<PAGE>

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.

                                   FORM 10-Q

(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
    Act of 1934 for the quarterly period ended July 31, 1999.

                                       OR

[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities Act of
    1934 For the transition period from                  to
                                       -----------------   ------------------

Commission file number  33-92496
                        --------

                       GULF STATES STEEL, INC. OF ALABAMA
                       ----------------------------------
                   (DEBTOR-IN-POSSESSION AS OF JULY 1, 1999)
             (Exact name of registrant as specified in its charter)

          Alabama                                  63-1141013
-------------------------------            --------------------------
(State or other jurisdiction of                  (I.R.S. Employer
incorporation or organization)                  Identification No.)

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

                                 (256) 543-6100
                                 --------------
              (Registrant's telephone number, including area code)

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

                            Yes   X       No
                                 ---         ---

Indicate the number of shares outstanding of each class of common stock, as of
the latest practical date:

     Common Stock $ .01 par value - 3,610,000 shares as of  July 31, 1999

<PAGE>

                       GULF STATES STEEL, INC. OF ALABAMA
                             (DEBTOR-IN-POSSESSION)

                                     INDEX

<TABLE>
<CAPTION>
                                                                 Page
                                                                 ----
<S>                                                            <C>
PART I   FINANCIAL INFORMATION
ITEM 1.  Financial Statements (Unaudited)

         Statements of Operations -
         For the Three Months Ended July 31, 1999 and 1998;
         For the Nine Months Ended July 31, 1999 and 1998.....     1

         Balance Sheets -
         As of July 31, 1999 and October 31, 1998.............     2

         Statements of Cash Flows -
         For the Nine Months Ended July 31, 1999 and 1998.....     3

         Notes to Financial Statements........................   4 - 11

ITEM 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations........  12 - 16

PART II  OTHER INFORMATION

ITEM 1.  Legal Proceedings....................................    17

ITEM 2.  Defaults Upon Senior Securities......................    17

ITEM 3.  Exhibits & Reports on Form 8-K.......................    18
</TABLE>

<PAGE>

PART I   FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)
         --------------------------------

                       GULF STATES STEEL, INC. OF ALABAMA
                             (DEBTOR-IN-POSSESSION)
                      Statements of Operations (Unaudited)
                  (dollars in thousands except per share data)

<TABLE>
<CAPTION>
                                                            Three Months Ended                     Nine Months Ended
                                                                 July 31,                                July 31,
                                                   ------------------------------------  -------------------------------------
                                                         1999               1998                1999               1998
                                                   -----------------  -----------------  ------------------  -----------------

<S>                                                <C>                <C>                <C>                 <C>
Net sales........................................        $   82,339         $  107,356          $  235,879         $  314,265
Costs of goods sold, excluding depreciation......            78,788             92,229             233,535            269,026
Depreciation.....................................             5,253              5,043              15,759             15,129
Selling, general and administrative expenses.....             4,896              4,487              13,596             13,071
                                                         ----------         ----------          ----------         ----------

Operating profit (loss)..........................            (6,598)             5,597             (27,011)            17,039

Other (income) expense:
   Interest expense..............................             4,986              6,868              19,017             20,930
   Interest income...............................               (18)               (90)                (19)               (93)
                                                         ----------         ----------          ----------         ----------
                                                              4,968              6,778              18,998             20,837
                                                         ----------         ----------          ----------         ----------

Loss before restructuring items, income taxes,
 and extraordinary items:                                   (11,566)            (1,181)            (46,009)            (3,798)
                                                         ----------         ----------          ----------         ----------

Restructuring items:
Professional fees................................            (1,787)                 -              (3,013)                 -
                                                         ----------         ----------          ----------         ----------

Loss before income taxes and extraordinary
 items...........................................           (13,353)            (1,181)            (49,022)            (3,798)
Income tax benefit...............................                 -                  -                   -                  -
                                                         ----------         ----------          ----------         ----------

Loss before extraordinary items..................           (13,353)            (1,181)            (49,022)            (3,798)
Extraordinary charge for debt refinancing........                 -                  -                   -             (1,044)
                                                         ----------         ----------          ----------         ----------

Net loss.........................................        $  (13,353)        $   (1,181)         $  (49,022)        $   (4,842)
                                                         ==========         ==========          ==========         ==========

Basic earnings per share:
   Loss before extraordinary items...............            $(3.70)             $(.33)            $(13.58)        $    (1.05)
   Extraordinary charge..........................                 -                  -                   -               (.29)
                                                         ----------         ----------          ----------         ----------
Net loss per share...............................            $(3.70)             $(.33)            $(13.58)        $    (1.34)
                                                         ==========         ==========          ==========         ==========

Common shares
     Outstanding.................................         3,610,000          3,610,000           3,610,000          3,610,000
                                                         ==========         ==========          ==========         ==========

</TABLE>


See accompanying notes

                                       1
<PAGE>

                       GULF STATES STEEL, INC. OF ALABAMA
                             (DEBTOR-IN-POSSESSION)
                          Balance Sheets, (Unadudited)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                        July 31, 1999             October 31, 1998
                                                                   ------------------------  ---------------------------
<S>                                                                <C>                       <C>
                             ASSETS
CURRENT ASSETS:
  Cash and cash equivalents......................................         $  5,099                     $  1,990
  Accounts receivable, less allowance for doubtful accounts
    of $976 in 1999 and $930 in 1998.............................           30,078                       25,117
  Inventories (Note 3)...........................................           36,093                       60,941
  Deferred income taxes..........................................            2,949                        2,949
  Prepaids and other current assets..............................            1,742                        4,080
                                                                          --------                     --------
     Total current assets........................................           75,961                       95,077

Property, plant and equipment, net...............................          196,021                      200,702
Deferred charges, less accumulated amortization of $50 in
  1999 and $3,965 in 1998........................................              548                        5,122
                                                                          --------                     --------
     Total assets................................................         $272,530                     $300,901
                                                                          ========                     ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
  Accounts payable...............................................        $ 10,209                     $ 29,832
  Accrued payroll and employee benefits..........................           6,735                        5,264
  Accrued workers compensation...................................           2,698                        2,517
  Accrued gainsharing............................................           2,350                        2,425
  Accrued interest payable.......................................             308                        1,431
  Other accrued liabilities......................................           4,960                        6,742
  Debtor-in-possession term loan (note 5)........................          14,570                            -
  Current portion of long-term debt..............................               -                          964
  Debtor-in-possession credit facility (note 5)..................          29,143                            -
                                                                         --------                     --------
     Total current liabilities...................................          70,973                       49,175

NONCURRENT LIABILITIES:
  Long-term debt.................................................               -                      230,123
  Deferred postretirement health benefits........................           6,858                        4,862
  Deferred income taxes..........................................           2,949                        2,949
                                                                         --------                     --------
     Total noncurrent liabilities................................           9,807                      237,934

Liabilities subject to compromise (Note 2).......................         228,046                            -

Stockholders' equity (deficit):
Common Stock, par value $.01 per share: 4,000,000 shares
 authorized, 3,610,000 shares issued and outstanding as of
 July 31, 1999, and October 31, 1988.............................              36                           36
Additional paid-in capital.......................................          39,050                       39,050
Notes receivable from officers...................................            (750)                        (750)
Accumulated deficit..............................................         (74,632)                     (24,544)
                                                                         --------                     --------
     Total stockholders' equity (deficit)........................         (36,296)                      13,792
                                                                         --------                     --------
     Total liabilities and stockholders' equity (deficit)........        $272,530                     $300,901
                                                                         ========                     ========
</TABLE>
See accompanying notes

                                       2
<PAGE>

                      GULF STATES STEEL, INC. OF ALABAMA
                             (DEBTOR-IN-POSSESSION)
                      Statements of Cash Flows (Unaudited)
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                          Nine Months Ended           Nine Months Ended
                                                                            July 31, 1999               July 31, 1998
<S>                                                                      <C>                          <C>
Operating activities:
Net loss.............................................................           $(49,022)                   $(4,842)
Adjustments to reconcile net loss to net cash provided (used) by
    Operating activities:
  Depreciation.......................................................             15,759                      15,129
  Amortization.......................................................              1,046                       1,154
  Write down of inventories..........................................              4,339                           -
  Extraordinary item.................................................                  -                         859
  Changes in operating assets and liabilities:
     Accounts receivable.............................................             (4,961)                       (294)
     Inventories.....................................................             20,509                         647
     Prepaids and other current assets...............................              2,339                       2,618
     Accounts payable................................................            (19,623)                       (277)
     Prepetition debt (accounts payable).............................             19,017                           -
     Accrued payroll and employee benefits...........................              3,573                       2,222
     Accrued interest payable........................................             (1,123)                      6,542
     Prepetition debt (accrued interest payable).....................             18,240                           -
     Prepetition debt (real estate and personal property taxes).                   1,554
     Other accrued liabilities.......................................             (1,783)                      3,748
     Income taxes prepaid and payable................................                  -                          (1)
                                                                                --------                    --------
Net cash provided (used) by operating activities.....................              9,864                      27,541
                                                                                --------                    --------

INVESTING ACTIVITIES:
Building and equipment purchases.....................................            (10,402)                    (17,902)
                                                                                --------                    --------
Net cash used in investing activities................................            (10,402)                    (17,902)
                                                                                --------                    --------

FINANCING ACTIVITIES:
Net borrowings (payments) on revolving credit facilities.............            (10,278)                     31,457
Prepayment of prior revolving credit facility........................                  -                     (37,393)
Proceeds from issuance of long term-term debt........................                  -                         735
Proceeds from debtor-in-possession term loan.........................             14,570                           -
Net borrowings (payments) on long-term debt..........................                 77                        (519)
Increase (reduction) of capitalized lease obligations................               (125)                        (97)
Debt issuance costs..................................................               (597)                       (391)
                                                                                --------                    --------
Net cash provided by financing activities............................              3,647                      (6,208)
                                                                                --------                    --------

Net increase (decrease) in cash and cash equivalents.................              3,109                       3,431
Cash and cash equivalents at beginning of year.......................              1,990                       2,359
                                                                                --------                    --------
Cash and cash equivalents at end of period...........................           $  5,099                    $  5,790
                                                                                ========                    ========

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
  Interest...........................................................           $  3,928                    $ 14,772
  Income taxes.......................................................                  -                           1
Noncash investing and financing activities:
  Capital lease obligations..........................................                676                         333
</TABLE>

                                       3
<PAGE>

                       GULF STATES STEEL, INC. OF ALABAMA
                             (DEBTOR-IN-POSSESSION)
                   Notes to Financial Statements (Unaudited)
                                 JULY 31, 1999


NOTE 1 - BASIS OF PRESENTATION AND LIQUIDITY

  The accompanying financial statements present the financial position, results
of operations and cash flows of Gulf States Steel, Inc. of Alabama (the
"Company") as of and for the fiscal nine month period ended July 31, 1999 and
1998.

  The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article X of Regulation
S-X.  Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements.  In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.  Operating results for the period November 1, 1998 to July 31, 1999
are not necessarily indicative of the results that may be expected for the full
fiscal year ending October 31, 1999.  The financial results for the fiscal year
ending October 31, 1999 are subject to annual audit. For further information,
refer to the consolidated financial statements of the Company and the notes
thereto included in the Company's Form 10-K for the fiscal year ended
October 31, 1998.

   The Company has incurred losses in the current and prior years.  During the
third quarter of fiscal 1999, orders, shipments and pricing for the Company's
products continued to be adversely affected by, among other things, increased
foreign steel imports.  As a result of such increased imports and their effect
on the domestic steel market, orders, shipments and pricing have decreased
significantly in fiscal 1999 and are expected to remain at low levels throughout
the remainder of the year.  Given current market conditions, the level of debt
and associated interest expense, required capital expenditures, and improvements
and the potential realization of loss contingencies, management believes that
the Company will continue to incur losses in fiscal 1999.

   The unaudited financial statements have been prepared in accordance with the
American Institute of Certified Public Accountants Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. The
financial statements have been prepared using accounting principles applicable
to a going concern, which assumes continuity of operations, realization of
assets, and settlement of liabilities in the normal course of business.  The
Company's recent losses from operations, significant stockholders deficit and
the related Chapter 11 filing raise substantial doubt about the Company's
ability to continue as a going concern. Realization of the carrying amounts of
the Company's and classification of its liabilities is dependent upon, among
other things the ability to comply with debtor-in-possession financing
agreements, confirmation of a plan of reorganization, the ability to achieve
profitable operations, and the ability to generate sufficient cash flow from
operations to meet its obligations.

   The accompanying unaudited balance sheet as of July 31, 1999 segregates
liabilities subject to compromise, such as unsecured claims, from liabilities
not subject to compromise and liabilities arising subsequent to filing
bankruptcy.   A plan of reorganization could materially change the amounts
currently recorded in the financial statements.  The  statements that might
result from the outcome of this uncertainty may be materially different than
those presented herein.  Reorganization items represent expenses incurred by the
Company as a result of the bankruptcy filing and proceedings, which are required
to be expensed as incurred.

                                       4
<PAGE>

NOTE 2 - VOLUNTARY FILING SEEKING REORGANIZATION UNDER CHAPTER 11 OF THE UNITED
STATES BANKRUPTCY CODE

   The Company's operating results for fiscal 1998 and for the first three
fiscal quarters of 1999 were severely affected by, among other things, a
dramatic surge in steel imports beginning in the summer of 1998.  As a
consequence of record-high levels of low-priced steel imports and the resultant
deteriorating market conditions, the Company's overall sales prices and
shipments declined thereby causing a decrease in liquidity.  Such decreased
liquidity made it impossible for the Company to service its then existing debt
and fund ongoing operations.   As a result on July 1, 1999, the Company filed a
voluntary petition seeking reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for Northern District of Alabama, Eastern Division (the "Bankruptcy Court"). The
Company has implemented a restructuring program to reduce costs, improve
operating efficiencies and increases financial flexibility.

   The Company is in possession of its properties and assets and continues to
operate with its existing directors and officers as a debtor-in-possession. As a
debtor-in-possession, the Company is authorized to operate its business, but may
not engage in transactions outside of the normal course of business without
approval, after notice and hearing, of the Bankruptcy Court.  Pursuant to the
provisions of the Bankruptcy Code, as of the petition date actions to collect
prepetition indebtedness owed by the Company are stayed and other prepetition
contractual obligations may not be enforced against the Company.  In addition,
as a debtor-in-possession, the Company has the right, subject to the Bankruptcy
Court's approval and certain other conditions, to assume or reject any
prepetition executory contracts and unexpired leases. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization process.  The Company cannot presently determine or reasonably
estimate the ultimate liability that may result from rejecting such contracts or
leases or from the filing of claims and no provisions have been made for these
items.  Schedules have been filed by the Company with the Bankruptcy Court
setting forth the assets and liabilities of the debtor as of the filing date as
reflected in the Company's accounting records. Differences between amounts
reflected in such schedules and claims filed by creditors will be investigated
and amicably resolved or adjudicated before the Bankruptcy Court.  The
Bankruptcy Court has set November 29, 1999 as the Bar Date.  The Bar Date is the
date which all claims must be filed against the Company.   The ultimate amount
and settlement terms for such liabilities are subject to a plan of
reorganization, and accordingly, are not presently determinable.

   The Bankruptcy Court has approved payment of certain prepetition liabilities
such as employee wages and benefits.  Furthermore, the Bankruptcy Court has
allowed for the retention of legal and financial professionals.  These items are
recorded as accounts payable and accrued expenses not subject to compromise.  As
further described under Note 5 below, on July 20, 1999, the Bankruptcy Court
also approved a $65 million debtor-in-possession credit facility (the " DIP
Credit Facility"), a $17.1 million Term Loan, and a Preferred Supplier
Continuous Credit Program

   The Company intends to present a plan of reorganization to the Bankruptcy
Court to reorganize the Company's business and to restructure the Company's
obligations. Under the provisions of the Bankruptcy Code, the Company has the
exclusive right to file such plan at any time during the 120-day period
following July 1, 1999.  The exclusive filing time period may be extended by the
Bankruptcy Court.  Notwithstanding any such extension, a committee, representing
holders (the "Ad Hoc Noteholders Committee") of the Company's 13 1/2% Series B
First Mortgage Notes due 2003 (the "First Mortgage Notes") has been granted the
right, in exchange for permitting the subordination of the liens securing the
First Mortgage Notes to the liens securing the collateral under the Term Loan,
to file a Chapter 11 plan of reorganization on the earlier of (a) the 305th day
after the Company's Chapter 11 filing, unless the Company has failed to file a
plan a reorganization by the 244th day after its bankruptcy filing, in which
case the Ad Hoc Noteholders Committee may file a petition commencing on the
245th day, or (b) the first to occur of (i) certain financial covenant defaults
or (ii) 30 days after an uncured default under the Term Loan.

                                       5
<PAGE>

   Due to the lack of sufficient liquidity, the Company did not make the $12.8
million interest payment due April 15, 1999 on the First Mortgage Notes.  The
Company was also unable to cure that default by May 15, 1999, which date
represented the expiration of the 30-day cure period from the original interest
payment due date.  The Bankruptcy Code generally prohibits the Company from
making payments on unsecured, pre-petition debt, including the First Mortgage
Notes, except as pursuant to Bankruptcy Court  approval.  State Street Bank &
Trust Company, as indenture trustee with respect to the First Mortgage Notes,
and the Ad Hoc Noteholders Committee entered a stipulation with the Bankruptcy
Court with respect to the adequate protection of the lien securing the First
Mortgage Notes and the subordination of such liens to the liens securing the
advance under the Term Loan and the Preferred Supplier Continuous Credit
Program.

   As a result of the voluntary petition for reorganization under Chapter 11 of
the Bankruptcy Code in the Bankruptcy Court and under the terms of the
bankruptcy case, liabilities in the amount of  approximately $228.0 million, as
set forth below, are subject to compromise under a plan of reorganization.
Pursuant to the provisions of the Bankruptcy Code and during the pendency of the
bankruptcy proceeding, actions to enforce or otherwise effect repayment of all
prepetition liabilities, as well as all pending litigation against the Company,
are stayed while the Company continues its business operations as debtors-in-
possession. The ultimate amount and settlement terms for such liabilities are
subject to a plan of reorganization, and accordingly, are not presently
determinable.  Liabilities subject to compromise are detailed as follows:
<TABLE>
<CAPTION>

      LIABILITIES SUBJECT TO COMPROMISE                AMOUNT
      ---------------------------------                ------
           (dollars in thousands)
<S>                                                  <C>
Bonds, and Accrued Interest net of Debt
 Issuance Cost (First Mortgage Notes)                 $203,929

Notes Payable (Secured Equipment Notes)                  2,800

Vendor Notes Payable (Unsecured)                         2,908

Capitalized Lease Obligations (Secured)                    746

Real Estate and Personal Property Taxes (Unsecured)      1,554

Accounts Payable (Unsecured)                            16,109
                                                      --------

  Total Liabilities Subject To Compromise             $228,046
                                                      ========
</TABLE>

NOTE 3  INVENTORIES

Inventories are as follows:

<TABLE>
<CAPTION>
                                           July 31, 1999      October 31, 1998
                                           -------------      ----------------
                                                 (dollars in thousands)
<S>                                    <C>                    <C>
Raw Materials and Supplies                    $ 5,180               $15,677

Work-in-Process                                 8,647                17,821

Finished Products                              22,266                27,443
                                              -------               -------

Total                                         $36,093               $60,941
                                              =======               =======
</TABLE>

                                       6
<PAGE>

  The Company's inventories are valued at the lower of cost, as determined by
the first-in first-out (FIFO) method, or market. Cost of Sales in the current
nine month period includes an inventory write-down of approximately $4.3 million
resulting from lower realizable values of certain steel products as a result of
depressed market conditions and physical inventory write downs.

NOTE 4  CONTINGENCIES

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

  The predecessor company as further discussed in the Company's 10K (the
"Predecessor") settled with the Alabama Department of Environmental Management
("ADEM") during 1994 for all outstanding air and water violations, and the
Company believes that its facility now operates, as a general matter, in
substantial compliance with existing air emission regulations and its water
discharge permit, subject, however, to the matters set forth below.

  During 1992, the U.S. Environmental Protection Agency ("EPA") asserted that a
wastewater ditch system on the Company's property should be remediated and
"closed" under the Resource Conservation and Recovery Act ("RCRA").  As of
October 31, 1994, the Predecessor had remediated a portion of the ditch.  The
Predecessor also agreed to a $1.1 million civil penalty, of which $300,000 was
to be offset by future capital expenditures, related to this issue.  As of
October 31, 1996, the $800,000 penalty had been paid.  Subsequently, the
$300,000 of capital expenditures was not approved by the EPA, and during fiscal
year 1997 the Company made an additional penalty payment of that amount plus
interest.  On November 26, 1997, ADEM approved the closure plan for the
wastewater ditch system.  The requirements of the closure plan are: (1) sediment
sampling in the ditch system and (2) groundwater monitoring.  Sixty-six sediment
samples were taken throughout the system and analyzed in March 1998.  Eleven
groundwater-monitoring wells were installed and samples were taken in February
1998.  On September 29, 1998, closure certification was granted by ADEM
releasing the Company from providing financial assurance of closure.  The EPA
has not yet responded to the closure certification.  If clean closure cannot be
achieved, the Company estimates the contingent closure costs will be $1.1
million with post-closure costs of $2.7 million ($90,000 annually for 30 years).
As part of the settlement of this action, the Company is required to perform a
RCRA Facility Investigation of certain solid waste management units at the site.
The Company submitted a workplan for this investigation to EPA on May 26, 1999
and is waiting for the agency comments. The RCRA facility assessment conducted
by EPA identified a total of 41 solid waste management units (SWMUs) and 6 areas
of concern (AOCs) at the Gadsden facility.  Of the 41 SWMUs, two are recommended
for confirmatory sampling (CS). Of the 6 AOCs, two are recommended for CS.  All
the other SWMUs or AOCs are recommended for no further action (NFA) or are
recommended for action under other regulatory programs.

  The Company faces an enforcement action under the Clean Water Act.  The U.S.
Department of Justice ("DOJ") notified the Company that it, at the request of
the EPA, was prepared to take "appropriate enforcement action in federal court"
against the Company for alleged violations of its water discharge permit, and
invited the Company to discuss a possible settlement prior to filing suit.  The
Company opened discussions with the DOJ in an attempt to settle these claims.
These discussions resulted in substantial agreement as to certain additional
upgrades to the Company's wastewater treatment system, and these upgrades have
now been completed.  On August 28, 1997, while negotiations were ongoing with
the DOJ, a 60-day notice of intent to file a citizen suit under the Clean Water
Act was sent by one Johnny Williams, a resident of Rainbow City, Alabama.  Prior
to expiration of the 60-day period, the DOJ filed its action under the Clean
Water Act, thus precluding the citizen suit.  On October 27, 1997, Mr. Williams
moved to intervene in the government's action, and this intervention was allowed
by the court.  On April 21, 1998, a second motion to intervene was filed by L.E.
McGriff and Herbert Patterson, and this motion was also allowed by the court.
Despite the filing of this litigation, the Company and the DOJ continued to
explore a

                                       7
<PAGE>

possible settlement. As a result of these discussions, an agreement in principle
was reached with the EPA and DOJ on September 1, 1998 pursuant to the terms of
which the Company would pay $500,000 as a cash civil penalty and would agree to
implement $4.0 million in facility improvements as Supplemental Environmental
Projects ("SEPs") which offer environmental benefits. On December 27, 1998, DOJ
decided to reduce the SEP expenditures required from $4.0 million to $3,175,000,
which was accepted by the Company, on the condition that additional minor
language modifications be made in the proposed consent decree. On January 4,
1999, however, settlement discussions terminated because DOJ required the
Company to agree to waive certain defenses to any and all future actions of any
nature that the United States might initiate in the future against the Company.
The Company declined to agree to this unconditional waiver. On January 8, 1999,
the United States District Court for the Northern District of Alabama ("district
court") convened a Status Conference, at which time a Pretrial Conference was
set for October 25, 1999. On January 22, 1999, the district court issued a
scheduling order regarding dispositive motions and discovery, which are to be
completed by September 30, 1999. The Clean Water Act provides for civil
penalties of up to $25,000 per day for violations occurring before January 30,
1997 and $27,500 per day for violations occurring on or after January 30, 1997.
DOJ has alleged that over 4,000 potential violations of the Clean Water Act have
occurred. On June 8, 1999, the district court issued an order granting DOJ's
motion for a partial summary judgement holding the Company liable for 1,000
violations of its National Pollution Discharge Elimination System (the "NPDES")
permit from May 1, 1995 to September 1998 comprising 4,290 days of violation.
Almost two-thirds of the exceedances occurred at points internal to the plant.
The district court's opinion provides that "the amount of the penalty for
violations of the effluent limitations on outfalls along the Company's internal
waste streams might be subject to mitigation, given that those outfalls do not
discharge directly into waters of the United States." It is the Company's belief
that if that is true, such discharges are not regulated by the Clean Water Act
and therefore the Company has no liability for those discharges as a matter of
law. In the event a civil penalty is imposed, the Clean Water Act requires the
district court to consider the seriousness of the violations, the economic
benefits (if any) resulting from the violations, any good faith efforts to
comply with the applicable requirements, the economic impact of the penalty on
the Company, and such other matters as the DOJ may require in determining the
amount of the penalty. On December 11, 1998, the Company filed an expedited
petition with the ADEM for a modification of its NPDES permit. If granted, the
Company will be in a position to be in compliance with the Clean Water Act at
all times of the year. ADEM has not yet acted on that petition.

  In addition, on February 5, 1998, Mr. Williams instituted an action in the
Circuit Court of Etowah County, individually and as a representative of a
putative class of downstream property owners, seeking unspecified damages and
injunctive relief on a variety of theories for the alleged diminution of
downstream property values and unspecified health hazards as a result of the
Company's wastewater discharges.  The Company believes the claims of Mr.
Williams are without merit, and that no class should be certified.  On motion of
the Company, this action has been stayed pending possible resolution of the
Clean Water Act enforcement action.

  During negotiations with the DOJ over the Clean Water Act matter described
above, the DOJ raised remediation of Black Creek as a possible issue.  The EPA
investigated Black Creek and performed sampling in Black Creek and Lake Gadsden.
Sampling results thus far indicate levels of metals, primarily lead and zinc, in
the sediment of Black Creek and in certain locations in Lake Gadsden.  The
levels of metals in the sediment generally increase with depth, indicating
historical discharges are a greater contributor to the elevated levels.  The EPA
has made no determination of what remediation, if any, will be necessary,
although the EPA indicated that another round of sampling would be performed to
define the scope of the potential remediation.  On December 23, 1998, as a
result of a routine file review at the ADEM, the Company was provided with the
initial page of a "Comprehensive Environmental Response Compensation Liability
Act ("CERCLA") Site Investigation Report" prepared for EPA on September 30,
1998, under the supervision of a EPA Task Monitor, together with a November 30,
1998 e-mail message from the EPA Task Monitor addressed to a member of the
public.  That e-mail reported that the Gulf States Steel Site Investigation
Report was referred from EPA's Emergency Response and Removal Branch to the EPA
Superfund Remedial Program for evaluation and potential remediation, but
reported that "the time frame for this is uncertain."  Since the time that core
samples were taken at Lake Gadsden almost one year ago, EPA has initiated no
further communications with the Company regarding this matter.  The Company

                                       8
<PAGE>

was informed that when the EPA's Site Investigation Report was completed, the
Company would have an opportunity to discuss the findings with EPA prior to the
time that EPA made any future decisions regarding this matter.  Instead, the
Company learned about these events through the above-referenced file review.
The Company informed the EPA that its contribution, if any, to the sediment
findings is divisible, and that apportioned, rather than joint and several
liability, is appropriate.  Additionally, the Company's relative contribution if
any, to the sediment results must be further reduced to the extent that it is
the result of a federally permitted discharge.  The combined effect of the
Company's analysis is that any potential liability that is assignable to it is
so small as to be de minimis.  Given current information, it is not possible to
predict the scope or cost of any potentially required remediation of Black Creek
and/or Lake Gadsden, nor is it known whether the Company's analysis regarding
its potential liability will be accepted.  The Company continues to request
further information about EPA's intentions regarding this issue.

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

  On April 22, 1998, the EPA issued a NOV to the Company relating to alleged
violations of the Toxic Substance Control Act ("TSCA") based on an inspection
conducted on May 16, 1996.  The conditions cited in the NOV had been promptly
addressed following the May 16, 1996 inspection.  On December 31, 1998 the
Company and the EPA reached an administrative settlement of these allegations
for a penalty payment of $31,813 and the voluntary replacement of four PCB
transformers at an estimated total cost of $149,500.

  As a result of a September 1997 inspection, ADEM determined that certain
violations of hazardous waste rules had occurred at the Company's facility and
had resulted in the release of hazardous waste from a secondary containment area
on site.  The Company is addressing assessment and possible remediation of this
site area with ADEM.  In August 1998, ADEM proposed a Consent Order with an
administrative penalty of $80,000.  On September 28, 1998, ADEM issued a second
NOV regarding the same issue.  These matters have been consolidated.  ADEM
issued a draft Administrative Order regarding the consolidated NOV's on May 20,
1999, again proposing a civil penalty of $80,000. The Company has requested a
meeting with ADEM to discuss settlement of this matter.

  The solid waste permit for the on-site landfill at the facility expired on
December 31, 1988.  On April 1, 1999, ADEM issued the renewed solid waste permit
to the Company.

  On April 1, 1999, the Company was identified by the Environmental Protection
Division of the State of Georgia Department of Natural Resources ("EPD") as one
of the parties responsible for the SoGreen Barren Area Site in Tifton, Georgia.
Previously, the Company had responded to EPD that it had no records of any
materials being shipped to the site, and that a review of EPD documents revealed
that the Company was incorrectly identified as a "successor" to Republic Steel
Corporation.  EPD nevertheless issued an Administrative Order to the Company.
The Company declined to participate in the Order, and EPD now may seek cost
recovery and punitive damages for expenses it incurs to complete the corrective
action at the site.  No appeal was available from the Administrative Order;
however, the Company may petition for a hearing in the event EPD seeks to
recover costs, enforce the Administrative Order, or recover a penalty.  It is
unknown at this time whether EPD will take any of these actions.  Should EPD
take any such action, the Company will petition for a review, as it believes it
has valid defenses as it is not a successor to Republic Steel Corporation.

                                       9
<PAGE>

  On January 27, 1999, the EPA filed an information request with the Company
regarding certain potential violations of the Clean Air Act regarding Prevention
of Significant Deterioration ("PSD") pre-construction review and permitting for
certain boilers (Nos. 1, 2, 3, 4, 5, 7, 8, and 9).  The Company responded to the
request on May 6, 1999. The EPA has not yet replied.

  The Company's expenditures for environmental capital projects aggregated $1.3
million and $1.8 million for the nine months ended July  31, 1999 and 1998,
respectively.  As of July 31, 1999, the Company has accrued $2.1 million for
unresolved environmental matters.  Though the Company believes that it has
adequately reserved for the cost of all known environmental conditions in
accordance with generally accepted accounting principles, the relevant agencies
could insist upon different and possibly more costly remedial measures than
those believed by the Company to be adequate or required by existing law.  The
ultimate resolution of the above matters may have a material adverse effect on
the Company's financial position, results of operations, and liquidity.

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

NOTE 5 - DEBTOR-IN-POSSESSION AND OTHER FINANCING ARRANGEMENTS

   On July 20, 1999, the Bankruptcy Court granted the Company's motion to
approve a new $65 million  DIP Credit Facility.  The DIP Credit Facility expires
on the earlier of the consummation of a plan of reorganization or July 6, 2000.
The DIP Credit Facility replaced the Company's previous revolving credit
facility. The DIP Credit Facility is secured by raw material, work-in-process,
finished goods inventory, and the Company's trade accounts receivable.  Actual
borrowing availability is subject to a borrowing base calculation and the right
of the lender to establish reserves, which it has done in the amount of $2.5
million. The amount available to the Company under the DIP Credit Facility is
the aggregate of 85% of eligible accounts receivables, and 64% of eligible
inventories (up to an aggregate of $40 million), less reserves on the various
collateral established by the lender. Borrowing availability under the DIP
Credit Facility is also subject to compliance with certain covenants. As of
July 31, 1999, the Company's eligible inventories and accounts receivable
supported access to $48.8 million under the DIP Credit Facility. As of July 31,
1999, the Company had a net availability of $16.8 million under the DIP Credit
Facility. The Company recorded $350,000 for debt issuance cost of the DIP Credit
Facility, which is being amortized over a one-year period.

   On July 20, 1999, the Bankruptcy Court also granted the Company's motion to
approve a new debtor-in-possession agreement in the aggregate principal amount
of $17.1 million (the "Term Loan").  The Term Loan is secured by the property,
plant and equipment and certain other collateral of the Company.  All loans are
payable one year from the initial advance.  Upon entry of the interim bankruptcy
order on July 7, 1999, the Bankruptcy Court approved the advance of $6.4 million
to the Company and $9.0 million was advanced upon entry of the final bankruptcy
order on July 20, 1999, less approximately  $800,000 which has been retained by
the lender pending resolution of certain collateral issues.  An additional $2.5
million will be advanced after November 1, 1999 upon request of the Company.
Such amounts may be reduced by certain reserves in respect of existing liens on
collateral and are subject to compliance with certain covenants.  The Company
recorded $247,000 for debt issuance cost of the Term Loan, which is being
amortized over a one-year period.

   On July 20, 1999, the Bankruptcy Court also approved a Preferred Supplier
Continuous Credit Program (the "Program").  The Program provides that (a)
selected suppliers that offer postpetition credit terms at least equal to the
lesser of twice the number of days that are listed as "Current Trade Term Days"
(but not less than 30 days) or 45 days, and (b) any suppliers that have not been
pre-selected that offer postpetition credit terms of at least 45 days, and, in
each case, for a continuous period of at least 6 month, shall be entitled to
liens with superpriority administrative expense status on all postpetition
credit extended to the Company under the Program.  Such liens are senior to the
First Mortgage Noteholders' prepetition liens, but subordinate to Bankruptcy
Court approved debtor-in-possession financing, the prepetition revolving credit
facility and certain professional and administrative fees and expenses.  In
addition, so long

                                       10
<PAGE>

as continuous credit is provided, a participant is entitled to a credit
extension fee of up to 50% of the participants prepetition claim, if any,
payable after 6 months over a 30 month period. The maximum amount of
postpetition credit eligible to receive credit extension fees is $15 million and
the Company may pay up to a maximum of $7.5 million in credit extension fees to
selected suppliers that participate in the Program.

NOTE 6 - EXTRAORDINARY ITEM

   On November 13, 1997, the Company retired its previous $70 million revolving
credit facility and entered into the prepetition $80 million credit facility
which included a $70 million revolving credit facitliy and a $10 million
equipment financing facility.  In connection with this refinancing, the Company
recorded an extraordinary expense of approximately $1.0 million, consisting of a
noncash charge of $800,000 to write-off unamortized debt issuance costs and a
prepayment penalty of $200,000.  The income tax benefit relating to this write-
off is reserved by a deferred income tax valuation allowance.  The $80 million
prepetition credit facility was replaced by the DIP Credit Facility.

                                       11
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         ---------------------------------------------------------------
         RESULTS OF OPERATIONS
         ---------------------


Forward-Looking Statements

  This Quarterly Report on Form 10-Q may contain forward-looking statements as
that term is defined in the Private Securities Litigation Reform Act of 1995.
The words "believe", "expect", "anticipate" and similar expressions identify
forward-looking statements.  Such statements are based on management's current
assumptions and expectations and are subject to a number of factors and
uncertainties which could cause actual results or business conditions to differ
materially from those anticipated in the forward-looking statements.  There can
be no assurance that actual results will not differ materially from those
described in such statements because of various factors, including, but not
limited to:  the size and timing of significant orders, as well as deferral of
orders, over which the Company has little control; the variation in the
Company's sales cycles from customer to customer; increased competition posed by
other steel producers, both domestic and foreign; changes in pricing policies by
the Company and its competitors; the need to secure or build manufacturing
capacity in order to meet demand for the Company's products; the Company's
success in expanding its sales programs and its ability to gain increased market
acceptance for its existing product lines; the continued increase of foreign
steel imports at extremely low prices; the continued access to and adequacy of
the DIP Credit Facility and Term Loan; the gain or loss of significant
customers; the ability to complete the Company's capital investment program and
successfully produce its products; shortages in the availability of raw
materials from the Company's suppliers; fluctuations in the price and
availability of energy; the costs of environmental compliance and the impact of
government regulations; the Company's relationship with its work force; the
restrictive covenants and tests contained in the Company's financing
instruments, which could limit the Company's operating and financial
flexibility; adverse developments arising from the Chapter 11 proceedings; the
Company's ability to successfully reorganize under Chapter 11 of the Bankruptcy
Code, and general economic conditions.

GENERAL

  The discussion and analysis below should be read in conjunction with unaudited
financial statements and the accompanying notes included in this Form 10-Q. As
described in Note 2 to the unaudited financial statements, the Company filed a
voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code.

RESULTS OF OPERATIONS

  Results of operations for an interim period are not necessarily indicative of
results for the full year.

THREE MONTHS ENDED JULY 31, 1999 COMPARED TO THREE MONTHS ENDED JULY 31, 1998

  Net Sales.  Net sales decreased 23.3% to $82.3 million for the 1999 period
from $107.4 million for the 1998 period.  This decline was the result of a
reduction in the average selling prices of $80 per ton in the third quarter of
fiscal 1999 to $354 per ton compared to $434 per ton in 1998.  In addition,
there was a 5.8% decrease in sales volume on shipments of flat rolled products
to 226,888 net tons in the 1999 period compared to 240,644 net tons in the 1998
period.  This decline was primarily the result of depressed market conditions
resulting from the sharp increase in foreign steel imports.

  Cost of Goods Sold.  Cost of goods sold, excluding depreciation, decreased
14.6% to $78.8 million for the 1999 period from $92.2 million for the 1998
period.  This decrease is primarily due to lower production volumes in the third
quarter of 1999 compared to the 1998 period.  As a percentage of net sales, cost
of goods sold, excluding depreciation, increased to 95.7% from 85.9%.  This
increase is due to lower selling prices per ton resulting from the unfavorable
market conditions as well as higher average manufacturing costs per ton
resulting from lower production volumes. Average manufacturing costs for flat
rolled products decreased to $337 per ton in the 1999 period from $368 per ton
in the 1998 period.  Depreciation expense increased to $5.3 million in the third
quarter of fiscal 1999 compared to $5.0 million in 1998.

                                       12
<PAGE>

  Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased to $4.9 million, or 5.9% of sales, in the 1999
period from $4.5 million, or 4.2% of sales in the 1998 period. The increase in
selling, general and administrative expenses as a percentage of sales is due
primarily to a decrease in overall sales on a year-to-year comparable basis.

  Operating Profit (Loss).  As a result of the changes in net sales, cost of
goods sold, selling and general and administrative expenses, operating profit
decreased  $12.2 million from $5.6 million in 1998 to a loss of $6.6 million for
the 1999 period.

  Restructuring Expenses. Restructuring expenses for the first three months of
1999 were approximately $1.8 million.  Restructuring expenses includes
additional costs incurred for financial and legal advisors and is classified as
professional fees under restructuring items on the Statement of Operations.

  Interest Expense.  Interest expense, net of interest income, decreased to $5.0
million in the 1999 period from $6.8 million during the comparable period in
1998. This decrease is primarily due to the three months period in 1999
containing only two months of interest expense as the Company discontinued
accruing interest on July 1, 1999 due to the bankruptcy filing.  Contractual
interest on those obligations amounts to $7.2 million, which is $2.2 million in
excess of the reported interest expense.

NINE MONTHS ENDED JULY 31, 1999 COMPARED TO NINE MONTHS ENDED JULY 31, 1998

  Net Sales.  Net sales decreased 24.9% to $235.9 million for the 1999 period
from $314.3 million for the 1998 period.  This decline was the result of a
reduction in the average selling prices of $55 per ton in the first nine months
of fiscal 1999 to $373 per ton compared to $428 per ton in 1998.  In addition,
there was a 14.7% decrease in sales volume on shipments of flat rolled products
to 616,380 net tons in the 1999 period compared to 722,662 net tons in the 1998
period.  This decline was primarily the result of depressed market conditions
resulting from the sharp increase in foreign steel imports.

  Cost of Goods Sold.  Cost of goods sold, excluding depreciation, decreased
13.2% to $233.5 million for the 1999 period from $269.0 million for the 1998
period. This decrease is primarily due to lower production volumes in the first
nine months of 1999 compared to the 1998 period.  As a percentage of net sales,
cost of goods sold, excluding depreciation, increased to 99.0% from 85.6%.  This
increase is due to lower selling prices per ton resulting from the unfavorable
market conditions as well as higher average manufacturing costs per ton
resulting from lower production volumes.  Average manufacturing costs for flat
rolled products increased to $368 per ton in the 1999 period from $363 per ton
in the 1998 period.  Depreciation expense increased to $15.8 million in the
first nine months of fiscal 1999 compared to $15.1 million in 1998.

  Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased to $13.6 million, or 5.8% of sales, in the
1999 period from $13.1 million, or 4.2% of sales in the 1998 period. The
increase in selling, general and administrative expenses as a percentage of
sales is due primarily to a decrease in overall sales on a year-to-year
comparable basis.

  Restructuring Expenses. Restructuring expenses for the first nine months of
1999 were $3.0 million. Restructuring expenses includes additional costs
incurred for financial and legal advisors and is classified as professional fees
under restructuring items on the Statement of Operations.

  Operating Profit (Loss).  As a result of the changes in net sales, cost of
goods sold, selling and general and administrative expenses, operating profit
decreased  $44.0 million from $17.0 million in 1998 to a loss of $27.0 million
for the 1999 period.

  Interest Expense. Interest expense, net of interest income, decreased to $19.0
million in the 1999 period from $20.8 million during the comparable period in
1998. This decrease is primarily due to the nine months period in 1999
containing only eight months of interest expense as the Company discontinued
accruing  interest on July 1, 1999 due to the bankruptcy filing.  Contractual
interest on those obligations amounts to $21.2 million, which is $2.2 million in
excess of the reported interest expense.

                                       13
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

  The Company's net cash provided by operations was $9.9 million during the nine
months ended July 31, 1999, compared to cash provided by operations of $27.5
million for the nine months ended July 31, 1998.  The primary reason for this
decrease was the decrease in earnings during the nine months ended July 31, 1999
compared to the nine months ended July 31, 1998, partially offset by decreased
inventory.

  The Company's current liquidity requirements include working capital needs,
cash for debt service and capital expenditures.  The Company intends to finance
its current operations and investing activities with existing cash balances,
borrowing under the DIP Credit Facility, funds from the Term Loan, and trade
credit including amounts provided under the Program.  Although the Company
believes that anticipated cash flows from future operations and borrowings under
the DIP Credit Facility, the Term Loan, and the Program should provide
sufficient liquidity for the Company to meet its debt service requirements,
satisfy covenants under the financing agreements and fund ongoing operations and
capital improvements, there can be no assurance these or other possible sources
of liquidity will be adequate.  The Company makes capital expenditures for the
replacement of existing plant and equipment, compliance with environmental
regulations, and the upgrading and improvement of manufacturing facilities.  The
Company's capital expenditures for the nine months ended July 31, 1999 were
$10.4 million compared to $17.9 million in the nine months ended July 31, 1998.
For fiscal year 1999, the Company expects capital expenditures, excluding
capitalized interest, to total approximately $4.0 million for environmental
projects and expenditures for the replacements, upgrading and improvement of
facilities and equipment to total approximately $11.7 million.  Although the
Company expects to benefit from improved operating performance related to its
capital investments, there can be no assurance that any or all of these
potential cost savings will be realized.

  The Company's recent losses from operations, significant stockholders deficit
and the related Chapter 11 filing raise substantial doubt about the Company's
ability to continue as a going concern. Realization of the carrying amounts of
the Company's and classification of its liabilities is dependent upon, among
other things the ability to comply with debtor-in-possession financing
agreements, the ability to achieve profitable operations, and the ability to
generate sufficient cash flow from operations to meet its obligations.

  The Company was unable to make its April 15, 1999, interest payment of $12.8
million due on the First Mortgage Notes. The Company was also unable to cure
that default by May 15, 1999, which date represented the expiration of the 30-
day cure period from the original interest payment due date.  The Bankruptcy
Code generally prohibits the Company from making payment on prepetition debt,
including the First Mortgage Notes, except pursuant to Bankruptcy Court
approval.

  Under the terms of the bankruptcy case, liabilities in the amount of
approximately  $228.0 million are subject to compromise under a plan of
reorganization.  Pursuant to the provisions of the Bankruptcy Code and during
the pendency of the bankruptcy proceeding, actions to enforce or otherwise
effect repayment of  prepetition liabilities, as well as all pending litigation
against the Company, are stayed while the Company continues its business
operations as debtor-in-possession. The ultimate amount and settlement terms for
such liabilities are subject to a plan of reorganization, and accordingly, are
not presently determinable.

   On July 20, 1999, the Bankruptcy Court granted the Company's motion to
approve a new $65 million debtor-in-possession credit facility.  The DIP Credit
Facility expires on the earlier of the consummation of a plan of reorganization
or July 6, 2000. The DIP Credit Facility replaced the Company's prepetition
revolving credit facility.   The DIP Credit Facility is secured by raw
materials, work-in-process, finished goods inventory, and the Company's trade
accounts receivable.  Actual borrowing availability is subject to a borrowing
base calculation and the right of the lender to establish reserves, which it has
done in the amount of $2.5 million.  The amount available to the Company under
the DIP Credit Facility is the aggregate of 85% of eligible accounts
receivables, and 64% of eligible inventories (up to an aggregate of

                                       14
<PAGE>

$40 million), less reserves on the various collateral established by the lender.
Borrowing availability under the DIP Credit Facility is also subject to
compliance with certain covenants.  As of July 31, 1999, the Company's eligible
inventories and accounts receivable supported access to $48.8 million under the
Credit Facility.  As of July 31 1999, the Company had a net availability of
$16.8 million under the DIP Credit Facility.  The Company recorded $350,000 for
debt issuance cost of the DIP Credit Facility, which is being amortized over a
one-year period.

   On July 20, 1999, the Bankruptcy Court also granted the Company's motion to
approve a new debtor-in-possession agreement in the aggregate principal amount
of $17.1 million.  The Term Loan is secured by the property, plant and
equipment, and certain other collateral of the Company.  All loans are payable
one year from the initial advance.  Upon entry of the bankruptcy interim order
on July 7, 1999, the Bankruptcy Court approved the advance of $6.4 million to
the Company and $9.0 million was advanced upon entry of the bankruptcy final
order on July 20, 1999, less approximately $800,000 which has been retained by
the lender pending resolution of certain collateral issues.  An additional $2.5
million will be advanced after November 1, 1999 upon request of the Company.
Such amounts may be reduced by certain reserves in respect of existing liens on
collateral and are subject to compliance with certain covenants. The Company
recorded $247,000 for debt issuance cost of the Term Loan, which is being
amortized over a one-year period.

  On July 20, 1999, the Bankruptcy Court also approved a Preferred Supplier
Continuous Credit Program.  The Program provides that (a) selected suppliers
that offer postpetition credit terms at least equal to the lesser of twice the
number of days that are listed as "current trade term days" (but not less than
30 days) or 45 days, and (b) any suppliers that have not been pre-selected that
offer postpetition credit terms of at least 45 days, and, in each case, for a
continuous period of at least 6 months, shall be entitled to liens with
superpriority administrative expense status on all postpetition credit extended
to the Company under the Program.  Such liens are senior to the First Mortgage
Noteholders' prepetition liens, but subordinate to Bankruptcy Court approved
debtor-in-possession financing and certain professional and administrative fees
and expenses.  In addition, so long as continuous credit is provided, a
participant is entitled to a credit extension fee of up to 50% of the
participants prepetition claim, if any, payable after 6 months over a 30 month
period. The maximum amount of postpetition credit eligible to receive credit
extension fees is $15 million and the Company may pay up to a maximum of $7.5
million in credit extension fees to selected suppliers that participate in the
Program

  Although the Company believes that anticipated cash flows from future
operations and borrowings under the DIP Credit Facility, the Term Loan, and the
Program should provide sufficient liquidity for the Company to meet its debt
service requirements, satisfy covenants under the financing agreements and fund
ongoing operations and capital improvements, there can be no assurance these or
other possible sources or liquidity will be adequate.

  Given current market conditions, the levels of debt and associated interest
expense, required capital expenditures and improvements and the potential
realization of loss contingencies, the Company believes that it will continue to
incur losses in fiscal 1999.  If the level of foreign imports is not reduced and
if the Company is unable to increase sales and pricing, continue to reduce
costs, implement productivity improvements, comply with the covenant
requirements contained in the Company's financing documents and maintain its
borrowing availability under the DIP Credit Facility and the Term Loan, the
Company may not have sufficient liquidity and capital resources to meet its
projected fiscal year 1999 requirements. As a result, the Company has been
evaluating when it will commence the bosh reline project, discussed under
"Capital Investments" in Item 1, Part I of the Company's Form 10-K for the year
ended October 31, 1998, and is developing a restructuring plan to improve
operating results and to increase its financial flexibility.  The evaluation has
determined that certain refractories maintenance techniques may allow the
project to be deferred for at least one more year.  This estimate could be
affected by unseen deterioration of the bosh lining.  A failure of the blast
furnace would have a material adverse effect on the Company.  The Term Loan
covenants do not allow capital expenditures related to steel making activities
including the bosh reline project.

                                       15
<PAGE>

   On April 21, 1995, the Company completed the Acquisition (see the Business
section of Item 1 of Form 10-K for the year ended October 31, 1998) of
substantially all the assets and the assumption of certain liabilities of the
Gadsden, Alabama facilities of Gulf States Steel, Inc. of Alabama (the
"Predecessor of the Company") from the Brenlin Group.  In connection with the
Acquisition, GSS Holdings Corp ("GSS Holdings") issued certain promissory notes
to Capital Resource Lenders II, L.P. as a part of a related transaction.
Although the Company has no obligation with respect to the promissory notes, GSS
Holdings is required to make payments thereon in accordance with the respective
terms thereof, for which the source of funds was expected to be dividend
distributions or loans from the Company.  The promissory notes require GSS
Holdings to cause the Company to pay dividends to GSS Holdings to the maximum
extent allowed under the terms of the First Mortgage Notes Indenture and
applicable law until the GSS Holdings notes are repaid in full.  No dividends
are payable by the Company as of July 31, 1999.  In addition, in connection with
the Acquisition, GSS Holdings issued a promissory note to the seller for which
the source of funds for repayment was also expected to be dividend distributions
or loans from the Company.  There have been no cash payments required or made on
the seller note through July 31, 1999.  As noted above, the Company is
prohibited from making payments with respect to prepetition debt, except
pursuant to Bankruptcy Court approval.

YEAR 2000 ISSUE

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

  As previously reported in the Company's Form 10-K for the fiscal year ended
October 31, 1998, the Company has recognized the serious nature of its exposure
under the Year 2000 Issue and has developed a modification plan that will
minimize this exposure.  It has budgeted approximately $11.7 million (of which
$9.1 million is expected to be capitalized) for the purchase of Year 2000
compliant software and consultant support all of which is expected to be funded
through operating cash flows and borrowing on its DIP Credit Facility.  The
primary purchased software is for an enterprise resource planning system which
will provide enhanced productivity and customer service benefits in addition to
mitigating potential consequences of the Year 2000 problem.  Through July 31,
1999, the Company has incurred expenditures for software and consultant support
of $11.4 million and has spent another $1.1 million for contractors to rewrite
existing systems.  Those activities were initiated in late 1996 for all business
systems. The Company believes that the costs to rewrite existing systems, which
will be expensed as incurred, are not expected to have a material effect on its
results of operations.

  The Company implemented the final phase of the Year 2000 project on August 2,
1999, which is prior to any anticipated impact on its operating systems. A team
of information systems personnel has evaluated the progress and has developed
contingency plans that ensure the continued operation of the business.  The
Company appointed a task force to further evaluate and develop action plans for
minimizing the impact of the Year 2000 Issue on its process control systems.
The appointed task force has identified a minor system fault that is being
remediated at this time.  The Company believes the project will be completed on
time and the risk of loss is minimal.

  The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors.  There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.  See also the Company's statements regarding "forward-looking
statements" contained in this Form 10-Q.

                                       16
<PAGE>

PART II  OTHER INFORMATION

ITEM 1.  LEGAL  PROCEEDINGS
         ------------------


   On July 1, 1999, the Company filed a voluntary petition seeking
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for Northern District of Alabama, Eastern
Division. The Company's operating results for fiscal 1998 and for the first
three fiscal quarters of 1999 were severely affected by, among other things, a
dramatic surge in steel imports beginning in the summer of 1998.  As a
consequence of record-high levels of low-priced steel imports and the resultant
deteriorating market conditions, the Company's overall price realization and
shipments declined.  Decreased liquidity made it impossible for the Company to
service its debt and fund ongoing operations. Therefore, the Company sought
protection under Chapter 11 of the Bankruptcy Code.

ITEM 2.   DEFAULTS UPON SENIOR SECURITIES
          -------------------------------


  The Company did not make its interest payment of approximately $12.8 million
due April 15, 1999 on the Company's First Mortgage Notes, due in 2003. The
Company was also unable to cure that default by May 15, 1999, which date
represented the expiration of the 30-day cure period from the original interest
payment date, which resulted in a default under the terms thereof. As described
above, the Company filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code on July 1, 1999.  The Bankruptcy Code generally
prohibits the Company from making payments on unsecured, prepetition debt,
including the First Mortgage Notes, except pursuant to Bankruptcy Court
approval.

                                       17
<PAGE>

ITEM 3.  EXHIBITS AND REPORTS ON FORM 8-K
         --------------------------------

(a)  (10.1)  Postpetition Loan and Security Agreement dated July 1, 1999, among
     Gulf States Steel, Inc. of Alabama, Fleet Capital Corporation, as agent,
     and certain financial institutions listed therein

     (10.2) Financing Agreement, dated as of July 1, 1999, among Gulf States
     Steel, Inc. of Alabama, Ableco Finance LLC, as agent, and certain lenders
     listed therein.

     (10.3) Final Order Pursuant to 11 U.S.C. (S)(S) 105(a), 364(c)(1), (c)(3)
     and (d)(1) (I) Authorizing Debtor to Obtain Trade Credit from Suppliers
     Secured by Lien on Debtor's Assets with Administrative Expense Priority,
     and (II) Authorizing Debtor to Pay Credit Extension Fees, signed and
     dated July 20, 1999, by the United States Bankruptcy Court, Northern
     District of Alabama, Eastern Division, In the Matter of Gulf States
     Steel, Inc. of Alabama, as debtor, in Bankruptcy Case No. 99-41958-JSS-11,
     with accompanying Exhibit of Terms

     (27) Financial Data Schedule

(b)  (1)  Form 8-K was filed on April 19, 1999

     (2)  Form 8-K was filed on May 28, 1999

     (3)  Form 8-K was filed on July 15, 1999

     (4)  Form 8-K was filed on September 10, 1999

                                       18
<PAGE>

                                   SIGNATURES



     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.


                                GULF STATES STEEL, INC. OF ALABAMA
                                ----------------------------------
                                                  (registrant)


                                By:  /s/ Robert Schaal
                                   ---------------------------------
                                   Robert Schaal
                                   Chairman & Chief Executive Officer
                                   (Principal Executive Officer)



Dated: September 20, 1999       By:  /s/ James R. Grimm
                                   ---------------------------------
                                   James R. Grimm
                                   Senior Vice President & CFO
                                   (Principal Financial and Accounting Officer)

                                       19