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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended September 30, 2004

or

For the Transition Period from              to             

Commission file number 1-31926

INTERNATIONAL STEEL GROUP INC.

(Exact Name of Registrant as Specified in Its Charter)

(330) 659-9100

(Registrant’s telephone number including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares of Common Stock, par value $0.01 per share, outstanding as of October 29, 2004: 100,027,950

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PART I

ITEM 1. FINANCIAL STATEMENTS

INTERNATIONAL STEEL GROUP INC.

Consolidated Statements of Operations

(Unaudited)

(Dollars in millions, except per share data)

See accompanying notes to consolidated financial statements.

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INTERNATIONAL STEEL GROUP INC.

Consolidated Balance Sheets

September 30, 2004 and December 31, 2003

(Dollars in millions, except share data)

See accompanying notes to consolidated financial statements.

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INTERNATIONAL STEEL GROUP INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in millions)

See accompanying notes to consolidated financial statements.

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INTERNATIONAL STEEL GROUP INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars and shares in millions, except per share data)

These interim financial statements are unaudited and include only selected notes. They do not contain all information required for annual statements under accounting principles generally accepted in the United States of America and should be read together with the audited financial statements in ISG’s Annual Report on Form 10-K for the year ended December 31, 2003 and all other reports on file with the Securities and Exchange Commission during the year 2004. In the opinion of management, these interim financial statements reflect all adjustments that are necessary to fairly present the results for the interim periods presented.

ISG acquired a hot briquetted iron (HBI) facility located in Point Lisas, Trinidad and Tobago in July 2004. The facility was idle when purchased. ISG acquired substantially all the assets and assumed certain liabilities of Georgetown Steel Company in June 2004, Weirton Steel Corporation in May 2004, and Bethlehem Steel Corporation in May 2003. These three companies were in bankruptcy proceedings at the purchase date. The results of their operations have been included in ISG’s consolidated financial statements since the dates of acquisition.

The amounts recorded for the net assets acquired follow:

The amounts assigned to the HBI, Weirton, and Georgetown assets and liabilities are preliminary and could change as more information as to values is obtained.

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INTERNATIONAL STEEL GROUP INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars and shares in millions, except per share data)

The following unaudited pro forma consolidated information includes the results of operations of the Bethlehem and Weirton acquisitions as if they had been consummated on January 1, 2003, including the effects of the new labor agreement as it pertains to the former Bethlehem facilities and the financings incurred to fund the Bethlehem acquisition. Georgetown was winding down operations during 2003, ceased operations in October 2003 and is not expected to resume full operations until early 2005. The HBI facility ceased operations in 2001 and is expected to restart operations during the fourth quarter 2004. Accordingly, the following pro forma information does not include any amounts related to the Georgetown and HBI operations, is based on historical information and does not necessarily reflect the actual results that would have occurred.

(3) Inventories

Inventories are stated at the lower of cost or market. Cost was determined using the last-in, first-out (LIFO) method of accounting for about 20% of inventories at December 31, 2003 and the balance, principally the inventories at the former Bethlehem facilities, was determined using the first-in, first-out (FIFO) or average cost method.

Effective January 1, 2004, we changed to the LIFO cost method of accounting for substantially all existing inventories and we reduced the number of pools from a pool for each manufacturing facility to a single pool. We believe that the LIFO method of valuing inventories is preferable because it more closely matches current costs and revenues in periods of increasing costs. We believe that a single method and a single pool for substantially all inventories is preferable because, in order to further achieve the operating synergies from our acquisitions, we are reallocating the supply of semi-finished materials to our finishing facilities among our steel producing facilities and are reallocating the sources of certain raw materials among our steel producing facilities in order to improve operating efficiencies. Having a single LIFO pool for substantially all inventories eliminates the potential for changes in inventory value solely because of this movement of inventory among manufacturing facilities.

Because of significant raw material cost increases in the first quarter 2004, we changed our interim accounting for LIFO effective January 1, 2004, from an allocation of the projected annual LIFO provision ratably over the year to an estimated year-to-date calculation. We believe that the year-to-date calculation method is preferable because it more closely matches current costs with revenues in interim periods of rapidly rising costs.

Consistent with the accounting for inventories at the Bethlehem operations during 2003, we are accounting for inventories at HBI, Weirton and Georgetown, which total about $237.9 at September 30, 2004, under the FIFO or average cost method during 2004. We expect to include these inventories in the single LIFO pool beginning January 1, 2005.

The total LIFO provision for the third quarter and nine months ended September 30, 2004 was about $24.1 and $310.4. Because of the volatility of raw material costs during 2004, it is not possible to estimate the effect of the accounting changes mentioned above on interim 2004 results.

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INTERNATIONAL STEEL GROUP INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars and shares in millions, except per share data)

The components of inventories follow:

(4) Income Taxes

At December 31, 2003, we recorded a full valuation allowance for our net deferred tax asset as discussed below. As a result, our provision for income taxes will typically reflect the amounts we expect to pay or recover for the year until we reduce the valuation allowance. Based on our pre-tax income to date and forecasted pre-tax income for the year 2004, we expect to pay income taxes for the year after recognizing temporary differences that arise during the year, the benefit of the net operating loss (NOL) carryforward arising in 2003 and the benefit of NOL carryforwards available for the year from the Bethlehem acquisition. In addition, generally accepted accounting principles require that we recognize in 2004 the benefit of temporary differences, principally depreciation, that are expected to be available in 2005 and 2006 to carryback against the current income taxes paid for 2004. The net effect of all these items results in an estimated effective income tax rate for 2004 of about 17.1%. Our strong results in the third quarter 2004 due principally to higher realized prices and expected performance in the fourth quarter caused the effective tax rate for 2004 to increase to our current estimate of 17.1% from the 8.9% used in the first half 2004. As a result, the effective tax rate for the third quarter 2004 is 21.6% in order to bring the effective tax rate for nine months ended September 2004 to the 17.1% estimated full year rate.

The acquisition of the Bethlehem assets was structured as a tax-free reorganization under Internal Revenue Code (IRC) Section 368(a)(1)(G). As a result, the historic tax attributes of Bethlehem are carried over to the ISG consolidated federal income tax return. These tax attributes are composed principally of NOL carryforwards, alternative minimum tax (AMT) credit carryforwards and temporary differences related to the tax basis of property, plant and equipment. The net deferred tax assets acquired related to these tax attributes were not recognized at the date of acquisition because there were a number of required actions related to, among other matters, Bethlehem’s plan of liquidation under federal bankruptcy law. During the fourth quarter of 2003, among other events, the Bankruptcy Court confirmed Bethlehem’s plan of liquidation, which subsequently became effective on December 31, 2003. Accordingly, in the fourth quarter of 2003, we determined that it was appropriate to recognize the acquired net deferred tax assets and any related valuation allowance.

SFAS No. 109, Accounting for Income Taxes, requires that we record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of sufficient future taxable income during periods in which those temporary differences become deductible and before the expiration of the NOL carryforwards. Because of ISG’s two-year existence, limited financial performance and cumulative tax loss from inception, it was management’s judgment at December 31, 2003, that SFAS No. 109 required recording a full valuation allowance for the net deferred tax asset. That resulted in a $5.3 provision for deferred income taxes for the fourth quarter and year 2003 to provide a full valuation allowance on the previously recorded net deferred tax asset. Generally accepted accounting principles require that we recognize any tax benefits of the Bethlehem acquisition realized in 2003 through the income statement only after writing off any remaining intangible assets acquired from Bethlehem. Accordingly, in the fourth quarter of 2003, we wrote off $15.2 of intangible assets as a provision for deferred income taxes bringing the total provision for deferred taxes in the fourth quarter and year 2003 to $20.5.

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INTERNATIONAL STEEL GROUP INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars and shares in millions, except per share data)

(5) Income (Loss) per Share

The following table presents calculations of income (loss) per share of common stock:

(6) Pension and Other Postretirement Benefit Plans

Under certain of ISG’s labor agreements with the United Steelworkers of America (USWA), ISG has a defined benefit retiree medical and death benefit plan (Plan) covering USWA employees who are eligible to retire under the current labor agreements. ISG does not intend to provide similar retiree medical benefits for employees who retire after the current labor agreement expires in 2008. ISG is not required to pre-fund any benefits and expects any benefits to be paid in 2004 to be minimal.

In the Bethlehem acquisition, ISG acquired a 62.3% interest in Hibbing Taconite Company (Hibbing), an iron ore mining joint venture. Hibbing is consolidated on a pro rata basis in ISG’s consolidated financial statements because ISG does not have voting control of Hibbing, owns an undivided interest in each asset and is proportionately liable for its share of each liability. Hibbing maintains a noncontributory defined benefit pension plan for hourly and salary employees with benefits based on years of service and compensation. Hibbing funds the pension plan within statutory guidelines and our share of expected 2004 funding is $3.2. Hibbing also provides retiree medical and death benefits to most full-time employees with 30 years of service or employees who are 60 years of age with 15 years of service.

The net periodic postretirement benefit costs for the plan for USWA employees at our steel plants presented below do not reflect the effects of the recently passed legislation “Medicare Prescription Drug, Improvement and Modernization Act of 2003” (Act). Detailed regulations necessary to implement the Act have not been issued. Accordingly, we have not been able to determine if the Plan meets the actuarial equivalent requirement of the Act or if we will modify the Plan. However, because the Plan requires that the Plan beneficiaries pay premiums beginning in 2011 to cover any cost per capita increases after 2008, the Act is not likely to have any significant effect on our accumulated postretirement benefit obligation nor our future net periodic benefit costs. The net periodic postretirement benefit costs for Hibbing employees does reflect lower costs as a result of the passage of this legislation. The impact on our postretirement benefit costs and our accumulated post retirement obligation was not material.

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INTERNATIONAL STEEL GROUP INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars and shares in millions, except per share data)

The components of net periodic pension and other postemployment benefits costs for the third quarter and nine months ended 2004 and 2003 follow:

(7) Contingencies

ISG is subject to various legal actions and contingencies in the normal course of conducting business. ISG accrues liabilities for such matters when a loss is likely and the amount can be reasonably estimated. The effect of the ultimate outcome of these matters on future results of operations and liquidity cannot be predicted with any certainty. While the resolution of these matters may have a material effect on the results of operations of a particular future quarter or year, we believe that the ultimate resolution of such matters in excess of liabilities recorded will not have a material adverse effect on our competitive position or financial position.

ISG is subject to changing and increasingly stringent environmental laws and regulations concerning air emissions, water discharges and waste disposal, as well as certain remediation activities that involve the clean up of environmental media such as soils and groundwater. If, in the future, ISG is required to investigate and remediate any currently unknown contamination and wastes at plant sites, ISG could be required to record additional liabilities.

Environmental liabilities acquired in business combinations are recorded at their estimated fair value based on their estimated net present value determined using a market discount rate.

The table below represents changes in the amounts recorded for environmental liabilities:

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INTERNATIONAL STEEL GROUP INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars and shares in millions, except per share data)

(8) Stockholders’ Equity

During the nine months ended September 2004, we issued 3,171,530 shares of common stock upon exercise of employee stock options and purchased 641,089 shares of common stock currently held in treasury.

(9) Other Comprehensive Income

The table below shows the components of comprehensive income for the nine months ended September 30, 2004:

(10) Subsequent Event

On October 25, 2004, International Steel Group Inc. (ISG) entered into a merger agreement with Ispat International N.V. (Ispat) and an Ispat subsidiary providing for a merger of ISG and the Ispat subsidiary. At the effective time of the merger, ISG stockholders will be entitled to receive in exchange for each ISG common share either (1) $42.00 in cash, (2) a number of Ispat Class A common shares equal to $42.00 divided by the average closing price for Ispat shares on the New York Stock Exchange for the 20 trading days ending two days prior to the effective time of the merger, up to a maximum of 1.21740 Ispat shares and a minimum of 0.95865 Ispat shares, or (3) a combination of $42.00 in cash and Ispat shares at the applicable exchange ratio.

The merger is subject to the completion of the acquisition of LNM Holdings N.V. by Ispat, approval by the stockholders of ISG and Ispat, regulatory approval and satisfaction of customary conditions. The merger is expected to be completed by the end of the first quarter of 2005.

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

FORWARD-LOOKING STATEMENTS

ISG and its representatives may from time to time make forward-looking statements in reports filed with the Securities and Exchange Commission, reports to stockholders, press releases, other written documents and oral presentations. These forward-looking statements may be identified by the use of predictive, future-tense or forward-looking terminology, such as “believes,” “anticipates,” “expects,” “estimates,” “intends,” “may,” “will” or similar terms. These statements speak only as of the date of such statements and ISG will undertake no ongoing obligation, other than that imposed by law, to update these statements. These statements appear in a number of places in this report and include statements regarding ISG’s intent, belief or current expectations of its directors, officers or advisors with respect to, among other things:

Any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and actual results may differ materially from those contained in the forward-looking statements as a result of various factors, some of which are unknown. The factors that could adversely affect ISG’s actual results and performance include, without limitation:

Consolidated Results of Operations for the Third Quarter and Nine Months Ended September 2004 and 2003

The discussion below relates to the results of ISG for the third quarter and nine months ended September 2004 and 2003. In May 2003, we acquired substantially all the assets of the Bethlehem Steel Corporation. The Bethlehem acquisition more than doubled our shipping capacity, substantially broadened our product mix with the addition of plate, tin and rail products, and improved our product mix by increasing the percentage of higher value-added cold rolled and coated products. In May 2004, we acquired substantially all the assets of the Weirton Steel Corporation. The Weirton acquisition is expected to increase our annual shipment capacity by about 12% - 15%. Accordingly, our financial results for the third quarter and nine months ended 2004 are not comparable to our results for the similar periods in 2003.

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The table below shows shipments by product and certain other data for the periods shown. Pro forma information reflects the acquisitions of the Bethlehem and Weirton assets as if they had occurred on January 1, 2003. The pro forma information does not include any information related to the HBI and Georgetown acquisitions because they had previously ceased operations.

For the third quarter 2004, we reported net income of $256.4 million on net sales of $2,608.3 million and shipments of 4,039,000 net tons, compared to a net loss of $18.6 million on net sales of $1,184.9 million and shipments of 2,916,000 net tons in the third quarter 2003. The increase in shipments reflects an improvement in the steel market and our increased shipment capability resulting from the Weirton and Georgetown acquisitions. Those acquisitions contributed about 40% of the increased shipments in the third quarter 2004 over the comparable period in 2003. Our average net sales per ton shipped was $646 for the third quarter 2004 compared to $406 in the third quarter 2003. Realized prices were significantly higher as a result of strong demand for steel products globally allowing the domestic industry to implement price increases, including surcharges, to offset higher raw material costs.

For the nine months ended September 30, 2004, we reported net income of $421.4 million on net sales of $6,462.4 million and shipments of 11,715,000 net tons, compared to a net loss of $48.4 million on net sales of $2,651.7 million and shipments of 6,905,000 net tons for the nine months ended September 27, 2003. The Bethlehem, Weirton and Georgetown acquisitions contributed the majority of the increased shipments in 2004 compared to 2003. Our average net sales per ton shipped were $552 in 2004 compared to $384 in 2003. Prices were higher as a result of strong demand and the industry’s implementation of price increases, including surcharges, to offset higher raw material costs.

Cost of sales for the third quarter and nine months ended September 2004 were about 83% and 87% of net sales compared to 95% and 97% in the comparable 2003 periods reflecting the benefits of higher average selling prices and higher operating rates. During 2004, the cost of raw materials such as coke, scrap and iron ore have increased significantly. Employment costs were also higher as a 3% wage increase for our employees represented by the United Steelworkers of America (USWA) was effective at the beginning of the second quarter 2004, production payments are higher and variable compensation including profit sharing for all employees and contributions to the USWA VEBA welfare benefit trust was significantly higher in 2004.

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Inventory cost was determined using the last-in, first-out (LIFO) method of accounting for about 20% of inventories at December 31, 2003 and the balance, principally the inventories at the former Bethlehem facilities, was determined using the first-in, first-out (FIFO) or average cost method. Effective January 1, 2004, we changed to the LIFO cost method of accounting for substantially all existing inventories and reduced the number of pools from a pool for each manufacturing facility to a single pool. We believe that the LIFO method of valuing inventories is preferable because it more closely matches current costs and revenues in periods of increasing costs. We believe that a single method and a single pool for substantially all inventories is preferable because, in order to further achieve the operating synergies from our acquisitions, we are reallocating the supply of semi-finished materials to our finishing facilities among our steel producing facilities and are reallocating the sources of certain raw materials among our steel producing facilities in order to improve operating efficiencies. Having a single LIFO pool for substantially all inventories eliminates the potential for changes in inventory value solely because of this movement of inventory among manufacturing facilities.

Because of significant raw material cost increases in the first quarter 2004, we changed our interim accounting for LIFO effective January 1, 2004, from an allocation of the projected annual LIFO provision ratably over the year to an estimated year-to-date calculation. We believe that the year-to-date calculation method is preferable because it more closely matches current costs with revenues in interim periods of rapidly rising costs. Consistent with the accounting for inventories at the Bethlehem operations during 2003, we are accounting for the inventories at HBI, Weirton and Georgetown, which totaled about $237.9 million at September 30, 2004, under the FIFO or average cost method during 2004. We expect to include these inventories in the single LIFO pool beginning January 1, 2005.

The LIFO provision for the third quarter and nine months ended September 2004 was about $24.1 million and $310.4 million driven principally by the significant increases in the cost of coke purchased in the international markets and scrap, iron ore and other metallics. Because of the volatility of raw material costs expected for the remainder of 2004, it is not possible to estimate the effect of the accounting changes mentioned above on interim 2004 results.

Net financing expense for the nine months ended September 2004 increased from the comparable period in 2003 because of higher average debt outstanding in 2004, including the $600 million 6.5% Senior Notes due 2014 issued in April 2004.

At December 31, 2003, we had recorded a full valuation allowance for our net deferred tax asset as discussed in our Annual Report on Form 10-K for the year ended December 31, 2003. As a result, our provision for income taxes will typically reflect the amounts we expect to pay or recover for the year until we reduce the valuation allowance. Based on our nine months ended September 2004 pretax income and forecasted pretax income for the year 2004, we expect to pay income taxes for the year after recognizing temporary differences that arise during the year, the benefit of the net operating loss (NOL) carryforward arising in 2003 and the benefit of NOL carryforwards available from the Bethlehem acquisition. In addition, generally accepted accounting principles require that we recognize in 2004 the benefit of temporary differences, principally depreciation, that are expected to be available in 2005 and 2006 to carryback against the current income taxes paid for 2004. The net effect of all these items results in an estimated effective income tax rate for 2004 of about 17.1% compared to a normally expected rate of about 40% for federal and state income taxes. Our strong results in the third quarter due to higher realized prices and expected performance in the fourth quarter caused the effective tax rate to increase to our current estimate of 17.1% from the 8.9% used in the first half 2004. As a result, the effective tax rate for the third quarter 2004 is 21.6% in order to bring the nine months ended September 2004 effective tax rate to the 17.1% estimated full year 2004 rate.

SFAS No. 109, Accounting for Income Taxes, requires that we record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of sufficient future taxable income during periods in which those temporary differences become deductible and before the expiration of the NOL carryforwards. Because of ISG’s two-year existence, limited financial performance and cumulative tax loss from inception, it was management’s judgment at December 31, 2003, that SFAS No. 109 required recording a full valuation allowance for the net deferred tax asset. That resulted in a $5.3 million provision for deferred income taxes for the fourth quarter and year 2003 to provide a full valuation allowance on the previously recorded net deferred tax asset. Generally

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accepted accounting principles require that we recognize any tax benefits of the Bethlehem acquisition realized in 2003 through the income statement only after writing off any remaining intangible assets acquired from Bethlehem. Accordingly, in the fourth quarter of 2003, we wrote off $15.2 million of intangible assets as a provision for deferred income taxes bringing the total provision for deferred taxes in the fourth quarter and year 2003 to $20.5 million.

Liquidity and Cash Flow

We define liquidity as our cash position and remaining availability under our revolving credit facility. At September 30, 2004, we had liquidity of $828.4 million consisting of cash of $603.7 million and available borrowing capacity of $224.7 million under our revolving credit facility. As of December 31, 2003, we had liquidity of $432.7 million. We believe that our liquidity will be adequate to meet our obligations for the foreseeable future.

Cash provided by operating activities for the nine months ended September 2004 was $568.7 million. Receivables were higher as a result of higher sales in the current period. Inventory quantities for coke, ore and scrap increased during 2004 to support our expected increased shipments partly due to the 2004 acquisitions. Higher prices for raw materials accounted for under the FIFO or average cost method since acquisition also used cash during 2004. We also made advances to secure certain coke in the international market, increasing our prepaid and other current assets during the nine months ended September 2004. Higher prices for raw materials also resulted in higher accounts payable at September 30, 2004. Our accruals for profit sharing and VEBA to be paid in the fourth quarter exceeded our contributions to the USWA pension plan and we continued to make payments under our transition assistance program with the USWA. Cash provided by operations for the nine months ended September 2003 was $224.5 million principally from lower inventories as we processed and shipped semi-finished inventories acquired in late 2002.

During 2004, we acquired a hot briquetted iron (HBI) facility in Point Lisas, Trinidad and Tobago and substantially all of the assets of Weirton Steel Corporation and Georgetown Steel Corporation for a total of about $222 million cash plus assumed liabilities. In May 2003, we acquired substantially all of the assets of Bethlehem Steel Corporation for about $851 million net cash paid through September 2003 plus assumed liabilities.

The amounts recorded for the net assets acquired follows: