QUANEX CORP, 10-K405, 1996-01-22

QUANEX CORP
10-K405, 1996-01-22
STEEL WORKS, BLAST FURNACES & ROLLING MILLS (COKE OVENS)

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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 [FEE REQUIRED]
For the fiscal year ended October 31, 1995

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________

Commission file number 1-5725

QUANEX CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 38-1872178
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)

1900 WEST LOOP SOUTH, SUITE 1500
HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (713) 961-4600

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

<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
COMMON STOCK, $.50 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
RIGHTS TO PURCHASE SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK NEW YORK STOCK EXCHANGE, INC.
6.88% CONVERTIBLE SUBORDINATED
DEBENTURES NEW YORK STOCK EXCHANGE, INC.
</TABLE>

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

NONE

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

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

The aggregate market value of the registrant's voting stock held by
non-affiliates as of November 30, 1995, computed by reference to the closing
price for the Common Stock on the New York Stock Exchange, Inc. on that date,
was $248,242,336. Such calculation assumes only the registrant's officers and
directors were affiliates of the registrant.

At December 31, 1995, there were outstanding 13,517,582 shares of the
registrant's Common Stock, $.50 par value.

DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
Documents Reference to this Report
--------- ------------------------
<S> <C>
Annual Report to Stockholders Parts I, II and IV

Proxy Statement for Annual Meeting of Stockholders to be
held February 22, 1996 Part III
</TABLE>
<PAGE> 2

ITEM 1. BUSINESS

GENERAL
The Company was organized in 1927 as a Michigan corporation under the name of
Michigan Seamless Tube Company. The Company reincorporated in Delaware in 1968
under the same name and changed its name to Quanex Corporation in 1977. The
Company's executive offices are located at 1900 West Loop South, Suite 1500,
Houston, Texas 77027. References made to the "Company" or "Quanex" include
Quanex Corporation and its subsidiaries unless the context otherwise requires.
Quanex Corporation is a technological leader in the manufacture of specialized
metals, including carbon and alloy steel and aluminum. The Company's products
include engineered hot rolled carbon and alloy steel bars, cold finished steel
bars, seamless and welded steel tubing and aluminum products. Quanex produces
high quality specialized metal products for selected markets to achieve
attractive profit margins. Through state-of-the-art process technology, low cost
production and engineering to specific customer applications, the Company
believes it achieves competitive advantages. To reduce the impact of cyclical
economic downturns, the Company's strategy is to participate in diversified
markets, including the industrial machinery and capital equipment industries,
the transportation industry (including auto and truck), energy processing and
the home building and remodeling industries.
Since the mid-1980s Quanex has refocused its strategy from being a
manufacturer principally of steel products with a heavy dependence on energy
markets to a diversified specialized metals company serving a broad range of
markets. The Company's future growth strategy focuses on continued penetration
of higher margin markets for the Company's steel products and the continued
expansion of its aluminum products manufacturing operations. Quanex also has
implemented programs to increase capacity utilization by selectively producing
certain commodity grade products at some of its facilities.
The Company has invested significantly in technologically advanced continuous
manufacturing processes to meet demanding quality specifications and to achieve
cost efficiencies. In its MacSteel operations, rotary centrifugal continuous
casters are used in an in-line manufacturing process to produce bearing grade
and aircraft quality, seam-free, specialty engineered carbon and alloy steel
bars that enable Quanex to participate in higher margin markets. In August 1991,
the Company completed Phase I of a capital expenditure program for its MacSteel
operations, at a capital cost of approximately $20 million, that enhanced the
steel refining processes and increased productive capacity by approximately 10%
to 500,000 tons per year. In March 1995, the Company completed Phase II, at a
capital cost of approximately $61 million. Phase II enhanced dimensional
precision rolling and finishing capability and increased productive capacity by
approximately 10% to 550,000 tons per year. Phase III of the program aims at
increasing caster productivity and is expected to increase productive capacity
by approximately 12% to 620,000 tons per year when completed in fiscal 1998. The
Company estimates total expenditures of approximately $60 million for the Phase
III project.
In 1989 Quanex entered the aluminum products business through the acquisition
of Nichols-Homeshield, Inc. to diversify its earnings base and continue its
strategic transition into specialized metals. In early 1990 the Company
commenced a two-year aluminum mini-mill construction project to increase
significantly its participation in the aluminum markets. The plant began
commercial production in July 1992 producing coiled aluminum sheet from scrap
using a state-of-the-art Hazelett thin-slab continuous caster with annual
finishing capacity of approximately 300 million pounds.
The Company's business is managed on a decentralized basis. Each operating
group has administrative, operating and marketing functions. Financial
accounting and controls measure each plant's return on investment; and superior
performance is rewarded with incentive compensation, which is a significant
portion of total employee compensation. Intercompany sales are conducted on an
arms-length basis. Operational activities and policies are managed by corporate
officers and a small staff who provide corporate accounting, financial and cash
management, tax and human resource services to operating divisions.

MARKETS AND PRODUCT SALES BY BUSINESS SEGMENT
The Company's operations are primarily grouped into four business segments,
consisting of (i) hot rolled steel bars, (ii) cold finished steel bars, (iii)
steel tubes and (iv) aluminum products. General corporate expenses are
classified as other operations.
Information with respect to major markets for the Company's products,
expressed as a percentage of consolidated net sales, is shown under the heading
"Sales by Major Markets" on page 8 of the 1995 Annual Report to Stockholders and
is incorporated herein by reference. Although Quanex has attempted to estimate
its sales by product and market categories, many products have multiple end uses
for several industries and sales are not recorded on the basis of product or
market categories. A significant portion of sales is made to distributors who
sell to different industries. Net sales by principal market are based upon the
total dollar volume of customer invoices. For the year ended October 31, 1995,
no single customer accounted for more than 10% of the Company's sales.

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A description of each industry segment is shown below:

Hot Rolled Steel Bars

The Company's hot rolled steel bar operations are conducted through its
MacSteel division, consisting of two plants located in Ft. Smith, Arkansas and
Jackson, Michigan. These plants manufacture hot finished precision engineered
carbon and alloy steel bars. Management believes that MacSteel has the only two
plants in North America using continuous rotary centrifugal casting technology.
This casting process produces inherently seam-free bars, without surface defects
and inclusions, thereby reducing the need for subsequent surface conditioning.
The continuous casting and automated in-line manufacturing operations at the
MacSteel plants substantially reduce labor and energy costs by eliminating the
intermittent steps that characterize manufacturing operations at most integrated
steel mills. Typically, the Company sells only complete heat lots, or batches,
which are made to specific customer requirements. Heat lots average 45 tons at
Jackson and 50 tons at Ft. Smith. MacSteel's high quality steel bars currently
sell for an average of approximately $566 per ton, and its specialty products
can sell at a considerable premium to that price.
MacSteel has focused its capital expenditure programs on production of high
quality specialty steel bars. In August 1991, MacSteel completed the first phase
of a capital improvement program, called MacSteel Ultra Clean Steel Program, at
a cost of approximately $20 million ("Phase I"). This program improved
MacSteel's metallurgical, melting and casting operations and provided ultrasonic
testing facilities at both plants. These improvements enable the Company to
produce bearing grade and aircraft quality steel bars, permitting the Company to
participate in higher margin segments of the market. Phase I increased
productive capacity of the MacSteel operations by approximately 40,000 tons to
500,000 tons per year. Phase II of the Ultra Clean Steel Program upgraded and
modernized rolling and finishing capacity and increased caster productivity.
This improvement will permit increased participation in the value-added cold
forming and bearing markets and will expand product size ranges. The Phase II
program increased annual capacity by approximately 50,000 tons to 550,000 tons
per year. Total cost of Phase II was approximately $62 million. The Phase III
program is expected to increase capacity by approximately 12% to 620,000 tons by
improving caster and melting utilization. Total cost of Phase III is expected to
be approximately $60 million with a completion date in fiscal 1998.
MacSteel products are manufactured for customers in the automotive, light
truck, heavy truck, anti-friction bearing, off-road and farm equipment, defense,
capital equipment and seamless tubular industries. These industries use steel
bar in critical applications requiring high performance steels such as
camshafts, crankshafts, transmission gears, bearing cages and rollers, steering
components, hydraulic mechanisms, seamless tube production and track components
of military vehicles. Part of MacSteel's production may be sold to LaSalle Steel
for conversion into cold finished bars. The Company's steel tube business also
purchases MacSteel bars for piercing and extrusion into specialty tubular
products.

Cold Finished Steel Bars

The Company's LaSalle Steel subsidiary produces cold finished bars in its
Hammond, Indiana facility. LaSalle Steel is a technological leader in the
production of cold finished and special purpose steel bar products, having
obtained numerous foreign and domestic patents throughout its history. Like
MacSteel, LaSalle Steel features products and manufacturing processes that
emphasize quality and cost effectiveness. LaSalle Steel uses high quality hot
finished steel bars that satisfy exacting quality and metallurgical
specifications. The bars are cold drawn and, through a combination of turning,
grinding and polishing operations, are manufactured into bars with precision
surfaces and guaranteed size and straightness tolerances. These processes,
together with heat treating, enhance the tensile and fatigue strength,
machinability, wear and corrosion resistance, weldability and platability of the
cold finished bar product.
LaSalle Steel's products are sold directly to customers in the machinery,
industrial equipment, tooling and automotive markets and are used to produce
items such as clutch shafts, gear box shafts, ball joints, sprockets and drive
mechanisms. Over one-half of LaSalle Steel's sales are to service centers that
supply the same industries. LaSalle Steel has implemented programs to increase
capacity utilization by selectively producing certain commodity grade products.
LaSalle Steel's Fluid Power plant in Griffith, Indiana is a major producer of
chrome plated steel bars. The plant uses advanced techniques of surface removal,
induction hardening and chrome plating to produce chrome plated bars and
induction hardened chrome plated bars. These products, which represent the
highest value-added products manufactured by LaSalle Steel, are used in
hydraulic and pneumatic cylinders by customers in the construction, material
handling, farm equipment and industrial machinery industries.

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Steel Tubes

The Company's steel tube business consists of its Michigan Seamless Tube
("MST") plant in South Lyon, Michigan, which produces cold drawn seamless steel
tube and drawn-over-mandrel welded steel tube; its Gulf States Tube ("GST")
plant in Rosenberg, Texas, which produces hot finished and cold drawn seamless
steel tube and welded tubular products; its Heat Treating plant in Huntington,
Indiana provides tube and bar heat treating services; its NitroSteel Plant in
Kenosha, Wisconsin provides wear and corrosion resistant finishing to steel bars
and tubes. A significant portion of production at all plants is manufactured to
specific customer orders. The Company can deliver small quantities of finished
products at competitive prices in considerably less time than many other mills
as a result of its production efficiencies.
MST produces over 60 grades of carbon and alloy tubing. Major product lines
include customized seamless carbon and alloy mechanical tubing, carbon and alloy
boiler and condenser tubing and carbon and alloy pipe. These products are sold
by MST to customers in the commercial and utility boiler market, industrial
equipment market and capital goods market.
GST produces seamless and welded tubular products in 35 grades to over 100
specifications. The hot finished seamless carbon and alloy pipe and cold drawn
tubing produced at GST are used in petroleum refining, petrochemical, aircraft,
public utility, oil country and mechanical applications. Electric resistance
welded tubing is also manufactured primarily for heat exchangers and condenser
applications.
The Heat Treating plant provides tube and bar heat treating services, such as
quench and temper, stress relieving, normalizing and "cut-to-length".
Metallurgical testing services are also available. This plant serves customers
in the energy, automotive, ordnance, mining and fluid power markets.
The NitroSteel division was acquired in January 1995. The plant provides wear
and corrosion resistant finishing to steel bars. The products are sold into
fluid power markets.

Aluminum Products

Nichols-Homeshield ("N-H") manufactures aluminum sheet and fabricates aluminum
products for the transportation, home improvement, new construction and light
commercial construction markets. The principal products produced by N-H include
mill finished sheet, aluminum window screens, patio door screens, window frames,
window and screen components, rain carrying systems and exterior trim. Aluminum
reroll coil is produced by the Company's mini-mill ("N-H Casting"), which began
commercial operations in July 1992. The aluminum reroll coil is cold rolled,
finished and marketed from the Davenport, Iowa and Lincolnshire, Illinois
facilities (collectively, "Nichols-Aluminum"). The Company's aluminum products
are fabricated at the AMSCO plant ("AMSCO") in Rice Lake, Wisconsin, and at its
Homeshield Fabricated Products plant ("HFP") in Chatsworth, Illinois. N-H's
primary businesses are described below.
N-H Casting completed construction of a $60 million aluminum mini-mill in
Davenport, Iowa in late fiscal 1992. The capital costs included site
acquisition, scrap processing and melting equipment, a 52-inch wide Hazelett
thin-slab continuous caster and a three-stand hot rolling mill. The mini-mill
provides a finished capacity of as much as 300 million pounds annually of hot
rolled coiled aluminum sheet for building products, transportation and service
center markets, the Company's fabricated products businesses and other markets.
The three-stand hot rolling mill is able to reduce aluminum slab from a
thickness of approximately 0.75 inches to coiled aluminum sheet with a thickness
of 0.045 inches. This hot rolling mill process substantially reduces subsequent
cold rolling requirements. Similar to the more developed steel mini-mill sector,
the advent of aluminum mini-mills offers advantages over large integrated
producers, including labor and energy cost savings and reduced capital costs.
Nichols Aluminum finishes the coiled aluminum sheet produced at N-H Casting
and markets aluminum mill products. This division includes the Nichols Aluminum
Davenport (NAD) plant and the Nichols Aluminum Lincolnshire (NAL) plant acquired
in 1991. Operations include cold rolling to specific gauge, slitting to width,
annealing, leveling and custom coating. The Company currently has cold rolling
capacity of 300 million pounds annually.
The HFP plant manufactures a broad line of custom designed, roll formed and
stamped shapes and residential building and home improvement products. HFP
designs and manufactures custom engineered aluminum and stainless steel products
at its two plants in Chatsworth, Illinois, such as window screens, window and
screen components, wood window cladding and other custom products for
manufacturers of windows and doors. HFP also coats aluminum coil in many colors,
sizes and finishes for sale and for HFP's fabrication into rain carrying
systems, soffit, exterior housing trim and painted coiled sheet and roofing
products. These products are sold primarily through distributors and private
label producers for the new housing, remodeling and do-it-yourself markets. Most
of the non-custom products are marketed under the "Homeshield" brand name.
The AMSCO plant manufactures aluminum window and patio door screens, window
frames, combination windows and related accessories. All production from this
facility is sold to Andersen Corporation, a major

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manufacturer of premium wood windows, for the home improvement, new construction
and commercial construction markets. AMSCO combines a strong product design and
development emphasis with reliable, just-in-time delivery to service Andersen
Corporation. This exclusive business relationship has been in effect for 50
years.

MANUFACTURING
The Company operates fourteen manufacturing facilities in seven states. These
facilities feature efficient plant design and flexibility in manufacturing
processes, enabling the Company to produce a wide variety of products for
various industries and applications. Because the Company typically manufactures
products to customer specifications upon order, it is able to maintain minimal
levels of finished goods inventories at most locations.
Hot Rolled Steel Bars. The Company's MacSteel facilities produce specialty
engineered steel bars by melting high quality steel scrap and casting it in a
rotary continuous caster. MacSteel's molten steel is secondarily refined by
argon stirring, ladle injection and vacuum arc degassing prior to casting. This
enables MacSteel to produce higher quality, "cleaner" steels. Precision
engineered steel bars are produced in a continuous in-line process in which
scrap steel is converted into hot rolled steel bars without interruption. To the
Company's knowledge, MacSteel has the only two plants in North America producing
inherently seam-free steel bars using the rotary continuous casting process.
As a result of its state-of-the-art continuous manufacturing technology, which
reduces labor, energy and process yield loss, the Company believes that MacSteel
is one of the lowest cost producers of precision engineered carbon and alloy
steel bars. The Company believes that energy costs at MacSteel are significantly
lower than those of its competitors because its bars are moved directly from the
caster through the rolling mill before cooling, eliminating the need for costly
reheating. MacSteel's unit labor costs are similarly very low, with its highly
automated manufacturing process enabling it to produce finished high quality
steel bars using approximately 2 man-hours of labor per ton compared to an
estimated average of 5 man-hours per ton for U.S. integrated steel producers.
Cold Finished Steel Bars. At the LaSalle Steel facility in Hammond, Indiana,
hot finished steel bars meeting quality and metallurgical specifications are
used as raw materials in the manufacturing process. These bars are cold drawn to
closer size tolerances and to achieve desired metallurgical properties. A
portion of LaSalle's product is further processed through a combination of
turning, grinding and polishing operations, manufactured into bars having
precision surfaces with guaranteed size and straightness tolerances. Heat
treating further enhances the tensile and fatigue strength, machinability, wear
and corrosion resistance, weldability and platability of LaSalle Steel's cold
finished bar products. The Company's Griffith, Indiana facility uses advanced
techniques of surface removal, induction hardening and chrome plating to produce
chrome plated bars and induction hardened chrome plated bars.
Steel Tubes. The Company produces seamless tubing at its MST and GST
facilities. The manufacturing begins with solid steel bars that are heated and
then pierced on a rotary piercing mill at MST or extruded at GST. The resulting
hot tube shells are further reduced on draw benches. The product may be shipped
as hot finished pipe at GST or, after cooling and inspection, be again reduced
in size by cold drawing at both plants. After cold drawing, tubing is annealed
to develop specific metallurgical characteristics and mechanical properties to
customer order. Following straightening, the product is cut to length and
inspected where various mechanical and non-destructive tests are performed to
insure product integrity. Cold drawn tubing offers a greater degree of
dimensional consistency and better machinability than does hot finished tubing.
GST also produces small diameter welded tubular products.
Aluminum Products. Manufacturing at the Company's various N-H facilities
ranges from the production of coiled aluminum sheet to the production and
fabrication of finished building products such as window and patio door screens
and window frames.
Since commercial production began in July 1992, all of the Company's aluminum
casting operations have been conducted at N-H Casting's mini-mill in Davenport,
Iowa. The single in-line manufacturing process at the facility has 300 million
pounds of annual melting and hot rolled aluminum sheet capacity. This mini-mill
expanded the Company's annual capacity by 250 million pounds of aluminum. The
mini-mill converts scrap to aluminum sheet through melting and continuous
casting and in-line hot rolling. N-H Casting also has the ability to shred
aluminum scrap to broaden the diversity and source of its raw material.
Additionally, fuel efficient delacquering equipment improves the quality of the
raw material before it is charged to the melting furnaces where it is blended
through computer analysis to achieve the desired alloy composition. After
melting and degassing, the molten metal flows into a Hazelett thin-slab caster,
which casts up to a 52-inch wide aluminum slab. The slab then is fed directly to
a hot mill with three in-line rolling stands to reduce the slab from a thickness
of approximately 0.75 inches to coiled aluminum sheet with a thickness of down
to 0.045 inches. The combination of capacity increases and technological
enhancements directed at producing quality coiled aluminum sheet for the
building products, service center, appliance and truck trailer markets enables
N-H Casting to achieve cost savings from higher scrap utilization, use of lower
cost scrap, reduced energy costs, reduced cold rolling requirements and reduced
direct and indirect labor costs.

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Further processing of the coiled aluminum sheet from the mini-mill occurs at
Nichols Aluminum. At Nichols Aluminum's Davenport, Iowa, and Lincolnshire,
Illinois, plants, the specific product requirements of customers can be met
through cold rolling to various gauges, slitting to specific widths, annealing
for additional product formability and physical properties and tension
levelling. Products at Davenport can also be custom coated, an important feature
for the building products applications of certain customers.
Manufacturing of products and components takes place at the group's HFP
facilities (including residential building products such as rain carrying
systems and engineered products such as window and screen components) and at
AMSCO (including aluminum window frames and patio door screens). These
facilities fabricate aluminum sheet into various components, some of which are
then assembled into final products. A significant aspect of the manufacturing
process at HFP and AMSCO is the use of MRP II, a closed loop management
information system in which all stages of manufacturing, including receiving,
billing, accounting, ordering and production, are linked. This process enables
HFP and AMSCO to operate efficiently and effect a just-in-time delivery system,
with minimal levels of raw materials inventory and maximum usage of available
manufacturing capacity.

RAW MATERIALS AND SUPPLIES
The Company's precision engineered steel bar plants purchase steel scrap and hot
briquetted iron, their principal raw materials, on the open market. Barge
transportation of these raw materials to Company plants can be adversely
affected by cold weather, creating seasonal price increases. Prices for quality
scrap also vary in relation to the general business cycle, typically declining
in periods of slow economic growth. LaSalle Steel's primary raw material is hot
finished steel bars that it purchases both from the Company's hot rolled steel
bars plants and on the open market. The Company's tube manufacturing facilities
also purchase hot rolled steel bars from MacSteel and on the open market. MST
also purchases tube hollows and GST purchases flat-rolled steel as raw material
on the open market.
Historically, the Company's aluminum products business purchased aluminum
scrap, ingot, reroll stock and finished sheet from aluminum dealers, brokers and
producers. With the completion of the N-H Casting mini-mill, the principal raw
material of this business is aluminum scrap. The mini-mill includes a scrap
processing and delacquering facility which enables the Company to use the
broadest and most economical mix of aluminum scrap for its requirements. The
Company also purchases aluminum ingot futures contracts on the London Metals
Exchange in amounts equal to N-H's requirements for fixed price sales
commitments for aluminum products, thereby protecting against increases in the
price of the aluminum used to manufacture the related products.

BACKLOG
At October 31, 1995, Quanex's backlog of orders to be shipped in the next twelve
months was $164.0 million. This compares to $182.7 million at October 31, 1994.
Because many of the markets in which Quanex operates have short lead times,
backlog figures are not reliable indicators of annual sales volume or operating
results.

COMPETITION
All of the Company's products are sold under highly competitive conditions. The
Company competes with a number of companies, some of which have financial and
other resources greater than those of the Company. Competitive factors include
product quality, price, delivery and ability to manufacture products to customer
specifications. The amounts of aluminum, hot rolled steel bars, cold finished
bar products and tubing produced by the Company represent a small percentage of
annual domestic production.
The hot rolled precision engineered steel bar plants compete with two large
integrated steel producers, two large nonintegrated steel producers and two
smaller steel companies. Although many of these producers are larger and have
greater resources than the Company, the Company believes that the technology
used at the MacSteel facilities permits it to compete effectively in the markets
it serves.
LaSalle Steel has ten major competitors including both integrated and
independent steel producers. Although a portion of LaSalle Steel's sales are in
specialized products made by patented processes, many of their competitors have
similar products using their own patents and processes.
The Company's steel tube manufacturing businesses compete with numerous
domestic and foreign steel producers. As a specialized producer, the steel tube
segment manufactures seamless steel tubing only in the smaller size ranges.
Currently there are five other manufacturers of seamless tubing in the same size
ranges as those produced by Quanex. Each of these manufacturers is either wholly
or partially integrated in that they produce all or part of the steel used by
them for their production of tubing. The Company's welded tube business is also
highly competitive, with more than 100 companies producing welded steel tubing.
For reasons of geography and product quality, however, the number of welded tube
manufacturers with which Quanex is in direct competition is significantly less.
Imports are a significant factor in this market. On June 23, 1994, Quanex
announced that its Gulf States Tube Division had filed petitions alleging that
imports of carbon and alloy seamless pipe up to 4.5 inches in diameter from four
countries were being dumped or subsidized. On August 3,

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1994, the International Trade Commission (ITC) made an affirmative preliminary
determination that imports of small diameter pipe from these countries were
causing injury to the U.S. industry. On July 20, 1995, the ITC made a unanimous,
affirmative final determination that those same imports did cause injury to the
U.S. industry. As a result of the ITC findings, the Department of Commerce
imposed dumping margins on these four countries ranging from 3.31% to 124.96%.
The Company's aluminum products business competes with many small and large
manufacturers and fabricators of aluminum products. Some of these competitors
are divisions or subsidiaries of major corporations with substantially greater
resources. The Company also competes with major aluminum producers in
coil-coated and mill products, primarily on the basis of the breadth of product
lines, the quality and design of its products, the responsiveness of its
services and its prices. With the increased production of coiled aluminum sheet
for aluminum mill products markets, the Company will increasingly compete with
major integrated aluminum manufacturers.

SALES AND DISTRIBUTION
The Company has a nationwide system of sales offices. MacSteel sells hot
finished steel bars primarily to original equipment manufacturers ("OEM's")
through its sales organization and manufacturers' representatives. LaSalle Steel
sells its cold finished bars to independent distributors, steel service centers
and directly to OEM's. The steel tube segment's products are sold by its sales
organization to steel service centers and directly to OEM's.
The sales and distribution of products in the Company's aluminum products
business are organized by major product group. Residential products are sold
primarily through distributors; engineered products are sold primarily to OEM's;
and mill products are sold directly to OEM's and through metal service centers.

SEASONAL NATURE OF BUSINESS
The Company's aluminum products business is seasonal as its primary markets are
in the Northeast and Midwest regions of the United States where winter weather
reduces home building and home improvement activity. Historically, this
business's lowest sales have occurred during the Company's first fiscal quarter.
Because a high percentage of this business's manufacturing overhead and
operating expenses is due to labor and costs that are generally fixed throughout
the year, profits for the operations in this business tend to be lower in
quarters with lower sales.
The other businesses in which the Company competes are not seasonal. However,
due to the holidays in the Company's first fiscal quarter and steel plant
shutdowns for vacations and maintenance in the Company's third fiscal quarter,
sales have historically been lower in those quarters. Due to the combined
effects of seasonality, the Company generally expects that, absent unusual
activity or changes in economic conditions, its lowest sales will occur in the
first fiscal quarter.

TRADEMARKS, TRADE NAMES AND PATENTS
The Company's Nichols-Homeshield and MacSteel logos and designs are registered
trademarks. The trade name "Homeshield" and its unregistered name
"Nichols-Homeshield" are used in connection with the sale of the Company's
aluminum products. The Homeshield and MacSteel logos and designs and their trade
names are considered valuable in the conduct of the Company's business.
In general, the businesses conducted in the Company's businesses do not depend
upon patent protection. Although the Company holds numerous patents, in many
cases the proprietary technology that the Company has developed is more
important than the patents themselves.

RESEARCH AND DEVELOPMENT
Expenditures for research and development of new products or services during the
last three years were not significant. Although not technically defined as
research and development, a significant amount of time, effort and expense is
devoted to manufacturing processes and to customizing and qualifying the
Company's products for specific customer applications.

ENVIRONMENTAL MATTERS
As a manufacturer of specialty metal products, Quanex is subject to extensive
and expansive regulations concerning the discharge of materials into the
environment, and the remediation of chemical contamination at its plant sites or
offsite disposal locations. Quanex is required to make capital and other
expenditures on an ongoing basis in order to comply with such regulations. The
cost of environmental matters has not had a material adverse effect on Quanex's
operations or financial condition in the past, and management is not currently
aware of any existing conditions that it currently believes are likely to have a
material adverse effect on Quanex's operations or financial condition.
Under applicable state and federal laws, including the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), also known as "Superfund," the Company may be

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responsible for all or part of the costs required to remove or remediate
previously disposed of wastes or hazardous substances at the locations Quanex
owns or operates or at which it arranged for disposal of such materials. The
Company's most significant involvement at Superfund sites is described below.
During fiscal 1987, Quanex's LaSalle Steel Company subsidiary paid
approximately $200,000, of which approximately $130,000 has subsequently been
contributed to Quanex by other potentially responsible parties, in connection
with a removal action at the Conservation Chemical Co. of Illinois site in the
State of Indiana in accordance with an order of the Environmental Protection
Agency (the "EPA") pursuant to Section 106 of CERCLA. This matter relates to
hazardous substances sold to owners of the waste site by a company whose assets
were purchased by Quanex and transferred to LaSalle Steel. LaSalle was named in
this matter by the EPA as a potentially responsible party. LaSalle and other
parties named by the EPA as potentially responsible parties took various actions
to comply with the EPA's order. The Company believes that the response actions
contemplated by the EPA removal order have been substantially completed. In
1989, LaSalle withdrew from the group of potentially responsible parties because
its only connection to the site was the purchase of assets, without
contractually assuming liabilities, from a company that allegedly sent waste to
the site. Since that time, the Company has had no involvement with the site. The
need for, or extent of, any further cleanup therefore is unknown by Quanex. Even
if the Company is unsuccessful in asserting its defenses, LaSalle was one of
numerous parties contributing cleanup funds and it has no reason to believe that
those other parties generally would not be able to pay costs apportioned to
them. For all of these reasons, Quanex does not believe that its liability, if
any, with respect to this facility, will have a material adverse effect on its
business or financial position.
The EPA has placed on the Superfund National Priorities List the Lenz Oil site
in the State of Illinois to which a company, whose assets were purchased by
Quanex and transferred to LaSalle Steel, had previously sent used petroleum
products. The State of Illinois previously had sent a letter to LaSalle Steel
stating that those materials had been disposed of improperly at that site.
LaSalle Steel, in conjunction with a group of parties who received similar
letters, entered into a consent decree pursuant to which action was taken to
address the matters referred to in the letter from the State of Illinois.
LaSalle paid approximately $8 thousand out of a $2.5 million group settlement.
LaSalle Steel is currently participating in a group that is assessing site
conditions and further remediation options. Further liability could be asserted
against Quanex as a result of the EPA's actions. The company that sold its
assets to LaSalle Steel is one of many companies that had sent materials to this
facility. It is Quanex's understanding that such company contributed
approximately 0.2% of the total volume of materials handled at this facility.
The Company has no reason to believe that the other companies involved will not
be financially able to contribute to any possible future clean-up efforts at
this site, or that the basis for allocation of liability will substantially
change. As a result of the foregoing, Quanex does not believe that its
liability, if any, with respect to this facility, will have a material adverse
effect on its business or financial position.
The EPA also has placed on the National Priorities List the Douglassville, or
Berks Associates, Disposal Site in the Commonwealth of Pennsylvania to which
LaSalle Steel may have sent used petroleum products. The EPA currently is
administering a multistage cleanup at the site. Liability has been asserted
against the Company by a group of potentially responsible parties for
contribution toward cleanup costs incurred at the facility. It is Quanex's
understanding that many companies sent wastes to this site and that LaSalle is
alleged to have contributed less than 0.005%, on a volumetric basis, of the
total materials. The group of defendants and third-party defendants include a
number of large companies and several agencies of the federal government that
the Company has no reason to believe will not be financially able to contribute
their expected share. These parties have expressed a willingness to participate
in settlement efforts. Pursuant to settlement negotiations, LaSalle Steel
currently is classified as a de minimis contributor. Based on the foregoing,
Quanex does not believe that its liability, if any, with respect to this site,
will have a material adverse effect on its business or financial position.
Amendments to the federal Clean Air Act were adopted in 1990, and the EPA
currently is developing regulations to implement the requirements of those
amendments. Depending on the nature of the regulations adopted, and upon
requirements that may be imposed by state and local regulatory authorities,
Quanex may be required to incur capital expenditures sometime in the next
several years for air pollution control equipment to maintain or obtain
operating permits and approvals and address other air emission-related issues.
The Company's Board of Directors has approved capital expenditures totaling
approximately $20 million to be spent in 1996, 1997 and 1998 to meet these
requirements. Based upon its analysis to date, Quanex does not believe that its
compliance with these requirements will have a material effect on its operations
or finances.
Quanex incurred approximately $3,300,000 and $4,000,000 during fiscal 1995 and
1994, respectively, in expenses and capital expenditures in order to comply with
existing or proposed environmental regulations. It is anticipated that Quanex
will spend approximately $3,500,000 at various of its facilities during fiscal
1996, and, although not currently quantifiable or expected to be material to the
Company as a whole, will continue to have expenditures in connection with
environmental matters beyond 1996. Future expenditures relating to environmental
matters will necessarily depend upon existing future regulations and their
application to Quanex and its facilities.

64
<PAGE> 9

EMPLOYEES
At October 31, 1995, the Company employed 2,716 persons. Of the total employed,
48% were covered by collective bargaining agreements. During 1996, two labor
contracts will expire affecting two Quanex facilities. The United Steelworkers
of America contract at Michigan Seamless Tube covering 228 employees will expire
on September 15, 1996 and the United Steelworkers of America contract with
LaSalle Steel -- Fluid Power division covering 22 employees will expire on
January 31, 1996.

ITEM 2. PROPERTIES

The following table lists Quanex's principal plants at October 31, 1995,
together with their locations, general character and the industry segment which
uses the facility. Each of the facilities identified as being owned by the
Company is free of any material encumbrance.

<TABLE>
<S> <C> <C>
Square
Owned STEEL BARS Footage
- ----- ---------- -------
Fort Smith, Arkansas MacSteel 415,723
Jackson, Michigan MacSteel 245,150

Owned COLD FINISHED STEEL BARS
- ----- ------------------------
Griffith, Indiana Fluid Power 37,000
Hammond, Indiana LaSalle Steel 493,000

Owned STEEL TUBES
- ----- -----------
Rosenberg, Texas Gulf States Tube 128,000
South Lyon, Michigan Michigan Seamless Tube 323,000
Huntington, Indiana Heat Treating 82,000

Leased (expires 2009)
- ---------------------
Kenosha, Wisconsin NitroSteel 35,000

Owned ALUMINUM PRODUCTS
- ----- -----------------
Rice Lake, Wisconsin AMSCO 290,800
Chatsworth, Illinois Homeshield Fabricated Products 212,000
Lincolnshire, Illinois Nichols Aluminum 142,000
Davenport, Iowa Nichols Aluminum 236,000
Davenport, Iowa Nichols-Aluminum Casting 245,000

Leased (expires 1999) EXECUTIVE OFFICES
- --------------------- -----------------
Houston, Texas Quanex Corporation 21,000
</TABLE>

ITEM 3. LEGAL PROCEEDINGS

Other than the proceedings under Item 1, "Environmental Matters", incorporated
here by reference, there are no material legal proceedings to which Quanex, its
subsidiaries, or its property is subject.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders through the solicitation
of proxies or otherwise during the fourth quarter of the fiscal year covered by
this report.

65
<PAGE> 10

FORM 10K INFORMATION PART II

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

Quanex's common stock, $.50 par value, is traded on the New York Stock Exchange,
ticker symbol: NX. Quarterly stock price information and dividend information is
shown on Page 67.
The terms of Quanex's revolving credit arrangements with certain banks limit
the total amount of common dividends and other distributions on such stock.
Under the most restrictive test under such credit facilities, the total common
stock dividends the Company may declare and pay is limited to $21,000,000, plus
50% of consolidated net earnings after October 31, 1989, adjusted for other
factors as defined in their respective Loan Agreements. As of October 31, 1995,
the amount of dividends and other distributions the Company was permitted to
declare and pay under its credit facilities was $25,483,000.
There were 3,659 record holders of Quanex common stock on October 31, 1995.

ITEM 6. SELECTED FINANCIAL DATA

Pages 34 and 35 of the 1995 Annual Report to Stockholders present selected
financial data for the past eleven fiscal years.

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

See pages 37-41 of the 1995 Annual Report to Stockholders.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data for Quanex are on pages 42-57 of
the 1995 Annual Report to Stockholders.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

During the past two fiscal years there has been no change in the Company's
independent auditors, and there has been no disagreement on accounting practices
or financial statement disclosure required to be reported.

66
<PAGE> 11

INDEX TO FORM 10-K INFORMATION

Form 10-K Item No. Location in Annual Report
- --------------------------------------------------------------------------------
PART I
1. Business ....................................................... 8, 40, 58-65
2. Properties .............................................................. 65
3. Legal Proceedings ....................................................... 65
4. Submission of Matters to a Vote of Security Holders ..................... 65
- --------------------------------------------------------------------------------
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................... 66, 67
6. Selected Financial Data ....................................... 33, 34-35, 66
7. Management's Discussion and Financial Analysis of
Financial Condition and Results of Operations ..................... 37-41, 66
8. Financial Statements and Supplementary Data ............... 36, 42-57, 66, 67
9. Disagreements on Accounting and Financial Disclosure .................... 66
- --------------------------------------------------------------------------------
PART III
10. Directors and Executive Officers of the Registrant(1) .................. --
11. Executive Compensation(2) .............................................. --
12. Security Ownership of Certain Beneficial Owners and Management(3) ...... --
13. Certain Relationships and Related Transactions(2) ...................... --
- --------------------------------------------------------------------------------
PART IV
14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedules ....... 36, 42-57
(b) Exhibits(4) ........................................................ --
(c) Reports on Form 8-K(4) ............................................. --
- --------------------------------------------------------------------------------

(1) The information under the captions "Matters to Come Before the Meeting --
(1) Election of Three Directors" and "Further Information -- Executive
Officers" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held February 22, 1996, is incorporated herein by
reference.

(2) The information under the captions "Further Information" and "Executive
Compensation" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held February 22, 1996, is incorporated herein by
reference.

(3) The information regarding beneficial ownership of Common Stock by directors
and nominees (in the table of directors and nominees) and under the caption
"Further Information -- Principal Stockholders" in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held February 22,
1996, is incorporated herein by reference.

(4) A copy of the Index to Exhibits, filed with Quanex's Form 10-K Report,
can be obtained free of charge by written request to Stockholder Relations,
Quanex Corporation, 1900 West Loop South, Suite 1500, Houston, Texas,
77027. No Reports on Form 8-K were filed by the Company during the quarter
ended October 31, 1995.

68
<PAGE> 12
EXHIBITS
<TABLE>
<CAPTION>

Exhibit
Number Name of Exhibit
- ------ ---------------
<S> <C>

3.1 Amended and Restated Certificate of Incorporation of the
Registrant.

3.2 Amended and Restated Bylaws of the Registrant, as
amended through October 21, 1992, filed as Exhibit 3.2 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1992, and incorporated herein by
reference.

4.1 Form of Registrant's Common Stock certificate, filed as
Exhibit 4.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1987, and
incorporated herein by reference.

4.2 Amended and Restated Rights Agreement between the
Registrant and Manufacturers Hanover Trust Company, as
Rights Agent, filed as Exhibit 1 to Amendment No. 1 to
the Registrant's Form 8-A dated April 28, 1989, and
incorporated herein by reference.

4.3 Amended and Restated Certificate of Designation,
Preferences and Rights of the Registrant's Series A
Junior Participating Preferred Stock, filed as Exhibit 1 to
Amendment No. 1 to the Registrant's Form 8-A dated April
28, 1989, and incorporated herein by reference.

4.4 Form of Indenture relating to the Registrant's 6.88%
Convertible Subordinated Debentures due 2007 between the
Registrant and Chemical Bank, as Trustee, filed as Exhibit
19.2 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended April 30, 1992, and incorporated herein
by reference.

4.5 Revolving Credit and Letter of Credit Agreement dated as
of December 4, 1990 among the Registrant and the Banks
listed therein relating to a $40,000,000 revolving credit,
filed as Exhibit 4.7 to the Registrant's Annual Report on
Form 10-K for the year ended October 31, 1991, and
incorporated herein by reference.
</TABLE>
<PAGE> 13
<TABLE>
<S> <C>
4.6 Second Amendment to the Revolving Credit Agreement dated
as of April 15, 1992, filed as Exhibit 4.13 to the
Registrant's Registration Statement on Form S-3
(Registration No. 33-47282), and incorporated herein by
reference.

4.7 Third and Fourth Amendments to the Revolving Credit and
Letter of Credit Agreement dated as of February 12,
1993 and April 1, 1993, respectively, filed as Exhibit 19
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1993, and incorporated herein by
reference.

4.8 Fifth Amendment to the Revolving Credit and Letter of
Credit Agreement dated as of December 8, 1994, filed as
Exhibit 4.15 to the Registrant's Form S-8 Registration No.
33-57235, and incorporated herein by reference.

4.9 Sixth Amendment to the Revolving Credit and Letter of
Credit Agreement dated as of June 30, 1995, filed as
Exhibit 4.1 of the Registrant's Quarterly Report for the
quarter ended July 31, 1995, and incorporated herein by
reference.

4.10 Seventh Amendment to the Revolving Credit and Letter of
Credit Agreement dated as of December 28, 1995.

10.1 Agreement of Lease between Leland Tube Company, Inc. and
Role Realty Co., dated March 5, 1970, with attached
Assignment of Tenant's Interest in Lease from Leland Tube
Company to the Registrant, dated May 31, 1979, and filed
as Exhibit 10.3 of the Registrant's Form S-2, Registration
No. 2-88583, and incorporated herein by reference.

10.2 Agreement of Lease between Leland Tube Company, Inc. and
Role Realty Co., dated January 24, 1973, with attached
Assignment of Tenant's Interest in Lease from Leland Tube
Company to the Registrant, dated May 31, 1979, and filed
as Exhibit 10.4 of the Registrant's Form S-2, Registration
No. 2-88583, and incorporated herein by reference.

10.3 Lease Agreement between the Registrant and William M. Paul
and Associates, dated August 27, 1980, filed as Exhibit
10.5 of the Registrant's Form S-2, Registration No.
2-88583, and incorporated herein by reference.

10.4 Agreement of Lease between the Registrant and 3D Tower
Limited, dated March 5, 1985, filed as Exhibit 10.13 of
the Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1985, and incorporated herein by
</TABLE>
<PAGE> 14
<TABLE>
<S> <C>
reference, as amended by the First Amendment to Lease
Agreement between the Registrant and VPM 1989-1, Ltd.
effective December 8, 1989 and the amendment filed as
Exhibit 10.23 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1995.

10.5 Quanex Corporation 1988 Stock Option Plan, as amended, and
form of Stock Option Agreement filed as Exhibit 10.4 to
the Registrant's Annual Report on Form 10-K for the year
ended October 31, 1988, together with the amendment filed
as Exhibit 10.17 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1995, and
incorporated herein by reference.

10.6 Quanex Corporation Deferred Compensation Plan, as amended
and restated.

10.7 Quanex Corporation 1978 Stock Option Plan, as amended,
filed as Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1988, together
with the amendment filed as Exhibit 10.16 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1995, and incorporated herein by
reference.

10.8 Quanex Corporation Executive Incentive Compensation Plan,
as amended, filed as Exhibit 10.8 to the Registrant's
Form 10-K for the fiscal year ended October 31, 1993, and
incorporated herein by reference.

10.9 Quanex Corporation Supplemental Benefit Plan, effective
February 28, 1980 as restated November 1, 1988 and
amended on June 28, 1991, filed as Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the year ended
October 31, 1991, and incorporated herein by reference.

10.10 Form of Severance Compensation Agreement and Escrow
Agreement, adopted on February 28, 1985, between the
Registrant and each executive officer of the Registrant,
filed as Exhibit 10.14 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended October 31, 1985,
and incorporated herein by reference.

10.11 Quanex Corporation Stock Option Loan Plan for Key
Officers, filed as Exhibit 10.13 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1988, and incorporated herein by reference.
</TABLE>
<PAGE> 15
<TABLE>
<S> <C>
10.12 Quanex Corporation 1987 Non-Employee Director Stock Option
Plan, as amended, and the related form of Stock Option
Agreement, filed as Exhibit 10.14 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1988, together with the amendment filed as
Exhibit 10.14 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1995, and
incorporated herein by reference.

10.13 Quanex Corporation 1989 Non-Employee Director Stock Option
Plan, as amended, filed as Exhibit 4.4 of the
Registrant's Form S-8, Registration No. 33-35128, together
with the amendment filed as Exhibit 10.15 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1995, and incorporated herein by
reference.

10.14 Quanex Corporation Employee Stock Option and Restricted
Stock Plan, as amended, filed as Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1994, and incorporated herein by
reference.

10.15 Retirement Agreement dated as of September 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 1992, and
incorporated herein by reference.

10.16 Stock Option Agreement dated as of October 1, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.21 to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 1992, and
incorporated herein by reference.

10.17 Deferred Compensation Agreement dated as of July 31, 1992,
between the Registrant and Carl E. Pfeiffer, filed as
Exhibit 10.22 to the Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 1992, and
incorporated herein by reference.

10.18 Quanex Corporation Non-Employee Director Retirement Plan,
filed as Exhibit 10.18 of the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31,
1994, and incorporated herein by reference.

11 Statement re computation of per share earnings.
</TABLE>
<PAGE> 16
<TABLE>
<S> <C>
13 Quanex Corporation Annual Report to Shareholders for
fiscal year 1995 (each portion of the annual report
that is incorporated and filed as part of this report).

21 Subsidiaries of the Registrant.

23 Consent of Deloitte & Touche LLP.

27 Financial Data Schedule.
</TABLE>

As permitted by Item 601(b)(4) of Regulation S-K, the Registrant has not filed
with this Annual Report on Form 10-K certain instruments defining the rights of
holders of long-term debt of the Registrant and its subsidiaries because the
total amount of securities authorized under any of such instruments does not
exceed 10% of the total assets of the Registrant and its subsidiaries on a
consolidated basis. The Registrant agrees to furnish a copy of any such
agreements to the Securities and Exchange Commission upon request.
<PAGE> 17

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.

QUANEX CORPORATION

By: VERNON E. OECHSLE January 22, 1996
----------------------------------------
VERNON E. OECHSLE
Director, President and Chief
Executive Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

By: ROBERT C. SNYDER January 22, 1996
----------------------------------------
ROBERT C. SNYDER
Director and Chairman

By: VERNON E. OECHSLE January 22, 1996
----------------------------------------
VERNON E. OECHSLE
Director, President and
Chief Executive Officer

By: JAMES H. DAVIS January 22, 1996
----------------------------------------
JAMES H. DAVIS
Executive Vice President and
Chief Operating Officer
(Principal Operating Officer)

By: CARL E. PFEIFFER January 22, 1996
----------------------------------------
CARL E. PFEIFFER
Director

By: GERALD B. HAECKEL January 22, 1996
----------------------------------
GERALD B. HAECKEL
Director

<PAGE> 18

By: DONALD J. MORFEE January 22, 1996
----------------------------------------
DONALD J. MORFEE
Director

By: JOHN D. O'CONNELL January 22, 1996
----------------------------------------
JOHN D. O'CONNELL
Director

By: DONALD G. BARGER, JR January 22, 1996
----------------------------------------
DONALD G. BARGER, JR
Director

By: VINCENT R. SCORSONE January 22, 1996
----------------------------------------
VINCENT R. SCORSONE
Director

By: MICHAEL J. SEBASTIAN January 22, 1996
----------------------------------------
MICHAEL J. SEBASTIAN
Director

By: WAYNE M. ROSE January 22, 1996
----------------------------------------
WAYNE M. ROSE
Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)

By: VIREN M. PARIKH January 22, 1996
----------------------------------------
VIREN M. PARIKH
Controller
(Principal Accounting Officer)

<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>

Sequentially
Exhibit Numbered
Number Page
- ------ ------------
<S> <C> <C>

3.1 Amended and Restated Certificate of Incorporation of the
Registrant.

4.1 Form of Registrant's Common Stock certificate, filed as
Exhibit 4.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1987, and
incorporated herein by reference.

4.5 Revolving Credit and Letter of Credit Agreement dated as
of December 4, 1990 among the Registrant and the Banks
listed therein relating to a $40,000,000 revolving credit,
filed as Exhibit 4.7 to the Registrant's Annual Report on
Form 10-K for the year ended October 31, 1991, and
incorporated herein by reference.
</TABLE>
<PAGE> 20
<TABLE>
<S> <C> <C>
4.6 Second Amendment to the Revolving Credit Agreement dated
as of April 15, 1992, filed as Exhibit 4.13 to the
Registrant's Registration Statement on Form S-3
(Registration No. 33-47282), and incorporated herein by
reference.

4.10 Seventh Amendment to the Revolving Credit and Letter of
Credit Agreement dated as of December 28, 1995.

10.4 Agreement of Lease between the Registrant and 3D Tower
Limited, dated March 5, 1985, filed as Exhibit 10.13 of
the Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 1985, and incorporated herein by
</TABLE>
<PAGE> 21
<TABLE>
<S> <C> <C>
reference, as amended by the First Amendment to Lease
Agreement between the Registrant and VPM 1989-1, Ltd.
effective December 8, 1989 and the amendment filed as
Exhibit 10.23 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1995.

10.6 Quanex Corporation Deferred Compensation Plan, as amended
and restated.

10.11 Quanex Corporation Stock Option Loan Plan for Key
Officers, filed as Exhibit 10.13 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1988, and incorporated herein by reference.
</TABLE>
<PAGE> 22
<TABLE>
<S> <C> <C>
10.12 Quanex Corporation 1987 Non-Employee Director Stock Option
Plan, as amended, and the related form of Stock Option
Agreement, filed as Exhibit 10.14 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1988, together with the amendment filed as
Exhibit 10.14 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 1995, and
incorporated herein by reference.

11 Statement re computation of per share earnings.
</TABLE>
<PAGE> 23
<TABLE>
<S> <C> <C>
13 Quanex Corporation Annual Report to Shareholders for
fiscal year 1995 (each portion of the annual report
that is incorporated and filed as part of this report).

21 Subsidiaries of the Registrant.

23 Consent of Deloitte & Touche LLP.

27 Financial Data Schedule.
</TABLE>

<PAGE> 1

EXHIBIT 3.1

RESTATED CERTIFICATE
OF
INCORPORATION
OF
QUANEX CORPORATION

The original Certificate of Incorporation of Quanex Corporation (the
"Company") was filed with the Delaware Secretary of State on June 3, 1968 under
the name of Michigan Seamless Tube Company. On August 24, 1995 the Board of
Directors of the Company duly adopted resolutions authorizing the restatement
and integration of the provisions of the Certificate of Incorporation of the
Company and authorizing the filing of this Restated Certificate of
Incorporation in accordance with Section 245 of the General Corporation Law of
the State of Delaware. This Restated Certificate of Incorporation only
restates and integrates and does not further amend any of the provisions of the
Certificate of Incorporation of the Company presently in effect and there is no
discrepancy between the provisions of the Certificate of Incorporation of the
Company as presently in effect and the provisions of this Restated Certificate
of Incorporation.

The following Restated Certificate of Incorporation supersedes the
Certificate of Incorporation of the Company as presently in effect:

FIRST: The name of the Corporation is

QUANEX CORPORATION

SECOND: Its registered office in the state of Delaware is located at
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The
name and address of its registered agent is The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801.

THIRD: The nature of the business, or objects or purposes to be
transacted, promoted or carried on are:

To manufacture and fabricate tubing and pipe of every type and
character, seamless, non-seamless, metal or non-metal, and of every
size and description, of every shape and form, and to buy, sell, and
trade in tubing and pipe and products made thereof, in whole or in
part, and in any and all materials used or required in connection with
the production and marketing of such products; to manufacture,
deliver, buy, sell, deal in and with machines and equipment, tools,
dies, fixtures, goods, wares, and merchandise and property of every
kind and description.
<PAGE> 2
To establish, maintain, conduct and carry on a general merchandising
business; and in conjunction therewith to produce, buy, import,
purchase and otherwise acquire, contract for, own, store, hold, use,
sell, export, distribute, lease, pledge and otherwise dispose of and
generally deal in and with, at wholesale or retail, as principal or
agent for others, upon commission, consignment or otherwise, goods,
wares, commodities, merchandise and personal property of every class,
name, nature and description.

To import, export, manufacture, produce, buy, sell and otherwise deal
in and with, goods, wares and merchandise of every class and
description.

To manufacture, purchase or otherwise acquire, invest in, own,
mortgage, pledge, sell, assign and transfer or otherwise dispose of,
trade, deal in and deal with goods, wares and merchandise and personal
property of every class and description.

To acquire, and pay for in cash, stock or bonds of this corporation or
otherwise, the good will, rights, assets and property, and to
undertake or assume the whole or any part of the obligations or
liabilities of any person, firm, association or corporation.

To acquire, hold, use, sell, assign, lease, grant licenses in respect
of, mortgage or otherwise dispose of letters patent of the United
States or any foreign country, patent rights, licenses and privileges,
inventions, improvements and processes, copyrights, trade-marks and
trade names, relating to or useful in connection with any business of
this corporation.

To acquire by purchase, subscription or otherwise, and to receive,
hold, own, guarantee, sell, assign, exchange, transfer, mortgage,
pledge or otherwise dispose of or deal in and with any of the shares
of the capital stock, or any voting trust certificates in respect of
the shares of capital stock, scrip, warrants, rights, bonds,
debentures, notes, trust receipts, and other securities, obligations,
chooses in action and evidences of indebtedness or interest issued or
created by any corporations, joint stock companies, syndicates,
associations, firms, trusts or persons, public or private, or by the
government of the United States of America, or by any foreign
government, or by any state, territory, province, municipality or
other political subdivision or by any governmental agency, and as
owner thereof to possess and exercise all the rights, powers and
privileges of ownership, including the right to execute consents and
vote thereon, and to do any and all acts and things necessary or
advisable for the preservation, protection, improvement and
enhancement in value thereof.

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To enter into, make and perform contracts of every kind and
description with any person, firm, association, corporation,
municipality, county, state, body politic or government or colony or
dependency thereof.

To borrow or raise moneys for any of the purposes of the corporation
and, from time to time without limit as to amount, to draw, make,
accept, endorse, execute and issue promissory notes, drafts, bills of
exchange, warrants, bonds, debentures and other negotiable or
non-negotiable instruments and evidences of indebtedness, and to
secure the payment of any thereof and of the interest thereon by
mortgage upon or pledge, conveyance or assignment in trust of the
whole or any part of the property of the corporation, whether at the
time owned or thereafter acquired, and to sell, pledge or otherwise
dispose of such bonds or other obligations of the corporation for its
corporate purposes.

To loan to any person, firm or corporation any of its surplus funds,
either with or without security.

To purchase, hold, sell and transfer the shares of its own capital
stock; provided it shall not use its funds or property for the
purchase of its own shares of capital stock when such use would cause
any impairment of its capital except as otherwise permitted by law,
and provided further that shares of its own capital stock belonging to
it shall not be voted upon directly or indirectly.

To have one or more offices, to carry on all or any of its operations
and business and without restriction or limit as to amount to purchase
or otherwise acquire, hold, own, mortgage, sell, convey or otherwise
dispose of, real and personal property of every class and description
in any of the states, districts, territories or colonies of the United
States, and in any and all foreign countries, subject to the laws of
such state, district, territory, colony or country.

In general, to carry on any other business in connection with the
foregoing, and to have and exercise all the powers conferred by the
laws of Delaware upon corporations formed under the General
Corporation Law of the State of Delaware, and to do any or all of the
things hereinbefore set forth to the same extent as natural persons
might or could do.

The objects and purposes specified in the foregoing clauses shall,
except where otherwise expressed, be in nowise limited or restricted by
reference to, or inference from, the terms of any other clause in this Restated
Certificate of Incorporation, but

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the objects and purposes specified in each of the foregoing clauses of this
Article shall be regarded as independent objects and purposes.

FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Twenty-Six Million (26,000,000),
of which Twenty-Five Million (25,000,000) shall be shares of Common Stock, par
value Fifty Cents ($.50) per share, and of which One Million (1,000,000) shares
shall be Preferred Stock, no par value.

Any amendment to this Restated Certificate of Incorporation which
shall increase or decrease the authorized stock of the corporation may be
adopted by the affirmative vote of the holders of a majority of the outstanding
shares of stock of the corporation entitled to vote.

The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, of the Preferred Stock
shall be as follows:

(1) The Board of Directors is expressly authorized at any
time, and from time to time, to provide for the issuance of shares of
Preferred Stock in one or more series, with such voting powers, full
or limited but not to exceed one vote per share, or without voting
powers and with such designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated and expressed
in the resolution or resolutions providing for the issue thereof
adopted by the Board of Directors, and as are not stated and expressed
in this Restated Certificate of Incorporation, or any amendment
thereto, including (but without limiting the generality of the
foregoing) the following:

(a) the designation of such series;

(b) the dividend rate of such series, the
conditions and dates upon which such dividends shall be
payable, the preference or relation which such dividends shall
bear to the dividends payable on any other class or classes or
of any other series of capital stock, and whether such
dividends shall be cumulative or non-cumulative;

(c) whether the shares of such series shall be
subject to redemption by the corporation, and, if made subject
to such redemption, the times, prices and other terms and
conditions of such redemption;

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<PAGE> 5
(d) the terms and amount of any sinking fund
provided for the purchase or redemption of the shares of such
series;

(e) whether or not the shares of such series
shall be convertible into or exchangeable for shares of any
other class or classes or of any other series of any class or
classes of capital stock of the corporation, and, if provision
be made for conversion or exchange, the times, prices, rates,
adjustments, and other terms and conditions of such conversion
or exchanges;

(f) the extent, if any, to which the holders of
the shares of such series shall be entitled to vote as a class
or otherwise with respect to the election of the directors or
otherwise; provided, however, that in no event shall any
holder of any series of Preferred Stock be entitled to more
than one vote for each share of such Preferred Stock held by
him;

(g) the restrictions, if any, on the issue or
reissue of any additional Preferred Stock; and

(h) the rights of the holders of the shares of
such series upon the dissolution of, or upon the distribution
of assets of, the corporation.

(2) Except as otherwise required by law and except for
such voting powers with respect to the election of directors or other
matters as may be stated in the resolutions of the Board of Directors
creating any series of Preferred Stock, the holders of any such series
shall have no voting power whatsoever.

Pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation of the said Corporation, the said Board of
Directors on April 26, 1989, adopted the resolution set forth on Exhibit A to
this Restated Certificate of Incorportion amending and restating the
preferences and rights of a series of 150,000 shares of Preferred Stock, no par
value, designated as Series A Junior Participating Preferred Stock.

FIFTH: The corporation is to have perpetual existence.

SIXTH: The private property of the stockholders shall not be subject
to the payment of corporate debts to any extent whatever.

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<PAGE> 6
SEVENTH: In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized:

To authorize and cause to be executed mortgages and liens upon the
real and personal property of the Corporation.

To set apart out of any of the funds of the Corporation available for
dividends a reserve or reserves for any proper purpose and to abolish
any such reserve in the manner in which it was created.

By resolution passed by a majority of the whole Board, to designate
one or more committees, each committee to consist of two or more of
the directors of the Corporation, which, to the extent provided in the
resolution or in the bylaws of the Corporation, shall have and may
exercise the powers of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the seal of
the Corporation to be affixed to all papers which may require it.
Such committee or committees shall have such name or names as may be
stated in the bylaws of the Corporation or as may be determined from
time to time by resolution adopted by the board of directors.

EIGHTH: Meetings of stockholders may be held outside the State of
Delaware, if the bylaws so provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
board of directors or in the bylaws of the corporation. Elections of directors
need not be by ballot unless the bylaws of the corporation shall so provide.

NINTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.

TENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this corporation under the provisions of section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as the
case may be, to be

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<PAGE> 7
summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization
of this corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.

ELEVENTH: The Board of Directors shall be divided into three classes
as nearly equal in number as possible, with the term of office of one class
expiring each year. At the annual meeting of stockholders in 1974, directors
of the first class shall be elected to hold office for a term expiring at the
next succeeding annual meeting, directors of the second class shall be elected
to hold office for a term expiring at the second succeeding annual meeting and
directors of the third class shall be elected to hold office for a term
expiring at the third succeeding annual meeting. During the intervals between
annual meetings of stockholders, any vacancy occurring in the Board of
Directors caused by resignation, removal, death, or other incapacity and any
newly created directorships resulting from an increase in the number of
directors shall be filled by a majority vote of the directors then in office,
whether or not a quorum. Each director chosen to fill a vacancy shall hold
office for the unexpired term in respect of which such vacancy occurred. Each
director chosen to fill a newly created directorship shall hold office until
the next election of the class for which such director shall have been chosen.
When the number of directors is changed, any newly created directorships or any
decreases in directorships shall be so apportioned among the classes as to make
all classes as nearly equal in number as possible.

Any director may be removed from office as a director at any time, but
only for cause, by the affirmative vote of stockholders of record holding a
majority of the outstanding shares of stock of the corporation entitled to vote
in elections of directors at a meeting of the stockholders called for that
purpose.

TWELFTH: (A) Except as set forth in paragraph (B) of this
Article, the affirmative vote or consent of the holders of not less than
four-fifths (80%) of the outstanding shares of stock of this corporation (the
"Corporation") entitled to vote in elections of directors, voting for purposes
of this Article as one class, shall be required:

(1) to adopt any agreement for, or to approve, the merger or
consolidation of the Corporation or any subsidiary (as
hereinafter defined) with or into any other person (as
hereinafter defined),

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<PAGE> 8
(2) to authorize any sale, lease, transfer, exchange, mortgage,
pledge or other disposition to any other person of all or
substantially all of the assets of the Corporation or any
subsidiary, or

(3) to authorize the issuance or transfer by the Corporation or
any subsidiary of any voting securities of the Corporation or
any subsidiary in exchange or payment for the securities or
assets of any other person, if such authorization is otherwise
required by law or by any agreement between the Corporation
and any national securities exchange or by any other agreement
to which the Corporation or any subsidiary is a party, if, in
any such case, as of the record date for the determination of
stockholders entitled to notice thereof and to vote thereon or
consent thereto, such other person is, or at any time within
the preceding twelve months has been, the beneficial owner (as
hereinafter defined) of 5 percent or more of the outstanding
shares of stock of the Corporation entitled to vote in
elections of directors. If such other person is not, and has
not been a 5 percent beneficial owner, the provisions of this
paragraph (A) shall not apply, the provisions of Delaware law
shall apply.

(B) The provisions of paragraph (A) of this Article shall not
apply, and the provisions of Delaware law shall apply, to (1) any transaction
described therein if the Board of Directors by resolution shall have approved a
memorandum of understanding with such other person setting forth the principal
terms of such transaction and such transaction is substantially consistent
therewith, provided that a majority of those members of the Board of Directors
voting in favor of such resolution were duly elected and acting members of the
Board of Directors prior to the time such other person became the beneficial
owner of 5 percent or more of the outstanding shares of stock of the
Corporation entitled to vote in elections of directors; or (2) any transaction
described therein if such other person is a corporation of which a majority of
the outstanding shares of all classes of stock entitled to vote in elections of
directors is owned of record or beneficially by the Corporation or its
subsidiaries.

(C) The affirmative vote or consent of the holders of not less
than four-fifths (80%) of the outstanding shares of stock of the Corporation
entitled to vote in elections of directors, voting for purposes of this Article
as one class, shall be required for the adoption of any plan for the
dissolution of the Corporation if the Board of Directors shall not have, by
resolution, recommended to the stockholders the adoption of such plan for
dissolution of the Corporation. If the Board of Directors shall have so
recommended to the stockholders such plan for dissolution of the Corporation,
the provisions of Delaware law shall apply.

(D) For purposes of this Article,

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<PAGE> 9
(1) any specified person shall be deemed to be the
"beneficial owner" of shares of stock of the Corporation (a) which
such specified person or any of its affiliates or associates (as such
terms are hereinafter defined) owns, directly or indirectly, whether
of record or not, (b) which such specified person or any of its
affiliates or associates has the right to acquire pursuant to any
agreement, or upon exercise of conversion rights, warrants or options,
or otherwise, or (c) which are beneficially owned, directly or
indirectly (including shares deemed owned through application of
clauses (a) and (b) above), by any other person with which such
specified person or any of its affiliates or associates has any
agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of stock of the Corporation;

(2) a "subsidiary" is any corporation more than 49
percent of the voting securities of which are owned, directly or
indirectly, by the Corporation;

(3) a "person" is any individual, corporation or other
entity;

(4) an "affiliate" of a specified person is any person
that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the
specified person; and

(5) an "associate" of a specified person is (a) any
person of which such specified person is an officer or partner or is,
directly or indirectly, the beneficial owner of 10 percent or more of
any class of equity securities, (b) any trust or other estate in which
such specified person has a substantial beneficial interest or as to
which such specified person serves as trustee or in a similar
capacity, or (c) any relative or spouse of such specified person, or
any relative of such spouse, who has the same home as such specified
person or who is a director or officer of such specified person or any
corporation which controls or is controlled by such specified person.

(E) For purposes of determining whether a person owns beneficially
5 percent or more of the outstanding shares of stock of the Corporation
entitled to vote in elections of directors, the outstanding shares of stock of
the Corporation shall include shares deemed owned through application of
clauses (a), (b) or (c) of paragraph (D)(1) above but shall not include any
other shares which may be issuable pursuant to any agreement or upon exercise
of conversion rights, warrants or options, or otherwise.

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<PAGE> 10
(F) The Board of Directors shall have the power and duty to
determine, for purposes of this Article, on the basis of information known to
such Board,

(1) whether any person referred to in paragraph (A) of
this Article owns beneficially 5 percent or more of the outstanding
shares of stock of the Corporation entitled to vote in elections of
directors; and

(2) whether a proposed transaction is substantially
consistent with any memorandum of understanding of the character
referred to in paragraph (B) of this Article.

Any such determination shall be conclusive and binding for all
purposes of this Article.

THIRTEENTH: Notwithstanding the provisions of this Restated
Certificate of Incorporation and any provisions of the Bylaws of the
corporation, no amendment to this Restated Certificate of Incorporation shall
amend, modify or repeal any or all of the provisions of Article Eleventh,
Article Twelfth or this Article Thirteenth of this Restated Certificate of
Incorporation, and the stockholders of the corporation shall not have the right
to amend, modify or repeal any or all provisions of the Bylaws of the
corporation relating to the number or term of office of directors, unless so
adopted by the affirmative vote or consent of the holders of not less than
four-fifths (80%) of the outstanding shares of stock of the corporation
entitled to vote in elections of directors, considered for purposes of this
Article as a class; provided, however, that in the event the Board of Directors
of the corporation shall by resolution adopted by a majority of the then
directors in office recommend to the stockholders the adoption of any such
amendment, the stockholders of record holding a majority of the outstanding
shares of stock of the corporation entitled to vote in elections of directors
may amend, modify or repeal any or all of such provisions.

FOURTEENTH: (A) Except as set forth in paragraph (3) of this Article,
notwithstanding any other provision of law or requirement of these Articles,
the affirmative vote of the holders of a majority of all of the outstanding
shares of the capital stock of this Corporation (the "Corporation") entitled to
vote generally in the election of directors ("Voting Stock"),voting for the
purposes of this Article as one class, other than holders who are Related
Holders (as hereinafter defined), or Affiliates (as hereinafter defined) or
Associates (as hereinafter defined) of the Related Holder, shall be required

(1) to adopt any agreement for, or to approve, the merger
or consolidation of the Corporation or any Subsidiary (as
hereinafter defined) with or into any Related Holder or any
Affiliate of a Related Holder; or

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(2) to authorize or approve any sale, lease, transfer,
exchange, mortgage, pledge or other disposition (in one
transaction or a series of transactions) to any Related Holder
or any Affiliate of a Related Holder of any assets of the
Corporation or any Subsidiary, having an aggregate Fair Market
Value (as hereinafter defined) of $5,000,000 or more; or

(3) to authorize or approve the issuance or transfer by
the Corporation or any Subsidiary of any Voting Stock of the
Corporation or any Subsidiary in exchange or payment for
securities or other assets of any Related Holder or any
Affiliate of a Related Holder, which securities or assets have
an aggregate Fair Market Value of $5,000,000 or more; or

(4) to adopt any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any
Related Holder or any Affiliate of a Related Holder; or

(5) to authorize or approve the reclassification of
securities (including any reverse stock split), or
recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries
or any other transaction (whether or not with or into or
otherwise involving any Related Holder) which has the effect,
directly or indirectly, of increasing the proportionate share
of the outstanding shares of any class of equity securities or
securities convertible into equity securities of the
Corporation or any Subsidiary which is directly or indirectly
owned by any Related Holder or any Affiliate of a Related
Holder; if there is a Related Holder as of the date in
question regarding any transaction described in this paragraph
(A) or immediately prior to the consummation of any
transaction described in this paragraph (A).

(B) The provisions of paragraph (A) of this Article shall not
apply to transactions set forth below in Sections (1), (2) and (3) of this
paragraph (B) and such transactions shall require only such affirmative vote as
is otherwise required by law or any other provision of this Certificate of
Incorporation:

(1) any transaction described in paragraph (A) of this Article, if
the Board of Directors by resolution shall have approved a memorandum
of understanding with such Related Holder, or such Affiliate of such
Related Holder, setting forth the principal terms of such transaction
and such transaction is effected on terms substantially consistent
with such memorandum of understanding, provided that a majority of the
Continuing Directors (as hereinafter defined) vote in favor of such
resolution; or

(2) any transaction described in subparagraphs (A)(1), (A)(2),
(A)(3) and (A)(4) of this Article, if such Related Holder, or such
Affiliate of such Related

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<PAGE> 12
Holder, is a corporation of which a majority of the outstanding shares
of each class of Voting Stock is owned of record or beneficially by
the Corporation or its Subsidiaries; or

(3) any transaction described in paragraph (a) of this Article, if
the aggregate amount of the cash and the Fair Market Value of
consideration other than cash to be received per share by holders of
common, preferred or preference stock in such transactions shall be at
least equal to the higher of the following:

(a) with respect to common, preferred or preference
stock, the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers fees) paid
or agreed to be paid by such Related Holder to acquire
beneficial ownership of any shares of such series or class of
stock, within the three-year period immediately prior to the
date of the first public announcement of the proposed
transaction described in paragraph (A);

(b) the highest closing per share price of common,
preferred or preference stock, during the three- month period
immediately preceding the date of the first public
announcement off the proposed transaction described in
paragraph (A);

(c) with respect to preferred or preference stock, if the
highest preferential amount per share of a series of preferred
or preference stock to which the holders thereof would be
entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the affairs of the
Corporation (regardless of whether the transaction, as
described in paragraph (A), to be consummated constitutes such
an event) is greater than the aggregate amount to which the
holders thereof would be entitled pursuant to subparagraphs
(B)(3)(a) or (b), holders of such series of preferred or
preference stock shall receive an amount for each such share
at least equal to the highest preferential amount applicable
to such series of preferred or preference stock;

except that if at any time after a Related Holder becomes such, if any
of the following events shall occur which are not approved by a
majority of the Continuing Directors, the provisions of this paragraph
(B)(3) shall not apply and the provisions of paragraph (A) shall
apply:

(1) any failure to declare and pay at the regular date
therefor any full quarterly dividend (whether or not
cumulative) on outstanding preferred or preference stock; or

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(2) any reduction on the annual rate of dividends paid on
the common stock (except as necessary to reflect any
subdivision of the common stock); or

(3) any failure to increase the annual rate of dividends
paid on the common stock as necessary to reflect any
reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction
that has the effect of reducing the number of outstanding
shares of the common stock; or

(4) the receipt by the Related Holder, after such Related
Holder has become a Related Holder, of a direct or indirect
benefit (except proportionately as a shareholder) from any
loans, advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages provided
by the Corporation or any Subsidiary of the Corporation,
whether in anticipation of or in connection with a transaction
described in paragraph (A) or otherwise.

(1) a "Person" means any individual, corporation or other
entity;

(2) a "Related Holder" means any Person (other than the
Corporation, a Subsidiary of the Corporation, or a
profit-sharing, employee stock ownership or other employee
benefit plan of the Corporation, or a Subsidiary of the
Corporation, or any trustee of, or fiduciary with respect to,
any such plan acting in such capacity) which is, or within the
preceding twelve-month period was, the Beneficial Owner of
shares of Voting Stock of the Corporation having 5 percent or
more of the voting power of the outstanding capital stock of
the Corporation;

(3) a Person shall be deemed to be a "Beneficial Owner"
of shares of stock of the Corporation (a) which such Person
and its Affiliates and Associates beneficially own, directly
or indirectly, whether of record or not, or (b) which such
Person or any of its Affiliates or Associates has the right to
acquire pursuant to any agreement, upon the exercise of
conversion rights, warrants, options, or otherwise, or (c)
which such Person or any of its Affiliates or Associates has
the right to sell or vote pursuant to any agreement, or (d)
which are beneficially owned, directly or indirectly, by any
other Person with which such first mentioned Person or any of
its Affiliates or Associates has any agreement, arrangement or
understanding for the purposes of acquiring, holding, voting
or disposing of securities of the Corporation;

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(4) a "Subsidiary" means any corporation more than
forty-nine percent (49%) of the voting securities of which are
beneficially owned, directly or indirectly, by the
Corporation;

(5) an "Affiliate" of a Related Holder means any person
that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under
common control with, the Related Holder;

(6) an "Associate" of a Related Holder means (a) any
person of which such Related Holder is an officer, director,
or partner or is, directly or indirectly, the Beneficial Owner
of ten percent (10%) or more of any class of equity securities
of such person, or (b) any trust or other estate in which such
Related Holder has a substantial beneficial interest or as to
which such Related Holder serves as trustee or in a similar
fiduciary capacity, or (c) any relative or spouse of such
Related Holder, or any relative of such spouse, who has the
same home as such Related Holder, or (d) any person who is a
director or officer of such Related Holder or any corporation
which controls or is controlled by such Related Holder, or (e)
any other member or partner in a partnership, limited
partnership, syndicate or other group, formal or informal, of
which such Related Holder is a member or partner and which is
acting together for the purpose of acquiring, holding or
disposing of securities of the Corporation;

(7) "Voting Stock" shall be the outstanding shares of the
capital stock of the Corporation entitled to vote generally in
the election of directors;

(8) "Fair Market Value" means: (i) in the case of stock,
the highest closing price during the 90- day period
immediately preceding the date in question of a share of such
stock on the Composite Tape for New York Stock Exchange-Listed
Stocks, or, if such stock is not quoted on the Composite Tape,
on the New York Stock Exchange, or, if such stock is not
listed on such Exchange, the fair market value on the date in
question of a share of such stock as determined by the Board
in good faith, which determination shall include consideration
of the highest closing price, or, in the event there is no
closing price, the highest closing bid in the primary market
in which such stock is traded during the 90-day period
preceding the date in question; and (ii) in the case of
property other than cash or stock, the fair market value of
such property on the date in question as determined by the
Board in good faith;

(9) a "Continuing Director" means a member of the Board
of Directors of the Corporation who is unaffiliated with the
Related Holder

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or any Affiliate or Associate of the Related Holder and was a
duly elected and acting member of the Board prior to the time
such Related Holder became the Beneficial Owner of 5 percent
or more of the Voting Stock of the Corporation, and any
successor to a Continuing Director who is unaffiliated with
the Related Holder and who is recommended to succeed a
Continuing Director by a majority of the then Continuing
Directors.

(D) A majority of the total number of Continuing Directors
(whether or not there exist any vacancies in previously authorized
directorships at the time any such determination as is hereinafter in this
paragraph (D) specified is to be made by the Board) shall have the power to
determine, on the basis of information known to them after reasonable inquiry,
all facts necessary to determine compliance with this Article, including,
without limitation, (1) whether a person is a Related Holder, (2) the number of
shares of Voting Stock beneficially owned by any person, (3) whether a person
is an Affiliate or Associate of another, (4) whether the applicable conditions
set forth in paragraph (B) have been met with respect to any transaction
described therein, and (5) whether the assets which are the subject of any
transaction referred to in section (2) of paragraph (A) have, or the
consideration to be received for the issuance or transfer of securities by the
Corporation or any Subsidiary in any transaction referred to in section (3) of
paragraph (A) has, an aggregate Fair Market Value of $5,000,000 or more.

(E) Notwithstanding any other provision of this Certificate of
Incorporation or any provision of the Bylaws of the Corporation, no amendment
to this Certificate of Incorporation shall amend, modify or repeal any or all
of the provisions of this Article, unless adopted by the affirmative vote of
the holders of a majority of all of the outstanding shares of the Voting Stock
of the Corporation, voting for the purposes of this Article as a class, other
than holders who are the Related Holder or Affiliates or Associates of the
Related Holder.

FIFTEENTH: (A) Except for (1) any action which may be taken
solely upon the vote or consent of holders of Preferred Stock or any series
thereof, or, (2) except for any action with respect to which other Articles
expressly provide stockholder consent requirements, no action required to be
taken or which may be taken at any annual or special meeting of stockholders of
the Corporation may be taken by written consent without a meeting, except that
any such action may be taken without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by all
the stockholders of the Corporation entitled to vote thereon.

(B) This Article shall not be amended, modified or repealed except
by the affirmative vote of the holders of not less than four-fifths (80%) of
the voting power of

-15-
<PAGE> 16
all of the then outstanding shares of capital stock of the Corporation then
entitled to vote generally in the election of directors.

SIXTEENTH: (A) The power to adopt, alter, amend or repeal
bylaws shall be vested in the Board of Directors, which may take such action by
the vote of a majority of the directors present and voting at a meeting where a
quorum is present, provided that if, as of the date such action shall occur,
there is a Related Holder as defined in Article FOURTEENTH of the Certificate
of Incorporation, such majority shall include a majority of the Continuing
Directors as defined in Article FOURTEENTH of the Certificate of Incorporation.
In addition, the stockholders, by the affirmative votes of the holders of not
less than four-fifths (80%) of the voting power of all of the then outstanding
shares of capital stock of the Corporation then entitled to vote generally in
the election of directors, may adopt new bylaws, or alter, amend or repeal
bylaws adopted by either the stockholders or the Board of Directors.

(B) This Article shall not be amended, modified or repealed except
by the affirmative vote of the holders of not less than four-fifths (80%) of
the voting power of all of the then outstanding shares of capital stock of the
Corporation then entitled to vote generally in the election of directors.

SEVENTEENTH: A director of the Corporation shall not personally
liable to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty of the director, except for liability (i) or any breach of
the director's duty of loyalty to the Corporation or its shareholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) under Section 174 of the General Corporation
Law of the State of Delaware, or (iv) or any transaction from which the
director derived an improper personal benefit.

IN WITNESS WHEREOF, Quanex Corporation has caused this Restated
Certificate of Incorporation to be signed this 10th day of November, 1995.

QUANEX CORPORATION

By: /s/ WAYNE M. ROSE
------------------------
Wayne M. Rose
Vice President and Chief
Financial Officer

Filed: November 17, 1995.

-16-
<PAGE> 17
EXHIBIT A

RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its
Certificate of Incorporation, a series of Preferred Stock, no par value, of the
Corporation be and it hereby is created, and that the designation and amount
thereof and the powers, preferences and relative, participating, optional and
other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:

Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Junior Participating Preferred Stock", which
shall have no par value, and the number of shares constituting such series
shall be 150,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Junior Participating Preferred Stock to a
number less than that of the shares then outstanding plus the number of shares
issuable upon exercise of outstanding rights, options or warrants or upon
conversion of outstanding securities issued by the Corporation.

Section 2. Dividends and Distributions.

(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Junior Participating Preferred Stock with respect to
dividends, the holders of shares of Series A Junior Participating Preferred
Stock, in preference to the holders of shares of Common Stock, par value $0.50
per share (the "Common Stock"), of the Corporation and any other junior stock,
shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the first day of March, June, September and December in each
year (each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series A Junior Participating
Preferred Stock in an amount per share (rounded to the nearest cent) equal to
the greater of (a) $1.00, or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind) of
all non-cash dividends or other distributions other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock, since
the immediately preceding Quarterly Dividend Payment Date, or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Junior Participating Preferred Stock.
In the event the Corporation shall at any time after August 28, 1986 (the
"Rights Declaration Date") (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount to which holders of shares of Series A Junior
Participating Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.

A-1
<PAGE> 18
(B) The Corporation shall declare a dividend or distribution on
the Series A Junior Participating Preferred Stock as provided in paragraph (A)
above immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided that,
in the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share
on the Series A Junior Participating Preferred Stock shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.

(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such shares
of Series A Junior Participating Preferred Stock unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to accrue from
the date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the determination
of holders of shares of Series A Junior Participating Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date
in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Junior Participating Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by- share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Junior Participating Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 30 days prior to the date
fixed for the payment thereof.

Section 3. Voting Rights. The holders of shares of Series A
Junior Participating Preferred Stock shall have the following voting rights:

(A) Each share of Series A Junior Participating Preferred Stock
shall entitle the holder thereof to one vote on all matters submitted to a vote
of the stockholders of the Corporation.

(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Junior Participating Preferred Stock and the holders of
shares of Common Stock shall vote together as one class on all matters
submitted to a vote of shareholders of the Corporation.

(C) (i) If at any time dividends on any Series A Junior
Participating Preferred Stock shall be in arrears in an amount equal to six (6)
quarterly dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (herein called a "default period") which shall extend
until such time when all accrued and unpaid dividends for all previous
quarterly dividend periods and for the current quarterly dividend period on all
shares of Series A Junior Participating Preferred Stock then outstanding shall
have been declared and paid or set apart for payment. During each default
period, the holders of the Series A Junior Participating Preferred Stock,
voting as a class together with the holders, if any, of other series of
Preferred

A-2
<PAGE> 19
Stock having the right to vote upon a default in the payment of dividends,
irrespective of series, shall have the right to elect two (2) Directors.

(ii) During any default period, such voting right of the
holders of Series A Junior Participating Preferred Stock may be exercised
initially at a special meeting called pursuant to subparagraph (iii) of this
Section 3(C) or at any annual meeting of stockholders, and thereafter at annual
meetings of stockholders, provided that neither such voting right nor the right
of the holders of any other series of Preferred Stock, if any, to increase, in
certain cases, the authorized number of Directors shall be exercised unless the
holders of ten percent (10%) in number of shares of Preferred Stock outstanding
shall be present in person or by proxy. The absence of a quorum of the holders
of Common Stock shall not affect the exercise by the holders of Preferred Stock
of such voting right. At any meeting at which the holders of Preferred Stock
shall exercise such voting right initially during an existing default period,
they shall have the right, voting as a class, to elect Directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two (2)
Directors or, if such right is exercised at an annual meeting, to elect two (2)
Directors. If the number which may be so elected at any special meeting does
not amount to the required number, the holders of the Preferred Stock shall
have the right to make such increase in the number of Directors as shall be
necessary to permit the election by them of the required number. After the
holders of the Preferred Stock shall have exercised their right to elect
Directors in any default period and during the continuance of such period, the
number of Directors shall not be increased or decreased except by vote of the
holders of Preferred Stock as herein provided or pursuant to the rights of any
equity securities ranking senior to or pari passu with the Series A Junior
Participating Preferred Stock.

(iii) Unless the holders of Preferred Stock shall, during
an existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding, irrespective of series, may request, the
calling of a special meeting of the holders of Preferred Stock, which meeting
shall thereupon be called by the President, a Vice-President or the Corporate
Secretary of the Corporation. Notice of such meeting and of any annual meeting
at which holders of Preferred Stock are entitled to vote pursuant to this
paragraph (C)(iii) shall be given to each holder of record of Preferred Stock
by mailing a copy of such notice to him at his last address as the same appears
on the books of the Corporation. Such meeting shall be called for a time not
earlier than 20 days and not later than 60 days after such order or request or
in default of the calling of such meeting within 60 days after such order or
request, such meeting may be called on similar notice by any stockholder or
stockholders owning in the aggregate not less than ten percent (10%) of the
total number of shares of Preferred Stock outstanding. Notwithstanding the
provisions of this paragraph (C)(iii), no such special meeting shall be called
during the period within 60 days immediately preceding the date fixed for the
next annual meeting of the stockholders.

(iv) In any default period, the holders of Common Stock,
and other classes of stock of the Corporation if applicable, shall continue to
be entitled to elect the whole number of Directors until the holders of
Preferred Stock shall have exercised their right to elect two (2) Directors
voting as a class, after the exercise of which right (x) the Directors so
elected by the holders of Preferred Stock shall continue in office until their
successors shall have been elected by such holders or until the expiration of
the default period, and (y) any vacancy in the Board of

A-3
<PAGE> 20
Directors may (except as provided in paragraph (C)(ii) of this Section 3) be
filled by vote of a majority of the remaining Directors theretofore elected by
the holders of the class of stock which elected the Director whose office shall
have become vacant. References in this paragraph (C) to Directors elected by
the holders of a particular class of stock shall include Directors elected by
such Directors to fill vacancies as provided in clause (y) of the foregoing
sentence.

(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Series A Junior Participating Preferred Stock as a
class to elect Directors shall cease, (y) the term of any Directors elected by
the holders of Series A Junior Participating Preferred Stock as a class shall
terminate, and (z) the number of Directors shall be such number as may be
provided for in the Certificate of Incorporation or By-laws irrespective of any
increase made pursuant to the provisions of paragraph (C)(ii) of this Section 3
(such number being subject, however to change thereafter in any manner provided
by law or in the Certificate of Incorporation or By-laws). Any vacancies in
the Board of Directors effected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining Directors.

(D) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.

Section 4. Certain Restrictions.

(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Junior Participating Preferred Stock as
provided in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of
Series A Junior Participating Preferred Stock outstanding shall have been paid
in full, the Corporation shall not

(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series A Junior Participating Preferred Stock;

(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Junior Participating Preferred Stock except dividends paid
ratably on the Series A Junior Participating Preferred Stock and all
such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such
shares are then entitled;

(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Junior Participating Preferred Stock provided that the
Corporation may at any time redeem, purchase or otherwise acquire
shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Junior
Participating Preferred Stock; or

A-4
<PAGE> 21
(iv) purchase or otherwise acquire for consideration any
shares of Series A Junior Participating Preferred Stock or any shares
of stock ranking on a parity with the Series A Junior Participating
Preferred Stock except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.

(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.

Section 5. Reacquired Shares. Any shares of Series A
Junior Participating Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and cancelled promptly
after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock and may be reissued as
part of a new series of Preferred Stock to be created by resolution or
resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.

Section 6. Liquidation, Dissolution or Winding Up. (A)
Upon any liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred Stock
shall have received per share, the greater of 100 times the exercise price per
Right or 100 times the payment made per share of Common Stock, plus an amount
equal to accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment (the "Series A Liquidation Preference").
Following the payment of the full amount of the Series A Liquidation
Preference, no additional distributions shall be made to the holders of shares
of Series A Junior Participating Preferred Stock unless, prior thereto, the
holders of shares of Common Stock shall have received an amount per share (the
"Common Adjustment") equal to the quotient obtained by dividing (i) the Series
A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in
subparagraph C below to reflect such events as stock splits, stock dividends
and recapitalizations with respect to the Common Stock) (such number in clause
(ii), the "Adjustment Number"). Following the payment of the full amount of
the Series A Liquidation Preference and the Common Adjustment in respect of all
outstanding shares of Series A Junior Participating Preferred Stock and Common
Stock, respectively, holders of Series A Junior Participating Preferred Stock
and holders of shares of Common Stock shall receive their ratable and
proportionate share of the remaining assets to be distributed in the ratio of
the Adjustment Number to 1 with respect to such Preferred Stock and Common
Stock, on a par share basis, respectively.

(B) In the event there are not sufficient assets available to
permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of Preferred Stock, if any, which
rank on a parity with the Series A Junior Participating Preferred Stock then
such remaining assets shall be distributed

A-5
<PAGE> 22
ratably to the holders of such parity shares in proportion to their respective
liquidation preferences. In the event there are not sufficient assets
available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common Stock.

(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.

Section 7. Consolidation, Merger, etc. In case the
Corporation shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or changed
into other stock or securities, cash and/or any other property, then in any
such case the shares of Series A Junior Participating Preferred Stock shall at
the same time be similarly exchanged or changed in an amount per share (subject
to the provision for adjustment hereinafter set forth) equal to 100 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common
Stock is changed or exchanged. In the event the Corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount set forth in the preceding sentence with
respect to the exchange or change of shares of Series A Junior Participating
Preferred Stock shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that are outstanding immediately prior to such event.

Section 8. Redemption. The shares of Series A Junior
Participating Preferred Stock shall not be redeemable.

Section 9. Ranking. The Series A Junior Participating
Preferred Stock shall rank junior to all other series of the Corporation's
Preferred Stock as to the payment of dividends and the distribution of assets,
unless the terms of any such series shall provide otherwise.

Section 10. Amendment. The Restated Certificate of
Incorporation of the Corporation shall not be further amended in any manner
which would materially alter or change the powers, preferences or special
rights of the Series A Junior Participating Preferred Stock so as to affect
them adversely without the affirmative vote of the holders of a majority or
more of the outstanding shares of Series A Junior Participating Preferred Stock
voting separately as a class.

Section 11. Fractional Shares. Series A Junior
Participating Preferred Stock may be issued in fractions of a share which shall
entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive

A-6
<PAGE> 23
dividends, participate in distributions and to have the benefit of all other
rights of holders of Series A Junior Participating Preferred Stock.

A-7

<PAGE> 1
EXHIBIT 4.10

SEVENTH AMENDMENT TO QUANEX CORPORATION
REVOLVING CREDIT AND LETTER OF CREDIT AGREEMENT
-----------------------------------------------

This Seventh Amendment to Quanex Corporation $48,000,000 Revolving
Credit and Letter of Credit Agreement (this "Seventh Amendment") made as of the
28th day of December, 1995 ("Amendment Effective Date"), among Comerica Bank
(successor in interest by reason of merger to Manufacturers Bank, N.A.,
formerly known as Manufacturers National Bank of Detroit), First Interstate
Bank of Texas, N.A., Harris Trust and Savings Bank and NationsBank of Texas,
N.A. (individually, "Bank" and collectively, "Banks"), Comerica Bank, as agent
for the Banks (in such capacity "Agent") and Quanex Corporation, a Delaware
corporation ("Company").

WITNESSETH:

WHEREAS, the Banks, the Agent and the Company have executed and
delivered that certain Quanex Corporation $40,000,000 Revolving Credit and
Letter of Credit Agreement dated as of December 4, 1990 as amended by a First
Amendment to Quanex Corporation $40,000,000 Revolving Credit and Letter of
Credit Agreement dated March 26, 1991, a Second Amendment to Quanex Corporation
$40,000,000 Revolving Credit and Letter of Credit Agreement dated April 15,
1992, a Third Amendment to Quanex Corporation $40,000,000 Revolving Credit and
Letter of Credit Agreement dated as of February 12, 1993, a Fourth Amendment to
Quanex Corporation $40,000,000 Revolving Credit and Letter of Credit Agreement
dated April 1, 1993, a Fifth Amendment to Quanex Corporation Revolving Credit
and Letter of Credit Agreement dated December 8, 1994 and a Sixth Amendment to
Quanex Corporation Revolving Credit and Letter of Credit Agreement dated June
26, 1995 (the "Original Agreement"); and

WHEREAS, the Company, the Banks and the Agent now desire to increase
the Revolving Credit Aggregate Commitment to $75,000,000 and desire to further
amend the Original Agreement as set forth herein;

NOW, THEREFORE, in consideration of the premises, the Banks, the Agent
and the Company hereby represent and agree as follows:

1. Section 1.67 of the Original Agreement is amended to read in
its entirety as follows:

"1.67 "Revolving Credit Aggregate Commitment" shall mean
Seventy Five Million Dollars ($75,000,000), subject to reduction or
termination pursuant to Section 2.6 hereof."

2. Exhibits "B", "D" and "E" to the Original Agreement are
deleted in their entirety and attached Exhibits "B", "D" and "E" shall be
substituted therefor.
<PAGE> 2

3. Company hereby represents and warrants that, after giving
effect to the amendments contained herein, (a) execution, delivery and
performance of this Seventh Amendment and any other documents and instruments
required by this Seventh Amendment or the Original Agreement are within
Company's corporate powers, have been duly authorized, are not in contravention
of law or the terms of Company's Certificate of Incorporation or Bylaws, and do
not require the consent or approval of any governmental body, agency, or
authority; and this Amendment and any other documents and instruments required
under this Seventh Amendment or the Original Agreement, will be valid and
binding in accordance with their terms; (b) the continuing representations and
warranties of Company set forth in Sections 8.1 through 8.16 of the Original
Agreement are true and correct on and as of the date hereof with the same force
and effect as made on and as of the date hereof; (c) the continuing
representations and warranties of Company set forth in section 8.17 of the
Original Agreement are true and correct as of the date hereof with respect to
the most recent financial statements furnished to the Banks by Company in
accordance with Section 9.3 of the Original Agreement; and (d) no Event of
Default, or condition or event which, with the giving of notice or the running
of time, or both, would constitute an Event of Default under the Original
Agreement, has occurred and is continuing as of the date hereof.

4. This Seventh Amendment shall be effective upon (a) execution
of this Seventh Amendment by Company, Agent and the Banks, (b) delivery by
Company to Agent of new Revolving Credit Notes for the Banks in the form of
Exhibit "A" attached hereto completed to reflect the commitments of each Bank
as modified hereby, (c) delivery by LaSalle, Nichols and Michigan Seamless Tube
Company to Agent of amended and restated guaranty agreements in the form of
attached Exhibit "E", and (d) payment to the Agent for pro rata distribution to
the Banks an amendment fee of $20,250. Company agrees to deliver to Agent on or
before January 22, 1996 an opinion of legal counsel to the Company and the
Guarantors in form and substance satisfactory to the Agent and the Banks.

5. All references to the term "Agreement" and to the terms
"hereof", "hereunder" and similar referential terms in the Original Agreement
shall be deemed to mean or refer to the Original Agreement as amended by this
Seventh Amendment.

6. Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the Original Agreement.

7. This Seventh Amendment may be executed in counterparts, in
accordance with Section 13.8 of the Original Agreement.

2
<PAGE> 3

IN WITNESS WHEREOF, the Banks, the Agent and the Company have caused
this Seventh Amendment to be executed by their respective, duly authorized
officers, all as of the date set forth above.

COMPANY:

QUANEX CORPORATION

By: /s/ WAYNE M. ROSE
-----------------------
Wayne M. Rose
Title: Vice President-Finance

AGENT:

COMERICA BANK (successor in
interest by reason of merger
to Manufacturers Bank, N.A.,
formerly known as
Manufacturers National Bank of
Detroit), as Agent

By: /s/ Ilegible Signature
-----------------------
Name:
Title: Vice President

BANKS:

COMERICA BANK (successor in
interest by reason of merger
to Manufacturers Bank, N.A.,
formerly known as
Manufacturers National Bank of
Detroit)

By: /s/ CHARLES E. POHL
-------------------
Name: Charles E. Pohl
Title: Vice President

3
<PAGE> 4
FIRST INTERSTATE BANK OF TEXAS,
N.A.

By: /s/ CHRISTOPHER A. KING
------------------------
Name: Christopher A. King
Title: Banking Officer

HARRIS TRUST AND SAVINGS BANK

By: /s/ JAMES H. COLLEY
------------------------
Name: James H. Colley
Title: Vice President

NATIONSBANK OF TEXAS, N.A.

By: /s/ F. SCOTT SINGHOFF
------------------------
Name: F. Scott Singhoff
Title: Senior Vice President

<PAGE> 5
EXHIBIT "A"

REVOLVING CREDIT NOTE

$27,000,000 Detroit, Michigan
December 28, 1995

On or before the Revolving Credit Maturity Date (initially March 31,
1997), FOR VALUE RECEIVED, Quanex Corporation, a Delaware corporation,
("Company") promises to pay to the order of Comerica Bank, a Michigan banking
corporation ("Bank") at Detroit, Michigan, care of Agent, in lawful money of
the United States of America the Indebtedness to Bank or so much of the sum of
Twenty Seven Million and no/100 Dollars ($27,000,000) as may from time to time
have been advanced and then be outstanding hereunder pursuant to the Quanex
Corporation Revolving Credit and Letter of Credit Agreement ("Agreement") dated
as of December 4, 1990, as amended, made by and between Company, certain banks
including the Bank, and Comerica Bank (successor in interest by reason of
merger to Manufacturers Bank, N.A., formerly known as Manufacturers National
Bank of Detroit) as agent for such banks, together with interest thereon as
hereinafter set forth. Capitalized terms used herein, unless defined to the
contrary, have the meanings given them in the Agreement.

Each of the Loans made hereunder shall bear interest at the
Eurodollar-based Rate, or the Prime-based Rate as elected by Company or as
otherwise determined under the Agreement. Provided, however, that: (a) in the
event and so long as there shall exist a default hereunder or an Event of
Default, Loans outstanding hereunder shall bear interest at the default rates
of interest described in Section 4.1 of the Agreement; and (b) any Advances
made hereunder pursuant to Sections 3.6 and 3.7 of the Agreement shall bear
interest until paid at a per annum rate equal to the Prime-based Rate plus
three percent (3%) whether or not any default hereunder or any Event of Default
shall then exist.

Interest on the unpaid balance of all Loans shall be calculated and
payable as set forth in the Agreement.

This Note is a note under which advances, repayments and readvances may
be made from time to time, but only in accordance with the terms and conditions
of the Agreement. This Note evidences borrowing under, is subject to, and may
be accelerated or matured under, the terms of the Agreement, to which reference
is hereby made.

Company agrees that in the event of a default hereunder or any default
or Event of Default under the Agreement, Bank shall be entitled to liquidate
and collect all property or assets (including deposits and other credits)
whether presently owned or hereafter

<PAGE> 6
acquired, of Company in possession or control of (or owing by) the Bank for
any purpose, and to apply the proceeds of such liquidations and collections,
and offset any amounts owing by Bank, against Company's obligations hereunder
and under the Agreement.

THIS NOTE SHALL BE INTERPRETED AND THE RIGHTS OF THE PARTIES HEREUNDER
SHALL BE DETERMINED UNDER THE LAWS OF, AND ENFORCEABLE IN, THE STATE OF
MICHIGAN.

This Note replaces the Revolving Credit Note dated December 8, 1994 in
the principal amount of $18,000,000 by Company payable to Bank.

Company hereby waives presentment for payment, demand, protest and
notice of dishonor and nonpayment of this Note and agrees that no obligation
hereunder shall be discharged by reason of any extension, indulgence, release,
or forbearance granted by any holder of this Note to any party now or hereafter
liable hereon or any present or subsequent owner of any property, real or
personal, which is now or hereafter security for this Note. Any transferees of,
or endorser, guarantor or surety paying this Note in full shall succeed to all
rights of Bank, and Bank shall be under no further responsibility for the
exercise thereof or the loan evidenced hereby.

Nothing herein shall limit any right granted Bank by any other
instrument or by law.

QUANEX CORPORATION

By:
-------------------------

Its:
-------------------------

2
<PAGE> 7
EXHIBIT "A"

REVOLVING CREDIT NOTE

$16,000,000 Detroit, Michigan
December 28, 1995

On or before the Revolving Credit Maturity Date (initially March 31,
1997), FOR VALUE RECEIVED, Quanex Corporation, a Delaware corporation,
("Company") promises to pay to the order of Harris Trust and Savings Bank, a
state banking corporation ("Bank") at Detroit, Michigan, care of Agent, in
lawful money of the United States of America the Indebtedness to Bank or so
much of the sum of Sixteen Million and no/100 Dollars ($16,000,000) as may from
time to time have been advanced and then be outstanding hereunder pursuant to
the Quanex Corporation Revolving Credit and Letter of Credit Agreement
("Agreement") dated as of December 4, 1990, as amended, made by and between
Company, certain banks including the Bank, and Comerica Bank (successor in
interest by reason of merger to Manufacturers Bank, N.A., formerly known as
Manufacturers National Bank of Detroit) as agent for such banks, together with
interest thereon as hereinafter set forth. Capitalized terms used herein,
unless defined to the contrary, have the meanings given them in the Agreement.

Interest on the unpaid balance of all Loans shall be calculated and
payable as set forth in the Agreement.

<PAGE> 8
acquired, of Company in possession or control of (or owing by) the Bank for any
purpose, and to apply the proceeds of such liquidations and collections, and
offset any amounts owing by Bank, against Company's obligations hereunder and
under the Agreement.

THIS NOTE SHALL BE INTERPRETED AND THE RIGHTS OF THE PARTIES HEREUNDER
SHALL BE DETERMINED UNDER THE LAWS OF, AND ENFORCEABLE IN, THE STATE OF
MICHIGAN.

This Note replaces the Revolving Credit Note dated December 8, 1994 in
the principal amount of $10,000,000 by Company payable to Bank.

Nothing herein shall limit any right granted Bank by any other
instrument or by law.

QUANEX CORPORATION

By:
------------------------

Its: ------------------------

2
<PAGE> 9
EXHIBIT "A"

REVOLVING CREDIT NOTE

$16,000,000 Detroit, Michigan
December 28, 1995

On or before the Revolving Credit Maturity Date (initially March 31,
1997), FOR VALUE RECEIVED, Quanex Corporation, a Delaware corporation,
("Company") promises to pay to the order of NationsBank of Texas, N.A., a
national banking association ("Bank") at Detroit, Michigan, care of Agent, in
lawful money of the United States of America the Indebtedness to Bank or so
much of the sum of Sixteen Million and no/100 Dollars ($16,000,000) as may from
time to time have been advanced and then be outstanding hereunder pursuant to
the Quanex Corporation Revolving Credit and Letter of Credit Agreement
("Agreement") dated as of December 4, 1990, as amended, made by and between
Company, certain banks including the Bank, and Comerica Bank (successor in
interest by reason of merger to Manufacturers Bank, N.A., formerly known as
Manufacturers National Bank of Detroit) as agent for such banks, together with
interest thereon as hereinafter set forth. Capitalized terms used herein,
unless defined to the contrary, have the meanings given them in the Agreement.

Interest on the unpaid balance of all Loans shall be calculated and
payable as set forth in the Agreement.

<PAGE> 10
acquired, of Company in possession or control of (or owing by) the Bank for
any purpose, and to apply the proceeds of such liquidations and collections,
and offset any amounts owing by Bank, against Company's obligations hereunder
and under the Agreement.

THIS NOTE SHALL BE INTERPRETED AND THE RIGHTS OF THE PARTIES HEREUNDER
SHALL BE DETERMINED UNDER THE LAWS OF, AND ENFORCEABLE IN, THE STATE OF
MICHIGAN.

This Note replaces the Revolving Credit Note dated December 8, 1994 in
the principal amount of $10,000,000 by Company payable to Bank.

Nothing herein shall limit any right granted Bank by any other
instrument or by law.

QUANEX CORPORATION

By:
------------------------

Its: ------------------------

2
<PAGE> 11
EXHIBIT "A"

REVOLVING CREDIT NOTE

$16,000,000 Detroit, Michigan
December 28, 1995

On or before the Revolving Credit Maturity Date (initially March 31,
1997), FOR VALUE RECEIVED, Quanex Corporation, a Delaware corporation,
("Company") promises to pay to the order of First Interstate Bank of Texas,
N.A., a national banking association ("Bank") at Detroit, Michigan, care of
Agent, in lawful money of the United States of America the Indebtedness to Bank
or so much of the sum of Sixteen Million and no/100 Dollars ($16,000,000) as
may from time to time have been advanced and then be outstanding hereunder
pursuant to the Quanex Corporation Revolving Credit and Letter of Credit
Agreement ("Agreement") dated as of December 4, 1990, as amended, made by and
between Company, certain banks including the Bank, and Comerica Bank (successor
in interest by reason of merger to Manufacturers Bank, N.A., formerly known as
Manufacturers National Bank of Detroit) as agent for such banks, together with
interest thereon as hereinafter set forth. Capitalized terms used herein,
unless defined to the contrary, have the meanings given them in the Agreement.

Interest on the unpaid balance of all Loans shall be calculated and
payable as set forth in the Agreement.

This Note is a note under which advances, repayments and readvances may
be made from time to time, but only in accordance with the terms and conditions
of the Agreement. This Note evidences borrowing under, is subject to, and may be
accelerated or matured under, the terms of the Agreement, to which reference is
hereby made.

<PAGE> 12
acquired, of Company in possession or control of (or owing by) the Bank for
any purpose, and to apply the proceeds of such liquidations and collections,
and offset any amounts owing by Bank, against Company's obligations hereunder
and under the Agreement.

THIS NOTE SHALL BE INTERPRETED AND THE RIGHTS OF THE PARTIES HEREUNDER
SHALL BE DETERMINED UNDER THE LAWS OF, AND ENFORCEABLE IN, THE STATE OF
MICHIGAN.

This Note replaces the Revolving Credit Note dated December 8, 1994 in
the principal amount of $10,000,000 by Company payable to Bank.

Nothing herein shall limit any right granted Bank by any other
instrument or by law.

QUANEX CORPORATION

By:
-----------------------

Its: -----------------------

2
<PAGE> 13
EXHIBIT "B"

REVOLVING CREDIT NOTE

$_____________ Detroit, Michigan
______________, 1995

On or before the Revolving Credit Maturity Date (initially March 31,
1997), FOR VALUE RECEIVED, Quanex Corporation, a Delaware corporation,
("Company") promises to pay to the order of
________________________________________ _____________________, a
_________________________________________ ("Bank") at Detroit, Michigan, care
of Agent, in lawful money of the United States of America the Indebtedness to
Bank or so much of the sum of ___________________ Million and no/100 Dollars
($__________________) as may from time to time have been advanced and then be
outstanding hereunder pursuant to the Quanex Corporation Revolving Credit and
Letter of Credit Agreement ("Agreement") dated as of December 4, 1990, as
amended, made by and between Company, certain banks including the Bank, and
Comerica Bank (successor in interest by reason of merger to Manufacturers Bank,
N.A., formerly known as Manufacturers National Bank of Detroit) as agent for
such banks, together with interest thereon as hereinafter set forth.
Capitalized terms used herein, unless defined to the contrary, have the
meanings given them in the Agreement.

Interest on the unpaid balance of all Loans shall be calculated and
payable as set forth in the Agreement.

deposits and other credits) whether presently owned or hereafter acquired, of
Company in possession or control of (or owing by) the Bank for any purpose, and
to apply the proceeds of such liquidations and collections, and offset any
amounts owing by Bank, against Company's obligations hereunder and under the
Agreement.

THIS NOTE SHALL BE INTERPRETED AND THE RIGHTS OF THE PARTIES HEREUNDER
SHALL BE DETERMINED UNDER THE LAWS OF, AND ENFORCEABLE IN, THE STATE OF
MICHIGAN.

[This Note replaces the Revolving Credit Note dated
________________________, 1995 in the principal amount of $___________ by
Company payable to Bank.]

Nothing herein shall limit any right granted Bank by any other
instrument or by law.

QUANEX CORPORATION

By:
-------------------------

Its:
-------------------------

2
<PAGE> 15
EXHIBIT "D"

PERCENTAGES

<TABLE>
<CAPTION>
Bank Percentage
---- ----------
<S> <C> <C>
Comerica Bank 36.0% $27,000,000

First Interstate Bank of Texas, N.A. 21.333333% $16,000,000

Harris Trust and Savings Bank 21.333333% $16,000,000

NationsBank of Texas, N.A. 21.333333% $16,000,000
</TABLE>

<PAGE> 16
EXHIBIT "E"

[NAME OF GUARANTOR] GUARANTY

[Name of Guarantor], a ___________ corporation ("Guarantor") desires to
see the success of Quanex Corporation, a Delaware corporation ("Company") and
Account Parties (as defined below) and furthermore, Guarantor shall receive
direct and/or indirect benefits from loans and extensions of credit to Company
and Account Parties in connection with the transactions contemplated under the
Loan Agreement and the Loan Documents (as defined below).

To induce each of the Banks (as defined below), to enter into and
perform its obligations under that certain Revolving Credit and Letter of
Credit Agreement dated as of December 4, 1990, among Company, Comerica Bank, as
Agent, ("Agent") and the Banks, as amended from time to time (the "Loan
Agreement"), the Guarantor has executed and delivered this guaranty
("Guaranty").

1. Definitions. Unless otherwise provided herein, all capitalized
terms in this Guaranty shall have the meanings specified in the Loan Agreement.
The term "Banks" as used herein shall include any successors or assigns of the
Banks, in accordance with the Loan Agreement.

2. Guaranty. The Guarantor hereby guarantees to the Banks the due
and punctual payment to the Banks when due, whether by acceleration or
otherwise, of all amounts due and owing under:

(a) the Loan Agreement;

(b) the Notes executed by Company to the Banks in
the original aggregate principal amount of
$75,000,000 pursuant to the Loan Agreement; and

(c) all Letter of Credit Obligations and other amounts
owing under or in connection with Letters of Credit
issued for any Account Party from time to time
pursuant to the Loan Agreement;

all of the foregoing payable with interest thereon and otherwise in accordance
with the terms of such Notes and the Loan Agreement, as well as all extensions,
renewals, and amendments of or to the Loan Agreement, the Notes or Letters of
Credit or Letter of Credit Agreements or such other Indebtedness (as defined in
the Loan Agreement, or any replacements or substitutions therefor), and hereby
agrees that if the Company, any Account Party, or any other Person who is or
becomes primarily liable therefor, shall fail to pay any of such amounts when
and as the same shall be due and payable, or shall fail to perform and discharge
any covenant, representation or warranty in accordance with the terms of the
Notes, the Loan Agreement, the Letters of Credit, the Letter of
<PAGE> 17
Credit Agreements, or any of the other Loan Documents, the Guarantor will
forthwith pay to Agent on behalf of the Banks an amount equal to any such amount
or cause the Company and any other Person then primarily liable therefor to
perform and discharge any such covenant, representation or warranty, as the case
may be, and will pay any and all damages that may be incurred or suffered in
consequence thereof by Agent and all reasonable expenses, including reasonable
attorneys fees, that may be incurred by Agent in enforcing such covenant,
representation or warranty of the Company, and in enforcing the covenants and
agreements of this Guaranty.

3. Unconditional Character of Guaranty. The obligations of
Guarantor under this Guaranty shall be absolute and unconditional, and shall be
a guaranty of payment and not of collection, irrespective of the validity,
regularity or enforceability of the Notes, the Loan Agreement, the Letters of
Credit, the Letter of Credit Agreements, or any of the other Loan Documents, or
any provision thereof, the absence of any action to enforce the same, any
waiver or consent with respect to any provision thereof, the recovery of any
judgment against any person or action to enforce the same, any failure or delay
in the enforcement of the obligations of the Company under the Notes, the Loan
Agreement, or the obligations of Company or any other Account Party under the
Letters of Credit, the Letter of Credit Agreements, or of the obligations of
any Person under any of the other Loan Documents, or any setoff, counterclaim,
recoupment, limitation, defense or termination. Guarantor hereby waives
diligence, demand for payment, filing of claims with any court, any proceeding
to enforce any provision of the Notes, the Loan Agreement, the Letters of
Credit, the Letter of Credit Agreements, or any of the other Loan Documents,
any right to require a proceeding first against the Company, any Account Party,
or any other guarantor or surety, or to exhaust any security for the
performance of the obligations of the Company or any Account Party, any
protest, presentment, notice or demand whatsoever, and Guarantor hereby
covenants that this Guaranty shall not be terminated, discharged or released
except upon payment in full of all amounts due and to become due from the
Company and all Account Parties, as and to the extent described above, and only
to the extent of any such payment, performance and discharge or upon the
release of Guarantor pursuant to the terms of Section 5.6 hereof. Guarantor
further covenants that no security now or subsequently held by the Agent or the
Banks for the payment of the Indebtedness evidenced by the Notes, or incurred
under the Loan Agreement, the Letters of Credit, the Letter of Credit
Agreements, or otherwise evidenced or incurred, whether in the nature of a
security interest, pledge, lien, assignment, setoff, suretyship, guaranty,
indemnity, insurance or otherwise, and no act, omission or other conduct of
Agent or the Banks in respect of such security, shall affect in any manner
whatsoever the unconditional obligation of this Guaranty, and that the Agent
and each of the Banks, in their respective sole discretion and without notice
to Guarantor, may release, exchange, enforce, apply the

2
<PAGE> 18
proceeds of and otherwise deal with any such security without affecting in any
manner the unconditional obligation of this Guaranty. Notwithstanding anything
to the contrary contained in this Guaranty, Guarantor hereby irrevocably waives
any and all rights it may now or hereafter have under any agreement or at law or
in equity (including, without limitation, any law subrogating Guarantor to the
rights of Banks) to assert any claim against or seek contribution,
indemnification or any other form of reimbursement from the Company and the
Account Parties or any other party liable for payment of any or all of the
Indebtedness for any payment made by Guarantor under or in connection with this
Guaranty or otherwise.

Without limiting the generality of the foregoing, such obligations,
and the rights of the Agent on behalf of the Banks to enforce the same by
proceedings, whether by action at law, suit in equity or otherwise, shall not
be in any way affected by (i) any insolvency, bankruptcy, liquidation,
reorganization, readjustment, composition, dissolution, winding up or other
proceeding involving or affecting the Company, any Account Party, the Guarantor
or others or (ii) any change in the ownership of any of the capital stock of
the Company or any of the Company's Subsidiaries, or any of their respective
Affiliates.

Guarantor hereby waives:

(a) any defense based upon an election of remedies by the Agent or
the Banks, including, without limitation, an election to proceed by
non-judicial rather than judicial foreclosure, which destroys or otherwise
impairs the subrogation rights of the Guarantor or the right of the Guarantor
to proceed against the Company or any Account Party for reimbursement, or both;

(b) any defense based upon any statute or rule of law which
provides that the obligation of a surety must be neither larger in amount nor
in other respects more burdensome than that of the principal;

(c) any duty on the part of Agent or the Banks to disclose to the
Guarantor any facts Agent or the Banks may now or hereafter know about the
Company or any Account Party, regardless of whether the Agent or any Bank has
reason to believe that any such facts materially increase the risk beyond that
which the Guarantor intends to assume or has reason to believe that such facts
are unknown to the Guarantor or has a reasonable opportunity to communicate
such facts to the Guarantor, since the Guarantor acknowledges that it is fully
responsible for being and keeping informed of the financial condition of the
Company and Account Parties and of all circumstances bearing on the risk of
non-payment of any Indebtedness hereby guaranteed;

3
<PAGE> 19

(d) any defense arising because of the Agent's or the Banks'
election, in any proceeding instituted under the Federal Bankruptcy Code, of
the application of Section 1111(b)(2) of the Federal Bankruptcy Code;

(e) any other event or action (excluding Guarantor's compliance
with the provisions hereof) that would result in the discharge by operation of
law or otherwise of the Guarantor from the performance or observance of any
obligation, covenant or agreement contained in this Guaranty.

The Agent and any security held by them, for the obligations of the
Company or any Account Party (as aforesaid) in the same manner and as freely as
if this Guaranty did not exist and the Agent on behalf of the Banks shall be
entitled without notice to Guarantor, among other things, to grant to the
Company and Account Parties such extension or extensions of time to perform
any act or acts as may seem advisable to the Agent on behalf of the Banks at any
time and from time to time, and to permit the Company or any Account Party to
incur additional indebtedness to Agent, the Banks, or either or any of them,
without terminating, affecting or impairing the validity or enforceability of
this Guaranty or the obligations of Guarantor hereunder.

The Agent may proceed, either in its own name (on behalf of the Banks)
or in the name of the Guarantor, or otherwise, to protect and enforce any or
all of its rights under this Guaranty by suit in equity, action at law or by
other appropriate proceedings, or to take any action authorized or permitted
under applicable law, and shall be entitled to require and enforce the
performance of all acts and things required to be performed hereunder by the
Guarantor. Each and every remedy of the Agent on behalf of the Banks shall, to
the extent permitted by law, be cumulative and shall be in addition to any
other remedy given hereunder or now or hereafter existing at law or in equity.

No waiver or release shall be deemed to have been made by the Agent or
the Banks of any of its rights hereunder unless the same shall be in writing
and signed by or on behalf of the Banks, and any such waiver shall be a waiver
or release only with respect to the specific matter involved and shall in no
way impair the rights of the Agent or the Banks or the obligations of Guarantor
under this Guaranty in any other respect at any other time.

At the option of the Agent, Guarantor may be joined in any action or
proceeding commenced by the Agent against the Company, and/or any Account Party
or Account Parties, or any other Person in connection with or based upon the
Notes, the Loan Agreement, the Letters of Credit, the Letter of Credit
Agreements, or any of the other Loan Documents or other Indebtedness, or any
provision thereof, and recovery may be had against Guarantor in such action

4
<PAGE> 20
or proceeding or in any independent action or proceeding against Guarantor,
without any requirement that the Agent or the Banks first assert, prosecute or
exhaust any remedy or claim against the Company, any Account Party, or any
other Person.

4. Representations and Warranties. Guarantor represents, warrants
and agrees, and such representations and warranties shall be deemed to be
continuing representations and warranties during the entire life of this
Guaranty, that:

(a) Guarantor is a corporation duly organized, validly existing
and in good standing under the laws of its state of incorporation and has all
requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as now conducted. To the best of its
knowledge, Guarantor is duly qualified or licensed to do business as a foreign
corporation, and is in good standing in each jurisdiction where the nature of
the business conducted by it or the properties owned or leased by it makes such
qualification or licensing necessary and where failure to be so qualified would
have a material adverse effect on its business.

(b) Execution, delivery and performance of this Guaranty, all of
the other Loan Documents to which Guarantor is a party, and all other documents
and instruments executed and delivered under or in connection with this
Guaranty or the other Loan Documents by Guarantor (or to be so executed and
delivered) are within its corporate powers, have been duly authorized, are not
in contravention of law or the terms of Guarantor's articles of incorporation
or bylaws, and do not require the consent or approval, material to the
transactions contemplated by the Loan Documents, of any court, governmental
body, agency or authority not previously obtained and delivered to Agent under
the Loan Agreement.

(c) This Guaranty and each of the Loan Documents to which
Guarantor is a party and all other certificates, agreements, documents and
instruments executed and delivered by Guarantor under or in connection
therewith have each been duly executed and delivered by its duly authorized
officers and constitute the valid and binding obligations of Guarantor,
enforceable in accordance with their respective terms, except as the validity
or enforceability may be limited by bankruptcy, insolvency, moratorium,
reorganization or other similar laws affecting creditors' rights generally or
other equitable principles (regardless of whether enforcement is considered in
proceedings in law or equity).

(d) The execution, delivery and performance of the Guaranty and
each of the Loan Documents to which Guarantor is a party and any other
documents and instruments required under or in connection with this Guaranty by
Guarantor are not in contravention of the

5
<PAGE> 21
terms of any indenture, agreement or undertaking to which Guarantor is a
party or by which it is bound, except to the extent such terms have been waived
or are not material to the transactions contemplated by the Loan Documents.

(e) There is no suit, action, proceeding, including, without
limitation, any bankruptcy proceeding, or governmental investigation pending
against or affecting Guarantor or its Subsidiaries (other than any suit, action
or proceeding in which Guarantor or its Subsidiaries is the plaintiff and in
which no counterclaim or crossclaim against Guarantor or its Subsidiaries has
been filed) nor has Guarantor or its Subsidiaries or any of their respective
officers or directors been subject to any suit, action, proceeding or
governmental investigation as a result of which any such officer or director is
or may be entitled to indemnification by Guarantor or its Subsidiaries, except
as otherwise disclosed in the appropriate exhibit to the Loan Agreement and
except for miscellaneous suits, actions and proceedings (other than suits,
actions or proceedings commenced by any government or governmental authority or
seeking specific performance or other equitable or injunctive relief) involving
less than $100,000 which suits would not in the aggregate, if resolved
adversely to Guarantor, have a material adverse effect on Guarantor. Except as
so disclosed, there is not outstanding against Guarantor or its Subsidiaries
any judgment, decree, injunction, rule, or order of any court, government,
department, commission, agency, instrumentality or arbitrator nor is Guarantor
or its Subsidiaries in violation of any applicable law, regulation, ordinance,
order, injunction, decree or requirement of any governmental body or court
where such violation would have a material adverse effect on Guarantor.

(f) There are no security interests in, liens, mortgages, or other
encumbrances on any of the assets or properties of the Guarantor, that are
prohibited by the provisions of the Loan Agreement.

(g) All factual information heretofore or contemporaneously
furnished in writing by or on behalf of Guarantor to Agent or any Bank for
purposes of or in connection with this Agreement or any transaction
contemplated hereby is, and all other such factual information hereafter
furnished by or on behalf of Guarantor to Agent or any Bank will be, true and
accurate in every material respect on the date as of which such information is
dated or certified and, to the best of its knowledge, is not incomplete by
omitting to state any material fact necessary to make such information
not misleading.

6
<PAGE> 22

5. Miscellaneous.

5.1 Governing Law.

This Guaranty shall be deemed delivered in Michigan and shall be
interpreted and the rights of the parties hereunder shall be determined under
the laws of, and be enforceable in, the State of Michigan, Guarantor hereby
consenting to the jurisdiction of such state and all federal courts sitting in
such state.

5.2 Severability. If any term or provision of this
Guaranty or the application thereof to any circumstance shall, to any extent,
be invalid or unenforceable, the remainder of this Guaranty, or the application
of such term or provision to circumstances other than those as to which it is
held invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Guaranty shall be valid and enforceable to the fullest extent
permitted by law.

5.3 Notice. All notices and other communications to be
made or given pursuant to this Guaranty shall be sufficient if made or given in
writing and delivered by messenger or deposited in the U.S. mails, registered
or certified first class mail, addressed as follows:

AGENT: COMERICA BANK
500 Woodward Avenue
9th Floor
Detroit, Michigan 48226
Attention: U.S. Banking Department

BANKS: COMERICA BANK
500 Woodward Avenue
9th Floor
Detroit, Michigan 48226
Attention: U.S. Banking Department

FIRST INTERSTATE BANK OF TEXAS, N.A.
1000 Louisiana
2nd Floor
Houston, Texas 77002
Attention: Randall Walker

HARRIS TRUST AND SAVINGS BANK
111 W. Monroe-2W
Chicago, Illinois 60690
Attention: Kristan Seyfarth

7
<PAGE> 23
NATIONSBANK OF TEXAS, N.A.
Corporate Banking, 8th Floor
700 Louisiana
Houston, Texas 77002
Attention: F. Scott Singhoff

GUARANTOR: [NAME OF GUARANTOR]
c/o Quanex Corporation
1900 W. Loop South, Suite 1500
Houston, Texas 77027
Attention: Wayne Rose

or at such other addresses as directed by any of such parties to the others, as
applicable, in compliance with this paragraph.

5.4 Right of Offset. Guarantor acknowledges the rights of
the Agent and of each of the Banks to offset against the indebtedness of
Guarantor to the Banks under this Guaranty, any amount owing by the Agent or
the Banks, or either or any of them to the Guarantor, whether represented by
any deposit of Guarantor with the Agent or any of the Banks or otherwise.

5.5 Amendments. The terms of this Guaranty may not be
waived, altered, modified, amended, supplemented or terminated in any manner
whatsoever except as provided herein and in accordance with the Loan Agreement.

5.6 Release. Upon (a) the termination of the commitment
of the Banks to make Loans or Advances to Company and the satisfaction by
Guarantor of its obligations hereunder, or the time at which Guarantor is no
longer subject to any obligation hereunder or the time at which the Guarantor
is designated an Unrestricted Subsidiary pursuant to and in accordance with the
terms of the Loan Agreement, whichever first occurs, the Guarantor shall be
deemed released from this Guaranty and, the Agent shall deliver to Guarantor,
upon written request therefor, a written release of this Guaranty; provided
that, the effectiveness of this Guaranty shall continue or be reinstated, as
the case may be, in the event that any payment received or credit given by the
Agent or the Banks is returned, disgorged or rescinded as an avoidable
preference, impermissible setoff, fraudulent conveyance or otherwise under any
applicable state or federal law, including laws pertaining to bankruptcy or
insolvency, and this Guaranty shall thereafter be enforceable against Guarantor
as if such returned, disgorged or rescinded payment or credit had not been
received or given by the Agent or the Banks, and whether or not the Agent or
any Bank relied upon such payment or credit or changed its position as a
consequence thereof.

[This Guaranty amends and restates in its entirety the Guaranty dated
_________________, 199__ by the Guarantor in favor of the Agent and the Banks.]

8
<PAGE> 24

IN WITNESS WHEREOF, the undersigned Guarantor has executed this
Guaranty as of _______________, 199__.

[NAME OF GUARANTOR]

By:
-------------------------

Its:
-------------------------
ACCEPTED BY:

COMERICA BANK, As Agent,
on behalf of the Banks

By:
--------------------------

Its:
--------------------------

<PAGE> 1

EXHIBIT 10.6

QUANEX CORPORATION

DEFERRED COMPENSATION PLAN

AMENDED AND RESTATED

OCTOBER 12, 1995

<PAGE> 2

QUANEX CORPORATION
DEFERRED COMPENSATION PLAN

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Section
<S> <C>
ARTICLE I -- DEFINITIONS

Accou1.1

Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3
Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5
Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7
Company 1.8
Company Match . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9
Deferred Compensation Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.10
Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.11
Directors Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.11
Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.13
Incentive Bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.14
NYSE 1.15
Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.16
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.17
Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.18
Quanex 1.19
Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.20
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.21
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.22
Term of Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.23
Total Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.24
Voting Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.25

ARTICLE II - ELIGIBILITY

ARTICLE III - BONUS DEFERRAL AND COMPANY CONTRIBUTIONS

Bonus Deferral Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1
Company Match . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2
Mandatory Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3

ARTICLE IV - ACCOUNT
</TABLE>

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<PAGE> 3
TABLE OF CONTENTS (CONTINUED)

<TABLE>
<CAPTION>
Section
<S> <C>
Establishing a Participant's Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1

Credit of the Participant's Deferral and
the Company's Match . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2
Crediting of Dividends and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3
Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4
Common Stock Conversion Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5

ARTICLE V - VESTING

Vesting 5.1
Forfeiture of Company Match Because
of Early Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2
Forfeiture For Cause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3
Forfeiture For Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4

ARTICLE VI - DISTRIBUTIONS

Form of Distributions or Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1
Death6.2

Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3
Expiration of Term of Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4
Hardship Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5
Payment Restriction on any Portion of a Benefit
Determined Not to be Deductible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6
Responsibility for Distributions and
Withholding and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7

ARTICLE VII - ADMINISTRATION

Committee Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
Committee Organization and Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2
Powers of the Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3
Committee Discretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4
Annual Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5
Reimbursement of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
</TABLE>

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<PAGE> 4
TABLE OF CONTENTS (CONTINUED)

<TABLE>
<CAPTION>
Section
<S> <C>
ARTICLE VIII - ADOPTION BY SUBSIDIARIES

Procedure for and Status After Adoption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1
Termination of Participation By Adopting Subsidiary . . . . . . . . . . . . . . . . . . . . . . 8.2

ARTICLE IX - AMENDMENT AND/OR TERMINATION

Amendment or Termination of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1
No Retroactive Effect on Awarded Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2
Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3

ARTICLE X - FUNDING

Payments Under This Agreement are the Obligation
of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1
Agreement May Be Funded Through Rabbi Trust . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2
Reversion of Excess Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3
Participants Must Reply Only on General
Credit of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4

ARTICLE XI - MISCELLANEOUS

Limitation of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1
Distributions to Incompetents of Minors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2
Nonalienation of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3
Expenses Incurred in Enforcing the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4
Reliance Upon Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5
Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.6
Notice 11.7
Gender and Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.8
Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.9
Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.10
</TABLE>

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<PAGE> 5
QUANEX CORPORATION

DEFERRED COMPENSATION PLAN

WHEREAS, Quanex Corporation originally established the Quanex
Deferred Compensation Plan effective October 1, 1981, which provides for
certain highly compensated management personnel and directors a deferred
compensation plan whereby a portion of the Executive Incentive Compensation
Plan compensation may be deferred prior to its being earned by the executive
and a portion of director's fees may be deferred prior to its being earned by
directors;

WHEREAS, Quanex Corporation desires to amend, modify and
restate the Deferred Compensation Plan effective October 12, 1995.

NOW, THEREFORE, Quanex Corporation through this document
amends, modifies and restates the Quanex Corporation Deferred Compensation Plan
which shall be as follows:
<PAGE> 6
ARTICLE I

DEFINITIONS

1.1 Account. "Account" means a Participant's Account in
the Deferred Compensation Ledger maintained by the Committee which reflects the
benefits a Participant is entitled to under this Plan.

1.2 Beneficiary. "Beneficiary" means a person or entity
designated by the Participant under the terms of this Plan to receive any
amounts distributed under the Plan upon the death of the Participant.

1.3 Board of Directors. "Board of Directors" means the
Board of Directors of Quanex.

1.4 Change of Control. "Change of Control" means the
occurrence of one or more of the following events:

(a) Any "person", including a "syndication" or "group" as
those terms are used in Section 13(d)(3) of the Securities Act, is or
becomes the beneficial owner, directly or indirectly, of securities of
Quanex representing 20% or more of the combined voting power of
Quanex's then outstanding Voting Securities;

(b) Quanex is merged or consolidated with another
corporation and immediately after giving effect to the merger or
consolidation either (i) less than 80% of the outstanding Voting
Securities of the surviving or resulting entity are then beneficially
owned in the aggregate by (x) the stockholders of Quanex immediately
prior to such merger or consolidation, or (y) if a record date has
been set to determine the stockholders of Quanex entitled to vote on
such merger or consolidation, the stockholders of Quanex as of such
record date, or (ii) the Board of Directors, or similar governing
body, of the surviving or resulting entity does not have as a majority
of its members the persons specified in clause (c)(i) and (ii) below;

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<PAGE> 7
(c) If at any time the following do not constitute a
majority of the Board of Directors of Quanex (or any successor entity
referred to in clause (b) above):

(i) persons who are directors of Quanex on
January 1, 1995; and

(ii) persons who, prior to their election as a
director of Quanex (or successor entity if applicable) were
nominated, recommended or endorsed by a formal resolution of
the Board of Directors of Quanex;

(d) If at any time during a calendar year a majority of
the directors of Quanex are not persons who were directors at the
beginning of the calendar year; and

(e) Quanex transfers substantially all of its assets to
another corporation which is a less than 80% owned subsidiary of
Quanex.

1.5 Code. "Code" means the Internal Revenue Code of
1986, as amended from time to time.

1.6 Committee. "Committee" means the persons who are
from time to time serving as members of the committee administering this Plan.

1.7 Common Stock. "Common Stock" means Quanex Common
Stock, $.50 par value (or such other par value as may be designated by the vote
of Quanex Stockholders or such other equity securities of Quanex into which
such Common Stock may be converted, reclassified or exchanged.)

1.8 Company. "Company" means Quanex and any Subsidiary
adopting the Plan.

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<PAGE> 8
1.9 Company Match. "Company Match" means the 20% match
which the Company makes to the amount deferred in Common Stock during a Plan
Year by a Participant under this Plan for three or more Plan Years.

1.10 Deferred Compensation Ledger. "Deferred Compensation
Ledger" means the ledger maintained by the Committee for each Participant which
reflects the amount of compensation deferred for the Participant under this
Plan, the Company match, and the amount of income credited on each of these
amounts.

1.11 Director. "Director" means any person serving as a
member of the Board of Directors.

1.12 Director Fees. "Director Fees" means any amount paid
to a Director for services in such capacity.

1.13 Disability. "Disability" means a mental or physical
disability which in the opinion of a physician selected by the Committee, shall
prevent the Participant from engaging in any substantial gainful activity and
which can be expected to result in death or which has lasted or can be expected
to last for a continuous period of not less than twelve months and which: (a)
was not contracted, suffered or incurred while the Participant was engaged in
or did not result from having engaged in, a felonious criminal enterprise; (b)
did not result from alcoholism or addiction to narcotics; and (c) did not
result from an injury incurred while a

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<PAGE> 9
member of the Armed Forces of the United States for which the Participant
received a military pension.

1.14 Incentive Bonus. "Incentive Bonus" means a bonus
awarded or to be awarded to the Participant under the Quanex Corporation
Executive Incentive Compensation Plan.

1.15 NYSE. "NYSE" means the New York Stock Exchange.

1.16 Participant. "Participant" means an employee or
director of a Company who is eligible for and is participating in the Plan.

1.17 Plan. "Plan" means the Quanex Corporation Deferred
Compensation Plan set forth in this document, as amended from time to time.

1.18 Plan Year. "Plan Year" means a one year period which
coincides with the fiscal year of Quanex. Quanex's fiscal year begins on the
first day of November of each calendar year and ends on October 31st of the
next ensuing calendar year.

1.19 Quanex. "Quanex" means the Quanex Corporation, the
sponsor of this Plan.

1.20 Retirement. "Retirement" means the Retirement of a
Participant from any Company covered by the Plan under the terms of its
qualified defined benefit Retirement plan, if any, or if it has none applicable
to the Participant, under the Company's defined contribution Retirement plan,
if any, or if it has none applicable to the Participant, under the Company's
Retirement policy.

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<PAGE> 10
1.21 Securities Act. "Securities Act" means the
Securities Exchange Act of 1934, as amended from time to time.

1.22 Subsidiary. "Subsidiary" means any wholly owned
subsidiary of Quanex.

1.23 Term of Deferral. "Term of Deferral" means the
period of deferral chosen by the Participant under the election procedure
established in Section 3.1 or by the Committee which pertains to that portion
of the Incentive Bonus or Director Fees for each given Plan Year and its
accumulated income accrued that has been deferred under an election made prior
to the commencement of the period during which it is earned.

1.24 Voting Securities. "Voting Securities" means any
security which ordinarily possesses the power to vote in the election of the
Board of Directors without the happening of any precondition or contingency.

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<PAGE> 11
ARTICLE II

ELIGIBILITY

Initially, all participants in the Quanex Corporation
Executive Incentive Compensation Plan and all Directors will be eligible to
participate in this Plan. However, the Committee retains the right to
establish such additional eligibility requirements for participation in this
Plan as it may determine is appropriate or necessary from time to time and has
the right to determine, in its sole discretion, that any one or more persons
who meet the eligibility requirements will not be eligible to participate for
one or more Plan Years beginning after the date they are notified of this
decision by the Committee.

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<PAGE> 12
ARTICLE III

BONUS DEFERRAL AND COMPANY CONTRIBUTIONS

3.1 Bonus Deferral Election. A Participant may elect
during the election period established by the Committee prior to the beginning
of any Plan Year:

(1) the percentage of his Incentive Bonus earned
during the ensuing Plan Year which is to be paid as soon as
conveniently possible after year end and the percentage which
is to be deferred under this Plan;

(2) the percentage of his Director Fees earned
during the ensuing Plan Year which is to be paid during such
year and the percentage which is to be deferred under this
Plan;

(3) the percentage of the amount deferred, if
any, to be deferred in the form of Common Stock and the
percentage, if any, to be deferred in the form of cash;

(4) the length of the period of deferral, if any
amount has been elected to be deferred, whether in cash or in
Common Stock, which deferral shall be for a period of years,
to a date certain, to termination or to Retirement; and

(5) the form of payment of the amount that has
been elected to be deferred: a lump sum or quarterly or
annual installment payments of the principal amount plus the
interest accrued after the distribution date, or last
installment paid, if later, in the case of a deferral in the
form of cash or of the total shares of Common Stock credited
to him as of the date of distribution plus any other shares,
cash or other property credited as dividends or other rights
on those shares after the distribution date or last
installment distributed, if later, in the case of a deferral
in the form of Common Stock, over no less than three nor more
than 20 years.

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<PAGE> 13
If a Participant elects a deferral period to Retirement, the
participant shall also specify whether the deferral period shall end at
termination or at the Participant's normal Retirement date, in the event of
termination other than as a result of death, disability or Retirement. If a
Participant elects a deferral period of a number of years or to a date certain,
the deferral period shall end upon the Participant's Retirement if earlier.

The deferrals in the form of Common Stock elected by
Participants to be allocated to their Accounts in any Plan Year must not exceed
one percent of the shares of Common Stock outstanding on the first day of the
Plan Year. In the event this maximum would be exceeded each Participant who
elected to defer in the form of Common Stock shall have his election reduced on
a pro rata basis as compared to all Participants who elected to defer in the
form of Common Stock until those deferrals in the aggregate for that Plan Year
equal the maximum and the portion of his Incentive Bonus which would have been
deferred in the form of Common Stock shall instead be distributed to the
Participant as provided in the Quanex Corporation Executive Incentive
Compensation Plan.

Once an election has been made it becomes irrevocable for that
Plan Year, except that the Participant may change his election of the form of
payment he previously elected under Section 3.1(5) during a 30 day period
ending one year prior to the end of the deferral period. In the event a
Participant originally elected a deferral period of a number of years or until
a date certain and, as a result of the

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<PAGE> 14
Participant's election to take Retirement, the Participant will retire before
the end of the elected deferral period, the Participant may elect to change the
form of payment during a 30 day period ending one year prior to the Retirement
date chosen by the Participant by written notice to the Company. In the event
a Participant changes his election, if the deferral period terminates early for
any reason, which is beyond the control of the Participant, such as:
involuntary termination of employment, death or disability, then the
distribution or the first installment, whichever is applicable, shall not be
made until one year after the election was changed; however, if the deferral
period terminates early for any reason which is within the control of the
Participant, such as: Retirement or voluntary termination of employment, then
the change of election will be ineffective. If for any reason the deferral
period does not end one year after the end of such 30 day period because of a
postponement of Retirement or otherwise, the change of election shall remain in
effect and no further changes of election shall be permitted.

The election to participate in the Plan for a given Plan Year
will be effective only upon receipt by the Committee of the Participant's
election on such form as will be determined by the Committee from time to time.
If the Participant does not exercise his right to defer, subject to Section 3.4
below, the Participant will be deemed to have elected not to defer any part of
his Incentive Bonus or Director Fees for that Plan Year and all of his
Incentive Bonuses and Director Fees will be paid in cash. If the percentage of
the Incentive Bonus and Director Fees elected to be deferred in

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<PAGE> 15
Common Stock results in a fractional share it shall be reduced to the next
lowest full share and the fractional share shall be paid or deferred, as the
case may be, in cash.

3.2 Company Match. The Company will credit to the
Account of each Participant who has a portion of his Incentive Bonus or
Director Fees deferred under this Plan in the form of Common Stock for a period
of three full years or more additional shares of Common Stock equal to 20% of
the amount which is deferred in the form of Common Stock, rounded to the next
highest number of full shares.

3.3 Mandatory Deferral. If a Participant becomes
entitled to a cash payment of part or all of an Incentive Bonus because the
Participant did not elect to defer all of the Incentive Bonus but the Company
determines that Section 162(m) of the Code may not allow the Company to take a
deduction for part or all of the Incentive Bonus, then payment of the Incentive
Bonus will be delayed until December 1st following the end of the Plan Year in
which it occurred. Then on December 1st, if the Company's deduction is
determined by the Company not to be affected, the Incentive Bonus in total will
be paid immediately. However, if the Company determines that some portion of
the Incentive Bonus is affected, then only that portion of the Incentive Bonus
which is deductible by the Company shall be paid on December 1st and the
remaining portion of the Incentive Bonus will be delayed to the first day of
the first complete month of the second Plan Year, at which time it will be
paid. The Committee may waive the mandatory deferral required by this Section
3.3 with respect to a Participant who is not a member of the Committee but such

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<PAGE> 16
waiver shall only be made on an individual basis and at the time the Incentive
Bonus is determined and awarded.

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<PAGE> 17
ARTICLE IV

ACCOUNT

4.1 Establishing a Participant's Account. The Committee
will establish an Account for each Participant in a special Deferred
Compensation Ledger which will be maintained by the Company. The Account will
reflect the amount of the Company's obligation to the Participant at any given
time.

4.2 Credit of the Participant's Deferral and the
Company's Match. Upon completion of the Plan Year the Committee will
determine, as soon as administratively practicable, the amount of a
Participant's Incentive Bonus or Director Fees that has been deferred for that
Plan Year and the amount of the Company Match, if any, and will credit that or
those amounts to the Participant's Account in the Deferred Compensation Ledger
as of the end of the Plan Year during which the Incentive Bonus or Director
Fees was earned. If the Participant elected his deferral to be in the form of
Common Stock the number of shares credited to his Account as Common Stock
shall be the number of full shares of Common Stock that could have been
purchased with the dollar amount deferred, without taking into account any
brokerage fees, taxes or other expenses which might be incurred in such a
transaction, based upon the closing quotation on the NYSE, or if not traded on
the NYSE, the principal market in which the Common Stock is traded on the date
the amount would have been paid had it not been deferred pursuant to Article
III, and

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<PAGE> 18
any additional fractional amount shall be credited to the Participant's Account
in the form of cash.

4.3 Crediting of Dividends, Distributions and Interest.
When dividends are declared and paid on, or other distributions, whether stock,
property, cash, rights or other, are made with respect to the Common Stock,
those dividends and other distributions shall be accrued in a Participant's
Account based upon the shares of Common Stock credited to the Participant's
Account. The dividends or other distributions in the form of shares of Common
Stock shall be credited to the Account as additional shares of Common Stock.
The dividends or other distributions or rights in any other form shall be
credited to the Participant's Account in the form of cash. For this purpose,
all dividends and distributions not in the form of shares of Common Stock or
cash shall be valued at the fair market value as determined by a resolution
duly adopted by the Committee. Interest will be accrued on that portion of a
Participant's Account held in the form of cash at the rate established by
Section 4.4.

4.4 Interest Rate. Interest will be accrued on the last
day of each calendar month on each portion of a Participant's Account held in
the form of cash (whether resulting from a cash deferral, cash dividends or
other cash distributions on Common Stock or the conversion of a Common Stock
credit in his Account to cash) from the later of (a) the time it is credited to
his Account or (b) the last previous calendar month end at a rate equal to (x)
the rate of interest announced by Chase Manhattan Bank, N.A., or its successor,
if applicable as its prime rate of interest on

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<PAGE> 19
the last business day of the calendar quarter preceding the calendar quarter in
which the month falls divided by (y) four. Interest so accrued on the last day
of each calendar month shall be credited as cash to the Participant's Account
and shall thereafter accrue interest. Interest will continue to be credited on
the cash balance in the Participants Account until the entire cash balance has
been distributed.

4.5 Common Stock Conversion Election. At any time during
a period commencing three years prior to the earliest time a Participant could
retire under the

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<PAGE> 20
Company's Retirement Plan and ending on the Participant's normal Retirement
date as established under the Company's Retirement Plan, the Participant may
elect a Retirement date under the Company's Retirement Plan and may elect to
have all shares of Common Stock in his Account converted to cash. In that
event, all shares of Common Stock shall be converted on the date notice is
received by the Company based upon the closing quotation as described in
Section 4.2, on that day, unless the Participant has specified no more than
five different dates after the date of the notice on which the Participant
desires all or a portion of the shares of Common Stock to be converted and the
percentage of shares to be converted on each date. If the Participant has
specified dates for and the percentage of shares to be converted, then the
designated percentage of shares of Common Stock to be converted on each date
shall be converted on the specified date based on the closing quotation as
described in Section 4.2 on such specified dates.

At any time which is at least five years after Common Stock is
credited to a Participant's account pursuant to Section 4.2, the Participant
may elect to have such Common Stock converted to cash and credited to the
Participant's Account. In that event, all shares of Common Stock specified by
the Participant in a written notice to the Company which have been credited to
the Participant's Account for at least five years prior to the giving of such
notice shall be converted on the date notice is received by the Company based
upon the closing quotation as described in Section 4.2, on that day.

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<PAGE> 21
ARTICLE V

VESTING AND EVENTS CAUSING FORFEITURE

5.1 Vesting. All deferrals of the Incentive Bonus and
Director Fees and all income accrued on the deferrals will be 100% vested
except for the events of forfeiture described in Sections 5.3 and 5.4. All
Company matching accruals and all income accrued on those matching accruals
will be 100% vested except for the events of forfeiture described in Section
5.2, 5.3 and 5.4.

5.2 Forfeiture of Company Match Because of Early
Distribution. If, but for the provisions of this Section 5.2, a Participant
would receive a benefit from this Plan for any reason, other than death,
disability or Retirement, in respect of shares of Common Stock credited to the
Participant's account pursuant to Section 4.2 as a result of the Company
matching accrual of 20% provided for in Section 3.2 within three years after
such shares were so credited, or if the Participant, prior to a Change of
Control, ceases to be an employee with respect to a matching accrual resulting
from deferral of an Incentive Bonus, or a director with respect to a matching
accrual resulting from deferral of Directors Fees within three years after such
shares are so credited, such matching accruals of shares of Common Stock and
any dividends or other property or rights accumulated because of those shares
of Common Stock shall be immediately forfeited.

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<PAGE> 22
5.3 Forfeiture For Cause. If the Committee finds, after
full consideration of the facts presented on behalf of both the Company and a
former Participant, that the Participant was discharged by the Company for
fraud, embezzlement, theft, commission of a felony, proven dishonesty in the
course of his employment by the Company which damaged the Company, or for
disclosing trade secrets of the Company, the entire amount credited to his
Account in the Deferred Compensation Ledger, exclusive of an amount equal to
the sum of the total deferrals of the Participant, will be forfeited. The
decision of the Committee as to the cause of a former Participant's discharge
and the damage done to the Company will be final. No decision of the Committee
will affect the finality of the discharge of the Participant by the Company in
any manner. Notwithstanding the foregoing, the forfeiture created by this
Section will not apply to a Participant or former Participant discharged during
the Plan Year in which a Change of Control occurs, or during the next three
succeeding Plan Years following the Plan Year in which a Change of Controls
occurs unless an arbitrator selected to review the Committee's findings agrees
that the Committee has established by clear and convincing evidence that the
grounds for forfeiture set forth in the first sentence have been met. The
arbitrator will be selected by permitting the Company and the Participant to
strike one name each from a panel of three names obtained from the American
Arbitration Association. The person whose name is remaining will be the
arbitrator.

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<PAGE> 23
5.4 Forfeiture for Competition. If at the time a
distribution is being made or is to be made to a Participant or former
Participant, the Committee finds after full consideration of the facts
presented on behalf of the Company and the Participant or former Participant,
that the Participant or former Participant at any time within two years from
his termination of employment from all Companies which adopted this Plan, and
without written consent of the Company, directly or indirectly owns, operates,
manages, controls or participates in the ownership, management, operation or
control of or is employed by, or is paid as a consultant or other independent
contractor by a business which competes or at any time did compete with the
Company by which he was formerly employed in a trade area served by the Company
at the time distributions are being made or to be made and in which the
Participant or former Participant had represented the Company while employed by
it; and, if the Participant or former Participant continues to be so engaged 60
days after written notice has been given to him, the Committee will forfeit all
amounts otherwise due the Participant or former Participant, exclusive of an
amount equal to the sum of the total deferrals of the Participant or former
Participant. Notwithstanding the foregoing, the forfeiture created by this
Section will not apply to any Participant or former Participant whose
termination of employment from all Companies which adopted this Plan occurs
during the Plan Year in which a Change of Control occurs or during the next
three succeeding Plan Years following the Plan Year in which a Change of
Control occurs.

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<PAGE> 24
ARTICLE VI

DISTRIBUTIONS

6.1 Form of Distributions or Withdrawals. Upon a
distribution or withdrawal, at the option of Quanex, the number of shares of
Common Stock credited to the Participant in the Deferred Compensation Ledger,
if any, required to be distributed shall be distributed in kind or in cash,
whether the distribution or withdrawal is in a lump sum or in installments. If
distributed in cash, the amount per share of Common Stock which would otherwise
be distributed in kind shall equal the closing quotation for the Common Stock
on the NYSE (or if not traded on the NYSE, the principal market in which the
Common Stock is traded) on the third business day prior to the date of
distribution. If the distribution is in installments, all dividends and other
property or rights accumulating on the shares still undistributed will be
credited as provided in Section 4.3 and distributed with the next installment.
If there are periodic installments to be made of the portion, if any, deferred
as cash, income shall accumulate on that portion of the Account as described in
Section 4.6 until the balance credited to the cash portion of the Participant's
Account has been distributed. In that event income accumulating on the cash
portion of the Account shall be distributed with the next installment to be
distributed.

6.2 Death. Upon the death of a Participant prior to the
expiration of the Term of Deferral, the Participant's Beneficiary or
Beneficiaries will receive in

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<PAGE> 25
Common Stock or cash as required by Section 6.1, the balance then credited to
the Participant's Account in the Deferred Compensation Ledger. The lump sum
distribution or the first installment of the periodic distribution will be made
90 days after the Participant's death.

Each Participant, upon making his initial deferral election,
will file with the Committee a designation of one or more Beneficiaries to whom
distributions otherwise due the Participant will be made in the event of his
death prior to the complete distribution of the amount credited to his Account
in the Deferred Compensation Ledger. The designation will be effective upon
receipt by the Committee of a properly executed form which the Committee has
approved for that purpose. The Participant may from time to time revoke or
change any designation of Beneficiary by filing another approved Beneficiary
designation form with the Committee. If there is no valid designation of
Beneficiary on file with the Committee at the time of the Participant's death,
or if all of the Beneficiaries designated in the last Beneficiary designation
have predeceased the Participant or otherwise ceased to exist, the Beneficiary
will be the Participant's spouse, if the spouse survives the Participant, or
otherwise the Participant's estate. A Beneficiary must survive the Participant
by 60 days in order to be considered to be living on the date of the
Participant's death. If any Beneficiary survives the Participant but dies or
otherwise ceases to exist before receiving all amounts due the Beneficiary from
the Participant's Account, the balance of the amount which would have been paid
to that Beneficiary

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<PAGE> 26
will, unless the Participant's designation provides otherwise, be distributed
to the individual deceased Beneficiary's estate or to the Participant's estate
in the case of a Beneficiary which is not an individual. Any Beneficiary
designation which designates any person or entity other than the Participant's
spouse must be consented to in writing in a form acceptable to the Committee in
order to be effective.

6.3 Disability. Upon the disability of a Participant
prior to the expiration of the Term of Deferral, the Participant will receive
in Common Stock or cash as required by Section 6.1, the balance then credited
to the Participant's Account in the Deferred Compensation Ledger. The lump sum
distribution or the first installment of the periodic distribution will be made
90 days after the Participant becomes disabled.

6.4 Expiration of Term of Deferral. Upon the expiration
of the Term of Deferral the Participant shall receive in Common Stock or cash
as required by Section 6.1, the balance credited to the Participant's Account
in the Deferred Compensation Ledger. The lump sum distribution or the first
installment of the periodic distribution will be made 90 days after the
expiration of the Term of Deferral without regard to whether the Participant is
still employed by the Company or not.

6.5 Hardship Withdrawals. Any Participant who is in the
employ of a Company and is not entitled to a distribution from this Plan may
request a hardship withdrawal. No hardship withdrawal can exceed the lesser of
the amount credited to the Participant's Account or the amount reasonably
needed to satisfy the

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<PAGE> 27
emergency need. Whether a hardship exists and the amount reasonably needed to
satisfy the emergency need will be determined by the Committee based upon the
evidence presented by the Participant and the rules established in this
Section. If a hardship withdrawal is approved by the Committee it will be made
in Common Stock or cash as required in Section 6.1 within 10 days of the
Committee's determination. A hardship for this purpose is a severe financial
hardship to the Participant resulting from a sudden and unexpected illness or
accident of the Participant or of a dependent (as defined in Section 152(a) of
the Internal Revenue Code of 1986, as amended) of the Participant, loss of the
Participant's property due to casualty, or any similar extraordinary and
unforeseeable circumstance arising as a result of events beyond the control of
the Participant. The circumstances that will constitute a hardship will depend
upon the facts of each case, but, in any case, payment may not be made to the
extent that the hardship is or may be relieved: (a) through reimbursement or
compensation by insurance or otherwise, (b) by liquidation of the Participant's
assets, to the extent the liquidation of such assets will not itself cause
severe financial hardship, or (c) by cessation of deferrals under this Plan.
Such foreseeable needs for funds as the need to send a Participant's child to
college or the desire to purchase a home will not be considered to be a
hardship.

6.6 Payment Restrictions on any Portion of a Benefit
Determined Not to be Deductible. Except for hardship withdrawals under Section
6.5, if a Participant has a benefit that is due during a Plan Year and the
Committee determines that

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<PAGE> 28
Section 162(m) of the Code could affect the Company's deduction on the amount
paid, the distribution of his benefit will be delayed until December 1st
following the end of the Plan Year. Then on December 1st if the Company's
deduction is determined by the Committee not to be affected, the benefit in
total will be distributed immediately; however, if the Committee determines
that some portion of the benefit is affected then only that portion of the
benefit which is deductible by the Company shall be distributed on December 1st
and the distribution of the remaining portion of the benefit will be delayed to
the first day of the first complete month of the Plan Year or Years on which a
portion or all of the remaining distribution can be made and deducted by the
Company on its federal income tax return. The Committee may waive the
mandatory deferral required by this Section 6.6 with respect to a Participant
who is not a member of the Committee but such waiver shall only be made on an
individual basis and at the time the distribution is to be made.

6.7 Responsibility for Distributions and Withholding of
Taxes. The Committee will furnish information, to the Company last employing
the Participant, concerning the amount and form of distribution to any
Participant entitled to a distribution so that the Company may make or cause
the Rabbi Trust to make the distribution required. It will also calculate the
deductions from the amount of the benefit paid under the Plan for any taxes
required to be withheld by federal, state or local government and will cause
them to be withheld. If a Participant has deferred compensation under the Plan
while in the service of more than one Company, each

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<PAGE> 29
Company for which the Participant was working will reimburse the disbursing
agent for the amount attributable to compensation deferred while the
Participant was in the service of that Company if it has not already provided
that funding to the disbursing agent.

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<PAGE> 30
ARTICLE VII

ADMINISTRATION

7.1 Committee Appointment. The Committee will be
appointed by the Board of Directors. The initial Committee members will be
Compensation Committee of the Board of Directors. Each Committee member will
serve until his or her resignation or removal. The Board of Directors will
have the sole discretion to remove any one or more Committee members and
appoint one or more replacement or additional Committee members from time to
time.

7.2 Committee Organization and Voting. The Committee
will select from among its members a chairman who will preside at all of its
meetings and will elect a secretary without regard to whether that person is a
member of the Committee. The secretary will keep all records, documents and
data pertaining to the Committee's supervision and administration of the Plan.
A majority of the members of the Committee will constitute a quorum for the
transaction of business and the vote of a majority of the members present at
any meeting will decide any question brought before the meeting. In addition,
the Committee may decide any question by vote, taken without a meeting, of a
majority of its members. If a member of the Committee is ever appointed who is
or becomes a Participant, that Committee member will not vote or act on any
matter relating solely to himself.

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<PAGE> 31
7.3 Powers of the Committee. The Committee will have the
exclusive responsibility for the general administration of the Plan according
to the terms and provisions of the Plan and will have all powers necessary to
accomplish those purposes, including but not by way of limitation the right,
power and authority:

(a) to make rules and regulations for the administration
of the Plan;

(b) to construe all terms, provisions, conditions and
limitations of the Plan;

(c) to correct any defect, supply any omission or
reconcile any inconsistency that may appear in the Plan in the manner
and to the extent it deems expedient to carry the Plan into effect for
the greatest benefit of all parties at interest;

(d) to designate the persons eligible to become
Participants and to establish the maximum and minimum amounts that may
be elected to be deferred;

(e) to determine all controversies relating to the
administration of the Plan, including but not limited to:

(1) differences of opinion arising between the
Company and a Participant except when the difference of
opinion relates to the entitlement to, the amount of or the
method or timing of a distribution of a benefit affected by a
Change of Control, in which event it shall be decided by
judicial action; and

(2) any question it deems advisable to determine
in order to promote the uniform administration of the Plan for
the benefit of all parties at interest; and

(f) to delegate by written notice those clerical and
recordation duties of the Committee, as it deems necessary or
advisable for the proper and efficient administration of the Plan.

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<PAGE> 32
7.4 Committee Discretion. The Committee in exercising
any power or authority granted under this Plan or in making any determination
under this Plan shall perform or refrain from performing those acts using its
sole discretion and judgment. Any decision made by the Committee or any
refraining to act or any act taken by the Committee in good faith shall be
final and binding on all parties. The Committee's decision shall never be
subject to de novo review. Notwithstanding the foregoing, the Committee's
decision, refraining to act or acting is to be subject to judicial review for
those incidents occurring during the Plan Year in which a Change of Control
occurs and during the next three succeeding Plan Years.

7.5 Annual Statements. The Committee will cause each
Participant to receive an annual statement as soon as administratively possible
after the conclusion of each Plan Year containing the amounts deferred, the
Company match, if any, and the income accrued on the deferred and matched
amounts.

7.6 Reimbursement of Expenses. The Committee will serve
without compensation for their services but will be reimbursed by Quanex for
all expenses properly and actually incurred in the performance of their duties
under the Plan.

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<PAGE> 33
ARTICLE VIII

ADOPTION BY SUBSIDIARIES

8.1 Procedure for and Status After Adoption. Any
Subsidiary may, with the approval of the Committee, adopt this Plan by
appropriate action of its board of directors. The terms of the Plan will apply
separately to each Subsidiary adopting the Plan and its Participants in the
same manner as is expressly provided for Quanex and its Participants except
that the powers of the Board of Directors and the Committee under the Plan will
be exercised by the Board of Directors of Quanex alone. Quanex and each
Subsidiary adopting the Plan will bear the cost of providing plan benefits for
its own Participants. It is intended that the obligation of Quanex and each
Subsidiary with respect to its Participants will be the sole obligation of the
Company that is employing the Participant and will not bind any other Company.

8.2 Termination of Participation By Adopting Subsidiary.
Any Subsidiary adopting the Plan may, by appropriate action of its board of
directors, terminate its participation in the Plan. The Committee may, in its
discretion, also terminate a Subsidiary's participation in the Plan at any
time. The termination of the participation in this Plan by a Subsidiary will
not, however, affect the rights of any Participant who is working or has worked
for the Subsidiary as to amounts or shares of Common Stock previously standing
to his credit in his Account in the Deferred Compensation Ledger or reduce the
income accrued on amounts deferred by

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<PAGE> 34
him or matched by the Company and credited to his Account whether in cash or in
shares of Common Stock, prior to the distribution of the benefit to the
Participant without his consent.

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<PAGE> 35
ARTICLE IX

AMENDMENT AND/OR TERMINATION

9.1 Amendment or Termination of the Plan. The Board of
Directors may amend or terminate this Plan at any time by an instrument in
writing without the consent of any adopting Company.

9.2 No Retroactive Effect on Awarded Benefits. No
amendment will affect the rights of any Participant to the amounts, whether in
cash or shares of Common Stock, then standing to his credit in his Account in
the Deferred Compensation Ledger, to change the method of calculating the
income already accrued or to accrue in the future on amounts already deferred
by him or matched by the Company prior to the date of the amendment or to
change a Participant's right under any provision relating to a Change of
Control after a Change of Control has occurred, without the Participant's
consent. However, the Board of Directors shall retain the right at any time to
change in any manner the method of calculating the match by the Company and the
income to accrue on all amounts to be deferred in the future by a Participant
and/or to be matched in the future by the Company after the date of the
amendment if it has been announced to the Participants.

9.3 Effect of Termination. If the Plan is terminated,
all amounts, whether in cash or in shares of Common Stock, deferred by
Participants and matched by the Company will continue to be held under the
terms of this Plan until all

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<PAGE> 36
amounts have been distributed according to the elections made by the
Participants or the directives made by the Committee prior to the deferrals.
The forfeiture provisions of Sections 5.2, 5.3 and 5.4 and the restriction set
out in Section 6.6 would continue to apply throughout the period after the
termination of the Plan but prior to the completed distribution of all
benefits.

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<PAGE> 37
ARTICLE X

FUNDING

10.1 Payments Under This Agreement are the Obligation of
the Company. The Company will distribute the benefits due the Participants
under this Plan; however should it fail to do so when a benefit is due and the
funding trust contemplated by Section 10.2 exists, the benefit will be
distributed by the trustee of that funding trust. In any event, if the trust
fails to distribute a benefit for any reason, the Company still remains liable
for all benefits provided by this Plan.

10.2 Agreement May Be Funded Through Rabbi Trust. It is
specifically recognized by both the Company and the Participants that the
Company may, but is not required to transfer any funds, shares or Common Stock
or other assets that it finds desirable to a trust established to accumulate
assets sufficient to fund the obligations of all of the Companies signatory to
this Plan. However, under all circumstances, the Participants will have no
rights to any of those assets; and likewise, under all circumstances, the
rights of the Participants to the assets held in the trust will be no greater
than the rights expressed in this agreement. Nothing contained in the trust
agreement which creates the funding trust will constitute a guarantee by any
Company that assets of the Company transferred to the trust will be sufficient
to fund all benefits under this Plan or would place the Participant in a
secured position ahead of general creditors should the Company become insolvent
or

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<PAGE> 38
bankrupt. Any trust agreement prepared to fund the Company's obligations under
this agreement must specifically set out these principles so it is clear in
that trust agreement that the Participants in this Plan are only unsecured
general creditors of the Company in relation to their benefits under this Plan.

10.3 Reversion of Excess Assets. Any adopting Company
may, at any time, request the actuary, who last performed the annual actuarial
valuation of the Quanex defined benefit Retirement plan, to determine the
present Account balance, assuming the accrual rate for income not to be reduced
(whether it actually is or not), as of the month end coincident with or next
preceding the request, of all Participants and Beneficiaries of deceased
Participants for which all Companies are or will be obligated to make benefit
distributions under this Plan. If the fair market value of the assets held in
the trust, as determined by the Trustee as of that same date, exceeds the total
of the Account balances of all Participants and Beneficiaries by 25%, any
Company may direct the trustee to return to each Company its proportionate part
of the assets which are in excess of 125% of the Account balances. Each
Company's share of the excess assets will be the Participants' Accounts accrued
while in the employ of that Company as compared to the total of the Account
balances accrued by all Participants under the Plan times the excess assets.
If there has been a Change of Control, for the purpose of determining if there
are excess funds, all contributions made prior to the Change of Control will be
subtracted from the fair

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<PAGE> 39
market value of the assets held in the trust as of the determination date but
before the determination is made.

10.4 Participants Must Rely Only on General Credit of the
Company. It is also specifically recognized by both the Company and the
Participants that this Plan is only a general corporate commitment and that
each Participant must rely upon the general credit of the Company for the
fulfillment of its obligations under this Plan. Under all circumstances the
rights of Participants to any asset held by the Company will be no greater than
the rights expressed in this agreement. Nothing contained in this agreement
will constitute a guarantee by the Company that the assets of the Company will
be sufficient to distribute any benefits under this Plan or would place the
Participant in a secured position ahead of general creditors of the Company.
Though the Company may establish or become a signatory to a Rabbi Trust, as
indicated in Section 10.1, to accumulate assets to fulfill its obligations, the
Plan and any such trust will not create any lien, claim, encumbrance, right,
title or other interest of any kind in any Participant in any asset held by the
Company, contributed to any such trust or otherwise designated to be used in
fulfillment of any of its obligations created in this agreement. No specific
assets of the Company have been or will be set aside, or will in any way be
transferred to the trust or will be pledged in any way for the performance of
the Company's obligations under this Plan which would remove such assets from
being subject to the general creditors of the Company.

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<PAGE> 40
ARTICLE XI

MISCELLANEOUS

11.1 Limitation of Rights. Nothing in this Plan will be
construed:

(a) to give any employee of any Company any right to be
designated a Participant in the Plan;

(b) to give a Participant any right with respect to the
compensation deferred, the Company match or the income accrued and
credited in the Deferred Compensation Ledger except in accordance with
the terms of this Plan;

(d) to evidence any agreement or understanding, expressed
or implied, that the Company will employ a Participant in any
particular position or for any particular remuneration; or

(e) to give a Participant or any other person claiming
through him any interest or right under this Plan other than that of
any unsecured general creditor of the Company.

11.2 Distributions to Incompetents or Minors. Should a
Participant become incompetent or should a Participant designate a Beneficiary
who is a minor or incompetent, the Committee is authorized to distribute the
benefit due to the parent of the minor or to the guardian of the minor or
incompetent or directly to the minor or to apply those assets for the benefit
of the minor or incompetent in any manner the Committee determines in its sole
discretion.

11.3 Nonalienation of Benefits. No right or benefit
provided in this Plan will be transferable by the Participant except, upon his
death, to a named

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<PAGE> 41
Beneficiary as provided in this Plan. No right or benefit under this Plan will
be subject to anticipation, alienation, sale, assignment, pledge, encumbrance
or charge, and any attempt to anticipate, alienate, sell, assign, pledge,
encumber, or charge the same will be void. No right or benefit under this Plan
will in any manner be liable for or subject to any debts, contracts,
liabilities or torts of the person entitled to such benefits. If any
Participant or any Beneficiary becomes bankrupt or attempts to anticipate,
alienate, sell, assign, pledge, encumber or charge any right or benefit under
this Plan, that right or benefit will, in the discretion of the Committee,
cease. In that event, the Committee may have the Company hold or apply the
right or benefit or any part of it to the benefit of the Participant or
Beneficiary, his or her spouse, children or other dependents or any of them in
any manner and in any proportion the Committee believes to be proper in its
sole and absolute discretion, but is not required to do so.

11.4 Expenses Incurred in Enforcing the Plan. The Company
will, in addition, pay a Participant for all legal fees and expenses incurred
by him in contesting or disputing his termination or in seeking to obtain or
enforce any benefit provided by this Plan if the termination occurs in the Plan
Year in which a Change of Control occurs or during the next three succeeding
Plan Years following the Plan Year in which a Change of Control occurs except
to the extent that the payment of those fees or expenses are restricted under
Section 6.6.

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<PAGE> 42
11.5 Reliance Upon Information. The Committee will not be
liable for any decision or action taken or not taken in good faith in
connection with the administration of this Plan. Without limiting the
generality of the foregoing, any decision or action taken or not taken by the
Committee when it relies upon information supplied it by any officer of the
Company, the Company's legal counsel, the Company's independent accountants or
other advisors in connection with the administration of this Plan will be
deemed to have been taken in good faith.

11.6 Severability. If any term, provision, covenant or
condition of the Plan is held to be invalid, void or otherwise unenforceable,
the rest of the Plan will remain in full force and effect and will in no way be
affected, impaired or invalidated.

11.7 Notice. Any notice or filing required or permitted
to be given to the Committee or a Participant will be sufficient if in writing
and hand delivered or sent by U.S. mail to the principal office of the Company
or to the residential mailing address of the Participant. Notice will be
deemed to be given as of the date of hand delivery or if delivery is by mail,
as of the date shown on the postmark.

11.8 Gender and Number. If the context requires it, words
of one gender when used in this Plan will include the other genders, and words
used in the singular or plural will include the other.

11.9 Governing Law. The Plan will be construed,
administered and governed in all respects by the laws of the State of Texas.

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<PAGE> 43
11.10 Effective Date. This Plan will be operative and
effective on October 12, 1995. However, those provisions relating to the
Participants' right to defer in the form of Common Stock and to receive Common
Stock when the period of deferral has been completed are contingent upon the
shareholders of Quanex approving those provisions of the Plan at their meeting
in 1996. Should they fail to do so, all provisions relating to the election to
defer in the form of and to receive Common Stock are null and void and anyone
who previously elected a deferral in the form of Common Stock shall instead
receive that portion of his deferral in cash as soon as conveniently possible,
with interest as if he had initially elected to defer in cash. Any
distribution prior to the approval of the shareholders of Quanex shall be in
the form of cash.

IN WITNESS WHEREOF, the Company has executed this document on
this _______ day of __________________, 1995, as authorized by the Board of
Directors of Quanex on __________________, 1995.

QUANEX CORPORATION

By
------------------------------

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<PAGE> 1

EXHIBIT 11
QUANEX CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE

<TABLE>
<CAPTION>
Years Ended October 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Income before extraordinary charge............................... $ 33,860 $ 18,852 $ 8,428
Extraordinary charge - early extinguishment of debt.............. (2,021) - -
-------- -------- --------
Net income ...................................................... 31,839 18,852 8,428
Preferred dividend requirements.................................. (3,957) (5,934) (5,934)
-------- -------- --------
Net income attributable to
common stockholders............................................ $ 27,882 $ 12,918 $ 2,494
======== ======== ========
Weighted average shares
outstanding-primary............................................ 13,580 13,496 13,551
======== ======== ========
Earnings per common share:
Primary:
Income before extraordinary charge........................... 2.20 $ 0.96 $ 0.18
Extraordinary charge......................................... (0.15) - -
-------- -------- --------
Earnings per common share.................................. $ 2.05 $ 0.96 $ 0.18
======== ======== ========

Income before extraordinary charge............................... $ 33,860 $ 18,852 $ 8,428
Extraordinary charge - early extinguishment of debt.............. (2,021) - -
-------- -------- --------
Net income ...................................................... 31,839 18,852 8,428
Interest on 6.88% convertible subordinated
debentures and amortization of related issuance
costs, net of applicable income taxes.......................... 1,188 - -
-------- -------- --------

Adjusted net income.............................................. $ 33,027 $ 18,852 $ 8,428
======== ======== ========
Weighted average shares
outstanding-primary............................................ 13,580 13,496 13,551
Effect of common stock equivalents
arising from stock options..................................... - 72 45
Preferred stock assumed converted
to common stock................................................ 1,825 2,738 2,738
Subordinated debentures assumed
converted to common stock...................................... 899 - -
-------- -------- --------
Weighted average shares
outstanding-fully diluted...................................... 16,304 16,306 16,334
======== ======== ========
Earnings per common share:
Assuming full dilution:
Earnings before extraordinary charge......................... $ 2.15 $ 1.16 $ 0.52
Extraordinary charge......................................... (0.12) - -
-------- -------- --------
Earnings per common share.................................. $ 2.03 $ 1.16 $ 0.52
======== ======== ========
</TABLE>

<PAGE> 1
SALES BY MAJOR MARKETS

<TABLE>
<CAPTION>
Markets Market Description Quanex Products Sales ($ millions)
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INDUSTRIAL General Industrial Mechanical and pressure $ 177.8 $ 179.9 $ 180.4 $ 163.9 $ 146.4
MACHINERY AND Machinery (including tubing, pipe, specialty 20.0% 25.7% 29.3% 28.7% 24.8%
CAPITAL EQUIPMENT mining, agriculture and forgings, extruded
construction) products, steel bars

Capital Equipment Mechanical tubing, $ 48.1 $ 46.8 $ 40.0 $ 30.3 $ 32.3
(including material steel bars 5.4% 6.7% 6.5% 5.3% 5.5%
handling, machine tools
and office/household)
TOTAL INDUSTRIAL $ 225.9 $ 226.7 $ 220.4 $ 194.2 $ 178.7
MACHINERY AND CAPITAL 25.4% 32.4% 35.8% 34.0% 30.3%
EQUIPMENT
- ------------------------------------------------------------------------------------------------------------------------------------

TRANSPORTATION Aerospace Seamless contoured rolled $ .1 $ - (1) $ 6.2(1) $ 24.2 $ 26.8
rings, mechanical tubing - - 1.0% 4.2% 4.6%

Auto/Truck Mechanical tubing, $ 230.8 $ 189.2 $ 153.1 $ 114.6 $ 93.6
steel bars 25.9% 27.1% 24.8% 20.0% 15.9%

Other Transportation Mechanical tubing, $ 24.0 $ 17.0 $ 17.1 $ 20.1 $ 26.7
(including ship/railroad, steel bars 2.7% 2.4% 2.8% 3.5% 4.5%
recreational vehicles and
military transportation)
TOTAL TRANSPORTATION $ 254.9 $ 206.2 $ 176.4 $ 158.9 $ 147.1
28.6% 29.5% 28.6% 27.7% 25.0%
- ------------------------------------------------------------------------------------------------------------------------------------
ENERGY Exploration/Production Oil field production $ 12.6 $ 9.9 $ 13.9 $ 23.1 $ 42.7
tubing and casing, 1.4% 1.4% 2.3% 4.0% 7.3%
mechanical tubing,
steel bars

Processing/Conversion Pressure tubing, $ 66.2 $ 55.2 $ 61.9 $ 58.5 $ 61.8
(refining, petrochemical, process pipe 7.4% 7.9% 10.0% 10.2% 10.5%
power generation)

TOTAL ENERGY $ 78.8 $ 65.1 $ 75.8 $ 81.6 $ 104.5
8.8% 9.3% 12.3% 14.2% 17.8%
- ------------------------------------------------------------------------------------------------------------------------------------
ALUMINUM Residential and Aluminum sheet, $ 331.6 $ 200.9 $ 143.0 $ 137.1 $ 133.7
PRODUCTS Commercial fabricated aluminum 37.2% 28.7% 23.2% 24.0% 22.7%
Building Materials, products, aluminum coil
Other and coated aluminum coil

OTHER $ - $ .4 $ .5 $ .3 $ 24.9
- .1% .1% .1% 4.2%

TOTAL SALES $ 891.2 $ 699.3 $ 616.1 $ 572.1 $ 588.9
100.0% 100.0% 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Decrease from prior years reflects the disposition of the
Viking Metallurgical Corporation subsidiary during the
second quarter of 1993.

8
<PAGE> 2
INDEX TO FINANCIAL SECTION
Years Ended October 31, 1995, 1994, and 1993

<TABLE>
<S> <C>
FINANCIAL SUMMARY 1985-1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 37-41
CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Statements of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Statements of stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Statements of cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46-56
SUPPLEMENTARY FINANCIAL DATA
Quarterly Results of Operations (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Schedule II - Valuation and qualifying accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
</TABLE>

Schedules not listed or discussed above have been omitted as they are either
inapplicable or the required information has been given in the consolidated
financial statements or the notes thereto.

GLOSSARY OF TERMS

The exact definitions of commonly used financial terms and ratios vary somewhat
among different companies and investment analysts. The following list gives the
definition of certain financial terms that are used in this report:

CAPITAL EXPENDITURES: Additions to property, plant and equipment.

BOOK VALUE PER COMMON SHARE: Stockholders' equity less the stated value of
preferred stock divided by the number of common shares outstanding.

ASSET TURNOVER: Net sales divided by average total assets.

CURRENT RATIO: Current assets divided by current liabilities.

FIXED CHARGE COVERAGE: The sum of income before income taxes plus interest
expense, plus the estimated interest component of rentals, less capitalized
interest, plus amortization of previously capitalized interest, plus
amortization of deferred debt issuance costs; divided by interest expense, plus
the estimated interest component of rentals, plus amortization of deferred debt
issuance costs.

RETURN ON INVESTMENT: The sum of net income and the after-tax effect of
interest expense less capitalized interest divided by the sum of the averages
for long-term debt and stockholders' equity.

RETURN ON COMMON STOCKHOLDERS' EQUITY: Net income attributable to common
stockholders divided by average common stockholders equity.

33
<PAGE> 3
FINANCIAL SUMMARY 1985-1995

($ thousands, except per share data)
<TABLE>
<CAPTION>
(For definition of items, see page 33) Fiscal years ended October 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES AND EARNINGS
Net sales $ 891,195 699,314 616,145
Cost of sales $ 778,067 613,553 550,969
Gross profit $ 113,128 85,761 65,176
Selling, general and administrative expenses $ 46,647 44,898 42,243
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 66,481 40,863 22,933
Percent of net sales 7.5 5.8 3.7
Other income (expense)-net $ 769 1,818 3,560
Interest expense-net of capitalized interest $ 8,870 10,178 11,962
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, extraordinary items,
and cumulative effect of accounting change $ 58,380 32,503 14,531
Income taxes (credit) $ 24,520 13,651 6,103
Extraordinary items and cumulative effect of accounting changes,
net of taxes(2) (2,021)(2) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 31,839 18,852 8,428
Percent of net sales 3.6 2.7 1.4
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Earnings (loss) per primary common share before extraordinary
items and cumulative effect of accounting change $ 2.20 0.96 0.18
Net earnings (loss) per primary common share $ 2.05 0.96 0.18
Cash dividends declared $ 0.59 0.56 0.56
Book value $ 12.65 10.91 10.48
Average shares outstanding (000) 13,580 13,496 13,551
Market closing price range
High $ 26 27 20 3/4
Low $ 18 3/8 16 1/4 14 1/4
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION - YEAR END
Working capital $ 77,167 124,645 148,338
Property, plant and equipment - net $ 258,564 262,261 242,346
Other assets $ 45,808 42,351 43,111
Noncurrent deferred income taxes $ 29,278 23,014 18,061
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 132,862 128,400 128,695
Stockholders' equity $ 170,526 232,249 225,776
Total capitalization $ 303,388 360,649 354,471
Long-term debt percent of capitalization 43.8 35.6 36.3
- ---------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Asset turnover 1.6 1.3 1.2
Current ratio 1.5 TO 1 1.9 to 1 2.6 to 1
Fixed charge coverage 6.04 3.08 1.98
- ---------------------------------------------------------------------------------------------------------------------------
Return on average investment - percent 11.1 6.9 4.3
Return on average common equity - percent 17.6 9.0 1.7
- ---------------------------------------------------------------------------------------------------------------------------
Working capital provided (used) by operations(4) $ 72,552 51,243 40,061
Depreciation and amortization $ 32,433 28,535 29,352
Capital expenditures $ 26,654 44,557 36,961
Backlog for shipment in next 12 months $ 164,035 182,707 142,771
- ---------------------------------------------------------------------------------------------------------------------------
Number of stockholders 3,659 3,454 3,540
Average number of employees 2,719 2,603 2,622
Sales/employee $ 328 269 235
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On August 22, 1989, Quanex Corporation acquired Nichols-Homeshield, Inc.
1989 results include two months of Nichols-Homeshield operations.
(2) 1995-early extinguishment of debt; 1992-cumulative effect of accounting
change for postretirement welfare benefits; 1988-primarily loss on early
extinguishment of debt; 1987-reduction of income taxes arising from
carryforward of prior year operating losses; 1985-loss on early
extinguishment of debt.

34
<PAGE> 4
<TABLE>
<CAPTION>
1992 1991 1990 1989(1) 1988 1987 1986 1985
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>

572,090 588,888 650,316 501,991 462,916 345,409 324,835 296,974
506,778 514,894 551,929 418,580 383,399 305,725 304,330 263,746
65,312 73,994 98,387 83,411 79,517 39,684 20,505 33,228
46,534(3) 38,914 41,207 30,136 29,495 23,415 26,476 26,452
- ------------------------------------------------------------------------------------------------------------------------------------
18,778 35,080 57,180 53,275 50,022 16,269 (5,971) 6,776
3.3 6.0 8.8 10.6 10.8 4.7 (1.8) 2.3
2,399 673 (2,106) 703 1,596 6,758 83 9,405
10,495 14,306 9,880 6,837 15,081 17,019 17,255 10,861
- ------------------------------------------------------------------------------------------------------------------------------------

10,682 21,447 45,194 47,141 36,537 6,008 (23,143) 5,320
4,487 9,007 17,174 17,891 13,600 2,958 (3,200) (5,801)

(25,108)(2) -- -- -- (4,464)(2) 2,158(2) -- (1,000)(2)
- ------------------------------------------------------------------------------------------------------------------------------------
(18,913) 12,440 28,020 29,250 18,473 5,208 (19,943) 10,121
(3.3) 2.1 4.3 5.8 4.0 1.5 (6.1) 3.4
- ------------------------------------------------------------------------------------------------------------------------------------

0.28 1.02 2.03 2.11 1.85 0.25 (1.63) 0.98
(1.70) 1.02 2.03 2.11 1.48 0.42 (1.63) 0.89
0.52 0.48 0.40 0.30 0.08 -- -- --
11.10 12.99 12.33 10.83 9.13 7.83 7.41 9.03
12,696 11,679 12,224 12,380 12,270 12,257 12,256 11,369

31 1/2 23 18 1/2 19 14 1/2 9 8 10 1/4
15 1/2 10 1/8 9 1/8 12 3/4 4 1/4 3 3 5/8 5 1/8
- ------------------------------------------------------------------------------------------------------------------------------------

154,455 69,142 74,187 76,257 64,820 43,772 24,513 35,201
239,538 220,038 187,712 194,638 141,640 155,766 169,782 187,299
44,801 45,431 44,683 35,580 3,688 7,662 13,132 14,276
16,675 32,428 31,400 37,132 14,890 4,623 3,545 10,765
- ------------------------------------------------------------------------------------------------------------------------------------
128,894 162,792 131,498 94,214 38,953 96,847 113,055 113,467
237,592 152,488 181,430 167,630 146,654 95,988 90,764 110,707
366,486 315,280 312,928 261,844 185,607 192,835 203,819 224,174
35.2 51.6 42.0 36.0 21.0 50.2 55.5 50.6
- ------------------------------------------------------------------------------------------------------------------------------------

1.2 1.3 1.5 1.4 1.6 1.3 1.2 1.0
2.6 to 1 1.7 to 1 1.8 to 1 1.8 to 1 1.7 to 1 1.7 to 1 1.5 to 1 1.6 to 1
1.52 2.12 5.12 7.47 2.84 1.42 (0.16) 0.97
- ------------------------------------------------------------------------------------------------------------------------------------
(3.8) 6.6 11.9 15.0 14.8 10.1 (2.4) 7.2
(14.2) 8.0 17.8 21.3 17.5 5.6 (19.8) 10.2
- ------------------------------------------------------------------------------------------------------------------------------------
44,932 37,971 49,848 56,883 52,784 25,762 (2,918) 21,254
26,777 25,741 22,920 17,442 18,355 18,091 20,597 15,625
52,516 47,945 31,939 13,781 5,348 2,210 5,045 25,302
119,254 91,396 114,534 116,641 110,955 101,679 69,941 54,911
- ------------------------------------------------------------------------------------------------------------------------------------
3,596 3,894 4,262 4,578 5,318 5,483 5,808 6,515
2,725 2,886 3,001 2,135 2,013 1,843 1,925 2,030
210 204 217 235 230 187 169 146
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(3) Includes $7.2 million facilities realignment charge.
(4) Working capital provided by operations is a supplemental financial
measurement used in the evaluation of the company's business and should
not be construed as an alternative to operating income or cash provided
by operating activities since it excludes the effects of changes in
working capital.

35
<PAGE> 5

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Quanex Corporation
Houston, Texas

We have audited the accompanying consolidated balance sheets of Quanex
Corporation and subsidiaries as of October 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 1995. Our audits also
included the financial statement schedule listed in the index on page 33. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Quanex Corporation and subsidiaries
as of October 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1995 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Houston, Texas
November 17, 1995
(December 29, 1995 as to Note 16)

RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying consolidated financial statements of Quanex Corporation and
subsidiaries were prepared by management, which is responsible for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles and include amounts that are based on
management's best judgments and estimates.
Quanex's system of internal controls is designed to provide reasonable
assurance, at justifiable cost, as to the reliability of financial records and
reporting and the protection of assets. The system of controls provides for
appropriate division of responsibility and the application of policies and
procedures that are consistent with high standards of accounting and
administration. Internal controls are monitored through recurring internal audit
programs and are updated as our businesses and business conditions change.
The Audit Committee, composed solely of outside directors, determines that
management is fulfilling its financial responsibilities by meeting periodically
with management, Deloitte & Touche LLP, and Quanex's internal auditors, to
review internal accounting control and financial reporting matters. The internal
and independent auditors have free and complete access to the Audit Committee.
We believe Quanex's system of internal controls, combined with the activities
of the internal and independent auditors and the Audit Committee, provides
reasonable assurance of the integrity of our financial reporting.

/s/ ROBERT C. SNYDER /s/ WAYNE M. ROSE
Robert C. Snyder Wayne M. Rose
Chairman and Vice President and
Chief Executive Officer Chief Financial Officer

36
<PAGE> 6

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

RESULTS OF OPERATIONS

The Company classifies its operations into four business segments: hot rolled
steel bars, cold finished steel bars, steel tubes and aluminum products. The
Company's products are marketed to the industrial machinery and capital
equipment industries, the transportation industry, the energy processing
industry and the home building and remodeling industries.
Fiscal 1995 was a record year for the Company in terms of net sales, operating
income, net income before extraordinary items, and earnings per share before
extraordinary items. The Company's results for fiscal 1995 reflected a
significant increase in revenues and income as compared to fiscal 1994 and 1993.
The most significant gains were recognized in the Company's aluminum products
and hot rolled steel bar businesses. The aluminum products business' operating
income improved from an operating loss of $437 thousand in fiscal 1993 to an
operating income of $9.6 million and $22.1 million for fiscal 1994 and 1995,
respectively. The hot rolled steel bar business' operating income in fiscal
1993, 1994 and 1995 was $21.9 million, $31.2 million and $41.6 million,
respectively. These improvements were principally due to higher volume and
favorable business conditions.
The improved results for fiscal 1995 reflected more favorable market
conditions in all segments due primarily to a stronger domestic economy,
improved margins for certain products resulting from favorable pricing trends,
greater market penetration for certain of the Company's manufactured products
and the cost reduction programs initiated in earlier years and continuing to the
present. The improved results also reflected the benefits realized from the
Company's capital expenditure programs, which increased capacity and have
allowed the Company to improve quality and better manage manufacturing costs.
The improvements in each of the Company's businesses resulted in the Company
reporting a record operating income for fiscal 1995 of $66.5 million, as
compared to $40.9 million and $22.9 million for fiscal 1994 and 1993,
respectively. Income before extraordinary charge for fiscal 1995 was $33.9
million, as compared to $18.9 million and $8.4 million for fiscal 1994 and 1993,
respectively. Fiscal 1995 included a $2.0 million ($3.5 million before tax)
extraordinary charge for early extinguishment of debt relating to the
acquisition by the Company of $59.5 million principal amount of its 10.77%
Senior Notes for a purchase price equal to 105% of the principal amount plus
accrued interest.
Domestic and global market factors will impact the Company and any slowdown in
the U.S. economy could affect demand and pricing for many of the Company's
products. A softening in demand was experienced during the fourth quarter of
fiscal 1995. However, the Company operated at near capacity during much of 1995
in both its hot rolled and cold finished steel bars segments. The softening in
demand is continuing into the first quarter of fiscal 1996. The first quarter is
typically the weakest quarter due to seasonal factors, with the unusually strong
demand experienced in the first quarter of fiscal 1995 being an exception.
Results for fiscal 1996 are expected to continue to reflect operational
improvements, with financial improvements being dependent upon, among other
things, whether the strong economic conditions experienced in fiscal 1995 are
sustained. The Company expects fiscal 1996 results to be affected by the current
sluggish demand and narrow profit margins in the aluminum products segment, and
price discounting in the cold finished steel bar segment.

1995 COMPARED TO 1994

Net Sales -- Net sales for fiscal 1995 were $891.2 million, representing an
increase of $191.9 million, or 27%, when compared to fiscal 1994. This increase
was due to significantly higher volume in the aluminum products business,
additional volume from increased production capacity as compared to last year,
improvements in the economy, increases in demand and higher average selling
prices.
Net sales for fiscal 1995 from the Company's hot rolled steel bar business
were $282.1 million, representing an increase of $36.9 million, or 15%, when
compared to fiscal 1994. This increase was primarily attributable to increased
volume and a 9% increase in average selling prices. Volume increases reflected
the additional capacity provided from the capital expenditures completed in
March 1995. The hot rolled steel bar business also benefited from strength in
the durable goods markets.
Net sales for fiscal 1995 from the Company's cold finished steel bar business
were $170.7 million, representing an increase of $10.7 million, or 7%, when
compared to fiscal 1994. The increase was primarily attributable to an increase
in average selling price of 7%. Even though volume for the last half of the
fiscal year was down 9% as compared to the last half of fiscal 1994, the
strength experienced during the first half of the year, combined with the
increase in average selling prices, resulted in the year-to-year net sales
improvement.
Net sales from the Company's steel tube business for fiscal 1995 were $119.9
million, representing an increase of $13.8 million, or 13%, when compared to
fiscal 1994. This increase in sales resulted principally from an increase in
volume of 16%. The Company's steel tube business was adversely affected in
fiscal 1994, and to a lesser degree in fiscal 1995, by downward pricing pressure
from imports on certain products and a general weakness in this

37
<PAGE> 7

segment's primary markets, which include power generation and the petrochemical
and refining industries. In June 1994, the Company filed petitions alleging that
imports of carbon and alloy seamless pipe up to 4.5 inches in diameter from four
countries were being dumped or subsidized. In August 1994, the International
Trade Commission (the "ITC") made an affirmative preliminary determination that
imports of small-diameter pipe from these countries were causing injury to the
U.S. industry and in January 1995, dumping bonds were imposed on imports of
these products by these countries. In July 1995, the ITC made a final
determination that imports of small diameter seamless carbon and alloy standard,
line and pressure pipe from four countries had caused injury to the U.S.
industry. This final ruling results in the ongoing enforcement of dumping
margins imposed by the U.S. Department of Commerce. The Company believes that
the volume improvement in fiscal 1995 over fiscal 1994 was due, in part, to the
favorable ruling.
Net sales from the Company's aluminum products business for fiscal 1995 were
$331.6 million, representing an increase of $130.6 million, or 65%, when
compared to fiscal 1994. This increase was attributable to an increase in volume
of 49% due to improved demand and market share and an increase in average
selling price of 11%. First and second quarter results for 1994 were adversely
affected by the fire at the Company's Lincolnshire plant. 1995 results were
affected by aluminum price increases, which generally increased by more than the
Company's average selling price because of a change in product mix.
Operating Income -- Consolidated operating income for fiscal 1995 was $66.5
million, representing an increase of $25.6 million, or 63%, when compared to
fiscal 1994. This increase was principally due to higher net sales.
Operating income from the Company's hot rolled steel bar business for fiscal
1995 was $41.6 million, representing an increase of $10.3 million, or 33%, when
compared to fiscal 1994. This increase was principally due to higher volume,
higher net sales and improved margins.
Operating income from the Company's cold finished steel bar business for
fiscal 1995 was $11.5 million, representing an increase of $2.8 million, or 33%,
when compared to fiscal 1994. This increase was principally due to higher net
sales and improved margins.
Operating income from the Company's steel tube business for fiscal 1995 was
$8.7 million, representing an increase of $2.2 million, or 34%, when compared to
fiscal 1994. This increase was principally due to higher volume and net sales.
Operating income from the Company's aluminum products business for fiscal 1995
was $22.1 million, representing an increase of $12.5 million, or 130%, when
compared to fiscal 1994. This increase was principally due to substantially
higher volume and net sales. For the first quarter of fiscal 1996, management
expects that softer demand and weaker margins will impact the operating results
of this business. Additionally, an aluminum products customer has indicated its
intention to replace at some future date a current product with a substitute
product of their own manufacture. The Company believes this potential loss of
business may reduce annual operating earnings by approximately $2 million to $3
million; however, the Company would seek to offset this loss through sales to
new customers.
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses increased in fiscal 1995 by $1.7 million, or 4%, as
compared to fiscal 1994. However, as a percentage of net sales, selling, general
and administrative expenses were 5.2% in fiscal 1995 as compared to 6.4% in
fiscal 1994.
Interest Expense and Capitalized Interest -- Interest expense decreased by
$3.2 million as compared to fiscal 1994 primarily as a result of the early
extinguishment of a portion of the Company's senior debt late in the first
fiscal quarter of 1995. Interest expense is expected to increase in fiscal 1996
following the Company's exchange of its 6.88% Cumulative Convertible
Exchangeable Preferred Stock ("Preferred Stock") for $84.9 million principal
amount of its 6.88% Convertible Subordinated Debentures due June 30, 2007
("6.88% Debentures") on June 30, 1995. Although this exchange will reduce net
income through interest charges, net income attributable to common shareholders
will benefit from the resulting tax savings. Interest expense is expected to
decrease in fiscal 1996 as a result of the early extinguishment of the remaining
senior debt in December 1995 (See Note 16). Capitalized interest decreased by
$1.9 million as compared to fiscal 1994 due to the completion in early 1995 of
the construction at the Company's hot rolled steel bar business facilities.
Other -- Included in "Other, net" for fiscal 1995, was a $1.1 million pretax
gain related to a life insurance policy on a deceased former officer. Included
in "Other, net" for fiscal 1994 was a $1.7 million pretax charge related to
certain financing contracts, partially offset by $1.0 million of income relating
to partial reimbursement of a business interruption loss for the fire that
occurred at the Company's Lincolnshire facility in August 1993. Also, included
in "Other, net" was investment income of $783 thousand for fiscal 1995, as
compared to $3.0 million for fiscal 1994. The decrease in investment income was
due to a decline in cash and short-term investments as such funds were used to
reduce debt, and losses on sales of short-term investments.
Extraordinary Charge -- Included in fiscal 1995 was an extraordinary charge of
$2.0 million ($3.5 million before tax) relating to early extinguishment of debt.
Net Income -- Net income attributable to common shareholders for fiscal 1995
was $27.9 million, as compared to $12.9 million for fiscal 1994. Preferred
dividends reduced net income attributable to common shareholders by

38
<PAGE> 8

$4.0 million for fiscal 1995, as compared to $5.9 million for fiscal 1994. The
improvement in net income attributable to common shareholders was primarily
attributable to improved operating income.

1994 COMPARED TO 1993

Net Sales -- Net sales for fiscal 1994 were $699.3 million, an increase of $83.2
million, or 13%, as compared to fiscal 1993 sales of $616.1 million.
Net sales for fiscal 1994 from the Company's hot rolled steel bar business
increased by $31.1 million, or 15%. The increase was attributable to a 5%
increase in tonnage shipped due to improved demand, particularly in the
automotive and light truck markets, and an increase in average net selling
prices of 9%.
Net sales for fiscal 1994 from the Company's cold finished steel bar business
increased by $15.6 million, or 11%. This increase was primarily attributable to
improved demand related to better market conditions. The improved demand
resulted in a 4% increase in tons shipped. Average net selling prices increased
by 7%.
Net sales for fiscal 1994 from the Company's steel tube business decreased by
$15.0 million, or 12%. However, net sales for 1993 included revenues from the
Bellville Tube Division that was sold in April of 1993. Excluding the net sales
of Bellville Tube Division from the 1993 data, net sales increased by $4.6
million, or 5%. The steel tube business was adversely affected during the year
by increased foreign competition and lower prices for certain products. The
increased pressure from imports on certain products was partially offset by
improved demand and prices in automotive related business. Weakness in this
segment's primary markets, which include power generation and the petrochemical
and refining industries, continued to depress revenues.
Net sales for fiscal 1994 from the Company's aluminum products business
increased by $57.9 million, or 41%. The increase was primarily attributable to a
larger customer base, which resulted in a higher market share, and improved
demand related to the economy. Overall average selling prices declined 6% in
fiscal 1994 due to product mix changes.
Operating Income -- Consolidated operating income for fiscal 1994 was $40.9
million, an increase of $17.9 million, or 78%, as compared to fiscal 1993
operating income of $22.9 million. This increase was principally due to higher
net sales and lower costs per unit resulting from operating at higher levels of
volume and continuing cost reduction programs. Included in 1993 results was $3.2
million of operating income from the Company's Bellville Tube Division and
Viking Metallurgical Subsidiary which were sold during fiscal 1993.
Operating income from the Company's hot rolled steel bar business was $31.2
million in fiscal 1994 compared to $21.9 million in fiscal 1993, an increase of
43%. This increase was due to higher net sales as well as lower variable
production costs per ton.
Operating income from the cold finished steel bar business was $8.6 million in
fiscal 1994, an increase of $2.1 million, or 33%, as compared to fiscal 1993
operating income of $6.5 million. The improvement resulted from increased volume
as well as better margins related to higher selling prices. The cold finished
steel bar business segment operated near capacity during 1994.
Operating income from the steel tube business for fiscal 1994 was $6.5
million, a decrease of $2.9 million, or 31% as compared to fiscal 1993 operating
income of $9.4 million. This decrease reflects primarily the absence of
operating income from Bellville Tube Division. After excluding the impact of the
Bellville Tube Division, operating income for fiscal 1994 was essentially flat
as compared to fiscal 1993 notwithstanding increased sales. Operating income in
the steel tube business reflected reduced margins due to pricing pressures from
imports.
Operating income from the aluminum products business for fiscal 1994 was $9.6
million as compared to an operating loss in fiscal 1993 of $437 thousand. The
improved results are due to significantly higher sales combined with lower
variable conversion costs per pound. The lower costs per pound resulted from
both cost reductions as well as from economies related to operating at higher
levels of volume. Also contributing to improved operating income in 1994 was the
partial elimination of outside service costs as the additional finishing
equipment became operational at the Company's Lincolnshire facility. Pricing
pressures declined in fiscal 1994 due to a reduction in the excess supply of
aluminum ingot, which allowed for improved profit margins.
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses increased $2.7 million, or 6%, in fiscal 1994 as
compared to fiscal 1993. This increase was primarily due to increased levels of
business activity. However, as a percentage of net sales, selling, general and
administrative expenses decreased slightly in fiscal 1994 from fiscal 1993.
Interest Expense and Capitalized Interest -- Interest expense was flat at
$13.9 million for both fiscal years 1994 and 1993. Capitalized interest
increased by $1.9 million due to continued construction at the Company's
MacSteel facilities which was completed in 1995.
Net Income -- Net income attributable to common stockholders for fiscal 1994
was $12.9 million as compared to $2.5 million in fiscal 1993, after deducting
preferred dividends of $5.9 million from both periods.
Interest income, included in "Other, net", was $3.0 million in fiscal 1994 as
compared to $5.0 million in fiscal 1993. The decrease reflects lower yields on
short-term investments and lower average cash balances available for investment
as a result of the Company's investment of cash in its businesses.

39
<PAGE> 9

Included in net income for fiscal 1994 and 1993 are certain items classified
as "Other, net" on the income statement. In fiscal 1994, $1.0 million of income
relating to partial reimbursement of a business interruption loss for the fire
that occurred at the Company's Lincolnshire facility in August 1993 was
received. In addition, included in fiscal 1994 and 1993 are a $1.7 million
pre-tax charge and a $1.4 million pre-tax gain, respectively realized from
certain financing contracts.

The following table sets forth selected operating data for the Company's four
businesses:

<TABLE>
<CAPTION>
Years Ended October 31,
----------------------------------
1995 1994(1) 1993(1)
----------------------------------
(In thousands)
<S> <C> <C> <C>
Hot Rolled Steel Bars:
Units shipped (Tons)............................................... 503.0 476.1 451.6
Net sales.......................................................... $282,100 $245,219 $214,139
Operating income................................................... 41,552 31,209 21,875
Depreciation and amortization...................................... 15,284 12,862 12,724
Identifiable assets................................................ $172,544 $167,583 $157,078

Cold Finished Steel Bars:
Units shipped (Tons)............................................... 182.9 182.9 175.9
Net sales.......................................................... $170,675 $160,010 $144,445
Operating income................................................... 11,461 8,618 6,464
Depreciation and amortization...................................... 1,310 1,268 1,195
Identifiable assets................................................ $ 54,985 $ 51,405 $ 49,400

Steel Tubes:
Units shipped (Tons)............................................... 94.2 81.4 113.2
Net sales.......................................................... $119,915 $106,136 $121,126
Operating income................................................... 8,724 6,492 9,436
Depreciation and amortization...................................... 1,966 1,992 2,811
Identifiable assets................................................ $ 43,777 $ 38,939 $ 37,821

Aluminum Products:
Units shipped (Pounds)............................................. 230,473 154,503 103,149
Net sales.......................................................... $331,565 $200,932 $142,990
Operating income................................................... 22,080 9,606 (437)
Depreciation and amortization...................................... 13,135 12,077 11,700
Identifiable assets................................................ $230,586 $221,332 $193,183
</TABLE>

- ---------------
(1) Excludes the effects of charges to a $7.2 million general write-down reserve
recorded against manufacturing facilities in 1992 that could not be
allocated against specific facilities or between businesses and was
therefore reflected as a charge against "Corporate and Other" operations and
the identifiable assets included within "Corporate and Other" operations. In
1993, $2.9 million was charged against the reserve, which included $2.2
million relating to the aluminum products business and $700 thousand
relating to the sale of Viking Metallurgical Corporation and Bellville Tube
Division. In 1994, $4.3 million was charged against the reserve, which
included $2.5 million relating to the aluminum products business, $900
thousand relating to the steel tubes business and $900 thousand relating to
write-downs of assets classified in "Corporate and Other". (See Note 10 to
consolidated financial statements).

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of funds are cash on hand, cash flow from
operations, and, if needed, borrowings under a $48 million unsecured revolving
credit facility with a group of banks (the "Bank Agreement"). All borrowings
under the Bank Agreement bear interest, at the option of the Company, at either
floating prime or a reserve adjusted Eurodollar rate. The Bank Agreement
contains customary affirmative and negative covenants and requirements to
maintain a minimum consolidated tangible net worth, as defined. The Bank
Agreement limits the payment of dividends and certain restricted investments.
The Bank Agreement was amended in December 1994 to extend the maturity of the
facility to March 31, 1999. In December 1995, the Bank Agreement was amended to
increase the amount of the credit facility to $75 million. At October 31, 1995,
there were $10.0 million of outstanding borrowings and $2.1 million of
outstanding letters of credit under the Bank Agreement. In December 1995, the
amount outstanding under the Bank Agreement increased to $60 million. The
additional borrowings were used to fund the repurchase of the Company's
remaining Senior Notes (See Note 16).

On June 30, 1995, the Company exercised its right under the terms of its
Cumulative Convertible Exchangeable Preferred Stock to exchange such stock for
an aggregate of $84,920,000 of its 6.88% Convertible Subordinated Debentures due
June 30, 2007 ("Debentures"). Interest is payable semi-annually on June 30 and
December 31 of

40
<PAGE> 10

each year. The Debentures are subject to mandatory annual sinking fund payments
sufficient to redeem 25% of the Debentures issued on each of June 30, 2005 and
June 30, 2006, to retire a total of 50% of the Debentures before maturity. The
Debentures are subordinate to all senior indebtedness of the Company and are
convertible, at the option of the holder, into shares of the Company's common
stock at a conversion price of $31.50 per share.
At October 31, 1995, the Company had outstanding $44.7 million in Senior Notes
("Senior Notes"). The Senior Notes are unsecured and bear interest at the rate
of 10.77% per annum, payable semi-annually. The Senior Notes contain customary
affirmative and negative covenants, as well as requirements to maintain a
minimum capital base, as defined. In addition, the Senior Notes limit the
payment of dividends and certain restricted investments. In December 1994, the
Company acquired $59.5 million principal amount of the Senior Notes for a
purchase price equal to 105% of the principal amount plus accrued interest. The
acquisition was funded with the Company's available cash, proceeds from the sale
of its short-term investments and $10 million in borrowings under the Bank
Agreement. On December 29, 1995, the Company acquired the remaining Senior Notes
for a purchase price equal to 107.5% of the principal amount plus accrued
interest. The acquisition premium and related expenses will result in a
one-time, after-tax extraordinary charge of approximately $2.5 million in the
first quarter of 1996. The December 29, 1995 acquisition was funded with current
cash balances and additional short-term borrowings.
At October 31, 1995, the Company had commitments of $10 million for the
purchase or construction of capital assets. During the first quarter of fiscal
1995, the Company's Board of Directors approved a $5 million capital project for
the purchase and installation of a fully integrated coil-to-bar cold drawing
line at LaSalle Steel's Hammond, Indiana operation. The Company's $52 million
(not including approximately $9 million in capitalized interest) Phase II
MacSteel expansion project and $8 million Nichols-Homeshield annealing expansion
were both completed in March 1995. In December 1995, the Company's Board of
Directors approved Phase III of the MacSteel expansion project. Phase III is
designed to improve melting and casting capabilities and is expected to increase
capacity by approximately 70,000 tons. The project also includes significant
upgrades to pollution control systems to ensure compliance with new EPA
standards under the Clean Air Act. Phase III is expected to cost approximately
$60 million and should be completed during fiscal year 1998. The Company plans
to fund this capital investment through cash flow from operations and, if
necessary, additional borrowings.
In management's opinion, the Company currently has sufficient funds and
adequate financial sources available to meet its anticipated liquidity needs.
Management believes that cash flow from operations, cash balances and available
borrowings will be sufficient for the foreseeable future to finance anticipated
working capital requirements, capital expenditures, debt service requirements
and dividends.

Operating Activities
Cash provided by operating activities during fiscal 1995 was $67.1 million. This
represents an increase of $21.1 million, or 46%, as compared to fiscal 1994. The
improvement resulted principally from higher operating income in 1995.

Investment Activities
Net cash provided by investment activities in fiscal 1995 was $25.6 million as
compared to net cash used of $41.3 million in fiscal 1994. The increase in cash
provided by investment activities was principally due to the liquidation of
short-term investments to fund the Company's acquisition of its Senior Notes. In
addition, capital expenditures decreased by $17.9 million as compared to fiscal
1994 primarily due to the completion of the Phase II MacSteel expansion project.
Fiscal 1994 included $6.4 million of proceeds from the sale of the Company's
Viking Metallurgical Corporation subsidiary. The Company estimates that fiscal
1996 capital expenditures will approximate $50 to $60 million.

Financing Activities
Net cash used by financing activities for fiscal 1995 was $81.5 million,
principally consisting of $59.5 million related to the early extinguishment of
the Senior Notes, $21.0 million in repayments of long-term debt, $7.9 million in
common dividends and $4.5 million in preferred dividends. These uses of cash
were partially offset by notes payable borrowings of $10.0 million.

EFFECTS OF INFLATION

Inflation has not had a significant effect on earnings and other financial
statement items.

41
<PAGE> 11

Quanex Corporation
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

October 31, 1995 1994
- -------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.......................................................... $ 45,213 $ 34,041
Short-term investments........................................................ -- 54,070
Accounts and notes receivable, less allowance for doubtful accounts of
$3,581,000 in 1995 and $3,593,000 in 1994..................................... 104,240 83,082
Inventories (Note 4).......................................................... 84,676 81,800
Deferred income taxes (Note 3)................................................ 6,848 6,114
Prepaid expenses.............................................................. 1,398 289
-------- --------
Total current assets.................................................. 242,375 259,396
Property, plant and equipment, net (Note 5)..................................... 258,564 262,261
Goodwill, net (Note 1).......................................................... 32,064 33,017
Other assets.................................................................... 13,744 9,334
-------- --------
$546,747 $564,008
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 7)........................................................ $ 10,000 $ --
Accounts payable.............................................................. 91,730 75,515
Accrued expenses (Note 6)..................................................... 42,087 37,118
Current maturities of long-term debt (Note 7)................................. 20,968 20,958
Income taxes payable (Note 3)................................................. 423 1,160
-------- --------
Total current liabilities............................................. 165,208 134,751
Long-term debt (Note 7)......................................................... 111,894 107,442
Deferred pension credits (Note 8)............................................... 16,656 15,810
Deferred postretirement welfare benefits (Note 9)............................... 53,185 50,742
Deferred income taxes (Note 3).................................................. 29,278 23,014
-------- --------
Total liabilities..................................................... 376,221 331,759
Stockholders' equity (Notes 11, 12, and 13):
Preferred stock, no par value, 1,000,000 shares authorized; No shares in 1995
and 345,000 shares in 1994 issued and outstanding.......................... -- 86,250
Common stock, $.50 par value, 25,000,000 shares authorized; 13,485,312 shares
in 1995 and 13,377,724 shares in 1994 issued and outstanding............... 6,743 6,688
Additional paid-in capital.................................................... 92,406 86,323
Retained earnings............................................................. 74,426 55,081
Unearned compensation......................................................... (317) (370)
Adjustment for minimum pension liability (Note 8)............................. (2,732) (1,723)
-------- --------
Total stockholders' equity............................................ 170,526 232,249
-------- --------
$546,747 $564,008
======== ========
</TABLE>

See notes to consolidated financial statements.

42
<PAGE> 12

Quanex Corporation
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended October 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net sales............................................................ $891,195 $699,314 $616,145
Costs and expenses:
Cost of sales...................................................... 778,067 613,553 550,969
Selling, general and administrative................................ 46,647 44,898 42,243
-------- -------- --------
Operating income..................................................... 66,481 40,863 22,933
Other income (expense):
Interest expense................................................... (10,742) (13,944) (13,871)
Capitalized interest............................................... 1,872 3,766 1,909
Other, net......................................................... 769 1,818 3,560
-------- -------- --------
Income before income taxes and extraordinary charge.................. 58,380 32,503 14,531
Income tax expense (Note 3).......................................... (24,520) (13,651) (6,103)
-------- -------- --------
Income before extraordinary charge................................... 33,860 18,852 8,428
Extraordinary charge -- early extinguishment of debt (Note 7)........ (2,021) -- --
-------- -------- --------
Net income........................................................... 31,839 18,852 8,428
Preferred dividends.................................................. (3,957) (5,934) (5,934)
-------- -------- --------
Net income attributable to common stockholders....................... $ 27,882 $ 12,918 $ 2,494
======== ======== ========
Earnings per common share:
Earnings before extraordinary charge............................... $ 2.20 $ .96 $ .18
Extraordinary charge............................................... (0.15) -- --
-------- -------- --------
Net earnings............................................... $ 2.05 $ .96 $ .18
======== ======== ========
Weighted average number of shares outstanding........................ 13,580 13,496 13,551
</TABLE>

See notes to consolidated financial statements.

43
<PAGE> 13

Quanex Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)

<TABLE>
<CAPTION>
Adjustment
for
Minimum
Pension Total
Years Ended October 31, Preferred Stock Common Stock Additional Liability/ Stock-
1995 ------------------- -------------------- Paid-in Retained Unearned holders'
1994 and 1993 Shares Amount Shares Amount Capital Earnings Compensation Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31,
1992................. 345,000 $86,250 13,638,005 $6,819 $87,260 $ 57,263 -- $237,592
Net Income........... -- -- -- -- -- 8,428 -- 8,428
Stock purchases...... -- -- (340,100) (170) (2,252) (2,574) -- (4,996)
Common dividends
($.56 per share).. -- -- -- -- -- (7,548) -- (7,548)
Preferred
dividends......... -- -- -- -- -- (5,934) -- (5,934)
Adjustment for
minimum pension
liability......... -- -- -- -- -- -- $(1,984) (1,984)
Exercise of stock
options........... -- -- 16,932 8 210 -- -- 218
-------- ------- ---------- ------ ------- -------- ------- --------
Balance at October 31,
1993................. 345,000 86,250 13,314,837 6,657 85,218 49,635 (1,984) 225,776
Net Income........... -- -- -- -- -- 18,852 -- 18,852
Common dividends
($.56 per share).. -- -- -- -- -- (7,472) -- (7,472)
Preferred
dividends......... -- -- -- -- -- (5,934) -- (5,934)
Adjustment for
minimum pension
liability......... -- -- -- -- -- -- 261 261
Unearned
compensation...... -- -- -- -- -- -- (370) (370)
Exercise of stock
options and
restricted stock
awards............ -- -- 62,887 31 1,105 -- -- 1,136
-------- ------- ---------- ------ ------- -------- ------- --------
Balance at October 31,
1994................. 345,000 86,250 13,377,724 6,688 86,323 55,081 (2,093) 232,249
Net income........... -- -- -- -- -- 31,839 -- 31,839
Common dividends
($.59 per share).. -- -- -- -- -- (7,932) -- (7,932)
Preferred
dividends......... -- -- -- -- -- (4,451) -- (4,451)
Conversion of
preferred stock to
subordinated
debentures........ (339,681) (84,920) -- -- 3,350 -- -- (81,570)
Conversion of
preferred stock to
common stock...... (5,319) (1,330) 42,211 21 1,309 -- -- --
Adjustment for
minimum pension
liability......... -- -- -- -- -- -- (1,009) (1,009)
Unearned
compensation...... -- -- -- -- -- -- 53 53
Other................ -- -- 65,377 34 1,424 (111) -- 1,347
-------- ------- ---------- ------ ------- -------- ------- --------
Balance at October 31,
1995................. -- $ -- 13,485,312 $6,743 $92,406 $ 74,426 $(3,049) $170,526
======== ======= ========== ====== ======= ======== ======= ========
</TABLE>

See notes to consolidated financial statements.

44
<PAGE> 14

Quanex Corporation
CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
Years Ended October 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income......................................................... $ 31,839 $ 18,852 $ 8,428
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization................................. 32,433 28,535 29,352
Facilities realignment charge (See Note 1).................... -- (4,264) (2,936)
Deferred income taxes......................................... 6,910 4,786 4,593
Deferred pension costs........................................ (1,073) 151 (1,400)
Deferred postretirement welfare benefits...................... 2,443 3,183 2,024
-------- -------- --------
72,552 51,243 40,061
Changes in assets and liabilities net of effects from acquisitions
and dispositions:
Increase in accounts and notes receivable..................... (21,158) (17,206) (3,008)
Increase in inventory......................................... (2,876) (4,901) (6,763)
Increase (decrease) in accounts payable....................... 16,215 13,166 (3,076)
Increase in accrued expenses.................................. 4,969 4,614 2,723
Other, net.................................................... (2,580) (900) (9)
-------- -------- --------
Cash provided by operating activities...................... 67,122 46,016 29,928
INVESTMENT ACTIVITIES:
Capital expenditures, net of retirements........................... (26,601) (42,457) (35,866)
Decrease (increase) in short-term investments...................... 54,070 (6,415) (47,655)
Proceeds from the sale of Bellville Tube Division and Viking
Metallurgical Subsidiary........................................ -- 6,390 15,500
Other, net......................................................... (1,878) 1,195 1,941
-------- -------- --------
Cash provided (used) by investment activities.............. 25,591 (41,287) (66,080)
-------- -------- --------
Cash provided (used) by operating and investment
activities............................................... 92,713 4,729 (36,152)
FINANCING ACTIVITIES:
Notes payable borrowings........................................... 10,000 -- --
Purchase of Senior Notes........................................... (59,500) -- --
Repayments of long-term debt....................................... (20,958) (295) (199)
Common dividends paid.............................................. (7,932) (7,472) (7,548)
Preferred dividends paid........................................... (4,451) (5,934) (5,934)
Purchases of Quanex common stock................................... -- -- (4,996)
Other, net......................................................... 1,300 766 218
-------- -------- --------
Cash used by financing activities.......................... (81,541) (12,935) (18,459)
-------- -------- --------
Increase (decrease) in cash and equivalents.......................... 11,172 (8,206) (54,611)
Cash and equivalents at beginning of period.......................... 34,041 42,247 96,858
-------- -------- --------
Cash and equivalents at end of period................................ $ 45,213 $ 34,041 $ 42,247
======== ======== ========
</TABLE>

See notes to consolidated financial statements.

45
<PAGE> 15

Quanex Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Quanex Corporation
and its subsidiaries (the "Company"), all of which are wholly owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.

SCOPE OF OPERATIONS
The Company operates primarily in four industry segments: the manufacturing of
hot rolled steel bars, cold finished steel bars, steel tubes, and aluminum
products. The Company's operations are conducted in the United States. For the
years ended October 31, 1995, 1994 and 1993, no single customer accounted for
more than 10% of the Company's revenue (See Note 10).

STATEMENTS OF CASH FLOWS
The Company generally considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. Similar
investments with original maturities beyond three months are considered
short-term investments. For fiscal years 1995, 1994 and 1993 cash paid for
income taxes was $17,572,000, $10,144,000 and $4,037,000, respectively. These
amounts are before refunds of $47,000, $294,000 and $1,412,000, respectively.
Cash paid for interest for fiscal 1995, 1994 and 1993 was $10,324,000,
$13,990,000 and $13,941,000, respectively. Cash payments related to the
facilities realignment charge recorded in fiscal 1992 were $625,000 and
$1,712,000, respectively, for fiscal 1994 and 1993. Non-cash investing and
financing activities in fiscal 1995 included the exchange of $84,920,000 of the
Company's Cumulative Convertible Exchangeable Preferred Stock for the Company's
6.88% Convertible Subordinated Debentures due June 30, 2007, and the conversion
of $1,330,000 of the Company's Cumulative Convertible Exchangeable Preferred
Stock to the Company's common stock.

INVENTORIES
Inventories are valued at the lower of cost or market. Costs related to
substantially all manufacturing inventories are determined by the last-in,
first-out ("LIFO") method (See Note 4).

GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
acquired companies and is being amortized on a straight line basis over forty
years. At October 31, 1995 and 1994, accumulated amortization was $5,807,000 and
$4,854,000, respectively.

PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives of certain categories are as follows:

<TABLE>
<CAPTION>
Years
---------
<S> <C>
Land improvements................................................................... 10 to 25
Buildings........................................................................... 10 to 40
Machinery and equipment............................................................. 3 to 18
</TABLE>

HEDGING
The Company uses futures and option contracts to hedge a portion of its exposure
to price fluctuations of aluminum. Hedging gains and losses are recognized
concurrently with the related sales transactions (See Note 14).

INCOME TAXES
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". This statement
requires the use of the asset and liability approach for financial accounting
and reporting for income taxes. Adoption of this statement did not have a
material effect on the Company's financial position or results of operations
(See Note 3).

46
<PAGE> 16

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

EARNINGS PER SHARE DATA
Primary earnings per share is computed by deducting preferred dividends from net
income in order to determine net income attributable to common stockholders.
This amount is then divided by the weighted average number of common shares
outstanding and common stock equivalents.

RECLASSIFICATION
Certain amounts for prior periods have been reclassified in the accompanying
consolidated financial statements to conform to 1995 presentations.

2. ACQUISITIONS AND DISPOSITIONS

During the second quarter of fiscal 1993, the Company sold the stock of its
Viking Metallurgical Corporation subsidiary and the assets of its Bellville Tube
Division for $15.5 million in cash and a $6.4 million note. The aggregate
consideration approximated the book value. These sales did not have a
significant effect on the Company's financial results.

3. INCOME TAXES

Effective November 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." This statement requires the use of the asset and
liability approach for financial accounting and reporting for income taxes.
Adoption of this statement did not have a material effect on the Company's
financial position or results of operations. Prior year financial statements
have not been restated.

Income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
Years Ended October 31,
------------------------------
1995 1994 1993
------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal............................................................... $16,302 $ 9,738 $4,226
State................................................................. 1,940 1,359 802
------- ------- ------
18,242 11,097 5,028
Deferred................................................................ 6,278 2,554 1,075
------- ------- ------
24,520 13,651 6,103
Reduction of taxes from extinguishment of debt.......................... (1,463) -- --
------- ------- ------
$23,057 $13,651 $6,103
======= ======= ======
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At October 31, 1995 and
1994, $6,848,000 and $6,114,000, respectively, of deferred tax assets were
classified as current assets.

Significant components of the Company's net deferred tax liability are as
follows:

<TABLE>
<CAPTION>
October 31,
-------------------
1995 1994
-------------------
(In thousands)
<S> <C> <C>
Deferred tax liability:
Property, plant and equipment................................................... $39,604 $38,406
Inventory....................................................................... 3,887 3,885
Other........................................................................... 15,446 8,547
------- -------
58,937 50,838
------- -------
Deferred tax assets:
Postretirement benefit obligation............................................... 20,834 19,786
Other employee benefit obligations.............................................. 9,982 8,647
Other accrued liabilities....................................................... 5,691 5,505
------- -------
36,507 33,938
------- -------
Net deferred tax liability........................................................ $22,430 $16,900
======= =======
</TABLE>

47
<PAGE> 17

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

Income tax expense differs from the amount computed by applying the statutory
federal income tax rate to earnings before income taxes for the following
reasons:

<TABLE>
<CAPTION>
Years Ended October 31,
--------------------------------
1995 1994 1993
--------------------------------
(In thousands)
<S> <C> <C> <C>
Income tax expense at statutory federal tax rate...................... $20,433 $11,376 $5,039
Increase in taxes resulting from:
State income taxes, net of federal effect........................... 3,190 1,720 694
Goodwill............................................................ 334 331 332
Other items, net.................................................... 563 224 38
------- ------- ------
$24,520 $13,651 $6,103
======= ======= ======
</TABLE>

4. INVENTORIES

Inventories consist of the following:
<TABLE>
<CAPTION>
October 31,
-------------------
1995 1994
-------------------
(In thousands)
<S> <C> <C>
Inventories valued at lower of cost (principally LIFO method) or market:
Raw materials................................................................... $27,655 $25,946
Finished goods and work in process.............................................. 48,071 47,684
------- -------
75,726 73,630
Other........................................................................... 8,950 8,170
------- -------
Total................................................................... $84,676 $81,800
======= =======
</TABLE>

With respect to inventories valued using the LIFO method, replacement cost
exceeded the LIFO value by approximately $24,000,000 and $15,000,000 at October
31, 1995 and 1994, respectively.

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
October 31,
----------------------
1995 1994
----------------------
(In thousands)
<S> <C> <C>
Land and land improvements .................................................... $ 17,462 $ 17,365
Leasehold improvements ........................................................ 94 94
Buildings ..................................................................... 76,364 70,795
Machinery and equipment ....................................................... 424,266 353,927
Construction in progress ...................................................... 7,139 57,617
-------- --------
525,325 499,798
Less accumulated depreciation and amortization................................. 266,761 237,537
-------- --------
$258,564 $262,261
======== ========
</TABLE>

Maintenance and repair expense was $26,397,000, $21,488,000, and $19,572,000 in
1995, 1994 and 1993, respectively. The Company had commitments for the purchase
or construction of capital assets amounting to approximately $10,000,000 at
October 31, 1995.

6. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
October 31,
-------------------
1995 1994
-------------------
(In thousands)
<S> <C> <C>
Accrued contribution to pension funds............................................. $ 2,703 $ 1,435
Interest.......................................................................... 3,080 2,661
Payroll, payroll taxes and employee benefits...................................... 23,479 20,392
State and local taxes............................................................. 3,346 3,271
Other............................................................................. 9,479 9,359
------- -------
$42,087 $37,118
======= =======
</TABLE>

48
<PAGE> 18

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

7. LONG-TERM DEBT AND FINANCING ARRANGEMENTS

Long-term debt consists of the following:

<TABLE>
<CAPTION>
October 31,
---------------------
1995 1994
---------------------
(In thousands)
<S> <C> <C>
Senior notes.................................................................... $ 44,667 $125,000
Convertible subordinated debentures............................................. 84,920 --
Industrial Revenue and Economic Development Bonds, unsecured, payable in annual
installments through the year 2005, bearing interest ranging from 7.40% to
8.375%........................................................................ 3,275 3,400
-------- --------
$132,862 $128,400
Less maturities due within one year included in current liabilities............. 20,968 20,958
-------- --------
$111,894 $107,442
======== ========
</TABLE>

At October 31, 1995, and 1994, the Company had $44.7 million and $125.0 million,
respectively, in Senior Notes ("Senior Notes"). The Senior Notes bear interest
at the rate of 10.77% per annum, payable semi-annually. The Senior Notes require
annual repayments of $20.8 million beginning August 23, 1995, with a final
payment of $3.0 million on August 23, 1998. In December 1994, the Company
acquired $59.5 million principal amount of the Senior Notes for a purchase price
equal to 105% of the principal amount plus accrued interest. The Company
recorded an extraordinary charge of $2.0 million ($3.5 million before tax) in
the first quarter of 1995 related to the call premium and write-off of deferred
debt issuance costs for the Senior Notes that were repurchased. On December 29,
1995, the Company repurchased the remaining Senior Notes (See Note 16).
On June 30, 1995, the Company exercised its right under the terms of its
Cumulative Convertible Exchangeable Preferred Stock to exchange such stock for
an aggregate of $84,920,000 of its 6.88% Convertible Subordinated Debentures due
June 30, 2007 ("Debentures"). Interest is payable semi-annually on June 30 and
December 31 of each year. The Debentures are subject to mandatory annual sinking
fund payments sufficient to redeem 25% of the Debentures issued on each of June
30, 2005 and June 30, 2006, to retire a total of 50% of the Debentures before
maturity. The Debentures are subordinate to all senior indebtedness of the
Company and are convertible, at the option of the holder, into shares of the
Company's common stock at a conversion price of $31.50 per share.
As of October 31, 1995, the Company had an unsecured $48 million Revolving
Credit and Letter of Credit Agreement ("Bank Agreement") with a group of banks.
In December 1995, the Bank Agreement was amended to increase the amount of the
credit facility to $75 million. The Bank Agreement consists of a revolving line
of credit ("Revolver"), and up to $20 million for standby letters of credit,
limited to the undrawn amount available under the Revolver. The Bank Agreement
is renewable annually and was amended in December 1994 to extend the maturity to
March 31, 1999. All borrowings under the Revolver bear interest, at the option
of the Company, at either floating prime or a reserve adjusted Eurodollar rate.
The Bank Agreement contains customary affirmative and negative covenants and
requirements to maintain a minimum consolidated tangible net worth, as defined.
The Bank Agreement limits the payment of dividends and certain restricted
investments. At October 31, 1995 and 1994, $10 million and zero, respectively,
were outstanding under the Revolver and $2.1 million and $93 thousand,
respectively, were issued under Letters of Credit. In December 1995, the amount
outstanding under the Revolver increased to $60 million. The additional
borrowings were used to fund the repurchase of the Company's remaining Senior
Notes (See Note 16). The weighted average interest rate on borrowings under the
Revolver was 7.1% during fiscal 1995. As of October 31, 1995, the Company was in
compliance with all Bank Agreement covenants. Under the Company's most
restrictive loan covenants, retained earnings of $25,483,000 at October 31,
1995, were available for dividends.
Aggregate maturities of long-term debt at October 31, 1995, are as follows (in
thousands):

<TABLE>
<S> <C>
1996................ $ 20,968
1997................ 20,978
1998................ 3,156
1999................ 165
2000................ 180
Thereafter.......... 87,415
--------
$132,862
========
</TABLE>

The above aggregate maturities will decrease in 1996, 1997 and 1998 by
approximately $20.8 million, $20.8 million and $3.0 million, respectively, as a
result of the repurchase of the Senior Notes in December 1995 (See Note 16).

49
<PAGE> 19

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

The Company had entered into financing arrangements in order to manage a
portion of its exposure to interest rate fluctuations. These arrangements
effectively converted a portion of the Company's debt from fixed-rate to
variable rate. In 1994, the Company accrued its maximum potential pretax loss on
open agreements of $1.7 million. These agreements expired in 1995. In 1993, the
Company recognized a $1.4 million gain on the close out of certain financing
contracts.

8. PENSION PLANS AND RETIREMENT BENEFITS

The Company has retirement plans covering substantially all employees. The plans
provide for defined benefits. The plans pay benefits to employees at retirement
using formulas based upon years of service and compensation rates near
retirement. The Company's funding policy is generally to make the minimum annual
contributions required by applicable regulations.
The plans' funded status was as follows:

<TABLE>
<CAPTION>
Assets exceed Accumulated benefit
accumulated obligation
benefit obligation exceeds assets
--------------------- ---------------------
October 31,
-----------------------------------------------
1995 1994 1995 1994
-----------------------------------------------
<S> <C> <C> <C> <C>
Assets available for benefits ........................... $ 26,013 $ 22,564 $ 12,823 $ 10,363
-------- -------- -------- --------
Projected benefit obligation
Vested ................................................ (21,630) (20,457) (18,939) (16,329)
Nonvested ............................................. (371) (340) (5,185) (3,217)
-------- -------- -------- --------
Accumulated benefit obligation ..................... (22,001) (20,797) (24,124) (19,546)
Effect of future salary increases ..................... (11,024) (8,725) (299) (278)
-------- -------- -------- --------
Total projected benefit obligation ...................... (33,025) (29,522) (24,423) (19,824)
-------- -------- -------- --------
Assets less than projected benefit obligation ........... $ (7,012) $ (6,958) $(11,600) $ (9,461)
======== ======== ======== ========
Consisting of:
Amounts to be offset against future pension costs:
Assets in excess of obligation at adoption ......... $ 979 $ 1,083 $ 233 $ 321
Obligation (increase) decrease due to plan
amendments ....................................... 350 405 (4,621) (4,343)
Actuarial gains and losses ......................... (235) (383) (5,046) (3,425)
Minimum liability adjustment ....................... -- -- 9,087 7,168
Amounts recognized in consolidated balance sheets:
Deferred pension credit ............................ (7,489) (7,497) (9,167) (8,313)
Accrued contribution to pension funds .............. (617) (566) (2,086) (869)
-------- -------- -------- --------
$ (7,012) $ (6,958) $(11,600) $ (9,461)
======== ======== ======== ========
</TABLE>

In accordance with the provisions of Statement of Financial Accounting Standards
No. 87, the Company recorded additional minimum pension liabilities as of
October 31, 1995 and 1994, representing the excess of the accumulated benefit
obligations over the fair value of plan assets and accrued pension liabilities.
The Company recorded additional pension liabilities of $9,087,000 and
$7,168,000; intangible assets of $4,607,000 and $4,343,000; and stockholders'
equity reductions, net of income taxes, of $2,732,000 and $1,723,000, as of
October 31, 1995 and 1994, respectively.
The projected unit credit method was used to determine the actuarial present
value of the accumulated benefit obligation and the projected benefit
obligation. For 1995, 1994 and 1993 the discount rates were 7.5%, 8% and 7%,
respectively. The expected long term rate of return on assets was 10% for the
three year period ending October 31, 1995. The assumed rate of increase in
future compensation levels was 4.5% in 1995, 5% in 1994 and 4% in 1993. The
plans invest primarily in marketable equity and debt securities.

50
<PAGE> 20

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

Net pension costs for defined benefit plans were as follows:

<TABLE>
<CAPTION>
Years Ended October 31,
-------------------------------
1995 1994 1993
-------------------------------
(In thousands)
<S> <C> <C> <C>
Benefits earned during the year......................................... $ 3,067 $ 3,040 $ 2,631
Interest cost on projected benefit obligation........................... 4,075 3,388 3,231
Actual return on plan assets............................................ (4,566) (275) (3,715)
Net amortization and deferral........................................... 1,490 (2,727) 1,153
------- ------- -------
$ 4,066 3,426 $ 3,300
======= ======= =======
</TABLE>

The Company has various defined contribution plans in effect for certain
eligible employees. The Company makes contributions to the plans subject to
certain limitations outlined in the plans. Contributions to these plans were
approximately $2,767,000, $2,478,000, and $2,277,000 during fiscal 1995, 1994,
and 1993, respectively.
The Company has a Supplemental Benefit Plan covering certain key officers of
the Company. Earned vested benefits under the Supplemental Benefit Plan were
approximately $4,107,000, $2,982,000, and $2,543,000 at October 31, 1995, 1994
and 1993, respectively. These benefits are funded with life insurance policies
on the officers purchased by the Company.

9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company provides certain health care and life insurance benefits for
eligible retired employees. Employees may become eligible for those benefits if
they reach normal retirement age while working for the Company. The Company
continues to fund benefit costs on a pay-as-you-go basis; and, for fiscal year
1995, the Company made benefit payments totaling $2,547,000, compared to
$1,892,000 and $2,460,000 in fiscal 1994 and 1993, respectively.
The following table sets forth the funded status of the Company's projected
postretirement benefits other than pensions, reconciled with amounts recognized
in the Company's consolidated balance sheets at:

<TABLE>
<CAPTION>
October 31,
---------------------
1995 1994
---------------------
(In thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees...................................................................... $(35,021) $(29,995)
Fully eligible active plan participants....................................... (7,764) (5,764)
Other active plan participants................................................ (15,874) (14,209)
-------- --------
(58,659) (49,968)
Plan assets at fair value....................................................... -- --
-------- --------
Accumulated postretirement benefit obligation in excess of plan assets.......... (58,659) (49,968)
Unrecognized prior service cost................................................. (2,941) (3,232)
Unrecognized net loss from past experience different from that assumed and from
changes in assumption......................................................... 8,415 2,458
-------- --------
Accrued postretirement benefit cost............................................. $(53,185) $(50,742)
======== ========
</TABLE>

<TABLE>
<CAPTION>
Years Ended October 31,
----------------------------
1995 1994 1993
----------------------------
(In thousands)
<S> <C> <C> <C>
Net periodic postretirement benefit cost:
Service cost -- benefits attributed to service during the period......... $ 780 $ 945 $ 824
Interest cost on accumulated postretirement benefit obligation........... 4,166 3,839 3,634
Net amortization and deferral............................................ 44 291 26
------ ------ ------
Net periodic postretirement benefit cost................................. $4,990 $5,075 $4,484
====== ====== ======
</TABLE>

The assumed health care cost trend rate was 9.9% in 1995, decreasing uniformly
to 5.5% in the year 2002 and remaining level thereafter. The assumed discount
rate used to measure the accumulated postretirement benefit obligation was 7.5%
at October 31, 1995, and 8% at October 31, 1994.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of October 31, 1995 would be
increased by 6.1%.
The effect of this change on the sum of the service cost and interest cost
would be an increase of 13.3%.

51
<PAGE> 21

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

10. INDUSTRY SEGMENT INFORMATION

Quanex is principally a specialized metals producer. The Company's operations
primarily consist of four segments: Hot rolled steel bars, cold finished steel
bars, steel tubes and aluminum products.
<TABLE>
<CAPTION>
Hot Cold
Rolled Finished Corporate
Year ended Steel Steel Steel Aluminum and
October 31, 1995 Bars Bars Tubes Products Other(1) Consolidated
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliated
companies............... 480.7 Tons 182.9 Tons 94.2 Tons 230,473 Lbs.
Intersegment .............. 22.3 -- -- --
---------- ---------- --------- ------------
Total........................ 503.0 Tons 182.9 Tons 94.2 Tons 230,473 Lbs.
========== ========== ========= ============
Net sales:
To unaffiliated
companies............... $269,040 $170,675 $119,915 $331,565 -- $891,195
Intersegment(2)............ 13,060 -- -- -- $(13,060) --
-------- -------- -------- -------- -------- --------
Total........................ $282,100 $170,675 $119,915 $331,565 $(13,060) $891,195
======== ======== ======== ======== ======== ========
Operating income (loss)...... $ 41,552 $ 11,461 $ 8,724 $ 22,080 $(17,336) $ 66,481
Depreciation and
amortization:
Operating.................. $ 15,284 $ 1,310 $ 1,966 $ 12,183 $ 113 $ 30,856
Other...................... -- -- -- 952 625 1,577
-------- -------- -------- -------- -------- --------
$ 15,284 $ 1,310 $ 1,966 $ 13,135 $ 738 $ 32,433
Capital expenditures......... $ 12,215 $ 2,108 $ 3,478 $ 8,704 $ 149 $ 26,654
Identifiable assets.......... $172,544 $ 54,985 $ 43,777 $230,586 $ 44,855 $546,747
</TABLE>

(1) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.

<TABLE>
<CAPTION>
Hot Cold
Rolled Finished Corporate
Year ended Steel Steel Steel Aluminum and
October 31, 1994(3) Bars Bars Tubes Products Other(1) Consolidated
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliated
companies............... 452.4 Tons 182.9 Tons 81.4 Tons 154,503 Lbs.
Intersegment............... 23.7 -- -- --
---------- ---------- --------- ------------
Total........................ 476.1 Tons 182.9 Tons 81.4 Tons 154,503 Lbs.
========== ========== ========= ============
Net sales:
To unaffiliated
companies............... $232,236 $160,010 $106,136 $200,932 -- $699,314
Intersegment(2)............ 12,983 -- -- -- $(12,983) --
-------- -------- -------- -------- -------- --------
Total........................ $245,219 $160,010 $106,136 $200,932 $(12,983) $699,314
======== ======== ======== ======== ======== ========
Operating income (loss)...... $ 31,209 $ 8,618 $ 6,492 $ 9,606 $(15,062) $ 40,863
Depreciation and
amortization:
Operating.................. $ 12,862 $ 1,268 $ 1,992 $ 11,130 $ 97 $ 27,349
Other...................... -- -- -- 947 239 1,186
-------- -------- -------- -------- -------- --------
$ 12,862 $ 1,268 $ 1,992 $ 12,077 $ 336 $ 28,535
Capital expenditures......... $ 23,931 $ 893 $ 1,907 $ 17,741 $ 85 $ 44,557
Identifiable assets.......... $167,583 $ 51,405 $ 38,939 $221,332 $ 84,749 $564,008
</TABLE>

(1) Included in "Corporate and Other" are intersegment eliminations and
corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.
(3) During 1994, $4.3 million was charged against a general facilities
realignment reserve recorded in 1992 and included in "Corporate and Other".
Of the $4.3 million total charge, $2.5 million related to the Aluminum
Products segment, $900 thousand related to the Steel Tubes segment and $900
thousand related to write-downs of assets classified in "Corporate and
Other".

52
<PAGE> 22

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Hot Cold
Rolled Finished Corporate
Year ended Steel Steel Steel Aluminum and
October 31, 1993(3) Bars Bars Tubes Products Other(1) Consolidated
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Units shipped:
To unaffiliated
companies............... 427.3 Tons 175.9 Tons 113.2 Tons 103,149 Lbs.
Intersegment............... 24.3 -- -- --
---------- ---------- ---------- ------------
Total........................ 451.6 Tons 175.9 Tons 113.2 Tons 103,149 Lbs.
========== ========== ========== ============
Net sales:
To unaffiliated
companies............... $201,419 $144,445 $121,126 $142,990 $ 6,165 $616,145
Intersegment(2)............ 12,720 -- -- -- (12,720) --
-------- -------- -------- -------- -------- --------
Total........................ $214,139 $144,445 $121,126 $142,990 $ (6,555) $616,145
======== ======== ======== ======== ======== ========
Operating income (loss)...... $ 21,875 $ 6,464 $ 9,436 $ (437) $(14,405) $ 22,933
Depreciation and
amortization:
Operating.................. $ 12,724 $ 1,195 $ 2,811 $ 10,752 $ 296 $ 27,778
Other...................... -- -- -- 948 626 1,574
-------- -------- -------- -------- -------- --------
$ 12,724 $ 1,195 $ 2,811 $ 11,700 $ 922 $ 29,352
Capital expenditures......... $ 26,734 $ 1,457 $ 1,388 $ 7,078 $ 304 $ 36,961
Identifiable assets.......... $157,078 $ 49,400 $ 37,821 $193,183 $ 91,385 $528,867
</TABLE>

(1) Included in "Corporate and Other" are intersegment eliminations, Viking
Metallurgical Corporation and corporate expenses.
(2) Intersegment sales are conducted on an arm's-length basis.
(3) During 1993, $2.9 million was charged against a general facilities
realignment reserve recorded in 1992 and included in "Corporate and Other".
Of the $2.9 million total charge, $2.2 million related to the Aluminum
Products segment and $700 thousand related to the sale of Viking
Metallurgical Corporation and Bellville Tube Division.

11. PREFERRED STOCK PURCHASE RIGHTS

The Company declared a dividend in 1986 of one Preferred Stock Purchase Right (a
"Right") on each outstanding share of its common stock. This action was intended
to assure that all shareholders would receive fair treatment in the event of a
proposed takeover of the Company. On April 26, 1989, the Company amended the
Rights to provide for additional protection to shareholders and to provide the
Board of Directors of the Company with needed flexibility in responding to
abusive takeover tactics. Each Right, when exercisable, entitles the holder to
purchase 1/100th of a share of the Company's Series A Junior Participating
Preferred Stock at an exercise price of $60. Each 1/100th of a share of Series A
Junior Participating Preferred Stock will be entitled to a dividend equal to the
greater of $.01 and the dividend declared on each share of common stock, and
will be entitled to 1/100th of a vote, voting together with the shares of common
stock. The Rights will be exercisable only if, without the Company's prior
consent, a person or group of persons acquires or announces the intention to
acquire 20% or more of the Company's common stock. If the Company is acquired
through a merger or other business combination transaction, each Right will
entitle the holder to purchase $120 worth of the surviving company's common
stock for $60. Additionally, if someone acquires 20% or more of the Company's
common stock, each Right not owned by the 20% or greater shareholder would
permit the holder to purchase $120 worth of the Company's common stock for $60.
The Rights are redeemable, at the option of the Company, at $.02 per Right at
any time until ten days after someone acquires 20% or more of the common stock.
The Rights expire in 1999.
As a result of the Rights distribution, 150,000 of the 1,000,000 shares of
authorized Preferred Stock were reserved for issuance as Series A Junior
Participating Preferred Stock.

12. PREFERRED STOCK -- DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED SHARES

During May 1992, the Company issued 3,450,000 Depositary Convertible
Exchangeable Preferred Shares ("Depositary Shares"), each representing 1/10th of
a share of the Company's 6.88% Cumulative Convertible Exchangeable Preferred
Stock ("Preferred Stock"). The net proceeds from the issuance was $82.9 million.
The dividend per annum and liquidation preference for each share of Preferred
Stock were $17.20 and $250, respectively, and for each Depositary Share were
$1.72 and $25, respectively. Dividends on the Preferred Stock and Depositary
Shares were cumulative and payable quarterly, commencing September 30, 1992. The
Company was prohibited from paying any dividends on Common Stock (other than in
Common Stock or junior stock) unless all required preferred dividends had been
paid.
The Preferred Stock was convertible at the option of the holder into shares of
the Company's Common Stock at a conversion price of $31.50 per share, subject to
adjustment in certain events. The Preferred Stock was

53
<PAGE> 23

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

exchangeable at the option of the Company, in whole but not in part, on any
dividend payment date commencing June 30, 1995 for the Company's 6.88%
Convertible Subordinated Debentures due June 30, 2007 ("6.88% Debentures") at
the rate of $250 principal amount of 6.88% Debentures for each share of
Preferred Stock and $25 principal amount of 6.88% Debentures for each Depositary
Share.
On June 30, 1995, the Company exercised its right under the terms of its
Cumulative Convertible Exchangeable Preferred Stock to exchange such stock for
an aggregate of $84,920,000 of its 6.88% Debentures. Interest is payable
semi-annually on June 30 and December 31 of each year. The Debentures are
subject to mandatory annual sinking fund payments sufficient to redeem 25% of
the Debentures issued on each of June 30, 2005 and June 30, 2006, to retire a
total of 50% of the Debentures before maturity. The Debentures are subordinate
to all senior indebtedness of the Company and are convertible, at the option of
the holder, into shares of the Company's common stock at a conversion price of
$31.50 per share.

13. RESTRICTED STOCK AND STOCK OPTION PLANS

The Company has restricted stock and stock option plans which provide for the
granting of common shares or stock options to key employees. Under the Company's
restricted stock plan, common stock may be awarded to key employees. The
recipient is entitled to all of the rights of a shareholder, except that during
the forfeiture period the shares are nontransferable. The award vests during an
eight year period based on the price of the Company's stock. Upon issuance of
stock under the plan, unearned compensation equal to the market value at the
date of grant is charged to stockholders' equity and subsequently amortized to
expense over the restricted period. Restricted shares granted were none in 1995,
22,400 in 1994, and none in 1993. The amount charged to compensation expense was
$53,000 in 1995, $92,000 in 1994 and none in 1993.
Options are granted at prices determined by the Board of Directors which may
not be less than the fair market value of the shares at the time the options are
granted. Unless otherwise provided by the Board at the time of grant, options
become exercisable in 33 1/3% increments maturing cumulatively on each of the
first through third anniversaries of the date of grant and must be exercised no
later than ten years from the date of grant. No options may be granted under the
plans after December 1, 2002. There were 140,151, 435,151, and 652,951 shares
available for granting of options at October 31, 1995, 1994 and 1993,
respectively. Stock option transactions for the three years ended October 31,
1995, were as follows:

<TABLE>
<CAPTION>
Shares Average
Shares Under Price
Exercisable Option Per Share
------------------------------------------
<S> <C> <C> <C>
Balance at October 31, 1992...................................... 190,885 481,871 $16
========
Granted........................................................ 198,700 20
Exercised...................................................... (13,932) 10
Cancelled...................................................... (32,838) 17
---------
Balance at October 31, 1993...................................... 287,412 633,801 17
========
Granted........................................................ 198,800 26
Exercised...................................................... (34,400) 15
Cancelled...................................................... (3,400) 19
---------
Balance at October 31, 1994...................................... 405,299 794,801 19
========
Granted........................................................ 295,000 20
Exercised...................................................... (28,768) 15
Cancelled...................................................... -- --
---------
Balance at October 31, 1995...................................... 567,243 1,061,033 $20
======== =========
</TABLE>

The Company also has a stock option plan which provides for the granting of
stock options to non-employee Directors to purchase up to an aggregate amount of
100,000 shares of common stock. The plan provides that each non-employee
Director and each future non-employee Director as of the first anniversary of
the date of his election as a Director of the Company will be granted an option
to purchase 10,000 shares of common stock at a price per share of common stock
equal to the fair market value of the common stock as of the date of the grant.

54
<PAGE> 24

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

Options become exercisable in 33 1/3% increments maturing cumulatively on each
of the first through third anniversaries of the date of the grant and must be
exercised no later than 10 years from the date of grant. No options may be
granted under the plan after June 22, 1997. There were 40,000 shares available
for granting of options at October 31, 1995, 1994 and 1993. Stock option
transactions for the three years ended October 31, 1995, were as follows:

<TABLE>
<CAPTION>
Shares Average
Shares Under Price
Exercisable Option Per Share
----------------------------------------
<S> <C> <C> <C>
Balance at October 31, 1992......................................... 10,000 10,000 $14
========
Granted........................................................... 10,000 21
Exercised......................................................... -- --
Cancelled......................................................... -- --
------
Balance at October 31, 1993......................................... 10,000 20,000 17
========
Granted........................................................... -- --
Exercised......................................................... -- --
Cancelled......................................................... -- --
------
Balance at October 31, 1994......................................... 13,333 20,000 17
========
Granted........................................................... -- --
Exercised......................................................... -- --
Cancelled......................................................... -- --
------
Balance at October 31, 1995......................................... 16,666 20,000 $17
======== ======
</TABLE>

In addition, the Company has a stock option plan which provides for the granting
of stock options to non-employee Directors to purchase up to an aggregate of
210,000 shares of common stock. The plan provides that each non-employee
Director as of December 6, 1989, was granted an option to purchase 3,000 shares
of common stock at a price per share of common stock equal to the fair market
value of the common stock as of the date of grant. Also, each non-employee
Director who is a director of the Company on any subsequent October 31, while
the plan is in effect and shares are available for the granting of options
hereunder, shall be granted on such October 31, an option to purchase 3,000
shares of common stock at a price equal to the fair market value of the common
stock as of such October 31. Options become exercisable at any time commencing
six months after the grant and must be exercised no later than 10 years from the
date of grant. No option may be granted under the plan after December 5, 1999.
There were 72,000, 93,000, and 114,000 shares available for granting of options
at October 31, 1995, 1994 and 1993, respectively. Stock option transactions for
the three years ended October 31, 1995, were as follows:

<TABLE>
<CAPTION>
Shares Average
Shares Under Price
Exercisable Option Per Share
-----------------------------------------
<S> <C> <C> <C>
Balance at October 31, 1992........................................ 36,000 57,000 $18
========
Granted.......................................................... 21,000 20
Exercised........................................................ (3,000) 11
Cancelled........................................................ -- --
-------
Balance at October 31, 1993........................................ 54,000 75,000 19
========
Granted.......................................................... 21,000 25
Exercised........................................................ (9,000) 15
Cancelled........................................................ -- --
-------
Balance at October 31, 1994........................................ 66,000 87,000 20
========
Granted.......................................................... 21,000 20
Exercised........................................................ -- --
Cancelled........................................................ -- --
-------
Balance at October 31, 1995........................................ 87,000 108,000 $20
======== =======
</TABLE>

On October 1, 1992, Carl E. Pfeiffer retired as the Chief Executive Officer of
the Company. In connection with such retirement, the Company replaced options to
purchase 60,000 shares of Common Stock at a weighted average exercise price of
$15.85 held by Mr. Pfeiffer, under the Company's employee stock option plans
with new options having the same exercise prices and expiration dates. Such
options are substantially similar to the options

55
<PAGE> 25

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

previously held by him with the exception that vesting is not contingent upon
his continued employment with the Company and the options expire on various
dates between October 25, 1999, and October 13, 2001, instead of one year after
retirement. There were 60,000, 60,000 and 50,000 shares exercisable at October
31, 1995, 1994, and 1993, respectively. There were no transactions related to
these stock options during the years ended October 31, 1995 and 1994.

14. FINANCIAL INSTRUMENTS

Required disclosure of fair value of certain financial assets and liabilities,
as well as the methods and assumptions to estimate fair value are as follows:

<TABLE>
<CAPTION>
October 31,
---------------------------------------------
1995 1994
---------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>

Financial assets:
Cash and equivalents........................................ $ 45,213 $ 45,213 $ 34,041 $ 34,041
Short-term investments...................................... -- -- 54,070 53,688
Financial liabilities and equities:
Long-term debt (including current portion).................. $132,862 $129,843 $128,400 $133,792
Preferred stock............................................. -- -- 86,250 83,663
</TABLE>

The fair values of cash and equivalents approximate amounts included in the
balance sheet due to the short-term maturity of the instruments. The fair value
of short-term investments was arrived at using quoted market prices. The fair
value of long-term debt was based on the quoted market price, recent
transactions, or based on rates available to the Company for instruments with
similar terms and maturities. The fair value of preferred stock was calculated
using the quoted market price.
The Company had open financing contracts in a net payable position as of
October 31, 1994 of $1.4 million (none as of October 31, 1995). The fair values
of open financing contracts were the net cash amounts payable in 1995.
The Company uses futures and option contracts to hedge a portion of its
exposure to price fluctuations of aluminum. The exposure is related to the
Company's backlog of aluminum sales orders with committed prices as well as
future aluminum sales for which a sales price increase would lag a raw material
cost increase. Firm price commitments do not extend beyond December, 1996.
Hedging gains and losses are included in "Cost of sales" in the income statement
concurrently with the hedged sales. Unrealized gains and losses related to open
contracts are not reflected in the financial statements.

15. CONTINGENCIES

The Company is subject to extensive federal, state and local environmental laws
and regulations. These laws, which are constantly changing, govern the discharge
of materials in the environment and may require the Company to make
environmental expenditures on an on-going basis. Environmental expenditures are
expensed or capitalized depending on their future economic benefit. The Company
has been identified as potentially responsible for cleanup of several
contaminated sites under the Federal Superfund law or similar statutes. Although
in some circumstances, Superfund might be deemed to impose joint and several
liability upon each responsible party at a site, the extent of the Company's
allocated financial contribution to the cleanup of these sites is expected to be
limited based on the number of companies participating, the volumes of waste
involved, and/or the nature of the Company's alleged connection. Although the
level of reasonably possible future expenditures, if any, beyond amounts already
accrued for environmental purposes, including cleanup obligations, is impossible
to determine with any degree of probability, it is management's opinion that,
based on current knowledge and the extent of such expenditures to date, the
ultimate aggregate cost of environmental remediation will not have a material
adverse effect on the Company's financial condition.

16. SUBSEQUENT EVENT

On December 29, 1995, the Company acquired all of its outstanding 10.77% Senior
Notes for a purchase price equal to 107.5% of the principal amount plus accrued
interest. The acquisition and related expenses will result in a one-time,
after-tax extraordinary charge of approximately $2.5 million in the first
quarter of 1996.

56
<PAGE> 26

Quanex Corporation
SUPPLEMENTARY FINANCIAL DATA

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Selected quarterly information for the years ended October 31, 1995 and 1994 is
as follows:

<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
1995:
Net sales................................................ $199,886 $234,347 $228,172 $228,790
Gross profit............................................. 22,697 29,747 30,156 30,528
Income before extraordinary charge....................... 4,653 9,822 9,603 9,782
Extraordinary charge -- early extinguishment of debt..... (2,021) -- -- --
-------- -------- -------- --------
Net income............................................... 2,632 9,822 9,603 9,782
Earnings per share:
Primary before extraordinary charge.................... .23 .62 .63 .72
Extraordinary charge -- early extinguishment of debt... (.15) -- -- --
Primary................................................ .08 .62 .63 .72
Assuming full dilution................................. .08 .60 .59 .65
1994:
Net sales................................................ $149,522 $172,235 $181,088 $196,469
Gross profit............................................. 14,330 20,383 23,534 27,514
Net income............................................... 1,768 3,777 5,777 7,530
Earnings per share....................................... $ .02 $ .17 $ .32 $ .45
</TABLE>

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Balance Charted
at to Balance
beginning costs and at end of
Description of year expenses Write-offs Other year
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended October 31, 1995................ $ 3,593 $ 574 $ (586) $ -- $ 3,581
Year ended October 31, 1994................ $ 2,025 $ 1,805 $ (237) $ -- $ 3,593
Year ended October 31, 1993................ $ 2,610 $ 13 $ (8) $ (590)(1) $ 2,025
</TABLE>

(1) Relates to sale of Viking Metallurgical Corporation and Bellville Tube
Division (See Note 2).

57
<PAGE> 27

QUARTERLY FINANCIAL RESULTS

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES (millions)
January ................................ 199.89 149.52 141.43 124.88 142.51
April .................................. 234.35 172.23 161.37 148.41 142.64
July ................................... 228.17 181.09 153.50 141.90 152.28
October ................................ 228.79 196.47 159.85 156.90 151.46
- ---------------------------------------------------------------------------------------------------------------------
Total ........................... 891.20 669.31 616.15 572.09 588.89

GROSS PROFIT (millions)
January ................................ 22.70 14.33 11.64 12.04 16.30
April .................................. 29.75 20.38 16.37 18.38 16.81
July ................................... 30.15 23.54 16.92 15.20 20.68
October ................................ 30.53 27.51 20.25 19.69 20.20
- ---------------------------------------------------------------------------------------------------------------------
Total ........................... 113.13 85.76 65.18 65.31 73.99

NET INCOME (LOSS) (millions)
January ................................ 2.63 1.77 .49 (24.55) 2.45
April .................................. 9.82 3.78 1.90 3.15 2.10
July ................................... 9.61 5.77 2.68 2.23 3.49
October ................................ 9.78 7.53 3.36 .26 4.40
- ---------------------------------------------------------------------------------------------------------------------
Total ........................... 31.84 18.85 8.43 (18.91) 12.44

NET EARNINGS (LOSS) PER PRIMARY COMMON SHARE
January ................................ .08 .02 (.07) (2.05) .16
April .................................. .62 .17 .03 .25 .19
July ................................... .63 .32 .09 .08 .29
October ................................ .72 .45 .13 (.09) .38
- ---------------------------------------------------------------------------------------------------------------------
Total ........................... 2.05 .96 .18 (1.70) 1.02

QUARTERLY COMMON STOCK DIVIDENDS
January ................................ .14 .14 .14 .13 .12
April .................................. .15 .14 .14 .13 .12
July ................................... .15 .14 .14 .13 .12
October ................................ .15 .14 .14 .13 .12
- ---------------------------------------------------------------------------------------------------------------------
Total ........................... .59 .56 .56 .52 .48

COMMON STOCK SALES PRICE
(High and Low)
January ................................ 24 5/8-20 21 1/4-16 1/8 27-17 5/8 27-16 1/8 13 3/4-10 1/4
April .................................. 23 7/8-21 22 3/8-19 1/8 20 7/8-14 1/4 29 7/8-24 3/4 18 5/8-13 1/2
July ................................... 26 5/8-22 1/8 23-18 1/8 17 3/4-14 31 3/4-21 1/2 17 3/4-14 1/8
October ................................ 26-18 5/8 27 1/4-20 3/4 20 3/4-16 1/2 24 3/4-15 1/2 23-15 1/4
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE> 1

EXHIBIT 21

Subsidiaries of
<TABLE>
<CAPTION>
Jurisdiction of
QUANEX CORPORATION Incorporation
- ------------------ ---------------
<S> <C>
LaSalle Steel Company Delaware
Michigan Seamless Tube Company Delaware
Quanex Foreign Sales Corporation U.S. Virgin Islands
Quanex Metals, Inc. Delaware
Quanex Wire, Inc. Delaware
Verdi Springs Water Co., Inc. Nevada
</TABLE>

<PAGE> 1

Exhibit No. 23

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statements No.
33-23474, No. 33-29585, No. 33-22550, No. 33-35128, No. 33-38702, No.
33-46824, No. 33-57235, No. 33-54081, No. 33-54085, and No. 33-54087 of Quanex
Corporation on Form S-8 of our report dated November 17, 1995 (December 29,
1995 as to Note 16) appearing in this Annual Report on Form 10-K of Quanex
Corporation for the year ended October 31, 1995.

DELOITTE & TOUCHE LLP
January 22, 1996

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet as of October 31, 1995 and the income statement for the twelve months
ended October 31, 1995 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<CASH> 45,213
<SECURITIES> 0
<RECEIVABLES> 104,240
<ALLOWANCES> 3,581
<INVENTORY> 84,676
<CURRENT-ASSETS> 242,375
<PP&E> 525,325
<DEPRECIATION> 266,761
<TOTAL-ASSETS> 546,747
<CURRENT-LIABILITIES> 165,208
<BONDS> 111,894
<COMMON> 6,743
0
0
<OTHER-SE> 163,783
<TOTAL-LIABILITY-AND-EQUITY> 546,747
<SALES> 891,195
<TOTAL-REVENUES> 891,195
<CGS> 778,067
<TOTAL-COSTS> 778,067
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 574
<INTEREST-EXPENSE> 10,742
<INCOME-PRETAX> 58,380
<INCOME-TAX> 24,520
<INCOME-CONTINUING> 33,860
<DISCONTINUED> 0
<EXTRAORDINARY> 2,021
<CHANGES> 0
<NET-INCOME> 31,839
<EPS-PRIMARY> 2.050
<EPS-DILUTED> 2.030

</TABLE>