ROANOKE ELECTRIC STEEL CORPORATION [LOGO] ANNUAL REPORT 1997

<PAGE>


1997 HIGHLIGHTS
o   Net earnings second highest on record

o   Sales highest in history

o   Continued strong earnings by our fabricating subsidiaries

o   Record shipments of mill products

o   Record production of raw steel

o   Record production of mill products

o   Record working capital of $68,028,793

o   Record cash flows from operations of $28,661,003

o   Record total assets of $176,860,219

o   Curtailments of long-term debt of $6,749,999

o   Record stockholders' equity of $106,436,269

o   16.8% return on average equity

o   15.8% pretax return on average total assets

o   Cash dividend increased 8.3%

o   $5,312,273 returned to shareholders in dividends
    and repurchases of stock

Roanoke Electric Steel Corporation and its wholly-owned subsidiaries are
engaged in the manufacturing, fabricating and marketing of merchant steel
products, billets, open-web steel joists and reinforcing bars. Each subsidiary
is either a supplier to the parent company or a purchaser of its finished
product.
    The main plant of Roanoke Electric Steel Corporation is a state-of-the-art
steel mini-mill located in Roanoke, VA. This facility melts scrap steel in
electric furnaces and continuously casts the molten steel into billets.

<PAGE>
TO OUR SHAREHOLDERS

  1997 RESULTS, RECORDS AND HIGHLIGHTS

        Fiscal year 1997 was one of the best years in the history of our
    company. Revenues were up 7.6% to record levels, while earnings were the
    second best on record, increasing 9.5%. The year included numerous other
    records, as raw steel production, mill production, and shipments of mill
    products reached all-time highs. In addition, our fabricating subsidiaries
    contributed substantial earnings for the third consecutive year.
        This success reflects the results of strategic acquisitions and
    commitments of large amounts of capital for plant and equipment made over
    the years. The benefits from these investments are increased levels of
    shipments and production, lower production costs and improved margins and
    earnings.
        Earnings for the year were $16,883,068 on record sales of $265,108,639.
    Last year's sales and earnings were $246,286,652 and $15,414,834,
    respectively. Earnings per share for 1997 were $2.25 compared to $1.96 for
    1996 - up 14.8%.
        The improved performance for the year was, primarily, due to increased
    shipments of mill products and billets and improved margins for mill
    products. The improved margins were attributable to increased selling prices
    and lower costs due to the efficiencies of increased production. Business
    conditions remained strong within the construction industry, and our
    fabricating subsidiaries, again, achieved excellent earnings.

        Other notable highlights of 1997 were:
          o An $8,398,604 increase in working capital to a record $68,028,793.
          o A $9,844,318 increase in total assets to a record $176,860,219.
          o An $11,494,939 increase in cash flows from operations to a record
            $28,661,003.
          o A $12,003,178 increase in stockholders' equity to a record
            $106,436,269.
          o A return on average equity of 16.8%.
          o A pretax return on average total assets of 15.8%.


     Billets are rolled into merchant steel products consisting of angles, plain
rounds, flats, channels and reinforcing bars of various lengths and sizes.Excess
steel billet production is sold to mills without melting facilities.
Roanoke Electric Steel Corporation markets its products to steel service center
and fabricators in 21 states east of the Mississippi River.

<PAGE>

  IMPROVED FINANCIAL STRENGTH

        We continued to improve our financial condition during the year.  In 
    addition to the
    increases in cash flows from operations, working capital and stockholders'
    equity, the current ratio was 3.5 to 1, and the quick ratio was 2.0 to 1.
    Cash, cash equivalents and investments increased to $16,660,219. Also, we
    deleveraged our capital structure and decreased long-term debt as a
    percentage of total capitalization to 21.1%, a 22.4% improvement from 1996.
    The ratio of debt to equity was .66 to 1, and we reduced borrowings by
    $6,749,999. Our $30,000,000 revolving credit facility was unused at year
    end. The revolver, working capital and conservative debt level have assured
    the available resources to make capital and equity investments necessary for
    future growth and to maintain our competitive position.

  ENHANCED SHAREHOLDER VALUE

        Our strong performance, among other things, created considerable value
    for our shareholders during the year. The share price increased 39%, and the
    quarterly dividend was increased 8.3% to 13 cents per share, putting the
    current yield on our common stock in the 2.7% range. The annual dividend
    rate has increased over 60% in the past five years to the present rate of 52
    cents per share. In October, 1997, the Board declared the 156th consecutive
    quarterly cash dividend in the amount of 13 cents per share payable November
    25, 1997. Annual cash dividends in 1997 were $3,739,495. Strong cash flows
    allowed us to return an additional $1,572,778 to shareholders with the
    repurchase of 103,000 shares of our common stock during the year. In the
    past two years, a total of $9,308,727 has been returned to shareholders as a
    total of 659,200 company shares have been repurchased. The Board approved
    Plan authorized the repurchase of up to 750,000 shares.

  PREPARED FOR GROWTH

        We will continue to use our substantial amounts of free cash flow and
    debt, when necessary, to make capital investments and pursue acquisition
    candidates. Capital expenditures will be made in our present lines of
    business to improve quality and service to our customers and to increase
    profitability by achieving further cost reductions and operating


     Shredded Products, Corporation, a subsidiary with operations in Rocky
Mount and Montvale, VA, extracts scrap steel and other metals from junked
automobies and other waste materials. These facilities supply the main plant
with a substantial amount of its raw materials. Non-ferrous metals generated
in the process are sold to unrelated customers.


<PAGE>

    efficiencies. Capital investments will be necessary to remain a low cost
    producer and a strong, competitive company. We will continue to evaluate
    companies that complement our existing lines of business and contribute to
    earnings. Generally, these are steel and steel-related businesses that allow
    us to add value to our existing product lines and benefit from our knowledge
    and expertise. We will also seek out other opportunities for growth and
    maximization of profits.

  OUTLOOK FOR 1998

        The prospects for the next fiscal year are excellent. Backlogs, orders
    and selling prices for all our products continue to be strong. At present
    levels of sales and margins, we expect improved earnings in the first
    quarter compared to last year. With economic conditions favorable and the
    steel and construction industries experiencing strong business conditions,
    the outlook for all of fiscal year 1998 is encouraging. If market conditions
    allow, we are confident the substantial outlays for capital and equity
    investments made in the past will take us to new highs in productivity and
    earnings. Our sincerest desire is that the results of our efforts will
    translate into improved shareholder value in the long term.
        It has been our pleasure reporting to you the results of fiscal year
    1997. We are pleased with the outcome and applaud the efforts of our 1,150
    ambitious and loyal employees. We thank our valued customers for their
    contribution to the 1997 results. We also extend our gratitude to you, our
    shareholders, for your interest and investment in Roanoke Electric Steel
    Corporation.
                                                 Sincerely,

                                           /s/ Donald G. Smith
                                   ------------------------------------------
                                               Donald G. Smith
                                                 Chairman of the Board and Chief
                                                 Executive Officer      


     John W. Hancock, Jr., and Socar, Inc. are steel fabrication subsidiaries
located in Salem, VA, Florence, SC and Continental, OH. All three operations
purchase rounds and angles from the main plant to fabricate long- and
short-span open-web steel joists. These joists are used as horizontal supports
for floors and roofs in commercial and industrial buildings.
     RESCO Steel Products Corporation, a Salem, VA, based subsidiary, fabricates
concrete reinforcing steel by cutting and bending it to contracting 
specifications.



<PAGE>
SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

Year Ended October 31,                       1997              1996             1995              1994             1993
---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Operations
  Sales                                  $265,108,639      $246,286,652     $259,968,524      $215,809,228    $167,294,378
  Gross earnings                           51,728,996        47,914,269       56,097,685        33,732,184      22,565,662
  Interest expense-net                      1,627,380         1,538,191        2,053,643         1,891,263       1,730,822
  Income taxes                             10,206,340         9,305,808       13,035,243         5,684,150       2,785,168
  Earnings before cumulative effect
    of change in accounting principle      16,883,068        15,414,834       20,228,902         8,766,435       4,750,106
  Net earnings                             16,883,068        15,414,834       20,228,902        11,860,375       4,750,106
---------------------------------------------------------------------------------------------------------------------------

Financial  Position
  Working capital                       $  68,028,793     $  59,630,189    $  45,483,760     $  34,504,420   $  36,406,901
  Total assets                            176,860,219       167,015,901      157,774,658       140,473,510     130,620,435
  Long-term debt                           28,541,667        35,291,666       16,979,166        20,729,166      25,521,000
  Stockholders' equity                    106,436,269        94,433,091       90,062,598        72,417,669      63,203,577
---------------------------------------------------------------------------------------------------------------------------

Selected Ratios
  Gross profit margin                            19.5%             19.5%            21.6%             15.6%           13.5%
  Operating income margin                         6.4%              6.3%             7.8%              5.5%            2.8%
  Effective tax rate                             37.7%             37.6%           39.2%              39.3%           37.0%
  Current ratio                                   3.5               3.5              2.2               2.0             2.4
  Quick ratio                                     2.0               2.0              1.3               1.2             1.4
  Funded debt as a percentage of total capital   23.6%             29.5%            26.1%             30.7%           36.6%
  Pretax return on average total assets          15.8%             15.2%            22.3%             10.7%            5.9%
  Return on average stockholders' equity         16.8%             16.7%            24.9%             12.9%*           7.6%
---------------------------------------------------------------------------------------------------------------------------

Per Share Data
  Earnings before cumulative effect
     of change in accounting principle          $2.25             $1.96            $2.51             $1.09           $0.60
  Net earnings                                   2.25              1.96             2.51              1.48            0.60
  Cash dividends                                 0.50              0.45             0.37              0.41            0.32
  Stockholders' equity                          14.24             12.52            11.16              9.03            7.94
---------------------------------------------------------------------------------------------------------------------------

Weighted average common
   shares outstanding                       7,487,301         7,876,987        8,045,644         7,988,985       7,956,339

</TABLE>

Per share information has been adjusted for a three-for-two stock split
effective May 1, 1995. 

*1994 accounting change of $3.1 million excluded.



                                 Capitalization
                                 (in millions)

<TABLE>
<CAPTION>
                                1993           1994         1995         1996              1997
<S> <C>
Stockholders' Equity         $63,203,577    72,417,669    90,062,598   94,433,091      106,436,269
Long-Term Debt                25,521,000    20,729,166    16,979,166   35,291,666       28,541,667
</TABLE>


                                 Working Capital
                                  (in millions)

                                     [chart]

            1993           1994         1995         1996          1997
        $36,406,901     34,504,420   45,483,760   59,630,189     68,028,793

                              Capital Expenditures
                                And Depreciation

                                   [chart]


<TABLE>
<CAPTION>
                                1993           1994         1995         1996              1997
<S> <C>
Capital Expenditures         $ 5,767,423    11,744,913    11,654,366   18,194,216        7,532,580
Depreciation                   7,295,885     7,332,833     7,863,154    8,366,012        9,456,201
</TABLE>



                          Cash Provided By Operations
                                  (in million)

                                   [chart]

            1993           1994         1995         1996          1997
        $9,641,895      14,412,573   19,733,012  17,166,064     28,661,803



                              Stockholders' Equity
                                 (in millions)

                                  [chart]

            1993           1994         1995         1996          1997
        $63,203,577     72,417,669   90,062,598   94,433,091   106,436,269


                                  Total Assets
                                 (in millions)


            1993           1994         1995         1996          1997
        $130,620,435    140,473,510   157,774,658  167,015,901   176,860,219


<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
                                                                                          Year Ended October 31,
                                                                                1997              1996             1995
                                                                             -----------       -----------     -----------
<S> <C>
SALES                                                                       $265,108,639      $246,286,652    $259,968,524
COST OF SALES                                                                213,379,643       198,372,383     203,870,839
                                                                             -----------       -----------     -----------
GROSS EARNINGS                                                                51,728,996        47,914,269      56,097,685
                                                                             -----------       -----------     -----------
OTHER OPERATING EXPENSES
  Administrative                                                              17,873,967        17,315,039      16,194,810
  Interest, net                                                                1,627,380         1,538,191       2,053,643
  Profit sharing                                                               5,138,241         4,340,397       4,585,087
                                                                             -----------       -----------     -----------
     Total                                                                    24,639,588        23,193,627      22,833,540
                                                                             -----------       -----------     -----------
EARNINGS BEFORE INCOME TAXES                                                  27,089,408        24,720,642      33,264,145
INCOME TAX EXPENSE                                                            10,206,340         9,305,808      13,035,243
                                                                             -----------       -----------     -----------
NET EARNINGS                                                               $  16,883,068     $  15,414,834   $  20,228,902
                                                                             ===========       ===========     ===========
NET EARNINGS PER SHARE OF COMMON STOCK                                     $        2.25     $        1.96   $        2.51
                                                                             ===========       ===========     ===========
CASH DIVIDENDS PER SHARE OF COMMON STOCK                                   $        0.50     $        0.45    $       0.37
</TABLE>



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                       Capital in                      Treasury Stock
                                                Common Stock            Excess of                         (At Cost)
                                           ----------------------        Stated       Retained       ---------------------
                                           Shares         Amount         Value        Earnings      Shares        Amount
                                           --------      ---------      ---------    -----------    --------    ----------
<S> <C>
BALANCE, NOVEMBER 1, 1994                 5,946,738     $1,330,650     $9,349,429  $  62,932,458     597,829  $  1,194,868
  Three-for-two stock split               2,984,619          -             -             -           298,914        -
  Cash paid in lieu of fractional
     shares on stock split                     (152)         -             -              (1,776)      -            -
  Stock options exercised                    39,185        398,853         -             -             -            -
  Net earnings                                -              -             -          20,228,902       -            -
  Cash dividends                              -              -             -          (2,981,050)      -            -
                                           --------      ---------      ---------    -----------    --------    ----------
BALANCE, OCTOBER 31, 1995                 8,970,390      1,729,503      9,349,429     80,178,534     896,743     1,194,868
  Repurchase of common stock                  -              -             -             -           556,200     7,735,949
  Stock options exercised                    23,750        187,293         -             -             -            -
  Net earnings                                -              -             -          15,414,834       -            -
  Cash dividends                              -              -             -          (3,495,685)      -            -
                                           --------      ---------      ---------    -----------    --------    ----------
BALANCE, OCTOBER 31, 1996                 8,994,140      1,916,796      9,349,429     92,097,683   1,452,943     8,930,817
  Repurchase of common stock                  -              -             -             -           103,000     1,572,778
  Stock options exercised                    35,950        432,383         -             -             -            -
  Net earnings                                -              -             -          16,883,068       -            -
  Cash dividends                              -              -             -          (3,739,495)      -            -
                                           --------      ---------      ---------    -----------    --------    ----------
BALANCE, OCTOBER 31, 1997                 9,030,090     $2,349,179     $9,349,429   $105,241,256   1,555,943   $10,503,595
                                          =========     ==========     ==========   ============   =========   ===========

</TABLE>


See notes to consolidated financial statements.

<PAGE>

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                                1997               1996
                                                                                             -----------       -----------
<S> <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                                               $    8,844,537    $    1,038,689
  Investments                                                                                  7,815,682         6,059,853
  Accounts receivable                                                                         38,786,302        40,479,798
  Inventories                                                                                 36,814,417        34,314,899
  Prepaid expenses                                                                             1,900,338           651,013
  Deferred income taxes                                                                        1,211,881         1,039,542
                                                                                             -----------       -----------
    Total current assets                                                                      95,373,157        83,583,794
                                                                                             -----------       -----------
PROPERTY, PLANT AND EQUIPMENT
  Land                                                                                         4,313,060         4,291,522
  Buildings                                                                                   18,874,555        17,889,855
  Other property and equipment                                                               119,266,483       123,215,697
  Assets under construction                                                                      921,581         1,054,026
                                                                                             -----------       -----------
    Total                                                                                    143,375,679       146,451,100
  Less-accumulated depreciation                                                               62,077,810        63,216,681
                                                                                             -----------       -----------
    Property, plant and equipment, net                                                        81,297,869        83,234,419
                                                                                             -----------       -----------
OTHER ASSETS                                                                                     189,193           197,688
                                                                                             -----------       -----------
TOTAL                                                                                       $176,860,219      $167,015,901
                                                                                             ===========       ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Current portion of long-term debt                                                       $    4,250,000    $    4,250,000
  Accounts payable                                                                            13,050,874        10,977,510
  Dividends payable                                                                              971,639           904,944
  Employees' taxes withheld                                                                      151,085           284,466
  Accrued profit sharing contribution                                                          4,910,443         3,911,957
  Accrued wages and expenses                                                                   2,938,065         2,745,159
  Accrued income taxes                                                                         1,072,258           879,569
                                                                                             -----------       -----------
    Total current liabilities                                                                 27,344,364        23,953,605
                                                                                             -----------       -----------
LONG-TERM DEBT
  Notes payable                                                                               32,791,667        39,541,666
  Less-current portion                                                                         4,250,000         4,250,000
                                                                                             -----------       -----------
    Long-term debt                                                                            28,541,667        35,291,666
                                                                                             -----------       -----------
POSTRETIREMENT LIABILITIES                                                                       990,809           742,839
                                                                                             -----------       -----------
DEFERRED INCOME TAXES                                                                         13,547,110        12,594,700
                                                                                             -----------       -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 7)
STOCKHOLDERS' EQUITY
  Common stock-no par value-authorized 20,000,000 shares,
       issued 9,030,090 shares in 1997 and 8,994,140 in 1996                                   2,349,179         1,916,796
  Capital in excess of stated value                                                            9,349,429         9,349,429
  Retained earnings                                                                          105,241,256        92,097,683
                                                                                             -----------       -----------
    Total                                                                                    116,939,864       103,363,908
  Less-treasury stock, 1,555,943 shares in 1997
       and 1,452,943 in 1996 - at cost                                                        10,503,595         8,930,817
                                                                                             -----------       -----------
    Total stockholders' equity                                                               106,436,269        94,433,091
                                                                                             -----------       -----------
TOTAL                                                                                       $176,860,219      $167,015,901
                                                                                             ===========       ===========
</TABLE>

See notes to consolidated financial statements.

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                          Year Ended October 31
                                                                                 1997             1996            1995
                                                                              ----------       ----------       ----------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings                                                                 $16,883,068      $15,414,834      $20,228,902
Adjustments to reconcile net earnings to net
  cash provided by operating activities:
  Postretirement liabilities                                                     247,970          248,248          252,591
  Depreciation and amortization                                                9,482,836        8,380,456        7,989,663
  Gain on sale of investments and property, plant and equipment                   (1,659)         (59,312)        (193,926)
  Deferred income taxes                                                          780,071        1,011,529         (160,859)
  Changes in assets and liabilities which provided
    (used) cash, exclusive of changes shown separately                         1,268,717       (7,829,691)      (8,383,359)
                                                                              ----------       ----------       ----------
Net cash provided by operating activities                                     28,661,003       17,166,064       19,733,012
                                                                              ----------       ----------       ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Expenditures for property, plant and equipment                              (7,532,580)     (18,194,216)     (11,654,366)
  Proceeds from sale of property, plant and equipment                             17,299          200,666          952,635
  Purchase of investments                                                     (6,085,692)      (3,840,892)      (1,879,186)
  Proceeds from sale of investments                                            4,309,012        1,910,093        3,022,446
  Other                                                                           -                12,328           -
                                                                              ----------       ----------       ----------
Net cash used in investing activities                                         (9,291,961)     (19,912,021)      (9,558,471)
                                                                              ----------       ----------       ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Increase (decrease) in notes payable                                            -           (11,000,000)       4,500,000
  Cash dividends                                                              (3,739,495)      (3,495,685)      (2,981,050)
  Cash paid for fractional shares on stock split                                  -                -                (1,776)
  Increase (decrease) in dividends payable                                        66,695           16,843         (449,126)
  Proceeds from exercise of common stock options                                 432,383          187,293          398,853
  Payment of long-term debt                                                   (6,749,999)     (15,687,500)      (4,791,834)
  Proceeds from long-term debt                                                    -            34,500,000           -
  Repurchase of common stock                                                  (1,572,778)      (7,735,949)          -
                                                                              ----------       ----------       ----------
Net cash used in financing activities                                        (11,563,194)      (3,214,998)      (3,324,933)
                                                                              ----------       ----------       ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           7,805,848       (5,960,955)       6,849,608
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                   1,038,689        6,999,644          150,036
                                                                              ----------       ----------       ----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                      $  8,844,537     $  1,038,689     $  6,999,644
                                                                              ==========       ==========       ==========
CHANGES IN ASSETS AND LIABILITIES WHICH PROVIDED
  (USED) CASH, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
  (Increase) decrease in accounts receivable                                $  1,693,496     $   (320,275)    $ (5,318,685)
  (Increase) decrease in inventories                                          (2,499,518)      (3,448,661)      (3,896,576)
  (Increase) decrease in prepaid expenses                                     (1,249,325)          71,716          436,345
  Increase (decrease) in accounts payable                                      2,073,364       (3,506,271)      (2,076,376)
  Increase (decrease) in employees' taxes withheld                              (133,381)          57,789          (28,288)
  Increase (decrease) in accrued profit sharing contribution                     998,486         (491,074)       1,133,391
  Increase (decrease) in accrued wages and expenses                              192,906          348,246          632,050
  Increase (decrease) in accrued income taxes                                    192,689         (541,161)         734,780
                                                                              ----------       ----------       ----------
Total                                                                       $  1,268,717     $ (7,829,691)    $ (8,383,359)
                                                                              ==========       ==========       ==========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period
for:
  Interest  (net of amount capitalized)                                     $  2,368,369     $  1,979,832     $  2,484,598
                                                                              ----------       ----------       ----------
  Income taxes                                                              $  9,233,580     $  8,835,440      $12,461,322
                                                                              ----------       ----------       ----------
</TABLE>
See notes to consolidated financial statements.

<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(NOTE 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Principles of Consolidation - The consolidated financial statements include
  the accounts of Roanoke Electric Steel Corporation and its wholly-owned
  subsidiaries, Shredded Products Corporation, John W. Hancock, Jr., Inc.,
  Socar, Inc., RESCO Steel Products Corporation and Roanoke Technical Treatment
  & Services, Inc. (the "Company"). All significant intercompany accounts and
  transactions have been eliminated.

  Inventories - Inventories of the Company, with the exception of John W.
  Hancock, Jr., Inc., are generally valued at cost on a first-in, first-out
  (FIFO) method or market, if lower. A major portion of the inventories of John
  W. Hancock, Jr., Inc. is valued on a last-in, first-out (LIFO) method. LIFO
  cost is not in excess of replacement or current cost.

  Property, Plant and Equipment - These assets are stated at cost. Depreciation
  expense is computed by straight-line and declining-balance methods.
  Maintenance and repairs are charged against operations as incurred. Major
  items of renewals and betterments are capitalized and depreciated over their
  estimated useful lives. Upon retirement or other disposition of plant and
  equipment, the cost and related accumulated depreciation are removed from the
  property and allowance accounts, and the resulting gain or loss is reflected
  in earnings.

  Income Taxes - The Company applies the provisions of Statement of Financial
  Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under
  SFAS 109, deferred income taxes are provided by the asset and liability
  method, which requires the recognition of deferred tax assets and liabilities
  for the future tax consequences of temporary differences between tax bases and
  financial reporting bases of other assets and liabilities.

  Cash and Cash Equivalents - The Company considers all highly liquid debt
  instruments purchased with an original maturity of three months or less to be
  cash equivalents.

  Investments - Investments consist primarily of debt securities which mature
  between 1998 and 2022. On November 1, 1994, the Company adopted Statement of
  Financial Accounting Standards No. 115, "Accounting for Certain Investments in
  Debt and Equity Securities" (SFAS 115). In accordance with the provisions of
  SFAS 115, management has classified its entire debt securities portfolio as
  "available for sale". Under SFAS 115, "available for sale" securities are
  reported at fair value with unrealized gains and losses reported as a separate
  component of equity. These investments are carried on the balance sheets at
  fair value, which approximates amortized cost. Accordingly, there were no
  adjustments to equity at October 31, 1997, 1996 and 1995.

  Revenue Recognition - Revenues from sales are recognized when products are
  shipped to customers, except for fabrication products which are recognized by
  the percentage-of-completion method in accordance with industry practice.
  Sales to an unaffiliated customer amounted to 12%, 11% and 15% of consolidated
  sales for 1997, 1996 and 1995, respectively.

  Concentration of Credit Risk - The Company sells to a large customer base of
  steel fabricators, steel service centers and construction contractors, most
  all of which deal primarily on 30-day credit terms. The Company believes its
  concentration of credit risk to be minimal in any one geographic area or
  market segment. The Company performs periodic credit evaluations of its
  customers' financial condition and generally does not require collateral.
  Credit losses have not been significant in the past, and are generally within
  management's expectations.

  Fair Value of Financial Instruments - At October 31, 1997, the fair value of
  the Company's cash and cash equivalents, accounts receivable, investments and
  long-term debt approximated amounts recorded in the accompanying consolidated
  financial statements (see notes 1 and 6).

  Stock Options - In October 1995, the Financial Accounting Standards Board
  issued Statement of Financial Accounting Standards No. 123, "Accounting for
  Stock-Based Compensation" (SFAS 123). SFAS 123 is effective for transactions
  entered into in fiscal years that begin after December 15, 1995. This
  statement adopts a "fair value based method" of accounting for employee stock
  option plans or similar stock-based compensation plans. Under the fair value
  based method, compensation cost is measured at the grant date based on the
  fair value of the award and is recognized over the service or vesting period.
  The statement does allow entities to continue to measure compensation using
  the "intrinsic value based method" of Accounting Principles Board Opinion No.
  25, "Accounting for Stock Issued to Employees" (APB 25) provided that they
  make pro forma disclosures on net earnings and earnings per common share as if
  the fair value based method of accounting had been applied. The Company has
  elected to continue to follow APB 25.

  Use of Estimates in the Preparation of Financial Statements - 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 revenues and expenses during the reporting period. Actual
  results could differ from those estimates.

  Comprehensive Income - In June 1997, Statement of Financial Accounting
  Standards No. 130, "Comprehensive Income" (SFAS 130) was issued, establishing
  standards for reporting and display of comprehensive income and its components
  in a full set of general-purpose financial statements. The Company will be
  required to adopt SFAS 130 in the first quarter of fiscal year 1999 and, based
  on current circumstances, does not believe the effect of adoption will be
  material.

<PAGE>

(NOTE 2) INVENTORIES
  If the FIFO method of valuing inventories had been used by John W. Hancock,
  Jr., Inc., consolidated inventories would have been $1,440,168 greater in 1997
  and $1,480,377 greater in 1996.

  Inventories include the following major classifications:

                                           October 31,
                             1997             1996             1995
                          ----------        ----------      ----------
    Scrap steel         $  7,579,552      $  5,313,335    $  3,728,612
    Melt supplies          2,212,939         2,416,879       2,443,827
    Billets                5,960,432         7,103,342       1,748,778
    Mill supplies          3,484,688         3,085,749       3,210,946
    Finished steel        17,576,806        16,395,594      19,734,075
                          ----------        ----------      ----------
    Total inventories    $36,814,417       $34,314,899     $30,866,238
                          ==========        ==========      ==========
(NOTE 3) PROPERTIES AND DEPRECIATION
  Depreciation expense for the years ended October 31, 1997, 1996 and 1995
  amounted to $9,456,201, $8,366,012 and $7,863,154, respectively. Generally,
  the rates of depreciation range from 3.3% to 20% for buildings and
  improvements and 5% to 33% for machinery and equipment. Property additions in
  1997, 1996 and 1995 included $54,668, $438,346, and $10,146 of interest
  capitalized, respectively.
(NOTE 4) SHORT-TERM DEBT
  On February 15, 1996, the Company replaced all of its domestic bank lines of
  credit with a syndicated loan facility, part of which provides a five-year
  $30,000,000 revolver, as explained in note 6. Also provided by this credit
  facility is a $5,000,000 line of credit to be used to cover overdrafts in a
  demand deposit account. This line of credit was unused at October 31, 1997 and
  1996.
(NOTE 5) INCOME TAXES
  The Company files a consolidated federal income tax return. The federal income
  tax returns through October 31, 1990 have been examined by the Internal
  Revenue Service with all issues settled.

  The following is a reconciliation of income tax expense per consolidated
  statements of earnings to that computed by using the federal statutory tax
  rate of 35% for 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                                         Year Ended October 31,
                                                                                 1997              1996           1995
                                                                              ----------         ---------      ----------
<S> <C>
    Federal tax at the statutory rate                                       $  9,481,293        $8,652,225     $11,642,451
    Increase (decrease) in taxes resulting from:
      State income taxes, net of federal tax benefit                             874,960           785,077       1,297,302
      Other items, net                                                          (149,913)         (131,494)         95,490
                                                                              ----------         ---------      ----------
    Income taxes per consolidated statements of earnings                     $10,206,340        $9,305,808     $13,035,243
                                                                              ==========         =========      ==========

    The components of income tax expense are as follows:
                                                                                         Year Ended October 31,

                                                                                 1997              1996            1995
                                                                              ----------         ---------      ----------
    Current income taxes:
      Federal                                                               $  8,156,471        $7,192,428     $11,463,015
      State                                                                    1,269,798         1,101,851       1,733,087
                                                                              ----------         ---------      ----------
    Total current income taxes                                                 9,426,269         8,294,279      13,196,102
                                                                              ----------         ---------      ----------
    Deferred income taxes:
      Federal                                                                    703,776           905,569        (122,692)
      State                                                                       76,295           105,960         (38,167)
                                                                              ----------         ---------      ----------
    Total deferred income taxes                                                  780,071         1,011,529        (160,859)
                                                                              ----------         ---------      ----------
    Total income taxes                                                       $10,206,340        $9,305,808     $13,035,243
                                                                              ==========         =========      ==========
</TABLE>
  Deferred income taxes reflect the net tax effects of temporary differences
  between the carrying amounts of assets and liabilities for financial reporting
  purposes and the amounts used for tax purposes, and operating loss and tax
  credit carry forwards. As of October 31, 1997, 1996 and 1995, the Company had
  total deferred tax liabilities of $13,547,110, $12,594,700 and $11,669,070,
  respectively, and deferred tax assets of $1,211,881, $1,039,542 and
  $1,125,441, respectively. Deferred tax liabilities result exclusively from
  excess tax depreciation, and deferred tax assets result, primarily, from
  reserves not currently deductible of $736,340 for 1997, $675,026 for 1996 and
  $988,429 for 1995. There were no valuation allowances.

<PAGE>


NOTE 6 - LONG-TERM DEBT
  Long-term debt consisted of the following:
<TABLE>
<CAPTION>
                                                                                                       October 31,
                                                                                                1997               1996
                                                                                              ----------        ----------
<S> <C>
    Syndicated term loan, unsecured, payable in quarterly installments of
       $750,000 beginning May 21, 1996. Interest payable quarterly at the
       LIBOR rate of 5.72% plus .60%. Due  February 21, 2006                                 $25,500,000       $28,500,000
    Term loan, unsecured, payable in monthly installments of $104,167,
       plus interest at 6.44%. Due September 1, 2003.                                          7,291,667         8,541,666
    Revolving credit agreement                                                                    -              2,500,000
                                                                                              ----------        ----------
    Total                                                                                     32,791,667        39,541,666
    Less - current portion                                                                     4,250,000         4,250,000
                                                                                              ----------        ----------
    Long-term debt                                                                           $28,541,667       $35,291,666
                                                                                              ==========        ==========
</TABLE>

  In February 1996, the Company entered into a $30,000,000 revolving credit
  agreement with a group of banks that extends through February 21, 2001. Under
  the revolving credit agreement, interest is payable at October 31, 1997 and
  1996, respectively, at the LIBOR rates of 5.72% plus .60% and 5.38% plus .35%.
  The agreement requires the Company to pay a facility fee at an annual rate of
  .125% for 1997 and .15% for 1996. Revolving credit debt at October 31, 1997
  and 1996 was classified as long-term, based on the terms of the agreement.


  The Company does not use derivatives for trading purposes. Interest rate
  swaps, a form of derivative, are used to manage interest costs. Currently, the
  Company maintains an interest rate swap agreement resulting in a fixed rate of
  6.68% on the notional amount of $25,500,000 through February 2006. The
  difference between fixed rate and floating rate interest is recognized as an
  adjustment to interest expense in the period incurred. The fair value of the
  current swap is estimated based on current settlement prices and was
  approximately $69,000, in favor of the lender, at October 31, 1997.

  Under the loan agreements, the Company must maintain consolidated current
  assets of not less than 1.5 times consolidated current liabilities and
  maintain consolidated funded debt of not greater than .5 times consolidated
  total capitalization. Currently, consolidated tangible net worth cannot be
  less than $74,689,370. In addition, the ratio of EBITDA to the sum of current
  maturities of long-term debt and consolidated interest expense must equal at
  least 1.5. The Company was in compliance with the loan agreements as of
  October 31, 1997 and 1996.

  Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
  Value of Financial Instruments", requires disclosure of the year end fair
  value of significant financial instruments, including long-term debt. The
  Company's carrying value of long-term debt approximates fair value. The fair
  value of the 1997 swap agreement is mentioned above.

  Annual aggregate long-term debt maturities are $4,250,000 for each of the next
  five years.
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES
  At October 31, 1997, the Company was committed for $978,860 for purchases of
  equipment and production facilities.

  The Company and the County of Roanoke, Va. have entered into consent
  agreements with the United States Environmental Protection Agency (EPA) for
  the clean-up of specific portions of a landfill site and adjacent streams near
  Salem, Va. One agreement is a "remedial action" for the removal and off-site
  treatment and disposal of an emission control dust pile located on the site.
  This action was completed during 1995 with all costs reflected in the
  accompanying consolidated financial statements. Another agreement pertains to
  a "removal action" for the removal and treatment of emission dust, sediment
  and contaminated soil associated with the streams. The EPA approved on-site
  stabilization and disposal, and certified completeness of all required work on
  September 14, 1997. The Company has entered into a cost sharing agreement with
  the County of Roanoke for both response actions at the landfill. It is not
  known whether other potentially responsible parties will pay some of the
  costs. The only remaining component of the requirements of the order is
  reimbursement of certain EPA oversite charges. The Company received a
  settlement from its primary insurance carrier in 1995 and has had discussions
  with its excess carriers concerning possible recoveries. Additional
  recoveries, if any, are uncertain.

NOTE 8 - COMMON STOCK AND EARNINGS PER SHARE
  Outstanding common stock consists of 560,000 shares, issued prior to October
  31, 1967, at no stated value; 750,656 shares issued subsequent to October 31,
  1967, at a stated value of $.50 per share; 1,310,656 shares issued in 1981 at
  no stated value; 1,310,656 shares, less the equivalent of 42 fractional
  shares, issued in 1986 at no stated value; 1,965,963 shares, less the
  equivalent of 151 fractional shares, issued in 1988 at no stated value; 800
  shares issued in 1989 at no stated value; 3,000 shares issued in 1992 at no
  stated value; 1,200 shares issued in 1993 at no stated value; 44,000 shares
  issued in 1994 at no stated value; 3,023,804 shares, less the equivalent of
  152 fractional shares, issued in 1995 at no stated value; 23,750 shares issued
  in 1996 at no stated value and 35,950 shares issued in 1997 at no stated
  value. During the years ended October 31, 1986 and October 31, 1996, the
  Company increased authorized common stock from 4,000,000 shares to 10,000,000
  shares, and from 10,000,000 shares to 20,000,000 shares, respectively.

  Earnings per share have been computed based on the weighted average number of
  shares outstanding of 7,487,301 for 1997, 7,876,987 for 1996 and 8,045,644 for
  1995. The average number of shares outstanding were weighted after giving
  effect both to stock options exercised during 1997, 1996 and 1995 and to a
  three-for-two stock split effective May 1, 1995. Stock options are not
  included in the computation of earnings per share since inclusion has less
  than a 3% effect.

<PAGE>

  In February 1997, the Financial Accounting Standards Board issued Statement of
  Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which
  changes the method of calculating earnings per share. SFAS 128 requires the
  presentation of "basic" earnings per share and "diluted" earnings per share on
  the face of the income statement. Basic earnings per share is computed by
  dividing the net income available to common shareholders by the weighted
  average shares of outstanding common stock. The calculation of diluted
  earnings per share is similar to basic earnings per share except that the
  denominator includes dilutive common stock equivalents such as stock options
  and warrants. The statement is effective for financial statements for periods
  ending after December 15, 1997, and early adoption is not permitted. The pro
  forma basic earnings per share and diluted earnings per share calculated in
  accordance with SFAS 128 are as follows:

<TABLE>
<CAPTION>
                                                        Year Ended October 31,
                                                1997              1996              1995
                                                ----             ----              ----
<S> <C>
    Pro forma basic earnings per share         $2.25            $1.96             $2.51
                                                ====             ====              ====
    Pro forma diluted earnings per share       $2.24            $1.95             $2.50
                                                ====             ====              ====
</TABLE>
NOTE 9 - PROFIT SHARING PLANS
  The Company, including Shredded Products Corporation, RESCO Steel Products
  Corporation and Socar, Inc., has qualified profit sharing plans which cover
  substantially all employees. John W. Hancock, Jr., Inc. has an unqualified
  plan. Socar, Inc.'s annual contribution is discretionary while the other
  plans' annual contribution cannot exceed 20% of their combined earnings before
  income taxes. Total contributions of all Companies shall not exceed the
  maximum amount deductible for such year under the Internal Revenue Code and
  amounted to $5,138,241 for 1997, $4,340,397 for 1996 and $4,585,087 for 1995.
NOTE 10 - INTEREST EXPENSE
  Interest expense is stated net of interest income of $702,333 in 1997,
  $711,274 in 1996 and $400,692 in 1995.
NOTE 11 - STOCK OPTIONS
  Under a nonqualified stock option plan approved by the stockholders in 1989,
  the Company may issue 75,000 shares of unissued common stock to employees of
  the Company each plan year. Under a non-statutory stock option plan approved
  by the Board in 1997, the Company may issue 25,000 shares of unissued common
  stock to directors of the Company over the life of the plan. Options for
  82,000 shares were granted for 1997, for 75,000 shares for 1996, for 41,500
  shares for 1995, for 36,000 shares for 1992 and for 32,500 shares for 1990. A
  three-for-two stock split in 1995 increased these grants an additional 32,300
  shares. These options are exercisable for a term of five years for employees
  and ten years for directors from the date of grant, and a summary follows:

                                        Weighted Average
                                         Exercise Price
                                            Per Share              Shares
                                        -----------------        ----------
    Balance, November 1, 1994               $  5.84                48,100
    Granted                                    9.07                41,500
    Stock split                                7.65                32,300
    Exercised                                  6.79               (39,185)
    Expired or terminated                      7.15                (7,565)
                                                                  -------
    Balance, October 31, 1995                  7.77                75,150
    Granted                                   11.90                75,000
    Exercised                                  6.71               (23,750)
    Expired or terminated                      4.11                (3,000)
                                                                  -------
    Balance, October 31, 1996                 10.57               123,400
    Granted                                   13.59                82,000
    Exercised                                 11.12               (35,950)
    Expired or terminated                      9.91               (16,750)
                                                                  -------
    Balance, October 31, 1997                 12.35               152,700
                                                                  =======
    Shares available for grant at year end                          None
                                                                  =======

  The Company applies APB 25 and related Interpretations in accounting for the
  nonqualified stock option plans. Accordingly, no compensation cost has been
  recognized since the exercise price approximates the fair value of the stock
  price at the grant dates. Had compensation cost been determined based on the
  fair value at the grant dates consistent with the method of SFAS 123, the
  Company's net earnings and earnings per share would have been reduced to the
  pro forma amounts indicated below:


<PAGE>

                                        Year Ended October 31,
                                      1997             1996             1995
                                   ----------        ----------      ----------
    Net earnings:
      As reported                 $16,883,068       $15,414,834     $20,228,902
                                   ==========        ==========      ==========
      Pro forma                   $16,729,358       $15,320,717     $20,187,952
                                   ==========        ==========      ==========
    Earnings per share:
      As reported                  $     2.25        $     1.96        $   2.51
                                   ==========        ==========      ==========
      Pro forma                    $     2.23        $     1.94        $   2.51
                                   ==========        ==========      ==========

  The fair value of options granted during the years ended October 31, 1997,
  1996 and 1995 was $15.75, $14.00 and $10.67, respectively. The following table
  summarizes information about stock options outstanding and exercisable at
  October 31, 1997:

                                    Number                     Remaining
                                Outstanding and            Contractual Life
Exercise Prices                   Exercisable                  in Years
   $  9.07                           24,700                       2.25
     11.90                           46,000                       3.33
     13.39                           75,000                       4.33
     15.75                            7,000                       9.33
                                    -------
                                    152,700
                                    =======

  The fair value of each option is estimated on the date of grant using the
  Black-Scholes option-pricing model with the following weighted average
  assumptions used for grants in 1997, 1996 and 1995, respectively: dividend
  yield of 2.90%,3.09% and 2.94%; expected volatility of 37.33%, 43.66% and
  60.15%; risk-free interest rates of 5.71%, 6.07% and 5.81%; and an expected
  life of 5 years.
NOTE 12 - HEALTH BENEFITS AND POSTRETIREMENT COSTS
  Effective November 1, 1993, the Company adopted Statement of Financial
  Accounting Standards No. 106, "Employers' Accounting for Postretirement
  Benefits Other Than Pensions" (SFAS 106). The Company currently provides
  certain health care benefits for terminated employees who have completed 10
  years of continuous service after age 45, and SFAS 106 requires the Company to
  accrue the estimated cost of such benefit payments during the years the
  employee provides services. The Company previously expensed the cost of these
  benefits as claims were incurred. SFAS 106 allows recognition of the
  cumulative effect of the liability in the year of adoption or the amortization
  of the obligation over a period of up to twenty years. The Company has elected
  to recognize this obligation of approximately $1,381,000 over a period of
  twenty years. Cash flows are not affected by implementation of SFAS 106, but
  implementation decreased net earnings from continuing operations for 1997,
  1996 and 1995 by approximately $154,400, $154,500 and $154,200, respectively.

  The Company's postretirement benefit plan is not funded. The accrued
  postretirement benefit cost recognized in the balance sheet at October 31 is
  as follows:
  <TABLE>
  <CAPTION>
                                                                                 1997              1996            1995
                                                                              ----------        ----------      ----------
<S> <C>
    Accumulated postretirement benefit obligation:
      Retirees                                                               $   402,724       $   378,968     $   347,019
      Fully eligible plan participants                                           672,238           652,789         723,491
      Other active plan participants                                             727,720           688,737         661,479
                                                                              ----------        ----------      ----------
      Accumulated postretirement benefit obligation                            1,802,682         1,720,494       1,731,989
      Unrecognized net actuarial gains (losses)                                  293,127           196,345           5,602
      Unrecognized transition obligation                                      (1,105,000)       (1,174,000)     (1,243,000)
                                                                              ----------        ----------       ---------
      Accrued postretirement benefit cost                                    $   990,809       $   742,839     $   494,591
                                                                              ==========        ==========      ==========
    Net postretirement benefit cost consisted of the following components:
      Service cost                                                           $   164,689       $   141,393     $   143,279
      Interest cost on accumulated postretirement benefit obligation             124,877           130,705         120,658
      Net amortization                                                            54,108            64,185          69,000
                                                                              ----------        ----------      ----------
      Net postretirement benefit cost                                        $   343,674       $   336,283     $   332,937
                                                                              ==========        ==========      ==========
</TABLE>
  The assumed health care cost trend rate used in measuring the accumulated
  postretirement benefit obligation was 10% for 1996, decreasing linearly each
  successive year until it reached 6.5% in 2003, after which it remains
  constant. A one-percentage-point increase in the assumed health care cost
  trend rate for each year would increase the accumulated postretirement benefit
  obligation by approximately $127,000 and the net postretirement benefit cost
  by approximately $29,000. The assumed discount rate used in determining the
  accumulated postretirement benefit obligation was 8% for the years ended
  October 31, 1997 and 1996.

<PAGE>
NOTE 13 - UNAUDITED QUARTERLY FINANCIAL DATA
  Summarized unaudited quarterly financial data for 1997 follows:
<TABLE>
<CAPTION>
                                                                                  Three Months Ended
                                                            January 31         April 30          July 31        October 31
                                                             ----------       ----------        ----------      ----------
<S> <C>
    Sales                                                   $58,351,734      $61,299,896       $68,768,769     $76,688,240
                                                             ==========       ==========        ==========      ==========
    Gross earnings                                         $  9,330,810      $11,851,198       $13,581,218     $16,965,770
                                                             ==========       ==========        ==========      ==========
    Net earnings                                           $  2,584,674     $  3,459,070      $  4,299,552    $  6,539,772
                                                             ==========       ==========        ==========      ==========
    Earnings per share                                     $        .34     $        .47      $        .57    $        .87
                                                             ==========       ==========        ==========      ==========

  Summarized unaudited quarterly financial data for 1996 follows:
<CAPTION>
                                                                                   Three Months Ended
                                                            January 31         April 30          July 31        October 31
                                                             ----------       ----------        ----------      ----------
<S> <C>
    Sales                                                   $58,429,217      $58,144,393       $61,532,232     $68,180,810
                                                             ==========       ==========        ==========      ==========
    Gross earnings                                          $11,955,299      $11,063,635       $10,001,165     $14,894,170
                                                             ==========       ==========        ==========      ==========
    Net earnings                                            $ 3,928,413      $ 3,365,754       $ 2,954,292     $ 5,166,375
                                                             ==========       ==========        ==========      ==========
    Earnings per share                                      $       .49      $       .41      $        .39     $       .67
                                                             ==========       ==========        ==========      ==========
</TABLE>

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors of Roanoke Electric Steel
Corporation:

We have audited the accompanying consolidated balance sheets of Roanoke Electric
Steel Corporation and its wholly-owned subsidiaries as of October 31, 1997 and
1996, and the related consolidated statements of earnings, stockholders' equity,
and cash flows for each of the three years in the period ended October 31, 1997.
These financial statements are the responsibility of the Corporation'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, such consolidated financial statements present fairly, in all
material respects, the financial position of Roanoke Electric Steel Corporation
and its wholly-owned subsidiaries at October 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1997 in conformity with generally accepted accounting
principles.


As discussed in Note 1 to the consolidated financial statements, effective
November 1, 1994, the Corporation changed its method of accounting for
investments.

                                        /s/ Deloitte & Touche LLP
                                        -------------------------------
                                        Winston-Salem, North Carolina
                                        November 18, 1997


STOCK ACTIVITY

The Common Stock of Roanoke Electric Steel Corporation is traded nationally over
the counter on Nasdaq National Market using the symbol RESC. At year end, there
were approximately 800 shareholders of record.

<TABLE>
<CAPTION>
                                    1997             1996
                                Stock Prices     Stock Prices                                  Cash Dividends
                                High     Low     High      Low                                  1997     1996
<S> <C>
First Quarter                  17 3/8   13 1/2   18 1/4   13           First Quarter            $.12    $.11
Second Quarter                 16 7/8   14 1/8   16       13 1/4       Second Quarter            .12     .11
Third Quarter                  19       14 1/8   14 7/8   12 3/4       Third Quarter             .13     .11
Fourth Quarter                 23       18 1/4   14       12           Fourth Quarter            .13     .12
</TABLE>

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS

  Sales
       The 20.5% increase in sales in 1995 was the result of substantial
  increases in shipments of fabricated products and billets, together with much
  improved selling prices for all product classes, while bar products shipments
  were flat. Reduced competition and increased activity within the construction
  industry led to the higher shipment levels of fabricated products. Improved
  market conditions and increased domestic demand resulted in the improved
  billet tons shipped, as export markets were highly competitive. Inventory
  reductions by bar products customers accounted for the flat shipments, even
  though market conditions and backlogs remained strong for much of the year.
  Selling prices for fabricated products increased due to higher raw material
  costs and demand. The improved selling prices for bar products were mostly
  attributable to increased scrap prices and rising demand in the early part of
  the year, as prices fell slightly near year end. Billet selling prices were
  higher due to the increased scrap costs, which normally trigger changes in
  billet prices, and improved product mix.
       In 1996, sales declined 5.3% due, primarily, to sharp reductions in both
  selling prices for bar products and billet shipments, while selling prices for
  billets declined only slightly. However, sales were favorably impacted by
  increased bar shipments and selling prices for fabricated products, while
  shipments of fabricated products were flat. Selling prices for bar products
  declined as a result of increased competition, prompting industry-wide price
  reductions. The planned shutdown of the melt shop during the year to install a
  new ladle furnace and upgrade an electric arc furnace was unexpectedly
  prolonged due to problems with construction and installation, resulting in an
  11% decline in billet production for the year and causing the significant
  reduction in billet shipments. In addition, the export markets for billets
  remained highly competitive. Billet selling prices declined with a downward
  trend in scrap prices. Bar products shipments increased as demand and backlogs
  remained high,in spite of the increased competition. Selling prices for
  fabricated products improved as a result of generally strong business
  conditions within the commercial construction industry.
       The 7.6% increase in sales in 1997 was attributable to increased
  shipments of bar products and billets, together with improved selling prices
  for bar products. Sales were negatively affected by lower selling prices for
  fabricated products and billets, while shipments of fabricated products were
  flat. Bar products shipments and selling prices increased as competition eased
  and order levels, backlogs and prices improved with demand. Billet shipments
  increased as a result of increased production, which hampered shipments last
  year, and improved domestic demand, while billet selling prices declined due
  to lower scrap prices. Competitive conditions in the commercial construction
  industry caused the lower selling prices for fabricated products; even though,
  market conditions continued to be favorable.

  Cost of Sales and Gross Margins

       In 1995, cost of sales increased, primarily, as a result of the higher
  shipments of fabricated products and billets in addition to increases in both
  scrap and other raw material costs. The decrease in cost of sales in 1996 was
  due, mainly, to the decreased tons of billets shipped, together with a
  reduction in the cost of scrap steel, in spite of the increased bar products
  shipments. Cost of sales increased in 1997, primarily, as a result of the
  increased tons shipped of bar products and billets.
       Gross earnings as a percentage of sales increased from 15.6% to 21.6% in
  1995 due, mainly, to the higher selling prices for all product classes and
  increased production levels which reduced unit costs for fixed expenses, in
  spite of the higher scrap costs. In 1996, the gross profit percentage declined
  to 19.5%. The decrease was, primarily, the result of the lower selling prices
  for bar products and billets, and the negative effect of reduced billet
  production on fixed costs, which more than offset the effects of the lower
  scrap costs and the improvement in fabricated products selling prices. Gross
  earnings as a percentage of sales were flat in 1997, in spite of higher
  selling prices for bar products, lower scrap costs and increased production.
  These were offset by lower selling prices for fabricated products and billets
  and, more importantly, by a higher percentage of billet shipments in the total
  mix which carry lower margins.
       For 1995, the increased shipment levels at the higher gross profit
  margins provided the improvements in gross and net earnings. The decline in
  gross profit margins and the reduced billet shipments were the main causes for
  the lower gross profits and net earnings in 1996. For 1997, the increased
  shipments of bar products and billets accounted for the improved gross and net
  earnings.

<PAGE>

  Administrative Expenses

       In 1995, administrative expenses increased due, mainly, to higher
  executive and management compensation which increased with production,
  shipments and earnings in accordance with various incentive arrangements.
  However, administrative expenses were 6.2% of sales, down from 6.5% in 1994.
  The majority of the increase in administrative expenses in 1996 was
  attributable to bad debts and insurance expenses. The percentage of
  administrative expenses to sales increased to 7.0%. The percentage declined in
  1997 to 6.7%; even though administrative expenses increased, primarily, as a
  result of increased executive and management compensation as production,
  shipments and earnings improved significantly. Other expenses such as
  insurance and professional fees increased, but were offset by a reduction in
  bad debts.

  Interest Expense

       In 1995, interest expense increased as a result of higher interest rates,
  increased average borrowings and declines in interest income and capitalized
  interest to $400,692 and $10,146, respectively. Interest expense declined in
  1996 due to lower interest rates, higher interest income of $711,274 and
  increased capitalized interest of $438,346, in spite of higher average
  borrowings. In 1997, interest expense increased as higher interest rates,
  reduced interest income of $702,333 and lower capitalized interest of $54,668
  more than offset lower average borrowings.

  Profit Sharing Expense and Income Taxes

       Contributions to various profit sharing plans are determined as a
  proportion of earnings before income taxes and should normally increase and
  decrease with earnings, except in years when the contribution is limited to
  the maximum amount deductible under the Internal Revenue Code.
       In 1995, the effective tax rate was affected by higher tax rates. In 1996
  and 1997, income tax expense as a percentage of pretax income declined due to
  permanent differences in the recognition of income and expenses between tax
  and books, and the effective tax rates were relatively constant.


FINANCIAL CONDITION, LIQUIDITY
AND CAPITAL RESOURCES

       At October 31, 1997, working capital was $68,028,793. Cash, investments
  and accounts receivable of $55,446,521 were more than adequate to pay current
  liabilities of $27,344,364. Cash flows from operating activities were
  $28,661,003 in 1997. Repurchases of the Company's common stock, commitments
  for the purchase of property, plant and equipment of $978,860, and 1998
  maturities of long-term debt of $4,250,000 will affect future liquidity and
  working capital; however, cash flows from operations should provide adequate
  working capital to fund these items.
       Long-term debt decreased $6,749,999 during the year. Our revolving credit
  facility of $30,000,000 was unused at year end and provides additional
  liquidity and capital resources. The ratio of debt to equity was only .66 to 1
  - down from .77 to 1 last year. The percentage of long-term debt to total
  capital decreased from 27.2% to 21.1%. The revolver, working capital and
  conservative debt levels have provided the capital resources necessary to
  maintain our competitive position and ensure future growth.
       Management is of the opinion that adoption of the Clean Air Act
  Amendments or any other environmental concerns will not have a materially
  adverse effect on the Company's operations, capital resources or liquidity
  (see note 7). Additional future capital expenditures are presently estimated
  to be less than $1,000,000.


FORWARD-LOOKING STATEMENTS

       From time to time, the Company may publish forward-looking statements
  relating to such matters as anticipated financial performance, business
  prospects, technological developments, new products, research and development
  activities and similar matters. The Private Securities Litigation Reform Act
  of 1995 provides a safe harbor for forward-looking statements. In order to
  comply with the terms of the safe harbor, the Company notes that a variety of
  factors could cause the Company's actual results and experience to differ
  materially from the anticipated results or other expectations expressed in the
  Company's forward-looking statements. The risks and uncertainties that may
  affect the operations, performance, development and results of the Company's
  business include economic and industry conditions, availability and prices of
  supplies, prices of steel products, competition, governmental regulations,
  interest rates, inflation, labor relations, environmental concerns and others.

<PAGE>


OFFICERS
Donald G. Smith, 62
Chairman, President, Treasurer
  and Chief Executive Officer
40 years of service

Frank S. Key, Jr., 73
President, Socar, Inc.
31 years of service


James F. Garlow, 61
President, John W. Hancock, Jr., Inc.
36 years of service

H. James Akers, Jr., 58
Vice President, Melt Operations
41 years of service

Donald R. Higgins, 52
Vice President - Sales
32 years of service

Watson B. King, 58
Vice President, Mill Operations
36 years of service

John E. Morris, 56
Vice President - Finance
  and Assistant Treasurer
26 years of service

Thomas J. Crawford, 42
Assistant Vice President and Secretary
20 years of service

Daniel L. Board, 60
Assistant Vice President, Purchasing
37 years of service

William O. Warwick, 65
Assistant Vice President, Human
  Resources and Environmental Affairs
30 years of service

BOARD OF DIRECTORS

Frank A. Boxley
President,
Southwest Construction, Inc.

T. A. Carter
Architect

George B. Cartledge, Jr.
President,
Grand Piano & Furniture Co., Inc.


George W. Logan
Chairman,
Valley Financial Corporation

Charles I. Lunsford, II
Chairman,
Charles Lunsford Sons & Associates

William L. Neal
Retired President,
John W. Hancock, Jr., Inc.

Thomas L. Robertson
President and Chief Executive Officer,
Carilion Health System

Donald G. Smith
Chairman, President, Treasurer
  and Chief Executive Officer,
Roanoke Electric Steel Corporation

Paul E. Torgersen
President,
Virginia Polytechnic Institute
  and State University

John D. Wilson
Retired President,
Washington & Lee University


COMMITTEES OF THE BOARD
Executive:
D. G. Smith, Chairman;
T. L. Robertson, P. E. Torgersen,
G. B. Cartledge, Jr.

Audit:
T. L. Robertson, Chairman;
T. A. Carter, P. E. Torgersen

Profit Sharing:
C. I. Lunsford, II, Chairman;

Compensation and Stock Option:
G. B. Cartledge, Jr., Chairman;
F. A. Boxley, C. I. Lunsford, II,
J. D. Wilson

CORPORATE INFORMATION

Annual Meeting
The 1998 annual meeting of shareholders will be held at 10:00 a.m. on Tuesday,
February 17, 1998 at the American Electric Power Company Building, 40 Franklin
Road, S. W., Roanoke, Virginia.

General Counsel
Woods, Rogers & Hazlegrove P.L.C.
Roanoke, Virginia

Independent Auditors
Deloitte & Touche LLP
Winston-Salem, North Carolina

Transfer Agent
Wachovia Bank, N.A.
Winston-Salem, North Carolina
1-800-633-4236
Written shareholder correspondence and requests for transfer should be sent to:
Wachovia Bank of North Carolina, N.A.
P.O. Box 8217
Boston, Massachusetts 02266-8217

Dividend Reinvestment Plan
Roanoke Electric Steel offers its
shareholders a dividend reinvestment plan through its transfer agent.
For more information, please contact the transfer agent or
Thomas J. Crawford, Secretary.

Stock Listing
Nasdaq National Market; Symbol: RESC

Financial Information
Analysts, investors and others seeking financial information are requested to
contact: John E. Morris, Vice President-Finance or Thomas J. Crawford,
Assistant Vice President and Secretary.

Copies of the Corporation's Annual Report or Form 10-K may be obtained without
charge by writing to Mr. Crawford at the address below.

Corporate Office
102 Westside Boulevard,
P.O. Box 13948, Roanoke, Virginia 24038   540-342-1831

<PAGE>

[LOGO] ROANOKE ELECTRIC
       STEEL CORPORATION
       P.O. Box 13948
       Roanoke, Virginia 24038-3948
       540-342-1831