SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE FISCAL YEAR ENDED JULY 31, 1998

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

FOR TRANSITION PERIOD FROM ___________ TO ___________

COMMISSION FILE NUMBER 0-21556

NORTHWESTERN STEEL AND WIRE COMPANY
(Exact name of registrant as specified in its charter)

ILLINOIS 36-1562920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

121 WALLACE STREET
STERLING, ILLINOIS 61081
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code
815/625-2500 Securities registered pursuant to
Section 12(b) of the Act:

NAME OF EACH EXCHANGE

TITLE OF EACH CLASS ON WHICH REGISTERED
None None

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.01 PAR VALUE
9 1/2% SENIOR NOTES DUE 2001

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 and 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 (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K of any amendment to this Form 10-K. [x]

On October 23, 1998 the aggregate market value of the Registrant's voting
stock held by non-affiliates of the Registrant: $26.6 million

On October 23, 1998, a total of 24,905,424 Common Stock, par value $0.01
per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated herein by reference in the
respective Parts hereof indicated:

None

PART I

ITEM 1. BUSINESS

GENERAL

Founded in 1879, the Company is a major mini-mill producer of structural
steel products and rod and wire products. In contrast to integrated mills which
produce steel from coke and iron ore through the use of blast furnaces and basic
oxygen furnaces, mini-mills use electric arc furnaces to melt steel scrap and
cast the resulting molten steel into long strands of various shapes in a
continuous casting process. The Company's steel products include wide flange
beams, light structural shapes, merchant bars and semi-finished steel. On
October 7, 1998, the Company announced the exit of the majority of its wire
products business by the end of calendar 1998. The remaining rod and wire
products include concrete reinforcing mesh, manufacturer's wire and cut rod
products. The Company is ceasing production of its agricultural, nail and lawn
and garden product lines.

The Company pioneered the use of electric arc furnaces for steelmaking,
installing its first electric arc furnace in 1936. The Company's two 400-ton
electric arc furnaces are among the world's largest.

The Company's operations are located in Sterling, Illinois (the "Sterling
Operations") and Hickman, Kentucky (the "Kentucky Facility"). The Sterling
Operations consist primarily of a melt shop with two 400-ton electric arc
furnaces with an annual scrap melting capacity in excess of 1.6 million tons,
two ladle metallurgical furnaces, two continuous casters, three rolling and
finishing mills and the Company's wire operations. The Kentucky Facility is the
Company's newest operation which produces concrete reinforcing mesh. The
Company's continuous casters have sufficient capacity to cast semi-finished
steel for all of the Company's rolling and finishing mills.

In July 1997, the Company closed a rolling mill in Houston, Texas which
produced wide flange beams. On July 24, 1998, the Company signed a letter of
intent to sell the Houston facility including the land and buildings in exchange
for cash.

RISK FACTORS

The Company is facing increasing competition, in both the domestic and
foreign markets, and has significant future debt service obligations. The
effects of these factors are described under Item 1. Business-Competition and
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - First Quarter Fiscal 1999 and - Liquidity, Capital Resources and
Outlook.

OPERATIONS

The Company's operations constitute one line of business with several
classes of products. Operations are divided into the Steel Products Group and
the Rod and Wire Products Group.

The Steel Products Group produces raw steel using the electric arc furnace
process. Semi-finished steel is made by continuous casting into billets and
blooms. Recent improvements in the melt shop operations include a second ladle
metallurgical station, a higher voltage transformer to reduce the time needed to
produce a ton of steel, new ladle transfer cars and improved furnace controls.

Finished products are rolled from the semi-finished steel through a series
of reduction mill processes. Such products include wide flange beams, channel
and angle products and merchant bar and bar shapes, which are sold nationally to
steel fabricators, distributors and original equipment manufacturers, including
industrial and agricultural machinery manufacturers. The Company sells its
output principally through Company personnel and independent sales agents to
customers located throughout the United States. In addition, semi-finished
products are sold to other steel producers. Recent improvements in the finishing
mills have included upgrades of mill stands and reheat furnaces.

The Rod and Wire Products Group produces rods for use in drawing to various
wire gauges and other fabricated wire products for shipments to the construction
industry. In addition, rods are sold to other wire manufacturers. Recent capital
improvements include construction of a high-speed reinforcing mesh facility in
Hickman, Kentucky.

CUSTOMERS AND MARKETS

Structural steel products are used in a variety of commercial, industrial
and residential construction applications, as well as infrastructure projects,
such as roads and bridges, and public sector construction, such as schools and
hospitals. In construction applications, structural steel products are used as
beams, columns and girders which form the support structure of a building. In
infrastructure construction, structural forms are combined to form bridge
trusses and vertical highway supports. Original equipment manufacturers use
light structural shapes in the fabrication of heavy equipment.

In recent years, 40% - 50% of the Company's steel rod production has been
utilized in the manufacture of the Company's rod and wire products, while the
remaining rod production was sold to other manufacturers of wire products. With
the Company's decision to exit the majority of its wire products business by the
end of calendar 1998, the Company intends to market a correspondingly greater
amount of rod to external rod markets although there can be no assurance as to
selling price and over what time-frame this will be realized. The Company sells
its rod and cut rod products largely to the construction industry in the upper
Midwest region of the United States. Manufacturers' wire is sold directly to
manufacturers of a variety of products, such as fan guards, automotive door
rods, shopping carts and dishwasher baskets.

The Company addresses the needs of its markets through enhanced customer
focus achieved through a variety of initiatives. These initiatives include
dedicated market sector sales groups, customer-direct computer access, on-time
delivery improvement programs and customer-friendly production cycles.

RAW MATERIALS

The Company's major raw material is steel scrap, which is generated
principally from industrial, automotive, demolition and railroad sources and is
purchased by the Company in the open market through a number of scrap brokers
and dealers or by direct purchase. The cost of scrap is subject to market forces
including demand by other steel producers for comparable grades of scrap. The
cost of scrap to the Company can vary significantly, and product prices
generally cannot be adjusted in the short-term to recover large increases in
steel scrap costs. Over longer periods of time, however, product prices and
scrap prices have tended to move in the same direction.

The long term demand for ferrous scrap and its importance to the domestic
steel industry can be expected to increase as steelmakers continue to expand
scrap-based electric furnace capacity. For the foreseeable future, however, the
Company believes that supplies of scrap grades used in its operations will
continue to be available in sufficient quantities.

ENERGY

Steelmaking is an electricity-intensive industry. Historically, the Company
has been adequately supplied with electricity and does not anticipate any
curtailment in its operations resulting from energy shortages. The Company's
second largest source of energy is natural gas. Historically, the Company has
been adequately supplied with natural gas and an adequate supply is expected to
be available in the future.

COMPETITION

The Company competes with a number of domestic minimills and steel imports.
The Company does not compete against any integrated steel producers, nor does it
participate in the flat rolled steel market. In the Company's medium and heavy
structural product range, the Company believes its principal competitors are
Nucor-Yamato Steel Company and Chaparral Steel Company. In the light structural
shape market, a number of domestic minimills compete with the Company, including
Bayou Steel Corp., Birmingham Steel, Chaparral Steel, North Star Steel Co. and
Nucor Corporation. With the strength of the U. S. dollar and a relatively strong
U. S. economy compared to other countries, foreign exports of steel into the
United States have increased dramatically throughout calendar 1998. Import
levels for the first six months of calendar 1998 have exceeded the total imports
for all of calendar 1997 by 50% and estimated import levels for all of calendar
1998 are anticipated to exceed historic records. Significant import levels of
steel into the United States are expected for the foreseeable future with
continued downward pressure on pricing.

During 1998, competitors of the Company began construction of three new
structural steel mills. These mills are expected to add up to as much as 1.9
million tons of capacity by the end of calendar 1999 across a broad range of
structural products, many of which are currently produced by the Company.
Additionally, a potential new competitor to the Company, Steel Dynamics Inc.,
has announced its intention to build a new structural rolling mill in Indiana
which if built, would add an additional 900,000 tons of new capacity. In
contrast to the Company's mills which were installed 20 or more years ago, these
new mills will be modern, state-of-the-art operations with lower costs than the
Company's (including lower labor costs associated with their non-union labor
force). Moreover, if the Steel Dynamics mill is built, it will erode the freight
advantage the Company presently enjoys with its Midwest customers. The effects
of this additional competition are described

under Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - First Quarter Fiscal 1999 and - Liquidity, Capital
Resources and Outlook.

The market for rod and wire products in which the Company competes is
generally confined to the Midwest region of the United States in which the
Sterling Operations are located. This confinement results from significant
foreign exports of rod into the other regions of the United States and the
relatively high freight costs as compared to product values on wire products.
The Company's competitors in the rod market include G.S.T., Rocky Mountain Steel
L.P., Keystone Steel & Wire Co. ("Keystone") and North Star Steel Co.

BACKLOG

As of September 30, 1998, order backlog, all of which is expected to be
filled in fiscal 1999, totaled approximately $71 million compared with
approximately $99 million as of September 30, 1997. The change in order backlog
is primarily in the Company's rod, structural and semi-finished products. The
Company believes that the decrease in order backlog reflects additional market
supply for structural and rod products due to significant increases in foreign
exports of steel into the United States and weaker demand for the Company's
semi-finished products due to deteriorating steel markets.

SALES BY DIVISION

During the fiscal years ended July 31, 1998, 1997 and 1996 no single
customer accounted for more than 10% of total dollar net sales. Sales to the
Company's ten largest customers accounted for approximately 31% of total net
sales in fiscal 1998. Total foreign sales accounted for approximately 1% of
total fiscal 1998 net sales.

For the fiscal years indicated below, the approximate percentage of net
sales contributed by each class of similar products is as follows:

1998 1997 1996
---- ---- ----

Steel Products Group
Structural 42.5% 51.2% 59.3%
Merchant bar 13.0 9.1 8.2
Semi-finished 12.1 7.8 5.0
----- ----- -----
67.6 68.1 72.5
----- ----- -----

Rod and Wire Products Group
Wire Products 17.9 18.3 17.7
Rod 14.5 13.6 9.8
----- ----- -----
32.4 31.9 27.5
----- ----- -----

Total 100.0% 100.0% 100.0%
===== ===== =====

EMPLOYEES

As of July 31, 1998, there were approximately 2,000 active employees of the
Company, approximately 1,650 of which are members of four collective bargaining
units. The majority are members affiliated with the United Steelworkers of
America ("USWA"), and the remainder represented by one local union affiliated
with the United Plant Guard Workers of America and one local union affiliated
with the International Brotherhood of Teamsters. The Company is party to
collective bargaining agreements with the USWA with respect to employees in
Sterling and Rock Falls, Illinois, which agreements expire on August 1, 2000.
Certain employees at the Hickman, Kentucky facility are also represented by the
USWA under a collective bargaining agreement that expires January 1, 2001. The
two remaining bargaining units are party to collective bargaining agreements
with the Company, of which the United Plant Guard expires in fiscal 2000 and the
Teamsters expires in fiscal 2001.

With the Company's announcement on October 7, 1998 to exit the majority of
its wire products business by the end of calendar 1998, approximately 400
employees of the Company will be affected through retirement, layoff or
severance. Pursuant to the terms of the labor agreement, the Company has
notified the USWA of this decision and WARN notification has been given to the
effected employees.

ENVIRONMENTAL COMPLIANCE

Based on continuing review of applicable regulatory requirements by the
Company's internal environmental compliance officer and advice from independent
consultants, the Company believes that it is currently in substantial compliance
with applicable environmental requirements, except as described below.
Nevertheless, as is the case with steel producers in general, if a release of
hazardous substances located on the Company's property occurs, the Company may
be held liable and may be required to pay the cost of remedying the condition.
The amount of any such liability and remedial cost could be material.

The Company possesses air emission permits for all major operations. New
rules to be adopted under amendments to the 1990 Clean Air Act ("CAA") may
impose significantly stricter air emissions standards on the Company. The
Company has applied for an air permit under Title V of the CAA. Because
regulations applicable to the Company's operations have not yet been promulgated
under the CAA, the Company cannot at this time determine the cost to comply with
the new regulations. Because these standards will also apply to the Company's
domestic competitors, they should not materially affect the Company's
competitive position.

The Company has been cited by the United States Environmental Protection
Agency ("USEPA") for alleged violations of clean air standards and other
requirements at its Sterling furnace operations. On October 22, 1997, the
Company was notified by the U. S. Department of Justice ("DOJ") that it intended
to file suit against the Company for alleged violations of the CAA. The Company
has agreed to settle this claim pending final approval. The agreement, if
approved, would require the Company to pay a civil penalty of approximately
$600,000 and achieve and maintain compliance with the CAA through future capital
expenditures that the Company anticipates to range between $5.0 and $7.0
million. Additionally, the Company would also undertake several Supplementary
Environmental Projects that could total $1.0 million in capital expenditures.

The Resource Conservation and Recovery Act ("RCRA") regulates the disposal
of emission control sludge/dust from electric arc furnaces ("K061"), a waste
stream generated in significant quantities at the Sterling Operations. The
Company is complying with RCRA with respect to K061 by using a third party to
chemically stabilize this waste before its disposal. Fiscal 1998 expenses in
connection with such services were approximately $4.4 million. This chemical
stabilization process allows the Company to use the fully permitted hazardous
waste landfill at the Sterling Operations for disposal of the stabilized K061.

In 1994, the Company received a modification to its Part B RCRA permit from
the Illinois EPA to allow an expansion to its hazardous waste landfill. The
Company currently estimates a cost of $3.1 million to close its hazardous waste
disposal site in 2008, of which $2.0 million has been accrued to date. The
Company also operates an on-site non-hazardous waste landfill which it expects
to operate for several years.

The Company has occasionally exceeded the limits of its wastewater
discharge permit at its Sterling Operations. The Company believes that modified
operating procedures and certain equipment upgrades have eliminated the waste
water discharge concerns of the State of Illinois and the EPA.

In November 1996, the USEPA issued a notice of a multi-media (air, water
and land) compliance review of all electric arc furnace steel mills in a six
state area, including Illinois. The USEPA conducted an inspection at the
Company's Sterling operations in July 1997. As a result of this inspection, in
August 1998, the USEPA proposed an immaterial civil penalty for hazardous waste
and PCB (polychlorinated biphenyl) storage and paperwork violations. The Company
is negotiating the amount of the penalty and has agreed to clean the area in
question for the alleged hazardous waste violation. These costs are not expected
to be material.

The Company has been identified by the Illinois Environmental Protection
Agency (IEPA) as one of the potentially responsible parties for costs associated
with a third party owned disposal site. The IEPA is likely to seek compensation
from the Company as an alleged waste generator for recovery of past costs and
future remediation of the waste site. Under Illinois law, the Company's share of
liability can be limited to its proportionate share based upon causation of the
total cost of the site. Based on data available, the Company believes its share
will be a smaller fraction of the total site clean up costs, however no
reasonable estimation of total cost for remediation can be made at this time.

PATENTS AND TRADEMARKS

The Company holds no patents, trademarks, licenses, franchises or
concessions of material importance to its business.

ENTERPRISE ZONE DESIGNATION

In 1988, the Company's property was designated to be within an Illinois
Enterprise Zone ("Enterprise Zone") by the Illinois Department of Commerce and
Community Affairs. The primary benefit to the Company of operating within an
Enterprise Zone is the receipt of a state utility tax exemption on gas and
electricity as well as an exemption on the Illinois Commerce Commission's
administrative charge on these utilities. The Company has been able to
demonstrate sufficient capital spending and thus is entitled to the utility tax
exemption through July 31, 2003. This utility tax exemption is expected to save
the Company approximately $2.0 million to $2.5 million per year through July 31,
2003.

An additional benefit to the Company of operating within the Enterprise
Zone is the receipt of a state sales tax exemption on the purchase of consumable
manufacturing supplies. Eligibility for the sales tax exemption was contingent
upon the Company making a $40 million investment that causes the retention of
2,000 full time jobs in Illinois. The Company has been able to demonstrate
sufficient capital spending and thus has utilized the sales tax exemption to
date. With the Company's anticipated reduction of approximately 400 employees
resulting from the exit of the majority of its wire products business, the
Company will no longer be eligible for this sales tax exemption. This sales tax
exemption saved the Company approximately $300,000 to $400,000 per year.

ITEM 2. PROPERTIES

The executive offices of the Company and its steel producing facilities,
designated as Plants 1, 2, 3, 5, and 6, are located on approximately 596 acres
of land along the Rock River in Sterling, Illinois, and Plant 4 is on 8 acres of
land located directly across the river in Rock Falls, Illinois. The Kentucky
Facility is located on approximately 60 acres of land in Hickman, Kentucky.

Plant 1, comprising 641,081 square feet of floor space, consists of a wire
mill with equipment for drawing, galvanizing and annealing wire, and machinery
for manufacturing fence, netting, nails and other wire products. It is
anticipated that a significant portion of this facility will be idled by the end
of calendar 1998 due to the Company's decision to exit the majority of its
wire products business.

Located in Plant 2 are liquid metal producing facilities, with more than
1,600,000 tons annual capacity, consisting of two 400-ton electric furnaces.
Also located at Plant 2 is a six-strand bloom continuous caster and an
eight-strand billet continuous caster, as well as the 12" rod mill. The
continuous casters have a combined capacity of approximately 1,500,000 tons and
the rod mill has a 440,000 ton capacity. Within this plant is the jumbo beam
caster which provided beam blanks to the Houston structural mill and was taken
out of regular service as a result of the closure of the Houston plant. At
present, this plant comprises 961,318 square feet of floor space.

Plant 3 consists of a 24" structural mill, with a total annual capacity of
450,000 tons. The plant comprises approximately 900,000 square feet of floor
space.

Manufacturing facilities for the production of welded wire products are
located at the Rock Falls Plant 4, which consists of 397,880 square feet. This
facility is expected to be idled by the end of calendar 1998 due to the
Company's decision to exit the majority of its wire products business.

The 14" merchant bar and light structural mill, comprising 434,740 square
feet and having an annual capacity of 400,000 tons, is located at Plant 5.

The Kentucky Facility consists of a manufacturing facility for the
production of concrete reinforcing mesh. The facility comprises approximately
192,000 square feet of floor space and has an annual capacity of 36,000 net
tons.

Plant 6 consists of 48,304 square feet of floor space and is currently
idle.

The Company's idled Houston facility consists of a wide flange structural
mill and comprises approximately 860,000 square feet of floor space on
approximately 180 acres of land. The property has access to the Houston ship
channel. On July 24, 1998, the Company signed a letter of intent to sell the
Houston facility including the land and buildings in exchange for cash.

All buildings are owned by the Company and are of steel, brick or concrete
construction. The Company believes that its plants and equipment are in
satisfactory operating condition.

Pursuant to the Company's existing credit facility, the Company has granted
mortgages on all of the Company's real estate and security interests in its
other assets, including equipment and fixtures.

ITEM 3. LEGAL PROCEEDINGS

Information on legal proceedings is contained on page 31 in the Note to
Consolidated Financial Statements entitled "Commitments and Contingent
Liabilities" included in this Annual Report on Form 10-K.

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

No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended July 31, 1998.

PART II

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

At September 30, 1998, 24,484,823 shares of Common Stock were issued and
outstanding and held by approximately 1,300 registered holders.

The Company does not expect to pay dividends on the Common Stock during the
foreseeable future. The Company's Senior Credit Facility prohibits the payment
of any dividends. The indenture relating to the 9 1/2% Senior Notes due 2001 of
the Company also restricts the payment of dividends. Since the initial public
offering of June 12, 1993, there have been no dividends paid on the Common
Stock.

The Company's Common Stock is traded on the NASDAQ stock market under the
ticker symbol NWSW. The range of Common Stock sales prices for each of the
quarters during the past two fiscal years (as reported by NASDAQ) are set forth
under the caption "Quarterly Financial Data" on page 33 included in this Annual
Report on Form 10-K in the rows captioned "Stock Price Range".

ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)

FISCAL YEARS ENDED JULY 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------------- ---------- ------------ ------------

STATEMENT OF OPERATIONS DATA:
Net sales $ 596,437 $ 640,980 $ 661,069 $ 638,420 $ 603,609
Cost of goods sold (excluding depreciation) 496,906 587,245 588,774 563,325 540,701
Selling and administrative expenses 13,017 13,546 11,920 11,334 10,882
Non-recurring item - 92,943 (2) - - -
Operating (loss) profit 68,966 (78,581)(2) 35,587 40,718 29,821

Interest expense 16,372 20,031 18,583 19,674 19,221

Income (loss) before income taxes 68,918 (1) (98,420) 17,167 21,178 10,730

Net income (loss) $ 41,696 $ (63,120) (2) $ 20,670 (3) $ 26,978 (4) $ 10,010

Net income (loss) per common share 1.70 (2.54) (2) 0.83 (3) 1.07 (4) 0.40

OTHER DATA:
Capital expenditures $ 12,069 $ 17,435 $ 36,269 $ 35,573 $ 22,930
EBITDA (5) $ 86,514 $ (52,754) (2) $ 60,375 $ 64,883 $ 53,148
Total Tons Shipped (000's) 1,558 1,686 1,668 1,662 1,632
Active employees 1,945 2,100 2,339 2,380 2,517

AT JULY 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------------- ---------- ------------ ------------
BALANCE SHEET DATA:
Current assets $ 201,254 $ 184,210 $ 190,279 $ 186,045 $ 168,999
Plant and equipment - net 152,460 158,004 241,189 229,708 217,178
Other assets 29,485 41,066 11,050 5,655 7,999
----------- ----------- ---------- ------------ ------------
Total assets $ 383,199 $ 383,280 $ 442,518 $ 421,408 $ 394,176
=========== =========== ========== ============ ============

Current liabilities $ 78,459 $ 86,507 $ 105,742 $ 96,641 $ 90,082
Long term debt 116,141 163,450 153,646 162,110 166,942
Other long term liabilities 101,899 82,852 77,114 75,042 79,246
Deferred income taxes - - - 4,744 7,402
Shareholders' equity 86,700 50,471 106,016 82,871 50,504
----------- ----------- ---------- ------------ ------------
Total liabilities and shareholders' equity $ 383,199 $ 383,280 $ 442,518 $ 421,408 $ 394,176
=========== =========== ========== ============ ============

Working capital $ 122,795 $ 97,703 $ 84,537 $ 89,404 $ 78,917
=========== =========== ========== ============ ============

Notes for Summary of Selected Financial Data
- --------------------------------------------

(1) Includes other income of $9.7 million and $5.2 million related to a
settlement with three of the Company's electrode suppliers and property tax
settlements paid in earlier years, respectively.
(2) Reflects a pre-tax charge of $92.9 million ($59.9 million after-tax,
or $2.40 per share) related to the closure of the Houston structural mill.
(3) Net income included a $10.4 million or $.42 per share tax benefit due to
recognition of certain deferred tax assets which are now more likely than
not to be realized.
(4) Net income included a $10.6 million or $.42 per share tax benefit due to
recognition of certain deferred tax assets which are now more likely than
not to be realized.
(5) EBITDA is defined as operating profit plus depreciation and amortization.
The Company believes EBITDA provides additional information for
determining its ability to meet debt service requirements. EBITDA does not
represent net income or cash flow from operations as determined by
generally accepted accounting principles, and is not necessarily an
indication of whether cash flow will be sufficient to fund cash
requirements.

FORWARD LOOKING STATEMENTS

Except for historical information, matters discussed in this Form 10-K
contain forward looking information and describe the Company's belief concerning
future business conditions and the outlook for the Company based on currently
available information. The Company has identified these "forward looking"
statements by words such as "believes", "estimates", "should", "could", "will
pay", "lead to", "expects", "anticipates", and similar expressions. Risks and
uncertainties which could cause the Company's actual results or performance to
differ materially from those expressed in these statements include the
following: volumes of production and product shipments; changes in product mix
and pricing; costs of scrap steel and other raw material inputs; changes in
domestic manufacturing capacity; the level of non-residential construction and
overall economic growth in the United States; the level of imported products in
the Company's markets; changes in legislative, regulatory or industrial
requirements; and modernizing or replacing the Company's existing rolling mills
including the need to access the capital markets on acceptable terms and to
modify certain terms of its labor agreement with the USWA. The Company assumes
no obligation to update the information contained herein.

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

NET SALES

Net sales for fiscal 1998 were $596.4 million, a decrease of $44.6 million
or 7% from fiscal 1997. Revenues decreased in fiscal 1998 as a result of the
closure of the Houston rolling mill. Although the closure reduced the Company's
capacity to produce medium and heavy structural products by approximately 50%,
total volume shipped in these products was only off approximately 33% compared
to the prior year. The Company's remaining facility for these products
experienced an increase of almost 35% in shipments during fiscal 1998, recording
the highest level in the Company's history. Additionally, the Company
experienced a 2% improvement in pricing for medium and heavy structural products
in fiscal 1998 compared to the prior year. The Company has seen a recent
weakening in orders for these structural products at the end of fiscal 1998 due
to record breaking levels of foreign imports into the United States.
Additionally, the Company anticipates continued high levels of imports for the
foreseeable future. The Company saw strong performance during 1998 for its light
structural and bar products as volume increased over 17% and revenue increased
23% compared to the prior year. Rod shipments decreased approximately 3%
in 1998 compared to the prior year. The decrease in rod shipments relate to the
end of operating difficulties experienced by certain competitors during the
first half of 1998 and the significant increase in foreign imports into the
United States during the latter half of 1998. The significant increase in
imports of foreign steel contributed to almost an 8% decrease in rod pricing by
the last quarter of 1998 compared to the first half of 1998. Shipments for the
Company's small structural products increased approximately 17% in 1998 and in
conjunction with a 5% increase in pricing, resulted in a 23% increase in sales
revenue. Semi-finished steel sales were higher in 1998 compared to the prior
year period due to increased strength in the overall steel markets, however,
selling prices and margins are lower in this product group than the Company's
value-added finished products. As the overall steel markets deteriorate going
into fiscal 1999, the Company anticipates that semi-finished steel sales will
decrease as our customers are able to supply their needs with their internal
production capabilities.

Net sales for fiscal 1997 decreased by $20.1 million or 3% from fiscal
1996. The 3% decrease in fiscal 1997 net sales resulted from greatly reduced
order levels going into fiscal 1997 which were directly related to the
uncertainties surrounding labor negotiations. Volume in medium and heavy
structural products were off approximately 20% compared to the prior year which
occurred primarily during the first half of fiscal 1997. The Company saw strong
performance during 1997 for its rod products as both volume and revenue
increased over 34% compared to the prior year. This improvement in rods was the
result of disruptions in supply due to difficulties experienced by certain
competitors. Shipments for the Company's small structural products increased
approximately 9% in 1997, however, pricing in this product range was lower which
resulted in a 6% increase in sales revenue. Semi-finished steel sales were
higher in 1997 compared to the prior year period.

Volumes shipped and revenues will be lower in fiscal 1999 compared to 1998
due to the exit of the majority of the Company's wire products business
consisting of agricultural, nail and lawn and garden products. In 1998, these
products impacted gross revenues by $74.1 million on almost 92,000 net tons.
Additionally the record import levels of foreign steel in the Company's rod and
structural markets will continue to put downward pressure on both pricing and
volume for the foreseeable future.

COST OF GOODS SOLD

Cost of goods sold (excluding depreciation) as a percentage of net sales
decreased from almost 92% in fiscal 1997 to approximately 83% in fiscal 1998.
This decrease resulted primarily from the strength of the fiscal 1998 steel
markets in which the Company participated. Increased operating efficiencies in
the furnace operations and finishing mills in conjunction with improved selling
price levels for the products noted above contributed to the almost nine
percentage point improvement in cost of goods sold

percentage. Additionally the Company's principal raw material, steel scrap,
decreased approximately 1% in 1998 compared to 1997. As the overall steel
markets deteriorate going into 1999, the Company anticipates that the cost of
goods sold percentage will increase from the record low levels achieved in 1998.
With the increased presence of foreign steel in the Company's markets, volume
will decrease reducing the capabilities of the Company to maintain operating
efficiencies achieved in 1998. Additionally, product pricing will continue to
experience downward pressure in the Company's markets. These deteriorations will
be somewhat offset by lower scrap costs as the weakening steel industry and
export demand for scrap contribute to significant reductions in the cost of
scrap. The net effect of the volume, pricing and scrap impacts will increase the
cost of goods sold percentage to more historical norms.

Cost of goods sold (excluding depreciation) as a percentage of net sales
increased from 89% experienced in fiscal 1996 to almost 92% for 1997. The
increase resulted primarily from higher costs associated with decreased
production levels for medium and large structural products, lower pricing levels
for all structural products and higher operating costs during the first half of
fiscal 1997. The Company's principal raw material, steel scrap, decreased
slightly in 1997.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses were $13.0 million in fiscal 1998
compared to $13.5 million in the prior year. The decrease resulted primarily
from the settlement of employment obligations with the former chief executive
officer of the Company and higher professional fees in the prior year, offset
somewhat by increased performance compensation expense.

Selling and administrative expenses were $13.5 million in fiscal 1997
compared to $11.9 million in the prior year. The increase resulted primarily
from the settlement of employment obligations with the former chief executive
officer of the Company, as well as higher professional fees.

NON-RECURRING ITEM

During the fourth quarter of fiscal 1997, the Company closed its
unprofitable Houston structural mill. As a result, the Company recorded a
one-time, non-recurring pre-tax charge of $92.9 million. The charge was
primarily non-cash and included the writedown to estimated fair market value of
the facility and equipment related to the Houston operations, closure costs and
employee termination expenses.

OPERATING PROFIT

Operating profit increased dramatically to almost $69.0 million in 1998
compared to $14.4 million in the prior year excluding the one-time,
non-recurring charge of $92.9 million. The 1998 operating profit represents the
highest profit levels in the Company's history. The strength of the fiscal 1998
steel market for structural products contributed to improved cost and stronger
pricing for this product which significantly impacted the Company's earnings.

Operating profit excluding the one-time, non-recurring charge of $92.9
million, was $14.4 million, a decrease of $21.2 million in fiscal 1997 compared
to fiscal 1996. The decrease in operating profit was due primarily to the impact
of labor negotiations and a potential work stoppage at the beginning of fiscal
1997, as well as from increased losses in the Company's wire products
operations. Shipment volumes for medium and large structural products were down
significantly due to greatly reduced order levels during the first half of the
fiscal year. Orders for large structurals, the least profitable structural
products, did not recover which contributed to the decision to close the Houston
operations.

INTEREST EXPENSE

Interest expense was $16.4 million for 1998, a $3.6 million decrease
compared to the prior year. The decrease in interest expense is primarily due to
decreased borrowings resulting from improved working capital management and
increased cash flow from operations.

Interest expense was $20.0 million for 1997, a $1.4 million increase
compared to the prior year. The increase in interest expense is primarily due to
increased borrowings resulting from higher inventory levels and reduced cash
flow from operations.

INTEREST AND OTHER INCOME

Other income increased significantly in 1998 due to the settlement of
claims against electrode suppliers regarding prices paid for graphite electrodes
in 1998 and earlier years resulting in a $9.7 million benefit. Additionally, the
Company also recognized a $5.2 million benefit for recovery of disputed property
tax payments made in earlier years.

INCOME TAXES

The provision for income taxes was $27.2 million based on income before
taxes of $68.9 million. Due to the loss before income taxes of $98.4 million in
fiscal 1997, the Company recognized a benefit for income taxes of $35.3 million.
The effective tax rate in fiscal 1999 is expected to approximate 39%.

NET (LOSS) INCOME

Net income of $41.7 million or $1.70 per share in fiscal 1998 compares to a
net loss of $63.1 million or $2.54 per share in fiscal 1997.

Net loss of $63.1 million or $2.54 per share in fiscal 1997 compares to net
income of $20.7 million or $.83 per share in the prior year.

NEW ACCOUNTING STANDARDS

FAS 130

In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130, ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in the financial statements and is effective for fiscal years beginning after
December 15, 1997. The statement will be adopted in the first quarter of fiscal
year 1999, but is not expected to have a significant impact on the Company's
financial statement disclosures.

FAS 131

Also, in June 1997, the FASB issued Statement of Financial Accounting
Standard No. 131, ("SFAS 131"), "Disclosure about Segments of an Enterprise and
Related Information". SFAS 131 establishes standards for reporting financial and
descriptive information about an enterprise's operating segments. The Standard
focuses on disclosures about products and services, major customers, and the
geographic areas in which the entity holds assets and reports revenues. SFAS 131
is effective for financial statement periods beginning after December 15, 1997.
The Company is currently evaluating the effects of this standard on its
financial statement disclosures and intends to make the appropriate disclosures
by the end of fiscal year 1999.

FAS 132

In February 1998, the FASB issued Statement of Financial Accounting
Standard No. 132, ("SFAS 132"), "Employers' Disclosures about Pension and other
Postretirement Benefits". SFAS 132 revises an employer's disclosures about
pension and other postretirement benefit plans, but does not change the
measurement or recognition of those plans. The Standard was developed to
standardize disclosure requirements, provide additional information on changes
in the benefit obligations and fair values of plan assets, and eliminate certain
disclosures which were previously required. SFAS 132 is effective for fiscal
years beginning after December 15, 1997. The Statement will be adopted in fiscal
year 1999.

ENVIRONMENTAL MATTERS

The Company is subject to various federal, state and local laws and
regulations. See "Commitments and Contingencies" Note to Consolidated Financial
Statements and "Environmental Compliance" in Item 1 of this Form 10-K.

YEAR 2000

The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond the year 1999, which could
cause a system failure or other computer errors, leading to disruptions in
operations. In 1997, the Company identified the following areas critical for its
successful implementation of Y2K compliance: (1) financial and information
system applications, (2) manufacturing applications and (3) vendor and other
third-party relationships. For each of these areas, the Company has established
the following procedures to enable it to meet its Y2K compliance obligation: (a)
identifying systems potentially susceptible to Y2K compliance issues, (b)
developing and implementing corrective actions and (c) testing to ensure
compliance. Management believes that the Company is devoting the necessary
resources to identify and resolve significant Y2K issues in a timely manner.

FINANCIAL AND INFORMATION SYSTEM APPLICATIONS: The Company utilized the services
of outside consultants to identify areas of exposure and solution implementation
for the financial and information system applications. Financial and

information system applications consist of the Company's main-frame computer
hardware and operating system, and the applications software. The Company has
recently upgraded the main-frame operating system, which is presently in use and
has been successfully tested for Y2K compliance. All applications software have
been identified for Y2K compliance, upgraded where necessary and are currently
in use. The Company is currently testing these upgraded systems for Y2K
compliance and estimates that the testing is 85% complete. The Company believes
completion of such testing will occur during the second quarter of fiscal 1999.
The total cost of these Y2K compliance activities, estimated at less than $1.0
million, has not been, and is not anticipated to be material to the Company's
financial position or its results of operations and have all been or will be
expensed as incurred. Based on the information gathered and the testing
performed to date, the Company does not believe any material exposure to
significant business interruption exists as a result of Y2K issues from the
financial and information system applications.

MANUFACTURING APPLICATIONS: The Company's manufacturing facilities rely on
systems for process control and production monitoring. Failure to identify,
correct and test Y2K sensitive systems at our manufacturing facilities could
result in manufacturing interruptions. The Company has identified and catalogued
hardware and software systems used in the manufacturing process. The Company is
currently analyzing responses from the suppliers of these manufacturing
applications and thus does not, at this time, have sufficient data to estimate
the cost of achieving Y2K compliance for its manufacturing applications. If the
Company is unable to achieve Y2K compliance for its manufacturing applications,
the Year 2000 could have a material impact on the operations of the Company. The
Company currently estimates the analysis of information and recommendation of
corrective actions will be completed by mid-fiscal 1999. Additionally, the
Company expects implementation and testing will be completed by the end of
fiscal 1999.

VENDOR AND OTHER THIRD-PARTY RELATIONSHIPS: The Company relies on third party
suppliers for raw materials, utilities, transportation and other key supplies
and services. Interruption of supplier operations due to Y2K issues could
adversely affect the Company's operations. The Company has initiated efforts to
evaluate the status of supplier's efforts to prepare for Y2K compliance issues
through a survey sent to its suppliers. Responses are currently being evaluated
and second requests mailed for non-responses. Unsatisfactory responses or
non-responses from critical suppliers will result, to the extent possible, in
alternate sources being utilized. These activities are intended to provide a
means of managing risk, but cannot eliminate the potential for disruption due to
third-party failure. The Company is also dependent upon its customers for sales
and cash flow. The Company does not currently have any formal information
concerning the Y2K compliance status of its customers but has received
indications that most of the Company's customers are working on Y2K compliance.
Y2K interruptions in the Company's customers' operations could result in reduced
sales, increased inventory or receivable levels and cash flow reductions. While
these events are possible, the Company believes its customer base is broad
enough to minimize the impact of isolated occurrences. The Company does not
believe it will experience material costs related to its Y2K compliance
activities for vendors and other third party relationships.

The foregoing assessment of the impact of the Y2K issue on the Company is
based on management's estimates at the present time. The assessment is based
upon numerous assumptions as to future events. There can be no assurance that
these estimates and assumptions will prove accurate, and the actual results
could differ materially. To the extent that Y2K issues cause significant delays
in production or limitation of sales, the Company's results of operations and
financial position would be materially adversely affected.

FIRST QUARTER FISCAL 1999

Discontinuance of Wire Products

On October 7, 1998, the Company announced that it will exit the majority of
its wire products business by the end of calendar 1998. Specifically, the
Company will cease in an orderly fashion production and marketing of its
agricultural, nail and lawn and garden product lines. The Company will continue
to produce and market manufacturer's wire and cut rod products at its Sterling
Operations. The Company has incurred losses in these product lines during the
last three years. The continued growth of low cost imported products and
continued pressure from lower cost domestic producers has impacted the
profitability and competitive position of these products. The Company has
concluded that market conditions today and for the foreseeable future are such
that these product lines are likely to remain uncompetitive. Additionally,
incremental future investments into these product lines would not generate
sufficient income to recover the cost of those investments.

The Company anticipates incurring a non-recurring pre-tax charge of $41.9
million in the first quarter ending October 31, 1998, to cover the expected cash
and non-cash costs of the closure. The charge includes employee termination
expenses, closure costs and the writedown to estimated fair market value of the
facility and equipment related to these product lines. The proceeds from the
liquidation of these wire product's working capital, net of cash closure costs,
is expected to generate a modest amount of cash, after all closure costs have
been incurred.

Prior to this decision, the Company manufactured and supplied the primary
incoming material, steel rod, in the production of these products. The Company
intends to market a correspondingly greater amount of rod to external rod
markets although there can be no assurance as to selling price and over what
time-frame this will be realized.

12
13

The discontinuance of these wire products has not caused the Company to be
in violation of its various bank covenants, however, depending on future
financial performance, the Company could require a waiver of the debt coverage
ratio at some time during the Spring or Summer of 1999. In the event this
occurs, the Company will seek a waiver from its bank lenders.

General Economic Environment

During the fourth quarter of 1998 and into the first quarter of 1999, the
Company has seen record import levels of foreign steel in its rod and structural
markets. Additionally, the Company anticipates continued high levels for the
foreseeable future. These record low import levels of foreign steel in the
Company's steel markets will continue to put downward pressure on both pricing
and volume. The significant increase in imports of foreign steel contributed to
almost an 8% decrease in rod pricing by the last quarter of 1998 compared to the
first half of 1998 and the price realization for rod remains at depressed
levels. The Company has experienced weakening in orders for its structural
products throughout the Company's first quarter. In response to the increased
level of imports in structural products, a major competitor of the Company
instituted a decrease in structural pricing of up to $60 per ton during the
quarter. In order to remain competitive, the Company has adjusted its structural
pricing and estimates that the realized value for structural products is
expected to decrease almost 10%. Overall steel markets have deteriorated going
into 1999 which have impacted semi-finished sales of the Company to other steel
manufacturers. These manufacturers are able to supply their needs with their
internal production capabilities which has significantly reduced sales of
semi-finished products in the first quarter of 1999.

With this deterioration of steel markets in 1999, the Company anticipates
that cost of goods sold as a percentage of net sales will increase from the
record low levels achieved in 1998. With the increased presence of foreign steel
in the Company's markets, volume will decrease reducing the capabilities of the
Company to maintain operating efficiencies achieved in 1998. As noted above,
product pricing will also continue to experience downward pressure in the
Company's markets. These deteriorations will be somewhat offset by lower scrap
costs as the weakening steel industry and export demand for scrap contribute to
significant reductions in the cost of scrap. However, the net effect of the
volume, pricing and scrap impacts will increase the cost of goods sold as a
percentage of net sales to more historical norms. With the decrease in volumes
and pricing and increases in manufacturing costs, the Company anticipates that
operating earnings will be greatly reduced from the records of 1998 although the
Company anticipates remaining profitable, excluding the one-time non-recurring
charge associated with the wire products exit, through the first quarter of
fiscal 1999.

LIQUIDITY, CAPITAL RESOURCES AND OUTLOOK

Liquidity and Capital Resources

The Company generated cash from operations of $99.7 million in 1998
compared to $5.5 million in 1997. The increase is attributable to significant
improvement in operating earnings in 1998, recapture of previously paid income
taxes and a net decrease in working capital (primarily due to the Houston mill
closure). The working capital ratio was approximately 2.6 to 1 and 2.1 to 1 at
July 31, 1998 and 1997, respectively.

Net cash used in investing activities amounted to $12.1 million in 1998
compared to $17.4 million in 1997. The Company decreased spending on capital
programs in fiscal 1998 in anticipation of potentially significant capital
commitments resulting from studies the Company undertook to upgrade, modernize
or replace its rolling mills in Sterling, Illinois. These studies were in
response to announced competitor capacity increases in structural steel products
expected to be operational by the end of calendar 1999.

Net repayments of debt in 1998 were $54.8 million compared to net cash
provided by financing activities of $10.4 million in 1997. With the significant
level of cash generated from earnings and the reduced investments in capital
programs, the Company fully repaid its Rollover Term Loan balance at July 31,
1998, without any prepayment penalties assessed. At July 31, 1998, there were no
outstanding borrowings against the Revolving Credit Loans and the Company was in
compliance with its bank covenants.

The Company believes its liquidity will be maintained in 1999. Although it
is expected that one of the Company's pension plans will require additional
funding of approximately $9 million to meet the minimum funding standards of the
Pension Benefit Guaranty Corporation, operations will be significantly impacted
by imports of foreign steel and the Company will incur a one-time, non-recurring
pre-tax charge of $41.9 million associated with the exit of a significant
portion of its wire business, the Company believes its on-going operations will
be profitable. Additionally, liquidation of working capital associated with the
wire business exit will generate modest positive cash flow.

Outlook

The Company faces a number of serious challenges, including increased
competition, that could have a material adverse effect on its liquidity and
capital resources. During 1998, competitors of the Company began construction of
three new structural steel mills. These mills are expected to add up to 1.9
million tons of capacity by the end of calendar 1999 across a broad range of
structural

13
14
products, many of which are currently produced by the Company. Additionally, a
potential new competitor to the Company, Steel Dynamics, Inc. has announced its
intention to build a new structural rolling mill in Indiana which if built,
would add an additional 900,000 tons of new capacity. See Item 1.
Business-Competition. In contrast to the Company's mills which were installed 20
or more years ago, these new mills will be modern, state-of-the-art operations
with lower operating costs than the Company's (including lower labor costs
associated with their non-union labor force). To remain competitive in this
environment, the Company will have to finance and complete the modernization or
replacement of its existing mills. However, unless the Company renegotiates
certain provisions of its labor agreement with the USWA, the Company believes
that it will not be feasible to modernize or replace its existing mills thereby
significantly limiting the Company's ability to repay or refinance its future
debt service and to service, over the long term, its unfunded employee benefit
obligations, as more fully described below.

In light of these concerns, the Company has advised the USWA of the need to
reopen the existing labor agreement which expires on August 1, 2000. The USWA
has not been willing to reopen the existing labor agreement unless the Company
agrees to certain preconditions which the Company finds unacceptable. If the
Company is able to reopen the existing labor agreement, no assurance can be
given that the Company will be able to reach a new agreement with the USWA on
acceptable terms. In addition, during the first quarter of fiscal 1999, the debt
markets available to the Company have deteriorated, further negatively impacting
the Company's ability to obtain necessary financing for a new mill in the near
term. The Company's business during the first quarter also has not been as
profitable as in the prior fiscal year due to the significant increase in
foreign steel imports and its effect on selling prices and volumes shipped as
stated above.

The Company also has significant future debt service obligations, primarily
consisting of $115 million of senior notes that are scheduled to be redeemed on
June 15, 2001, and significant unfunded employee benefit obligations. The
Company's ability to satisfy these obligations and to secure adequate capital
resources in the future will depend on its ability to generate adequate and
sustainable cash flow. If the Company is not able to renegotiate certain
provisions of its existing labor agreement and complete the necessary
modernization or replacement of its existing mills in a timely manner, the
Company believes it is unlikely that its operating cash flow will be sufficient
to repay or refinance its future debt service obligations as they become due.
Additionally, the Company is uncertain as to its ability to refinance these
obligations due to the factors outlined above as well as general business and
economic competitive factors affecting the Company and the domestic steel
industry.

The Company has had under consideration for some time various ways to
address these issues including the proposed merger with Bayou Steel Corporation
which was not concluded. If the Company is unable to develop or implement plans
that adequately address these challenges in a timely manner, the Company's
business, financial condition and operations will be materially and adversely
affected. As the Company faces the prospect of being unable to modernize or
replace its existing mills and the potential inability to repay its future debt
service obligations as they become due, the Company is considering a number of
alternatives including reorganization.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED
FINANCIAL STATEMENT SCHEDULES

CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1998 AND 1997................. 19

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
JULY 31, 1998, 1997 AND 1996........................................... 20

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED
JULY 31, 1998, 1997 AND 1996........................................... 21

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
JULY 31, 1998, 1997 AND 1996........................................... 22

NOTES TO FINANCIAL STATEMENTS............................................ 23

REPORT OF INDEPENDENT ACCOUNTANTS........................................ 34

CONSOLIDATED FINANCIAL STATEMENT SCHEDULES FOR THE YEARS
ENDED JULY 31, 1998, 1997 AND 1996:

II - VALUATION AND QUALIFYING ACCOUNTS................................... 35

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NORTHWESTERN STEEL AND WIRE COMPANY

CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands except share data)

As of July 31,
------------------------------
1998 1997
------------- -------------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,930 $ 4,078
Receivables, less allowances of
$1,175 and $1,375, respectively 52,057 67,228
Inventories 84,022 86,708
Income tax receivable 13 8,158
Deferred income taxes 14,147 13,442
Other assets 14,085 4,596
------------- -------------
Total current assets 201,254 184,210

PLANT AND EQUIPMENT, at cost, less accumulated
depreciation of $166,196 and $148,659,
respectively 152,460 158,004

DEFERRED INCOME TAXES 12,287 31,886
DEFERRED FINANCING COSTS 1,990 3,212
OTHER ASSETS 15,208 5,968
------------- -------------
Total assets $ 383,199 $ 383,280
============= =============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 42,953 $ 43,405
Accrued expenses 34,897 35,084
Current portion of long term debt 609 8,018
------------- -------------
Total current liabilities 78,459 86,507

LONG TERM DEBT 116,141 163,450
OTHER LONG TERM LIABILITIES 101,899 82,852
------------- -------------
296,499 332,809
------------- -------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
Preferred stock, par value $1 per share:
- Authorized - 1,000,000 shares
- Issued - none - -
Common stock, par value $.01 per share:
- Authorized - 75,000,000 shares
- Issued - 24,905,424 and 24,903,424 shares,
respectively 123,973 123,966
Retained (deficit) earnings (26,475) (68,171)
Minimum pension liability (5,473) -
Treasury shares, at cost; 420,601 and
420,144 shares, respectively (5,325) (5,324)

------------- -------------
Total shareholders' equity 86,700 50,471
------------- -------------

Total liabilities and
shareholders' equity $ 383,199 $ 383,280
============== =============

The accompanying notes are an integral part
of the consolidated financial statements

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OPERATIONS STATEMENT
NORTHWESTERN STEEL AND WIRE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data )

Years Ended July 31,
--------------------------------------------
1998 1997 1996
----------- ------------ -----------

Net sales $ 596,437 $ 640,980 $ 661,069
----------- ------------ -----------

Cost and operating expenses:
Cost of goods sold (excluding depreciation) 496,906 587,245 588,774
Depreciation 17,548 25,827 24,788
Selling and administrative 13,017 13,546 11,920
Non-recurring item - 92,943 -
----------- ------------ -----------
Total cost and operating expenses 527,471 719,561 625,482
----------- ------------ -----------

Operating profit (loss) 68,966 (78,581) 35,587
----------- ------------ -----------

Other income and expenses:
Interest expense 16,372 20,031 18,583
Interest and other income (16,324) (192) (163)
----------- ------------ -----------
Total other income and expenses 48 19,839 18,420
----------- ------------ -----------

Income (loss) before income taxes 68,918 (98,420) 17,167
Provision (benefit) for income taxes 27,222 (35,300) (3,503)
----------- ------------ -----------

Net income (loss) $ 41,696 $ (63,120) $ 20,670
=========== ============ ===========

Net income (loss) per share $ 1.70 $ (2.54) $ 0.83
=========== ============ ===========

Net tons shipped 1,558 1,686 1,668
=========== ============ ===========

The accompanying notes are an integral part
of the consolidated financial statements

16
17

SHAREHOLDERS EQUITY
NORTHWESTERN STEEL AND WIRE COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands except share data)

Common Stock
$.01 Par Value Retained Treasury Shares Total
------------------------------- Earnings ----------------------------- Shareholders'
Shares Amount (Deficit) Other Shares Amount Equity
---------------- ------------- ------------- ----------- ------------- ------------- -------------

Balance at July 31, 1995 24,809,842 $ 123,609 $ (25,721) $ (9,693) 420,144 $ (5,324) $ 82,871

Net income 20,670 20,670
Options exercised 49,000 177 177
Change in minimum
pension liability 2,298 2,298
---------------- ----------- ----------- --------- ----------- ----------- -----------

Balance at July 31, 1996 24,858,842 123,786 (5,051) (7,395) 420,144 (5,324) 106,016

Net loss (63,120) (63,120)
Options exercised 44,582 180 180
Change in minimum
pension liability 7,395 7,395
---------------- ----------- ----------- --------- ----------- ----------- -----------

Balance at July 31, 1997 24,903,424 123,966 (68,171) - 420,144 (5,324) 50,471

Net income 41,696 41,696
Treasury shares 457 (1) (1)
Options exercised 2,000 7 7
Change in minimum
pension liability (5,473) (5,473)
---------------- ----------- ----------- --------- ----------- ----------- -----------

Balance at July 31, 1998 24,905,424 $ 123,973 $ (26,475) $ (5,473) 420,601 $ (5,325) $ 86,700
================ =========== =========== ========= =========== =========== ===========

The accompanying notes are an integral part
of the consolidated financial statements.

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NORTHWESTERN STEEL AND WIRE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Years Ended July 31,
------------------------------------------------
1998 1997 1996
------------- ------------ -------------

Cash Flow From Operations:
Net income (loss) $ 41,696 $ (63,120) $ 20,670
Depreciation 17,548 25,827 24,788
Non-recurring item - 92,943 -
Loss on sale of plant and equipment 42 96 -
Amortization of deferred financing costs and debt discount 1,321 1,321 2,029
Deferred income tax expense (benefit) 18,894 (27,195) (7,533)
Decrease (increase) in income tax receivable 8,145 (8,158) -
Decrease (increase) in receivables 15,171 776 (9,126)
Decrease (increase) in inventories 2,686 7,594 (7,824)
(Increase) decrease in other current assets (9,489) 746 172
(Increase) in other assets (9,240) (5,968) -
(Decrease) increase in accounts payable and accrued expenses (639) (32,475) 7,987
Increase in other long term liabilities 13,573 13,133 4,370
------------- ------------ -------------
Net cash provided by operations 99,708 5,520 35,533
------------- ------------ -------------

Cash Flows From Investing Activities:
Capital expenditures (12,069) (17,435) (36,269)
Proceeds from sale of plant and equipment 23 36 -
------------- ------------ -------------
Net cash used in investing activities (12,046) (17,399) (36,269)
------------- ------------ -------------

Cash Flows From Financing Activities:
Payments of long term debt (89,817) (380,581) (252,658)
Proceeds from issuance of long term debt 35,000 390,800 244,500
Exercise of stock options 7 180 177
------------- ------------ -------------
Net cash (used in) provided by financing activities (54,810) 10,399 (7,981)
------------- ------------ -------------

Increase (decrease) in cash and cash equivalents 32,852 (1,480) (8,717)
Cash and Cash Equivalents:
Beginning of period 4,078 5,558 14,275
-------------- ------------- --------------

End of period $ 36,930 $ 4,078 $ 5,558
============== ============= ==============

Supplemental Disclosures of Cash Flow Information:
Cash Paid (Received) During the Period For:
Interest $ 15,439 $ 18,359 $ 17,716
Income taxes (8,702) 120 6,184

The accompanying notes are an integral part
of the consolidated financial statements

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19

NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO FINANCIAL STATEMENTS

(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Founded in 1879, the Company is a major mini-mill producer of structural
steel components which include wide flange beams, channels, angles and merchant
bar, as well as rod and wire products which include nails, fencing, concrete
reinforcing mesh and other fabricated wire products. Structural products are
used in a wide variety of commercial, industrial and residential construction
applications, while rod and wire products are marketed to the construction and
agricultural industries, retail "do-it-yourself" outlets, distributors and other
wire manufacturers. The majority of employees are covered by collective
bargaining agreements.

CONSOLIDATION

The consolidated financial statements include accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The financial results for the year ended July
31, 1997 include the operations of the Houston structural mill, which was closed
at the end of that year.

CONCENTRATION OF CREDIT RISK

The Company grants credit to its customers in the normal course of
business. Credit limits, on-going credit evaluation and account monitoring
procedures are utilized to minimize the risk of loss. Collateral is generally
not required.

INVENTORIES AND PRODUCTION COSTS

Inventories are valued at the lower of cost or market. Cost is determined
on a monthly moving average method and includes materials, labor and certain
components of conversion overhead.

PLANT AND EQUIPMENT

Plant and equipment is carried at cost and depreciated when placed in
service based on methods and rates designed to amortize the cost over the
estimated useful lives (generally 40 years for buildings, 12 and 18 years for
mill machinery and 3 to 20 years for all other equipment). Plant and equipment
to be disposed is carried at estimated fair market value. Depreciation is
computed principally on the straight-line method for financial reporting
purposes while accelerated methods and straight line methods are used for income
tax purposes. When properties are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts and
any profit or loss on disposition is reflected in income.

DEFERRED FINANCING COSTS

The Company defers direct costs of debt financing and amortizes such costs
over the life of the loan arrangement to interest expense.

REVENUE RECOGNITION

The Company recognizes sales revenue as shipments are made.

19
20

NET INCOME PER SHARE

During fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No.128, "Earnings per Share" (SFAS 128), which requires dual
presentation of basic and diluted earnings per share on the face of the
statement of operations. Basic income per share is based upon the average number
of common shares outstanding. Diluted income per share is based upon the average
number of common shares outstanding plus the potential dilution that would occur
if options to purchase common stock were exercised. For the years presented, the
diluted per share amounts equal the basic per share amounts reported.

BENEFITS FOR RETIRED EMPLOYEES

The Company provides pension benefits to substantially all hourly and
salaried employees under noncontributory plans. The pension costs are funded by
the Company in accordance with the requirements of the Employee Retirement
Income Security Act of 1974. The Company also provides post-retirement welfare
benefits (life insurance and medical) to substantially all its retired
employees. These benefits are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 87 and SFAS No. 106.

CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and other liquid instruments
purchased with an original maturity of three months or less.

USE OF ESTIMATES

Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at year end and
the reported amounts of revenues and expenses during the year. Actual results
could differ from these estimates.

STOCK-BASED COMPENSATION

Effective August 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). As provided by SFAS 123, the Company has elected to continue to account
for its stock-based compensation programs according to the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure provisions required by SFAS
123 (see "Stock Option Plans" Note to Consolidated Financial Statements).

LONG-LIVED ASSETS

Effective August 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. In the event that facts and circumstances indicate that the cost of
any long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required. The adoption did not have a material effect on the Company's financial
position or results of operation.

RECLASSIFICATION

Certain prior year amounts were reclassified to conform to current year
presentation.

EMPLOYEE BENEFIT PLANS

New labor agreements effective August 1, 1996, covering the majority of
the Company's hourly employees, improved retirement benefits and lowered
retirees' postretirement healthcare costs. The improved pension benefits
resulted in an increase in unrecognized prior service cost. Annual pension
expense did not change significantly due to reductions in benefit levels in the
hourly defined contribution plan.

The Company also sponsors defined contribution savings plans that cover the
majority of employees. For salaried employees, the Company contributes up to 5%
of eligible compensation. Company contributions to the hourly employee plan are
not required.

20
21

The Company provides benefits for certain officers and key employees
through a Supplemental Executive Retirement Plan. The cost of the plan and the
unfunded accumulated benefit obligation at July 31, 1998 were immaterial.

Prior to the plan termination, the Company's Employee Stock Ownership Plan
(the "ESOP") owned approximately 14% of the Company's common stock. In January,
1997, the Board of Directors and employee participants approved termination of
the ESOP, subject to a favorable determination by the Internal Revenue Service
(the "IRS"), which was subsequently received in March, 1998. The ESOP shares
were fully distributed to the participants as of July 31, 1998.

PENSION PLANS

The Company's noncontributory defined benefit plans cover the majority
of employees and provide pension benefits that are generally based on years of
credited service and employee compensation during the years preceding
retirement. Plan assets include primarily equity and fixed income securities.

A non-cash decrease to shareholders' equity of $5,473 during fiscal year
1998 and an increase of $7,395 during fiscal year 1997, resulted primarily from
pension plan asset changes due to investment experience and changes in interest
rate assumptions. At July 31, 1998, the Company recorded a minimum pension
liability of $20,501 and a corresponding intangible pension asset of $15,028. At
July 31, 1997, the Company recorded a minimum pension liability of $5,698 and a
corresponding intangible pension asset.

Actuarial present value of benefit obligations:

1998 1997
---- ----
Hourly Salaried Hourly Salaried
Plan Plan Plan Plan
---- ---- ---- ----

Vested benefit obligation $213,154 $ 58,950 $189,455 $ 53,583
======== ======== ======== ========

Accumulated benefit obligation $228,957 $ 61,687 $204,850 $ 56,142
======== ======== ======== ========

Projected benefit obligation $237,722 $ 66,240 $209,160 $ 60,956
Plan assets at fair value 211,708 75,145 199,449 70,739
-------- -------- -------- --------
Plan assets greater than (less than)
projected benefit obligation (26,014) 8,905 (9,711) 9,783
Unrecognized net (gain) or loss 14,238 (1,025) (6,414) (3,584)
Unrecognized prior service cost 15,028 58 16,422 66
-------- -------- -------- --------

Net pension (liability) asset, before
recognition of minimum pension
liability $ 3,252 $ 7,938 $ 297 $ 6,265
======== ======== ======== ========

A summary of the components of net periodic expense for the defined benefit
and contribution plans for the three years ended July 31, 1998 follows:

1998 1997 1996
---- ---- ----

Defined benefit plans:
Service cost of current period $ 4,356 $ 4,331 $ 3,774
Interest cost on projected
benefit obligation 20,715 19,661 17,928
Actual return on plan assets (31,518) (67,053) (18,915)
Net amortization and deferral 9,312 49,780 673
------- -------- --------
Net pension expense 2,865 6,719 3,460
Defined contribution plans 965 985 3,828
------- -------- --------

Total expense $ 3,830 $ 7,704 $ 7,288
======= ======== =======

Assumptions:
Discount rate 7.10% 7.70% 7.91%
Rate of future compensation increase 3.50% 3.50% 3.50%
Long term return on assets 9.00% 9.00% 9.00%

21
22

POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS

The postretirement benefit expense includes the following components:

1998 1997 1996
---- ---- ----

Service cost $ 1,061 $ 1,024 $ 912
Interest cost on accumulated benefit obligation 6,657 6,201 5,370
Net amortization and deferral 792 435 (291)
--------- --------- --------
$ 8,510 $ 7,660 $ 5,991
========= ========= ========

The Company continues to fund benefit costs on a cash basis, with retirees
paying a portion of the costs. The amounts paid for such benefits were $7.2
million, $6.5 million and $4.4 million for the fiscal years ended July 31, 1998,
1997 and 1996, respectively. The status of the Company's postretirement benefit
obligation at July 31, 1998 and 1997 was:

1998 1997
---- ----
Retirees and surviving spouses $ 66,047 $ 52,357
Fully eligible active plan participants 9,581 11,516
Other active employees 21,545 20,668
--------- ----------
97,173 84,541
Unrecognized amounts (26,706) (15,475)
--------- ----------
Postretirement benefit obligation $ 70,467 $ 69,066
========= ==========

The actuarial assumptions used to determine 1998 and 1997 costs and benefit
obligations include a discount rate of 7.1% and 7.7%, respectively. The assumed
health care cost trend rate used in 1998 and 1997 was 6.9% and 7.3%,
respectively, for pre-65 retirees and 6.4% and 6.7%, respectively, for post-65
retirees declining to an ultimate rate of 4.6% over a 10-year period for both
populations.

If the health care cost trend rate assumptions were increased by 1% each
year, the accumulated postretirement benefit obligation as of July 31, 1998,
would be increased by $11,600 and the net periodic postretirement benefit cost
for the year then ended would be increased by $1,014.

INCOME TAXES

As of July 31, 1998, the Company has approximately $17,251 of net operating
loss carryforwards. As a result of an "ownership change" in fiscal 1993, as
defined by Section 382 of the Internal Revenue Code of 1986, as amended, all of
the loss carryforwards are subject to an annual limitation of approximately
$2,000 and will expire in 2006 and 2007. The Company also has alternative
minimum tax credit carryforwards of approximately $5,365.

Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities for which
income tax effects will be realized in future years. Deferred tax benefits of
approximately $10,400 were recorded in fiscal year 1996 as a result of a
reduction in the recorded valuation allowance. The basis for the reduction was
the determination that the future profitability of the Company will more likely
than not allow realization of certain deferred tax assets.

Although realization is not assured, management continues to believe that
it is more likely than not that all of the deferred tax asset will be realized.

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23

The types of temporary differences resulting from the difference between
the tax bases of assets and liabilities and their financial reporting amounts
that give rise to the deferred tax liabilities and the deferred tax assets and
their approximate tax effects are as follows:

1998 1997
------------------------------ -----------------------------
Temporary Tax Temporary Tax
Difference Effect Difference Effect
---------- ----------- ---------- ----------

Net operating loss $ 17,251 $ 6,728 $ 62,594 $ 22,988
Retirement costs 42,289 16,493 59,466 23,192
Employee compensation 19,487 7,600 19,961 7,785
AMT carryforwards 5,365 5,365 1,486 1,486
Other 15,441 6,021 13,159 5,131
--------- -------- -------- --------
Total deferred tax asset $ 99,833 $ 42,207 $156,666 $ 60,582
========= ======== ======== ========

Property, plant and equipment $ 40,445 $ 15,773 $ 39,112 $ 15,254
--------- -------- -------- --------

Total deferred tax liability $ 40,445 $ 15,773 $ 39,112 $ 15,254
========= ======== ======== ========

Net deferred tax asset $ 59,388 $ 26,434 $117,554 $ 45,328
========= ======== ======== ========

The provision (benefit) for income taxes consists of the following:

1998 1997 1996
---- ---- ----

Current $ 8,328 $ (8,105) $ 4,030
Deferred 18,894 (27,195) (7,533)
------- -------- -------

Total income tax provision (benefit) $27,222 $(35,300) $(3,503)
======= ======== =======

The provision (benefit) for income taxes on income differs from the
expected tax provision (benefit) computed by applying the federal corporate rate
as follows:

1998 1997 1996
---- ---- ----

Tax provision (benefit) computed at statutory rate $ 24,121 $(34,447) $ 6,008
Current benefit of deferred tax asset - - (10,399)
Other provision (benefit), primarily state income
Taxes 3,101 (853) 888
-------- -------- --------
Total income tax provision (benefit) $ 27,222 $(35,300) $( 3,503)
======== ======== ========

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24

DEBT AND CREDIT ARRANGEMENTS

Long term debt consists of the following obligations at July 31, 1998 and
1997:

1998 1997
---- ----

Senior Credit Facility:
Rollover Term Loan $ - $ 28,207
Revolving Credit Loans - 26,000
9.5% Senior Notes due 2001, net of discount 114,716 114,617
Other notes payable (average rates of 5.3% and
5.8%, respectively) 2,034 2,644
--------- --------
116,750 171,468
Less Current Portion 609 8,018
--------- --------

$ 116,141 $163,450
========= ========

Market value of total debt $ 117,770 $167,124
========= ========

The Company's Senior Credit Facility (the "Facility") comprises the
Rollover Term Loan and Revolving Credit Loans, each of which are described
below. The Facility was amended as of July 31, 1997 as a result of the closure
of the Houston structural mill. The maximum permitted borrowings under the
Revolving Credit loans was reduced to $80 million from $100 million and the
non-recurring charge for the plant closure was excluded from the various
financial covenants. The Company was in compliance with its bank covenants, as
amended, as of July 31, 1998. The Facility extends to April 2001, unless certain
financial conditions are not met at July 31, 1999, in which case the Facility
expires on that date.

The Facility contains various covenants, including covenants prohibiting or
limiting the incurrence of additional indebtedness, the granting of liens or
guarantees, sales of assets, and capital expenditures, as well as financial
covenants requiring maintenance of a specified current ratio, a fixed charge
coverage ratio and a leverage ratio. Revolving Credit Loans are subject to
certain borrowing base criteria. Loans under the Facility are collateralized by
a lien on substantially all of the Company's assets, and all loans are
cross-collateralized.

The Rollover Term Loan balance of $22,651 was fully repaid on July 31,
1998, without any prepayment penalties assessed.

At July 31, 1998, there were no outstanding borrowings against the
Revolving Credit Loans. At the option of the Company, any borrowings of
Revolving Credit Loans bear interest at (a) the prime rate plus applicable
margin, or (b) the LIBO rate plus applicable margin.

The Facility lenders receive a quarterly commitment fee of 1/2% per annum
based on the average unused amount of the commitment.

At July 31, 1998, $114,716 (net of unamortized discount of $284) of Senior
Notes was outstanding. The Senior Notes bear interest at the rate of 9.5% per
annum, payable semi-annually on June 15 and December 15. The Company will be
required to redeem on June 15, 2001 the aggregate principal amount of the Senior
Notes plus accrued and unpaid interest. On or before June 14, 1999, the Company
may, at its option, redeem the Senior Notes in whole or in part at a premium
plus accrued and unpaid interest. Thereafter, the Company may redeem in whole or
in part the Senior Notes at the aggregate principal amount plus accrued and
unpaid interest.

The Senior Notes are unsecured obligations of the Company. They are senior
to all subordinated indebtedness of the Company, and rank pari passu with all
other existing and future senior indebtedness of the Company and contain various
covenants equal to or less restrictive than the Facility. Upon the occurrence of
a change in control, the holders will have the option to cause the Company to
repurchase all or a portion of the outstanding Senior Notes at 101% of the
principal amount.

24
25

Annual maturities of long term debt for the years subsequent to fiscal 1998
are:

1999 $ 609
2000 615
2001 115,108
2002 111
2003 115
Remaining years 476
---------
Total $ 117,034
=========

The Company estimated the market value of its total debt by utilizing a
discounted cash flow methodology.

SUPPLEMENTAL BALANCE SHEET DATA

The following balance sheet information is provided as of July 31:

1998 1997
---- ----

INVENTORIES:
Raw materials and supplies $ 20,218 $ 25,501
Semi-finished products 26,937 23,912
Finished products 36,867 37,295
--------- ----------
$ 84,022 $ 86,708
========= ==========
PLANT AND EQUIPMENT:
Land $ 5,952 $ 5,952
Buildings 38,249 38,132
Machinery and equipment 272,582 262,205
Construction in progress 1,873 374
--------- ----------
Total 318,656 306,663
Less accumulated depreciation 166,196 148,659
--------- ----------
Net plant and equipment $ 152,460 $ 158,004
========= ==========

ACCRUED EXPENSES:
Salaries and wages $ 16,041 $ 12,022
Other employment costs 7,578 9,384
Postretirement welfare benefits 5,000 5,000
Other accrued expenses 6,278 8,678
--------- ----------
$ 34,897 $ 35,084
========= ==========

OTHER LONG TERM LIABILITIES:
Postretirement welfare benefits $ 65,467 $ 64,066
Minimum pension liability 20,501 5,698
Other long term liabilities 15,931 13,088
--------- ----------
$ 101,899 $ 82,852
========= ==========

STOCK OPTION PLANS

The Company has one active stock option plans and three plans under which
no further awards may be made, all approved by shareholders.

Under the 1994 Long Term Incentive Plan, 1,250,000 shares of common stock
are reserved for issuance to key employees and other key individuals who perform
services for the Company. Stock options, stock appreciation rights and
restricted stock may be granted by the Board of Directors at not less than the
fair market value on the date of grant. Such grants generally vest over three
years and expire five years from the date of grant. At July 31, 1998, shares
available for future grants were 246,459.

25
26
Under the 1994 Director Stock Plan, 50,000 common shares are reserved for
issuance of non-qualified stock options to directors who are not employees of
the Company or affiliates of Kohlberg & Co., L.P. expires not less than five
years nor more than ten years from the grant date. At July 31, 1998 there were
no shares available for future grants.

An aggregate of 1,400,000 common shares had been reserved for the
Management Stock Option Plan and the Employee Stock Purchase and Option Plan.
Options generally expire ten years from the date of grant. No further awards may
be granted under either Plan.

Activity for common shares under option for the years ended July 31, 1998,
1997 and 1996 were as follows:

Number of Average
Shares Price
----------- -----------

Outstanding, July 31, 1995 1,059,393 $ 5.14

Granted 350,000 8.14

Exercised (49,000) 4.00

Canceled (33,168) 6.47
----------- --------
Outstanding, July 31, 1996 1,327,225 $ 5.94

Granted 510,000 3.89

Exercised (44,582) 4.10

Canceled (111,630) 5.88
----------- --------
Outstanding, July 31, 1997 1,681,013 $ 5.25

Granted 942,225 $ 3.69

Exercised (2,000) 3.59

Canceled (951,741) 5.42
----------- --------
Outstanding, July 31, 1998 1,669,497 $ 4.27
=========== ========
Exercisable, July 31, 1998 996,653 $ 4.65
=========== ========

The following table summarizes the status of outstanding stock options as of
July 31, 1998:

Options Outstanding Options Exercisable
------------------- -------------------
Number of Weighted Weighted Number of Weighted
Range of Exercise Options Average Life Average Options Average
Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
------- ----------- ---------- -------------- ----------- --------------

$3.00 - $5.99 1,507,831 5.0 $3.91 834,987 $3.82
$6.00 - $7.99 66,666 3.8 $7.00 66,666 $7.00
$8.00 - $11.25 95,000 2.4 $9.53 95,000 $9.53

On September 16, 1997, the Company cancelled and reissued 850,725
outstanding options. The newly re-issued options have exercise prices that range
between $3.59 and $4.00. No compensation expense was recorded for these
transactions, as the re-issued options were either equal to, or in excess of,
the fair market value of the common stock at the time of reissuance.

The fair value for the options was estimated at the date of grant using a
present value approach with the following weighted-average assumptions: risk
free interest rate on the Long Term Incentive Plan and the Director Stock Plan
of 6.2% and 5.77%, respectively; no expected dividend yield; an estimated
volatility of 55.8%, and an average expected life of the options under the Long
Term Incentive Plan and the Director Stock Plan of 4 and 5 years, respectively.

The pro forma net income and related pro forma earnings per share effect
from applying SFAS 123 did not result in a material change to the actual results
and earnings per share amounts as reported.

26
27

COMMITMENTS AND CONTINGENCIES

There are various claims and legal proceedings arising in the normal course
of business pending against or involving the Company wherein monetary damages
are sought. These claims and proceedings are generally covered by insurance, and
it is management's opinion that the Company's liability, if any, under such
claims or proceedings would not materially affect its financial position or
results of operations.

The Company is subject to a broad range of federal, state and local
environmental requirements, including those governing discharges to the air and
water, the handling and disposal of solid and/or hazardous wastes and the
remediation of contamination associated with releases of hazardous substances.
Primarily because the scrap melting process produces dust that contains lead and
cadmium, the Company is classified, in the same manner as other similar steel
mills in its industry, as a generator of hazardous waste and is therefore
subject to periodic compliance reviews by the United States Environmental
Protection Agency ("USEPA"). The Company currently estimates a cost of
approximately $3,100 to close its hazardous waste disposal site in 2008, of
which approximately $2,000 has been accrued to date.

The Company has been identified by the Illinois Environmental Protection
Agency (IEPA) as one of the potentially responsible parties for costs associated
with a third party owned disposal site. The IEPA is likely to seek compensation
from the Company as an alleged waste generator for recovery of past costs and
future remediation of the waste site. Under Illinois law, the Company's share of
liability can be limited to its proportionate share based upon causation of the
total cost of the site cleanup. Based on data available, the Company's share
will be a small fraction of the total site clean up costs, however reasonable
estimation of total cost for remediation cannot be made at this time.

The Company has also been cited by the USEPA for alleged violations of
clean air standards under the 1990 Clean Air Act ("CAA") and other requirements
at its Sterling furnace operations. On October 22, 1997, the Company was
notified by the U. S. Department of Justice ("DOJ") that it intended to file
suit against the Company for alleged violations of the CAA. The Company has
agreed to settle this claim pending final approval. The agreement, if approved,
would require the Company to pay a civil penalty of approximately $600 and
achieve and maintain compliance with the CAA through future capital expenditures
that the Company anticipates to range between $5,000 and $7,000. The Company
would also undertake several Supplementary Environmental Projects that could
total $1,000 in capital expenditures.

DESCRIPTION OF LEASING ARRANGEMENTS

The Company has entered into various operating leases for transportation
equipment (principally over-the-road tractors and trailers for shipment of a
portion of the Company's products) and other equipment. The majority of the
transportation equipment leases expire during fiscal 1999.

The future minimum rental payments required for the noncancelable lease
term of the operating leases as of July 31, 1998, were as follows:

Fiscal year ending July 31:

1999 $ 1,191
2000 373
2001 206
2002 104
2003 7
Remaining years -
-------
Total minimum future lease payments $ 1,881
=======

Rental expense under operating leases for the years ended July 31, 1998,
1997 and 1996 was approximately $2,130; $1,929; and $2,318, respectively.

27
28

NON-RECURRING ITEM

During the fourth quarter of 1997, the Company closed its Houston
structural mill. As a result, the Company recorded a primarily non-cash charge
of $92.9 million. The charge included the writedown to estimated fair market
value of the facility and equipment related to the Houston operations, closure
costs and employee termination expenses.

As of July 31, 1998, approximately $5.8 million of the initial charge
remains and relates primarily to insurance, taxes and other post-exit costs on
the Houston facility.

On July 24, 1998, the Company signed a letter of intent to sell the Houston
facility, including the land and buildings, in exchange for cash.

SUBSEQUENT EVENT

The Company anticipates incurring a special non-recurring pre-tax charge of
$41.9 million in the first quarter ending October 31, 1998, to cover the
expected cash and non-cash costs of the closure. The charge includes employee
termination expenses, closure costs and the writedown to estimated fair market
value of the facility and equipment related to these product lines. The proceeds
from the liquidation of these wire product's working capital, net of cash
closure costs, is expected to generate a modest amount of cash, after all
closure costs have been incurred.

28
29

QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

QUARTER ENDED

1998 OCTOBER JANUARY APRIL JULY
- -----------------------------------------------------------------------------------------------------------

Net sales $138,925 $140,420 $168,274 $148,818
Gross profit(1) 19,875 23,806 27,383 28,467
Net income 7,770 (2) 7,420 9,564 16,942 (3)

Per common share data:
Net income $ 0.32 (2) $ 0.30 $ 0.39 $ 0.69 (3)
Stock price range-
High 4 4 1/8 4 1/2 4 7/8
Low 1 15/16 2 3/8 3 13/32 2 3/4
Close 3 9/16 3 5/8 4 3/32 2 15/16

Tons Shipped 366,639 376,753 435,711 378,751

1997 OCTOBER JANUARY APRIL JULY
- -----------------------------------------------------------------------------------------------------------

Net sales $ 145,218 $ 143,706 $ 171,652 $ 180,404
Gross profit(1) 10,527 10,732 14,503 17,973
Net (loss) (2,005) (2,185) (573) (58,357) (4)

Per common share data:
Net (loss) $ (0.08) $ ( 0.09) $ (0.02) $ (2.34) (4)
Stock price range-
High 7 1/8 5 3/8 4 13/16 3 1/8
Low 4 1/2 3 1/2 2 3/8 1 3/4
Close 5 3 7/8 2 7/16 1 15/16

Tons Shipped 376,553 374,108 448,611 486,979

The common stock of the Company is traded on the Nasdaq-National Market (Symbol:
NWSW).

Notes:
(1) Gross profit is defined as net sales less cost of
goods sold excluding depreciation.

(2) For the quarter ended October 31, 1997, net income
included other income of $3.1 million ($.12 per
share) related to property tax settlements for the
Sterling property for the 1991-1996 tax years.

(3) For the quarter and year ended July 31, 1998, net
income included other income of $5.9 million ($.24
per share) related to a settlement with three of
the Company's electrode suppliers.

(4) For the quarter and year ended July 31, 1997, net
income included a net charge of $59.9 million
($2.40 per share) associated with the closure of
the Houston plant.

29
30

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF NORTHWESTERN STEEL AND WIRE COMPANY

In our opinion, the consolidated financial statements listed in the index
included in Item 14 of this Form 10-K present fairly, in all material respects,
the financial position of Northwestern Steel and Wire Company and Subsidiaries
at July 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended July 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index included in Item
14 of this Form 10-K, presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP

Chicago, Illinois
August 20, 1998
except for Subsequent Event Note to Financial Statements,
as to which the date is October 7, 1998

REPORT OF MANAGEMENT

The management of Northwestern Steel and Wire Company prepared, and is
responsible for, the consolidated financial statements and the other information
appearing in this annual report. The consolidated financial statements include
amounts that are based on management's best estimates and judgments.

The Company's financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, selected by the Audit
Committee of the Board of Directors. Management has made available to
PricewaterhouseCoopers LLP all of the Company's financial records and related
data, as well as the minutes of shareholders' and directors' meetings.

Management of the Company has established and maintains a system of
internal accounting controls. We believe the internal controls in use provide
reasonable assurance that assets are safeguarded, transactions are authorized
and properly recorded and that the reports do not contain any material
misstatement.

The financial statements and related notes in this report have been
prepared according to generally accepted accounting principles, and we believe
they are accurate in all material respects.

Thomas A. Gildehaus Thomas M. Vercillo
Chairman of the Board and Chief Financial Officer
Chief Executive Officer

30
31

SCHEDULE II

NORTHWESTERN STEEL AND WIRE COMPANY

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996

(In thousands of dollars)

CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------------------------------------- ------------- ------------- -------------- --------------

Allowance for doubtful accounts:

FOR THE YEAR
ENDED JULY 31, 1998 $ 1,375 $ 500 $ (700) $ 1,175
============= ============= ============== ==============

FOR THE YEAR
ENDED JULY 31, 1997 $ 825 $ 605 $ (55) $ 1,375
============= ============= ============== ==============

FOR THE YEAR
ENDED JULY 31, 1996 $ 1,000 $ 163 $ (338) $ 825
============= ============= ============== ==============

Inventory valuation allowance:

FOR THE YEAR
ENDED JULY 31, 1998 $ 103 $ 297 $ (186) $ 214
============= ============= ============== ==============

FOR THE YEAR
ENDED JULY 31, 1997 $ 793 $ - $ (690) $ 103
============= ============= ============== ==============

FOR THE YEAR
ENDED JULY 31, 1996 $ 334 $ 459 $ - $ 793
============= ============= ============== ==============

31
32

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

The following persons are members of the Company's Board of Directors
which board consists of ten directors. The Bylaws of the Company provide for the
election of directors to staggered terms of two years.

Name Age Served as Director Since End of Term
- --------------------------- -------- ------------------------ -----------

William F. Andrews (1) 67 1994 1998

Darius W. Gaskins, Jr. (4) 59 1994 1998

Thomas A. Gildehaus (2) 58 1997 1998

David L. Gore 60 1997 1998

Michael E. Lubbs (3) 50 1997 1998

Marion H. Antonini 68 1997 1999

Warner C. Frazier (1) 66 1995 1999

James A. Kohlberg (2)(4) 40 1992 1999

Christopher Lacovara (2)(3)(4) 33 1992 1999

George W. Peck IV 66 1992 1999

- ------------------
(1) Member of Audit Committee
(2) Member of Executive Committee.
(3) Member of Pension Committee.
(4) Member of Compensation Committee.

William F. Andrews is Chairman of Scovill Fasteners, Inc., a designer,
manufacturer and distributor of apparel fasteners and specialty industrial
fasteners. From 1995 to 1998 Mr. Andrews was also Chairman of
Schrader-Bridgeport International Inc., a manufacturer of tire valves and
pressure control devices. From 1993 to 1995, Mr. Andrews was Chairman, Chief
Executive Officer, and President of Amdura Corporation, a manufacturer of
hardware and industrial equipment. Mr. Andrews is also a Director of Black Box
Corporation, Dayton Superior Corp., Johnson Controls, Inc., Katy Industries,
Navistar, Inc. and Southern New England Telephone Company.

Marion H. Antonini has been a Principal of Kohlberg & Co. L.P.
("Kohlberg") since March 1998. Mr. Antonini has been Chairman of the Board
at Welbilt Corporation, a manufacturer of foodservice equipment, since
October 1997 and President and Chief Executive Officer of that company since
September 1990. Mr. Antonini is also a director of Engelhard Corporation,
Scientific Atlanta, Inc., Turbochef Technologies, and Vulcan Materials Company.

32
33

Warner C. Frazier has been Chairman and Chief Executive Officer of
Simplicity Manufacturing, Inc., a manufacturer of outdoor power equipment
("Simplicity"), since 1988 and was President of Simplicity from 1988 to 1996.
Mr. Frazier is also a Director of ABT Building Products Corporation ("ABT") and
Superior Services, Inc.

Darius W. Gaskins, Jr. has been a Partner of Carlisle, Fagan, Gaskins &
Wise, Inc., a management consulting firm, since 1993, and a Partner of High
Street Associates, Inc., an investment partnership, since 1991. From 1994 to
1995, Mr. Gaskins was Chairman of Leaseway Transportation Corporation, a
distribution services provider. Mr. Gaskins is also a Director of Anacomp,
Inc., Sapient Corporation, and ROHN Industries, Inc., formerly UNR Industries,
Inc. ("UNR").

Thomas A. Gildehaus has been Chairman and Chief Executive Officer of the
Company since April 1997 and a Director of the Company since January 1997. From
1992 to April 1997, Mr. Gildehaus was President, Chief Executive Officer and a
Director of UNR, a manufacturer of infrastructure products used in the wireless
communication industry. Mr. Gildehaus is also an advisory director of Bank of
America Illinois.

David L. Gore has been an attorney in private practice regarding labor law
since 1994. From 1982 to 1994, Mr. Gore was a member of the firm of Kleiman,
Whitney, Wolfe & Gore, handling a variety of legal matters for the United
Steelworkers of America (the "Union").

James A. Kohlberg has been Managing Partner of Kohlberg since 1994 and
Co-Managing Partner from 1987 to 1994. Mr. Kohlberg is also a Director of ABT.

Christopher Lacovara has been a Principal of Kohlberg since 1995 and an
associate of Kohlberg from 1988 to 1994.

Michael E. Lubbs has been an electronics and instrumentation technician for
the Company since 1986.

George W. Peck IV has been a Special Limited Principal of Kohlberg since
January, 1997 and was a Principal of Kohlberg from 1987 to January, 1997. Mr.
Peck is also a Director of ABC Rail Products Corporation, The Lion Brewery, Inc.
and ABT.

Pursuant to the Company's agreement with the Union, the International
President of the Union may designate an individual for appointment to the Board
of Directors. Subject to the approval of, and then recommendation by, the Chief
Executive Officer, the Board shall consider such designee. In accordance with
this procedure, Mr. Gore was appointed to the Board of Directors effective June
5, 1997. His term of office continues until the Annual Meeting of Shareholders
following fiscal 1998.

Mr. Lubbs is the designee of the Employee Stock Ownership Plan ("ESOP").
The ESOP was terminated by the Company effective March 31, 1997. Accordingly,
the ESOP position on the Board of Directors shall be discontinued upon Mr.
Lubbs' completion of his term.

Management

The following persons are executive officers of the Company.

Name Age Position
- -------------------------- ------- ---------------------------

Thomas A. Gildehaus 58 Chairman of the Board and Chief Executive Officer
Richard D. Way 57 President and Chief Operating Officer
Birchel S. Brown 57 Vice President, Sterling Steel Operations
Kenneth J. Burnett 54 Vice President
Andrew R. Moore 45 Vice President-Human Resources

33
34

David C. Oberbillig 54 Vice President, Sales-Wire Products Division
Michael S. Venie 50 Vice President-Sales and Marketing
Thomas M. Vercillo 43 Chief Financial Officer, Secretary and Treasurer

Richard D. Way has been President and Chief Operating Officer of the
Company since September 1996. He had been Senior Vice President-Sterling
Operations of the Company since July 1994, and from January 1994 through July
1994, he was Vice President of Operations-Steel Division. From 1990 through
1993, Mr. Way was Senior Vice President-Manufacturing of Shieldalloy
Metallurgical Corporation, a subsidiary of Metallurg, Inc. and a producer and
seller of metal alloys and speciality metals.

Birchel S. Brown has been Vice President-Sterling Steel Operations since
April 1997. From 1994 to 1996, Mr. Brown was Senior Vice President, Operations
of Bar Technologies, Inc. From 1993 to 1994, he was Vice President and Division
Manager for Florida Steel Corp., now known as AmeriSteel Coproration, a
manufacturer of steel products used in building construction. From 1992 to 1993,
Mr. Brown was Manager of Technology and Support for Gladwin Corp., a firm that
designs and maintains steel casting equipment.

Kenneth J. Burnett, Vice President, had been Vice President of
Operations-Houston of the Company from January 1994 through December 1997. From
1990 through 1993 he was the Company's Vice President of Operations-Steel
Division.

Andrew R. Moore has been Vice President-Human Resources since October
1996. Mr. Moore was previously the Manager of Employee Benefits for the Company
from November 1992.

David C. Oberbillig has been Vice President, Sales-Wire Products Division
of the Company since 1987.

Michael S. Venie has been Vice President-Sales and Marketing since
September 1995. From 1991 through 1995 Mr. Venie was Vice President-Automotive
Marketing of Kaiser Aluminum & Chemical Corporation, a subsidiary of Kaiser
Aluminum Corporation, a producer of aluminum and aluminum products.

Thomas M. Vercillo has been Chief Financial Officer, Secretary and
Treasurer since August 1998, and has been Corporate Controller since 1996. From
1992 through 1996, Mr. Vercillo was Manager of Corporate Accounting for the
Company.

Mr. Gildehaus has notified the Board of Directors of his intention to
retire as Chief Executive Officer and Chairman of the Board of Directors by the
end of calendar 1998. A committee of the Board is currently performing a
search for his successor and expects to name his replacement soon.
Mr. Gildehaus will continue to serve as Director of the Company.

34
35

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following Summary Compensation Table discloses, for the fiscal years
indicated, individual compensation information on the Company's Chief Executive
Officer and the next four most highly compensated executive officers in fiscal
1998. Such information is also provided for the former Vice President-Wire
Operations and Materials Management who would have been one of the four most
highly compensated executive officers in fiscal 1998 had he stayed through the
end of the fiscal year (such six individuals, the "Named Officers").

- ----------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM
----------------------- COMPENSATION
----------------
NAME AND TITLE FISCAL SALARY BONUS (1) # OPTION ALL OTHER
YEAR AWARDS (2) COMPENSATION
- ---------------------------- --------- ------------- ----------- --------------- -----------------

Thomas A. Gildehaus(3)...... 1998 $390,000 $400,900 500,000 -
Chairman of the Board and 1997 $116,750 - 500,000 $ 7,086
Chief Executive Officer

Richard D. Way(4)........... 1998 $275,000 $200,450 80,000 -
President and Chief 1997 $270,125 - - $ 6,475
Operating Officer 1996 $207,497 - 35,000 $ 6,025

Timothy J. Bondy(5)......... 1998 $197,563 $114,657 70,000 -
Vice President, Chief 1997 $191,000 - - $ 4,500
Financial Officer, 1996 $111,415 - 70,000 $23,342
Secretary and Treasurer

Michael S. Venie............ 1998 $169,375 $104,234 60,000 $ 1,693 (8)
Vice President-Sales and 1997 $165,000 - - $ 4,650
Marketing 1996 $141,250 - 60,000 $ 4,113

Birchel S. Brown(6)......... 1998 $146,121 $120,270 23,000 $17,412 (8)
Vice President, 1997 $ 38,920 - - $50,000 (9)
Sterling Steel Operations

William H. Hillpot(7)....... 1998 $126,411 $ 72,964 23,000 -
Vice President-Wire 1997 $138,875 - - -
Operations and Materials 1996 $119,750 - 12,000 $ 3,593
Management
- ------------------

(1) All of the fiscal 1998 bonuses were accrued in fiscal 1998 and paid in
fiscal 1999.
(2) All option grants during fiscal 1998, other than Messrs. Brown and Way,
were regrants for the repricing of existing options. Mr. Brown received a
new option grant for 23,000 shares, with no prior options to reprice. The
options granted to Mr. Way included a new option grant for 20,000 shares
and the repricing of existing options to purchase 60,000 shares. For
additional information on the repricing of options see footnotes to
Option/SAR Grants in Last Fiscal Year table and the section Executive
Compensation - Repricing of Options.
(3) Mr. Gildehaus has been Chairman of the Board and Chief Executive Officer
since April 14, 1997.
(4) Mr. Way was named President and Chief Operating Officer in September 1996.
(5) Mr. Bondy was hired effective January 1, 1996 and resigned from the
Company effective August 28, 1998.
(6) Mr. Brown was hired effective April 14, 1997.
(7) Mr. Hillpot resigned from the Company effective May 16, 1998.
(8) Relocation expenses.
(9) One time signing bonus.

35
36

OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------------------------

POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATE OF STOCK
PRICE APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM (2)
------------------------------------------------------------ ---------------------------------
5% 10%

----------- ----------- -------------- --------------- ---------------- ------------
% OF TOTAL AGGREGATE AGGREGATE
NUMBER OF OPTIONS EXERCISE PRICE EXPIRATION DATE POTENTIAL POTENTIAL
OPTIONS GRANTED TO (PER SHARE) REALIZABLE VALUE REALIZABLE
NAME GRANTED (1) EMPLOYEES VALUE
- ------------------------- ----------- ----------- -------------- --------------- ---------------- ------------

Thomas A. Gildehaus(3).... 250,000 27% $3.59 9/16/2002 $247,963 $547,933
250,000 27% $4.00 9/16/2002 $276,282 $610,510

Richard D. Way(4)......... 80,000 9% $3.59 9/16/2002 $79,348 $175,338

Timothy J. Bondy(5)....... 70,000 8% $3.59 9/16/2002 $69,430 $153,421

Michael S. Venie(6)....... 60,000 6% $3.59 9/16/2002 $59,511 $131,504

Birchel S. Brown.......... 23,000 2% $3.59 9/16/2002 $22,813 $50,410

William H. Hillpot(7)..... 23,000 2% $3.59 9/16/2002 $22,813 $50,410

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

(1) 25% of the options become vested and exercisable upon the grant date
(9/16/97) and 25% vest on each of the next three anniversaries of that
date, commencing one year after the date of grant, subject to acceleration
in the event of a "change in control" of the Company (defined the same as
in the agreements described below under the heading "Change in Control
Agreements").

(2) Potential realizable value is presented net of the option exercise price
but before any federal or state income taxes associated with exercise.
These amounts reflect certain assumed rates of appreciation set forth in
the Securities and Exchange Commission's executive compensation disclosure
rules. Actual gains, if any, on stock option exercises depend on future
performance of the Common Stock and overall market conditions.

(3) 500,000 options granted pursuant to the cancellation and regrant of all
existing options under the 1994 Long Term Incentive Plan pursuant to a
repricing plan of the Compensation Committee of the Board of Directors.

(4) 60,000 options granted pursuant to the cancellation and regrant of all
existing options under the 1994 Long Term Incentive Plan pursuant to a
repricing plan of the Compensation Committee of the Board of Directors.
The Named Officer received an additional grant of 20,000 shares subject
to option.

(5) 70,000 options granted pursuant to the cancellation and regrant of all
existing options under the 1994 Long Term Incentive Plan pursuant to a
repricing plan of the Compensation Committee of the Board of Directors.

(6) 60,000 options granted pursuant to the cancellation and regrant of all
existing options under the 1994 Long Term Incentive Plan pursuant to a
repricing plan of the Compensation Committee of the Board of Directors.

(7) 23,000 options granted pursuant to the cancellation and regrant of all
existing options under the 1994 Long Term Incentive Plan pursuant to a
repricing plan of the Compensation Committee of the Board of Directors.

36
37

OPTION EXERCISES AND FISCAL YEAR END VALUES FOR THE YEAR ENDED JULY 31, 1998

NUMBER OF VALUE OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS AT OPTIONS/SARS AT
ON VALUE FY-END (#) FY-END ($)
EXERCISE REALIZED EXERCISABLE EXERCISABLE
NAME (#) ($) /UNEXERCISABLE /UNEXERCISABLE(1)
- -------------------------- --------- --------- ----------------- ---------------------

Thomas A. Gildehaus.... 0 0 127,500/375,000 0/0

Richard D. Way......... 0 0 57,500/60,000 0/0

Timothy J. Bondy....... 0 0 17,500/52,500 0/0

Michael S. Venie....... 0 0 15,000/45,000 0/0

Birchel S. Brown....... 0 0 5,750/17,250 0/0

William H. Hillpot..... 0 0 55,750/17,250 0/0

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

(1) The closing price of the Common Stock on July 31, 1998 was $2.938.

REPRICING OF OPTIONS

At a meeting on September 15, 1997, the Compensation Committee determined
to reprice all options issued and outstanding under the 1994 Long Term Incentive
Plan, except for 250,000 options awarded to Mr. Gildehaus which remain at the
original exercise price of $4.00 per share. A total of 600,725 shares at an
average price of $6.19 per share were to be exchanged for an equal number of
options at $3.59 per share, the fair market value on September 16, 1997. In
making its decision, the Compensation Committee considered the report of Johnson
Associates, a benefits consulting firm. Johnson Associates reviewed various
alternatives, including the valuation of options using the Black Scholes option
pricing model. The Compensation Committee has concluded that the existing stock
options, which are a key element in the Company's incentive compensation
program, no longer provided sufficient incentives to, nor adequately encouraged,
key personnel to remain in the employ of the Company. The repricing of options
on an even exchange basis is intended to achieve the incentive and retention
value of management stock options.

DIRECTOR COMPENSATION

Pursuant to the Company's Director Stock Option Plan, directors who are not
employees of the Company or affiliates of KNSW Acquisition Company, L.P.
("KNSW"), receive 2,500 Options on an annual basis during their tenure as
directors and are paid a quarterly fee of $3,000. During the fiscal year ended
July 31, 1998, Messrs. Andrews, Antonini, Frazier, Gaskins, and Gore each
received 2,500 options to purchase shares of Common Stock at $3.00 per share.

EMPLOYMENT AGREEMENT

On March 28, 1997, the Company, upon Compensation Committee and Board of
Director approval, entered into an employment agreement with Thomas A. Gildehaus
in connection with his becoming employed by the Company as Chief Executive
Officer. At that time, the Company granted options to Mr. Gildehaus as described
above under the heading "Option/SAR Grants in Last Fiscal Year". The employment
agreement provides for a minimum annual salary of $390,000, participation in the
Company's annual short term incentive plan and in the Company's non-qualified
Supplemental Executive Retirement Plan, supplemental life insurance, a
disability income policy and other typical Company benefit programs. The
employment agreement also includes severance benefits if Mr. Gildehaus is
terminated for any reason other than "for cause" or Mr. Gildehaus terminates his
employment with the Company for "good reason" (each as defined in the
agreement), equal to the sum of base compensation and target bonus for the short
term incentive plan then in effect. The employment agreement also contains a
change in control provision. See "Change in Control Agreements" below for
additional information. The employment agreement includes non-competition,
non-solicitation and confidentiality obligations on the part of Mr. Gildehaus.

37
38

CHANGE OF CONTROL AGREEMENTS

The Company is party to agreements with Messrs. Way and Venie, and until
their resignations were party to agreements with Messers. Bondy and Hillpot,
which provide that in the event the Company terminates such executive's
employment for a reason other than "cause" as defined in the agreement or the
executive quits his employment with the Company for "good reason" as defined in
the agreement, after a "change of control" of the Company, he will be entitled
to receive payment for (i) up to twelve months of base salary, and (ii) bonus
payout under any bonus plan or program covering the executive as of the change
of control, prorated for that portion of the year prior to separation from
service. In addition, during the period under (i) above, the Company will
provide the executive with benefit plans and programs no less favorable than
those in effect at any time during the 120 days prior to the change of control
or to the extent more favorable, no less favorable than those provided to senior
executives of similar capacity preceding or after the change of control.

As to Mr. Gildehaus, if either the Company terminates Mr. Gildehaus'
employment with the Company for any reason, or Mr. Gildehaus resigns for "good
reason" within one (1) year following a "change in control", Mr. Gildehaus shall
be entitled, as a severance benefit, to twice the sum of the base compensation
and target bonus then in effect, payable upon such termination.

For purposes of the agreements, a "change of control" of the Company occurs
if (i) a person or entity becomes the beneficial owner, directly or indirectly,
of securities of the Company representing 30% or more of the combined voting
power of the Company's then outstanding securities entitled to vote in the
election of directors of the Company; (ii) during any period of two consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors and any new directors who were approved by a vote of at least three
quarters of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination was previously so
approved, cease for any reason to constitute at least a majority thereof; or
(iii) all or substantially all of the assets of the Company are liquidated or
distributed.

In return for the benefits provided by his agreement, each executive agrees
to continue to perform the regular duties of his current office (and/or such
duties of such other positions to which he may be assigned).

38
39

PENSION PLAN

The Company maintains a pension plan for all eligible employees. A
participant who retires on or after turning 65 and has completed at least five
years of service will qualify for an annual pension equal to 1.155% of the
participant's average earnings for each year of service not in excess of 30
years and 1.26% of the participant's final average earnings for each year of
service in excess of 30 years. Final average earnings are based on total
compensation (exclusive of certain cost-of-living adjustments) during the
participant's highest five consecutive years in the participant's last 15 years
of service. A deferred vested pension benefit normally commencing at age 65 is
provided for any employee who does not qualify for retirement under the plan
but has completed at least five years of service.

Years of service for purposes of the plan with respect to the officers
of the Company named in the Summary Compensation Table are as follows: Mr.
Gildehaus, 1 year; Mr. Way, 4 years; Mr. Venie, 3 years; and Mr. Brown, 1
year. Upon Mr. Hillpot's resignation from the Company, he was vested in the
pension plan with 5 years of service. Mr. Bondy did not become vested in the
pension plan prior to his resignation from the Company and was therefore not
entitled to any benefits thereunder.

The following table shows the projected annual pension benefits payable,
under the pension plan at the normal retirement age of 65:

ANNUAL NORMAL PENSION BENEFITS
FOR YEARS OF SERVICE SHOWN (1)

AVERAGE
ANNUAL
PENSION
EARNINGS 5 YEARS 10 YEARS 20 YEARS 30 YEARS 40 YEARS 50 YEARS
- ----------- --------- ---------- ---------- ---------- --------- ----------

$ 50,000 $ 2,888 $ 5,775 $11,550 $17,325 $23,625 $29,925

100,000 5,775 11,550 23,100 34,650 47,250 59,850

150,000 8,663 17,325 34,650 51,975 70,875 89,775

200,000 9,240 18,480 36,960 55,440 75,600 95,760

250,000 9,240 18,480 36,960 55,440 75,600 95,760

300,000 9,240 18,480 36,960 55,440 75,600 95,760

350,000 9,240 18,480 36,960 55,440 75,600 95,760

400,000 9,240 18,480 36,960 55,440 75,600 95,760

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

(1) Normal pension benefits are formula based and are not subject to a social
security offset. With exceptions not applicable to any of the officers
named in the above compensation table, Sections 401(a)(17) and 415 of the
Internal Revenue Code limit the annual pension earnings that can be
considered under the plan to $160,000 and the annual benefits to $125,000.

39
40

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR COVERED EXECUTIVES

Effective August 1, 1997, the Company adopted a Supplemental Executive
Retirement Plan for Covered Executives (the "Plan"). Participation in the Plan
is limited to key employees of the Company, designed by the Compensation
Committee, whose benefits under the Pension Plan B of Northwestern Steel and
Wire Company (the "Pension Plan") and the Northwestern Steel and Wire Company
401(k) Salary Deferral Plan (the "401(k) Plan") are limited under applicable
provisions of the Internal Revenue Code (the "Code"). The Plan is a
nonqualified, unfunded plan.

For each Plan participant, benefits under the Plan have two components.
First component: With respect to the Pension Plan, benefits under the Plan are
provided in amounts equal to the reduction of the participant's accrued benefits
under the Pension Plan as a result of applicable Code limitations, and are paid
based on the participant's election for benefit distribution under the Pension
Plan. Second component: With respect to the 401(k) Plan, each Plan participant
is credited with (i) a Company match equal to two percent (2%) of the portion of
such participant's compensation in excess of applicable Code limitations, and
(ii) an amount equal to the reduction of the Company's non-elective
contributions under the 401(k) Plan pursuant to applicable Code limitations. The
second component of a participant's benefit under the Plan is paid in a lump
sum.

In the event of a change in control, benefits accrued under the Plan as of
the date of such change in control are payable to Plan participants within sixty
(60) days following such change in control.

As of July 31, 1998, the designated Plan participants consist of Thomas A.
Gildehaus, Richard D. Way, Timothy J. Bondy and Michael S. Venie. The Company
has estimated and reserved $116,000 to cover the benefits which the Plan
participants are eligible to receive pursuant to the Plan.

RULE 16(B) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Company's executive officers, directors and 10% shareholders are
required under the Securities Exchange Act of 1934, as amended, to file reports
of ownership with the Securities and Exchange Commission. Copies of these
reports must also be furnished to the Company. Based solely upon a review of
copies of such reports, or written representations that no reports were
required, the Company believes that all filing requirements applicable to its
executive officers, directors and 10% shareholders were complied with by such
persons.

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41

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The table below sets forth certain information regarding beneficial
ownership of Common Stock as of October 23, 1998, by each person or entity known
to the Company who owns of record or beneficially five percent or more of the
Common Stock and by each Named Officer and director and all executive officers
and directors as a group.

PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING
NAME OF COMMON STOCK (1) COMMON STOCK
- ------------------------------------------ ------------------- --------------

KNSW Acquisition Company, L.P. (2)........ 8,687,000 34.9%
Dimensional Fund Advisors, Inc.(3)........ 1,423,000 5.7%
William F. Andrews ....................... 18,020 *
Marion H. Antonini........................ 2,500 *
Timothy J. Bondy(4) ...................... 17,500 *
Birchel S. Brown.......................... 11,500 *
Warner C. Frazier......................... 10,000 *
Darius W. Gaskins, Jr. ................... 20,500 *
Thomas A. Gildehaus ...................... 262,500 *
David L. Gore............................. 2,900 *
William H. Hillpot (5).................... 50,000 *
James A. Kohlberg (6)..................... 8,687,000 34.9%
Christopher Lacovara (6).................. 8,687,000 34.9%
Michael E. Lubbs ......................... 4,461 *
George W. Peck IV......................... -- *
Michael S. Venie ......................... 30,000 *
Richard D. Way ........................... 79,538 *
All executive officers and directors and 9,297,143 37.3%
director nominee as a group (18 persons)
(6).....................................

- ------------------
* Less than 1%.

(1) Includes shares issuable pursuant to options which may be exercised within
60 days after October 23, 1998.

(2) KNSW owns directly 8,687,000 shares of Common Stock. Kohlberg Associates,
L.P., a Delaware limited partnership ("Associates"), is the general
partner of KNSW. Kohlberg & Kohlberg, L.L.C., is the general partner of
Associates. Messrs. Kohlberg and Lacovara may be deemed to share voting
and dispositive power as to all shares of Common Stock owned by KNSW.
Messrs. Kohlberg and Lacovara disclaim beneficial ownership with
respect to such shares. The address for KNSW is c/o Kohlberg & Co., 111
Radio Circle, Mt. Kisco, NY 10549.

(3) As reported on a Schedule 13G dated December 31, 1997, filed with the
Securities Exchange Commission ("the Commission") by Dimensional Fund
Advisors, Inc. ("DFA"). According to such Schedule 13G, DFA has sole
voting power with respect to 929,300 shares. The persons who are officers
of Dimensional Fund Advisors Inc. also serve as officers of DFA Investment
Dimensions Group Inc., (the "Fund") and The DFA Investment Trust Company
(the "Trust"), each an open-end management investment company registered
under the Investment Company Act of 1940. According to such Schedule 13G,
in their capacities as officers of the Fund and the Trust, these persons
vote 163,000 additional shares which are owned by the Fund and 330,700
shares which are owned by the Trust. According to the Schedule 13G, DFA
has sole dispositive power over 1,423,000 shares. The address of
Dimensional Fund Advisors, Inc. is 1299 Ocean Avenue, 11th Floor, Santa
Monica, CA 90401.

(4) Mr. Bondy resigned from the Company effective August 28, 1998 and is no
longer an officer of the Company. The 17,500 shares subject to option
will expire on November 26, 1998.

(5) Mr. Hillpot resigned from the Company effective May 16, 1998 and is no
longer an officer of the Company. The 50,000 shares subject to option
will expire on May 16, 1999.

(6) Includes the 8,687,000 shares of Common Stock owned by KNSW. See Note 2.

41
42

ITEM 13. CERTAIN TRANSACTIONS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

In August 1992, the Company underwent a reorganization which included the
sale of 8,687,000 shares of Common Stock to KNSW (the "1992 Investment"), which
represented at such time approximately 52% of the outstanding Common Stock. KNSW
is an affiliate of Kohlberg. At the time of the 1992 Investment, the Company and
Kohlberg entered into a fee agreement (the "Fee Agreement") pursuant to which
Kohlberg agreed to provide such advisory and management services to the Company
and its subsidiaries as the Board of Directors reasonably requests in
consideration for which the Company pays Kohlberg a fee of $43,435 per fiscal
quarter at the beginning of each quarter. The Fee Agreement provides that
Kohlberg, but not the Company, may terminate the Fee Agreement at any time. The
Fee Agreement will terminate automatically on the earlier of the end of the
fiscal year in which KNSW's percentage interest in the outstanding Common Stock
is less than 25% and the tenth anniversary of the Fee Agreement. Fees may not be
increased through July 31, 2000. The Fee Agreement also provides that the
Company will indemnify Kohlberg and its affiliates and their respective
partners, officers, directors, stockholders, agents and employees against any
third party claims arising from the Fee Agreement and the services provided
thereunder, the 1992 Investment or their equity interest in the Company.

Pursuant to the terms of the ESOP which was terminated effective March 31,
1997, the Company is obligated to pay certain fees and expenses of the ESOP
incurred prior to the distribution of its assets which for the year ended July
31, 1998 aggregated $198,121.

PART IV

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

(a) 1. Financial Statements

The consolidated financial statements included in Item 8 are
filed as part of this annual report.

2. Financial Statements Schedule:

The consolidated financial statement schedule included in Item
8 is filed as part of this annual report.

3. Exhibits

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43

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, on the 23rd day of
October 1998.

NORTHWESTERN STEEL AND WIRE COMPANY

By:/s/ Thomas M. Vercillo
----------------------------------
Thomas M. Vercillo
Corporate Controller and Chief
Financial Officer

Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in the
capacities indicated on the 23rd day of October, 1998.

Signatures

/s/ Thomas A. Gildehaus /s/ James A. Kohlberg
- ---------------------------- ----------------------------
Thomas A. Gildehaus James A. Kohlberg
Chairman of the Board Director
Chief Executive Officer
and Director /s/ Christopher Lacovara
----------------------------
/s/ William F. Andrews Christopher Lacovara
- ---------------------------- Director
William F. Andrews
Director /s/ Michael E. Lubbs
----------------------------
/s/ Warner C. Frazier Michael E. Lubbs
- ---------------------------- Director
Warner C. Frazier
Director /s/ Marion H. Antonini
----------------------------
/s/ Darius W. Gaskins, Jr. Marion H. Antonini
- ---------------------------- Director
Darius W. Gaskins, Jr.
Director /s/ George W. Peck, IV
----------------------------
/s/ David L. Gore George W. Peck, IV
- ---------------------------- Director
David L. Gore
Director

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EXHIBIT NUMBER INCORPORATED BY REFERENCE
DESCRIPTION TO OTHER DOCUMENT
----------- --------------------------

2 PLAN OF ACQUISITION, REORGANIZATION,
ARRANGEMENT, LIQUIDATION OR SUCCESSION

2.1 Stock Purchase Agreement dated as of July 27, Current Report on Form 8-K dated July 27,
1992 between the Company and KNSW 1992, File No. 1-4288, Exhibit 2.1

3 ARTICLES OF INCORPORATION AND BY-LAWS

3.1 Second Amended and Restated Articles of Annual Report on Form 10-K for the fiscal year
Incorporation of the Company dated as of August ended July 31, 1992, File No. 1-4288, Exhibit
12, 1992 3.1

3.2 First Amendment to the Second Amended and Registration Statement on Form S-1
Restated Articles of Incorporation filed with the Commission on April 18, 1993,
File No. 33-60764, Exhibit 3.2

3.3 Amended and Restated By-Laws of the Company Annual Report on Form 10-K for the
fiscal year ended July 31, 1996, File No.
0-21556, Exhibit 3.3

3.4 Amendment to the Amended and Restated Bylaws Filed herewith
of the Company

3.5 Amendment to the Amended and Restated Bylaws Filed herewith
of the Company

3.6 Amendment to the Amended and Restated Bylaws Filed herewith
of the Company

3.7 Amendment to the Amended and Restated Bylaws Filed herewith
of the Company

3.8 Amendment to the Amended and Restated Bylaws Filed herewith
of the Company

4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY
HOLDERS, INCLUDING INDENTURES

4.1 Amended and Restated Credit Agreement (the Annual Report on Form 10-K for the
"Credit Agreement") dated as of August 16, fiscal year ended July 31, 1997,
1988 As Amended and Restated as of April 30, File No. 0-21556, Exhibit 4.1
1996

4.2 First Amendment to the Credit Agreement, Annual Report on Form 10-K for the
effective July 31, 1997 fiscal year ended July 31, 1997,
File No. 0-21556, Exhibit 4.2

4.3 Form of Indenture dated as of 1993, between the Registration Statement on Form S-1 filed
Company and Continental Bank, National with the Commission on April 18, 1993,
Association, as Trustee (including form of File No. 33-60766, Exhibit 4.38
Senior Note)

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45

10 MATERIAL CONTRACTS

10.1 Employment Agreement between Thomas A. Annual Report on Form 10-K for the fiscal year
Gildehaus and the Company dated as of March 28, ended July 31, 1997, File No. 0-21556, Exhibit
1997 10.1

10.2 Form of Indemnification Agreements between the Annual Report on Form 10-K for the fiscal year
Company and each of its directors and officers ended July 31, 1997, File No. 0-21556, Exhibit
serving at any time after January 31, 1997 10.2

10.3 Northwestern Steel and Wire Company Management Annual Report on Form 10-K for the fiscal year
Stock Option Plan effective August 12, 1992 ended July 31, 1992, File No. 1-4288, Exhibit
10.20

10.4 Fee Agreement dated as of August 12, 1992 Annual Report on Form 10-K for the fiscal year
between the Company and Kohlberg ended July 31, 1992, File No. 1-4288, Exhibit
10.22

10.5 1994 Long Term Incentive Plan Registration Statement on Form S-8 and Form
S-3, No. 33-53471, Exhibit 4(d)

10.6 1994 Director Stock Option Plan Registration Statement on Form S-8 and Form
S-3, No. 33-53471, Exhibit 4(e)

10.7 Employee Stock Purchase and Option Plan Registration Statement on Form S-8, filed with
the Commission December 28, 1992, File No.
33-56412, Exhibit 4.3

10.8 Form of Termination of Control Agreement Annual Report on Form 10-K for the fiscal year
between the Company and named executives ended July 31, 1997, File No. 0-21556, Exhibit
10.10

10.9 Form of Supplemental Executive Retirement Plan Annual Report on Form 10-K for the fiscal year
for Covered Executives ended July 31, 1997, File No. 0-21556, Exhibit
10.11

21 SUBSIDIARIES OF THE REGISTRANT

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46

21.1 The Company has three subsidiaries: Northwestern Steel and Wire
Company (formerly H/N Steel Company, Inc.), a Texas corporation,
Northwestern Steel and Wire Company, a Delaware corporation, and
Northwestern Steel and Wire Company - Kentucky, a Delaware
corporation

23 CONSENT OF EXPERTS AND COUNSEL

23.1 Consent of Independent Accountants dated
October 27, 1998 Filed herewith

27 DATA SCHEDULE

27.1 Data Schedule Filed herewith

(b) Reports on Form 8-K

None.