<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
                                      OR
  [   ]  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
                          THE SECURITIES ACT OF 1934

For the fiscal year ended September 28, 1997         Commission File No. 0-24492

                              CITATION CORPORATION
             (exact name of registrant as specified in its charter)

       DELAWARE                                                       63-0828225
(State of Incorporation)                                 (IRS Employer I.D. No.)

                        2 OFFICE PARK CIRCLE, SUITE 204
                           BIRMINGHAM, ALABAMA 35223
                    (Address of principal executive offices)

                                 (205) 871-5731
                        (Registrant's Telephone Number)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                  Name of each exchange
               Title of each class                 on which registered
               -------------------              ------------------------
                       None                               None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT

                          Common Stock, $.01 par value
                          ----------------------------
                                (Title of Class)

Indicate whether the registrant 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, and has been subject to such filing requirements for the past 90
days.

               Yes    X                         No ________ 
                   --------                                     

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   [ X ]

The aggregate market value of the registrant's voting Common Stock held by non-
affiliates of the registrant was approximately $162,767,163 as of December 15,
1997 based on the NASDAQ National Market System closing price on that date.

As of December 15, 1997 there were 17,782,600 shares of the registrant's Common
Stock, $.01 par value, outstanding.

                     DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareholders to be held on February 17, 1998 are incorporated by reference into
Part III of this Form 10-K.
<PAGE>
 
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
       Item No.                                                        Page No.
       --------                                                        --------
<S>                                                                    <C>
PART I
     1.   Business....................................................        3
     2.   Properties..................................................       18
     3.   Legal Proceedings...........................................       18
     4.   Submission of Matters to a Vote of Security Holders.........       19
          Executive Officers..........................................       19

PART II
     5.   Market for Registrant's Common Equity and Related
          Stockholder Matters.........................................       20
     6.   Selected Financial Data.....................................       21
     7.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations.........................       23
     8.   Financial Statements........................................       31
     9.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure.........................       60

PART III
     10.  Directors and Executive Officers of the
          Registrant..................................................        *
     11.  Executive Compensation......................................        *
     12.  Security Ownership of Certain Beneficial
          Owners and Management.......................................        *
     13.  Certain Relationships and Related Transactions..............        *

PART IV
     14.  Exhibits, Financial Statement schedules, and
          Reports on Form 8-K.........................................       61

SIGNATURES............................................................       63
</TABLE>

* Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareholders to be held on February 17, 1998 are incorporated by reference in
Part III of this Form 10-K.

                                       2
<PAGE>
 
                              CITATION CORPORATION

                                     PART I

ITEM 1:   BUSINESS

     Citation Corporation is a manufacturer of cast, forged and machined
components for the capital and durable goods industries.  At its 20 operations
in nine states, its approximately 6,000 employees produce aluminum, iron and
steel castings, steel forgings and machined and assembled components for
automobiles, light, medium and heavy trucks, off-highway construction equipment,
agricultural equipment, pumps, compressors and industrial valves, machine tools,
aircraft and other durable goods.  The Company's stock is traded on the Nasdaq
National Market under the symbol "CAST."

BUSINESS CONDITIONS

     Within its markets, Citation identifies the following trends;

     Outsourcing.  Many of Citation's current and potential customers are large
     ------------                                                              
original equipment manufacturers (OEM's) including Caterpillar Inc., Ford Motor,
General Motors, Freightliner and other large multi-national corporations.
 
     In the past, many large OEM's were integrated manufacturers with large
component manufacturing capability in-house.  Today, many of these same
companies see their component operations as liabilities that are less cost
effective than independent suppliers and require significant capital and
management attention to maintain.  This applies to captive foundries and forge
shops that the OEM's have operated and, in some cases, continue to operate
today.

     Leading Edge Reports, a market research firm which prepared the 1996 market
study, "Foundry Products and Markets," has estimated that the captive share of
foundry shipments has dropped from approximately 29 percent in 1987 to less than
18 percent by 1996.  During the same period, however, the independent share has
risen from approximately 71 percent to slightly more than 82 percent.

     Citation believes that outsourcing is beneficial to its customers because
the Company provides a broad range of components and services to its customers
and is growing through acquiring other companies and adding internal capacity.
Further, Citation is one of the largest suppliers of its type and is, therefore,
capable of handling the requirements of major corporations wishing to outsource
castings or forgings.

     Supplier Consolidation.   Many OEM's, including those in markets served by
     -----------------------                                                   
Citation, are working to consolidate their supplier base.  Supplier
consolidation is attractive to these companies because it is more efficient to
deal with a smaller, but better equipped group of suppliers.  

                                       3
<PAGE>
 
Consolidation also allows them to practice a partnership process with vendors.

     In a partnership process, vendors are invited to participate in the product
development stage, which helps the customer reduce new product development
costs.  For the vendor, it offers the attractiveness of better understanding the
customer goals and the ability to design long term agreements acceptable to both
parties.  Supplier consolidation thus reduces costs to the customers and
improves the efficiency of the purchasing process.

     Citation supports customers who wish to consolidate suppliers by providing
engineering and design services through its Automotive Sales and Engineering
Division located in Southfield, Michigan and through its individual forge and
foundry locations.  Citation offers other value-added services as appropriate.
As a large, diverse, and financially healthy corporation, Citation believes
supplier consolidation is a positive trend.

     Foundry/Forge Shop Closings.  Both foundry and forge industries, while
     ----------------------------                                          
collectively very large in total U.S. shipments (approximately $22.8 billion in
1996), are composed of a multitude of very fragmented companies, many of which
are regional businesses with focus on a single market and/or product.  While
there are a number of larger companies in the industry, a relatively small
number have revenues exceeding $100 million and most are smaller than $50
million.

     Further, the foundry/forge industry is consolidating, with a few larger
corporations such as Citation growing through acquisition.  According to Leading
Edge, approximately 1,000 foundries closed down in the 10-year period from 1987
to 1997.  This included both very large captive facilities which were not cost
effective and small foundries that could not keep up with capital demands and
government regulations.  In most cases, the companies went out of business and
the capacity was lost.

     There are far fewer U.S. forge shops than foundries, approximately 500 in
1997 according to Leading Edge, and there have been relatively few closings in
the past decade.  More typically, weaker forge shops were closed in the decades
of the 60's and 70's due to competition from ductile iron.  However, forges,
like foundries, tend to be relatively small companies with revenues under $50
million.  Only a relatively few large forging companies exist.

     This environment of smaller, fragmented companies is considered a plus for
Citation because there are opportunities to make acquisitions and few
competitors in the industry which can follow the same strategy.

     Material shift to lighter weight.  Led by a quest for lighter vehicles to
     ---------------------------------                                        
improve gas mileage, as well as other applications, weight reduction has
important implications to metal component suppliers.

     In industries such as automotive, this has resulted in substantial growth
in lighter weight materials such as aluminum.  In the past two decades, a number
of gray iron and steel components on cars were converted to aluminum.  This
includes parts such as engine cylinder heads, intake 

                                       4
<PAGE>
 
manifolds, brake master cylinders, wheels and other parts. In addition, engine
blocks for a number of passenger cars are now cast in aluminum, instead of gray
iron.

     As a result, aluminum, which constituted approximately 191 pounds per
vehicle in 1991, is projected by Drucker Research to reach 350 pounds per
vehicle by 2001, an average annual growth rate of more than six percent.

     However, beyond changing to lighter weight materials, there are other
implications.  Processes such as austempered ductile iron allow a smaller,
lighter, but higher strength part to substitute for a larger part.  Further,
smaller, higher-revving gasoline engines may require higher strength forged
steel crankshafts instead of cast crankshafts.

     Citation Corporation is a leading producer of aluminum castings and forged
steel, as well as steel and iron castings, and is, thus, able to take advantage
of shifting material trends better than companies with single product
capability.

BUSINESS STRATEGY

     Citation's strategy encompasses four elements.
 
     First, the Company is a growth company with a growth objective of
approximately 15 percent a year.  The Company's financial objectives are built
on the premise of growth, thus assuming higher leverage than industry norms.
Because cash is utilized for both internal and external growth, the Company does
not currently pay its shareholders a dividend.
 
     Citation operates in a highly fragmented industry where very few metal
component producers exceed $100 million in annual revenues and the average
company employs less than 100 employees.  Within this industry, very few are
pursuing a consolidation strategy.

     Citation's plans are to grow at five percent a year (approximately twice
GDP growth) through internal growth and 10 percent a year through acquisition.
Such growth is measured as an average over time.

     Second, rather than focusing solely on the product produced, Citation grows
based upon its markets and customers' needs.  The question Citation seeks to
answer is, "What are the customer's wants and needs that fit within Citation's
core competence?"

     Thus, Citation's strategy is to provide products and technologies that
solve customer needs.  A Citation sales proposal might show specifications,
function and costs of aluminum, iron, or steel castings, or steel forgings.
 
     Third, Citation tends to view diverse metal shaping technologies and
different metallurgy as complementary rather than competitive.  Therefore, it is
strongly desirable to offer steel forgings and ductile iron castings, depending
upon the application.

                                       5
<PAGE>
 
     Fourth, Citation considers a broad market presence appropriate.  The
Company sees itself as a supplier to durable goods and capital goods markets,
rather than linking itself to the cycles of any single market.  The Company
maintains, however, a significant presence in the automotive and heavy truck
markets and will continue to do so because these markets are two of the largest
consumers of castings and forgings.
 
ACQUISITIONS

     In fiscal 1997, Citation made its largest acquisition to date when the
Company acquired Interstate Forging Industries, Inc. of Milwaukee, Wisconsin and
Navasota, Texas.

     Interstate currently has sales capacity of approximately $140 million that
will increase to approximately $155 million when it completes construction and
installation of a 7,000 ton forging press at its Navasota plant.  This is
scheduled for completion at the end of fiscal 1998.

     Interstate, which is operated as a separate group, produces custom closed
die forgings of carbon, alloy and stainless steel for construction equipment,
aircraft, off-road-equipment, material handling, and truck and trailer
industries.  Interstate is one of Caterpillar Inc.'s largest suppliers of steel
forgings and is a Certified Caterpillar Supplier.

     The purchase price was approximately $70 million, including the assumption
of debt.  Shareholders of Interstate are also eligible for a contingent payment
based upon Interstate exceeding certain established earnings targets during the
period from January 1, 1996 to December 31, 1998.

     Interstate has a total of 626 employees at its two locations.  The
Milwaukee plant, which is also its corporate headquarters, produces forgings up
to 50 pounds.  The Navasota location produces large forgings up to 2,500 pounds.
Navasota currently possesses the largest mechanical forging press in North
America, its 14,000-ton behemoth, "Big Bear."

     Since Citation completed its initial public offering of stock in August
1994, the Company has completed 12 acquisitions and one divestiture, more than
tripling the revenues.  While most of these acquisitions are currently
performing at or above the Company average return, the future strategy is to
consider fewer, but larger acquisitions.  The goal of acquiring only companies
that are expected to be accretive to earnings continues to be part of the
acquisition strategy.

     Acquisitions that fit these goals must also fit with Citation's extensive
metal forming experience.  Within this range, however, strategic acquisition
opportunities are extremely broad.

     These opportunities include companies that add to current Citation
technology within a like or dissimilar material; increase Citation's current
product offering, such as in larger or smaller components than now produced;
offer new or emerging methods of producing similar products; provide different
processes; or give market or geographic (including global) diversification.

                                       6
<PAGE>
 
     Given the highly fragmented industry in which Citation operates, and the
limited number of true consolidators within those industries, the acquisition
opportunities for Citation are excellent.

INTERNAL EXPANSION

     During fiscal 1997, Citation not only made its largest acquisition to date
but also undertook its largest overall capital program, spending approximately
$40 million. This is 1.3 times depreciation and amortization and indicates
Citation's commitment to add capacity, improve its competitive position and
maintain its facilities in an environmentally aware and employee safe manner.

     The largest single capacity-adding project involves expansion of Citation's
lost foam facilities at Columbiana, Alabama - Citation Foam Casting Company.

     Lost foam is a different form of casting technology that utilizes pattern
replicas of polystyrene coated with ceramic slurry. The coating is dried, the
pattern placed in a metal flask and sand compacted around it. When the
polystyrene pattern is contacted by molten metal, the pattern evaporates. What
remains when the metal cools is a metal replica.

     There are a number of advantages of lost foam or "evaporative pattern"
casting. Principally, a part can be designed nearer to the net shape required.
This reduces or eliminates machining, thus lowering the overall cost to the
customer. General Motor's Saturn Division, for example, produces component parts
for its vehicles using both iron and aluminum lost foam manufacturing.

     Citation Foam currently has one production line and a large casting
prototype line that was completed in fiscal 1997.

     Currently the division is doubling capacity by adding additional melt
capability, a second production line, expanding and upgrading casting finishing
operations, adding a paint line and expanding building and ancillary equipment.
All together, the projects are estimated to cost $12.5 million, spread over
fiscal 96, 97 and 98.  Start up is scheduled for the second quarter of fiscal
98.

     Approximately 105 additional employees will be hired when the project is
complete, adding to the 140 currently employed.  After completion of the
expansion, Citation Foam, which is already the largest independent iron lost
foam producer in the world, will have capacity to produce in excess of $30
million annually in lost foam gray and ductile iron castings.

     Another very significant project that will be completed over three years --
fiscal 96, 97 and 98 -- is the addition of a 7,000-ton press at Interstate
Forging's Navasota plant.

     This 7,000-ton press will be the second largest at Interstate and will
provide about $15 million in additional capacity when completed at the end of

                                       7
<PAGE>
 
fiscal 1998. Capital cost for the project is about $5.0 million, of which
approximately $2.5 million was spent in fiscal 1997.

     The project will relieve some of the demand on the 6,000-ton press, which
is currently pressured to meet customer orders. Total Interstate capacity when
the project is complete will be approximately $155 million annually.

     A number of other capital projects also offer important productivity gains.

     The Oberdorfer Industries facility, one of the oldest aluminum casting
plants in the U.S., is being rebuilt from the inside out. This includes support
equipment such as electrical and compressed air, as well as additional melt
capacity, heat treatment and a no-bake molding line. This project will take four
years to complete at a cost of approximately $12 million, of which about $2.5
million was spent in fiscal 1997. The State of New York is supporting the
rebuild with low cost loans, training grants and other assistance.

     When completed in fiscal 2000, Oberdorfer's practical capacity will have
doubled and it will have the capability of producing a more cost effective,
higher quality product.

     Also during fiscal 1997, Castwell Products replaced a high-speed molding
line with a newer version.  The replacement, at an approximate cost of $1.4
million, adds capacity and is more efficient than the old line.

     Alabama Ductile added an automatic pressure pour for one of its three high-
speed molding lines at a cost of $824 thousand.  Addition of the unit is
expected to increase efficiency and quality.

     Hi-Tech Corporation, the medium volume machining company acquired in fiscal
1996, spent approximately $4.0 million in capital during the year for several
projects.  Hi-Tech added two production lines to machine low volume knuckles and
disconnect housings, plus added to its physical plant.

     Texas Steel increased its steel casting capacity through the addition of an
air set molding line.  The new line has the capability to produce 240 tons per
month of castings weighing in the range of 2,000 to 20,000 pounds.  The
expansion also required the addition of a 2,000-pound per minute sand mixer to
prepare sand for molding and a building expansion.  Completed during the fiscal
year at a capital cost of approximately $660 thousand, the new molding line adds
about $7 million in annual capacity for Texas Steel.

     Iroquois Foundry added warehouse and shipping capacity at the main plant at
a cost of about $500 thousand.  Iroquois had been shipping a portion of its
requirements out of old facilities not located on the plant site.  This was
costly and inefficient.

     During fiscal 1997, Citation allocated approximately $23.4 million in
capital to insure its divisions remain cost efficient and to add additional
product capability.

                                       8
<PAGE>
 
     In addition, a significant amount of capital is required to stay abreast of
environmental requirements and for employee safety. Citation spent approximately
$1.9 million for environmental projects in fiscal 1997 and an additional $850
thousand for employee safety. All told, staying current is a significant expense
for manufacturing businesses today.

MARKETS AND CUSTOMERS

     Citation's programs to broaden its product lines showed significant
progress during fiscal 1997. In fiscal 1995, the Company's output was almost 90
percent gray and ductile iron castings, less than seven percent steel castings
and only three percent aluminum castings. However, in fiscal 1997, Citation
produced 55 percent iron castings, 20 percent aluminum castings, 18 percent
steel forgings and slightly more than seven percent steel castings. Not included
in these breakdowns is the fact that the Company now also offers medium volume
machining through its Hi-Tech Corporation subsidiary.

--------------------------------------------------------------------------------
                       CITATION SHIPMENTS BY METAL TYPE
<TABLE>
<CAPTION>
        Ductile    Gray        Alloy        
        Iron       Iron        Iron       Steel      Aluminum    Steel         
        Castings   Castings    Castings   Castings   Castings    Forgings      
        -----------------------------------------------------------------      
<S>     <C>        <C>         <C>        <C>        <C>         <C>           
1997       40%       14%          1%         7%         20%         18%        
                                                                               
1995       74%       16%          -          7%          3%         -          
--------------------------------------------------------------------------------
</TABLE>

     The largest single impact on product diversification in 1997 was the
acquisition of Interstate Forging Industries. That acquisition made Citation one
of the few large metals component companies able to offer both castings and
forgings.

     In addition, successful new product launches at Citation's Southern
Aluminum and a strong order book at Bohn Aluminum, both acquired in fiscal 1996,
increased Citation's presence in the aluminum castings industry.

     Ford Motor Company remained Citation's largest customer for the second year
in a row. Due to product launches of engine components produced by Southern
Aluminum for Ford, Ford's percentage of Citation revenues increased from
slightly less than six percent in fiscal 1996 to 10.5 percent in fiscal 1997.
     
     Citation's second largest customer, Caterpillar, Inc., doubled as a
percentage of Citation business. A large part was due to the acquisition in
October 1996 of Interstate Forging. Interstate is one of Caterpillar's largest
suppliers of steel forgings.

     In addition, Caterpillar is Texas Steel's largest customer. Overall,
Caterpillar is a significant customer to four Citation divisions - Interstate,
Texas Steel, Iroquois Foundry and Berlin Foundry. These divisions were all
acquired since Citation's August 1994 IPO.
 
                                       9
<PAGE>
 
     In fact, Caterpillar may best represent how Citation's market inward
strategy is designed to work. Citation considers ways to meet the needs of
substantial multi-national original equipment manufacturers such as Caterpillar
and has grown by filling those needs through different technology and metallurgy
within the Citation repertoire.

     In the case of Caterpillar, this represents steel castings, steel forgings,
large gray iron castings and small to medium-sized ductile iron castings.
 
     New to Citation's top ten customer list in 1997 were Uni Boring Co., Inc.
and Hydro Aluminum Adrian, Inc. Uni Boring is a machiner of aluminum parts
supplied by Southern Aluminum Castings for Ford. Hydro Aluminum is an aluminum
forge company supplying the automotive industry. Bohn Aluminum supplies Hydro
with special alloy permanent mold castings for automotive air conditioners.


                          CITATION'S TOP 10 CUSTOMERS
<TABLE>
<CAPTION>
                                  1997       1996      1995
CUSTOMER                          PERCENT    PERCENT   PERCENT
--------------------------------------------------------------
<S>                               <C>        <C>       <C>
Ford Motor Co.                    10.5%      5.8%      1.0%
Caterpillar, Inc.                  8.7       4.3       0.7
Dana Corporation                   5.6       5.2       7.8
Digitron Tool Co.                  2.9       4.5       1.0
Simpson Industries                 2.4       2.0       1.9
Uni Boring Co., Inc.               2.3       1.6         -
Kelsey-Hayes Company               2.1       1.8       1.8
Chrysler Corporation               2.0       2.1       1.7
Hydro Aluminum Adrian, Inc.        1.7       1.2         -
Hendrickson Suspension             1.7       2.0       4.3
----------------------------------------------------------
 
TOTAL                             39.9%     30.5%     20.2%
</TABLE>

     Reflecting changes in Citation's product offering and customers, Citation's
major markets also showed changes. Despite these changes, Citation's markets
continue to reflect the Company's strategy to maintain Motor Vehicles as
approximately half of its revenues and Capital Goods as the other half.

     The percentage increase in the Automotive/Light Truck market from fiscal
1996 to fiscal 1997 reflects larger Citation shipments to Ford. The increase is
due to the successful launch of new Ford products at Southern Aluminum.
 
     On the other hand, the percentage decrease in the Medium/Heavy Truck
markets reflects the decline of heavy truck orders since the 1995 banner year.
While Citation shipments to this segment actually grew from fiscal 1996 to
fiscal 1997, growth was less than that of most other markets served by the
Company.

                                      10

<PAGE>
 
     The significant increases to the Construction Equipment market reflect
increased shipments to Caterpillar primarily because of the acquisitions of
Texas Steel and Interstate Forging, both of which are major Caterpillar
suppliers, and continued growth in end user demand for Caterpillar products.

                         CITATION SHIPMENTS BY MARKET
<TABLE>
<CAPTION>
                                  1997       1996       1995
------------------------------------------------------------
<S>                              <C>        <C>        <C>
Automotive/Light Truck            34.7%      30.2%      30.5%      
Medium and Heavy Trucks           15.1       18.5       23.5       
Construction Equipment            11.3        6.5          -       
Pumps, Valves and Compressors      6.9       10.8       11.1       
Oil Field Equipment                6.1        1.6        0.8       
Internal Combustion Engines        4.7        5.8        4.3       
Agriculture                        4.2        3.5        2.6       
Aircraft and Aerospace             2.7        2.4        2.5       
Railroad Equipment                 2.0        3.0        3.7       
Electrical Equipment               1.9        2.2        3.9       
Mining Equipment                   1.5          -          -       
Waterworks                         1.4        1.9        2.8       
Machine Tools                      0.9        2.5        2.4       
Other Uses                         6.6       11.1       11.9       
------------------------------------------------------------       
                                                                   
TOTAL                            100.0%     100.0%     100.0%       
</TABLE>

     Pumps, Valves and Compressors declined largely due to the divestiture of
Pennsylvania Steel and the idling of the Texas Foundries Steel Division. Both
actions took place at the end of fiscal 1996.
 
     Oil Field Equipment markets increased due to strong demand for oil and gas
well drilling and accessory equipment and the acquisition of Interstate Forging,
which is a significant supplier to the Oil Field Equipment market.

     Citation's market shipments and top ten customers in fiscal 1997 reflect
the success of the acquisition program since Citation's initial public offering
in August 1994 and the drive to diversify the Company's product base. From its
origin as an iron castings foundry company, Citation has developed into a broad
metal components supplier to Capital and Durable Goods Industries.

ORGANIZATIONAL CHANGE

     When Citation Corporation held its initial public offering in August 1994,
the Company had sales of $192 million. Today, sales have grown more than three-
fold to $650 million.

     In 1994, Citation was a leading producer of iron and steel castings in
Alabama, Texas and North Carolina. Today, Citation is also among the ten largest
independent producers of aluminum castings and the top five independent
producers of closed-die steel forgings. In addition to the three 

                                      11
<PAGE>
 
southern states where Citation was located in 1994, the company today also
operates in Wisconsin, Illinois, New York, Ohio, Tennessee, and Indiana.

     In 1994, the Company had seven manufacturing locations and about 2,100
employees. Today the Company has 17 divisions and about 6,000 employees.

     In order to manage a growing corporation in this significantly changing
environment, Citation must constantly change its methods and procedures or risk
chaos. But the goal is not to embrace change for change's sake. Senior
management has to understand which policies and procedures remain useful in
managing Citation's growing number of divisions, yet develop new systems where
improvement is required.

     A basic philosophy of managing the divisions is to support maximum autonomy
at each unit. The purpose of creating "stand alone" divisions is to foster an
entrepreneurial spirit throughout the corporation. Yet, given an autonomous
culture, how does Citation truly develop synergy among these independent
divisions?

REORGANIZING CORPORATE DIRECTION

     One of the programs required for well-managed growth was the need to
develop a more cooperative culture so that, with the help of a lean central
operations and staff management team, strengths and opportunities developed by
one division could be best utilized by all.

     Accomplishing this, however, to a large extent, required reorganizing
operations management.

     At the time, T. Morris Hackney was holding positions of Chairman,
President, CEO and COO.  Mr. Hackney recognized that the sheer size of what
would be a 17-division organization required increasing focus on the operating
side of the business.

     In July 1996, Frederick F. "Rick" Sommer was added to the Citation team as
President and COO.  With prior experience as President and CEO of a public,
multi-divisional, $700 million automotive parts supplier, Mr. Sommer had
experienced rapid growth and the changing methods of managing a public company
in turbulent times.
 
     The senior organization then, as now, includes the Chairman and CEO,
responsible for the guiding policies of the Company as well as long term
strategy and mergers and acquisitions.  The President and COO is responsible for
the operating and marketing organizations.

     The Executive Vice President - Finance and Administration and CFO, is
filled by long time Citation employee, R. Conner Warren.  Mr. Warren is
responsible for the fiscal management of the Company's resources and the
direction of the corporate staff.
 
     The manufacturing organization functioned around groups of like businesses,
each led by a Group Vice President.  At the end of 1997, there were four groups:

                                      12
<PAGE>
 
     High Volume Foundry Group
     -------------------------
     Alabama Ductile Casting Co., Brewton, Alabama
     Citation Foam Casting Co., Columbiana, Alabama
     Mansfield Foundry Corporation, Mansfield, Ohio
     Texas Foundries, Lufkin, Texas
     Hi-Tech Corporation, Albion, Indiana
     Camden Casting Center, Camden, Tennessee (acquired December 1, 1997)

     Medium Volume Foundry Group
     ---------------------------
     Southern Ductile Casting Co., Bessemer, Selma and Centreville, Alabama
     Foundry Service Company, Biscoe, North Carolina
     Mabry Foundry, Beaumont, Texas
     Iroquois Foundry, Browntown, Wisconsin
     Berlin Foundry Corporation, Berlin, Wisconsin

     Special Foundry Group
     ---------------------
     Bohn Aluminum Corporation, Butler, Indiana
     Southern Aluminum Castings Co., Bay Minette, Alabama
     Oberdorfer Industries, Inc., Syracuse, New York
     Texas Steel Company, Ft. Worth, Texas
     Castwell Products, Skokie, Illinois

     Forging Group
     -------------
     Interstate Forging Industries, Inc., Milwaukee, Wisconsin and Navasota,
     Texas

     In addition to the corporate organization, the division management team was
changed and realigned with half of the 17 operating divisions receiving new
management during the past 18 months.

DEVELOPING A COOPERATIVE CULTURE

     Most of the management tools used to develop a cooperative culture are
basic and straightforward.

     The first step was establishment of a measurement system that allows prompt
and accurate measurement of actual results against the expected financial
results.

     Citation utilized new software which allows each division to feed results
direct to corporate headquarters more quickly and accurately than sending
results on paper. Reports that compare results are now quickly made available to
divisions so that each can see how it compares with like divisions.

     Two formal evaluation programs also review division systems and results.
Conducted at the divisions by senior corporate management, one is called an
Administrative Review, the other, a Performance Review.

     The first measures systems, to insure the division is organized properly.
The second measures results. Both focus on benchmarking each 

                                      13
<PAGE>
 
division against its own systems and budgets as well as comparing it with
results at other divisions. Each program emphasizes continuous improvement.

    To further formalize the cooperative culture, at least one corporate wide
meeting for each management discipline is held either at corporate headquarters
or at a division location each year. In fiscal 1997, sessions were held with
corporate and division controllers, sales and sales administration personnel,
technical and quality directors, safety engineers, human resource managers, MIS
personnel, maintenance and industrial engineers, operations managers, purchasing
managers, and others. In all cases, the approach was the same - to share
successes and to assist other divisions with implementation of improvements.

     Divisional budget meetings with corporate management give the operating
units the opportunity to make a case for capital needs and to agree upon
financial performance for the coming year and beyond.
 
     Divisional capital expenditures are categorized by project.  Projects for
the purpose of increasing division capacity, improving productivity or cost
effectiveness, or to give the division the capability for producing new products
must exceed the corporate cost of capital.  The budget process is also linked to
continuous improvement goals.
 
     General Managers' meetings are held twice a year - once at corporate
headquarters and once at a remote site.  At these meetings, division managers
share concerns and develop ideas.  Key corporate and staff personnel also
participate in team-building activities with the General Managers.
 
     Of course, development is not limited to management levels.

     Employee attitude surveys are conducted to help division management
understand employee concerns. Training programs at the division level help
strengthen employee skills to accomplish the goal of advancing our human
resources while creating a safer workforce.  Several divisions have basic
education programs to strengthen employee communications and, in some cases,
assist towards a G.E.D. certificate.

     Success of these and other programs to develop a cooperative culture is not
always immediately apparent.  Often they are an investment in the future of the
organization.  However, a number of successes were noted in fiscal 1997.  These
include:

     -    Casting finishing technology developed at Alabama Ductile division is
          now utilized at Castwell Products, Foundry Service, Mansfield,
          Southern Aluminum, Texas Foundries, and Southern Ductile divisions.

     -    A number of divisions have completed either ISO and/or QS-9000
          certification and several more will complete certification shortly
          using assistance from corporate staff and outside consultants.

     -    Eight divisions are interlinking software and computer systems to
          better utilize those hardware systems that have more resources than
          required by a single division.

                                      14
<PAGE>
 
     -    Standard maintenance items and surplus equipment are now listed in
          computer printouts and circulated through all divisions to reduce
          duplication and improve utilization.

     -    Divisions are being refocused to better fit capabilities with
          production. Medium and low volume work is being moved from Bohn
          Aluminum to Oberdorfer Industries to better match Oberdorfer's
          capabilities and to allow Bohn additional capacity for increasing high
          volume production. Texas Foundries' medium volume iron work is
          similarly being moved to several facilities of the Medium Volume
          Foundry Group.

     -    Alabama Ductile and Southern Aluminum developed visual employee
          communications systems now in use at other Citation divisions.

RAW MATERIALS

     The primary raw material used by the Company to manufacture iron and steel
castings is steel scrap. To produce aluminum castings the Company purchases
aluminum ingot to specified alloy grades. The ingot is purchased from primary
aluminum producers and in some cases from secondary smelters. Bohn Aluminum and
Southern Aluminum produce part of their requirements by operating smelters that
melt scrap aluminum.

     The Company purchases steel scrap from numerous sources, generally regional
scrap brokers, using a combination of spot market purchases and contract
commitments. The Company has no long-term contractual commitments with any scrap
supplier and does not anticipate, nor has it experienced, any difficulty in
obtaining scrap. This is due to the relatively large number of suppliers and the
Company's position as a major scrap purchaser.

     The cost of steel scrap is subject to fluctuations, but the Company has
contractual arrangements with most of its customers allowing it to adjust its
casting prices to reflect fluctuations. In periods of rapidly rising steel scrap
prices, these adjustments will lag the current market price for steel scrap
because they are generally based on average market prices for prior periods.
These periods vary by customer but are generally no longer than one quarter.
This adjustment lag may have an adverse effect on the Company's results of
operations during such periods.

     The price of aluminum ingot is also subject to fluctuations and in some
cases the Company has contractual arrangements to adjust its prices to reflect
fluctuations. In other cases, changes in aluminum ingot prices must be recovered
through casting price negotiations with the customer. Recovery of cost increases
in both cases may lag the aluminum ingot price increases by a quarter or more.

BACKLOG

     See the financial summary on page 22.

                                      15
<PAGE>
 
COMPETITION

     The market for the Company's casting products is highly competitive.  There
are an estimated 3,000 foundries and forge shops currently producing ductile
iron, gray iron, steel and aluminum castings and steel forgings in the United
States.  The companies within the industry compete on the basis of price,
quality, service and engineering.  The industry consolidation that has occurred
over the past two decades has resulted in a significant reduction in the number
of smaller foundry companies and a rise in the share of production held by the
larger foundry companies.  Major users of castings and forgings own some of the
foundries and forge shops in this industry.  For example, the three largest
automobile manufacturers operate foundries.  Some of the Company's competitors
have greater financial resources than the Company, may have lower production
costs than the Company, or both.

EMPLOYEES

     As of September 28, 1997, the Company had 5,778 full time employees, of
whom 4,898 were hourly employees and 880 were salaried employees.  Unions
represent approximately 2,414 of the Company's hourly manufacturing employees at
11 of its 19 plants under collective bargaining agreements expiring at various
times through October 2002.

     The management of each division and corporate staff participate in a
management bonus pool equal to 15% of income before taxes and corporate
administrative charges.  Divisional management's bonus compensation is based on
the financial performance of their respective divisions, while corporate
management's bonus compensation is based on overall Company profitability.
Hourly incentive plan programs and participants vary by division.

ENVIRONMENTAL MATTERS

     Companies in the foundry and forging industries must comply with numerous
federal, state and local environmental laws and regulations which address the
generation, storage, treatment, transportation and disposal of solid and
hazardous waste, and the release of hazardous substances into the environment.
The Company's operations require compliance with these regulations, as well as
regulations concerning workplace safety and health standards.  The Company
believes it is in substantial compliance with these laws and regulations.

     The Company has implemented substantial record keeping, management
procedures and practices for the purposes of complying with environmental laws
and regulations.  In seeking to comply with these laws and regulations, each
foundry has personnel responsible for environmental issues who work closely with
the Company's corporate director of environmental management.  The corporate
director assists in supplying technical advice and guidance in interpreting
regulations, transferring technology, procedures and obtaining permits.

     The chief environmental issues for the Company's foundries are air
emissions and solid waste disposal.  Air emissions, primarily dust particles,
are handled by dust collection systems.  The solid waste generated by these

                                      16
<PAGE>
 
foundries is generally sand, which is recycled and reused in the foundry or
disposed of as non-hazardous waste in landfills on Company property or in
permitted off-site landfills.  The Company has closed certain of the landfills
on its properties without incurring material expenditures and expects to close
other such landfills in the future without incurring material expenditures.  The
Company has also begun beneficially reusing the excess sand as fill material and
as a raw material in other products such as cement and asphalt. However, there
can be no assurance that future regulations will not require the Company to
incur additional and potentially material costs related to its past or present
environmental practices.  Because its forge shops do not melt metal nor utilize 
sand in their operations, environmental issues are much more limited than 
foundry operations.

     Although the Company's practices have, in certain instances, resulted in
noncompliance with environmental laws and regulations and in non-material fines
related thereto, the Company currently does not anticipate any environmental
related costs that would have a material adverse effect on its operations.
However, it cannot be assured that the Company's activities will not give rise
to actions by governmental agencies or private parties, which could cause the
Company to incur fines, penalties, operational shutdowns, damages, clean-up
costs or other similar expenses.  Also, the Company's foundries, capacity
levels, or increases thereof, are dependent upon the Company's ability to
maintain, or obtain increases in such levels in its permits for air emissions.
However, it cannot be assured that the Company will be able to maintain its
current permits, or obtain appropriate increases in capacity levels under such
permits, so as to maintain its current level of operations or increase capacity
as it may desire in the future.

     The Company is implementing a source removal and shallow groundwater
remediation project at Castwell Products for purposes of removing excessive
levels of trichloroethylene ("TCE") which were detected at this facility.  These
excessive levels of TCE resulted from previous leakage into the groundwater from
a part washing area located on the premises.  The need for the remediation was
identified in connection with the Company's acquisition of Castwell Products,
and the Company assumed an accrued liability in the amount of $1.2 million
related to the estimated cost of the remediation.  Of this amount, approximately
$600,000 is expected to be paid through fiscal 1998 in connection with soil
removal, groundwater remediation measures and testing expenses.  Of that amount,
approximately $365,000 was spent through fiscal 1997.   Thereafter, the Company
estimates that it will incur approximately $30,000 annually for an estimated 20
to 30 years for ongoing monitoring and periodic sampling tests.  There can be no
assurance, however, that the costs and expenses related to this remediation
project will not be materially greater than currently estimated.

     The 1990 amendments to the Clean Air Act may have a major impact on the
compliance costs of many U.S. companies, including foundries.  Many of the
regulations that will implement the Clean Air Act amendments have not yet been
promulgated.  The MACT Standard affecting iron and steel foundries will not
issue draft regulations until November 1999 and final regulations until November
2000.  Until such regulations are issued, it is not possible to estimate the
costs the Company may need to incur to comply with them.

                                      17
<PAGE>
 
ITEM 2:   PROPERTIES

     The following table sets forth certain information concerning the
facilities owned and operated by the Company as of September 28, 1997:

<TABLE>
<CAPTION>
                                                                                     CAPACITY/(1)/            FLOOR SPACE
             FACILITY                  LOCATION                                     (TONS PER YEAR)            (SQ. FT.)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                                            <C>                        <C>
Alabama Ductile                      Brewton, Alabama                                     45,000                135,000
Bohn Aluminum                        Butler, Indiana                                      15,000                135,000
Berlin Foundry                       Berlin, Wisconsin                                    30,000                335,000
Castwell Products                    Skokie, Illinois                                     32,000                286,000
Citation Foam                        Columbiana, Alabama                                  13,000                130,000
Foundry Service                      Biscoe, North Carolina                               20,000                160,000
Hi-Tech Corporation                  Albion, Indiana                                         /(2)/               67,000
Interstate Forging                   Milwaukee, Wisconsin                                 16,000                200,000
                                     Navasota, Texas                                      42,000                500,000
Iroquois Foundry                     Browntown, Wisconsin                                 25,000                131,600
Mabry Foundry                        Beaumont, Texas                                      12,250                118,000
Mansfield Foundry                    Mansfield, Ohio                                      30,000                242,000
Oberdorfer Industries                Syracuse, New York                                    3,500                250,000
Southern Aluminum                    Bay Minette, Alabama                                 22,000                255,000
Southern Ductile                     Bessemer, Alabama                                    15,000                108,000
                                     Centreville, Alabama                                  2,400                 32,000
                                     Selma, Alabama                                        5,000                 30,000
Texas Foundries                      Lufkin, Texas                                        90,000                595,000
Texas Steel Corporation              Fort Worth, Texas                                    23,500                454,000
                                                                                         -------              ---------
                                                                                         441,650              4,163,600
</TABLE>


     (1)  Maximum capacity of each foundry is based on six days of operations
          per week with two ten-hour-shifts per day, except for Iroquois, which
          is based on one ten-hour-shift per day and Bohn Aluminum, which is
          based on five days of operations per week with three eight-hour-shifts
          per day.

     (2)  Hi-Tech Corporation performs machining. Capacity, therefore, is stated
          in sales revenue, rather than tons. Estimated capacity of Hi-Tech
          Corporation is approximately $15.0 million in sales revenue.

ITEM 3:   LEGAL PROCEEDINGS

     The Company is party to several pending legal proceedings, all of which are
deemed by management of the Company to be routine litigation incidental to the
business, and none of which is believed likely to have a material adverse effect
on the Company, its financial position or operations.

                                      18
<PAGE>
 
ITEM 4:   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     During the fourth quarter of the Company's fiscal year covered by this
report, no matter has been submitted to a vote of security holders through the
solicitation of proxies or otherwise.

EXECUTIVE OFFICERS


     The executive officers of the Company as of the end of fiscal 1997 were as
follows:

Name                    Position
----                    --------
T. Morris Hackney       Chairman of the Board and Chief Executive Officer
Frederick F. Sommer     President and Chief Operating Officer
R. Conner Warren        Executive Vice President of Finance and Administration,
                        Treasurer and Chief Financial Officer
Virgil C. Reid          Group Vice President - Medium Volume Foundries
Timothy L. Roberts      Group Vice President - Special Foundry Group
Thomas W. Burleson      Vice President - Controller and Assistant Secretary

     T. MORRIS HACKNEY founded the Company in 1974 and has served as its Chief
Executive Officer since that time.  Prior to establishing the Company, Mr.
Hackney served as President of Hackney Corporation, a chain-link fence
manufacturer, for nine years.

     FREDERICK F. SOMMER joined the Company as its President and Chief Operating
Officer in July 1996.  Automotive Industries, Inc. formerly employed Mr. Sommer
as its President and Chief Operating Officer from 1992 until his appointment as
President and Chief Executive Officer in 1994.  He remained in this position
after the company was acquired by Lear Corporation in 1995, and also served as a
Senior Vice President of Lear Corporation.

     R. CONNER WARREN joined the Company in 1975, shortly after its founding.
Since that time, Mr. Warren has served the Company in various capacities and is
currently its Executive Vice President of Finance and Administration and
Treasurer.  Mr. Warren is the Company's senior administrative and financial
officer.  Prior to joining the Company, Mr. Warren was an employee of Hackney
Corporation.  He is a past president of the American Foundryman's Society and of
the American Cast Metals Association and is currently the U.S. representative to
the International Association of Foundry Technical Associations and a member of
its executive board.
 
     VIRGIL C. REID joined the Company in 1981 and has served as Group Vice
President - Medium Volume Foundries since October 1992.  Prior to attaining his
current position, Mr. Reid served as General Manager of Alabama Ductile, and
General Manager, Sales Administrator and Controller of Foundry Service.  From
1974 to 1981, Mr. Reid served in various capacities for GTE, including
Divisional Cost Accounting Manager of its Metal Laminates Division.

                                      19
<PAGE>
 
     TIMOTHY L. ROBERTS joined the Company in May 1995 as Group Vice President -
Special Foundry Group.  He served as Director of Manufacturing Operations at
Intermet Corporation, an iron castings company, from 1994 to 1995, and
previously served ten years at Wheland Foundry where he advanced to the position
of Director of Operations and General Manager.

     THOMAS W. BURLESON joined the Company in 1992 as Corporate Controller and
became Vice President - Controller in August 1994.  Prior to joining the
Company, Mr. Burleson was Corporate Controller of Marvin's, a regional building
products chain, from 1990 to 1992, and was an accountant with Coopers & Lybrand
from 1980 to 1990.  Mr. Burleson is a certified public accountant.

                                    PART II

ITEM 5:   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
          RELATED STOCKHOLDER MATTERS

     The Company's common stock first began trading on the NASDAQ National
Market System on August 2, 1994.  The stock is quoted in the NASDAQ National
Market System under the symbol CAST.  The following table sets forth, for the
fiscal periods indicated, the high and low bid prices reported on the NASDAQ
National Market System.

<TABLE>
<CAPTION>

                                   HIGH              LOW         
                                   ----              ---     
<S>                                <C>               <C>      
FISCAL 1995
First Quarter                      $13               $10 1/2 
Second Quarter                     $15 1/8           $12 1/8 
Third Quarter                      $17 5/8           $13 1/8 
Fourth Quarter                     $18 3/8           $15     
                                                             
FISCAL 1996                                                  
First Quarter                      $19               $ 9 1/4 
Second Quarter                     $13               $ 9 3/4 
Third Quarter                      $15 7/8           $11 1/2 
Fourth Quarter                     $14 3/4           $10 3/8 
                                                             
FISCAL 1997                                                  
First Quarter                      $13 1/8           $ 9 1/2 
Second Quarter                     $15 3/8           $ 9 7/8 
Third Quarter                      $18 1/4           $13 1/4 
Fourth Quarter                     $20               $16 1/4 
</TABLE>

     As of December 11, 1997, there were approximately 3,300 holders of the
Company's Common Stock, including shares held in "street" names by nominees who
are record holders.

     The Company has never declared or paid a cash dividend, except for
dividends paid to the Company's former S corporation shareholders.  It is the
present policy of the Board of Directors to retain all earnings for the
development of the Company's business.  Any payment of dividends in the future
will depend upon the Company's earnings, capital requirements, financial
condition and such other factors as the Board of Directors may deem relevant.

                                      20
<PAGE>
 
ITEM 6:   SELECTED FINANCIAL DATA

     The following table sets forth selected financial data for the Company and
should be read in conjunction with the financial statements and notes related
thereto included elsewhere in this report.  The selected financial data as of
and for the five years ended September 28, 1997 have been derived from the
Company's consolidated financial statements, which were audited by Coopers &
Lybrand L.L.P., the Company's independent accountants.

                                      21
<PAGE>
 
<TABLE>
<CAPTION>
                                                                   FISCAL YEAR ENDED/(1)/

                                                 (Dollars in thousands, except per share amounts)
                                       October 3,     October 2,    October 1,    Sept. 29,     Sept. 28,
                                         1993            1994          1995          1996          1997
                                         ----            ----          ----          ----          ----    
<S>                                    <C>            <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
Sales                                     $150,318      $191,566      $307,681      $487,753      $648,961
Cost of sales                              123,733       151,921       243,493       404,961       538,502
                                          --------      --------      --------      --------      --------
Gross profit                                26,585        39,645        64,188        82,792       110,459
Selling, general and administrative
     expenses                               17,545        19,650        32,697        45,844        58,066
                                          --------      --------      --------      --------      --------
Operating income                             9,040        19,995        31,491        36,948        52,393
Interest expense, net                        2,513         2,813         3,974         7,866        14,433
Other expenses (income)                        382           (24)         (581)        1,178           (14)
                                          --------      --------      --------      --------      --------
Income before provision for
     income taxes                            6,145        17,206        28,098        27,904        37,974
Provision for income taxes/ (2)/             2,568         6,538        11,019        11,162        14,810
                                          --------      --------      --------      --------      --------
 
Net income (pro forma
     through October 2, 1994)/(2)/        $  3,577      $ 10,668      $ 17,079      $ 16,742      $ 23,164
                                          ========      ========      ========      ========      ========
 
Pro forma net income per share/(3)/          $0.36         $1.02         $1.27         $0.95         $1.31
                                          ========      ========      ========      ========      ========
 
Weighted average number of shares
     outstanding (in thousands)/(3)/         9,933        10,486        13,438        17,694        17,733
 
OTHER DATA (UNAUDITED):
Backlog (in dollars)                      $ 25,535      $ 48,051      $ 78,262      $ 84,596      $156,880
Tons shipped                               110,481       131,984       196,616       231,618       268,034
Capital expenditures                      $  7,921      $ 17,228      $ 29,844      $ 31,166      $ 40,531
Depreciation and amortization                5,468         7,089        10,638        20,151        30,489
EBITDA/(4)/                                 14,508        27,084        42,129        57,099        82,896
Gross margin                                  17.7%         20.7%         20.9%         17.0%         17.0%
 
BALANCE SHEET DATA (AT END OF
PERIOD):
Current assets                            $ 34,990      $ 46,713      $ 94,591      $135,359      $160,503
Current liabilities                         39,654        31,213        56,015        72,855        93,957
Working capital                             (4,664)       15,500        38,576        62,504        66,546
Net property, plant and equipment           41,910        63,203       143,425       199,367       282,991
Total assets                                82,223       113,449       271,871       383,557       493,296
Short-term debt, including current
     portion of long-term debt              18,332           579         6,553         2,654         2,994
Long-term debt, excluding current
     portion                                24,387        29,703        71,254       140,946       181,239
Stockholders' equity                        15,041        43,631       132,476       149,319       172,639
</TABLE>

                                      22
<PAGE>
 
(1)  The Company operates on a 52- or 53-week fiscal year ending on the Sunday
     closest to September 30.  Fiscal years 1994, 1995, 1996, and 1997 were 52-
     week fiscal years and fiscal year 1993 was a 53-week fiscal year.

(2)  The Company terminated its status as an S corporation on the completion of
     its initial public offering in August 1994 and became subject to corporate
     income taxation.  Accordingly, pro forma net income through October 2, 1994
     reflects federal and state income taxes as if the Company had been a C
     corporation based on the statutory tax rates that were in effect during the
     periods reported.

(3)  The weighted average number of shares outstanding for the year ended
     October 2, 1994 gives effect to the number of shares (1,002,500) of Common
     Stock that would have been required to be sold (at the initial public
     offering price of $8.00 per share) to fund an $8.0 million S Corporation
     distribution to the former S corporation stockholders effected at the
     closing of the Company's initial public offering in August 1994.

(4)  Earnings before interest, taxes, depreciation and amortization ("EBITDA")
     represents operating income plus depreciation and amortization.  EBITDA
     should not be considered as an alternative measure of net income or cash
     provided by operating activities (both as determined in accordance with
     generally accepted accounting principles), but it is presented to provide
     additional information related to the Company's debt service capability.
     EBITDA should not be considered in isolation or as a substitute for other
     measures of financial performance or liquidity.

ITEM 7:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

GENERAL

     The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto, included
elsewhere in this annual report.

     The Company operates on a 52- or 53-week year, ending on the Sunday closest
to September 30. Fiscal years 1994, 1995, 1996, and 1997 consisted of 52 weeks,
and fiscal 1993 consisted of 53 weeks.  The next 53-week year will be the fiscal
year ending October 3, 1999.

RESULTS OF OPERATIONS

     The following table sets forth operating results expressed as a percentage
of sales for the periods indicated, and the percentage change in such operating
results between periods.

                                      23
<PAGE>
 
<TABLE>
<CAPTION>
                                                Percentage of Sales                 Period-to-Period Percentage
                                                -------------------                                           
                                                 Fiscal Year Ended                      Increase (Decrease)               
                                                 -----------------                      -------------------               
                                                                                         1996             1997            
                                      October 1,   September 29,  September 28,       compared to       compared to       
                                         1995          1996           1997                1995             1996           
                                         ----          ----           ----                ----             ----           
          <S>                         <C>          <C>            <C>                 <C>               <C>    
          Sales -------------------        100.0       100.0           100.0              58.5               33.0
          Cost of sales -----------         79.1        83.0            83.0              66.3               33.0
                                           -----       -----           -----    
          Gross profit ------------         20.9        17.0            17.0              29.0               33.4
          Selling, general and                                                  
          administrative expenses -         10.6         9.4             9.0              40.2               26.7
                                           -----       -----            -----    
          Operating income --------         10.3         7.6             8.0              17.3               41.8
          Interest expense, net ---          1.3         1.6             2.2              97.9               83.5
          Other expense (income) --         (0.1)        0.3             0.0             302.8             (101.2)
                                           -----       -----           -----    
          Income before income                                                  
          taxes -------------------          9.1         5.7             5.8              (0.7)              36.1
</TABLE>

FISCAL YEAR ENDED SEPTEMBER 28, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 29,
1996

     Sales.  Sales increased 33.0%, or $161.2 million, to $649.0 million in 1997
from $487.8 million in 1996.  Of this increase, $169.2 million resulted from
sales by the Company's 1996 and 1997 acquisitions.  These include the Company's
Interstate Forging Industries operations, acquired during fiscal year 1997, and
the increase resulting from a full year of sales of the Company's Texas Steel,
Hi-Tech, Southern Aluminum, and Bohn Aluminum operations which were acquired
during fiscal year 1996.  A decrease of $33.1 million in sales revenue resulted
from the sale of Pennsylvania Steel and the idling of the Texas Foundries Steel
Division, both of which were effective as of September 29, 1996. If the
continuing operations were compared on a "same store" basis, i.e., excluding
both the sales increase resulting from the acquisitions and the decrease
attributable to the sold and idled operations, sales revenue would have
increased approximately $25.1 million or 5.2%. Management believes this increase
was primarily attributable to the general strength of the underlying economy and
its positive impact on the Company's customers, as well as capacity expansions
at selected Company facilities. Tons shipped increased 15.7% for the year ended
September 28, 1997.

     Gross Profit.  Gross profit increased 33.4% or $27.7 million, to $110.5
million in 1997 from $82.8 million in 1996.  Gross margin of 17.0% was
essentially the same in both 1997 and 1996 due to lower average gross margins on
the acquisitions.  Excluding the non-continuing operations, $25.6 million of the
increase in gross profit was attributable to the acquisitions, and $4.3 million
of the increase was attributable to the same store operations.

     Selling, General and Administrative Expenses.  Selling, general and
administrative (SG&A) expenses increased 26.7%, or $12.2 million, to $58.1
million in 1997 from $45.8 million in 1996.  Approximately $13.0 million of this
increase resulted from the addition of the acquisitions.  The SG&A expenses
increase in 1997 was offset by a decrease of $3.1 million due to the sale of
Pennsylvania Steel and the idling of the Texas Foundries Steel

                                      24
<PAGE>
 
Division at the end of 1996. The remaining increase of $2.3 million in 1997
compared to 1996 relates primarily to higher sales commissions and
administrative costs and related staffing resulting from the Company's growth at
its continuing operations. As a percentage of sales, SG&A expenses decreased to
9.0% in 1997 from 9.4% in 1996.

     Operating Income.  Operating income increased 41.8%, or $15.4 million, to
$52.4 million in 1997 from $36.9 million in 1996. Operating margin increased to
8.1% in 1997 from 7.6% in 1996.  The increase in the operating margins and
operating income resulted from operating efficiencies and lower SG&A expenses as
a percentage of sales at the acquisitions.  In addition, spreading the SG&A
expenses over a significantly increased sales base without proportional
increases in the SG&A expenses also contributed to improved operating margins.
Operating income attributable to the acquisitions increased by $12.6 million in
1997.  Same store operating income increased by $2.0 million in 1997 and the
operations of Pennsylvania Steel and Texas Foundries Steel Division, which were
sold and idled respectively, had a negative impact on 1996 operating income of
$0.9 million.

     Interest Expense.  Interest expense, net of interest income, increased
83.5%, or $6.5 million, to $14.4 million in 1997 from $7.9 million in 1996.
This increase is primarily attributable to significantly higher average debt
balances related to acquisition activity during fiscal 1996 and 1997.  The
Company capitalized $388 thousand of interest costs in 1997 as compared to $453
thousand in 1996.

     Bank debt increased from $143.6 million as of September 29, 1996, to $185.2
million as of September 28, 1997.  This increase is primarily attributable to
the Interstate Forging acquisition on October 29, 1996.  The  acquisition of
Interstate increased bank borrowings approximately $73.8 million.  On July 24,
1997, the Company closed a new secured revolving credit facility with a maximum
loan commitment of $300 million with a consortium of banks, led by The First
National Bank of Chicago.  See further discussion of the Company's current
credit facility under "Liquidity and Capital Resources."

     Net Income.  Net income increased 38.4%, or $6.4 million, to $23.2 million
in 1997 from net income of $16.7 million in 1996.  Net income for 1997 was 3.6%
of sales, as compared to 3.4% of sales in 1996.  Net income increased by $3.4
million as a result of the acquisitions.  In 1996, Pennsylvania Steel and the
Steel Division of Texas Foundries, prior to their sale and idling, respectively,
combined to lose approximately $1.2 million after tax.

FISCAL YEAR ENDED SEPTEMBER 29, 1996 COMPARED TO FISCAL YEAR ENDED OCTOBER 1,
1995

     Sales.  Sales increased 58.5%, or $180.1 million to $487.8 million in 1996
from $307.7 million in 1995. Of this increase, approximately $190.2 million
resulted from sales by the Company's 1995 and 1996 acquisitions.  These include
the Company's Texas Steel, Hi-Tech, Southern Aluminum and Bohn Aluminum
operations, each

                                      25
<PAGE>
 
acquired during fiscal year 1996, and the increase resulting from the full-
year's sales of the Company's Oberdorfer, Iroquois, Berlin, Pennsylvania Steel
and Castwell operations which were acquired during fiscal year 1995. There was a
$10.1 million sales decrease for the operations owned prior to 1995 due to
general declines in the economy affecting the demand for the Company's products,
particularly products utilized in the Heavy Truck market which decreased 15-20%
from 1995 to 1996. For fiscal 1996, average selling prices remained
approximately the same as in fiscal 1995 at all operating units. Tons shipped
increased 17.8% for the year ended September 29, 1996.

     Gross Profit.  Gross profit increased 29.0% or $18.6 million to $82.8
million in 1996 from $64.2 million in 1995.  Gross profit margins decreased to
17.0% in 1996 from 20.9% in 1995, due to the lower gross margins from the
majority of the 1995 and 1996 acquisitions, the impact of lower sales volume on
units owned prior to 1995, and the lower operating efficiencies due to a major
expansion of Texas Foundries operations which was delayed and suffered major
equipment downtime. Of the increase in the gross profit, $30.9 million resulted
from the 1995 and 1996 acquisitions.  The remaining $12.3 million decrease
resulted from the impact of the economy on units owned prior to 1995 and the
inefficient operations at Texas Foundries.

     Selling, General and Administrative Expenses.  Selling, general and
administrative (SG&A) expenses increased by 40.2% or $13.1 million to $45.8
million in 1996 from $32.7 million in 1995.  Expenses increased by $15.6 million
as the result of SG&A expenses attributable to companies acquired in 1995 and
1996.  Expenses from operations owned prior to 1995 declined by approximately
$2.5 million as a result of reductions in sales representative commissions and
spreading corporate administrative costs over a larger sales base.  For fiscal
1996, SG&A expenses, as a percentage of sales, declined to 9.4% from 10.6% in
fiscal 1995.

     Operating Income. Operating income increased by 17.3% or $5.4 million to
$36.9 million in 1996 from $31.5 million in 1995.  Approximately $15.3 million
of the operating income resulted from the Company's 1995 and 1996 acquisitions,
while operating income from the pre-acquisition units declined approximately
$9.9 million in 1996.  The decline was primarily attributable to lower revenues
of the units owned prior to 1995, inefficiencies at the Mansfield Foundry
operation, the impact of the delayed "ramp-up" of the Texas Foundries' Iron
Division, and excess losses attributed to maintenance shut-downs of a number of
the units in July and August 1996.  The operating margin in 1996 declined to
7.6% from 10.3% in 1995, attributable to the preceding factors and the generally
lower operating margins of the acquired operations.

     Interest Expense.  Interest expense, net of interest income, increased
97.9% or $3.9 million to $7.9 million in 1996 from $4.0 million in 1995.
Interest expense increased because of higher debt balances to fund acquisitions
and slightly higher average interest rates.  Additionally, the Company
capitalized interest on the Texas  Foundries expansion project until

                                      26
<PAGE>
 
it was substantially complete. The Company capitalized interest of $453 thousand
in 1996 as compared to $1.0 million in 1995.

     The Company's debt increased from $77.8 million at October 1, 1995 to
$143.6 million at September 29, 1996.  The increase was primarily attributable
to the completion of the acquisitions of Texas Steel, Southern Aluminum, Bohn
Aluminum and Hi-Tech Corporation during the current fiscal year.  See further
discussion of the Company's current credit facility under "Liquidity and Capital
Resources."

     Other Expense (Income).  In fiscal year 1996, the Company established a
$1.8 million pre-tax allowance for the anticipated loss on the sale of
Pennsylvania Steel, which occurred subsequent to the fiscal year end.
Pennsylvania Steel was sold for approximately $9.0 million, which was less than
net book value.  The Company also had approximately $600 thousand in other
income in both fiscal 1996 and 1995.

     Net Income.  Net income declined 2.0% or $400 thousand to $16.7 million in
1996 from $17.1 million in 1995.  As a percentage of sales, 1996 net income
declined to 3.4% as compared to 5.6% in 1995.

SUPPLEMENTAL QUARTERLY INFORMATION

     The following table presents selected unaudited quarterly results for
fiscal years 1996 and 1997. The Company's sales are generally lower in its
first fiscal quarter due to plant closings by major customers for vacations,
holidays, and model changeovers.  In addition, the Company's operations usually
take normal one-week shut-downs during July.  The units lose production for the
week (or weeks) they are down, and also incur heavier than normal maintenance
expenses during these periods. These events negatively affect gross margins at
operating units in both the first and fourth fiscal quarters.

                                      27
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                              Fiscal Quarters Ended:
 
                                Dec. 31,    Mar. 31,    Jun. 30,   Sept. 29,   Dec. 29,   Mar. 30,   Jun. 29,   Sept. 28,
                                 1995         1996        1996       1996        1996       1997       1997       1997       
                             -----------------------------------------------------------------------------------------------
                                                     (Dollars in thousands, except per share amounts)                             
                                                                    (Unaudited)           
<S>                            <C>         <C>         <C>         <C>         <C>        <C>        <C>        <C> 
Sales ------------------       $91,761     $120,955    $143,420    $131,617    $140,486   $170,435   $177,858   $160,182   
Gross profit -----------        15,860       22,345      26,253      18,334      22,126     29,582     32,221     26,530   
SG&A Expenses ----------         9,956       11,776      12,326      11,786      12,805     15,290     15,648     14,323   
Operating income -------         5,904       10,569      13,927       6,548       9,321     14,292     16,573     12,207   
Income before taxes ----         5,214        8,826      11,509       2,355       5,695     10,474     12,795      9,010   
Net income -------------         3,128        5,296       6,905       1,413       3,474      6,389      7,805      5,496   
Net income per share ---       $  0.18     $   0.30    $   0.39    $   0.08    $   0.20   $   0.36   $   0.44   $   0.31   
                                                                                                                           
As a Percentage of Sales             %            %           %           %           %          %          %          %  
                                                                                                                           
Gross profit -----------          17.3         18.5        18.3        13.9        15.8       17.4       18.1       16.6   
SG&A expenses ----------          10.8          9.7         8.6         9.0         9.1        9.0        8.8        8.9   
Operating income -------           6.4          8.7         9.7         5.0         6.6        8.4        9.3        7.6   
Income before taxes ----           5.7          7.3         8.0         1.8         4.0        6.2        7.2        5.6   
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal capital requirements are to fund capital
expenditures for existing facilities and to fund new business acquisitions.
Historically, the Company has used cash generated by operations, bank financing
and proceeds from public equity offerings to fund its capital requirements.
Additionally, the Company requires capital to finance accounts receivable and
inventory.

     Net cash provided by operating activities primarily represents net income
plus non-cash charges for depreciation, amortization and deferred income taxes
and changes in working capital positions. Because of the capital intensive
nature of the business, non-cash charges for depreciation and amortization are
substantial. Net cash provided by operating activities was $22.6 million, $21.8
million, and $68.4 million in 1995, 1996, and 1997 respectively.

     Net cash used in investing activities in 1995, 1996, and 1997 was $97.0
million, $67.9 million, and $82.3 million respectively.  Substantially all of
the above investment activities were for capital expenditures and acquisitions.
In addition, the Company had non-cash investments of $14.9 million in 1995 and
$320 thousand in 1996 related to acquisitions.  There were no such
transactions during 1997.  These transactions are described more fully in the
notes to the consolidated financial statements included elsewhere in this annual
report.

     In order to meet or exceed customer expectations, the Company historically
has made significant capital investment in its plants and equipment. The Company
has spent $101.5 million during the three fiscal years ended September 28, 1997
for the purpose of improving production efficiency, expanding capacity and
technological capability, reducing costs

                                       28
<PAGE>
 
and complying with regulatory requirements. The Company believes that on average
it needs to spend amounts at least equal to its annual depreciation charge in
order to maintain its facilities in competitive working order, and in years when
substantial new capacity is added, capital expenditures may significantly exceed
the Company's depreciation charge. The most significant capital project has been
the expansion at Citation Foam. This included the addition of a new foam casting
production line, additional melt capacity and a new casting painting, finishing,
and shipping facility. The project will be substantially complete in the first
quarter of fiscal 1998. As a result of the expansion project, Citation Foam
capacity will be more than doubled.

     The Company had net cash provided by financing activities of $83.2 million,
$38.5 million, and $14.2 million for 1995, 1996, and 1997, respectively.  The
Company's secondary public offering in 1995 provided $69.5 million of cash.  For
1995, 1996, and 1997, net cash of $17.2 million, $30.1 million, and $18.0
million, respectively, was provided from the Company's credit facility, capital
lease obligations, and other financing arrangements.  Cash distributions to the
Company's original stockholders (pre IPO) were $3.5 million during 1995.
Dividends paid in fiscal year 1995 represent the final payment of previously
undistributed S Corporation taxable income.  The Company has no current plans to
pay dividends, as future earnings of the Company are expected to be retained for
use in the business.

     On July 24, 1997, the Company's credit facility was increased from $230
million to $300 million to be used for working capital purposes and to fund
future acquisitions.  At September 28, 1997, the total outstanding balance under
the credit facility was $170.3 million and $129.6 million was available for
borrowing.  This transaction and the outstanding debt balances at September 29,
1996 and September 28, 1997 are described more fully in note 6 of the
consolidated financial statements included elsewhere in this annual report.

     The Company anticipates that its cash flow from operations and amounts
expected to be available for borrowing from lending institutions will be
adequate to fund its capital expenditure and working capital requirements for
the next two years.

CYCLICALITY, SEASONALITY AND INDUSTRY CONCENTRATION

     The Company has had and expects to have a significant concentration of its
sales in the automotive/light truck and heavy truck industries.  The Company's
sales are generally lower in its first and fourth fiscal quarters due to plant
closings by major customers for vacations, holidays and model changeovers.  As a
result, the inherent cyclicality and seasonality of these industries may affect
the Company's future sales and earnings, particularly during periods of slow
economic growth or recession.  In addition to the above industries, the Company
also has significant sales to substantially all major industrial sectors of the
economy.  Management believes the differing cycles of these sectors will provide
protection against periodic down cycles in any particular industrial sector.

                                       29
<PAGE>
 
INFLATION
 
     Management believes that the Company's operations have not been materially
adversely affected by inflation because the Company is generally able to pass
through to its customers inflationary cost increases.  However, in periods of
rapidly rising steel scrap prices, the Company will lag behind the market on the
amount it can pass through to customers, and its results of operations may be
adversely affected during these periods.

RECENTLY ISSUED ACCOUNTING STANDARDS

     Note 2 of the consolidated financial statements included elsewhere in this
report describes recently issued accounting standards.

CONFORMANCE OF COMPUTER SYSTEMS TO YEAR 2000

     Citation is in the process of reviewing current software and has surveyed
its divisional operations to assess the impact of the year 2000 issue. The
standard software in use at its corporate office and divisions and the computer
software for interface among its divisions and corporate office is year 2000
compliant. At three divisions, older or locally developed software systems are
in use that are not fully in conformance with year 2000 effects. Programs to
bring remaining software in compliance are anticipated to be completed by the
end of fiscal year 1998. Citation management believes that its own compliance
programs will not result in material costs to the Company.

     The Company is in the preliminary stages of assessing the impact of the 
year 2000 issue on its major suppliers and customers to determine the extent to 
which the Company is vulnerable to those third parties' failure to remediate 
their own year 2000 issue. Based on information presently available, the Company
does not anticipate any material impact on its financial condition or results of
operations from the effect of the year 2000 issue on the Company's internal 
systems, or those of its major suppliers and customers. However, there can be no
guarantee that the systems of other companies on which the Company's systems 
rely will be timely converted, or that a failure to convert by another company, 
or a conversion that is incompatible with the Company's systems, would not have 
a material adverse impact on the Company. The Company does not believe it has 
any material exposure to contingencies related to the year 2000 issue for 
products it has sold.

RECENT ACQUISITIONS

     The Company completed one acquisition during fiscal 1997, as follows:

     Interstate Forging Industries, Inc.   Milwaukee, WI    October, 1996
                                           Navasota, TX
 
     In addition to the above acquisition completed during the fiscal year, the
Company completed the acquisition of Camden Castings Center, Camden, TN on
December 1, 1997 following the close of the 1997 fiscal year.  These
transactions are described more fully in the notes to the consolidated financial
statements included elsewhere in this annual report.

                                       30
<PAGE>
 
ITEM 8:   FINANCIAL STATEMENTS
 
     The following financial statements are contained in this report.
     
                                                                           Page
Report of Independent Certified Public Accountants                           32
Consolidated Financial Statements for Years Ended October 1, 1995,
     September 29, 1996 and September 28, 1997
          Consolidated Balance Sheets                                        33
          Consolidated Statements of Income                                  34
          Consolidated Statements of Stockholders' Equity                    35
          Consolidated Statements of Cash Flows                              36
          Notes to Consolidated Financial Statements                         37
Report of Independent Certified Public Accountants on                          
Supplementary Information                                                    69
Schedule II - Valuation and Qualifying Accounts                              70 

                                       31
<PAGE>
 
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders
Citation Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheets of Citation
Corporation and subsidiaries (the Company) as of September 28, 1997 and
September 29, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended September 28, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits 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 Citation
Corporation and subsidiaries as of September 28, 1997 and September 29, 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 28, 1997, in conformity with
generally accepted accounting principles.


Birmingham, Alabama
November 17, 1997

                                       32
<PAGE>
 
CITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 29, 1996 and September 28, 1997
(In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                                         SEPTEMBER 29,            SEPTEMBER 28,
                                                                                             1996                     1997
                                                                                         -------------            -------------
                                      ASSETS
<S>                                                                                      <C>                      <C> 
Current assets:
    Cash and cash equivalents                                                            $      2,267             $      2,645
    Accounts receivable - trade, less allowance for doubtful accounts
      of $1,421 and $1,367 in 1996 and 1997, respectively                                      77,931                   93,542
    Inventories                                                                                39,478                   48,953
    Income tax receivable                                                                       3,655
    Deferred income taxes                                                                       4,411                    8,429
    Prepaid expenses and other assets                                                           7,617                    6,934
                                                                                         -------------            -------------
        Total current assets                                                                  135,359                  160,503
Property, plant, and equipment, net of accumulated depreciation                               199,367                  282,991
Intangible assets, net of accumulated amortization                                             47,802                   47,373
Other assets                                                                                    1,029                    2,429
                                                                                         -------------            -------------
        Total assets                                                                     $    383,557             $    493,296
                                                                                         =============            =============
                LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Cash overdraft                                                                       $      8,328             $      4,211
    Current portion of other long-term debt                                                     2,654                    2,994
    Accounts payable                                                                           33,668                   43,256
    Income tax payable                                                                                                   2,745
    Accrued wages and benefits                                                                  6,122                    9,131
    Accrued benefit plan contributions                                                          3,051                    4,324
    Accrued vacation                                                                            4,219                    4,716
    Accrued insurance reserves                                                                  4,508                    6,592
    Accrued interest                                                                            2,014                    2,430
    Other accrued expenses                                                                      8,291                   13,558
                                                                                         -------------            -------------
        Total current liabilities                                                              72,855                   93,957
Credit facility                                                                               133,055                  170,393
Other long-term debt, less current portion above                                                7,891                   10,846
Deferred income taxes                                                                          15,725                   38,921
Other liabilities                                                                               4,712                    6,540
                                                                                         -------------            -------------
        Total liabilities                                                                     234,238                  320,657
Commitments and contingencies (Notes 13, 17, and 19)
Stockholders' equity:
    Preferred stock, $0.01 par value; 5,000,000 shares
      authorized, none issued and outstanding
    Common stock, par value $0.01 per share; 30,000,000 shares
      authorized, 17,715,540 and 17,759,600 shares issued and
      outstanding in 1996 and 1997, respectively                                                  177                      177
    Additional paid-in capital                                                                107,087                  107,243
    Retained earnings                                                                          42,055                   65,219
                                                                                         -------------            -------------
        Total stockholders' equity                                                            149,319                  172,639
                                                                                         -------------            -------------
        Total liabilities and stockholders' equity                                       $    383,557             $    493,296
                                                                                         =============            =============
 </TABLE>

See notes to consolidated financial statements.

                                       33
<PAGE>
 
CITATION CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
for the years ended October 1, 1995, September 29, 1996, and September 28, 1997
(In Thousands, Except Share and Per Share Data)

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED
                                                                     ----------------------------------------------
                                                                     OCTOBER 1,      SEPTEMBER 29,    SEPTEMBER 28,
                                                                        1995            1996             1997
                                                                     ------------   ---------------  ------------- 
                                                                     <C>             <C>              <C> 
<S>                                                                  
Sales                                                                $   307,681    $    487,753     $    648,961
Cost of sales                                                            243,493         404,961          538,502
                                                                     ------------   ---------------  ------------- 
                                                                     
Gross profit                                                              64,188          82,792          110,459
                                                                     
Selling, general, and administrative expenses                             32,697          45,844           58,066
                                                                     ------------   ---------------  ------------- 
                                                                     
Operating income                                                          31,491          36,948           52,393
                                                                     
Other expenses (income):                                             
  Interest expense, net of amounts capitalized of $1,003, $453,      
     and  $388 in  1995, 1996, and 1997, respectively                      3,974           7,866           14,433
  Other, net                                                                (581)          1,178              (14)
                                                                     ------------   ---------------  ------------- 
                                                                     
                                                                           3,393           9,044           14,419
                                                                     ------------   ---------------  ------------- 
                                                                     
Income before provision for income taxes                                  28,098          27,904           37,974
                                                                     
Provision for income taxes                                                11,019          11,162           14,810
                                                                     ------------   ---------------  ------------- 
                                                                     
          Net income                                                 $    17,079    $     16,742     $     23,164
                                                                     ============   ===============  =============   
                                                                     
Earnings per average common share                                    $      1.27    $       0.95     $       1.31
                                                                     ============   ===============  =============   
                                                                     
Weighted average common shares outstanding                            13,437,900      17,693,974       17,733,157
                                                                     ============   ===============  =============   
</TABLE> 
 
See notes to consolidated financial statements.
 

                                       34
<PAGE>
 
CITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended October 1, 1995, September 29, 1996, and September 28, 1997
(In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                             NUMBER                     ADDITIONAL                                
                                               OF          PAR           PAID-IN         RETAINED                 
                                             SHARES       VALUE          CAPITAL         EARNINGS           TOTAL 
                                           -----------   -------      ------------      ---------       ----------- 
<S>                                         <C>           <C>          <C>              <C>              <C>     
Balance, October 2, 1994                    13,242,500    $  132       $   35,265       $   8,234        $   43,631
Issuance of common stock
  under Incentive Award Plan                    41,500                        332                               332
Issuance of common stock
  for the acquisition of:
    Berlin Foundry Corporation                  61,540         1              999                             1,000
    Pennsylvania Steel Foundry
     and Machine Company, Inc.                  80,000         1            1,309                             1,310
Issuance of common stock                     4,250,000        43           69,133                            69,176
Subscriptions under employee
  stock purchase plan                                                         (52)                              (52)
Net income                                                                                 17,079            17,079
                                           -----------   -------      ------------      ---------       -----------  

Balance, October 1, 1995                    17,675,540       177          106,986          25,313           132,476
Issuance of common stock
  under Incentive Award Plan                    40,000                        320                               320
Subscriptions under employee
  stock purchase plan                                                        (219)                             (219)
Net income                                                                                 16,742            16,742
                                           -----------   -------      ------------      ---------       -----------   

Balance, September 29, 1996                 17,715,540       177          107,087          42,055           149,319
Issuance of common stock
  under Incentive Award Plan                    59,310                        499                               499
Purchase of common shares
  for constructive retirement                  (15,250)                      (255)                             (255)
Subscriptions under employee
  stock purchase plan                                                         (88)                              (88)
Net income                                                                                 23,164            23,164
                                           -----------   -------      ------------      ---------       -----------   

Balance, September 28, 1997                 17,759,600    $  177       $  107,243       $  65,219        $  172,639
                                           ===========   =======      ============      =========       ===========   
</TABLE> 

See notes to consolidated financial statements.

                                       35
<PAGE>
 
CITATION CORPORATION  AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended October 1, 1995, September 29, 1996, and September 28, 1997
(In Thousands)

<TABLE>
<CAPTION>
                                                              OCTOBER 1,    SEPTEMBER 29,  SEPTEMBER 28,
                                                                 1995          1996           1997
                                                             -----------    -------------  -------------
<S>                                                          <C>            <C>            <C>    
Cash flows from operating activities:
 Net income                                                  $    17,079    $   16,742     $     23,164
Adjustments to reconcile net income to net cash
 provided by operating activities:
   Provision for losses on receivables                               461           584               64
   Provision for loss on sale of Penn Steel                                      1,807
   Depreciation expense                                            8,944        17,080           26,539
   Amortization expense                                            1,694         3,071            3,950
   Deferred income taxes, net                                      1,866         3,444            3,045
   Gain on sale of property, plant, and equipment                   (200)          (38)            (116)
   Changes in operating assets and liabilities, net:
     Accounts receivable - trade                                  (2,823)       (7,294)          (3,729)
     Inventories                                                    (572)       (3,138)          (1,175)
     Prepaid expenses and other assets                            (6,789)       (2,135)           1,519
     Income tax  receivable                                         (489)       (3,166)           3,655
     Income tax payable                                           (1,236)                         3,520
     Accounts payable                                                (29)          198            3,828
     Accrued expenses and other liabilities                        4,698        (5,374)           4,159
                                                             -----------    ----------     ------------ 
       Net cash provided by operating activities                  22,604        21,781           68,423
                                                             -----------    ----------     ------------ 
 
Cash flows from investing activities:
 Property, plant, and equipment expenditures                     (29,844)      (31,166)         (40,531)
 Proceeds from sale of property, plant, and equipment                367           258              371
 Cash paid for acquisitions                                      (67,500)      (36,130)         (51,089)
 Proceeds from sale of Penn Steel                                                                 9,006
 Other nonoperating assets, net                                                   (820)             (37)
                                                             -----------    ----------     ------------ 
       Net cash used in investing activities                     (96,977)      (67,858)         (82,280)
                                                             -----------    ----------     ------------ 
 
Cash flows from financing activities:
 Cash overdraft                                                                  8,328           (3,890)
 Issuance of capital stock                                        69,456           101              411
 Purchase of Common Stock for constructive retirement                                              (255)
 Other financing arrangements, net                                (1,670)       (6,652)          (3,029)
 Repayment of acquired debt                                      (16,750)      (33,662)         (16,340)
 Credit facility, net change                                      35,634        70,417           37,338
 Distributions to stockholders                                    (3,466)
                                                             -----------    ----------     ------------ 
       Net cash provided by financing activities                  83,204        38,532           14,235
                                                             -----------    ----------     ------------ 

       Net increase (decrease) in cash and cash equivalents        8,831        (7,545)             378
Cash and cash equivalents, beginning of year                         981         9,812            2,267
                                                             -----------    ----------     ------------ 
 
Cash and cash equivalents, end of year                       $     9,812    $    2,267     $      2,645
                                                             ===========    ==========     ============ 
Supplemental disclosures of cash flow information:
 Cash paid during the year for:
  Interest                                                   $     2,154    $    8,434     $     13,932
                                                             ===========    ==========     ============ 
  Income taxes, net of refunds received                      $    10,249    $   10,797     $      3,431
                                                             ===========    ==========     ============
</TABLE> 
 
See Notes 16, 17, and 18 for additional supplemental disclosures of cash flow
information.
 
See notes to consolidated financial statements.

                                       36
<PAGE>
 
CITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)


1. ORGANIZATION AND OPERATIONS

   Citation Corporation and subsidiaries (the Company) is a manufacturer of
   cast, forged, and machined components for the capital goods and durable goods
   industries. At its 16 operating divisions, the Company produces aluminum,
   iron and steel castings, steel forgings, and machined and assembled
   components for automobiles, light, medium and heavy trucks, off-highway
   construction equipment, agricultural equipment, pumps, compressors and
   industrial valves, and other durable goods. The Company owns and operates
   businesses in Alabama, Illinois, Indiana, New York, North Carolina, Ohio,
   Texas, and Wisconsin which function as separate divisions or subsidiaries.
   References herein to Alabama Ductile Casting Company (ADCC), Berlin Foundry
   Corporation (BFC), Bohn Aluminum Corporation (Bohn), Castwell Products (CP),
   Citation Foam Casting Company (CFCC), Foundry Service Company (FSC), Hi-Tech
   Corporation (Hi-Tech), Interstate Forging Industries, Inc. (Interstate),
   Iroquois Foundry Corporation (IFC), Mabry Foundry (Mabry), Mansfield Foundry
   Corporation (MFC), Oberdorfer Industries (Oberdorfer), Pennsylvania Steel
   Foundry and Machine Company, Inc. (Penn Steel), Southern Ductile Casting
   Company (SDCC), Southern Aluminum Castings Company (SACC), Texas Foundries,
   and Texas Steel Company (Texas Steel) refer to operations of these divisions
   or subsidiaries. The Company also has a wholly owned subsidiary, Citation
   Automotive Sales Corp. (CAS), which operates a sales and engineering office
   in Detroit, Michigan.

   The consolidated financial statements and notes to consolidated financial
   statements include the accounts of Citation Corporation and its divisions and
   wholly-owned subsidiaries. All significant intercompany balances and
   transactions have been eliminated.

   The Company sells castings and forgings to customers in various industries
   and geographic regions of the U.S.  To reduce credit risk, the Company
   performs ongoing credit evaluations of its customers' financial condition and
   does not generally require collateral. Significant volumes of sales to
   customers in specific industries during fiscal years 1995, 1996, and 1997
   were as follows:

<TABLE>
<CAPTION>
                                   1995              1996              1997
     <S>                         <C>               <C>               <C>
     Automotive/light truck         31%               30%               35%
     Heavy truck                    24%               19%               15%
                                 ----------        ----------        ---------
                                    55%               49%               50%
                                 ==========        ==========        =========
</TABLE>

   On September 19, 1995, the Company completed a secondary offering of
   4,250,000 shares of common stock at $17.375 per share. The net proceeds after
   deducting applicable issuance costs and expenses were $69,176. The net
   proceeds were used to reduce amounts outstanding under the Company's note
   payable agreement.

                                       37
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   FISCAL YEAR - The Company operates on a fifty-two/fifty-three week fiscal
   year which ends on the Sunday nearest to September 30. Fiscal years 1995,
   1996, and 1997 each consisted of fifty-two weeks.

   REVENUE RECOGNITION - The Company records sales upon shipment of the related
   products, net of any discounts.

   CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
   purchased with an original maturity of three months or less at the date of
   purchase to be cash equivalents.

   CASH OVERDRAFT - In conjunction with the credit facility discussed in Note 6,
   the Company entered into a consolidated cash management system with the
   administrative agent and lead bank of the credit facility. As a result of
   maintaining this consolidated cash management system, the Company maintains a
   zero balance at the lead bank resulting in book cash overdrafts. Such
   overdrafts are included in current liabilities.

   INVENTORIES - Raw materials inventories are stated at the lower of cost
   (principally first-in, first-out basis) or market. Supplies and containers
   inventories are stated primarily at the lower of cost (principally average
   cost) or market. Castings and forgings inventories are stated primarily at
   the lower of cost (as determined principally at standard cost or under the
   retail method) or market.

   PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are carried
   at cost, less accumulated depreciation, and include expenditures that
   substantially increase the useful lives of existing assets. Maintenance,
   repairs, and minor renovations are charged to expense as incurred. Upon sale,
   retirement, or other disposition of these assets, the cost and related
   accumulated depreciation are removed from the respective accounts, and any
   gain or loss on the disposition is included in income.

   The Company provides for depreciation of property, plant, and equipment using
   primarily the straight-line method designed to depreciate costs over
   estimated useful lives as shown below:

<TABLE>
<CAPTION>
                                                     ESTIMATED USEFUL LIFE
                                                     ---------------------
      <S>                                            <C>
      Buildings                                          10 - 50 years
      Plant equipment                                     3 - 20 years
      Office equipment                                    2 - 12 years
      Transportation equipment                             3 - 7 years
</TABLE>

   Property, plant, and equipment acquired under capital lease agreements are
   carried at cost less accumulated depreciation. These assets are depreciated
   in a manner consistent with the Company's depreciation policy for purchased
   assets.

   INTANGIBLE ASSETS - Goodwill, the excess of purchase price over the fair
   value of net assets acquired in purchase transactions, is being amortized on
   a straight-line basis primarily over a 20-year period but with various
   amounts ranging from 18 to 40 years. The Company assesses

                                       38
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)


   the recoverability and the amortization period of the goodwill by determining
   whether the amount can be recovered through undiscounted net income of the
   businesses acquired, excluding interest expense and goodwill amortization,
   over the remaining amortization period. Amounts paid or accrued for
   noncompetition and consulting agreements are amortized using the straight-
   line method over the term of the agreements. Bond and other financing
   expenses are amortized using the straight-line method, which approximates the
   effective interest method, over the term of the related debt issues.

   LONG-LIVED ASSETS - The Company recognizes impairment losses on long-lived
   assets used in operations when indicators of impairment are present and the
   undiscounted cash flows estimated to be generated by those assets are less
   than the assets' carrying amount. There were no such losses recognized during
   fiscal years 1995, 1996, or 1997.

   ACCOUNTING FOR INCOME TAXES - The Company accounts for income taxes in
   accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
   Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are
   recognized for the tax consequences in future years of differences between
   the tax bases of assets and liabilities and their financial reporting amounts
   at each year end. The amounts recognized are based on enacted tax laws and
   statutory tax rates applicable to the periods in which the differences are
   expected to affect taxable income. Valuation allowances are established when
   necessary to reduce deferred tax assets to the amount expected to be
   realized. Income tax expense is the tax payable for the period and the change
   during the period in deferred tax assets and liabilities.

   RECLASSIFICATIONS - Certain reclassifications have been made in the previous
   years' financial statements in order to conform them to the current year
   classifications, with no effect on previously reported net income or
   stockholders' equity.

   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 amounts of revenue and expenses
   during the reporting period. Actual results could differ from those
   estimates.

   RECENTLY ISSUED ACCOUNTING STANDARDS - In February 1997, the Financial
   Accounting Standards Board issued Statement of Financial Accounting Standards
   No. 128, Earnings Per Share (SFAS 128). SFAS 128 supersedes existing
   generally accepted accounting principles relative to the calculation of
   earnings per share, is effective for years ending after December 15, 1997,
   and requires restatement of all prior period earnings per share information
   upon adoption. Generally, SFAS 128 requires a calculation of basic earnings
   per share, which takes into consideration income (loss) available to common
   shareholders and the weighted average of common shares outstanding. SFAS 128
   also requires the calculation of a diluted earnings per share, which takes
   into effect the impact of all additional common shares that would have been
   outstanding if all potential common shares relating to options, warrants, and
   convertible securities had been issued, as long as their effect is dilutive.
   SFAS 128 requires dual

                                       39
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

     presentation of basic and diluted earnings per share on the face of the
     statement of income and requires a reconciliation of the numerator and
     denominator of the basic earnings per share computation. The Company does
     not expect the effect of its adoption of SFAS 128 to be material.


3.   INVENTORIES

     A summary of inventories is as follows:

<TABLE>
<CAPTION>
                                                    SEPTEMBER 29,         SEPTEMBER 28,  
                                                         1996                  1997      
                                                 ------------------    ------------------
        <S>                                      <C>                   <C>               
        Raw materials                            $          8,872      $          10,981 
        Supplies and containers                             9,817                 12,478 
        Castings and forgings                              20,789                 25,494 
                                                 ------------------    ------------------
                                                 $         39,478      $          48,953 
                                                 ==================    ================== 
</TABLE>

4.   PROPERTY, PLANT, AND EQUIPMENT

     Balances of major classes of assets and accumulated depreciation are as
     follows:


<TABLE>
<CAPTION>
                                                    SEPTEMBER 29,         SEPTEMBER 28,  
                                                        1996                  1997       
                                                 ------------------    ------------------
        <S>                                      <C>                   <C>               
        Land and improvements                    $          7,166      $          11,096 
        Buildings                                          37,316                 50,217 
        Plant equipment                                   195,370                267,607 
        Office equipment                                    9,230                 11,797 
        Transportation equipment                            8,788                 10,527 
        Construction in progress                            8,403                 23,149 
                                                 ------------------    ------------------
                                                                                         
                                                          266,273                374,393 
        Less accumulated depreciation                     (66,906)               (91,402)
                                                 ------------------    ------------------
                                                                                         
                                                 $        199,367      $         282,991 
                                                 ==================    ================== 
</TABLE>


5.   INTANGIBLE ASSETS

     The Company's intangible assets, net of accumulated amortization, consist
     of the following:

<TABLE>
<CAPTION>
                                                    SEPTEMBER 29,         SEPTEMBER 28,  
                                                         1996                  1997      
                                                 ------------------    ------------------
        <S>                                      <C>                   <C>
        Goodwill                                 $         45,704      $          46,161 
        Consulting and noncompetition agreements            1,893                  1,178 
        Other                                                 205                     34 
                                                 ------------------    ------------------
                                                                                       
                                                 $         47,802      $          47,373
                                                 ==================    ================== 
</TABLE>

                                       40
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

   The future annual amount of amortization expense related to the Company's
   intangible assets as of September 28, 1997 is as follows for fiscal years:

<TABLE>
        <S>                                                  <C>       
        1998                                                   $  3,231
        1999                                                      2,953
        2000                                                      2,841
        2001                                                      2,616
        2002                                                      2,616
        Thereafter                                               33,116
                                                             ----------
                                                                       
                                                              $  47,373 
                                                             ========== 
</TABLE>

6. LONG-TERM DEBT


   Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                              SEPTEMBER 29,         SEPTEMBER 28,   
                                                                  1996                  1997     
                                                              -------------         ------------- 
   <S>                                                        <C>                   <C>          
   Credit facility                                            $     133,055         $     170,393
   Industrial development bonds                                       1,085                   900
   Other financing arrangements                                       9,460                12,940
                                                              -------------         ------------- 
                                                                    143,600               184,233
   Less current portion of other long-term debt                       2,654                 2,994
                                                              -------------         ------------- 
                                                              $     140,946         $     181,239
                                                              =============         ============= 
</TABLE>

   From October 2, 1995 to June 30, 1996, the Company's credit facility provided
   for borrowings up to a total of $135,000 and was to expire on July 31, 1998.
   The credit facility bore interest at a rate ranging from LIBOR plus 1% to
   LIBOR plus 2.5%, depending on the Company's leverage ratio, as defined in the
   agreement.

   Effective July 1, 1996, the Company executed a new primary facility with a
   consortium of banks, led by the First National Bank of Chicago - NBD (First
   Chicago - NBD), to increase the amount available to borrow up to $230,000 to
   be used for working capital purposes and to fund future acquisitions. The
   facility consisted of a swing line of credit bearing interest at prime and
   revolving credit borrowings which bore interest at LIBOR plus a margin based
   on the Company's leverage ratio, as defined in the credit agreement, at the
   time of the borrowing and was to expire on July 31, 1998. At September 29,
   1996, the total balance outstanding under this credit facility was $133,055
   and $96,945 was available for borrowing. As of September 29, 1996, the total
   outstanding balance consisted of $3,055 under the swing line of credit at a
   prime rate of 8.25%. The remaining $130,000 outstanding under this facility
   related to four revolving loans. At September 29, 1996, the Company had
   $30,000 and $60,000 outstanding under these loans at interest rates of 7.31 %
   and 7.14% which repriced on January 2, 1997 and February 3, 1997,
   respectively. The Company entered into two $20,000 five-year interest rate
   swaps 

                                       41
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

   establishing fixed interest rates for the remaining $40,000 of debt
   outstanding under the credit facility at September 29, 1996. These swap
   agreements are repriced every 90 days and expire in August 2001. The
   Company's fixed interest rates were 8.34% and 8.16% under these two
   agreements at September 29, 1996.

   On July 24, 1997, the Company's credit facility was increased from $230,000
   to $300,000 to be used for working capital purposes and to fund future
   acquisitions. Several new banks were added to the lending group. Under the
   amended facility, the Company can borrow at interest rates from LIBOR plus
   .5% to LIBOR plus 1.375% based upon the Company's ratio of debt to its cash
   flow, measured by earnings before interest and taxes plus depreciation and
   amortization (EBITDA). On September 28, 1997, the Company was able to borrow
   at LIBOR plus 1%. The facility calls for an unused commitment fee payable
   quarterly, in arrears, at a rate of .18% to .30% based upon the Company's
   ratio of debt to EBITDA. On September 28, 1997, the Company's unused
   commitment fee rate was .25%. The facility is collateralized by substantially
   all of the assets of the Company as well as the stock of its subsidiaries and
   expires on July 24, 2000. At September 28, 1997, the total outstanding
   balance under this credit facility was $170,393 and $129,607 was available
   for borrowing.

   As of September 28, 1997, the Company had $5,393 outstanding under the swing
   line of credit at the prime rate of 8.5%. The remaining $165,000 outstanding
   under this facility related to five revolving loans. At September 28, 1997,
   the Company had $8,000 and $77,000 outstanding under these loans at interest
   rates of 6.66% and 6.85% which reprice on October 27, 1997 and January 27,
   1998, respectively. The remaining $80,000 outstanding under this facility
   consists of one $40,000 five-year interest rate swap agreement, which
   commenced in fiscal year 1997, and two $20,000 five-year interest rate swap
   agreements that were entered into during fiscal year 1996. These agreements
   are repriced every 90 days and expire between August 2001 and February 2002.
   The agreements have fixed interest rates plus a margin of .5% to 1.375%,
   based on the Company's leverage ratio on the date the agreements are
   repriced. The Company's fixed interest rates were 7.91% and 8.09% on the two
   $20,000 swap agreements and 7.85% on the $40,000 swap agreement at September
   28, 1997. The Company is exposed to credit risk in the event of
   nonperformance by the counterparty to the interest rate swap agreements. The
   Company mitigates credit risk by dealing only with financially sound banks.
   Accordingly, the Company does not anticipate loss for nonperformance by these
   counterparties.

   The Company's credit facility contains certain restrictive covenants that
   require the maintenance of a funded debt to EBITDA ratio; a specified fixed
   charge coverage ratio; places a maximum debt to total capital leverage ratio;
   places limitations on capital expenditures, and places limitations on
   dividends and other borrowings.

   The Company has industrial development bond issues which are for expanded
   production facilities. One of the bonds bears interest at 80% of prime (6.56%
   and 6.76% at September 29, 1996 and September 28, 1997, respectively). The
   remaining bonds bear interest at fixed rates of 5.75% and 8.25% and mature
   through 2003. Amounts due under these bond issues are

                                       42
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

   collateralized by property, plant, and equipment having a net book value of
   $7,506 and $7,400 at September 29, 1996 and September 28, 1997, respectively.

   Other financing arrangements are as follows:

<TABLE>
<CAPTION>
                                                                       SEPTEMBER 29,       SEPTEMBER 28,
                                                                            1996                1997
                                                                     ----------------    ----------------
       <S>                                                           <C>                 <C>
       Notes payable for the purchase of Mabry, guaranteed by the
       Company's majority stockholder, requiring quarterly
       payments of $18 each, including principal and interest at
       8% through April 1998, at which time the rate will be
       determined annually based on rates charged by banks to
       large corporations until final payment in May 2003             $          757      $           669 
   
       Notes payable for the purchase of BFC requiring twelve
       combined quarterly payments of $167 beginning August 1,
       1995, including interest at 8%                                          1,166                  500 
 
       Note payable for the purchase of CP requiring a payment of
       $3,000 on January 1, 1996 and 22 quarterly payments of
       approximately $273 beginning April 1, 1996                              5,455                4,364
 
       Note payable for the purchase of Hi-Tech, bearing interest
       at 8%, payable on December 30, 1996                                       320
 
       Bank note bearing interest at 7.63%, payable in quarterly
       installments of $200, plus interest, with a final
       installment due March 31, 1999                                                               5,400
 
       Note payable to Small Business Administration, bearing
       interest at 9.23%, payable in monthly payments of interest
       and principal through July 2011                                           656                  630 
  
       Note payable to Small Business Administration, bearing
       interest at 6.625%, payable in monthly payments of
       interest and principal through September 2006, and
       collateralized by equipment with no remaining net book
       value                                                                     238                  226 
 
       Miscellaneous capital lease obligations for equipment,
       requiring monthly payments ranging from $1 to $7,
       including principal and interest, at rates ranging from
       8.25% to 12.1% and maturing at dates ranging from 1998
       through 2002                                                              476                  664 
                                                                                                           
       Various other notes, requiring monthly payments ranging
       from $1 to $50, including principal and interest at rates
       ranging from 9.25% to 14.5%, and maturing at dates ranging
       from 1998 through 2001                                                    392                  487 
                                                                     ----------------     ----------------
 
                                                                       $        9,460      $        12,940
                                                                     ================     ================
</TABLE>

                                       43
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

   Aggregate maturities of long-term debt at September 28, 1997 are as follows
   for fiscal years:

<TABLE>
          <S>                      <C>  
           1998                     $  2,994
           1999                        6,318
           2000                      171,924
           2001                        1,787
           2002                          365
           Thereafter                    845
                                   ---------
                                   $ 184,233
                                   =========
</TABLE>

7. COMMON STOCK PLANS

   The Company's Incentive Award Plan (the Award Plan) provides for the grant of
   incentive stock options, non-qualified stock options, stock appreciation
   rights, and restricted stock or a combination thereof, as determined by the
   Compensation Committee of the Board of Directors at the time of grant, to
   officers and certain employees. Under the Award Plan, 1,750,000 shares of the
   Company's common stock have been reserved for issuance. Options granted under
   the plan provide for the purchase of the Company's common stock at not less
   than the fair market value on the date the option is granted. In conjunction
   with the Company's initial public offering, options for 538,000 shares of
   common stock were granted at prices ranging from $8-$8.80 per share. The
   options expire on August 2, 1999 and portions of the options granted became
   exercisable beginning December 1, 1994 at varying times through fiscal year
   1998. Options subsequently granted generally become exercisable over periods
   ranging from six months to two years and have terms of five years. In 
   connection with the acquisition of Interstate as discussed in Note 17, the 
   Company issued 43,500 restricted shares under the Award Plan during 1997.

   On February 23, 1995, the Shareholders approved the Non-Qualified Stock
   Option Plan for Non-Employee Directors (Non-Employee Directors Stock Option
   Plan) which provides for the grant of stock options to the non-employee
   directors of the Company. Under this plan, 100,000 shares of the Company's
   common stock have been reserved for issuance. Options granted under the plan
   provide for the purchase of the Company's common stock at not less than the
   fair market value on the date the option is granted. The options issued under
   this plan are exercisable six months after the date of grant and expire five
   years after the date of grant. As of September 29, 1996 and September 28,
   1997, options for 50,000 shares of the Company's stock have been issued under
   this plan and 50,000 shares are available for grant. All of the 50,000
   options issued to date were granted at $15.25 per share, became exercisable
   in January 1996, and expire in June 2000. None of these options have been
   exercised as of September 28, 1997.

                                       44
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

   Transactions under both plans are summarized as follows:

<TABLE>
<CAPTION>
                                                                                                               WEIGHTED-
                                                                    NUMBER                 RANGE OF             AVERAGE
                                                                  OF OPTIONS            EXERCISE PRICES      EXERCISE PRICE
                                                                 ------------           ---------------      --------------
        <S>                                                      <C>                    <C>                  <C>
        Options outstanding, October 2, 1994                           538,000          $ 8.00 - $ 8.80             $  8.07
        Granted                                                        159,000          $13.38 - $16.06             $ 15.64
        Exercised                                                      (41,500)         $          8.00             $  8.00
        Canceled                                                       (50,000)         $          8.00             $  8.00
                                                                 ------------------------------------------------------------ 
 
        Options outstanding, October 1, 1995                           605,500          $ 8.00 - $16.06             $ 10.07
        Granted                                                        100,000          $         12.06             $ 12.06  
        Exercised                                                      (40,000)         $          8.00             $  8.00  
                                                                 ------------------------------------------------------------ 
 
        Options outstanding, September 29, 1996                        665,500          $ 8.00 - $16.06             $ 10.49 
        Granted                                                         34,000          $14.44 - $14.88             $ 14.57 
        Exercised                                                      (59,310)         $ 8.00 - $16.06             $  8.41 
        Canceled                                                       (20,000)         $         16.06             $ 16.06 
                                                                 ------------------------------------------------------------ 
 
        Options outstanding, September 28, 1997                        620,190          $   8.00-$16.06             $ 11.00
                                                                 ============================================================
</TABLE>

   The following table summarizes information about options exercisable and
   granted as of the following years:

<TABLE>
<CAPTION>
                                                   OCTOBER 1,               SEPTEMBER 29,          SEPTEMBER 28,
                                                      1995                      1996                    1997
                                                 --------------            ---------------         --------------
        <S>                                      <C>                       <C>                     <C> 
        Options exercisable                            346,500                  495,500                610,190
                                                  
        Weighted-average exercise                 
         price of options exercisable                 $   8.21                 $  10.19               $  10.67
</TABLE>
 

                                       45
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in Thousands, Except Share and Per Share Data)

   The following table summarizes information about options outstanding at
   September 28, 1997:


<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING                                 OPTIONS EXERCISABLE
          ---------------------------------------------------------    -------------------------------------
                                                        WEIGHTED
                                 NUMBER                  AVERAGE             NUMBER         
                               OUTSTANDING              REMAINING         EXERCISABLE       
             EXERCISE         SEPTEMBER 28,            CONTRACTUAL         SEPTEMBER 28,           EXERCISE
              PRICE               1997                    LIFE                1997                   PRICE
          ------------      -----------------         -------------    -------------------       ------------
          <S>               <C>                       <C>              <C>                       <C>
                $8.00                 280,190             1.8                   280,190               $8.00  
                $8.80                  50,000             1.8                    50,000               $8.80
               $13.38                  10,000             1.9                    10,000              $13.38  
               $15.25                  50,000             2.8                    50,000              $15.25  
               $16.06                  96,000             2.8                    96,000              $16.06  
               $12.06                 100,000             3.9                   100,000              $12.06  
               $14.44                  24,000             4.5                    24,000              $14.44  
               $14.88                  10,000             4.6      
                            -----------------                         -----------------
 
                                      620,190                                   610,190
                            =================                         =================
</TABLE>

   The Company applies Accounting Principles Board Opinion 25 and related
   Interpretations in accounting for its stock option plans. Accordingly, no
   compensation expense has been recognized for its stock option plans. Had
   compensation expense for the Company's stock option plans been determined
   based on the fair value at the grant dates for awards under those plans
   consistent with the method of Statement of Financial Accounting Standards No.
   123, the Company's net income and earnings per share would have been reduced
   to the pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                               SEPTEMBER 29,       SEPTEMBER 28,                                               
                                                   1996                1997                                                    
                                              ---------------     ---------------                                               
    <S>                                       <C>                 <C> 
    Net income:                                                                                                                 
     As reported                              $       16,742      $       23,164       
     Pro forma                                $       16,301      $       22,989       
                                                                                       
   Net income per share:                                                               
     As reported                              $         0.95      $         1.31       
     Pro forma                                $         0.93      $         1.30       
</TABLE>

   The pro forma amounts reflected above are not representative of the effects
   on reported net income in future  years because, in general, the options
   granted have different vesting periods and additional awards are made each
   year.

                                       46
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in Thousands, Except Share and Per Share Data)

   The Company elected to use the Black-Scholes pricing model to calculate the
   fair values of the options awarded, which are included in the pro forma
   results above. The following weighted average assumptions were used to derive
   the fair values:

<TABLE>
<CAPTION>
                                               SEPTEMBER 29,        SEPTEMBER 28,                                               
                                                   1996                 1997                                                    
                                              ---------------      --------------                                               
   <S>                                        <C>                  <C>                                                          
   Dividend yield                                          0%                  0%                                             
   Expected life (years)                                   3                   3                                              
   Expected volatility                                  44.2%               41.9%                                             
   Risk-free interest rate (range)                      6.32%       6.27% - 6.56%                                           
</TABLE>


   The Company also has an Employee Stock Purchase Plan (Stock Purchase Plan)
   that allows eligible employees to purchase, through payroll deductions,
   shares of the Company's common stock at specified dates at no less than 85%
   of the fair market value of the stock as of the offering date. All active
   employees are eligible to participate. Shares of common stock under the Stock
   Purchase Plan are to be purchased in the open market or issued from treasury
   stock. The maximum number of shares currently available under the Stock
   Purchase Plan is 250,000 shares. Subscriptions were outstanding for
   approximately 49,000 shares of common stock at $9.55 per share at September
   29, 1996 and approximately 75,000 shares of common stock at $13.30 per share
   were outstanding at September 28, 1997.

   On December 15, 1994, the Board of Directors approved the Stock Plan for Non-
   Employee Directors (Directors Stock Plan) to enable its non-employee
   directors to have all or part of their directors' fees used to purchase
   shares of the Company's common stock. As of September 29, 1996 and September
   28, 1997, 5,013 shares have been issued under this plan.


8. PREFERRED STOCK

   The Company has 5,000,000 shares of preferred stock authorized for issuance.
   The preferences, powers, and rights of the preferred stock are to be
   determined by the Company's board of directors.  None of these shares are
   issued and outstanding.

                                       47
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in Thousands, Except Share and Per Share Data)

9. INCOME TAXES

   The components of the provision for income taxes consist of the following:

<TABLE>
<CAPTION>
                                                OCTOBER 1,          SEPTEMBER 29,         SEPTEMBER 28,           
                                                  1995                  1996                  1997               
                                            ------------------    ------------------    ------------------         
   <S>                                      <C>                   <C>                   <C> 
   Current income tax expense:                                                                                     
     Federal                                  $          7,522      $          6,192      $         10,355         
     State                                               1,001                 1,526                 1,410         
                                            ------------------    ------------------    ------------------         
                                                                                                                   
                                                         8,523                 7,718                11,765         
                                            ------------------    ------------------    ------------------         
   Deferred income tax expense (benefit):                                                                                    
     Federal                                             1,824                 3,054                 2,511         
     State                                                 672                   390                  (384)         
                                            ------------------    ------------------    ------------------         
                                                                                                                   
                                                         2,496                 3,444                 2,127         
                                            ------------------    ------------------    ------------------         
   Valuation allowance                                                                                 918
                                            ------------------    ------------------    ------------------         
                                                                                                                   
   Total provision for income taxes           $         11,019      $         11,162      $         14,810            
                                            ==================    ==================    ==================         
</TABLE>



   Deferred tax assets and liabilities are composed of the following:

<TABLE>
<CAPTION>
                                                                                    SEPTEMBER 29,          SEPTEMBER 28,
                                                                                         1996                  1997
                                                                                 ------------------    -------------------
   <S>                                                                           <C>                   <C>     
   Current:
   Allowance for doubtful accounts and returns                                     $            980      $             861
   Accrued insurance liabilities                                                              1,719                  2,417
   Other accrued liabilities                                                                  1,712                  5,151
                                                                                 ------------------    -------------------
 
       Net current deferred tax asset                                              $          4,411      $           8,429
                                                                                 ==================    ===================
 
   Long-term:
     Basis differences of property, plant, and equipment                           $         15,685      $          36,807
     Other, net                                                                                  40                  1,196
     Valuation allowance                                                                                               918
                                                                                 ------------------    -------------------
 
       Net long-term deferred tax liability                                        $        15,725       $         38,921 
                                                                                 ==================    ===================
</TABLE>
   
   Realization of deferred tax assets associated with certain state net
   operationg loss (NOL) carryforwards is dependent upon the related subsidiary
   generating sufficient income prior to their expiration. Management believes
   that there is a risk that certain of the NOL carryforwards may expire unused,
   and, accordingly, has established a valuation allowance against them of $918
   as of September 28, 1997.

   The Company has NOLs for state income tax reporting purposes of $15,373
   available for years beginning after September 28, 1997. These NOLs have
   expiration dates through fiscal year 2012.


                                       48
<PAGE>
 
   Total provision for income taxes differs from the amount which would be
   provided by applying the statutory federal income tax rate to pretax earnings
   as indicated below:
 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

<TABLE>
<CAPTION>
                                                                  October 1,                    September 29,        September 28,
                                                                     1995                            1996                 1997
                                                             -----------------               -----------------    -----------------
<S>                                                          <C>                             <C>                  <C> 
      Provision for income taxes at statutory federal
       income tax rate                                        $         9,837                 $         9,766      $        13,291
      Increase (decrease) resulting from:
       Officers' life insurance                                            27                               7                   87
       Nondeductible meals and entertainment
         expenses                                                         107                             133                  190
       State income taxes                                               1,075                           1,245                  345
       Valuation allowance                                                                                                     918
       Other, net                                                         (27)                             11                  (21)
                                                             -----------------               -----------------    -----------------
      Total provision for income taxes                        $        11,019                 $        11,162      $        14,810
                                                             -----------------               -----------------    -----------------
</TABLE>

10.  DEFINED BENEFIT PLANS

     BFC's employees are covered by a defined benefit pension plan sponsored by
     the union which represents the employees. Minimum contributions are
     determined in accordance with provisions of the negotiated labor contract,
     but the Company's funding policy is to contribute amounts which are
     actuarially determined to provide the plan with sufficient assets to meet
     future benefit payment requirements consistent with the funding
     requirements of federal laws and regulations.

     Bohn maintains a defined benefit pension plan covering employees subject to
     a collective bargaining agreement. Benefits under the plan accrued at a
     rate of $14.50 per month per year of credited service during 1996 and 1997,
     respectively.

     Interstate sponsors two defined pension plans covering Milwaukee union
     employees. Pursuant to its collective bargaining agreements, Interstate
     amended these defined benefit plans in 1991 and 1990 to cease future
     benefit accruals and to freeze the current benefit rates.

     Oberdorfer maintains a defined benefit pension plan covering employees
     subject to a collective bargaining agreement. Benefits under the plan
     accrued at a rate of $16 and $19 per month per year of service during 1996
     and 1997, respectively.

     SDCC has two defined benefit pension plans for employees covered by a
     collective bargaining agreement. The plans provide pension benefits equal
     to a multiple of years of continuous service before age 65. The Company's
     policy is to make annual contributions to the plans based on the maximum
     amount allowed as deductible by the Internal Revenue Service.

                                       49
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

   The components of net pension costs of the plans are as follows:

<TABLE>
<CAPTION>
                                   ASSETS EXCEED ACCUMULATED BENEFITS                ACCUMULATED BENEFITS EXCEED ASSETS
                             ---------------------------------------------    -----------------------------------------------
                                               YEAR ENDED                                        YEAR ENDED
                             ---------------------------------------------    -----------------------------------------------
                            OCTOBER 1,     SEPTEMBER 29,     SEPTEMBER 28,     OCTOBER 1,     SEPTEMBER 29,     SEPTEMBER 28,
                               1995            1996              1997             1995            1996              1997
                          ------------   ---------------   ---------------   ------------   ---------------   ---------------
 
<S>                       <C>            <C>               <C>               <C>            <C>               <C>
        Service cost        $       95     $         217     $         168     $      307     $         306     $         167
        Interest cost              240               442               457            529               514               434
        Return on plan
         assets                   (313)             (443)             (757)          (518)             (674)             (470)
        Net amortization
         and deferral               84               (27)              256            115               290                73
                          ------------   ---------------   ---------------   ------------   ---------------   ---------------

         Net pension
         expense            $      106     $         189     $         124     $      433     $         436     $         204
                          ============   ===============   ===============   ============   ===============   ===============
</TABLE>


   The measurement dates for the plan assets and obligations for fiscal years
   1996 and 1997 are September 30, 1996 and 1997, respectively. The
   reconciliation of the funded status of the plans combined is as follows:

<TABLE>
<CAPTION>
                                                                             
                                           ASSETS EXCEED                    ACCUMULATED BENEFITS
                                        ACCUMULATED BENEFITS                    EXCEED ASSETS
                                 ---------------------------------   ---------------------------------
                                   SEPTEMBER 29,     SEPTEMBER 28,     SEPTEMBER 29,     SEPTEMBER 28,
                                       1996              1997              1996              1997
                                 ---------------   ---------------   ---------------   ---------------
<S>                              <C>               <C>               <C>               <C>            
     Present value of accumu-
      lated plan benefits:
        Vested                     $      5,970      $      6,023      $      6,406      $      6,512
        Nonvested                           574               323               379               399
                                 ---------------   ---------------   ---------------   ---------------
 
                                   $      6,544      $      6,346      $      6,785      $      6,911
                                 ===============   ===============   ===============   ===============
 
     Projected benefit
      obligation                   $      6,544      $      6,346      $      7,287      $      6,911
      Fair value of plan assets           6,988             6,788             6,384             5,700
                                 ---------------   ---------------   ---------------   ---------------
     Projected benefit
      obligation less than (in
      excess of) plan assets                444               442              (903)           (1,211)
     Unrecognized net (gain)
      loss                                  299               242              (145)            1,071
     Prior service cost not yet
      recognized in net
      periodic pension cost                 320               286               261               578
     Unrecognized  net
      assets at date of initial
      application                          (210)              (88)              705               (38)
     Additional minimum liability                                               (78)             (811)
                                 ---------------   ---------------   ---------------   ---------------
     (Accrued) prepaid
      pension liability            $        853      $        882      $       (160)      $      (411)
                                 ===============   ===============   ===============   ===============
</TABLE>

                                       50
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

     The settlement (discount) rates used to measure the projected benefit
     obligations for all plans ranged from 7.25% to 8.5% for 1996 and from 6.5%
     to 8.5% for 1997. The expected long-term rates of return on all plan assets
     ranged from 7.5% to 8.5% for 1996 and from 7.5% to 9.0% for 1997.

     ADCC's union employees are covered by a multi-employer defined benefit
     pension plan sponsored by the union which represents the employees. The
     Company makes contributions to the plan in accordance with the collective
     bargaining agreement between the Company and the union. The Company
     contributed $70, $63, and $59 to this plan in fiscal years 1995, 1996,
     and 1997, respectively. The actuarial present value of accumulated plan
     benefits at January 1, 1997 (the most recent valuation date) for the multi-
     employer union plan as a whole determined through an actuarial valuation
     performed as of that date was approximately $107,100. The market value of
     the union plan's net assets available for benefits on that date was
     approximately $143,100.

     In addition to those benefits provided by the frozen defined benefit plans
     described above, Interstate's union employees are covered by two multi-
     employer defined benefit pension plans sponsored by two labor unions which
     represent the employees. The Company makes contributions to the plans in
     accordance with the collective bargaining agreements between Interstate and
     the unions. The Company contributed $133 to these plans in fiscal year
     1997. The actuarial present values of accumulated plan benefits at January
     1, 1996 (the most recent valuation date) for the multi-employer union plans
     as a whole determined through actuarial valuations performed as of that
     date were $2,284,852 and $3,047,776. The market values of the union plans'
     net assets available for benefits on that date were $3,441,855 and
     $3,861,743.


11.  DEFINED CONTRIBUTION PLANS

     The Company maintains separate divisional or subsidiary defined
     contribution 401(k) plans covering substantially all employees (other than
     those covered by collective bargaining agreements). Company contributions
     are based upon a multiple of operating income as a percentage of sales on a
     divisional or subsidiary basis. However, the Company will match a minimum
     of 20%.

     In addition, BFC maintains two 401(k) plans which cover substantially all
     salaried employees and all hourly employees subject to a collective
     bargaining agreement. Company contributions to the salaried plan match up
     to 50% of the employees' contribution, up to 5% of the employees'
     compensation. Company matching contributions to the hourly plan are equal
     to the amount required by the collective bargaining agreement. Unless
     otherwise specified, the Company matching contributions shall equal 10% of
     each employee's contribution or, if less, five cents for each hour of
     service worked by the employee.

     Bohn maintains a 401(k) plan covering substantially all salaried employees.
     The Company will match 35% of the first 6% of the employees' contribution.
     Additionally, the Company 

                                       51
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

     contributes 3% of all salaried employees' annual compensation to the plan
     without regard for employee contribution.

     Interstate maintains a 401(k) plan covering all salaried employees. Company
     matching contributions are discretionary.

     MFC maintains two 401(k) plans which cover its salaried and hourly
     employees. Company contributions to the salaried plan are 50% of the first
     6% of the employee contribution. Company contributions to the hourly plan
     are equal to $.05 per regular hour worked by the employee.

     Previously, Oberdorfer maintained a 401(k) plan for all eligible employees
     who were not governed by the terms of a collective bargaining agreement.
     Effective June 30, 1995, Oberdorfer terminated its 401(k) plan and funded
     all outstanding contributions due to the plan.

     SACC maintains a 401(k) plan covering substantially all employees. The
     Company match is based on the employees' contribution to the plan during
     the year and is limited to 6% of the total compensation of all
     participants. The Company may also make a non-elective contribution which
     is made at the discretion of the board of directors.

     TSC maintains three 401(k) plans which cover its salaried and hourly
     employees. Company contributions to the salaried plan are based upon a
     multiple of operating income as a percentage of sales. Company
     contributions to the two hourly plans are 20% of the first 5% of the
     employee contribution for one plan and 22% of the first 7% of the employee
     contribution for the second plan.

     Contribution expense recognized by the Company under the 401(k) plans
     totaled $1,550, $2,068 and $3,237 in fiscal years 1995, 1996, and 1997,
     respectively.

     On August 17, 1995, the Board of Directors approved the nonqualified
     deferred compensation plan which allows certain members of management and
     highly compensated employees to defer a portion of their compensation. The
     deferred compensation, which together with Company matching amounts and
     accumulated interest, is distributable in cash after retirement or
     termination of employment. The Company recognized expense related to this
     plan of $98 and $110 in fiscal years 1996 and 1997, respectively. No
     amounts were contributed in fiscal year 1995.


12.  POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

     Interstate provides postretirement benefits other than pensions, including
     health care and life insurance, to certain employee groups. Interstate
     currently funds the cost of providing these benefits as they are incurred.

     Employees governed by collective bargaining agreements receive the
     following benefits:

     * Health insurance coverage to age 65 if they retire after age 62.

     * Life insurance coverage, in varying amounts, for the remainder of their
       lives.

                                       52
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
 
   Certain salaried employees receive health care and life insurance benefits
   for the remainder of their lives if they retire after age 60.

   The net periodic postretirement benefit cost is as follows:


<TABLE>
<CAPTION>
                                                                                        SEPTEMBER 28,
                                                                                            1997
                                                                                     -----------------
         <S>                                                                          <C>
        Service cost                                                                   $            90
        Interest cost                                                                              158
        Amortization of unrecognized gain                                                           (8)
                                                                                     -----------------
 
                                                                                       $           240
                                                                                     =================
</TABLE>

   The measurement date for the plan assets and obligations for fiscal year 1997
   is July 1, 1997. A reconciliation of the funded status of the plan is as
   follows:

<TABLE>
<CAPTION>
                                                                                                    SEPTEMBER 28,
                                                                                                        1997
                                                                                                 -----------------
        <S>                                                                                      <C> 
        Accumulated postretirement benefit obligation:
            Retirees                                                                               $           958
            Fully eligible active plan participants                                                            288
            Other active plan participants                                                                     936
                                                                                                 -----------------
 
                                                                                                             2,182
        Plan assets at fair value                                                                                0
                                                                                                 -----------------
 
        Accumulated postretirement benefit obligation
            in excess of plan assets                                                                         2,182
        Unrecognized net gain                                                                                  523
                                                                                                 -----------------
 
        Accrued postretirement benefit liability                                                             2,705
        Less current portion                                                                                  (150)
                                                                                                 -----------------
 
                                                                                                   $         2,555
                                                                                                 =================
</TABLE>

   Assumptions affecting the calculation of the accumulated obligation are as
   follows:


<TABLE> 
     <S>                               <C> 
     Health care cost trend rate       7.6%, with the rate decreasing until it levels out
                                       at 6% for the year 2001 and thereafter.
 
     Discount rate                     8%
</TABLE> 

   The effect of a one percentage point increase in the assumed health care cost
   trend rate would have increased the expense during fiscal year 1997 by $66
   and would have increased the accumulated postretirement benefit obligation by
   $289 at September 28, 1997.

                                       53
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

13.  COMMITMENTS AND CONTINGENT LIABILITIES

     On July 8, 1993, the Company entered into a consulting and noncompetition
     agreement with respect to the iron lost foam casting business of Robinson
     Foundry, Inc. (Robinson). The agreement consists of Robinson transferring
     existing business and orders to CFCC, providing technical and sales
     assistance to CFCC, and agreeing not to compete with the Company in the
     iron lost foam casting business for a period of five years. The agreement
     requires the Company to make payments to Robinson in the amount of $300 at
     the closing of the agreement and upon each of the next four anniversary
     dates of the agreement. The agreement also requires the Company to pay
     commissions to Robinson, at a rate of 6%, for all CFCC sales arising from
     this agreement in excess of $5,000 and to pay an additional 5% commission
     for all sales to new customers established by Robinson during the term of
     the agreement. There were no commissions paid under this agreement during
     fiscal years 1995, 1996, and 1997. In conjunction with the agreement, the
     Company entered into a noncompetition agreement with Robinson's principal
     owner requiring the Company to make annual payments of $100 to this owner
     concurrent with the payments to Robinson. The liabilities and corresponding
     intangible assets associated with these noncompetition agreements are
     reflected in the Company's consolidated balance sheets. The intangible
     assets are being amortized over the terms of the agreements.

     The Company leases offices and equipment under operating lease agreements
     expiring in various years through 2002. Rent expense under operating leases
     was $505, $1,277, and $1,954 in fiscal years 1995, 1996, and 1997,
     respectively. Minimum future rental payments under operating leases having
     remaining terms in excess of one year are as follows for fiscal years:


<TABLE>
                    <S>                    <C> 
                    1998                   $      1,504
                    1999                          1,167
                    2000                            843   
                    2001                            507
                    2002                            402 
                    Thereafter                       87
                                           ------------
                                           $      4,510
                                           ============
</TABLE>

     The Company is subject to legal proceedings and claims which arise in the
     ordinary course of its business. In the opinion of management, the amount
     of ultimate liability with respect to these actions will not materially
     affect the consolidated financial position or results of operations of the
     Company.

     The Company is subject to numerous federal, state, and local environmental
     laws and regulations. Management believes that the Company is in material
     compliance with such laws and regulations and that potential environmental
     liabilities, if any, are not material to the consolidated financial
     position or results of operations of the Company.

     The divisions and subsidiaries are primarily self insured for workman's
     compensation claims and health plans. Stop loss insurance agreements are
     utilized to limit the Company's liability on

                                       54
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

    both a specific and aggregate basis for the period of coverage. The
    liability for unpaid claims includes an accrual for an estimate of claims
    incurred but not reported.


14. RELATED PARTY TRANSACTIONS
  
    The Company made payments totaling $234, $542, and $254 in fiscal years
    1995, 1996, and 1997, respectively, to a law firm in which one of the
    Company's stockholders is a partner.


15. FINANCIAL INSTRUMENTS

    Financial instruments consist of the following:

<TABLE>
<CAPTION>
                                                                                     
                                                          SEPTEMBER 29, 1996            SEPTEMBER 28, 1997
                                                   ------------------------------    ------------------------------
                                                      CARRYING           FAIR           CARRYING           FAIR
                                                       AMOUNT            VALUE           AMOUNT            VALUE
                                                   -------------    -------------    -------------    -------------
<S>                                                <C>              <C>              <C>              <C>
        Accounts receivable - trade, net             $    77,931      $    77,931      $    93,542      $    93,542
        Accounts payable                             $    33,668      $    33,668      $    43,256      $    43,256
        Credit facility                              $   133,055      $   134,684      $   170,393      $   174,371
        Interest rate swaps                                           $      (830)                      $    (2,496)
        Other long-term debt, including current      
        portion                                      $    10,545      $     8,940      $    13,840      $    12,768
</TABLE>

    The carrying amounts reported in the consolidated balance sheets for cash
    and cash equivalents, accounts receivable, and accounts payable approximate
    fair value because of the immediate or short-term maturity of these
    financial instruments. The carrying amounts reported for the credit facility
    and a portion of the other long-term debt approximates fair value because
    the underlying instruments are at variable interest rates which reprice
    frequently. Fair value for fixed rate long-term debt was estimated using
    either quoted market prices for the same or similar issues or the current
    rates offered to the Company for debt with similar maturities.

    As discussed in Note 6, the Company is party to three interest rate swap
    agreements with durations of five years to hedge against interest rate
    exposures on $80,000 of long-term debt. The fair value of the interest rate
    swaps is estimated based on valuations from the Company's lead bank.

                                       55
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

16.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

     The following represents noncash financing and investing activities:

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED
                                                                      ------------------------------------
                                                                         OCTOBER 1,        SEPTEMBER 29,
                                                                            1995                1996
                                                                      ----------------    ----------------
        <S>                                                           <C>                 <C> 
        Issuance of common stock in acquisitions                      $         2,310
        Debt incurred in connection with acquisitions                 $        12,600      $          320
</TABLE>


     There were no such transactions during the year ended September 28, 1997.


17.  ACQUISITIONS

     Effective January 1, 1995, the Company acquired the net assets of
     Oberdorfer for the assumption of $3,900 of long-term debt plus $600 in cash
     payable in four equal quarterly installments beginning April 1995. The
     agreement provides for an increase in the purchase price of up to $1,000 if
     Oberdorfer meets certain earnings criteria over the five-year period ending
     December 31, 1999. The acquisition has been accounted for under the
     purchase method of accounting and, accordingly, the purchase price has been
     allocated to the assets and liabilities of Oberdorfer based on their
     estimated fair values at the date of acquisition. Operating results of
     Oberdorfer since January 1, 1995 are included in the Company's consolidated
     financial statements.

     On February 24, 1995, the Company completed the purchase of the net assets
     of IFC for $5,700 in cash and a $1,000 note payable due in February 1996.
     The acquisition has been accounted for under the purchase method of
     accounting and, accordingly, the purchase price has been allocated to the
     assets and liabilities of IFC based on their estimated fair values at the
     date of acquisition. Operating results of IFC since February 24, 1995 are
     included in the Company's consolidated financial statements.

     On May 8, 1995, the Company completed the purchase of the outstanding stock
     of BFC for $13,000 in cash, a note payable for $2,000 payable over a three
     year period, and 61,540 shares of common stock of the Company valued at
     $1,000. The acquisition has been accounted for under the purchase method of
     accounting and, accordingly, the purchase price has been allocated to the
     assets and liabilities of BFC based on their estimated fair values at the
     date of acquisition. Operating results of BFC since May 8, 1995 are
     included in the Company's consolidated financial statements.

     On June 12, 1995, the Company completed the purchase of the stock of Penn
     Steel for $700 cash, $300 in cash to be held in escrow for warranties, and
     80,000 shares of the common stock of the Company valued at $1,310. The
     acquisition has been accounted for under the purchase method of accounting
     and, accordingly, the purchase price has been allocated to the assets and
     liabilities of Penn Steel based on their estimated fair values at the date
     of acquisition.

                                       56
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

     Operating results of Penn Steel since June 12, 1995 are included in the
     Company's consolidated financial statements through the date the Company
     was sold (See Note 18).

     On August 1, 1995, the Company completed the purchase of the net assets of
     CP for $47,800 in cash and a note payable for $9,000 payable over a six-
     year period. The acquisition has been accounted for under the purchase
     method of accounting and, accordingly, the purchase price has been
     allocated to the assets and liabilities of CP based on their estimated fair
     values at the date of acquisition. Operating results of CP since August 1,
     1995 are included in the Company's consolidated financial statements.

     The estimated fair value of assets acquired and liabilities assumed in each
     of the fiscal year 1995 acquisitions are summarized as follows:

<TABLE>
<CAPTION>
                                                     OBERDORFER          IFC             BFC            PENN STEEL         CP
                                                    -------------    ------------   -------------     -------------    ----------
        <S>                                         <C>              <C>             <C>              <C>              <C>     
        Accounts receivable, net                     $     1,535      $    2,549      $    6,620      $      3,016      $  5,532
        Inventories                                        1,408           1,945             852             3,459         5,084
        Other current assets                                 353             210             725               321         1,043
        Property, plant, and equipment                     4,611           7,875           4,020             4,740        38,243
        Intangible assets and other                        1,030                          11,673                72        12,399
        Accounts payable and accrued expenses             (3,491)         (2,084)         (5,763)           (2,355)       (5,501)
        Long-term debt                                    (4,846)         (3,795)         (2,127)           (6,943)
                                                    -------------    ------------    ------------     -------------    ----------
                                                  
        Purchase price                               $       600      $    6,700      $   16,000      $      2,310       $56,800
                                                   ==============   =============   =============    =============    ===========
</TABLE>


     Effective January 5, 1996, the Company completed the purchase of the net
     assets of TSC for $13,000 in cash and the assumption of $2,195 in long-term
     debt. The acquisition has been accounted for under the purchase method of
     accounting and, accordingly, the purchase price has been allocated to the
     assets and liabilities of TSC based on their estimated fair values at the
     date of acquisition. Operating results of TSC since January 5, 1996 are
     included in the Company's consolidated financial statements.

     Effective February 4, 1996, the Company completed the purchase of the net
     assets of Hi-Tech for $2,880 in cash, the assumption of $2,625 in long-term
     debt, and a $320 note payable due in December 1996. The acquisition has
     been accounted for under the purchase method of accounting and,
     accordingly, the purchase price has been allocated to the assets and
     liabilities of Hi-Tech based on their estimated fair values at the date of
     acquisition. Operating results of Hi-Tech since February 4, 1996 are
     included in the Company's consolidated financial statements.

     Effective March 1, 1996, the Company completed the purchase of the
     outstanding stock of SACC for $12,000 in cash and the assumption of $28,538
     in long-term debt. The acquisition has been accounted for under the
     purchase method of accounting and, accordingly, the purchase price has been
     allocated to the assets and liabilities of SACC based on their estimated
     fair values at the date of acquisition. Operating results of SACC since
     March 1, 1996 are included in the Company's consolidated financial
     statements.

                                       57
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

   Effective April 1, 1996, the Company completed the purchase of the net assets
   of Bohn for $8,250 in cash and the assumption of $2,012 in long-term debt.
   The acquisition has been accounted for under the purchase method of
   accounting and, accordingly, the purchase price has been allocated to the
   assets and liabilities of Bohn based on their estimated fair values at the
   date of acquisition. Operating results of Bohn since April 1, 1996 are
   included in the Company's consolidated financial statements.

   Effective October 29, 1996, the Company completed the purchase of the
   outstanding stock of Interstate for $51,089 in cash plus the assumption of
   $22,700 of long-term debt. In addition, the purchase agreement requires
   contingent payments equal to five times the amount by which the average
   annual net earnings of Interstate before all interest, income taxes, and
   franchise taxes during the three-year period from January 1, 1996 through
   December 31, 1998 exceeds $10,000, computed in accordance with generally
   accepted accounting principles on a pre-merger basis. Any additional payments
   made, as the contingencies are resolved, will be accounted for as additional
   costs of acquired assets and amortized over the remaining life of the assets.
   During fiscal year 1997, the Company distributed $2,542 to the previous
   stockholders of Interstate representing the Company's contingent payment for
   calendar year 1996 as required by the purchase agreement. This payment has
   been included in the calculation of the cash paid for the Interstate
   acquisition of $51,089. The acquisition has been accounted for under the
   purchase method of accounting and, accordingly, the purchase price has been
   allocated to the assets and liabilities of Interstate based on their
   estimated fair values at the date of acquisition. Operating results of
   Interstate since October 29, 1996 are included in the Company's consolidated
   financial statements.

   The estimated fair value of assets acquired and liabilities assumed in each
   of the fiscal year 1996 and 1997 acquisitions are summarized as follows:


<TABLE>
<CAPTION>
                                               TSC           HI-TECH           SACC            BOHN          INTERSTATE   
                                           ------------    ------------    ------------    ------------     ------------- 
        <S>                                <C>             <C>             <C>             <C>              <C>           
        Accounts receivable, net           $     3,833      $      801      $     9,911      $     4,139     $    15,161    
        Inventories                              4,795             367            5,975            1,300          12,946    
        Other current assets                       211               8               19              112           3,014    
        Property, plant, and equipment           9,938           4,622           26,980            5,948          78,353    
        Intangible assets and other                521             437            5,046            2,777                    
        Accounts payable and                                                                                                
         accrued expenses                       (4,103)           (410)          (7,393)          (4,014)        (18,675)   
        Deferred income taxes                                                                                    (17,046)   
        Long-term debt                          (2,195)         (2,625)         (28,538)          (2,012)        (22,664)   
                                           ------------     ------------    ------------     ------------   -------------   
                                                                                                                            
        Purchase price                     $    13,000      $     3,200     $    12,000      $     8,250     $    51,089    
                                           ============     ============    ============     ============   =============   
</TABLE>

   The following unaudited pro forma summary for the year ended September 29,
   1996 combines the results of operations of the Company with the acquisitions
   of Bohn, Hi-Tech, Interstate, SACC, and Texas Steel, the sale of Penn Steel,
   and the idling of the steel division operations at Texas Foundries as if the
   acquisitions, sale and idling had occurred at the beginning of the 1996
   fiscal year. For the year ended September 28, 1997, the pro forma summary
   presents the results

                                       58
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)

   of operations of the Company as if the acquisitions of Interstate and the
   sale of Penn Steel had occurred at the beginning of the 1997 fiscal year.
   Certain adjustments, including additional depreciation expense, interest
   expense on the acquisition debt, amortization of intangible assets and income
   tax effects, have been made to reflect the impact of the purchase
   transactions. These pro forma results have been prepared for comparative
   purposes only and do not purport to be indicative of what would have occurred
   had the acquisitions, sale, and idling been made at the beginning of the
   respective fiscal years, or of results which may occur in the future.


<TABLE>
<CAPTION>
                                                                                 SEPTEMBER 29,              SEPTEMBER 28,
                                                                                     1996                       1997
                                                                              -----------------          -----------------
        <S>                                                                   <C>                        <C> 
        Sales                                                                   $    596,104               $    658,108
        Operating income                                                        $     47,402               $     53,292
        Income before provision for income taxes                                $     31,627               $     38,401
        Net income                                                              $     18,976               $     23,425
        Net income per common share                                             $       1.07               $       1.32
</TABLE>

    Pro forma earnings per share for the years ended September 29, 1996 and
    September 28, 1997 is calculated by dividing pro forma net income by the
    weighted average shares outstanding of 17,693,974 and 17,733,157,
    respectively.

    The Company's April 30, 1993 acquisition of Mabry included an agreement for
    contingent consideration based on earnings. The Company recorded additional
    amounts due to the sellers of Mabry of $2,793 in fiscal year 1995 in full
    settlement of such contingent consideration. This amount is included as an
    addition to goodwill related to such acquisition.

18. SALE OF PENN STEEL

    On October 31, 1996, the Company completed the sale of Penn Steel and
    recorded a one-time pre-tax loss of $1,807 in the consolidated statement of
    income for the year ended September 29, 1996.

19. SUBSEQUENT EVENT

    Subsequent to year end, the Company acquired all of the stock of Camden
    Casting Center, Inc. (Camden) of Camden, Tennessee from Kelsey Hayes Company
    for a purchase price of approximately $2,000. The acquisition will be
    accounted for under the purchase method of accounting. Coincident with the
    purchase of Camden, the Company entered into a requirements supply contract
    for the sale of castings to Kelsey Hayes Company.

    Camden produces high volume ductile iron braking parts. Its annual sales for
    the year ended December 31, 1997 are anticipated to be approximately 
    $20,000. Over 90% of its sales are to Kelsey Hayes Company.

                                       59
<PAGE>
 
ITEM 9:   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     During the fiscal years 1996 and 1997 and through the date of this report,
there has been no change in the Company's independent accountants, nor have any
disagreements with such accountants or reportable events occurred.

                                    PART III

ITEM 10:  DIRECTORS AND EXECUTIVE OFFICERS

     Information required by this item is incorporated by reference from the
sections entitled "Election of Directors" and "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 17, 1998, as filed with the
Securities and Exchange Commission.

ITEM 11:  EXECUTIVE COMPENSATION

     Information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 17, 1998, as filed with the
Securities and Exchange Commission.

ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required by this item is incorporated by reference from the
section entitled "Security Ownership of Management and Certain Beneficial
Owners" and "Election of Directors" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 17, 1998, as filed with the
Securities and Exchange Commission.

ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 17, 1998, as filed with the
Securities and Exchange Commission.

                                      60
<PAGE>
 
                                    PART IV

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

EXHIBITS

     The exhibits set forth in the following index of exhibits are filed as a
part of this report:

<TABLE>
<CAPTION> 
 Exhibit
 -------
  Number                                                                                  Page
 -------                                                                                  ----- 
<S>                                                                                       <C>
    3.1        Certificate of Incorporation of the Company, as amended /(1)/
       
    3.2        Bylaws of the Company /(1)/
 
10.2(v)        Amended and Restated Credit Agreement dated as of July 24, 1997 among
               the Company and its subsidiaries, certain banks party to the
               Agreement, The First National Bank of Chicago, and SouthTrust Bank,
               National Association /(2)/
 
10.2(w)        Agreement and Plan of Merger dated May 16, 1996 among Interstate
               Forging Industries, Inc., Citation Forging Corporation, and Citation
               Corporation, as amended /(3)/
 
10.3(a)        Employment Agreement commencing on August 9, 1994 between Citation
               Corporation and T. Morris Hackney /(1)/
 
10.3(b)        Employment Agreement commencing on August 9, 1994 between Citation
               Corporation and R. Conner Warren /(1)/
 
   10.4        Citation Corporation Incentive Award Plan /(1)/
 
10.4(a)        Citation Corporation Stock Plan for Non-Employee Directors/(4)/
 
10.4(b)        Citation Non-Qualified Stock Option Plan for Non-Employee Directors/
               (5)/
 
   10.6        Tax Indemnification Agreement between Shareholders existing prior to
               August 9, 1994 and Citation Corporation/(1)/
 
     21        Subsidiaries of the Registrant                                                 67
      
     23        Consent of Coopers & Lybrand, L.L.P.                                           68
      
     27        Financial Data Schedule, submitted to the Securities and Exchange
               Commission in electronic format.
 
   99.1        Report of Independent Certified Public Accountants on Supplementary
               Information                                                                    69
 
   99.2        Schedule II - Valuation and Qualifying Accounts                                70
</TABLE>

(1)  Incorporated by reference to the Company's Registration Statement on Form
     S-1 under the Securities Act of 1933 (Registration No. 33-79804, as filed
     August 

                                      61
<PAGE>
 
     2, 1994). The exhibit numbers listed correspond to the exhibit numbers in
     the Form S-1.

(2)  Incorporated by reference to Exhibit 10.2(v) of the Company's report on
     Form 10-Q for the quarter ended June 29, 1997.

(3)  Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K dated
     October 29, 1996.

(4)  Incorporated by reference to Exhibit 10.4(a) of the Company's Annual Report
     on Form 10-K for the year ended October 1, 1995.

(5)  Incorporated by reference to Exhibit 10.4(b) of the Company's Annual Report
     on Form 10-K for the year ended September 29, 1996.


FINANCIAL STATEMENT SCHEDULES

     The Index to financial statements filed as a part of this Report is
contained at page 31.

     The following schedule is filed as an exhibit to this report:

          Report of Independent Certified Public Accountants on Supplementary
          Information

          Schedule II - Valuation and Qualifying Accounts

REPORTS ON FORM 8-K

     No reports on Form 8-K were filed for the quarter ended September 28,
1997.

                                      62
<PAGE>
 
                                  SIGNATURES

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

                                                               
 
                             CITATION CORPORATION

                             /s/  T. Morris Hackney            December 11, 1997
                           ------------------------        
                           By:    T. MORRIS HACKNEY
                                  Chief Executive Officer and
                                  Chairman of the Board

 
     Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                              <C>                                   <C> 
/s/ T. Morris Hackney            Chief Executive Officer and           December 11, 1997
-------------------------------     Chairman of the Board                                                                      
T. MORRIS HACKNEY                (Principal Executive Officer)                          
                                
                                                                                        
/s/ Frederick F. Sommer          President and Chief Operating         December 11, 1997
-------------------------------    Officer          
FREDERICK F. SOMMER             
                                                                                        
/s/ R. Conner Warren             Executive Vice President of           December 11, 1997
-------------------------------    Finance and Administration                                                                  
R. CONNER WARREN                   Treasurer and Director                               
                                  (Principal Financial Officer)                         
                                 
                                                                                        
/s/ Thomas W. Burleson           Vice President - Corporate            December 11, 1997
-------------------------------    Controller                                                                                  
THOMAS W. BURLESON                (Principal Accounting Officer)                        
                                 
                                                                                        
/s/ Hugh G. Weeks                Director                              December 11, 1997
-------------------------------                                                         
HUGH G. WEEKS                                                                           
                                                                                        
/s/ A. Derrill Crowe             Director                              December 11, 1997
-------------------------------                                                         
A. DERRILL CROWE                                                                        
                                                                                        
/s/ Franklyn Esenberg            Director                              December 11, 1997
-------------------------------                                                         
FRANKLYN ESENBERG                                                                       
                                                                                        
/s/ William W. Featheringill     Director                              December 11, 1997
-------------------------------                                                         
WILLIAM W. FEATHERINGILL                                                                
                                                                                        
/s/ Frank B. Kelso, II           Director                              December 11, 1997
-------------------------------                                                         
FRANK B. KELSO, II                                                                      
                                                                                        
/s/ Van L. Richey                Director                              December 11, 1997 
-------------------------------
VAN L. RICHEY
</TABLE>

                                      63

<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549




                                   EXHIBITS 

                                      TO

                                   FORM 10-K


                             CITATION CORPORATION



For the fiscal year ended September 28, 1997         Commission file No. 0-24492

                                      64
<PAGE>
 
                               TABLE OF CONTENTS
                                  FOR EXHIBITS


     The exhibits set forth in the following index of exhibits are filed as a
part of this report:

<TABLE>
<CAPTION>
 Exhibit
 -------
  Number                                                                                      Page
 -------                                                                                      ---- 
<S>                                                                                           <C>
    3.1        Certificate of Incorporation of the Company, as amended /(1)/
 
    3.2        Bylaws of the Company /(1)/
 
10.2(v)        Amended and Restated Credit Agreement dated as of July 24, 1997 among
               the Company and its subsidiaries, certain banks party to the Agreement,
               The First National Bank of Chicago, and SouthTrust Bank, National
               Association /(2)/
 
10.2(w)        Agreement and Plan of Merger dated May 16, 1996 among Interstate
               Forging Industries, Inc., Citation Forging Corporation, and Citation
               Corporation, as amended /(3)/
 
10.3(a)        Employment Agreement commencing on August 9, 1994 between Citation
               Corporation and T. Morris Hackney /(1)/
 
10.3(b)        Employment Agreement commencing on August 9, 1994 between Citation
               Corporation and R. Conner Warren /(1)/
 
   10.4        Citation Corporation Incentive Award Plan /(1)/
 
10.4(a)        Citation Corporation Stock Plan for Non-Employee Directors/(4)/
 
10.4(b)        Citation Non-Qualified Stock Option Plan for Non-Employee Directors/
               (5)/
 
   10.6        Tax Indemnification Agreement between Shareholders existing prior to
               August 9, 1994 and Citation Corporation/(1)/
 
     21        Subsidiaries of the Registrant                                                   67
 
     23        Consent of Coopers & Lybrand, L.L.P.                                             68
 
     27        Financial Data Schedule, submitted to the Securities and Exchange
               Commission in electronic format.
 
   99.1        Report of Independent Certified Public Accountants on Supplementary              69
               Information
 
   99.2        Schedule II - Valuation and Qualifying Accounts                                  70
</TABLE>

(1)  Incorporated by reference to the Company's Registration Statement on Form
     S-1 under the Securities Act of 1933 (Registration No. 33-79804, 

                                      65
<PAGE>
 
     as filed August 2, 1994). The exhibit numbers listed correspond to the
     exhibit numbers in the Form S-1.

(2)  Incorporated by reference to Exhibit 10.2(v) of the Company's report on
     Form 10-Q for the quarter ended June 29, 1997.

(3)  Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K dated
     October 29, 1996.

(4)  Incorporated by reference to Exhibit 10.4(a) of the Company's Annual Report
     on Form 10-K for the year ended October 1, 1995.

(5)  Incorporated by reference to Exhibit 10.4(b) of the Company's Annual Report
     on Form 10-K for the year ended September 29, 1996.

                                      66