33,385           40,788
Inventories                                                                          54,651           58,383
Deferred income taxes                                                                 3,311            2,850
Prepaids and other current assets                                                     7,140            2,873
                                                                              ------------------------------
Total current assets                                                                100,846          109,352

Property, plant and equipment, net                                                  197,706          186,893
Deferred charges, less accumulated amortization of
$3,109 in 1997 and $1,864 in 1996                                                     6,840            8,079
                                                                              ------------------------------
Total assets                                                                      $ 305,392        $ 304,324
                                                                              ==============================

Liabilities and Stockholder's Equity 
Current liabilities:
Accounts payable                                                                  $  33,998        $  34,878
Accrued payroll and employee benefits                                                 4,851            5,713
Accrued interest payable                                                              1,272            1,270
Accrued workers compensation                                                          3,056            3,358
Accrued gain sharing                                                                  2,934            2,966
Other accrued liabilities                                                             7,902            2,841
Income taxes payable                                                                    174              156
Current portion of long-term debt                                                       643              643
                                                                              ------------------------------
Total current liabilities                                                            54,830           51,825

Long-term debt                                                                      227,556          210,839
Deferred income taxes                                                                 1,313            1,469
Common stock warrants subject to put options                                          2,225            2,225

Stockholder's equity:
Common stock, par value $.01 per share; 4,000,000 shares
authorized, 3,610,000 shares issued and outstanding                                      36               36
Additional paid-in capital                                                           39,050           39,050
Notes receivable from officers                                                         (750)            (750)
Accumulated deficit                                                                 (18,868)            (370)
                                                                              ------------------------------
Total stockholder's equity                                                           19,468           37,966
                                                                              ------------------------------
Total liabilities and stockholder's equity                                        $ 305,392        $ 304,324
                                                                              ==============================
</TABLE> 

  See accompanying notes.

                                                                              21
<PAGE>
 
                      Gulf States Steel, Inc. of Alabama

                       Consolidated Statements of Income
                            (dollars in thousands)
<TABLE> 
<CAPTION>                                                                                                       
                                                                                  Period from           Period from
                                                 Year ended October 31,         April 21, 1995 to     November 1, 1994
                                                1997               1996         October 31, 1995     to April 20, 1995
                                           --------------    ---------------    -----------------    -----------------  
                                                                (Successor)                             (Predecessor)
<S>                                       <C>                <C>                <C>                  <C>   
Net Sales                                    $   436,510        $   454,283       $   255,821            $   232,618
                                                                                                
Cost of goods sold, excluding                                                                   
depreciation                                     389,780            399,547           204,341                180,367
                                                                                                
Effect of inventory write-up                           -                  -            13,195                      -
                                                                                                
Depreciation                                      18,443             15,345             7,261                  8,683
                                                                                                
Selling, general and administrative                                                             
expenses                                          16,145             15,249            10,639                 11,213
                                                                                                
Write-off of blooming mill                         1,800                  -                 -                      -
                                                                                                
Profit sharing                                        10                139             5,824                  7,197
                                             ------------------------------------------------            -----------
Operating profit                                  10,332             24,003            14,561                 25,158
                                                                                                
Other (income) expense:                                                                         
                                                                                                
Interest expense                                  27,019             24,685            12,668                  5,234
                                                                                                
Interest income                                      (76)               (42)             (262)                    (4)
                                             ------------------------------------------------            -----------
                                                  26,943             24,643            12,406                  5,230
                                             ------------------------------------------------            -----------
Income (loss) before income taxes                (16,611)              (640)            2,155                 19,928
                                                                                                
Provision (benefit) for income taxes                (760)              (270)              910                  7,126
                                             ------------------------------------------------            -----------
Income (loss) before cumulative effect                                                          
of accounting change                             (15,851)              (370)            1,245                 12,802
                                                                                                
Cumulative effect of accounting change            (2,647)                 -                 -                      -
                                             ------------------------------------------------            -----------
Net income (loss)                            $   (18,498)       $      (370)      $     1,245            $    12,802
                                             ================================================            ===========
Earnings per share:                                                                             
Income (loss) before cumulative                                                                 
effect of accounting change                  $     (4.39)       $      (.10)      $       .33           

                                                                                                
Cumulative effect of accounting                     
change                                              (.73)                 -                 -           
                                             ------------------------------       -----------           
                                                                                                
Net income (loss)                            $     (5.12)       $      (.10)      $       .33           
                                             ==============================       ===========           
                                                                                                
Weighted average common and common                                                              
equivalent shares outstanding                  3,610,000          3,610,000         3,799,838           
                                             ==============================       ===========           
</TABLE> 

See accompanying notes.


                                                                              22
<PAGE>
 
<TABLE> 
<CAPTION> 

                                                    Gulf States Steel, Inc. of Alabama

                                                 Consolidated Statements of Cash Flows
                                                        (dollars in thousands)

                                                                              Period from              Period from      
                                               Year ended October 31,      April 21, 1995 to         November 1, 1994   
                                                   1997         1996        October 31, 1995         to April 20, 1995  
                                               ---------------------------------------------        -------------------
                                                             (Successor)                               (Predecessor)        
<S>                                            <C>          <C>            <C>                      <C>          
Operating activities:

Net income (loss)                              $ (18,498)   $    (370)            $    1,245                $    12,802      
                                                                                                                           
Adjustments to reconcile net income                                                                                        
  (loss) to net cash provided by                                                                                             
  operating activities:                                                                                                      
                                                                                                                           
  Depreciation, including amounts                                                                                            
  capitalized in inventories                      18,443       15,485                  6,870                      8,994    
                                                                                                                           
  Amortization                                     1,524        1,663                    618                        415    
                                                                                                                           
  Write-off of blooming mill                       1,800           --                     --                         --    
                                                                                                                           
  Deferred income taxes                             (617)      (1,134)                  (247)                     1,824    
                                                                                                                           
Changes in operating assets and liabilities:                                                                               
                                                                                                                           
  Accounts receivable                              7,403       (1,130)                (4,218)                     3,899    
                                                                                                                           
  Inventories                                      3,732       (1,708)                  (497)                      (871)   
                                                                                                                           
  Effect of inventory write-up                        --           --                 13,195                         --    
                                                                                                                           
  Prepaids and other current assets               (4,267)      (1,979)                   284                         --    
                                                                                                                           
  Deferred charges                                    (7)         (49)                (9,894)                    (1,547)   
                                                                                                                           
  Accounts payable                                  (880)        (692)                (2,174)                   (10,175)   
                                                                                                                           
  Accrued payroll and employee benefits             (862)         967                 (1,628)                     1,946    
                                                                                                                           
  Accrued interest payable                             2           86                  1,184                        (33)   
                                                                                                                           
  Other accrued liabilities                        4,727       (4,402)                   (93)                     1,913    
                                                                                                                           
  Income taxes payable                                18       (1,001)                 1,157                     (6,790)   
                                               ---------    ---------              ---------                  ---------    
Net cash provided by operations                   12,518        5,736                  5,802                     12,377    
                                                                                                                           
                                                                                                                           
Investing activities:                                                                                                      
                                                                                                                           
Acquisition of predecessor company                    --           --               (201,954)                        --    
                                                                                                                           
Building and equipment purchases                 (31,056)     (25,535)               (16,792)                   (11,611)   
                                                                                                                           
Proceeds from disposal of equipment                   --           70                     --                         --    
                                               ---------    ---------              ---------                  ---------    
Net cash used in investing activities            (31,056)     (25,465)              (218,746)                   (11,611)   
</TABLE> 

                                                                              23
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                          Gulf States Steel, Inc. of Alabama

                                                  Consolidated Statements of Cash Flows (continued)
                                                                (dollars in thousands)


                                                                                Period from            Period from
                                               Year ended October 31,        April 21, 1995 to      November 1, 1994
                                                   1997             1996     October 31, 1995       to April 20, 1995
                                             -------------------------------------------------      ------------------
                                                                (Successor)                            (Predecessor)
<S>                                          <C>           <C>                <C>                   <C> 
Financing activities:

Proceeds from first mortgage notes            $      --         $      --             $ 190,000               $      --
                                                                                                                      
Proceeds from long-term debt                         --            3,525                    --                      --
                                                                                                                      
Payments of long-term debt                         (653)            (329)                   --                 (18,839)
                                                                                                                      
Net borrowings (payments) on revolving                                                                                
   credit agreement                              17,092           19,094                 1,000                  18,079
                                                                                                                      
Payment of dividends                                 --               --                (5,013)                     --
                                                                                                                      
Capital contribution                                 --               --                28,853                      -- 
                                             -------------------------------------------------      ------------------  
Net cash provided (used) by financing
   activities                                    16,439           22,290               214,840                    (760)
                                             -------------------------------------------------      ------------------ 
Net increase (decrease) in cash and
   cash equivalents                              (2,099)           2,561                 1,896                       6
                                                                        
Cash and cash equivalents at beginning                                  
   of period                                      4,458            1,897                     1                     179
                                             -------------------------------------------------      ------------------ 
Cash and cash equivalents at end of
  period                                      $   2,359        $   4,458             $   1,897               $     185
                                             -------------------------------------------------      ------------------ 

Supplemental cash flow information:

Cash paid (received) during the period 
  for:

   Interest                                   $ 28,386         $  26,817             $  12,511               $   5,267

   Income taxes                                    (18)            1,865                    --                  12,092

Supplemental schedule of non-cash
   operating and financing activities:

Dividends declared and payable                $     --         $      --             $   1,749               $      --
</TABLE> 

See accompanying notes.

                                                                              24
<PAGE>
 
                       Gulf States Steel, Inc. of Alabama

                          Notes to Financial Statements

                                October 31, 1997
                                      

1. Significant Accounting Policies

Description of the Company

The Company owns and operates a fully integrated steel mill in Gadsden, Alabama,
which has been a leading producer of steel products in the Southern United
States since its inception in 1904. Approximately 80% of the Company's employees
are covered under a contract with the United Steelworkers of America (the
"USWA") which expires on October 1, 2000.

The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of Gulf States Steel, Inc. of
Alabama (GSS) and its wholly-owned subsidiary, Alabama Structural Beams, Inc.
(ASB) (collectively the Company or Successor) since the Acquisition (see Note 2)
on April 21, 1995. GSS is a wholly-owned subsidiary of GSS Holding Corp.
(Holding), a Delaware corporation, which is controlled by Watermill Ventures,
Ltd. The accompanying Predecessor financial statements present the combined
financial position, results of operations and cash flows of GSS, ASB, DSC
Equipment Associates, LTD. (DSC), Will's Creek Associates (WCA) and Villa II
Associates (VA) prior to the Acquisition.

All material intercompany accounts and transactions have been eliminated.

Cash Equivalents

Investments with maturities of three months or less at the time of purchase are
considered to be cash equivalents.

Income Taxes

The Company (GSS and ASB) is included in the consolidated federal income tax
return of its parent. Under terms of a federal tax sharing agreement with its
parent, federal income tax expense is allocated to GSS and ASB on a separate
return basis.

Inventories

The Company's inventories are valued at the lower of cost, as determined by the
first-in, first-out (FIFO) method, or market. The Predecessor's inventories were
valued at the lower of cost, as determined by the last-in, first-out (LIFO)
method, or market.

                                                                              25
<PAGE>
 
                       Gulf States Steel, Inc. of Alabama

                    Notes to Financial Statements (continued)


1. Significant Accounting Policies (continued)

Property, Plant and Equipment

Property, plant and equipment for the Predecessor and for the Company subsequent
to the Acquisition is stated at cost. Property, plant and equipment acquired by
the Company in the Acquisition is recorded at an amount which represents the
remaining portion of the purchase price after allocation of fair value to other
acquired current assets and assumed liabilities and which is not in excess of
the fair value. Depreciation is computed using the straight-line method over
estimated useful lives of 3 to 12 years.

Deferred Charges

The Company's deferred charges include debt issuance costs which are expected to
benefit future periods and are being amortized over eight years. The
Predecessor's deferred charges included organization, preoperating and prepaid
lease costs which were expected to benefit future periods and were being
amortized over five years. Financing costs for the Predecessor's restructured
senior secured notes were also being amortized over five years.

Earnings Per Share

Earnings per share is based upon the weighted average number of common shares
outstanding and the dilutive common equivalent shares. The Company has
outstanding common stock warrants subject to put options to purchase 190,000
shares of common stock. The warrants are considered common equivalent shares
and, if dilutive, are included in the average shares outstanding using the
treasury stock method. Earnings per share data for the Predecessor for the
periods prior to the Acquisition has been omitted because its capital structure
is not comparable to that of the Company.

The Financial Accounting Standards Board (FASB) issued Statement No. 128
Earnings Per Share which is effective for the Company for fiscal 1998. This
statement is not expected to have a material effect on the Company's financial
statements when adopted.

                                                                              26
<PAGE>
 
                      Gulf States Steel, Inc. of Alabama

                   Notes to Financial Statements (continued)


1. Significant Accounting Policies (continued)

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.


2. Acquisition

On April 21, 1995, the Company (f/k/a Gulf States Steel Acquisition Corp.)
completed an acquisition of substantially all of the assets and certain
liabilities of the Gadsden, Alabama facilities of Gulf States Steel, Inc. of
Alabama and other affiliates, collectively referred to as the Predecessor (the
Acquisition). Funds for the Acquisition were obtained from the net proceeds of
the sale of 190,000 units, each consisting of a $1,000 face amount of 13.5%
First Mortgage Note and a Warrant to purchase one share of common stock, and a
capital contribution from Holding to the Company of $28.9 million in cash and a
$15 million note issued by Holding to the seller.

The Acquisition was accounted for using the purchase method of accounting and is
included in the Company's financial statements from the date of the Acquisition.
In connection with the Acquisition of the Predecessor for approximately $202
million cash (including direct acquisition expenses) plus a note of $15 million,
the Company acquired assets with a fair value of $273 million and assumed
liabilities of $56 million.

During December 1996, the Company agreed to pay the seller $1 million in
settlement of certain liabilities related to the purchase of the Company. This
settlement was less than the estimated liability recorded in connection with the
acquisition and resulted in a gain of $893,000 which is reflected in the results
of operations for the year ended October 31, 1996.

The following unaudited pro forma information presents the results of operations
as though the aforementioned Acquisition, which occurred on April 21, 1995, had
occurred as of the beginning of the period presented below (dollars in
thousands):

<TABLE> 
<CAPTION> 
                                                     Period from November
                                                     1, 1994 to April 20,
                                                             1995
                                                    -----------------------
                                                        (Predecessor)
<S>                                                 <C> 
Net sales                                              $         232,618
Net income                                                        11,378
</TABLE> 

                                                                              27
<PAGE>
 
                      Gulf States Steel, Inc. of Alabama

                   Notes to Financial Statements (continued)


3. Inventories

Inventories consist of the following (dollars in thousands):

<TABLE> 
<CAPTION> 
                                                October 31,
                                         1997                  1996
                                ---------------------------------------------
<S>                             <C>                      <C>   
Raw materials                      $          19,534     $          16,920
Work-in-process                               13,528                11,803
Finished goods                                21,589                29,660
                                ---------------------------------------------
                                   $          54,651     $          58,383
                                =============================================
</TABLE> 

At the time of the Acquisition, the purchase price allocated to inventories
resulted in a $13.2 million write-up from the Predecessor's historical cost. The
$13.2 write-up was expensed as the inventories were sold during the period from
April 21, 1995 to July 31, 1995. This is a non-recurring cost.


4. Property, Plant and Equipment

Property, plant and equipment consists of the following (dollars in thousands):

<TABLE> 
<CAPTION> 
                                                October 31,
                                         1997                  1996
                                ---------------------------------------------
<S>                             <C>                      <C>   
Land                               $           1,268     $           1,268
Buildings                                      6,089                 6,055
Machinery and equipment                      216,520               186,943
Construction in progress                      14,460                14,982
                                ---------------------------------------------
                                             238,337               209,248
Accumulated depreciation                     (40,631)              (22,355)
                                =============================================
                                   $         197,706     $         186,893
                                =============================================
</TABLE> 

During 1997, the Company recorded a $1.8 million charge to write down assets of
the blooming mill that is being shut down.

Effective October 31, 1997, the Company changed its method of accounting for
costs incurred for process reengineering. These costs, totaling $2.6 million at
October 31, 1997, were previously capitalized by the Company and are being
written off in 1997 as the cumulative effect of an accounting change. This
accounting change is in accordance with a consensus reached by the Emerging
Issues Task Force, Issue 97-13, Accounting for Costs Incurred in Connection with
a Consulting Contract or an Internal Project That Combines Business Process
Reengineering and Information Technology Transformation. The income tax benefit
relating to this write-off is reserved by a deferred income tax valuation
allowance. The effect of this accounting change is not material for years prior
to 1997.

                                                                              28
<PAGE>
 
                      Gulf States Steel, Inc. of Alabama

                   Notes of Financial Statements (continued)


5. Long-Term Debt

Long-term debt of the Company consists of the following (dollars in thousands):

<TABLE> 
<CAPTION> 
                                                October 31,
                                         1997                  1996
                                ---------------------------------------------
<S>                             <C>                      <C>    
Revolving credit facility          $          37,186     $          20,094
First mortgage notes                         188,470               188,192
Equipment notes                                2,543                 3,196
                                ---------------------------------------------
                                             228,199               211,482
Less current portion                            (643)                 (643)
                                ---------------------------------------------
                                   $         227,556     $         210,839
                                =============================================
</TABLE> 

Revolving Credit Facility

As of October 31, 1997, the Company had a $70 million revolving credit facility
with two banks which was scheduled to expire on April 21, 2000. Available
borrowings were subject to limits based on eligible accounts receivable and
inventories, less outstanding letters of credit. The Company was committed to
maintaining a minimum availability at all times of $10 million. Interest on
borrowings under the facility was calculated, at the Company's option, at either
the bank's Eurodollar rate plus an applicable margin, which was initially 3.25%,
or the prime rate plus 1%. The interest rate in effect at October 31, 1997 was
8.91%. Obligations under the revolving credit facility were secured by accounts
receivable and inventories. Under the terms of the credit facility, the Company
was required to maintain a ratio of consolidated EBITDA (earnings before
interest, income taxes, depreciation and amortization, as defined) to interest
expense plus consolidated current maturities of long-term liabilities, as
defined, of 1.0 to 1.0. Additionally, if the revolving loan balance exceeded $45
million or borrowing availability under the facility was less than $20 million
at the end of any fiscal quarter, certain other financial covenants applied.

On November 13, 1997, the Company entered into an $80 million credit facility
which included a $70 million revolving credit facility and $10 million equipment
financing facility. Available borrowings on the revolving credit facility are
subject to limits based on eligible accounts receivable and inventories, less
outstanding letters of credit. This credit facility has an original term of
three years through November 13, 2000, at which time the agreement will
automatically renew itself for one-year terms thereafter. This facility was used
to pay off the outstanding amount of the previous $70 million revolving credit
facility. Borrowings under the facility bear interest, at the Company's option,
at either the adjusted LIBOR rate plus an applicable margin, which is initially
3.00%, or the prime rate plus .75%. Obligations under the revolving credit
facility are secured by inventories and accounts receivable. Under the revolving
credit facility, the Company is required to maintain at all times a stated
amount of consolidated adjusted tangible net worth, as defined. In November,
1997, in connection with the refinancing of the revolving

                                                                              29
<PAGE>
 
                      Gulf States Steel, Inc. of Alabama

                   Notes to Financial Statements (continued)


5. Long-Term Debt (continued)

credit facility, the Company recorded an extraordinary expense of $1.0 million,
consisting of a write-off of unamortized debt issuance costs and a prepayment 
penalty.

First Mortgage Notes

The First Mortgage Notes (Notes) mature April 15, 2003. Interest on the Notes
accrues at 13.5% per annum with semiannual interest payments due on April 15 and
October 15. Under the Notes, the Company is required to make excess cash flow
payments, as defined, beginning with the fiscal year ending October 31, 1996.
The Company did not have excess cash flow, as defined, in the fiscal year ending
October 31, 1997 or 1996, therefore no payment was required. The Notes are
senior obligations of the Company and are secured by substantially all of the
assets of the Company except accounts receivable and inventories. The Notes are
redeemable at the option of the Company on or after April 15, 1999 at amounts
ranging from 106.75% of face value in 1999 to 100.00% of face value in 2001 and
thereafter. The Company is required to purchase all of the outstanding Notes in
the event of a change of control and to offer to purchase a portion of the Notes
in the event of one or more public equity offerings. The Notes impose certain
limitations on the Company including the ability to incur additional
indebtedness, pay dividends, make certain other restricted payments, create
liens, consummate certain mergers or consolidations or sell substantially all of
the Company's assets.

The Company has 190,000 warrants outstanding, which were included with the Notes
in the units sold by the Company. Each warrant entitles the holder thereof to
purchase one share of common stock, subject to certain adjustments, at a price
of $.01 per share. The warrants are exercisable upon the occurrence of an
Exercise Event (as defined in the warrant agreement) and expire 180 days after
becoming exercisable, but in any event no later than April 15, 2003. Pursuant to
the warrant agreement, under certain circumstances the Company or Holding is
required to make an offer to purchase all outstanding warrants and warrant
shares in cash at a price equal to the current market value, as defined,
thereof. The warrants have been assigned a value resulting in a debt discount of
$2,225,000 at issuance, which is being amortized over the term of the Notes. The
warrants are reflected as common stock warrants subject to put options in the
Company's accompanying consolidated balance sheets.

Equipment Notes

Principal and interest payments are made monthly, with the interest rates from
3.65% above the LIBOR rate to prime plus 0.75%. The Notes mature from April 1,
2001 to October 1, 2001. The Equipment Notes are secured by a security interest
in equipment that is purchased with the proceeds of these notes.

                                                                              30
<PAGE>
 
                      Gulf States Steel, Inc. of Alabama

                   Notes to Financial Statements (continued)


5.  Long-Term Debt (continued)

Maturities of long-term debt consists of the following (dollars in thousands):

<TABLE> 
<S>                                                    <C> 
1998                                                                  $     643
1999                                                                     37,829
2000                                                                        643
2001                                                                        623
2002                                                                         --
Thereafter through 2003                                                 190,000
                                                       ------------------------
                                                                      $ 229,738
Less unamortized discount on the Notes                                   (1,539)
                                                       ========================
                                                                      $ 228,199
                                                       ========================
</TABLE> 

For the years ended October 31, 1997 and 1996, interest of $2.0 million and $2.2
million was capitalized, respectively.



6. Stockholders' Equity and Partners' Capital

Changes in stockholder's equity (Successor) and stockholders' equity and
partners' capital (Predecessor) were as follows (dollars in thousands):

<TABLE> 
<CAPTION> 
                                                                       Period from           Period from
                                       Year ended October 31,       April 21, 1995 to      November 1, 1994
                                        1997             1996       October 31, 1995      to April 20, 1995
                                  ----------------------------------------------------    -------------------
                                                      (Successor)                            (Predecessor)
<S>                               <C>                 <C>           <C>                   <C>   
Balance at beginning of period        $ 37,966        $ 38,336           $     --              $ 45,841
                                                                                    
   Net income (loss)                   (18,498)           (370)             1,245                12,802
                                                                                    
   Dividends paid and payable               --              --             (6,762)                   --
                                                                                    
   Capital contributions                    --              --             43,853                43,853
                                  ----------------------------------------------------    -------------------
Balance at end of period              $ 19,468        $ 37,966           $ 38,336              $ 58,643
                                  ====================================================    ===================
</TABLE> 

                                                                              31
<PAGE>
 
                      Gulf States Steel, Inc. of Alabama

                   Notes to Financial Statements (continued)


7. Stock Option Plan

Holding's 1995 Employee, Director and Consultant Stock Option Plan (Holding
Stock Option Plan) provides for the issuance of up to 50,000 shares of Gulf
States Steel Holding Corporation non-voting, $0.01 par value common stock
through grants of incentive stock options and non-qualified stock options (for
Holding's Class C common stock) to key employees, directors and consultants of
Holding and its subsidiaries (including the Company).

The options vested 40% on April 21, 1997, and 20% per annum for the next three
years. Options expire ten years after the grant date unless the employee owns
more than 10% of the total combined value of all classes of capital stock of the
Company or an affiliate whereby the options will expire in five years. The
Company accounts for its stock options in accordance with APB Opinion No. 25 and
related interpretations, and intends to continue to do so.

Options granted pursuant to the Holdings Stock Option Plan become immediately
exercisable upon the occurrence of a Change in Control (as defined). The
purchase price for shares as to which an option is exercised may be payable,
among other things, by delivery of a personal, interest bearing recourse note.
At the election of an employee the Company is required to repurchase, in any
fiscal year, up to 20% of the options granted to such employee (or 20% of the
shares acquired pursuant to the exercise of options), up to an aggregate of 60%
of the options and/or the shares.

The fair value of each option is estimated on the date of the grant using the
minimum value method with the following weighted average assumptions used in
1997: dividend yield of zero percent, risk-free interest rate of 6.34%, and
expected life of ten years. Based on this calculation, the fair value of the
options is nominal.

A summary of the status of the Holding Stock Option Plan as of October 31, 1997
and 1996, and the changes during those dates, is presented below:

<TABLE> 
<CAPTION> 
                                                     1997                               1996
                                        -------------------------------    --------------------------------
                                                          Weighted                            Weighted
                                                          Average                             Average
                                           Shares      Exercise Price         Shares       Exercise Price
                                        -------------------------------    --------------------------------
<S>                                     <C>            <C>                  <C>            <C> 
Outstanding at beginning of year         $    38,600    $     0.01          $       --     $        --

Granted                                          --             --               41,000            0.01

Canceled                                         --             --               (2,400)           0.01
                                        ============                       ============    
Outstanding at end of year               $    38,600          0.01          $    38,600            0.01
                                        ============                       ============    
Options exercisable at end of year            15,440                                --
</TABLE> 

                                                                              32
<PAGE>
 
                      Gulf States Steel, Inc. of Alabama

                   Notes to Financial Statements (continued)


7.  Stock Option Plan (continued)

The following table summarizes information about the stock options outstanding
at October 31, 1997:

<TABLE> 
<CAPTION> 
                                      Options Outstanding                     Options Exercisable
                               ----------------------------------      ----------------------------------
                                                    Weighted
                                    Number           average               Number           Weighted
                                outstanding at      remaining          outstanding at       average
                                 October 31,       contractual           October 31,        exercise
  Range of exercise prices           1997             life                  1997             price
-----------------------------------------------------------------      ----------------------------------
<S>                             <C>                <C>                 <C>              <C> 
$0.01                                 38,600               8.5                15,440    $        0.01
</TABLE> 

Had compensation expense for the Company's stock option plan been determined
based on the fair value at the grant date for awards under this plan, consistent
with the method of FASB Statement No. 123, the Company's net loss would not have
increased for 1997 or 1996. The effects of FASB Statement No. 123 on pro forma
net loss in 1997 and 1996 is not likely to be representative of the effects on
pro forma net income or loss in future years.


8. Employee Profit Sharing

GSS is required by the terms of an agreement, which expires October 1, 2000,
between GSS and the United Steelworkers of America (the Union), to make
quarterly profit sharing payments to its union employees. Such payments are
16.5% of profits excluding extraordinary items, pre-tax income or loss from
significant sales of property, plant and equipment, income and investments
applicable to affiliates, cumulative effect on prior years of changes in
accounting principle, pre-tax income or loss from increases or decreases in
value of equipment permanently taken out of service and deferred costs arising
out of permanent closure of any department of substantial portion. In addition,
GSS makes quarterly profit sharing payments to salaried administrative personnel
equivalent to 9.75% of profits before deduction for profit sharing and income
tax expense, with inventories valued on the basis of the lower of cost, on a
first-in, first-out basis, or market.

ASB is required by the terms of an agreement with the Union to make quarterly
profit sharing payments to its Union employees. Such payments are 10% of profits
before taxes and before deduction for profit sharing.

                                                                              33
<PAGE>
 
                    Gulf States Steel, Inc. of Alabama    
                                                            
                  Notes to Financial Statements (continued) 


9.    Income Taxes

The Company is included in the consolidated federal income tax return of its
parent. The federal tax sharing agreement with its parent requires the Company
to pay to its parent an amount equivalent to its federal income tax expense as
if the Company was filing a separate tax return.

The components of net deferred tax amounts recognized in the balance sheets are
as follows (dollars in thousands):
<TABLE> 
<CAPTION> 

                                                                              October 31,
                                                                       1997                  1996
                                                              ---------------------------------------------
<S>                                                          <C>                         <C> 
Deferred tax liabilities:
         Basis of property, plant and equipment                        $21,793               $13,858
         Accrued gain sharing                                                -                    96
Allowance for doubtful accounts                                            245                   171
                                                              ---------------------------------------------
Total deferred tax liabilities                                         $22,038               $14,125
Deferred tax assets:
Net operating loss carryforward                                        $23,550               $10,009
Alternative minimum tax credit carryforward                              2,048                 2,048
Accrued employee benefits                                                3,174                 2,613
Environmental                                                                -                   279
Inventories                                                                662                   557
                                                              ---------------------------------------------
Total deferred tax assets                                              $29,434               $15,506
Valuation allowance                                                     (5,398)                    -
                                                              ---------------------------------------------
Net deferred tax asset                                                 $(1,998)              $(1,381)
                                                              =============================================
</TABLE> 
At October 31, 1997, the Company has net operating loss carryforwards of
approximately $63,392,000 that expire in 2011 and 2012.

                                                                              34
<PAGE>
 
                    Gulf States Steel, Inc. of Alabama    
                                          
                  Notes to Financial Statements (continued) 

10.   Income Taxes (continued)

The Company's effective tax rate differs from the applicable U.S. federal
statutory rate for the period due to the following:

<TABLE> 
<CAPTION> 

                                                                         Period from           Period from
                                                                        April 21, 1995         November 1
                                          Year ended October 31,         to October 31,          1994 to
                                          1997             1996              1995            April 20, 1995
                                    ----------------- ---------------- -----------------    ------------------
                                                        (Successor)                           (Predecessor)
<S>                                 <C>               <C>              <C>                  <C> 
Tax expense (benefit) at the
   federal statutory rate                 (35.0)%           (35.0)%           35.0%                35.0%
Increase (decrease) resulting from:
   State income taxes                      (2.1)%            (3.3)             3.3                  2.1
   Expenses not tax deductible              0.9%              3.8              0.7                  -
Deferred income tax valuation
   allowance                               32.5%              -                -                    -
(Income) loss from affiliates with no
    associated (tax benefit) tax            -                 -                -                   (0.1)
Benefit of AMT credit                       -                 -                -                   (2.5)
Other                                      (0.9)%            (7.7)             3.2                  1.3
                                    ----------------- ---------------- -----------------    ------------------
Effective rate                             (4.6)%           (42.2)%           42.2%                35.8%
                                    ================= ================ =================    ==================
</TABLE> 

The provision (benefit) for income taxes consists of the following (dollars in
thousands):
<TABLE> 
<CAPTION> 

                                                                         Period from           Period from
                                                                        April 21, 1995         November 1, 
                                         Year Ended October 31,         to October 31,       1994 to April 20,
                                          1997             1996              1995                 1995
                                    ----------------- ---------------- -----------------    ------------------
                                                        (Successor)                           (Predecessor)
<S>                                 <C>               <C>              <C>                 <C>                       
Current:
   Federal                             $      (130)      $       864      $     1,151          $     4,831
   State                                       (13)                -                6                  471
                                    ----------------- ---------------- -----------------    ------------------
                                              (143)              864            1,157                5,302
Deferred:
   Federal                                    (562)           (1,037)            (329)               1,662
   State                                       (55)              (97)              82                  162
                                    ----------------- ---------------- -----------------    ------------------
                                              (617)           (1,134)            (247)               1,824
                                    ----------------- ---------------- -----------------    ------------------
                                       $      (760)      $      (270)     $       910          $     7,126
                                    ================= ================ =================    ==================
</TABLE> 
Income taxes payable at October 31, 1997 and 1996 include amounts for federal
income taxes of $174,000 and $156,000, respectively, due Holding under a tax
sharing agreement.

                                                                              35
<PAGE>
 
                    Gulf States Steel, Inc. of Alabama    
                                          
                  Notes to Financial Statements (continued) 

10. Related Parties

The Company has separate management agreements with two affiliates and an
insurance service agreement with another affiliate. The management agreements
obligate the Company to pay annual fees totaling $1,250,000. The insurance
agreement calls for fees equal to 15% of the total annual cost of the Company's
insurance program. All agreements contain provisions for reimbursement of
expenses in addition to the annual fees. Total amounts paid to affiliates for
services under management agreements for the years ended October 31, 1997 and
1996 and for the period from April 21, 1995 to October 31, 1996 were $1,545,000,
$1,378,000 and $722,000, respectively, including $295,000, $128,000 and $66,000
in reimbursed expenses. Total fees paid to an affiliate under the insurance
services agreement for the years ended October 31, 1997 and 1996 totaled
$213,000 and $175,000, respectively. Fees totaling $3 million were paid to
related parties and affiliates for services rendered and as reimbursement for
expenses incurred in connection with the Acquisition and the offering of the
Notes.

Notes receivable from officers of $750,000 at October 31, 1997 and 1996 are
evidenced by promissory notes bearing interest at 6.5% and becoming due on April
15, 2015, or on such earlier date upon the occurrence of certain events as
stated in each such promissory note, including upon termination of employment
for cause. The indebtedness is secured by a pledge of the officers' interest in
a limited partnership.

The Predecessor had significant transactions with its parent, primarily related
to management services provided to the Predecessor. Management fees and other
expenses charged to the Predecessor by its parent for the period from November
1, 1994 to April 20, 1995 were approximately $3.4 million.

                                                                              36
<PAGE>
 
                    Gulf States Steel, Inc. of Alabama    
                                          
                  Notes to Financial Statements (continued) 

11. Commitments and Contingencies

Commitments

The Company has two purchase agreements with suppliers whereby agreed-upon
volumes of ore pellets will be supplied. Contract volumes under one agreement
are established six months prior to the beginning of each contract year with a
minimum of 695,000 natural metric tons. Volumes under the other agreement have
been established at 688,000 natural metric tons for contract years 1998 and
1999, and 172,000 natural metric tons for contract year 2000. However, the
Company can increase or decrease the amounts under the second agreement by ten
percent at its discretion. Prices under the agreements are adjusted annually
based on a formula. Amounts paid under the contracts, excluding freight charges,
totaled $42.3 million and $46.6 million for the years ended October 31, 1997 and
1996, respectively, $24.7 million for the period from April 21, 1995 to October
31, 1995, and $19.9 million for the period from November 1, 1994 to April 20,
1995. At October 31, 1997, the Company has a minimum obligation of approximately
$36.5 million under the above agreements.

The Company has commitments for construction projects related to plant expansion
and environmental improvements of approximately $6.8 million at October 31,
1997.

Although the Company has no obligation with respect to the senior subordinated
notes, the seller note or redeemable preferred stock of Holding, the sole source
of funds for these obligations is expected to be dividend distributions or loans
from the Company. The Holding's senior subordinated notes require Holding to
cause the Company to pay dividends to Holding to the maximum extent permitted
under the indenture for the Notes and applicable law. Accordingly, on September
6, 1995, the Company's Board of Directors approved a dividend to Holding in the
amount of $5,013,000, or $1.39 per share. Effective October 31, 1995, a dividend
of $1,749,000, or $0.48 per share, was declared and paid on December 14, 1995.
No dividends were declared for the years ended October 31, 1997 and 1996.

Contingencies

The Company is subject to a broad range of federal, state and local
environmental laws and regulations, including those governing discharges to the
air and water, the handling and disposal of solid and/or hazardous wastes, and
the remediation of contamination associated with releases of hazardous
substances. The Company conducts continuous environmental compliance and
monitoring programs and believes that it is currently in substantial compliance
with all known material and applicable environmental regulations except as
follows:

                                                                              37
<PAGE>
 
                    Gulf States Steel, Inc. of Alabama    
                                          
                  Notes to Financial Statements (continued) 

11. Commitments and Contingencies (continued)

During 1992, the Environmental Protection Agency (EPA) asserted that a waste
water ditch system on the Company's property should be remediated and closed. At
October 31, 1994, the Predecessor had remediated a portion of the ditch. The
Company believes that the most probable course of action for the remainder of
the ditch will involve sampling soil and water and possibly removing some
contaminated soil at a nominal cost. The less likely, but more expensive course
of action would involve sampling soil and water, closing and securing the ditch
with the possibility of some contaminated soil remaining in place, and
monitoring for any migration of the contaminants. This remediation would cost
$1.1 million for closure, with post-closure monitoring costs over thirty years
of $2.8 million. The Predecessor also agreed to a $1.1 million civil penalty, of
which $300,000 was to be offset by future capital expenditures related to this
issue. During 1997, the $300,000 of capital expenditures was not approved by the
EPA, and the $300,000 was assessed as a penalty, with accrued interest. This
amount was paid and expensed in 1997.

During 1996, the Company was contacted by the U. S. Department of Justice (DOJ),
at the request of the U.S. Environmental Protection Agency (EPA), about alleged
violations of its water discharge permit. Since December 21, 1994, there have
been exceedences of certain of the permit limits, but the Company asserts these
have been sporadic and non-continuous, and the Company has taken, and continues
to take, remedial measures. During 1997, the DOJ filed its action under the
provisions of the Clean Water Act against the Company.

The DOJ has indicated that it was seeking three things in the Clean Water Act
case: (i) injunctive relief for plant water treatment upgrades at the plant;
(ii) a "significant" penalty; and (iii) some remediation of Black Creek, the
off-site receiving stream for the Company's discharge. Basic agreement has been
reached regarding the waste water treatment upgrades and will require future
capital expenditures already included in the Company's capital expenditure
plans. Negotiations are continuing on penalties, including the possibility that
some portion of any monetary penalty will be offset by capital expenditures.

The EPA has conducted, and is continuing to conduct, sampling of sediments in
Black Creek and Lake Gadsden. The EPA has indicated that it is considering a
removal action of sediments in Black Creek, and possibly Lake Gadsden, using
federal funds. Discussions have been opened with the EPA and the DOJ as to what
potential liability, if any, the Company may have in this regard. The Company's
position is that the sediment contamination is largely the result of prior
owners' discharges, which are reasonably quantifiable, and for which the Company
should not be held responsible. Moreover, the Company also cannot be held
responsible to the extent the sediment data result from federally permitted
discharges by the Company.

                                                                              38
<PAGE>
 
                    Gulf States Steel, Inc. of Alabama    
                                          
                  Notes to Financial Statements (continued) 

11. Commitments and Contingencies (continued)

It is not known at this time the scope or extent of sediment remediation the EPA
will deem necessary, nor is it possible to quantify the total cost of any such
remediation. If the EPA proceeds with a federally-funded remediation, it may
later seek cost recovery from potentially responsible parties, including the
Company. The Company believes it would have valid defenses to any cost recovery
action that would minimize or eliminate any liability it may have for the costs
of any remediation.

Although the Company believes that it has adequately provided for the cost of
all known environmental conditions, the applicable agencies could insist upon
different, and possibly more costly, remediative measures than those believed by
the Company to be adequate or required by existing law. The Company has accrued
$750,000 at October 31, 1997 for unresolved environmental matters and does not
expect that the final resolution of these matters will have a significant effect
on the Company's financial position, results of operations or liquidity.

During fiscal years 1997 and 1996, and during the periods from April 21, 1995 to
October 31, 1995 and from November 1, 1994 to April 20, 1995, capital
expenditures for environmental projects were $4.1 million, $6.4 million, $4.0
million and $2.9 million, respectively, and environmental compliance expenses
were $6.0 million, $5.8 million, $2.5 million and $3.1 million, respectively.
The Company currently estimates that expenditures for environmental capital
projects in fiscal 1998 will be approximately $3.1 million.

The Company is involved in litigation arising from its normal operations,
including employee matters, the resolution of which is not expected to have a
significant effect on the Company's financial position, results of operations or
liquidity.

                                                                              39
<PAGE>
 
                    Gulf States Steel, Inc. of Alabama    
                                          
                  Notes to Financial Statements (continued) 

12. Pension Plan

The Company has a defined contribution pension plan covering all employees
represented by the Union. For the period from April 1, 1997 to October 31, 1997,
the Company's required contribution to the plan was $.70 per hour for all paid
qualified hours for each eligible participant. For the period from November 1,
1996 to March 31, 1997, and during fiscal years 1996 and 1995, the Company's
required contribution to the plan was $.60 per hour. Pension expense for the
years ended October 31, 1997 and 1996, and for the periods from April 21, 1995
to October 31, 1995 and November 1, 1994 to April 20, 1995 was $2.2 million,
$2.1 million, $1.1 million and $1.0 million, respectively.


13. Postretirement Benefit Plan

Effective April 1, 1996 for union employees and November, 1996 for non-union
employees, the Company initiated and sponsors defined benefit health care plans
that provide postretirement medical benefits to full-time employees who have
worked 30 years, or have reached the age of 60 with 15 years of service, or have
reached the age of 65 while in service with the Company. The plans are
contributory and contain other cost-sharing features such as deductibles and
coinsurance. The accounting for the plans anticipates future cost-sharing
changes to the written plans that are consistent with the Company's expressed
intent to increase the retiree contribution rate annually for the expected
general inflation rate for that year. The Company's policy is to fund the cost
of medical benefits in amounts determined at the discretion of management.

                                                                              40
<PAGE>
 
                    Gulf States Steel, Inc. of Alabama    
                                          
                  Notes to Financial Statements (continued) 

13. Postretirement Benefit Plan (continued)

The following table presents the plans' funded status reconciled with amounts
recognized in the Company's consolidated balance sheet (dollars in thousands):

<TABLE> 
<CAPTION> 

                                                                                 October 31,
                                                                            1997              1996
                                                                      ---------------- -----------------
<S>                                                                  <C>               <C> 
Accumulated postretirement benefit obligation:
   Retirees                                                             $       (340)    $      (185)
   Fully eligible active plan participants                                    (4,319)         (2,948)
   Other active plan participants                                            (11,069)         (7,301)
                                                                      ---------------- -----------------
                                                                             (15,728)        (10,434)
Plan assets at fair value                                                      3,493           3,373
                                                                      ---------------- -----------------
Accumulated postretirement benefit obligation
   in excess of plan assets                                                  (12,235)         (7,061)
Unrecognized obligation (asset):
   Unrecognized prior service cost                                              8,268          6,356
   Unrecognized net (gain) or loss                                              1,199            (74)
                                                                      ---------------- -----------------
   Accrued postretirement benefit cost                                   $     (2,768)    $      (779)
                                                                      ================ =================
</TABLE> 
Net periodic postretirement benefit cost includes the following components:

<TABLE> 
<CAPTION> 
   <S>                                                                <C>                <C> 
   Service Cost                                                         $         576    $       282
   Interest Cost                                                                1,079            464
   Actual return on assets                                                       (120)          (244)
   Net amortization and deferral                                                  458            277
                                                                      ---------------- -----------------
   Net periodic postretirement benefit cost                             $      1,993     $       779
                                                                      ================ =================
</TABLE> 

The annual assumed rate of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) is 7.5% for pre-65 medical costs and 6.0%
for post-65 medical costs for 1997 and is assumed to decrease gradually to 5% by
2002, and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
October 31, 1997 by $3,822,000, and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 1997 by
$428,000. The unrecognized prior service cost resulting from the Plans'
initiations is being amortized on a straight-line basis over seventeen years for
the Union Plan and eleven years for the Non-Union Plan, which is the average
remaining years of service of the Plans' participants.

                                                                              41
<PAGE>
 
                    Gulf States Steel, Inc. of Alabama    
                                          
                  Notes to Financial Statements (continued) 

13. Postretirement Benefit Plan (continued)

The discount rate used in determining the accumulated postretirement benefit
obligation was 7.75% and 8.25% at November 30, 1997 and 1996, respectively. The
trust holding the Union Plan's assets is subject to federal income taxes at a
34% tax rate. The Union Plan's assets are invested in U.S. Treasury obligations.
The expected long-term rate of return on plan assets, after estimated income
taxes, was 7.5% and 6.8% at November 30, 1997 and 1996, respectively.


14. Concentration of Credit Risk

The Company is one of the largest steel coil and plate producers in the Southern
United States, where most of its customers are located. Approximately 42% of its
sales are to wholesalers and the remaining 58% are to miscellaneous
manufacturers and end users. No customer accounted for as much as 10% of the
Company's net sales. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.


15. Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents approximates their fair value.
The carrying value of notes outstanding under the Revolving Credit Agreement
approximates its fair value. The fair market value of the First Mortgage Notes
at October 31, 1997 is $194,750,000.

                                                                              42
<PAGE>
 
                    Gulf States Steel, Inc. of Alabama    
                                          
                  Notes to Financial Statements (continued) 

16. Summary of Quarterly Results of Operations (unaudited)

The following is a summary of unaudited quarterly results of operations (dollars
in thousands, except per share data):
<TABLE> 
<CAPTION> 

                                                           Three months ended
                             --------------------------------------------------------------------------------
                                  October 31,           July 31,            April 30,      January 31, 1997
                                     1997                1997                 1997
                             ------------------- -------------------- ------------------- -------------------
<S>                          <C>                 <C>                  <C>                 <C> 
Net sales                        $     109,863       $   108,402            $  106,928        $   111,317
Operating profit (loss)                    368              (543)                5,390              5,117
Loss before cumulative
   effect of accounting
   change                               (6,234)           (7,678)               (1,097)              (842)
Cumulative effect of
   accounting change                    (2,647)                -                     -                 -
Net loss                                (8,881)           (7,678)               (1,097)              (842)

Earnings per share:
   Loss before cumulative
     effect of accounting
     change                              (1.73)            (2.13)                 (.30)               (.23)

   Cumulative effect of
     accounting change                    (.73)                -                     -                 -

   Net loss                              (2.46)            (2.13)                 (.30)               (.23)

<CAPTION> 
                                                           Three months ended
                             -------------------------------------------------------------------------------
                                October 31,           July 31,           April 30,           January 31,
                                    1996                1996                1996                1996
                             ------------------- ------------------- ------------------- --------------------
<S>                         <C>                  <C>                <C>                  <C> 
Net sales                        $     123,285       $   114,540           $  104,676        $   111,782
Operating profit (loss)                 11,630             7,497                 (721)             5,597
Net income (loss)                        3,196               733               (4,149)              (150)
Net income (loss) per share                .84               .19                (1.15)              (.04)

</TABLE> 

                                                                              43
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 
-------  ------------------------------------------------
         ACCOUNTING AND FINANCIAL DISCLOSURE
         -----------------------------------

     None.


                                   PART III
                                   --------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------- --------------------------------------------------

     The information contained on pages 4, 5, 6 and 7 of Gulf States Steel, Inc.
of Alabama's Proxy Statement dated January 23, 1998, with respect to directors
and executive officers of the Company, is incorporated herein by reference in
response to this item.

ITEM 11. EXECUTIVE COMPENSATION
-------- ----------------------

     The information contained on pages 7, 8, and 9 of Gulf States Steel, Inc.
of Alabama's Proxy Statement dated January 23, 1998, with respect to directors
and executive officers of this Company, is incorporated herein by reference in
response to this item.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-------- -----------------------------------------------
         AND MANAGEMENT
         --------------

     The information contained on pages 2 and 3 of Gulf States Steel, Inc. of
Alabama's Proxy Statement dated January 23, 1998, with respect to directors and
executive officers of this Company, is incorporated herein by reference in
response to this item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------

     The information contained on pages 9, 10, and 11 of Gulf States Steel, Inc.
of Alabama's Proxy Statement dated January 23, 1998, with respect to directors
and executive officers of this Company, is incorporated herein by reference in
response to this item.

                                                                              44
<PAGE>
 
                                    PART IV
                                    -------

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
--------      ----------------------------------------------------
              ON FORM 8-K
              -----------

ITEM 14 (a)1. INDEX TO FINANCIAL STATEMENTS COVERED BY REPORT
------------- -----------------------------------------------
              OF INDEPENDENT AUDITORS
              -----------------------

     The Financial Statements of Gulf States Steel, Inc. of Alabama are included
in Item 8:

Balance Sheets
     Consolidated as of October 31, 1997 and 1996
Statements of Income
     Consolidated for the years ended October 31, 1997 and 1996 and the period
     April 21, 1995 to October 31, 1995 (Successor) and combined for the period
     November 1, 1994 to April 20, 1995 (Predecessor )
Statements of Cash Flows
     Consolidated for the years ended October 31, 1997 and 1996 and the period
     April 21, 1995 to October 31, 1995 (Successor) and combined for the period
     November 1, 1994 to April 20, 1995 (Predecessor)
Notes to Financial Statements

ITEM 14 (a)2. INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
------------- ---------------------------------------------------

     The following financial statement schedules of Gulf States Steel, Inc. of
Alabama are included in Item 14 (d):

<TABLE> 
<CAPTION> 
         Form 10-K Schedules     Description                         Page Number
         -------------------     -----------                         -----------
          <S>                    <C>                                 <C> 
                  II             Valuation and Qualifying Accounts        48
</TABLE> 

     All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.

                                                                              45
<PAGE>
 
ITEM 14 (a) 3.    EXHIBITS
--------------    --------

     The Exhibits listed on the Exhibit Index below are filed or incorporated by
reference as part of this report and such Exhibit Index is hereby incorporated
herein by reference.


                                 Exhibit Index
(a) Exhibits

Exhibit No.                        Description
-----------                        -----------

3.1            --Certificate of Incorporation of the Registrant, as amended.
                 (Incorporated by reference to Exhibit 3.1 to the Registrant's
                 registration statement on Form S-1, Registration No. 33-92496
                 filed with the Securities and Exchange Commission on May 19,
                 1995.)
3.2            --By-Laws of the Registrant (Incorporated by reference to Exhibit
                 3.2 to the Registrant's registration statement on Form S-1,
                 Registration No. 33-92496 filed with the Securities and
                 Exchange Commission on May 19, 1995.)
10.1           --Indenture, dated as of April 21, 1995 (the "Indenture") by and
                 between the Registrant and Shawmut Bank Connecticut, National
                 Association, as Trustee. (Incorporated by reference to Exhibit
                 4.1 to the Registrant's registration statement on Form S-1,
                 Registration No. 33-92496 filed with the Securities and
                 Exchange Commission on May 19, 1995.)
10.2           --Form of New Note (included as part of Exhibit 4.1 hereto)
                 (Incorporated by reference to Exhibit 4.2 to the Registrant's
                 registration statement on Form S-1, Registration No. 33-92496
                 filed with the Securities and Exchange Commission on May 19,
                 1995.)
10.3           --Intercreditor Agreement dated as of April 21, 1995, by and
                 among GSS Holding Corp., the Registrant, ASB Acquisition
                 Corp., NationsBank of Georgia, as Agent and Shawmut Bank
                 Connecticut, National Association, as Trustee. (Incorporated by
                 reference to Exhibit 4.3 to the Registrant's registration
                 statement on Form S-1, Registration No. 33-92496 filed with the
                 Securities and Exchange Commission on May 19, 1995.)
10.4           --Amendment to Intercreditor Agreement (see Exhibit 4.3 hereto)
                 dated as of November 13, 1997, by and among GSS Holding Corp.,
                 the Registrant, Alabama Structural Beam Corp., Fleet Capital
                 Corporation, as Agent, and State Street Bank and Trust Company,
                 as Trustee.
10.5           --Loan and Security Agreement dated November 13, 1997, by and
                 among the Registrant, Alabama Structural Beam Corp., Fleet
                 Capital Corporation, as Agent, and the financial institutions
                 listed therein.
10.6           --Asset Purchase Agreement dated January 13, 1995, by and among
                 Gulf States Steel, Inc. of Alabama, GSS Acquisition Corp. and
                 GSS Holding Corp., together with (i) Real Estate Purchase
                 Agreement dated January 13, 1995 by and between Wills Creek
                 Associates, Ltd. and GSS Acquisition Corp. (ii) Caster Purchase
                 Agreement dated January 13, 1995, between DSC Equipment
                 Associates, Ltd. and GSS Acquisition Corp. and (iii) Asset
                 Purchase Agreement dated January 13, 1995, between Alabama
                 Structural Beams, Inc. and Alabama Structural Beams Acquisition
                 Corp. (Incorporated by reference to Exhibit 10.1 to the
                 Registrant's registration statement on Form S-1, Registration
                 No. 33-92496 filed with the Securities and Exchange Commission
                 on May 19, 1995.)
10.7           --Assignment Agreement dated as of March 30, 1995, by and among
                 GSS Acquisition Corp. and the Registrant. (Incorporated by
                 reference to Exhibit 10.2 to the Registrant's registration
                 statement on Form S-1, Registration No. 33-92496 filed with the
                 Securities and Exchange Commission on May 19, 1995.)
10.8           --Assignment Agreement dated as of March 30, 1995, by and among
                 Alabama Structural Beams Acquisition Corp., a Delaware
                 corporation, and Alabama Structural Beams Acquisition Corp., an
                 Alabama corporation. (Incorporated by reference to Exhibit 10.3
                 to the Registrant's registration statement on Form S-1,
                 Registration No. 33-92496 filed with the Securities and
                 Exchange Commission on May 19, 1995.)

                                                                              46
<PAGE>
 
10.9           --Tax Sharing Agreement dated as of April 21, 1995, among GSS
                 Holding Corp. the Registrant and Alabama Structural Beam
                 Acquisition Corp. (Incorporated by reference to Exhibit 10.5 to
                 the Registrant's registration statement on Form S-1,
                 Registration No. 33-92496 filed with the Securities and
                 Exchange Commission on May 19, 1995.)
10.10          --Management Consulting Services Agreement dated April 21, 1995,
                 between the Registrant and Spectrum Management Company, Inc.
                 (Incorporated by reference to Exhibit 10.6 to the Registrant's
                 registration statement on Form S-1, Registration No. 33-92496
                 filed with the Securities and Exchange Commission on May 19,
                 1995.)
10.11          --Management Consulting Services Agreement dated April 21, 1995,
                 between the Registrant and Hancock Venture Partners, Inc.
                 (Incorporated by reference to Exhibit 10.7 to the Registrant's
                 registration statement on Form S-1, Registration No. 33-92496
                 filed with the Securities and Exchange Commission on May 19,
                 1995.)
10.12          --Insurance Services Agreement dated April 21, 1995, between the
                 Registrant and Risk Management Solutions, Inc. (Incorporated
                 by reference to Exhibit 10.8 to the Registrant's registration
                 statement on Form S-1, Registration No. 33-92496 filed with the
                 Securities and Exchange Commission on May 19, 1995.)
10.13          --GSS Holding Corp. 1995 Employee, Director and Consultant Stock
                 Option Plan (Incorporated by reference to Exhibit 10.9 to the
                 Registrant's registration statement on Form S-1, Registration
                 No. 33-92496 filed with the Securities and Exchange Commission
                 on May 19, 1995.)
10.14          --Iron Ore Sales Agreement dated as of May 5, 1994 by and between
                 Quebec Cartier Mining Company and the Registrant. (Incorporated
                 by reference to Exhibit 10.10 to the Registrant's registration
                 statement on Form S-1, Registration No. 33-92496 filed with the
                 Securities and Exchange Commission on May 19, 1995.)
10.15          --Employment contracts with named executive officers.
                 (Incorporated by reference to the Registrant's annual report
                 on Form 10-K for the fiscal year ended October 31, 1995 filed
                 with the Securities and Exchange Commission on January 27,
                 1996.)
11             --Computation of earnings per share.
12             --Computation of ratios.
21             --Subsidiaries of the Registrant (Incorporated by reference to
                 Exhibit 21 to the Registrant's registration statement on Form
                 S-1, Registration No. 33-92496 filed with the Securities and
                 Exchange Commission on May 19, 1995.)
27             --Financial Data Schedule.

                                                                              47
<PAGE>
 
ITEM 14 (b).    REPORTS ON FORM 8-K
------------    -------------------

         No reports on Form 8-K were filed during the fourth quarter ended
October 31, 1997.


ITEM 14 (c).    EXHIBITS
------------    --------

         The response to this portion of item 14 is submitted as a separate
section of this report.

ITEM 14 (d).    CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
------------    -----------------------------------------

                                                                     Schedule II

                      GULF STATES STEEL, INC. OF ALABAMA

                       Valuation and Qualifying Accounts

<TABLE> 
<CAPTION> 
                                           Balance at        Charged to      Deductions-        Balance at 
                                          Beginning of       Costs and      Write-offs(a)         End of 
Description                                  Period           Expenses                            Period
--------------------------------------------------------------------------------------------------------------
<S>                                       <C>                <C>            <C>                <C> 
Allowance for Doubtful accounts:

Year ended October 31, 1997               $1,050,000             --            660,126          $ 389,874


Year ended October 31, 1996               $1,509,000         (234,520)         224,480         $1,050,000

Period from April 21, 1995 to
  October 31, 1995 (Successor)            $1,509,000           (8,893)          (8,893)        $1,509,000

Period from November 1, 1994 to
   April 20, 1995 (Predecessor)           $1,509,000            4,987            4,987         $1,509,000
</TABLE> 

(a)  Uncollectible accounts written off, net of recoveries.

                                                                             48
<PAGE>
 
                      GULF STATES STEEL, INC. OF ALABAMA
                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

<TABLE> 
<CAPTION> 
                                                     GULF STATES STEEL, INC. OF ALABAMA
                                                                 (Registrant)
<C>                                                  <S> 
1/23/98                                              /s/ John D. Lefler
-------------------------                            -------------------------------------------------------
Date                                                 John D. Lefler, President and Chief Executive
                                                     Officer (Principal Executive Officer)

1/23/98                                              /s/ Hugh D. Bennett
-------------------------                            -------------------------------------------------------
Date                                                 Hugh D. Bennett, Vice President and CFO
                                                     (Principal Financial and Accounting Officer)
</TABLE> 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacity and on the dated indicated.

<TABLE> 
<C>                                                  <S> 
1/23/98                                              /s/ Steven E. Karol
-------------------------                            -------------------------------------------------------
Date                                                 Steven E. Karol, Chairman of the Board, Director

1/23/98                                              /s/ John D. Lefler
-------------------------                            -------------------------------------------------------
Date                                                 John D. Lefler, Director

1/23/98                                              /s/ Robert W. Ackerman
-------------------------                            -------------------------------------------------------
Date                                                 Robert W. Ackerman, Director

1/23/98                                              /s/ Dale S. Okonow
-------------------------                            -------------------------------------------------------
Date                                                 Dale S. Okonow, Director

1/23/98                                              /s/ William S. Karol
-------------------------                            -------------------------------------------------------
Date                                                 William S. Karol, Director

1/23/98                                              /s/ Howard H. Stevenson
-------------------------                            -------------------------------------------------------
Date                                                 Howard H. Stevenson, Director

1/23/98                                              /s/ Robert M. Wadsworth
-------------------------                            -------------------------------------------------------
Date                                                 Robert M. Wadsworth, Director

1/23/98                                              /s/ Alexander S. McGrath
-------------------------                            -------------------------------------------------------
Date                                                 Alexander S. McGrath, Director
</TABLE> 

                                                                              49