J&L SPECIALTY STEEL INC, 10-K, 1997-03-27

J&L SPECIALTY STEEL INC
10-K, 1997-03-27
STEEL WORKS, BLAST FURNACES & ROLLING MILLS (COKE OVENS)

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<PAGE> 1

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

[ x ] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required) for the fiscal year ended
DECEMBER 31, 1996, or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required) for the transition period from
_________ to _________.

Commission file number 1-11126-60

J&L SPECIALTY STEEL, INC.

(Exact name of registrant as specified in its charter)

PENNSYLVANIA 25-1564186

(State of Incorporation) (IRS Employer Identification No.)

ONE PPG PLACE
P.O. BOX 3373
PITTSBURGH, PENNSYLVANIA 15230-3373
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (412) 338-1600

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

================================================================================
Title of each class Name of exchange on which registered
Common Stock, par value $0.01 per share New York Stock Exchange, Inc.

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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[x] No[ ]

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

As of February 28, 1997, the aggregate market value of the registrant's Common
Stock held by nonaffiliates of the registrant was approximately $159,019,308.
All directors and officers of the registrant and each person who may be deemed
to own beneficially more than 5% of the registrant's Common Stock have been
deemed affiliates.

As of February 28, 1997, there were 38,670,000 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Specified portions of the 1996 Annual Report to Shareholders are
incorporated by reference into Parts II and IV of this report. Specified
portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders are
incorporated by reference into Part III of this report.

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<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I

PAGE
----
<S> <C> <C>
ITEM 1. BUSINESS.................................................. 3

ITEM 2. PROPERTIES................................................ 7

ITEM 3. LEGAL PROCEEDINGS......................................... 8

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 8

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS....................................... 9

ITEM 6. SELECTED FINANCIAL DATA................................... 9

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 9

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 9

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

PART III

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

ITEM 11. EXECUTIVE COMPENSATION.................................... 10

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 10

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 10

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K....................................... 11

SIGNATURES .......................................................... 16
</TABLE>

<PAGE> 3

PART I

ITEM 1. BUSINESS

OVERVIEW

J&L Specialty Steel, Inc. (the "Company") is a leading manufacturer of
flat rolled stainless steel. Stainless steel is the Company's only product
line. The Company produces both austenitic and ferritic flat rolled stainless
steels; austenitic cold rolled stainless steel is the largest part of the
domestic stainless steel market. The Company manufactures various grades of
stainless steel in the form of cold rolled stainless steel sheet and strip, hot
rolled stainless steel sheet and strip, and continuous mill plate, as well as
semifinished stainless steel slabs and coils.

The Company is a Pennsylvania corporation and successor by merger on
December 6, 1993, to Specialty Materials Corporation ("SMC") and J&L Specialty
Products Corporation ("Products"). Products was incorporated in 1986 to acquire
substantially all the assets of LTV Steel Specialty Products Company ("LTV
Specialty") in a management-led leveraged buyout. Prior to the asset
acquisition by Products, LTV Specialty was a subsidiary of LTV Steel and had
manufactured stainless steel for over 30 years. In 1987, SMC was incorporated
in Delaware pursuant to a corporate reorganization in order to hold all the
Common Stock of Products. In June 1990, Ugine s.a. ("Ugine"), a French
corporation, acquired all the stock of SMC from the management and other
shareholders who held shares from the 1986 leveraged buyout. At such time,
Ugine became the sole shareholder of SMC.

In December 1993, the Company completed an initial public offering of
17,940,000 shares of its Common Stock, which resulted in 46.4% of its
outstanding Common Stock being publicly held, and the remaining 53.6% being
held by Ugine. On December 11, 1995, pursuant to a merger, Ugine became a
division of its previous majority shareholder, Usinor Sacilor. As a result of
the merger, Usinor Sacilor holds a 53.6% ownership interest in the Company's
outstanding Common Stock, with the remaining 46.4% continuing to be publicly
held.

The Company's principal executive offices are located at One PPG
Place, P. O. Box 3373, Pittsburgh, Pennsylvania 15230-3373 and its telephone
number is (412) 338-1600.

STAINLESS STEEL INDUSTRY

Stainless steel, by containing elements such as chromium, nickel and
molybdenum, not only offers carbon steel's traditional attributes of strength,
durability and formability, but also is resistant to corrosion in many working
environments, maintains its strength at high operating temperatures and
provides an attractive, easily maintained surface appearance. Relative to
carbon steel, stainless steel sells at a higher price, but has a lower life
cycle cost for many applications. It is generally manufactured in smaller
quantities, and accounts for approximately 2% of total steel consumption in the
United States.

Stainless steel is manufactured in different types (or grades), but
all types contain at least 10% chromium along with other elements which are
added to develop specific properties. Stainless steel's resistance to many
corrosive conditions, such as exposure to water, air, food and alkalis, is
provided by a thin, transparent, protective chromium oxide film which forms on
its surface. When this film is scratched, nicked or otherwise penetrated, a
fresh film immediately forms to preserve the corrosion resistance.

Stainless steel is a segment of the domestic specialty steel industry,
which also consists of producers of heat-resisting steels, electric steel, tool
steel and alloy steel. Demand for stainless steel sheet and strip in the United
States has increased at an average annual rate of approximately 5.9% over the
past ten years.

<PAGE> 4

MANUFACTURING

The Company operates three production plants located in Midland,
Pennsylvania; Louisville, Ohio; and Detroit, Michigan.

The stainless steel manufacturing process begins in one of two
electric arc furnaces at the Company's Midland Plant. These furnaces are used
to melt carefully selected stainless steel and carbon steel scrap along with
pure alloys such as nickel and ferrochromium. After the scrap and alloys are
melted in the furnaces, the resulting liquid steel is transferred to an argon
oxygen decarburization ("AOD") vessel for refinement. The AOD process reduces
the carbon levels in the steel, improves the steel's cleanliness and
metallurgical consistency, and is utilized for final alloy additions. Following
the refining process, the liquid steel is cast into slabs having a thickness of
6-1/8 inches or 7-1/2 inches using a continuous slab caster.

Because the Company does not own a hot strip mill, steel slabs are
transported from the Midland Plant to one of two independent hot strip mills
owned by carbon steel producers which toll steel for the Company. At these
mills, the slabs are rolled at very high temperatures into long, thin bands
generally less than 1/2 inch in thickness, which are then wound into a coil.

After hot rolling, coils are transported to one of the Company's
finishing facilities for further processing (some of the hot rolled coils are
shipped directly to customers). At the finishing facilities, the stainless
steel is passed through a primary continuous annealing furnace (to increase its
ductility) and pickling line (an acid bath designed to remove surface defects
or scale formed during the heating process). The steel is then cold rolled on a
Sendzimir mill or a reversing mill. This rolling reduces the steel's thickness
and forms a cold rolled product. The resulting cold rolled steel is then
processed through a cold annealing and pickling process to recover its
ductility and to clean the steel surface. Finishing operations, such as
polishing, skin passing, leveling and slitting, are used to provide certain
product characteristics. The coils or sheets are then packaged and shipped to
the customer by common carrier.

SEGMENT AND PRODUCTS

The Company operates within a single business segment, stainless
steel, and predominantly within a single geographic area, the continental
United States. Approximately 4% of shipments were exported in 1996. The Company
manufactures various grades of stainless steel in the form of cold rolled
stainless steel sheet and strip, hot rolled stainless steel sheet and strip,
and continuous mill plate, as well as stainless steel slabs. Stainless steel
sheet represents flat rolled stainless steel sheet in widths of 24 inches and
wider, and thicknesses (or gauges) of .015 to .1875 inches (in the case of cold
rolled sheet) and .091 to .500 inches (in the case of hot rolled sheet and
plate). Stainless steel strip represents flat rolled stainless steel in widths
of less than 24 inches which may be produced by slitting stainless steel sheet.
Hot rolled stainless steel sheet and continuous mill plate are distinguished on
the basis of the gauge of the steel, with continuous mill plate being thicker.
In both cases, the final rolling operation is on a hot strip mill. Cold rolled
stainless steel sheet and strip are produced from hot rolled stainless steel
sheet through additional processing steps, principally a reduction in gauge by
processing on a cold reducing mill. Most of the Company's cold and hot rolled
sheet and strip products are sold in coil form and the balance is sold cut to
length. In addition to different grades, widths and gauges, stainless steel is
also produced in various finishes as required by specific customer
applications.

The Company produces a large portion of its stainless steel in
response to specific customer orders rather than for inventory. The products
manufactured for inventory are usually in standard grades and sizes. The period
from the date of a customer order to the date of shipment is generally six to
eight weeks for cold rolled stainless steel, which requires the most
processing, although in periods of peak demand these lead times can stretch to
ten to twelve weeks. Orders which can be filled from inventory can generally
be shipped in one week. The backlog of firm orders as of December 31, 1996,
was $122.8 million, all of which is expected to be filled within the current
year, as compared to $122.6 million at December 31, 1995.

MARKETING AND CUSTOMERS

<PAGE> 5

Approximately 50% of the Company's products are sold to steel service
centers. The remainder of the Company's products are sold to stainless steel
converters, manufacturers of finished industrial and consumer products, and
exporters. Steel service centers are independent distribution outlets where
steel in a variety of grades, forms, sizes and finishes is warehoused and may
be further customized to specific orders by slitting, splitting, polishing,
cutting to length and packaging in-house, and sold in smaller order quantities
than by producers. Stainless steel converters, or rerollers, purchase products
from the Company and then further process them into thinner gauge cold rolled
stainless steel sheet and strip products prior to selling to the ultimate
end-user, manufacturer or service center.

The Company's customer base has been relatively stable. Sales to
Vincent Metal Goods, a Division of Rio Algom Inc., accounted for 12.7% of net
sales in 1996.

The Company conducts its North American marketing activities through
its own personnel, who are organized into four regional districts. All sales
personnel are salaried employees. Regional sales offices are located in
Atlanta, Chicago, Los Angeles and Pittsburgh. Additional sales representatives
are also located in Detroit, Houston, Boston and Milwaukee. The Company
utilizes Uginox Sales Corporation, a sales affiliate of Ugine, to service the
export market outside of North America. The Company believes that the terms of
sales made to and through Uginox Sales Corporation are no less favorable than
the Company could obtain in transactions with unrelated parties.

RAW MATERIALS

The principal raw materials used to produce stainless steel are
stainless steel scrap, nickel, ferrochromium, carbon steel scrap, molybdenum,
ferrosilicon, manganese and manganese alloys. The Company purchases its
stainless steel scrap and carbon steel scrap from a number of suppliers in the
United States. The Company purchases most of its nickel requirements from
producers in Canada, Russia, Australia, the Dominican Republic and Colombia.
Ferrochromium is purchased principally from producers in the United States,
Turkey and South Africa. South Africa has approximately 80% of the known
reserves of chromite ore from which ferrochromium is produced. The Company also
purchases its low phosphorous ferromanganese requirements from producers in
South Africa, which has substantially all of the known reserves.

The Company believes that it has adequate sources of raw materials to
support its business activity, although no prediction can be made as to the
continued availability of such raw materials or their cost in future periods.
Some of the sources of raw materials are located in countries which may be
subject to unstable political and economic conditions, which might disrupt
supplies or affect the prices of these raw materials. A continued interruption
in the supply of raw materials could have a material adverse effect on the
Company's financial condition and results of operations.

The Company's ultra-high-powered electric arc furnaces located at its
Midland Plant consume a large amount of electricity. The Company believes it
will continue to have an adequate supply of electricity for its current and
future needs.

COMPETITION

The Company faces vigorous competition from domestic and foreign
producers of stainless steel. Its principal United States competitors are
Allegheny Teledyne Incorporated; Armco, Inc.; North American Stainless Corp.,
which is a majority-owned subsidiary of Acerinox, S.A. (a Spanish stainless
steel producer); Lukens, Inc., which owns Washington Stainless Company; and
Nucor Corporation. Together with the Company, these companies produce
substantially all of the flat rolled stainless steel produced in the United
States.

<PAGE> 6

Based on statistics, the Company believes it is the third largest
manufacturer of stainless steel sheet and strip products in the United States
and the second largest United States producer of austenitic cold rolled
stainless steel, which is the largest part of the domestic stainless steel
market. Competition is based principally on price, product characteristics,
quality and service.

Major foreign producers competing in the United States market include
those located in the member countries of the European Union, Japan, Mexico,
Canada, Korea and Taiwan. The market share of imported stainless steel sheet
and strip has increased significantly over the past five years. In 1991,
imports represented 16.1% of apparent United States consumption compared to 20%
in 1996. Voluntary Restraint Agreements, which limited the importation of
certain stainless steel products, expired on March 31, 1992, contributing to
increased imports.

In addition to competition from other stainless steel producers, the
Company faces competition from other materials which can be substituted for
stainless steel. These include plastics, composites, ceramics, aluminum and
coated carbon steel.

RESEARCH AND DEVELOPMENT

Effective October 1, 1993, the Company entered into a ten-year
research and technology agreement with Ugine that provides the Company with a
broad spectrum of patents, know-how and future research and development
services concerning the manufacturing and processing of flat rolled stainless
steel including, under certain circumstances, any commercially viable thin
strip casting technology developed by Ugine. Ugine, in partnership with Thyssen
Stahl AG, among others, is actively pursuing thin strip casting technology,
which takes liquid steel and casts it into hot rolled sheet in one step,
thereby eliminating the need for a continuous slab caster and hot strip mill.
All patents and know-how relating to this thin strip casting technology will be
provided to the Company without additional payment once the technology is ready
for commercialization, so long as Usinor Sacilor (successor by merger to Ugine)
owns a majority of the voting stock of the Company at that time.

Expenditures for research and development for the years ended December
31, 1996, 1995 and 1994, were $6,049, $4,033 and $1,351.

PATENTS AND TRADEMARKS

Other than the trademarks Kool Line(R) and JL(R), the Company does not
believe any patents or trademarks it owns are material to its business.

EMPLOYEES

As of December 31, 1996, the Company had 1,346 full-time employees, of
whom 851 were represented by the United Steelworkers of America, AFL-CIO
("USWA"). The USWA workers located at the Company's three manufacturing
facilities are covered by separate collective bargaining agreements. These
three agreements expire on July 1, 1999. The Company also has three other
collective bargaining agreements covering 47 employees. The Company believes
that its relationships with its union employees are good. The Company has
profit sharing plans for all of its union and salaried employees.

<PAGE> 7

ENVIRONMENTAL MATTERS

The Company is subject to various federal, state and local
environmental laws and regulations governing, among other things, air
emissions, waste water discharge, and solid and hazardous waste disposal. The
Company believes that its business, operations and facilities are being
operated in substantial compliance with applicable environmental laws and
regulations. The Company's expenditures relating to environmental compliance
during the years ended December 31, 1996 and 1995, amounted to $23.6 million
and $16.9 million, respectively. The 1996 amount includes approximately $8.5
million of capital expenditures, the majority of which were related to the
recently completed Direct Roll Anneal and Pickle ("DRAP") Line at the Midland
Plant. Environmental-related capital expenditures are broadly estimated to
total approximately $3.0 million and $9.0 million during 1997 and 1998,
respectively. This estimate is based on identified projects; actual
expenditures may vary as the number and scope of environmental projects are
revised and could increase if additional projects are identified or additional
regulatory requirements are imposed.

The Company anticipates that its capital expenditures in connection
with environmental matters may increase in the future as more stringent laws
and regulations are enacted or become effective. For example, under the Clean
Air Act Amendments of 1990, the Company's facilities are becoming subject to
air emission regulations more stringent than those that were previously in
effect, possibly requiring abatement of chemical air emissions that were
previously unregulated and requiring air emission permits not previously
required. Also, the implementation of the Great Lakes Initiative will have an
impact on future water discharge permits. Legislative reauthorization and
amendments are also expected in the next few years for the Clean Water Act and
the Resource Conservation and Recovery Act. The Company is currently unable to
predict the long-term economic effect that these new laws and regulations will
have on the Company.

ITEM 2. PROPERTIES

The Company leases 26,500 square feet of office space at One PPG Place
in Pittsburgh, Pennsylvania, for its principal corporate offices under a lease
expiring in 2002. The Company owns its manufacturing and finishing facilities
located at Midland, Pennsylvania; Louisville, Ohio; and Detroit, Michigan.

The Midland Plant site consists of 364 acres with building space of
approximately 3,856,000 square feet currently in use. The Midland Plant
contains melting, conditioning and various finishing facilities. This facility
was constructed by its original owner for the manufacture of both carbon and
stainless steels. Only a portion of the available square footage at the Midland
facility is used for the manufacture of flat rolled stainless steel. The
Company does not presently intend to use other dormant areas at the Midland
Plant, nor does the Company intend to utilize any portion of the facilities for
the manufacture of carbon steel.

The Louisville Plant site consists of 270 acres containing a main
manufacturing facility and several auxiliary and office buildings totaling
644,000 square feet. It is a finishing facility and houses the Company's
computer center.

The Detroit Plant site consists of 11 acres containing a manufacturing
facility and office building totaling 371,000 square feet. It is a finishing
facility.

The Company believes that its facilities and equipment are adequate
and suitable for, and are in a condition which will permit them to serve, the
Company's present needs. However, the Company has begun a major capital program
designed to expand and improve its facilities to increase capacity and lower
operating costs. The Company recently completed construction of the new DRAP
Line at the Midland Plant. Commissioning of the DRAP Line, which has the
potential to increase J&L's finishing capacity by 80%, is anticipated to occur
during the first half of 1997, with full production on the line expected to be
achieved by the end of this year. Additionally, at the Louisville Plant, a new
coil slitting and packaging line and major improvements to the bright anneal
line were recently completed and commissioned in early 1997. The latter project
is part of the upgrade of the Company's bright anneal capabilities, which also
includes the installation of a new temper mill expected to be completed in
1999. The Company's utilization of its production capacity varies from month
to month. For 1996, the Company's utilization of its production capacity was
approximately 80%.

<PAGE> 8

ITEM 3. LEGAL PROCEEDINGS

On March 1, 1996, the United States filed a civil complaint against
the Company at the request of the Environmental Protection Agency ("EPA")
alleging eight claims of violations of the Clean Water Act at the Company's
Louisville Plant. The action was filed in Federal District Court in the
Northern District of Ohio and concerns various alleged violations under each
claim occurring from 1990 through 1994. The complaint requests civil penalties
of up to $25,000 per day for each violation and injunctive relief. The Company
filed an answer on May 23, 1996. The Company intends to vigorously defend this
litigation. The Company is not a party to any other pending legal proceedings
other than routine litigation incidental to its business. The Company believes
that the ultimate resolution of these proceedings, including the EPA action,
will not have a material adverse effect on the Company's financial condition
and results of operations.

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

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

The names of the executive officers of the Company, and certain other
information relating to them, is set forth below.

<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
---- --- --------------
<S> <C> <C>
Claude F. Kronk 65 Director, Vice-Chairman and Chief Executive Officer
Eugene A. Salvadore 48 Director, President and Chief Operating Officer
Daryl K. Fox 47 Vice President-Human Resources
Geoffrey S. Gibson 52 Vice President-Commercial
Paul J. Grandy 51 Vice President-Engineering
Gerald L. Kosko 55 Vice President-Purchasing and Traffic
Michael F. McGuire 51 Vice President-Technology
Kirk F. Vincent 48 Vice President-Finance and Law
John A. Wallace 54 Vice President-Operations
</TABLE>

Claude F. Kronk was appointed Vice-Chairman and Chief Executive
Officer on August 1, 1995. From 1986 until 1995, he served as President and
Chief Executive Officer. Mr. Kronk was employed in various positions by LTV
Specialty and its predecessors from 1957 until 1984 and was President of LTV
Specialty from 1984 until 1986. Mr. Kronk is also a director of Cold Metal
Products, Inc. and of the Triumph Group, Inc.

Eugene A. Salvadore has been President and Chief Operating Officer of
the Company since July 1, 1995. From April 1993 through June 1995, Mr.
Salvadore served as Vice President-Operations. From June 1992 through April
1993, Mr. Salvadore was General Manager-Operations of the Company. From
January 1990 to June 1992, he was Plant Manager of the Company's Detroit Plant;
prior thereto, he was Director-Operations Control of the Company.

Daryl K. Fox has been Vice President-Human Resources of the Company
since June 1993. From June 1991 to May 1993, Mr. Fox was General Manager,
Industrial Relations at LTV Steel Railroads, a division of LTV Steel. From June
1990 to June 1991, he was Director-Human Resources. Prior thereto, he was
Manager-Labor Relations at LTV Steel Railroads.

Geoffrey S. Gibson has been Vice President-Commercial of the Company
since June 1993. Prior thereto, Mr. Gibson was General Manager-Sales of the
Company.

Paul J. Grandy was named Vice President-Engineering of the Company in
June 1996. Prior thereto, Mr. Grandy was Vice President-Engineering at
Lukens, Inc. Mr. Grandy was Director-Engineering of the Company from 1986 to
1992, when he left to join Lukens.

Gerald L. Kosko has been Vice President-Purchasing and Traffic of the
Company since 1986.

<PAGE> 9

Michael F. McGuire was promoted to Vice President-Technology during
1995. Prior thereto, Mr. McGuire was Director-Technology of the Company since
1986.

Kirk F. Vincent has been Vice President-Finance and Law of the Company
since December 1991. Prior thereto, Mr. Vincent was Vice President, Secretary
and General Counsel of the Company.

John A. Wallace was promoted to Vice President-Operations during 1995.
Prior thereto, Mr. Wallace was Plant Manager of the Company's Midland Plant
since 1986.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS

The information required by this item is included herein by reference
from "Stock Exchange Listing" and "Common Stock Data" on page 29 of the
Company's 1996 Annual Report.

ITEM 6. SELECTED FINANCIAL DATA

The information required by this item is included herein by reference
from the "Selected Financial Data" on page 26 of the Company's 1996 Annual
Report.

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

The information required by this item is incorporated herein by
reference from "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 5 through 8 of the Company's 1996 Annual
Report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this
item are incorporated herein by reference from the Company's 1996 Annual
Report and are listed in Item 14(a) 1. and 2. of "Exhibits, Financial
Statement Schedules, and Reports on Form 8-K" hereof.

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

None.

<PAGE> 10

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

In addition to the information reported in Part I of this Form 10-K
under the caption "Executive Officers of the Registrant," the information
required by this item is incorporated by reference from the caption "Election
of Directors" in the Company's Proxy Statement relating to its 1997 Annual
Meeting of Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by
reference from the caption "Executive Compensation" in the Company's Proxy
Statement relating to its 1997 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information required by this item is incorporated herein by
reference from the caption "Beneficial Ownership of Common Stock" in the
Company's Proxy Statement relating to its 1997 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by
reference from the caption "Certain Relationships and Related Transactions" in
the Company's Proxy Statement relating to its 1997 Annual Meeting of
Shareholders.

<PAGE> 11

PART IV

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

(a) Documents filed as part of the Form 10-K report:

1. Financial Statements

The consolidated balance sheets as of December 31, 1996 and 1995, and
the consolidated statements of income, cash flows and shareholders'
equity for each of the three years in the period ended December 31,
1996, together with the report of Arthur Andersen LLP, independent
public accountants, dated January 28, 1997, on pages 9 through 24 of
the Company's 1996 Annual Report are incorporated herein by reference.

2. Financial Statement Schedules

The financial statement schedule shown below should be read in
conjunction with the financial statements contained in the Company's
1996 Annual Report.

<TABLE>
<CAPTION>
Page No. of
This Form 10-K Report
---------------------
<S> <C> <C>
a. Independent Public Accountants' Report 17

b. Financial Statement Schedule:

II - Valuation and Qualifying Accounts for the period 18
January 1, 1994 through December 31, 1996
</TABLE>

3. Exhibits

The exhibits listed below are filed as a part of this Form 10-K.

EXHIBIT NO. DESCRIPTION
----------- -----------

2.1 Asset Purchase Agreement, dated March 18, 1986, among LTV Steel
Specialty Products Company, LTV Steel Company, Inc., The LTV
Corporation, Inc., Citicorp Capital Investors Ltd. and Products.
Incorporated by reference to Exhibit 2.1 to the Company's Form
S-1, Registration No. 33-10474.

2.2 Plan of Merger and Agreement of Reorganization, dated as of
December 6, 1987, by and among Products, J&L Merger Corporation
and Specialty Materials Corporation. Incorporated by reference to
Exhibit 2.2 to the Company's Post-Effective Amendment No. 2 to
Form S-1, Registration No. 33-10474.

2.3 Merger Agreement, dated March 13, 1990, as amended as of June 14,
1990, among Specialty Materials Corporation, SMC Acquisition
Corporation of Delaware and Ugine s.a. (formerly Ugine Aciers de
Chatillon et Gueugnon, S.A.). Incorporated by reference to
Exhibit 2.3 to the Company's Form S-1, Registration No. 33-69370.

2.4 Agreement and Plan of Merger dated December 6, 1993 by and
between Products and Specialty Materials Corporation and by and
between Specialty Materials Corporation and J&L Specialty Steel,
Inc. Incorporated by reference to Exhibit 2.4 to the Company's
Form 10-K for the fiscal year ended December 31, 1993.

11
<PAGE> 12

EXHIBIT NO. DESCRIPTION
----------- -----------

3.1 Articles of Incorporation of the Company. Incorporated by
reference to Exhibit 3.2 to the Company's Form 10-Q for the
fiscal quarter ended June 30, 1996.

3.2 By-Laws of the Company. Incorporated by reference to Exhibit 3.2
to the Company's Form 10-Q for the fiscal quarter ended September
30, 1994.

4.1 Agreements to furnish a copy of certain instruments which relate
to long-term debt not registered. Incorporated by reference to
Exhibit 4.8 to the Company's Report on Form 10-K for the fiscal
year ended September 30, 1988, to Exhibit 4.5 to the Company's
Report on Form 10-K for the fiscal year ended September 30, 1989,
and to Exhibit 4.4 to the Company's Amendment No. 2 to Form S-1,
Registration No. 33-29398.

10.1 Employment Agreement, dated April 28, 1986, between Claude F.
Kronk and Products. Incorporated by reference to Exhibit 10.1 to
the Company's Post-Effective Amendment No. 2 to Form S-1,
Registration No. 33-10474 and to Exhibit 10.1 to the Company's
Report on Form 10-Q for the fiscal quarter ended June 30, 1987.*

10.2 Agreement Amending Employment Agreement, dated July 13, 1987,
between Claude F. Kronk and Products. Incorporated by reference
to Exhibit 10.7 to the Company's Report on Form 10-Q for the
fiscal quarter ended June 30, 1987.*

10.3 Amendment to Employment Agreement, dated as of October 1, 1989,
among Products, Specialty Materials Corporation and Claude F.
Kronk. Incorporated by reference to Exhibit 10.2 of the Company's
Report on Form 10-K for the fiscal year ended September 30,
1989.*

10.4 Third Amendment to Employment Agreement, dated as of November 1,
1990, between Products and Claude F. Kronk. Incorporated by
reference to Exhibit 10.4 to the Company's Form S-1, Registration
No. 33-69370.*

10.5 Second Agreement Amending Employment Agreement, dated as of
October 1, 1991, among Products, Specialty Materials Corporation
and Claude F. Kronk. Incorporated by reference to Exhibit 10.5 to
the Company's Form S-1, Registration No. 33-69370.*

10.6 Fourth Amendment to Employment Agreement, dated as of October 1,
1992, between Products and Claude F. Kronk. Incorporated by
reference to Exhibit 10.6 to the Company's Form S-1, Registration
No. 33-69370.*

10.7 Fifth Amendment to Employment Agreement, dated as of December 29,
1992, between Products and Claude F. Kronk. Incorporated by
reference to Exhibit 10.7 to the Company's Form S-1, Registration
No. 33-69370.*

10.8 Agreement, dated July 13, 1987, between Claude F. Kronk and
Products. Incorporated by reference to Exhibit 10.7 to the
Company's Report on Form 10-Q for the fiscal quarter ended June
30, 1987.*

10.9 Amendment to Agreement, dated as of October 5, 1989, between
Products and Claude F. Kronk. Incorporated by reference to
Exhibit 10.14 to the Company's Report on Form 10-K for the fiscal
year ended September 30, 1989.*

10.10 Letter Agreement dated September 28, 1995, between the Company
and Eugene A. Salvadore. Incorporated by reference to Exhibit
10.2 of the Company's Form 10-Q filed on September 30, 1995.*

<PAGE> 13

EXHIBIT NO. DESCRIPTION
----------- -----------

10.11 Company's Pension Plan, as amended and restated, effective
January 1, 1993. Incorporated by reference to Exhibit 10.8 to the
Company's Form S-1, Registration No. 33-69370.*

10.12 Company's Salaried Employees' Pension Plan, as amended and
restated, effective January 1, 1989. Incorporated by reference to
Exhibit 10.28 to the Company's Post-Effective Amendment No. 1 to
Form S-1, Registration No. 33-29398.*

10.13 Company's First Amendment to the Pension Plan, effective as of
the dates noted therein, executed December 12, 1994. Incorporated
by reference to Exhibit 10.2 of the Company's Form 10-Q filed on
June 30, 1995.*

10.14 Company's Salaried Employees' Pension Plan, as amended and
restated effective January 1, 1989, as amended by amendment
executed June 9, 1995. Incorporated by reference to Exhibit 10.3
of the Company's Form 10-Q filed on June 30, 1995.*

10.15 Company's Executive Benefit Plan, as amended and restated,
effective May 1, 1992. Incorporated by reference to Exhibit 10.10
to the Company's Form S-1, Registration No. 33-69370.*

10.16 Trust Agreement, dated July 21, 1987, between Products and
Pittsburgh National Bank for Claude F. Kronk, with a schedule
identifying other documents omitted and setting forth the
material details in which such omitted documents differ from the
document, a copy of which is filed. Incorporated by reference to
Exhibit 10.13 to the Company's Report on Form 10-Q for the fiscal
quarter ended June 30, 1987.*

10.17 Company's Capital Accumulation Plan, as amended and restated
effective July 1, 1990, as amended by amendment executed July 10,
1995. Incorporated by reference to Exhibit 10.1 of the Company's
Form 10-Q filed on June 30, 1995.*

10.18 Company's Amendment to Capital Accumulation Plan, effective as of
January 1, 1997. Filed herewith.*

10.19 Company's Amended and Restated Senior Management Incentive Plan,
dated January 1, 1992, as amended by amendment dated January 1,
1993. Incorporated by reference to Exhibit 10.13 to the Company's
Form S-1, Registration No. 33-69370.*

10.20 Company's Second Amendment to Senior Management Incentive Plan,
effective as of January 1, 1996. Incorporated by reference to
Exhibit 10.19 of the Company's Form 10-K filed on March 28,
1996.*

10.21 Company's Third Amendment to Senior Management Incentive Plan,
effective as of January 1, 1997. Filed herewith.*

10.22 Settlement Agreement, made as of June 1, 1988, as amended as of
August 15, 1988, by and among LTV Steel Tubular Products Company,
LTV Steel Company, Inc., The LTV Corporation, The Monongahela
Connecting Railroad Company, Products and Specialty Materials
Corporation, including Tolling Agreement attached thereto as
Exhibit B. Incorporated by reference to Exhibits 10.27 and 10.28
to the Company's Form 8-K filed on October 20, 1988.

10.23 Indemnity Trust Agreement, dated September 30, 1986, between
Products and Pittsburgh National Bank. Incorporated by reference
to Exhibit 10.27 to the Company's Post-Effective Amendment No. 2
to Form S-1, Registration No. 33-10474.

<PAGE> 14

EXHIBIT NO. DESCRIPTION
----------- -----------

10.24 Form of Indemnification Agreement (including signature pages)
among the Company and certain directors, officers and employees.
Incorporated by reference to Exhibit 10.28 to the Company's
Post-Effective Amendment No. 2 to Form S-1, Registration No.
33-10474, to Exhibit 10.28 to the Company's Report on Form 10-K
for the fiscal year ended September 30, 1987, and to Exhibits
10.24 and 10.31 to the Company's Post-Effective Amendment No. 1
to Form S-1, Registration No. 33-29398.

10.25 1993 Stock Incentive Plan of the Company. Incorporated by
reference to Exhibit 10.17 to the Company's Form 10-K for the
fiscal year ended December 31, 1993.*

10.26 Lease Agreement, dated September 1, 1992, between Beaver County
Industrial Development Authority and Products, with respect to
the 6.6% pollution control revenue bonds. Incorporated by
reference to Exhibit 10.24 to the Company's Form S-1,
Registration No. 33-69370.

10.27 Agreement of Sale, dated June 1, 1978, between Beaver County
Industrial Development Authority and Products (as successor to
Colt Industries, Inc.), with respect to the 7% pollution control
revenue bonds. Incorporated by reference to Exhibit 10.25 to the
Company's Form S-1, Registration No. 33-69370.

10.28 $100,000,000 Credit Agreement dated July 14, 1995, among the
Company, various banks, Mellon Bank, N.A., as agent and Credit
Lyonnais, Cayman Island Branch and Morgan Guaranty Trust of New
York, as co-agents. Incorporated by reference to Exhibit 10.4 of
the Company's Form 10-Q filed on June 30, 1995.

10.29 Amendment No. 1 to Credit Agreement dated as of December 10,
1995, among the Company, various banks, Mellon Bank, N.A. as
agent and Credit Lyonnais, Cayman Island Branch and Morgan
Guaranty Trust of New York, as co-agents. Incorporated by
reference to Exhibit 10.29 to the Company's Form 10-K filed on
March 28, 1996.

10.30 $125,000,000 Term Loan Agreement dated July 14, 1995, among the
Company, various banks, Mellon Bank, N.A., as agent and Credit
Lyonnais, Cayman Island Branch and Morgan Guaranty Trust of New
York, as co-agents. Incorporated by reference to Exhibit 10.5 of
the Company's Form 10-Q filed on June 30, 1995.

10.31 Amendment No. 1 to Term Loan Agreement, dated as of December 10,
1995, among the Company, various banks, Mellon Bank, N.A. as
agent and Credit Lyonnais, Cayman Island Branch and Morgan
Guaranty Trust of New York, as co-agents. Incorporated by
reference to Exhibit 10.31 to the Company's Form 10-K filed on
March 28, 1996.

10.32 Research and Technology Agreement, dated as of October 1, 1993,
between the Company and Usinor Sacilor (successor by merger to
Ugine s.a.). Incorporated by reference to Exhibit 10.26 to the
Company's Form 10-K for the fiscal year ended December 31, 1993.

10.33 Indemnification Agreement dated August 1, 1995 between the
Company and John A. Wallace. Incorporated by reference to Exhibit
10.4 of the Company's Form 10-Q filed on September 30, 1995.

10.34 Form of Indemnification Agreement between the Company and each of
Pierre F. de Ravel d'Esclapon, Michael J. Hiemstra and Jennings
R. Lambeth. Incorporated by reference to Exhibit 10.32 to the
Company's Form S-1, Registration No. 33-69370.

<PAGE> 15

EXHIBIT NO. DESCRIPTION
----------- -----------

13.1 The following portion of the 1996 Annual Report to Shareholders:
pages 5 through 26 inclusive, and the sections entitled "Common
Stock Data" and "Stock Exchange Listing" on page 29. Such Annual
Report, except for those portions thereof which are expressly
incorporated in this Form 10-K by reference, is not deemed
"filed" with the Securities and Exchange Commission.

22.1 List of Subsidiaries. Filed herewith.

23.2 Consent of Arthur Andersen LLP. Filed herewith.

27.1 Financial Data Schedule. Filed herewith.

*Management contract or compensatory plan, contract or arrangement
required to be filed by Item 601(b)(10)(iii) of Regulation S-K.

The Company agrees to furnish to the Commission upon request copies of
all instruments not listed above which define the rights of holders of
long-term debt of the Company and its subsidiaries.

Copies of the exhibits filed as part of this Form 10-K are available
at a cost of $.20 a page to any shareholder of record upon written request to
the Assistant Treasurer, J&L Specialty Steel, Inc., One PPG Place, P.O.
Box 3373, Pittsburgh, Pennsylvania 15230-3373.

(b) The following report on Form 8-K was filed:

Report Date Description
----------- -----------

February 3, 1997 In late January 1997, the Company reached a settlement
with an unrelated third-party vendor concerning a
commercial dispute relating to the quality of certain
material purchased by the Company from 1991 to 1996.
As a result of this settlement, the Company received a
$5.9 million cash payment. This $5.9 million pretax
gain will be recognized in the first quarter of 1997.

<PAGE> 16

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized as of March 27,
1997.

J&L SPECIALTY STEEL, INC.

/s/ CLAUDE F. KRONK
------------------------
Claude F. Kronk
Vice Chairman and Chief Executive Officer

Pursuant to requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 27, 1997.

/s/ PHILIPPE CHOPPIN DE JANVRY /s/ ROBERT HUDRY
- -------------------------------- ----------------------------
Philippe Choppin de Janvry Robert Hudry
Chairman, Board of Directors Director

/s/ CLAUDE F. KRONK /s/ JENNINGS R. LAMBETH
- -------------------------------- ----------------------------
Claude F. Kronk Jennings R. Lambeth
Vice Chairman, Chief Executive Officer Director
and Director

/s/ EUGENE A. SALVADORE /s/ MICHEL LE PAGE
- -------------------------------- ----------------------------
Eugene A. Salvadore Michel Le Page
President, Chief Operating Officer Director
and Director

/s/ KIRK F. VINCENT /s/ MICHEL J. LONGCHAMPT
- -------------------------------- ----------------------------
Kirk F. Vincent Michel J. Longchampt
Vice President - Finance and Law Director

/s/ JOSEPH F. BROZICK /s/ GERARD MARTEL
- -------------------------------- ----------------------------
Joseph F. Brozick Gerard Martel
Controller and Chief Accounting Officer Director

/s/ JEAN DIDIER DUJARDIN /s/ PIERRE F. DE RAVEL D'ESCLAPON
- -------------------------------- ---------------------------------
Jean Didier Dujardin Pierre F. de Ravel d'Esclapon
Director Director

/s/ MICHAEL J. HIEMSTRA /s/ FRANCIS MER
- -------------------------------- ----------------------------
Michael J. Hiemstra Francis Mer
Director Director

/s/ JOHN J. SHEEHAN
----------------------------
John J. Sheehan
Director

<PAGE> 17

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of
J&L Specialty Steel, Inc:

We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in J&L Specialty Steel, Inc.'s 1996
Annual Report incorporated by reference in this Form 10-K, and have issued our
report thereon dated January 28, 1997. Our audits were made for the purpose of
forming an opinion on those basic financial statements taken as a whole. The
schedule listed in the index in Item 14(a)2 of the Form 10-K is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a part
of the basic financial statements. The schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP

Pittsburgh, Pennsylvania,
January 28, 1997

<PAGE> 18
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
J&L SPECIALTY STEEL, INC.
FOR THE PERIOD JANUARY 1, 1994 THROUGH DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- -------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------
BALANCE CHARGED CHARGED BALANCE
AT TO TO OTHER AT
BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowances for accounts receivable $ 4,512 $ 500 $ -- $ (233) (A) $ 4,779
======== ======= ======= ========= ========
Year ended December 31, 1995:
Allowances for accounts receivable $ 4,779 $ 500 $ -- $ (943) (A) $ 4,336
======== ======= ======= ========= ========
Year ended December 31, 1996:
Allowances for accounts receivable $ 4,336 $ -- $ -- $ (467) (B) $ 3,869
======== ======= ======= ========= ========
</TABLE>
(A) Principally uncollectible accounts written off.
(B) Adjustment to account balance.

18
<PAGE> 19
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Asset Purchase Agreement, dated March 18, 1986, among LTV Steel
Specialty Products Company, LTV Steel Company, Inc., The LTV
Corporation, Inc., Citicorp Capital Investors Ltd. and Products.
Incorporated by reference to Exhibit 2.1 to the Company's Form S-1,
Registration No. 33-10474.*

2.2 Plan of Merger and Agreement of Reorganization, dated as of December
6, 1987, by and among Products, J&L Merger Corporation and Specialty
Materials Corporation. Incorporated by reference to Exhibit 2.2 to
the Company's Post-Effective Amendment No. 2 to Form S-1,
Registration No. 33-10474.*

2.3 Merger Agreement, dated March 13, 1990, as amended as of June 14,
1990, among Specialty Materials Corporation, SMC Acquisition
Corporation of Delaware and Ugine s.a. (formerly Ugine Aciers de
Chatillon et Gueugnon, S.A.). Incorporated by reference to Exhibit
2.3 to the Company's Form S-1, Registration No. 33-69370.*

2.4 Agreement and Plan of Merger dated December 6, 1993 by and between
Products and Specialty Materials Corporation and by and between
Specialty Materials Corporation and J&L Specialty Steel, Inc.
Incorporated by reference to Exhibit 2.4 to the Company's Form 10-K
for the fiscal year ended December 31, 1993.*

3.1 Articles of Incorporation of the Company. Incorporated by reference
to Exhibit 3.2 to the Company's Form 10-Q for the fiscal quarter
ended June 30, 1996.*

3.2 By-laws of the Company. Incorporated by reference to Exhibit 3.2 to
the Company's Form 10-Q for the fiscal quarter ended September 30,
1994.*

4.1 Agreements to furnish a copy of certain instruments which relate to
long-term debt not registered. Incorporated by reference to Exhibit
4.8 to the Company's Report on Form 10-K for the fiscal year ended
September 30, 1988, to Exhibit 4.5 to the Company's Report on Form
10-K for the fiscal year ended September 30, 1989, and to Exhibit
4.4 to the Company's Amendment No. 2 to Form S-1, Registration No.
33-29398.*

10.1 Employment Agreement, dated April 28, 1986, between Claude F. Kronk
and Products. Incorporated by reference to Exhibit 10.1 to the
Company's Post-Effective Amendment No. 2 to Form S-1, Registration
No. 33-10474 and to Exhibit 10.1 to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1987.*

10.2 Agreement Amending Employment Agreement, dated July 13, 1987,
between Claude F. Kronk and Products. Incorporated by reference to
Exhibit 10.7 to the Company's Report on Form 10-Q for the fiscal
quarter ended June 30, 1987.*

10.3 Amendment to Employment Agreement, dated as of October 1, 1989,
among Products, Specialty Materials Corporation and Claude F. Kronk.
Incorporated by reference to Exhibit 10.2 of the Company's Report on
Form 10-K for the fiscal year ended September 30, 1989.*

<PAGE> 20

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.5 Second Agreement Amending Employment Agreement, dated as of October
1, 1991, among Products, Specialty Materials Corporation and Claude
F. Kronk. Incorporated by reference to Exhibit 10.5 to the Company's
Form S-1, Registration No. 33-69370.*

10.8 Agreement, dated July 13, 1987, between Claude F. Kronk and
Products. Incorporated by reference to Exhibit 10.7 to the Company's
Report on Form 10-Q for the fiscal quarter ended June 30, 1987.*

10.9 Amendment to Agreement, dated as of October 5, 1989, between
Products and Claude F. Kronk. Incorporated by reference to Exhibit
10.14 to the Company's Report on Form 10-K for the fiscal year ended
September 30, 1989.*

10.10 Letter Agreement dated September 28, 1995, between the Company and
Eugene A. Salvadore. Incorporated by reference to Exhibit 10.2 of
the Company's Form 10-Q filed on September 30, 1995.*

10.11 Company's Pension Plan, as amended and restated, effective January
1, 1993. Incorporated by reference to Exhibit 10.8 to the Company's
Form S-1, Registration No. 33-69370.*

10.12 Company's Salaried Employees' Pension Plan, as amended and restated,
effective January 1, 1989. Incorporated by reference to Exhibit
10.28 to the Company's Post-Effective Amendment No. 1 to Form S-1,
Registration No. 33-29398.*

10.13 Company's First Amendment to the Pension Plan, effective as of the
dates noted therein, executed December 12, 1994. Incorporated by
reference to Exhibit 10.2 of the Company's Form 10-Q filed on June
30, 1995.*

10.14 Company's Salaried Employees' Pension Plan, as amended and restated
effective January 1, 1989, as amended by amendment executed June 9,
1995. Incorporated by reference to Exhibit 10.3 of the Company's
Form 10-Q filed on June 30, 1995.*

10.15 Company's Executive Benefit Plan, as amended and restated, effective
May 1, 1992. Incorporated by reference to Exhibit 10.10 to the
Company's Form S-1, Registration No. 33-69370.*

10.16 Trust Agreement, dated July 21, 1987, between Products and
Pittsburgh National Bank for Claude F. Kronk, with a schedule
identifying other documents omitted and setting forth the material
details in which such omitted documents differ from the document, a
copy of which is filed. Incorporated by reference to Exhibit 10.13
to the Company's Report on Form 10-Q for the fiscal quarter ended
June 30, 1987.*

10.17 Company's Capital Accumulation Plan, as amended and restated
effective July 1, 1990, as amended by amendment dated July 10, 1995.
Incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q
filed on June 30, 1995.*
</TABLE>

<PAGE> 21

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.18 Company's Amendment to Capital Accumulation Plan, effective as of
January 1, 1997. Filed herewith.

10.20 Company's Second Amendment to Senior Management Incentive Plan,
effective as of January 1, 1996. Incorporated by reference to
Exhibit 10.19 of the Company's Form 10-K filed on March 28, 1996.*

10.21 Company's Third Amendment to Senior Management Incentive Plan,
effective as of January 1, 1997. Filed herewith.

10.22 Settlement Agreement, made as of June 1, 1988, as amended as of
August 15, 1988, by and among LTV Steel Tubular Products Company,
LTV Steel Company, Inc., The LTV Corporation, The Monongahela
Connecting Railroad Company, Products and Specialty Materials
Corporation, including Tolling Agreement attached thereto as Exhibit
B. Incorporated by reference to Exhibits 10.27 and 10.28 to the
Company's Form 8-K filed on October 20, 1988.*

10.23 Indemnity Trust Agreement, dated September 30, 1986, between
Products and Pittsburgh National Bank. Incorporated by reference to
Exhibit 10.27 to the Company's Post-Effective Amendment No. 2 to
Form S-1, Registration No. 33-10474.*

10.24 Form of Indemnification Agreement (including signature pages) among
the Company and certain directors, officers and employees.
Incorporated by reference to Exhibit 10.28 to the Company's
Post-Effective Amendment No. 2 to Form S-1, Registration No.
33-10474, to Exhibit 10.28 to the Company's Report on Form 10-K for
the fiscal year ended September 30, 1987, and to Exhibits 10.24 and
10.31 to the Company's Post-Effective Amendment No. 1 to Form S-1,
Registration No. 33-29398.*

10.25 1993 Stock Incentive Plan of the Company. Incorporated by reference
to Exhibit 10.17 to the Company's Form 10-K for the fiscal year
ended December 31, 1993.*

10.26 Lease Agreement, dated September 1, 1992, between Beaver County
Industrial Development Authority and Products, with respect to the
6.6% pollution control revenue bonds. Incorporated by reference to
Exhibit 10.24 to the Company's Form S-1, Registration No. 33-69370.*

10.27 Agreement of Sale, dated June 1, 1978, between Beaver County
Industrial Development Authority and Products (as successor to Colt
Industries, Inc.), with respect to the 7% pollution control revenue
bonds. Incorporated by reference to Exhibit 10.25 to the Company's
Form S-1, Registration No. 33-69370.*

<PAGE> 22

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.29 Amendment No. 1 to Credit Agreement dated as of December 10, 1995,
among the Company, various banks, Mellon Bank, N.A. as agent and
Credit Lyonnais, Cayman Island Branch and Morgan Guaranty Trust of
New York, as co-agents. Incorporated by reference to Exhibit 10.29
to the Company's Form 10-K filed on March 28, 1996.*

10.30 $125,000,000 Term Loan Agreement dated July 14, 1995, among the
Company, various banks, Mellon Bank, N.A., as agent and Credit
Lyonnais, Cayman Island Branch and Morgan Guaranty Trust of New
York, as co-agents Incorporated by reference to Exhibit 10.5 of the
Company's Form 10-Q filed on June 30, 1995.*

10.31 Amendment No. 1 to Term Loan Agreement, dated as of December 10,
1995, among the Company, various banks, Mellon Bank, N.A. as agent
and Credit Lyonnais, Cayman Island Branch and Morgan Guaranty Trust
of New York, as co-agents. Incorporated by reference to Exhibit
10.31 to the Company's Form 10-K on March 28, 1996.*

10.32 Research and Technology Agreement, dated as of October 1, 1993,
between the Company and Usinor Sacilor (successor by merger to Ugine
s.a.). Incorporated by reference to Exhibit 10.26 to the Company's
Form 10-K for the fiscal year ended December 31, 1993.*

10.33 Indemnification Agreement dated August 1, 1995 between the Company
and John A. Wallace. Incorporated by reference to Exhibit 10.4 of
the Company's Form 10-Q filed on September 30, 1995.*

10.34 Form of Indemnification Agreement between the Company and each of
Pierre F. de Ravel d'Esclapon, Michael J. Hiemstra and Jennings R.
Lambeth. Incorporated by reference to Exhibit 10.32 to the Company's
Form S-1, Registration No. 33-69370.*

13.1 The following portion of the 1996 Annual Report to Shareholders:
pages 5 through 26 inclusive, and the sections entitled "Common
Stock Data" and "Stock Exchange Listing" on page 29. Such Annual
Report, except for those portions thereof which are expressly
incorporated in this Form 10-K by reference, is not deemed "filed"
with the Securities and Exchange Commission.

22.1 List of Subsidiaries. Filed herewith.

23.2 Consent of Arthur Andersen LLP. Filed herewith.

27.1 Financial Data Schedule. Filed herewith.
</TABLE>

- -----
* Incorporated by Reference.

<PAGE> 1
Exhibit 10.18

AMENDMENT TO THE
J&L SPECIALTY STEEL, INC.
CAPITAL ACCUMULATION PLAN

The J&L Specialty Steel, Inc. Capital Accumulation Plan ("Plan") is
hereby amended in the following respects effective January 1, 1997, pursuant to
the power to amend the Plan contained in Section 11.4 thereof:

1. Section 4.1, "Tax-Deferred Contributions," is amended by the addition of
the new subsection 4.1(a)(1), "Matching Contributions," as follows:

"(a)(1) Effective January 1, 1997, on behalf of each Participant who
is eligible to share in matching contributions for the Plan Year, a
matching contribution equal to fifty (50%) percent of each such
Participant's Tax-Deferred Contribution which amount shall be deemed an
Employer's contribution. Except, however, in applying the matching
percentage specified above, only Tax-Deferred Contributions up to six
(6)% of Compensation shall be considered.

Any Participant actively employed during the Plan Year shall be
eligible for a matching contribution for the Plan Year. Matching
contributions shall be subject to the schedule of Vested benefits
contained in Section 5.1(c). Matching contributions shall be paid by
the Employer to the Trustee as soon as possible after the close of the
pay period for which Compensation as to which the Tax-Deferred
Contribution election applied was to be paid."

2. Article II, "Definitions," is amended by the addition of the following
sentence at the end of Definition "(a) Account":

"A separate accounting shall be maintained with respect to that
portion of the Participant's Account attributable to Employer matching
contributions made pursuant to new subsection 4.1(a)(1)."

3. Article II, "Definitions," is amended by the addition of the following
sentence at the end of Definition "(aa) Tax-Deferred Contributions":

"In addition, the Employer's matching contribution made pursuant to
new subsection 4.1(a)(1) shall be considered a Tax-Deferred Contribution
for purposes of the Plan."

4. Subsection (e) of Section 4.5 "Limitation on Allocation to Accounts," is
amended by the addition of the following sentence at the end of the
subsection:
<PAGE> 2
"Any distribution made pursuant to this Section 4.5 shall be made
first from unmatched Tax-Deferred Contributions, and, thereafter, from
Tax-Deferred Contributions which are matched. Matching contributions
which relate to such Tax-Deferred contributions shall be forfeited."

5. Subsection 5.1(c), "Termination of Employment," is amended in its
entirety and restated as follows:

"(c) Termination of Employment - Except as provided below, a
Participant upon his termination of employment prior to his Normal
Retirement Date by reason of a quit or discharge shall be immediately
eligible to receive a distribution of the full amount of his Account.
The distribution shall be effective as soon as practical after notice of
such termination and the Participant's election (if required) to receive
a distribution is received by the Plan Administrator and at least within
a period of 45 days from receipt of the written notice provided all
applicable provisions of this Section have been satisfied. A Participant
shall be vested in all of his Contributions at all times except for
Employer matching contributions. For purposes of this Section, a
Participant shall not be deemed to have terminated employment if the
Participant continues in the employment of the Employer or an Affiliated
Employer.

Any Covered Employee who becomes a Participant after January 1, 1997,
shall be Vested in that portion of the Participant's Account
attributable to Employer matching contributions in accord with the
following schedule based on the Participant's number of Years of
Service:

Vesting Schedule (Employer matching contributions only)

<TABLE>
<CAPTION>
Years of Service Percentage
<S> <C>
Less than 2 0%
2 100%
</TABLE>

Any Covered Employee who is a Participant on January 1, 1997, shall be
100% vested in the Participant's Account attributable to Employer
matching contributions.

As of each last day of the Plan Year any amounts which become
Forfeitures since the last day of the last Plan Year shall first be made
available to reinstate previously forfeited account balances of former
Participants, if any, in accordance with this Section. The remaining
Forfeitures, if any, shall be used to reduce the matching contributions
of the Employer hereunder for the Plan Year in which such Forfeitures
occur.

Notwithstanding the vesting schedule above, upon any full or partial
termination of the Plan, all amounts credited to the Account of any
affected Participant shall become 100% Vested and shall not thereafter
be subject to Forfeiture.

- 2 -
<PAGE> 3
Vesting upon reemployment--

(1) If any former Participant shall be reemployed by the Employer
before a One-Year Period of Severance occurs, he shall continue to
participate in the Plan in the same manner as if such termination had
not occurred.

(2) If any former Participant shall be reemployed by the Employer
before five (5) consecutive One-Year Periods of Severance, his forfeited
account shall be reinstated upon the reemployment of such former
Participant. The undistributed portion of the Participant's Account must
be restored in full, unadjusted by any gains or losses occurring
subsequent to the last day of the Plan Year or other valuation date
coinciding with or preceding his termination. The source for such
reinstatement shall first be any Forfeitures occurring during the year.
If such source is insufficient, then the Employer shall contribute an
amount which is sufficient to restore any such forfeited Accounts.

(3) If any former Participant is reemployed after a One-Year Period of
Severance has occurred, Years of Service shall include Years of Service
prior to his One-Year Period of Severance subject to the following
rules:

(i) If a former Participant has a One-Year Period of Severance,
his pre-break and post-break service shall be used for computing
Years of Service for eligibility and for vesting purposes only
after he has been employed for One-Year of Service following the
date of his reemployment with the Employer;

(ii) Any former Participant who under the Plan does not have a
nonforfeitable right to any interest in the Plan resulting from
Employer contributions shall lose credits otherwise allowable
under (i) above if his consecutive One-Year Periods of Severance
equal or exceed the greater of (A) five (5) or (B) the aggregate
number of his pre-break Years of Service;

(iii) After five (5) consecutive One-Year Periods of Severance, a
former Participant's Vested Account balance attributable to
pre-break service shall not be increased as a result of post-break
service;

(iv) If a former Participant who has not had his Years of Service
before a One-Year Period of Severance disregarded pursuant to (ii)
above completes one (1) Year of Service for eligibility purposes
following his reemployment with the Employer, he shall participate
in the Plan retroactively from his date of reemployment;

(v) If a former Participant who has not had his Years of Service
before a One-Year Period of Severance disregarded pursuant to (ii)
above completes a Year of Service (a One-Year Period of Severance
previously occurred, but employment had not terminated), he shall
participate in the Plan retroactively from the first day of the
Plan Year during which he completes one (1) Year of Service.

- 3 -
<PAGE> 4
For purposes of vesting in Employer matching contributions under this
Section, the following Definitions shall apply:

"Forfeiture" means that portion of a Participant's Account that is not
Vested, and occurs on the last day of the Plan Year in which the
Participant incurs five (5) consecutive One-Year Periods of Severance.
In addition, the term Forfeiture shall also include amounts deemed to be
Forfeitures pursuant to any other provision of this Plan.

"Hour of Service" means any hour for which an Employee is paid or
entitled to payment by an Employer for the performance of duties for an
Employer. Each Hour of Service shall be credited to the Employee for the
day during which such Hour occurred, whether or not he is compensated on
the same day. For the purposes of this Section, "Employer" includes any
Affiliated Employer. To the extent relevant under the elapsed time
system used by the Plan, Hours of Service shall be computed and credited
to particular computation periods, on a consistent basis in accordance
with the minimum standards required under regulations promulgated by the
Secretary of Labor from time to time (particularly the regulations at 29
C.F.R. Subsection 2530.200(b)-2(b) and (c)), and with the exceptions
permitted under such regulations.

"Vested" means the nonforfeitable portion of any account maintained on
behalf of a Participant.

"One-Year Period of Severance" means a period of severance of at least
12 months beginning on the date an Employee severs from service during
which the Employee fails to complete an Hour of Service.

"Service" means the sum (in full years and days) of all periods of an
Employee's service with any Employer, excluding service that is ignored,
and including non-service time that is counted, under the rules stated
in this section:

(1) Each period of service shall be measured in full years and days from
the Employee's "employment commencement date" to the date of a
"severance from service" which is followed by a One-Year Period of
Severance. If the Employee severs from service but is reemployed
within twelve (12) consecutive months of such severance from
service, his current period of service shall be regarded as unbroken
and shall include the interim between his severance from service and
reemployment date. In no event, however, shall an Employee's period
of service be deemed broken where the Employee continues in the
employment of the Employer or any Affiliated Employer.

(2) An Employee's service in non-covered employment with the Employer or
an Affiliated Employer shall be credited as Service hereunder, for
purposes of vesting, should the Employee ever work as a Covered
Employee for an Employer.

(3) If an Employee incurs a One-Year Period of Severance, and if he is
not subject to the "rule of parity," his pre-break period(s) of
service shall not be added to his post-break service, to form a part
of his Service, until he has completed a year of service after his
return to service.

- 4 -
<PAGE> 5
(4) Rule of Parity: If an Employee has less than five years of Service
and incurs a One-Year Period of Severance, his pre-break service
shall be ignored after his continuous period of severance from
service equals or exceeds five (5) consecutive One-Year Periods of
Severance.

(5) For purposes of this section, "severance from service" occurs on the
date of the Employee's:

1. resignation;
2. discharge;
3. permanent layoff;
4. death; or
5. retirement;

or in the case of an Employee who is continuously absent from work
for any other reason (e.g., temporary layoff, vacation, or holiday),
beyond a period of time authorized under this Plan, on the first
anniversary of the date such Employee is first absent for such
unauthorized reason (unless he has resigned, died, retired, been
discharged or permanently laid off before such anniversary).

(6) For purposes of this section, "employment commencement date" means
the date commencing a period of Service on which the Employee first
completes an Hour of Service. As such, an employment commencement
date is either the first day an Employee works for an Employer, or
the first day he returns to service following a One-Year Period of
Severance.

(7) Notwithstanding the foregoing, in the case of an Employee who is
absent from work due to maternity or paternity absence, the twelve
(12) consecutive month period beginning on the first anniversary of
such absence shall not constitute a One-Year Period of Severance. An
Employee is on maternity or paternity absence where the Employee is
absent from work for any period:

1. by reason of pregnancy of the Employee;

2. by reason of birth of a child of an Employee;

3. by reason of the placement of a child with the Employee in
connection with the adoption of such child; or

4. for purposes of caring for such child for a period beginning
immediately following such birth or placement.

No credit shall be given pursuant to this paragraph unless the
Employee furnishes to the Plan Administrator such timely information
as the Plan Administrator may reasonably require to establish that
the absence from work is due to a maternity or paternity absence, as
described above.

- 5 -
<PAGE> 6
6. Subsection (b), "Limitation for Highly Compensated Employees," of
Section 4.1 is amended by the addition of the following sentence at the
end of the subsection:

"With respect to the distribution of excess total contributions
pursuant to above, such distribution shall be made first from unmatched
Tax-Deferred Contributions and, thereafter, from Tax-Deferred
Contributions which is matched. Matching contributions which relate to
such Tax-Deferred Contributions shall be forfeited."

7. Subsection (d), "Limitation for Highly Compensated Employees," of
Section 4.2 is amended by the addition of the following sentence at the
end of the subsection:

8. Section 5.2, "Withdrawals," is amended by the addition of the new
subsection (e), "Matching Contributions," as follows:

"(e) Matching Contributions - that portion of the Participant's
Account attributable to Employer matching contributions, and related
gains and losses, shall not be available for hardship withdrawals to
Participants."

9. Section 5.3, "Loans to Participants," is amended by the addition of the
new subsection (e), "Matching Contributions," as follows:

"(e) Matching Contributions - That portion of the Participant's
Account attributable to Employer matching contributions, and related
gains and losses, shall not be available for loan purposes to
Participants and Beneficiaries."

IN WITNESS WHEREOF, this Amendment to the J&L Specialty Steel, Inc. Capital
Accumulation Plan has been duly executed this 10th day of March, 1997.

ATTEST: J&L SPECIALTY STEEL, INC.

/s/ DANIEL W. AMIDON /s/ DARYL K. FOX
- --------------------------- --------------------------------
Daniel W. Amidon Daryl K. Fox
Assistant Secretary Vice President - Human Resources

-6-

<PAGE> 1
Exhibit 10.21

J&L SPECIALTY STEEL, INC.

THIRD AMENDMENT TO
SENIOR MANAGEMENT INCENTIVE PLAN

DATED AS OF JANUARY 1, 1997

The J&L Specialty Steel, Inc. Senior Management Incentive Plan as
amended and restated on January 1, 1992 and as further amended as of January 1,
1993 and January 1, 1996, is hereby amended by this Third Amendment effective
January 1, 1997 in the following respects, pursuant to the power to amend such
plan contained in Article 5.5 thereof:

1. Section 2.1(f) of the Plan, defining Net Operating Assets, will be
amended to add the following paragraph to the end thereof:

For calendar year 1997, all capital costs associated with the direct
roll anneal and pickle line project at the Corporation's Midland
Plant (the "DRAP Line") will not be included in the definition of
assets.

2. Section 2.1(g) of the Plan, defining Operating Income, will be
amended to add the following new paragraph to the end thereof:

For calendar year 1997, the following amounts will be added (i) the
amount of depreciation related to the DRAP Line, and (ii) Twelve
Million Dollars ($12,000,000).

3. Except as expressly provided in this Third Amendment, and as
previously amended, all of the terms and conditions of the Plan remain in full
force and effect.

IN WITNESS WHEREOF, the Corporation has caused this Third Amendment to
be executed by its duly authorized officers this 22nd day of January, 1997,
effective as of January 1, 1997.

ATTEST: J&L SPECIALTY STEEL, INC.

/s/ KIRK F. VINCENT /s/ PHILIPPE CHOPPIN DE JANVRY
- ---------------------------- ---------------------------------
Kirk F. Vincent Philippe Choppin de Janvry
Secretary Chairman

<PAGE> 1
Exhibit 13.1
- --------------------------------------------------------------------------------

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The management's discussion and analysis that follows provides information
with respect to the results of operations of J&L Specialty Steel, Inc. (the
"Company") for the years ended December 31, 1996, 1995 and 1994.

YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995

U.S. Stainless Steel Market. Apparent consumption of stainless steel sheet and
strip in the United States increased 7.4% to 1,669,453 tons in 1996 from
1,553,906 tons in 1995. In 1996, stainless steel sheet and strip imports were
337,068, up 9.0% due to a firming dollar and excess worldwide manufacturing
capacity. Reported domestic shipments of stainless steel sheet and strip by the
U.S. stainless steel industry (excluding exports) were 1,332,385, an increase of
7.0% compared to the 1,244,664 tons in 1995. Imports of stainless steel sheet
and strip comprised the remaining tons in 1996, or approximately 20% of the
domestic market.

Net Sales. Net sales for the Company decreased 27.6% to $628.0 million
from a record $867.0 million in 1995. The decrease in net sales was due to lower
selling prices and lower shipments. Import prices placed downward pressure on
domestic prices. Selling prices for 1996 were also negatively impacted by lower
raw material surcharges than were realized in 1995. Shipments for 1996 totaled
306,791 tons and were 16.4% lower than the 367,030 tons shipped in 1995. The
lower shipments in 1996 were the result of a decrease in exports and a decrease
in sales to the hot rolled market. Exports decreased from 8% of sales in 1995 to
4% of sales in 1996 due to low international selling prices, which the Company
elected not to meet. The lower sales to the hot rolled market were due to lower
demand in 1996 for finished goods manufactured from this product and from
increased competition.

Depreciation and Amortization Expenses. Depreciation and amortization
expenses were relatively unchanged, increasing by $.2 million in 1996 to $23.0
million compared with $22.8 million in 1995.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 1.8%, or $.4 million, to $20.1 million in
1996 compared with $19.7 million in 1995. Significantly higher engineering and
environmental consulting costs were mostly offset by reductions in the stock
appreciation right accrual.

Research and Technology Expense. Research and technology expense increased
to $6.0 million in 1996 from $4.0 million in 1995. The additional expense was
primarily due to the scheduled increase in fees paid under the Company's
ten-year research and technology agreement with Ugine. The agreement has
provided the Company with a broad spectrum of patents, know-how and future
research and development services, including any commercially viable thin strip
casting technology developed by Ugine.

Interest Income. The significant decrease in interest income in 1996 was
the result of lower cash balances available for investment.

Interest Expense. Interest expense decreased by 54.2% in 1996. The
significant decrease in interest expense was due to the capitalization of $6.1
million of interest related to capital projects in 1996 versus $2.0 million in
1995. Separately, the effect of higher average debt outstanding during 1996 was
proportionately offset by lower effective borrowing rates.

5
<PAGE> 2

- --------------------------------------------------------------------------------

Other Expense. Other expense decreased to $.4 million in 1996 from $2.7
million in 1995. The decrease in expense was due to a reduction in demolition
and disposal projects related to nonoperating facilities at the Midland plant.

Income Tax Provision. The effective income tax rate of 48.4% for 1996 was
higher than the 42.6% rate for 1995 due to the fact that the amortization of the
purchase accounting adjustment, primarily goodwill which is not deductible for
income tax purposes, was a relatively larger component of pretax income for
1996.

Net Income. Due to the items described above, net income decreased 71.3%
to $24.3 million in 1996 from $84.4 million in 1995.

YEAR ENDED 1995 COMPARED TO YEAR
ENDED 1994

U.S. Stainless Steel Market. Apparent consumption of stainless steel sheet
and strip in the United States increased .6% to 1,553,906 tons in 1995 from
1,544,217 tons in 1994. Demand for stainless steel remained high for most of
1995; however, demand weakened in the later part of the year. Reported domestic
shipments of stainless steel sheet and strip by the U.S. stainless steel
industry (excluding exports) were 1,244,664 tons in 1995, an increase of 5.1%
compared to the 1,184,199 tons in 1994. Imports of stainless steel sheet and
strip comprised the remaining 309,242 tons in 1995, or a decrease of 14.1%
compared to 1994.

Net Sales. Net sales for the Company increased 21.8% to a record $867.0
million from $711.7 million in 1994. The higher sales in 1995 were the result of
increased stainless steel prices and the addition of raw material sales price
surcharges which the Company implemented during 1995. Shipments of 367,030 tons
were just short of the record of 367,742 tons set in 1994. The year ended with
weak demand in the fourth quarter, resulting in falling prices for the Company's
products.

Cost of Products Sold, Excluding Depreciation and Amortization Expenses.
As a percentage of net sales, cost of products sold, excluding depreciation and
amortization expenses, decreased to 76.7% in 1995 compared with 78.9% in 1994.
The improvement in cost of products sold as a percentage of net sales was
largely due to the increased selling prices and, to a lesser extent, lower
quality related costs. Partially offsetting these improvements was an increase
in raw material costs, somewhat higher planned maintenance spending, higher
labor costs due to a $4,000 per union employee signing bonus and increased wages
provided under the new labor agreement that became effective on July 1, 1995.
This four-year labor agreement with the United Steelworkers of America provides
for wage and benefit cost increases averaging slightly less than 3% annually
over the contract term. Also reducing cost of products sold in 1995 was the
receipt of $2.5 million relating to the settlement of an insurance claim for
property damage and business interruption losses resulting from a 1993
industrial accident at the Midland plant.

Depreciation and Amortization Expenses. Depreciation and amortization
expenses were relatively unchanged, increasing by $.3 million in 1995 to $22.8
million compared with $22.5 million in 1994.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 11.4%, or $2.0 million, to $19.7 million in
1995 compared with $17.7 million in 1994. The increase was due to a
reclassification of costs due to the restructuring of functions formerly
included in costs of products sold and increased costs related to employee
compensation.

Research and Technology Expense. Research and technology expense increased
to $4.0 million in 1995 from $1.4 million in 1994. The additional expense was
primarily due to the scheduled increase in the fees paid under the Company's
ten-year research and technology agreement with Ugine. The agreement has
provided the Company with a broad spectrum of patents, know-how and future
research and development services, including any commercially viable thin strip
casting technology developed by Ugine.

Interest Income. The significant increase in interest income in 1995 was
the result of an increase in invested cash generated from the high level of
operations.

Interest Expense. Interest expense decreased slightly, $.3 million, from
1994. Although average interest rates were higher in 1995, the decrease in

6
<PAGE> 3

- --------------------------------------------------------------------------------

interest expense was due to lower levels of outstanding borrowings and the
capitalization of interest. This capitalization of interest, which reduced
interest expense in 1995 by $2.0 million, primarily related to the Direct Roll
Anneal and Pickle Line capital project.

Other Expense. Other expense increased to $2.7 million in 1995 from $.3
million in 1994. This increase was due to voluntary demolition and disposal
costs related to certain nonoperating facilities at the Midland plant.

Income Tax Provision. The effective income tax rate of 42.6% for 1995 was
lower than the 45.8% rate for 1994 due to the fact that the amortization of the
purchase accounting adjustment, primarily goodwill which is not deductible for
income tax purposes, was a relatively smaller component of pretax income for
1995.

Net Income. Due to the items described above, net income increased 57.5%
to $84.4 million in 1995 from $53.6 million in 1994.

LIQUIDITY AND CAPITAL RESOURCES

Working capital decreased by $44.3 million from the prior year-end to $68.8
million as of December 31, 1996. Cash and cash equivalents decreased $34.9
million during 1996 primarily due to a reduction in net income of $60.1 million,
capital expenditures of $103.3 million and dividend payments of $15.1 million.
Lower business activity levels contributed to the other major changes in working
capital, including a decrease in inventories of $18.2 million, which was offset
by a decrease in accounts payable of $14.4 million. This working capital change
and the significant amount of capital expenditures, discussed below, required
the Company to utilize established credit facilities as a supplemental source of
working capital during 1996. The Company had outstanding borrowings of $5.6
million under short-term lines of credit as of December 31, 1996, and $20.0
million under its $100.0 million revolving credit facility. The latter is
included in long-term debt as of December 31, 1996.

During 1996, total debt increased by $28.6 million, increasing the
Company's borrowed debt to total capitalization ratio to 31.1% as of December
31, 1996. Capital expenditures increased to $103.3 million in 1996, compared
with $94.1 million in 1995. A significant portion of the 1996 expenditures were
for the largest of the Company's five-year capital plan projects, the Direct
Roll Anneal and Pickle ("DRAP") Line. The construction phase of the DRAP Line at
the Company's Midland, Pa., plant was substantially completed at the end of
1996. Commissioning is anticipated to be completed during the first half of
1997, while full production of the line is expected to be achieved by the end of
1997. The Company believes, based on its current commissioning plan, that the
net impact of starting up the new line, including depreciation, will reduce 1997
net income by $.30 to $.35 per share. This impact will occur predominately in
the second, third and fourth quarters.

The forward-looking statements contained in this report involve risks and
uncertainties that could cause actual results to differ materially from those in
such forward-looking statements. Notably, the new DRAP Line utilizes novel
technology which could cause unforeseen start-up expense or benefits.

Two other significant finishing expansion projects were recently completed
and commissioned in early 1997 at the Company's Louisville, Ohio, plant: a new
coil slitting and packaging line and major improvements to the bright anneal
line. The latter project is part of the upgrade of the Company's bright anneal
capabilities, which also includes the installation of a new temper mill expected
to be completed in 1999.

Total capital expenditures for 1997 are expected to approximate $50 million
and will, with the commissioning of the equipment mentioned above, substantially
complete the finishing capacity expansion objectives of the five-year capital
plan. The Company believes that its cash flow provided by operating activities
and amounts available under its financing sources will enable it to satisfy its
planned capital expenditures and other cash requirements for the foreseeable
future.

The Company paid dividends to its shareholders of $15.1 million during
1996. On February 20, 1997, the Company declared a quarterly cash dividend of
$.10 per share payable on April 23, 1997, to

7
<PAGE> 4

- --------------------------------------------------------------------------------

shareholders of record as of the close of business on April 9, 1997.

OTHER MATTERS

Imports of stainless steel sheet and strip were up 9.0% in 1996 compared to
1995, capturing approximately 20% of the domestic market and absorbing a
significant portion of the 7.4% increase in domestic consumption. This increase
in imports adversely affected the Company's shipments and pricing for its
products in 1996. However, the Company is implementing a 5% price increase
effective March 2, 1997, and has announced a second 5% price increase effective
May 4, 1997, that will offset a recent rise in raw material costs.

In late January 1997, the Company reached a settlement with an unrelated
third-party vendor concerning a commercial dispute relating to the quality of
certain material purchased by the Company from 1991 to 1996. As a result of this
settlement, the Company received a $5.9 million cash payment. This $5.9 million
pretax gain will be recognized in the first quarter of 1997.

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
No. 123") in October 1995. This statement establishes a fair value based method
of financial accounting and related reporting standards for stock-based employee
compensation plans, such as the Company's 1993 Stock Incentive Plan. SFAS No.
123 became effective for calendar year 1996 and provides for adoption in the
income statement or through footnote disclosure only. The Company has continued
to account for its 1993 Stock Incentive Plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," as permitted by SFAS No. 123. Had
the recognition requirements been adopted in 1995 and 1996, the effect would
have been immaterial.

8
<PAGE> 5

- --------------------------------------------------------------------------------

J&L Specialty Steel, Inc.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 499 $ 35,428
Trade receivables, less allowances of $3,869 and $4,336,
respectively.................................................... 55,153 64,575
Trade receivables from affiliates.................................. 6,191 7,523
Inventories........................................................ 143,576 161,787
Deferred income taxes.............................................. 7,172 9,326
Prepaid expenses and other current assets.......................... 605 1,192
-------- --------
Total current assets.......................................... 213,196 279,831
-------- --------
Property, plant and equipment, net................................... 304,721 217,060
Goodwill, net of accumulated amortization of $68,194 and $61,066,
respectively....................................................... 238,209 245,337
Deferred income taxes................................................ 3,587 --
Other noncurrent assets.............................................. 12,215 11,590
-------- --------
Total assets.................................................. $771,928 $753,818
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Common stock dividend payable...................................... $ 3,867 $ 3,480
Short-term debt.................................................... 6,205 402
Trade accounts payable............................................. 72,621 86,976
Construction accounts payable...................................... 22,914 24,246
Accrued employee compensation and benefits......................... 19,571 30,741
Accrued income taxes............................................... 3,360 3,882
Reserve for claims and allowances.................................. 6,090 9,445
Other accrued liabilities.......................................... 9,810 7,635
-------- --------
Total current liabilities..................................... 144,438 166,807
-------- --------
Long-term debt....................................................... 170,452 147,620
Deferred income taxes................................................ -- 302
Postretirement benefits liability.................................... 48,729 46,786
Other noncurrent liabilities......................................... 17,571 12,078
Shareholders' equity:
Preferred stock (par value $.01 per share; 2,000,000 shares
authorized, no shares issued and outstanding)................... -- --
Common stock (par value $.01 per share; 100,000,000 shares
authorized, 38,670,000 shares issued and outstanding)........... 387 387
Additional paid-in capital......................................... 308,378 306,662
Retained earnings.................................................. 81,973 73,176
-------- --------
Total shareholders' equity.................................... 390,738 380,225
-------- --------
Total liabilities and shareholders' equity.................... $771,928 $753,818
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

9
<PAGE> 6

- --------------------------------------------------------------------------------

J&L Specialty Steel, Inc.

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Trade sales, net..................................... $579,500 $797,044 $638,624
Sales to affiliates, net............................. 48,522 69,978 73,036
-------- -------- --------
Total sales, net.............................. 628,022 867,022 711,660

Cost of products sold................................ 527,805 665,040 561,565
Depreciation and amortization expenses............... 23,031 22,797 22,469
-------- -------- --------
Gross profit.................................. 77,186 179,185 127,626

Selling, general and administrative expenses......... 20,102 19,739 17,716
Research and technology expense...................... 6,049 4,033 1,351
-------- -------- --------
Operating income.............................. 51,035 155,413 108,559

Interest income...................................... (225) (2,915) (273)
Interest expense..................................... 3,909 8,534 8,822
Interest (income) expense with affiliates, net....... (37) 185 868
Other expense, net................................... 378 2,682 274
-------- -------- --------
Income before income taxes.................... 47,010 146,927 98,868
Income taxes......................................... 22,745 62,525 45,293
-------- -------- --------

Net income.................................... $ 24,265 $ 84,402 $ 53,575
======== ======== ========
Per share data:
Net income.................................... $ .63 $ 2.18 $ 1.39
======== ======== ========

Weighted average number of common shares............. 38,670,000 38,670,000 38,670,000
</TABLE>

The accompanying notes are an integral part of these financial statements.

10
<PAGE> 7

- --------------------------------------------------------------------------------

J&L Specialty Steel, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 24,265 $ 84,402 $ 53,575
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangibles and depreciation........ 23,031 22,797 22,469
Deferred income taxes............................... (1,735) (3,891) (4,699)
Changes in certain assets and liabilities:
Trade receivables................................... 10,754 25,695 (30,064)
Inventories......................................... 18,211 (25,309) (10,473)
Prepaid expenses and other current assets........... 587 (418) (452)
Trade accounts payable.............................. (14,355) 2,537 24,358
Construction accounts payable....................... (1,332) 23,789 (78)
Accrued employee compensation and benefits.......... (9,570) (265) 1,622
Accrued income taxes................................ 1,194 (2,072) 8,363
Reserve for claims and allowances................... (3,355) 235 2,729
Other accrued liabilities........................... 2,175 (1,918) 3,308
Postretirement benefits liability................... 2,143 3,747 3,655
Other, net.......................................... 2,820 3,447 (400)
--------- -------- ---------
Net cash provided by operating activities......... 54,833 132,776 73,913
--------- -------- ---------
Cash flows from investing activities:
Capital expenditures................................... (103,316) (94,060) (7,590)
Proceeds from sale of property, plant and equipment.... -- -- 4,350
--------- -------- ---------
Net cash used by investing activities............. (103,316) (94,060) (3,240)
--------- -------- ---------
Cash flows from financing activities:
Borrowings on lines of credit, net..................... 5,600 -- --
Borrowings on revolving credit facility, net........... 20,000 -- --
Refinancing of long-term bank loan..................... -- 125,000 --
Repayment of long-term bank loan....................... -- (145,000) --
Borrowings of industrial development notes, net........ 3,035 2,414 (62)
Repayments of revolving credit loans with affiliates... -- -- (35,000)
Common stock dividends paid............................ (15,081) (13,921) (13,921)
--------- -------- ---------
Net cash provided (used) by financing
activities..................................... 13,554 (31,507) (48,983)
--------- -------- ---------
Net (decrease) increase in cash and cash equivalents..... (34,929) 7,209 21,690
Cash and cash equivalents at beginning of year........... 35,428 28,219 6,529
--------- -------- ---------
Cash and cash equivalents at end of year................. $ 499 $ 35,428 $ 28,219
========= ======== =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

11
<PAGE> 8

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J&L Specialty Steel, Inc.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS/
STOCK CAPITAL (DEFICIT) TOTAL
-------- ---------- --------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1993................... $ 387 $ 304,088 $ (36,959) $267,516

Net income................................... -- -- 53,575 53,575
Common stock dividends paid ($.27 per
share).................................... -- -- (10,441) (10,441)
Common stock dividends payable ($.09 per
share).................................... -- -- (3,480) (3,480)
Income tax benefit from exercised stock
warrant................................... -- 858 -- 858
-------- ---------- --------- --------
Balance at December 31, 1994................... 387 304,946 2,695 308,028

Net income................................... -- -- 84,402 84,402
Common stock dividends paid ($.27 per
share).................................... -- -- (10,441) (10,441)
Common stock dividends payable ($.09 per
share).................................... -- -- (3,480) (3,480)
Income tax benefit from exercised stock
warrant................................... -- 1,716 -- 1,716
-------- ---------- --------- --------
Balance at December 31, 1995................... 387 306,662 73,176 380,225

Net income................................... -- -- 24,265 24,265
Common stock dividends paid ($.30 per
share).................................... -- -- (11,601) (11,601)
Common stock dividends payable ($.10 per
share).................................... -- -- (3,867) (3,867)
Income tax benefit from exercised stock
warrant................................... -- 1,716 -- 1,716
-------- ---------- --------- --------
Balance at December 31, 1996................... $ 387 $ 308,378 $ 81,973 $390,738
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

12
<PAGE> 9

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1 ORGANIZATION AND NATURE OF OPERATIONS

J&L Specialty Steel, Inc. (the "Company") is a leading manufacturer of flat
rolled stainless steel. On June 14, 1990, Ugine s.a. ("Ugine"), a French
corporation, became the sole shareholder of a predecessor to the Company. On
December 6, 1993, two predecessors to the Company were merged with and into a
newly formed corporation, J&L Specialty Steel, Inc., with the Company being the
surviving entity. On December 15, 1993, the Company completed an initial public
offering of common stock. At December 31, 1996 and 1995, Usinor Sacilor
("Usinor"), successor by merger to Ugine, owned 53.6% of the Company's issued
and outstanding shares of common stock.

Flat rolled stainless steel is the Company's only product line. The Company
produces both austenitic and ferritic flat rolled stainless steels; austenitic
stainless steel represents the largest part of the domestic stainless steel
market. The Company manufactures various grades of stainless steel in the form
of cold rolled stainless steel sheet and strip, hot rolled stainless steel sheet
and strip and continuous mill plate, as well as stainless steel slabs. The
Company operates within a single business segment, stainless steel, and
predominantly within a single geographic area, the continental United States.

The principal raw materials used to produce stainless steel are stainless
steel scrap, nickel, ferrochromium, carbon steel scrap, molybdenum,
ferrosilicon, manganese and manganese alloys. Certain of these raw materials,
including the key raw materials nickel and chromite ore (which is the source of
ferrochromium), can be acquired by the Company and its competitors only from
foreign sources, some of which are located in countries which may be subject to
unstable political and economic conditions. These conditions might disrupt
supplies or affect the prices of these raw materials. In addition, the prices of
many of the Company's raw materials are cyclical as a result of being dependent
on international supply and demand relationships. A substantial increase in raw
material prices or a continued interruption in supply could have a material
adverse effect on the Company's financial condition and results of operations.

At present, an integral part of the Company's stainless steel production
process involves the use of a hot strip mill. The Company does not operate a hot
strip mill and maintains tolling arrangements with two other companies for the
use of their hot strip mills. The Company's dependence on these arrangements
could subject it to interruption in service due to strikes and other production
disruptions at the providers' facilities, which are not within the Company's
control. Should this interruption occur, it could have a material adverse effect
on the Company's financial condition and results of operations.

Virtually all of the Company's hourly labor force is represented by the
United Steelworkers of America, AFL-CIO ("USWA"). The USWA workers located at
the Company's three manufacturing facilities are covered by separate collective
bargaining agreements. These three agreements expire on July 1, 1999.

The Company's stainless steel is used in a wide variety of industrial,
commercial and consumer products, including pressure vessels, chemical and
refinery equipment, environmental control equipment, cargo containers, sinks,
transportation equipment, beer kegs, fast food equipment, automated bank teller
machines, automobile trim, exhaust systems, and kitchen appliances and utensils.
Approximately 50% of the Company's products are sold to steel service centers.
The remainder of the Company's products are sold to stainless steel converters,
manufacturers of finished industrial and consumer products and exporters. The
Company's customer base has been relatively stable. Sales to a principal
customer accounted for 12.7% of net sales in 1996.

13
<PAGE> 10

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NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation and Presentation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

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.

Cash Equivalents

Cash equivalents, consisting primarily of commercial paper and money market
funds, are stated at cost which approximates fair market value. For purposes of
the statements of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less at acquisition to be cash
equivalents.

Inventories

Inventories are stated at the lower of cost or market. Prior to 1994, the
cost of raw materials was determined by the first-in, first-out ("FIFO") method
and the cost of semifinished and finished steel inventories was determined by
the specific identification cost method. Effective January 1, 1994, the Company
changed its method of determining the cost for raw materials only, including raw
materials in all steel inventories, to the last-in, first-out ("LIFO") method.
This change affects the raw material cost in all steel inventory including raw
material, work-in-process and finished goods. This change was made to better
match current costs with current revenues.

The remaining costs of work-in-process and finished goods inventories are
not valued by the LIFO method; instead, they are determined by the specific
identification cost method.

Inventories include material, labor and overhead costs.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Expenditures for
additions and betterments are capitalized, while those for maintenance, repairs
and minor renewals are expensed as incurred. For financial reporting purposes,
the Company provides for depreciation on the straight-line method over the
estimated useful lives of the related assets. Accelerated depreciation methods
are utilized for federal income tax purposes.

Intangible Assets

Goodwill is being amortized on a straight-line basis over 40 years. Other
noncurrent assets include patents and manufacturing know-how that are valued on
a continued-use basis with lives not exceeding 15 years.

The Company evaluates the recoverability of intangible assets, including
goodwill, at each balance sheet date based on forecasted future operations and
undiscounted cash flows and other subjective criteria. Based upon historical
data, management believes that the carrying amount of these intangible assets
will be realizable over their respective amortization periods.

Postemployment Benefits

The Company recognizes the liability for postemployment benefits for former
and inactive employees and their dependents, other than retirees, based on
guidelines recommended by Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits," which was adopted by the
Company effective January 1, 1994.

Financial Instruments

The Company enters into nonleveraged interest rate swap agreements to
manage interest rate exposure. The differential to be paid or received is
accrued as interest rates change and is recognized as interest expense or income
in the current period.

14
<PAGE> 11

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Earnings Per Share

Net income per share of common stock has been determined by dividing net
income by the weighted average number of common shares outstanding during each
period. Common stock equivalents resulting from the assumed exercise of stock
options without stock appreciation rights are not dilutive in the calculation of
earnings per share.

Stock-Based Compensation

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
No. 123") in October 1995. This statement establishes a fair value based method
of financial accounting and related reporting standards for stock-based employee
compensation plans, such as the Company's 1993 Stock Incentive Plan. SFAS No.
123 became effective for calendar year 1996 and provides for adoption in the
income statement or through footnote disclosure only. The Company has continued
to account for its 1993 Stock Incentive Plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") as permitted by SFAS
No. 123, and has provided the new disclosure in Note 16.

NOTE 3 INVENTORIES

Effective January 1, 1994, the method for valuing costs of raw materials in
all levels of inventory was changed to the LIFO method to better match current
costs with current revenues.

Inventory balances as of December 31 consisted of the following:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Raw materials.............. $ 14,567 $ 29,559
Work-in-process............ 104,512 157,236
Finished goods............. 39,448 22,426
-------- --------
Total inventories at
current cost............. 158,527 209,221
Less allowance to reduce
current cost values to
LIFO basis............... (14,951) (47,434)
-------- --------
Total inventories.......... $143,576 $161,787
======== ========
</TABLE>

At December 31, 1996 and 1995, inventories not valued on the LIFO method
totaled $72,452 and $70,016, respectively. Cost of products sold was increased
by approximately $1,433 in 1996 as a result of the liquidation of LIFO
inventories.

The Company enters into fixed price raw material contracts to hedge its
exposure to price fluctuations. Currently, none of these contracts are for more
than one year. The Company's requirement for raw materials is expected to
significantly exceed the amounts under contract.

NOTE 4 PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment and their related allowances for depreciation
as of December 31 were:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land....................... $ 3,325 $ 3,325
Buildings.................. 21,242 20,057
Machinery and equipment.... 191,165 184,478
Construction-in-progress... 183,158 87,848
-------- --------
Total property, plant and
equipment................ 398,890 295,708
Less allowance for
depreciation............. (94,169) (78,648)
-------- --------
Property, plant and
equipment, net........... $304,721 $217,060
======== ========
</TABLE>

Interest capitalized during 1996 and 1995 was $6,097 and $1,996,
respectively. As of December 31, 1996 and 1995, purchase commitments for capital
expenditures were approximately $18 million and $26 million, respectively.

NOTE 5 SHORT-TERM BORROWING FACILITIES

The Company has $50,000 of unsecured, uncommitted, short-term lines of
credit with various banks. Borrowings under these lines of credit are available
to finance the Company's working capital requirements and for other general
corporate purposes. Interest rates are quoted by each bank on an "as offered"
basis depending on the terms of the borrowing (from one day to six months). The
Company had outstanding borrowings of $5,600 under these lines of credit as of
December 31, 1996. The maximum outstanding borrowing in 1996 was

15
<PAGE> 12

- --------------------------------------------------------------------------------

$20,600, and the average amount outstanding during the borrowing period was
$10,190. The weighted daily average interest rate was 5.7% for the year ended
December 31, 1996. The Company did not borrow under these lines of credit during
1995. The maximum borrowing available under these lines of credit at December
31, 1996, after considering the short-term borrowing limitations provided in the
revolving credit facility, was $34,400.

NOTE 6 LONG-TERM DEBT

Long-term debt as of December 31 consisted of the following:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Term loan.................. $125,000 $125,000
Revolving credit
facility................. 20,000 --
7% pollution control
revenue bonds due June 1,
1998 through June 1,
2008..................... 11,975 11,975
6.6% pollution control
revenue refunding bonds
due September 1, 2006
through September 1,
2010..................... 8,000 8,000
2%-3% industrial
development notes........ 6,082 3,047
-------- --------
171,057 148,022
Current maturities......... (605) (402)
-------- --------
Total long-term debt....... $170,452 $147,620
======== ========
</TABLE>

In July 1995, the Company entered into a $125,000 term loan with a group of
banks. The term loan agreement matures on July 14, 2002. The term loan allows
the Company to borrow up to $125,000 at either the bank's base rate or LIBOR
plus a fixed margin, based on the Company's financial performance, for either
one, two or three-month interest rate periods. The weighted average interest
rate was 6.0% in 1996 and 6.4% in 1995.

In July 1995, the Company entered into a five-year $100,000 revolving
credit facility with a group of banks. The credit agreement provides for
borrowings at either the bank's base rate or LIBOR plus a margin based upon the
Company's financial performance. The Company is obligated to pay a commitment
fee on the unused portion of the loan commitment. The Company had outstanding
borrowings of $20,000 under the revolving credit facility as of December 31,
1996. The maximum outstanding borrowing in 1996 was $20,000, and the average
amount outstanding during the borrowing period was $9,745. The weighted daily
average interest rate was 5.9% for the year ended December 31, 1996. The
available portion of this line was $80,000 at December 31, 1996. There was no
balance outstanding as of December 31, 1995, or at any time during 1995.
Borrowings under the revolving credit facility are available to finance the
Company's working capital requirements and for other general corporate purposes.

Both the term loan and the revolving credit facility are unsecured but
contain certain financial covenants that the Company is required to meet,
including a minimum consolidated tangible net worth covenant and consolidated
leverage ratio covenant. The agreements also contain a put event based on the
continued ownership of a majority of the issued and outstanding shares of common
stock of the Company by Usinor and an event of default in certain situations if
Usinor becomes involved in bankruptcy or insolvency proceedings. The agreements
do not contain any material limitations on the Company's ability to pay
dividends. The Company is in compliance with all applicable covenants.

An $8,300 stand-by letter of credit is outstanding to secure the 6.6%
pollution control revenue refunding bonds. An additional $7,211 in letters of
credit are outstanding with several banks in support of certain other Company
obligations.

During 1996, the Company entered into $3,500 of industrial development
loans with maturities between seven and 20 years. The industrial development
notes are secured by certain related facilities or equipment.

Maturities of long-term debt in each of the next five years are as follows:
1997--$605; 1998--$982; 1999--$32,268; 2000--$52,315; and 2001--$32,356.

Cash paid for interest was $8,869, $11,162 and $9,783 for the years ended
December 31, 1996, 1995 and 1994, respectively. Included in interest paid in
1995 and 1994 is a loan guarantee fee payable to Usinor on the former term loan.

16
<PAGE> 13

- --------------------------------------------------------------------------------

Amounts paid were $604 and $435 for the years ended December 31, 1995 and 1994,
respectively.

NOTE 7 FINANCIAL INSTRUMENTS

The Company's usage of derivative financial instruments has been limited to
nonleveraged interest rate swaps to manage well-defined interest rate risk.

The following table provides information on the interest rate swaps:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NOTIONAL INTEREST RATE
NOTIONAL AMOUNT ---------------
CLASSIFICATION AMOUNT OUTSTANDING RECEIVED PAID
- -------------- -------- ----------- -------- ----
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
SWAP........ $11,975 $11,975 7.0% 5.6%
SWAP........ 62,375 62,375 5.7 6.2
YEAR ENDED DECEMBER 31, 1995
SWAP........ $11,975 $11,975 7.0% 6.3%
SWAP........ 70,000 -- 6.3 6.2
</TABLE>

The Company entered into interest rate swap agreements in July 1996 that
had the effect of converting $62,375 of variable rate debt into a fixed rate
obligation. The expiration date of the interest rate swap agreements is October
1997. The cash settlement of the transactions occurs on a quarterly basis, with
the Company either paying or receiving the difference between the fixed rate of
interest and three-month LIBOR.

An interest rate swap agreement was entered into in June 1992 that has the
effect of converting $11,975 of fixed rate borrowings into a variable rate
obligation. The expiration date of the interest rate swap agreement is June
1999. The cash settlement of the transaction occurs on a quarterly and
semiannual basis, with the Company either paying or receiving the difference
between the fixed rate of interest and the three-month LIBOR.

The Company entered into a $70,000 interest rate swap agreement with a
major international financial institution for the period November 14, 1994,
through September 15, 1995, that had the effect of converting $70,000 of
variable rate obligations into a fixed rate obligation. The cash settlement of
the transaction occurred on a quarterly basis, with the Company either paying or
receiving the difference between the fixed rate of interest and the three-month
LIBOR.

The effect of the interest rate swaps was to decrease the Company's
interest expense by $14 and $111 in 1996 and 1995, respectively.

NOTE 8 SHAREHOLDERS' EQUITY

In 1988, The LTV Corporation ("LTV"), a former shareholder, exercised its
warrant to purchase 200,000 shares of common stock of J&L Specialty Products
Corporation, predecessor to the Company. A condition to the exercise of the
warrant was an extension of the Tolling Agreement between a subsidiary of LTV
and the Company pursuant to which LTV agreed to convert the Company's steel
slabs into hot bands. The Company believes that for income tax purposes, the
difference between the exercise price plus the amount paid for the warrant and
the fair value of the common stock on the date of exercise is deductible by the
Company over the term of the Tolling Agreement. Accordingly, the Company has
increased additional paid-in capital by $1,716 in 1996 and 1995 and $858 in 1994
to reflect the income tax benefit recognized for this amortization.

NOTE 9 INCOME TAXES

The consolidated provision for income tax expense includes current and
deferred taxes as follows for the years ended December 31:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
CURRENT TAXES:
Federal......... $21,237 $54,862 $39,124
State and
local......... 3,243 11,554 10,868
------- ------- -------
Total......... 24,480 66,416 49,992
------- ------- -------
DEFERRED TAXES:
Federal......... (1,452) (3,196) (3,651)
State and
local......... (283) (695) (1,048)
------- ------- -------
Total......... (1,735) (3,891) (4,699)
------- ------- -------
Total current and
deferred
taxes........... $22,745 $62,525 $45,293
======= ======= =======
</TABLE>

Income tax expense varies from the amount that would be provided by
applying the federal

17
<PAGE> 14

- --------------------------------------------------------------------------------

statutory income tax rate to earnings before income taxes as reflected below:

<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Federal statutory income
tax rate.............. 35.0% 35.0% 35.0%
State and local income
taxes, net of federal
income tax benefit.... 2.9 4.3 5.7
Amortization of purchase
accounting
adjustment............ 10.5 3.3 5.1
----- ----- -----
Effective income tax
rate.................. 48.4% 42.6% 45.8%
===== ===== =====
</TABLE>

Net deferred income tax assets (liabilities) are composed of the following
as of December 31:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred income
tax--current.............. $ 7,172 $ 9,326
Deferred income
tax--long-term............ 3,587 (302)
-------- --------
Net deferred income tax
assets.................... $ 10,759 $ 9,024
======== ========

Consisting of:
1996 1995
-------- --------
Financial reserves not yet
deductible................ $ 13,563 $ 14,115
Postretirement benefits
other than pensions....... 19,116 18,194
Depreciation................ (20,161) (20,619)
Other, net.................. (1,759) (2,666)
-------- --------
$ 10,759 $ 9,024
======== ========
</TABLE>

Cash paid for income taxes for 1996, 1995 and 1994 was $23,287, $68,488 and
$41,629, respectively.

NOTE 10 COMMITMENTS

During 1996, the Company entered into a noncancelable contract to purchase
certain manufacturing support services for the Company's new Direct Roll Anneal
and Pickle Line at its Midland, Pa. plant. The five-year contract provides the
Company with per unit prices for services to be provided under the contract plus
a minimum monthly obligation related to such contractor's fixed costs. The
contract takes effect February 1, 1997, and the Company's annual minimum
obligation under the contract is approximately $2 million per year.

The Company leases certain property, plant and equipment under various
operating lease agreements. The total rent expense for the years ended December
31, 1996, 1995 and 1994, was $2,362, $2,271 and $2,423, respectively.

Future minimum lease payments required under noncancelable operating leases
that have initial or remaining lease terms in excess of one year as of December
31, 1996, are: 1997--$1,234; 1998--$966; 1999--$783; 2000--$681; and 2001--$681.

NOTE 11 PENSION BENEFITS

The Company provides retirement benefits under a variety of employee
benefit plans. Virtually all hourly employees are covered by a defined benefit
plan and all salaried employees, and certain hourly employees, are covered by a
defined contribution plan. A group of salaried employees also has benefits under
the qualified defined benefit plan which was frozen as of January 1, 1993.
Certain key management employees are also covered by a nonqualified, unfunded
supplemental defined benefit plan.

Periodic pension expense for the defined benefit plan is actuarially
determined utilizing the projected unit credit method. The Company funds pension
costs for the defined benefit plan in accordance with the funding requirements
of the Employee Retirement Income Security Act of 1974. Pension costs for the
salaried and hourly defined contribution plans are based upon a percentage of
compensation for salaried employees or a multiple of hours worked for hourly
employees, respectively, and are funded monthly.

The following table summarizes total pension expense for the years ended
December 31:

<TABLE>
<CAPTION>
PLAN TYPE 1996 1995 1994
- ------------------------ ------ ------ ------
<S> <C> <C> <C>
Defined benefit......... $4,171 $4,445 $2,548
Defined contribution.... 1,602 1,478 1,429
------ ------ ------
Total................... $5,773 $5,923 $3,977
====== ====== ======
</TABLE>

Net periodic pension expense for the defined benefit plans in 1996, 1995
and 1994 was determined assuming discount rates of 7.0%, 8.0% and

18
<PAGE> 15

- --------------------------------------------------------------------------------

7.25%, respectively, and an expected rate of return on plan assets of 9.0% for
1996, 1995 and 1994. Components of net periodic pension expense are as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Service cost........ $ 2,930 $ 2,391 $ 2,376
Interest cost on
projected benefit
obligation........ 5,533 5,745 4,514
Actual return on
assets............ (8,005) (14,678) 869
Net amortization and
deferral.......... 3,713 10,987 (5,211)
------- -------- -------
Net periodic pension
expense........... $ 4,171 $ 4,445 $ 2,548
======= ======== =======
</TABLE>

The Company's projected, accumulated and vested defined benefit pension
obligations as of December 31, 1996 and 1995, were determined assuming discount
rates of 7.25% and 7.0%, respectively. The assumed rate of salary increase was
4.0% as of December 31, 1996 and 1995. Plan assets consist primarily of common
stocks, fixed income securities and short-term investments that are
professionally managed.

<TABLE>
<CAPTION>
BENEFITS 1996 1995
- -------------------------------- ------- -------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation..... $61,491 $61,654
Nonvested benefit
obligation.................. 10,299 9,715
------- -------
Accumulated benefit
obligation.................... 71,790 71,369
Additional obligation for
projected compensation
increases..................... 11,914 7,770
------- -------
Projected benefit obligation.... 83,704 79,139
Plan assets at market value..... 67,588 59,974
------- -------
Projected benefit obligation in
excess of plan assets......... 16,116 19,165
Unrecognized prior service
cost.......................... (6,857) (6,154)
Unrecognized net actuarial
gain.......................... 6,521 1,198
------- -------
Accrued pension cost............ $15,780 $14,209
======= =======
</TABLE>

NOTE 12 RETIREMENT BENEFITS OTHER THAN PENSIONS

The Company maintains unfunded postretirement health care and life
insurance benefit plans covering most hourly and salaried employees.
Substantially all of the Company's employees may become eligible for these
benefits if they retire while working for the Company. The basic hourly health
care and life insurance benefit plans are noncontributory, while the major
medical options of the health care plan are contributory. Generally, the
postretirement salaried benefit plans are contributory. In 1995, the Company
agreed to establish a Voluntary Employee Beneficiary Association Trust ("VEBA")
to prefund a portion of health care and life insurance benefits for retirees
covered under the USWA union agreement. In December 1996, the Company funded the
VEBA with a cash contribution of $1,800. Additionally, the Company is required
to make minimum cash contributions of $1,800 in each succeeding contract year of
the USWA union agreement.

Postretirement benefit expenses for 1996, 1995 and 1994 were determined
assuming discount rates of 7.0%, 8.0% and 7.25%, respectively. Components of
postretirement benefit expense are as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Cost of benefits earned
during the year....... $1,865 $1,670 $1,769
Interest on APBO........ 3,344 3,249 2,972
Net amortization........ 2 (54) 6
------ ------ ------
Total postretirement
benefit expense....... $5,211 $4,865 $4,747
====== ====== ======
</TABLE>

19
<PAGE> 16

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The accumulated postretirement benefit obligation ("APBO") as of December
31 was:

<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Retirees..................... $15,653 $14,066
Fully eligible plan
participants............... 7,599 7,294
Other active plan
participants............... 27,168 27,653
------- -------
Total APBO................... 50,420 49,013
Plan assets at market
value...................... 1,800 --
------- -------
APBO in excess of plan
assets..................... 48,620 49,013
Unrecognized prior service
cost....................... (42) (48)
Unrecognized net actuarial
gain....................... 3,451 921
------- -------
Accrued postretirement
benefit cost............... $52,029 $49,886
======= =======
</TABLE>

Postretirement benefit liabilities as of December 31 are reported on the
balance sheets as follows:

<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accrued compensation and
benefits................... $ 3,300 $ 3,100
Postretirement benefits
liability.................. 48,729 46,786
------- -------
Total postretirement benefits
liability.................. $52,029 $49,886
======= =======
</TABLE>

The discount rate used to determine the APBO was 7.25% at December 31,
1996, and 7.0% at December 31, 1995. The assumed medical cost trend rate at
December 31, 1996, was 10.0%, grading down to an ultimate rate of 5.0% in 2007
and remaining at that level thereafter. The assumed medical cost trend rate at
December 31, 1995, was 11.0%, grading down to an ultimate rate of 5.0% in 2007
and remaining at that level thereafter. A one percentage point increase in the
assumed health care cost trend rates for each future year increases annual
postretirement benefit expense by $1,091 and the APBO by $8,575.

The actual cash payments of postretirement benefits, excluding the $1,800
contribution to the VEBA, totaled $1,271, $1,118 and $1,313 in 1996, 1995 and
1994, respectively.

NOTE 13 RELATED-PARTY TRANSACTIONS

Effective October 1, 1993, the Company entered into a ten-year research and
technology agreement (the "Agreement") with Ugine that provides the Company with
a broad spectrum of patents, know-how and future research and development
services concerning the manufacturing and processing of flat rolled stainless
steel. The Company made an initial $5,000 cash payment to Ugine for the transfer
of rights to existing patents and know-how and for research and development
services provided during the first year of the Agreement. Ongoing annual fees
for the years ended December 31, 1996 and 1995, were $5,000 and $3,000,
respectively, for these research and development services. Ongoing annual fees
to be paid to Ugine for research and development services will be $5,000 in 1997
and each year thereafter for the term of the Agreement.

In addition to the research and technology agreement, the Company has
purchased various steel products and other services from Usinor or its
affiliates. Payments to Usinor relating to certain insurance premiums for the
Company amounted to $57, $391 and $741 in 1996, 1995 and 1994, respectively. The
payments in 1996 and 1995 represented coverage for a one-year period; the
payment in 1994 represented coverage for a two-year period. Purchases of steel
from Usinor or its affiliates during the three-year period were insignificant.

See also Note 6 for certain additional related-party transactions.

NOTE 14 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments as of December 31, 1996 and 1995.
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," defines the fair value of a financial
instrument as the amount at which the instrument

20
<PAGE> 17

- --------------------------------------------------------------------------------

could be exchanged in a current transaction between willing parties.

<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
FINANCIAL ASSETS:
Cash and cash
equivalents... $ 499 $ 499 $ 35,428 $ 35,428

FINANCIAL
LIABILITIES:
Interest rate
swaps......... -- (108) -- (592)
Term loan....... 125,000 125,000 125,000 125,000
Revolving credit
facility...... 20,000 20,000 -- --
Short-term
borrowings.... 5,600 5,600 -- --
Pollution
control
revenue
bonds......... 19,975 20,162 19,975 20,135
Industrial
development
notes......... 6,082 3,997 3,047 2,382
</TABLE>

The following methods and assumptions were used to estimate the fair value
of each financial instrument:

Cash and cash equivalents: The carrying amounts approximate fair value
because of the short term to maturity of these financial instruments.

Interest rate swaps: The fair value of these instruments is based on the
difference between the interest rates either received or paid on the notional
amount of the underlying liability. The calculation of the fair value was
computed on a net present value basis as if the financial instruments were
terminated on the reporting date. A relationship spread was developed based on
the difference between the three-month LIBOR and quoted three-month treasuries.
This spread was added to the quoted treasury yield for the respective maturity
period of the financial instruments and used to compute the net present value.
The negative or positive fair value is an estimate of the amounts that the
Company would either pay or receive to cancel the contracts at the reporting
date.

Term loan: The carrying amount approximates the fair value of the term
loan as this instrument is variable interest debt with the interest rates reset
at least each quarter.

Revolving credit facility: The carrying amount approximates the fair value
of the revolving credit facility as this instrument is variable interest debt
with the interest rates reset at least each quarter.

Short-term borrowings: The carrying amount approximates the fair value of
the short-term borrowings as these borrowings are variable interest debt with
the interest rates reset from 1 to 180 days.

Pollution control revenue bonds: The estimated fair value of the pollution
control revenue bonds was computed based on quoted market prices as of the
reporting date obtained from an independent financial trading institution.

Industrial development notes: The fair value of these industrial
development notes was computed by discounting expected cash flows at the rates
currently offered to the Company for debt of similar remaining maturities.

Other assets and liabilities: The Company believes that the carrying value
of its other assets and liabilities represent their fair value as of the
reporting date as a result of the short maturity and the reset interest rate
periods for such financial instruments.

NOTE 15 SUBSEQUENT EVENT

21
<PAGE> 18

- --------------------------------------------------------------------------------

NOTE 16 STOCK OPTION PLAN

On October 26, 1993, the Company's Board of Directors authorized the
adoption of the 1993 Stock Incentive Plan under which 2,000,000 shares of common
stock have been reserved for issuance to employees pursuant to the exercise of
incentive stock options ("ISOs") and for issuance to employees and the Chairman
of the Board of Directors of the Company pursuant to the exercise of
nonstatutory stock options. The 1993 Stock Incentive Plan also provides for
alternative stock appreciation rights ("SARs") with respect to both ISOs and
nonstatutory stock options. The SARs generally give the grantee the right to
either receive shares upon exercise of the option or, at the discretion of the
Board of Directors, cash, shares or a combination thereof equal in value to 100%
of the excess of the fair market value of the common stock on the date of
exercise of the option over the option price.

Under the 1993 Stock Incentive Plan, the exercise price of each option
equals the market price of the Company's stock on the date of grant. The stock
options and stock appreciation rights under the 1993 Stock Incentive Plan are
exercisable over a period determined by the Board of Directors, but no longer
than ten years after the date they are granted. Following are the options
granted under the 1993 Stock Incentive Plan:

<TABLE>
<CAPTION>
OPTIONS NUMBER NUMBER
DATE OF GRANT PRICE GRANTED EXERCISED OUTSTANDING WITH SARS EXERCISABLE
- ---------------------------------------- ------ ------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
October 1993............................ $14.00 568,000 20,000 548,000 548,000 209,333
December 1995........................... $15.63 330,000 -- 330,000 165,000 25,000
June 1996............................... $16.94 30,000 -- 30,000 15,000 --
December 1996........................... $12.00 27,000 -- 27,000 13,500 --
</TABLE>

During 1995, 20,000 of the October 1993 stock appreciation rights were
exercised, resulting in a cash payment of $163. There were 20,000 stock options
exercisable at December 31, 1995, and 234,333 exercisable at December 31, 1996.
The Company accounts for the 1993 Stock Incentive Plan by application of APB No.
25 and related Interpretations. For the years ended December 31, 1996, 1995 and
1994, the compensation (income) expense related to the stock appreciation rights
was $(1,390), $404 and $524, respectively.

Had compensation cost for the 1993 Stock Incentive Plan been determined
based on the fair value at the grant dates for awards under the 1993 Stock
Incentive Plan consistent with the method of SFAS No. 123, the Company's 1996
net income and earnings per share would have been $24,075 and $.63,
respectively. The pro forma effect on 1995 was insignificant. Because the SFAS
No. 123 method of accounting has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years. The fair value of each
option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
FAIR DIVIDEND EXPECTED RISK-FREE EXPECTED
GRANT DATE VALUE YIELD VOLATILITY INTEREST RATE LIVES
- ----------------------------------------------------- ----- -------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C>
December 1995........................................ $5.98 2.4% 35% 5.8% 8
June 1996............................................ 6.89 2.4 35 6.9 8
December 1996........................................ 4.20 3.3 35 6.4 8
</TABLE>

22
<PAGE> 19

- --------------------------------------------------------------------------------

NOTE 17 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
1996
- -------------------------------------
<S> <C> <C> <C> <C>
Net sales............................ $ 184,926 $ 163,704 $ 146,816 $ 132,576
Gross profit......................... 27,186 21,782 15,143 13,075
Operating income..................... 20,805 15,546 8,913 5,771
Net income........................... 10,682 7,773 3,834 1,976
Net income per common share.......... .28 .20 .10 .05
Weighted average number of common
shares............................. 38,670,000 38,670,000 38,670,000 38,670,000
</TABLE>

<TABLE>
<CAPTION>
1995
- -------------------------------------
<S> <C> <C> <C> <C>
Net sales............................ $ 241,647 $ 241,439 $ 220,972 $ 162,964
Gross profit......................... 40,007 62,605 47,173 29,400
Operating income..................... 34,405 56,789 40,593 23,626
Net income........................... 17,961 31,325 22,625 12,491
Net income per common share.......... .46 .81 .59 .32
Weighted average number of common
shares............................. 38,670,000 38,670,000 38,670,000 38,670,000
</TABLE>

23
<PAGE> 20

- --------------------------------------------------------------------------------

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors,
J&L Specialty Steel,
Inc.:

We have audited the accompanying consolidated balance sheets of J&L
Specialty Steel, Inc., a Pennsylvania corporation, and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of J&L Specialty Steel, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

As more fully explained in Note 2 to the consolidated financial statements,
the Company changed from the first-in, first-out to the last-in, first-out
method of determining the cost of its raw material components of inventories as
of January 1, 1994.

/s/ ARTHUR ANDERSEN LLP
---------------------------------
ARTHUR ANDERSEN LLP

Pittsburgh, Pennsylvania,
January 28, 1997

24
<PAGE> 21

- --------------------------------------------------------------------------------

MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL INFORMATION

The accompanying consolidated financial statements of J&L Specialty Steel,
Inc. have been prepared in accordance with generally accepted accounting
principles and include some amounts that are based upon management's best
estimates and judgments. Management has the primary responsibility for the
information contained in the consolidated financial statements and other
sections of this Annual Report.

The Company has a system of internal controls in place to provide
reasonable assurance of the safeguarding of assets and reliability of financial
reporting. Management is aware of the inherent limitations in all systems of
control; however, it believes that through a formal set of procedures and
policies, a structured program of review by local management and an internal
audit program with appropriate management follow-up, the Company has an
effective and responsive system of internal controls.

As part of their audit of the Company's consolidated financial statements,
Arthur Andersen LLP, independent public accountants, considered the Company's
system of internal control to the extent they deemed necessary to determine the
nature, timing and extent of their audit tests. The audit was done in accordance
with generally accepted auditing standards.

The Audit Committee of the Board of Directors is composed of three outside
members. The Audit Committee has the responsibility to make recommendations
concerning the engagement of the independent public accountants, to review with
the independent public accountants the plans and results of the audit
engagement, to review the independence of the independent public accountants, to
consider the range of audit and nonaudit fees and to review the adequacy of the
Company's internal controls. The Audit Committee meets with the independent
public accountants and the Company's internal auditors jointly and separately to
evaluate the controls in place.

/s/ CLAUDE F. KRONK
- ------------------------------------------------------
Claude F. Kronk
Vice Chairman and Chief Executive Officer

/s/ KIRK F. VINCENT
- ------------------------------------------------------
Kirk F. Vincent
Vice President-Finance and Law

/s/ JOSEPH F. BROZICK
- ------------------------------------------------------
Joseph F. Brozick
Controller

25
<PAGE> 22

- --------------------------------------------------------------------------------

J&L Specialty Steel, Inc.

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total sales, net......................... $628,022 $867,022 $711,660 $648,192 $667,451
Operating income......................... 51,035 155,413 108,559 83,671 67,933
Income before extraordinary item and
cumulative effect of accounting
change................................. $ 24,265 $ 84,402 $ 53,575 $ 36,444 $ 19,925
Extraordinary item....................... -- -- -- (4,134)(1) --
Cumulative effect of accounting change... -- -- -- (13,526)(2) --
-------- -------- -------- -------- --------
Net income(3)............................ $ 24,265 $ 84,402 $ 53,575 $ 18,784 $ 19,925
======== ======== ======== ======== ========
PER COMMON SHARE DATA:
Income before extraordinary item and
cumulative effect of accounting
change................................. $ .63 $ 2.18 $ 1.39 $ 1.15 $ .63
Extraordinary item....................... -- -- -- (.13) --
Cumulative effect of accounting change... -- -- -- (.43) --
-------- -------- -------- -------- --------
Net income............................... $ .63 $ 2.18 $ 1.39 $ .59 $ .63
======== ======== ======== ======== ========
Weighted average number of common
shares................................. 38,670,000 38,670,000 38,670,000 31,815,231 31,500,000
Dividends declared on common stock....... $ 15,468 $ 13,921 $ 13,921 $ 23,480 $ 34,000

OTHER DATA:
Tons shipped............................. 306,791 367,030 367,742 331,404 342,202

BALANCE SHEET DATA:
Working capital.......................... $ 68,758 $113,024 $132,949 $108,951 $ 97,574
Property, plant and equipment, net....... 304,721 217,060 138,551 146,736 152,495
Total assets............................. 771,928 753,818 674,361 626,038 664,529
Total debt............................... 176,657 148,022 165,608 200,670 315,731
Shareholders' equity..................... 390,738 380,225 308,028 267,516 177,472
</TABLE>

- ------------
(1) In December 1993, the Company terminated a $120.0 million interest rate swap
agreement scheduled to expire in June 1995. This termination resulted in an
extraordinary charge of $4.1 million.

(2) Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The Company elected to recognize the
cumulative effect of the accounting change by recording a one-time,
after-tax charge to net income of $13.5 million in 1993.

(3) Included in the 1994 results was a $6.6 million after-tax charge for the
adoption of the LIFO inventory accounting method.

26
<PAGE> 23

- --------------------------------------------------------------------------------

STOCK EXCHANGE LISTING

The common stock of J&L Specialty Steel, Inc. is listed on the New York
Stock Exchange under the symbol "JL."

COMMON STOCK DATA
<TABLE>
<CAPTION>
MARKET PRICE RANGES
-------------------------------
<S> <C> <C> <C> <C>
QUARTER 1996 1995
- ------------- ------------ ------------

<CAPTION>
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First........ $18-3/4 $15-5/8 $21 $16-3/4
Second....... 19-1/4 14-3/8 20 17-1/2
Third........ 15-3/8 13-1/8 27-1/4 19-1/8
Fourth....... 14 10-3/4 21-1/4 14-7/8
</TABLE>

A $.09 per share quarterly dividend was paid in 1995. In February 1996, the
quarterly dividend was increased to $.10 per share.

As of March 3, 1997, there were 38,670,000 shares of common stock
outstanding that were held by 230 shareholders of record.

<PAGE> 1

EXHIBIT 22.1

LIST OF SUBSIDIARIES

State or Other
Subsidiary Jurisdiction of Incorporation
---------- -----------------------------

The Midland Terminal Company Pennsylvania

Specialty Materials Investment Corporation Delaware

J&L Specialty Steel Investment Corporation Delaware

J&L Specialty Steel International Sales Corporation U.S. Virgin Islands

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated January 28, 1997 included in
the Company's 1996 Annual Report. It should be noted that we have not audited
any financial statements of the Company subsequent to December 31, 1996, or
performed any audit procedures subsequent to the date of our report.

/s/ ARTHUR ANDERSEN LLP
---------------------------------
ARTHUR ANDERSEN LLP

Pittsburgh, Pennsylvania,
March 27, 1997

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 499
<SECURITIES> 0
<RECEIVABLES> 58,866
<ALLOWANCES> 3,869
<INVENTORY> 143,576
<CURRENT-ASSETS> 213,196
<PP&E> 398,890
<DEPRECIATION> 94,169
<TOTAL-ASSETS> 771,928
<CURRENT-LIABILITIES> 144,438
<BONDS> 170,452
0
0
<COMMON> 387
<OTHER-SE> 390,351
<TOTAL-LIABILITY-AND-EQUITY> 771,928
<SALES> 628,022
<TOTAL-REVENUES> 628,022
<CGS> 527,805
<TOTAL-COSTS> 527,805
<OTHER-EXPENSES> 23,031
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,909
<INCOME-PRETAX> 47,010
<INCOME-TAX> 22,745
<INCOME-CONTINUING> 24,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,265
<EPS-PRIMARY> .63
<EPS-DILUTED> .63

</TABLE>