ROUGE INDUSTRIES INC, 10-K405, 1999-03-12

ROUGE INDUSTRIES INC
10-K405, 1999-03-12
STEEL WORKS, BLAST FURNACES & ROLLING MILLS (COKE OVENS)

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 1998

[ ] 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 1-12852

ROUGE INDUSTRIES, INC.
----------------------
(Exact name of registrant as specified in its charter)

DELAWARE 38-3340770
-------- ----------

(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

3001 MILLER ROAD, P.O. BOX 1699, DEARBORN, MICHIGAN 48121-1699
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

(313) 317-8900
--------------
(Registrant's telephone number, including area code)

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

Name of each exchange
Title of each class on which registered
------------------- -------------------

Class A Common Stock, $0.01 par value New York Stock Exchange

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

None

Indicate by check mark whether 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]

Based upon the closing price of the Class A Common Stock on February 26,
1999, as reported on the New York Stock Exchange composite tape (as reported by
the Wall Street Journal), the aggregate market value of registrant's Class A
Common Stock held by nonaffiliates of registrant as of such date was
$140,261,482.

The number of shares of common stock issued and outstanding as of February
26, 1999 was 22,102,896. This amount includes 14,540,496 shares of Class A
Common Stock and 7,562,400 shares of Class B Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Selected portions of the 1999 Proxy Statement of Rouge Industries, Inc. are
incorporated by reference into Part III of this Form 10-K to the extent provided
herein.
<PAGE> 2

ROUGE INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE

<S> <C> <C>
Item 1. Business.................................................................... 3

Item 2. Properties.................................................................. 13

Item 3. Legal Proceedings........................................................... 13

Item 4. Submission of Matters to a Vote of Security Holders......................... 13

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........ 16

Item 6. Selected Financial Data..................................................... 17

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 18

Item 8. Financial Statements and Supplementary Data................................. 28

Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................................... 51

PART III

Item 10. Directors and Executive Officers of the Registrant.......................... 52

Item 11. Executive Compensation...................................................... 52

Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 52

Item 13. Certain Relationships and Related Transactions.............................. 52

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 53
</TABLE>

2
<PAGE> 3

PART I

Item 1. Business.

GENERAL

Rouge Steel Company ("Rouge Steel") is the primary operating subsidiary
of Rouge Industries, Inc., a Delaware corporation (together with its
subsidiaries, "Rouge Industries" or the "Company"). Rouge Steel is an integrated
producer of high quality, flat rolled carbon steel products consisting of hot
rolled, cold rolled and galvanized steel. The Company's products generally
command higher margins than commodity flat rolled carbon steel products. The
Company's products generally, and its value-added products specifically, are
sold primarily to customers in the automotive industry which have exacting
quality, delivery and service requirements. The Company's ability to meet these
requirements and its participation in the development of new products designed
for automotive applications have enabled it to expand its sales to automotive
customers. The Company also sells its products to steel converters, service
centers and other end users.

Other wholly-owned subsidiaries of Rouge Industries include QS Steel Inc.
("QS Steel") and Eveleth Taconite Company ("Eveleth"). QS Steel holds minority
ownership interests in five Michigan-based joint ventures. Eveleth holds a 45%
interest in Eveleth Mines LLC ("EVTAC"), a Minnesota-based iron ore mining and
pellet producing operation.

PRODUCTS

The Company currently produces four finished sheet steel products: (i)
hot rolled, which is sold to automotive, converter and service center customers
and other end users; (ii) cold rolled, which is hot rolled steel that is
subsequently cold reduced in thickness, annealed and typically tempered to
enhance ductility and surface characteristics and is sold to automotive,
converter and service center customers and other end users; (iii)
electrogalvanized, which is cold rolled steel that is coated on one or both
sides with either pure zinc or a zinc/iron combination to make the steel more
corrosion resistant and is sold almost exclusively to automotive customers; and
(iv) hot dip galvanized, which is cold rolled steel that is coated on both sides
with zinc or a zinc/iron combination to make the steel more corrosion resistant
and is sold to automotive and service center customers and other end users.

The following table sets forth the percentage of Rouge Industries' steel
product revenues from hot rolled, cold rolled, electrogalvanized and hot dip
galvanized steel for the years from 1996 through 1998.

<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Hot Rolled 44.6 % 49.4 % 47.4 %
Cold Rolled 30.5 29.8 30.6
Electrogalvanized 21.0 20.2 22.0
Hot Dip Galvanized 3.9 0.6 -
----- ----- -----
Total 100.0 % 100.0 % 100.0 %
===== ===== =====
</TABLE>

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Approximately one-half of the Company's sales of hot rolled steel has
been to the automotive market for wheels and structural components such as
suspension arms, frames and seat frames. Rouge Steel also sells hot rolled steel
in the non-automotive end user markets for the manufacture of roof decking,
grating, guard rails and pipes and to converters and service centers to be
further processed or sold directly to other end users. Cold rolled steel is sold
by the Company for use in automotive parts, lighting fixtures, room dividers and
doors, and for unexposed applications such as the manufacture of floor pans and
tubing. Electrogalvanized products are sold to automotive customers for use as
major automotive body panels such as doors, quarter panels and fenders. Hot dip
galvanized products are presently sold to construction and service center
customers. In 1999, the Company will begin to sell hot dip galvanized products
to automotive customers.

One of the Company's primary objectives is to increase its production and
sales of value-added higher margin products. In order to increase the Company's
capability to produce more sophisticated products as well as retain and add
customers, the Company has entered into five Michigan-based strategic joint
ventures:

(i) Shiloh of Michigan, L.L.C. ("Shiloh of Michigan"), a joint venture
with Shiloh Industries, Inc. ("Shiloh") which produces engineered
steel blanks that the Company sells to its automotive customers;

(ii) Spartan Steel Coating, L.L.C. ("Spartan Steel"), a joint venture
with Worthington Industries, Inc. (together with its subsidiaries,
"Worthington") which produces hot dip galvanized steel primarily
for automotive applications;

(iii) TWB Company, L.L.C. ("TWB"), a joint venture with Worthington,
Thyssen Inc., Bethlehem Blank Welding, Inc. and LTV Steel Company,
Inc. which produces laser welded blanks sold primarily for
automotive applications;

(iv) Delaco Processing, L.L.C. ("Delaco Steel Processing"), a joint
venture with Delaco Supreme Tool & Gear Co. which slits and
warehouses steel coils to be sold to automotive customers and other
end users; and

(v) Bing Blanking, L.L.C. ("Bing Blanking"), a joint venture with Bing
Management II, L.L.C. which produces first operation blanks and
rollformed parts primarily for the automotive industry.

Spartan Steel and Bing Blanking began production in the second quarter of
1998 and Delaco Steel Processing began operating in the third quarter of 1998.
The Company has invested approximately $46.8 million in Spartan Steel and $6.5
million in TWB. Shiloh of Michigan has a $30 million credit facility, 20% of
which is guaranteed by the Company. Delaco Steel Processing and Bing Blanking
have credit facilities of $7.3 million and $5 million, respectively, both of
which are guaranteed by the Company. Rouge Industries' participation in these
joint ventures responds to the demand by end users for increasingly complex
products and is intended to mitigate the erosion in sales that might occur if
the Company were unable to provide these products to its current customers. In
addition, participation in these joint ventures may provide opportunities for
the Company to supply new customers.

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MARKETS AND CUSTOMERS

In light of the goal to strengthen long-term customer relationships,
customer service is a key component of Rouge Industries' strategy and
significant resources have been devoted toward that end. The Company has
approximately 200 steel customers, virtually all of which are located within 350
miles of Rouge Steel's integrated facility. The Company believes its proximity
to its customers allows it to provide focused customer service and resources.
The primary goal in this respect is to maintain and improve its responsiveness
to customer needs in a continually changing competitive environment.

Ford Motor Company ("Ford") and DaimlerChrysler AG ("DaimlerChrysler"),
the Company's two largest customers, accounted for approximately 37% and 10%,
respectively, of total sales in 1998. Sales to Ford and Worthington were 32% and
12%, respectively, of total sales in 1997. While the loss of Ford as a customer
could have a materially adverse effect on the Company's business, the Company
believes that its relationship with Ford provides a stable sales base and the
ability to expand its product capability and concentrate on increasing margins
through more efficient production. No single customer, other than Ford,
DaimlerChrysler or Worthington, has accounted for more than 10% of the Company's
total sales over the past five years. The Company's ten largest customers in the
aggregate accounted for approximately 75% of total sales in 1998 and
approximately 77% of total sales in 1997. For 1998, the Company estimates that
its share of the domestic flat rolled steel market, as measured by shipments,
was approximately 5.2%.

The Company's primary customers are in the automotive, converter, service
center and other end user markets. The following table sets forth the percentage
of the Company's steel product revenues from various markets for the years ended
December 31, 1996 through 1998.

<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Automotive 67.0 % 62.0 % 61.7 %
Converters 13.5 19.0 18.6
Service Centers 16.7 15.8 16.3
Other End Users 2.8 3.2 3.4
----- ----- -----
Total 100.0 % 100.0 % 100.0 %
===== ===== =====
</TABLE>

Automotive. The Company is a significant supplier of hot rolled, cold
rolled and electrogalvanized steel to the automotive industry. Car and truck
manufacturers and their parts suppliers require sheet steel with exact
dimensions, enhanced formability and defect-free surfaces. The Company's steel
products have been used in a variety of automotive applications including
exposed and unexposed panels and high strength parts for safety applications and
to achieve weight reduction. The Company supplies sophisticated steel products
to meet the demand for lighter, safer and longer lasting vehicles such as bake
hardenable steel and steel for hot forming, which is used for high strength and
safety applications such as automotive door beams. The automotive market
comprised 67.0% of the Company's steel product revenues in 1998 up from 61.7% in
1996.

Sales to Ford, the Company's largest customer, accounted for
approximately 37% of total sales in 1998, 32% of total sales in 1997 and 30% of
total sales in 1996. In addition to its relationship with Ford, the Company has
diversified its automotive customer base. Until the early

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<PAGE> 6

1990's, the Company sold only a small amount of steel to DaimlerChrysler and had
no direct sales to General Motors Corporation ("GM"). Sales to DaimlerChrysler,
the Company's second largest customer, were approximately 10% of total sales in
1998, 9% of total sales in 1997 and 8% of total sales in 1996. Currently, GM is
the Company's fourth largest customer. The Company believes that its ability to
provide the sophisticated grades of steel required for automotive applications
combined with its ability to provide competitive pricing, quality and delivery
prompted DaimlerChrysler and GM to begin purchasing significant quantities of
hot rolled, cold rolled and electrogalvanized steel from the Company.

Converters. The Company sells hot rolled and cold rolled steel to the
converter market, which includes customers that process steel into a more
finished state such as pipes, tubing and cold rolled strip steel. Although the
converter market is typically more price sensitive than the end user market due
to its reliance on purchases at prevailing prices, it provides the Company with
some sales stability during downturns in the automotive market.

Sales to Worthington, a major steel fabricator and processor and the
Company's third largest customer and second largest shareholder, were
approximately 7% of total sales in 1998 and 12% of total sales in each of 1997
and 1996. Worthington owns approximately 27.2% of the Company's Common Stock
which represents a voting interest of 19.8%.

Service Centers. The Company sells hot rolled, cold rolled and hot dip
galvanized steel to service center customers that provide processing services
such as slitting, shearing and blanking for distribution primarily to automotive
end users. Due to the increased costs for processing services, steel service
centers have become a major factor in the distribution of flat rolled products
to end users.

Direct Sales to Other End Users. The Company sells hot rolled steel to
manufacturers of roof decking, grating, guard rails and pipes. The Company sells
cold rolled steel to manufacturers of lighting fixtures, room dividers and
doors. Steel products are distributed by Rouge Steel principally through its own
sales organization.

Order Status. The order load was 432,000 net tons at December 31, 1998,
compared to 583,000 net tons at December 31, 1997. All orders related to the
order load at December 31, 1998 are expected to be shipped during the first half
of 1999. The order load represents orders received but not yet filled.

RAW MATERIALS AND ENERGY SOURCES

The principal raw materials and energy sources used by Rouge Steel in its
production process are coke, iron ore pellets, steel scrap, natural gas,
electricity, steam, oxygen and nitrogen. Coke, iron ore pellets, electricity,
steam, oxygen and nitrogen are predominantly purchased pursuant to long-term or
annual agreements. The other raw materials are generally purchased in the open
market from various sources. Certain of the purchased raw materials are not
covered by long-term contracts and, therefore, availability and price are
subject to world market conditions.

Coke. Coke represents the Company's single largest raw material
expenditure. The Company does not produce coke and, as a consequence, relies
upon outside sources. In 1998, approximately 42% of the Company's coke was
provided by Bethlehem Steel Corporation ("Bethlehem"). The Company acquired
approximately 31% of its coke through a tolling agreement with New Boston Coke
Corporation ("New Boston"), whose total productive capacity

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is dedicated to the Company. Under the tolling agreement, the Company provides
coal to New Boston for processing into coke. Approximately 27% of the Company's
coke was imported from China or was purchased in the open market. During the
past ten to fifteen years, coke production capacity in the United States has
been reduced. Due to the environmental issues associated with operating coke
ovens, the Company expects coke production capacity to be reduced further in the
next ten years. The coke shortage that may result from the reduction in capacity
may cause the price that the Company pays for coke to increase which may
adversely affect the Company's results of operations.

Iron Ore Pellets. The Company has consumed an average of 3.0 million
gross tons of iron ore pellets annually over the three-year period ended
December 31, 1998. Approximately 75% of the Company's requirements for pellets
during this period was obtained under a trade arrangement with Stelco, Inc.
Under this arrangement, the Company exchanged acid pellets purchased from its
45% owned joint venture, EVTAC (or its predecessor Eveleth), for fluxed pellets
or acid pellets with a higher manganese content, which are used to enhance blast
furnace productivity. The Company is required to pay a cash premium indexed to
inflation factors in addition to providing the EVTAC acid pellets. The premium
is equal to the difference between the market price of the fluxed pellets and
the market price of EVTAC acid pellets. During the three-year period ended
December 31, 1998, the Company traded an average of 2.3 million gross tons of
Eveleth/EVTAC pellets annually, which constituted 100% of the Company's share of
the pellets produced by Eveleth/EVTAC. The balance of the Company's pellet
requirements was purchased pursuant to a contract with The Cleveland-Cliffs Iron
Company.

The iron ore reserves of EVTAC are sufficient to provide the Company with
an estimated 25-year supply at the current level of production. The Company and
the other owners of EVTAC are currently in discussions regarding EVTAC's
operations and activities. These discussions and any subsequent resulting
actions may affect, among other things, the cost and availability of iron ore
pellets, the timing of EVTAC employee benefit liability recognition and funding
requirements and recognition of other obligations relating to the mining
operations.

Scrap. The price of steel scrap dropped dramatically during 1998. The
price of #1 industrial bundles, the steel scrap which constitutes the largest
portion of the Company's scrap purchases, decreased by 56% between the end of
1997 and the end of 1998. The lower price reflects increased supply, primarily
resulting from the high level of steel imports that arrived in the U.S. in the
second half of 1998. The Company spent approximately $99 million to purchase
steel scrap in 1998 compared to $114 million in 1997.

Other Raw Materials and Energy Sources. During 1998, natural gas,
electricity and steam constituted 46%, 40% and 14%, respectively, of the
Company's total energy costs. Natural gas is acquired at prevailing market
prices from various producers. The Company purchases electricity from DTE Energy
Company (together with its subsidiaries, "DTE") for its ladle refining and
electrogalvanizing facilities. The Company owns a 60% interest in a 345 megawatt
powerhouse (the "Powerhouse") that is managed and operated by Ford (which owns
the other 40%). Pursuant to an operating agreement with Ford (the "Powerhouse
Joint Operating Agreement") which expires December 31, 1999, the Powerhouse
provided the rest of the electricity consumed by the Company, as well as all of
its steam requirements. In December, 1998, Rouge Steel and Ford signed an
agreement for long-term energy services with CMS Energy Corporation (together
with its subsidaries, "CMS") which, along with DTE, will build and operate a
co-generation power plant. The new power plant is expected to be in operation by
mid 2000. On February 1, 1999, an explosion and fire at the Powerhouse curtailed
the supply of utilities which resulted in the

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temporary idling of the Company's steel making facilities as well as the Ford
facilities in the Rouge complex. Restoration of most of the utilities that were
provided by the Powerhouse was accomplished through a combination of new lines
from DTE and temporary generators and package boilers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Powerhouse Explosion."

The Company has a long-term contract for the supply of oxygen and
nitrogen with Praxair, Inc. which expires in 2005. The contract contains annual
minimum oxygen and nitrogen purchase levels of $8.3 million and $550,000,
respectively.

COMPETITION

The Company competes directly with domestic and foreign flat rolled
carbon steel producers and producers of plastics, aluminum and other materials
which can be used in place of flat rolled carbon steel in manufactured products.
The Company competes principally on the basis of quality, price and the ability
to meet customers' product specifications and delivery schedules. The Company
believes, however, that its competitive position in the steel industry is
strengthened by, among other things, (i) substantially reduced postretirement
expenses resulting from certain agreements with Ford, (ii) environmental
indemnifications from Ford until 2009, (iii) substantial capital investments
during the past four years in steel-making equipment and downstream joint
ventures, (iv) a single-site, geographically strategic location, and (v)
financial flexibility.

Imports. Domestic steel producers face significant competition from
foreign producers. Decisions by these foreign steel producers with respect to
production and sales may be influenced to a greater degree by political and
economic policy considerations than by prevailing market conditions.

Steel imports in 1998 are estimated to be 41.3 million tons, a 32%
increase over 1997 levels. This import level results from the depressed economic
conditions in other parts of the world, particularly in the Pacific Basin and
Russia. Imports as a percentage of apparent domestic consumption, including
semifinished steel, averaged approximately 30% in 1998, an all time high. In the
previous five years (1993 through 1997), steel imports averaged 26.9 million
tons, or 22.5% of apparent domestic consumption. Antidumping and countervailing
duty petitions were filed in September 1998 by a group of domestic steel
companies on hot rolled steel against three countries. In November, the
International Trade Commission made a preliminary determination that injury did
occur and to proceed with the investigation. The investigation is presently
proceeding.

Domestic Steel Industry. The domestic steel industry is a cyclical
business that is highly competitive. In the United States, the Company competes
with many domestic integrated steel companies. The Company also competes with
electric furnace based mini-mills, which generally target regional markets, have
reduced environmental maintenance costs and liabilities and derive certain
competitive advantages by utilizing less capital intensive steel-making
processes. The capability of electric furnace based, thin slab mini-mills to
produce flat rolled steel products is increasing. In the future, these
mini-mills may provide increased competition in the higher quality, value-added
product lines now dominated by the integrated steel producers. New mini-mills
that produce flat rolled steel and improvements in the production efficiencies
of integrated mills have increased overall production capacity in the United
States, which has caused downward price pressure. The ability of mini-mill
producers to capture a significant percentage

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of the sheet steel markets, which represented approximately half of domestic
industry shipments in 1998, cannot presently be determined due to operating cost
and product quality issues associated with thin-slab technology. In addition,
the availability and fluctuations in the cost of scrap, the primary raw material
for mini-mill steel production, may influence the ability of mini-mills to
compete with domestic integrated producers.

A number of integrated steel producers have gone through bankruptcy
reorganizations. These proceedings have resulted in reduced operating costs for
these producers and may permit them to price their steel products at levels
below those that could otherwise be maintained. The Company believes, however,
that due to its lower labor costs and reduced exposure to historical
environmental liabilities resulting from certain agreements with Ford, as well
as limited levels of indebtedness since the Company's initial public offering,
the Company is in a better position to compete with these companies than many of
its competitors.

Steel Substitutes. In the case of many steel products, there is
substantial competition from other products, including plastics, aluminum,
ceramics, glass, wood and concrete. However, the Company, to a limited degree,
and certain other manufacturers of steel products have begun to compete in
recent years in markets not traditionally served by steel producers, including
the markets for steel construction studs and steel frames for houses.

EMPLOYEES

At December 31, 1998, the work force of Rouge Steel was comprised of
2,463 hourly and 645 salaried personnel, including Rouge Steel employees working
at Double Eagle Steel Coating Company ("Double Eagle"). The Company's employment
cost per ton shipped in 1998 was $94, which the Company believes was one of the
lowest among domestic integrated steel producers, and tons shipped per employee
was approximately 850 in 1998, which the Company believes is one of the highest
in the steel industry.

Hourly employees of Rouge Steel are represented by the International
Union, United Automobile, Aerospace and Agricultural Implement Workers of
America, UAW (the "UAW"). Most of the hourly employees of the Company's
competitors are represented by the United Steelworkers of America (the "USWA")
and are subject to USWA-patterned agreements. In 1995, Rouge Steel and the UAW
executed a labor agreement with a five-year term and no provision to renegotiate
prior to expiration. The labor agreement includes provisions for employment
security and profit sharing. The Company believes that it continues to maintain
a good relationship with the UAW. EVTAC workers, who are employed by Thunderbird
Mining Company, a wholly-owned subsidiary of EVTAC, are represented by the USWA.
The agreement between the USWA and Thunderbird Mining Company will be in effect
through July 31, 1999.

ENVIRONMENTAL CONTROL AND CLEANUP EXPENDITURES

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environmental laws and regulations are becoming increasingly more stringent, the
Company's environmental capital expenditures and costs for environmental
compliance may increase in the future. In addition, due to the possibility of
unanticipated regulatory or other developments, the amount and timing of future
environmental expenditures may vary substantially from those currently
anticipated. The costs for current and future environmental compliance may also
place domestic steel producers at a competitive disadvantage with respect to
foreign steel producers, which may not be required to undertake equivalent costs
in their operations, and manufacturers of steel substitutes, which are subject
to less stringent environmental requirements.

Under the Comprehensive Environmental Response Compensation and Liability
Act of 1980, as amended ("CERCLA"), the U.S. Environmental Protection Agency
(the "U.S. EPA") has the authority to impose joint and several liability for the
remediation of contaminated properties on waste generators, current and former
site owners and operators, transporters and other potentially responsible
parties regardless of fault or the legality of the original disposal activity.
Many states have statues and other authorities similar to CERCLA. Domestic steel
producers have spent, and can be expected to spend in the future, substantial
amounts for compliance with these environmental laws and regulations.

In connection with the acquisition of the Company from Ford in 1989 (the
"Acquisition"), Ford has agreed to indemnify the Company (the "Ford Indemnity")
for any liability arising out of an environmental condition existing prior to
the Acquisition or a subsequent change in law relating to such condition that
results in an environmental claim under any federal or state environmental law,
including CERCLA, the Resource Conservation and Recovery Act ("RCRA"), the Clean
Water Act, the Safe Drinking Water Act, the Clean Air Act and the Occupational
Safety and Health Act of 1970 or an environmental claim based upon a release of
a material of environmental concern. An environmental claim includes, among
other things, the costs associated with the release of any pollutants,
contaminants, toxic substances and hazardous substances into the environment.
The Ford Indemnity provides that Ford pay the Company's liabilities, including
any penalties and attorney's fees, in connection with any environmental claim
relating to a pre-Acquisition condition. The Ford Indemnity terminates on
December 15, 2009. In some instances, Ford has acted proactively; in others, it
has denied responsibility. The submitted claims include asbestos removal, CERCLA
liabilities, National Pollutant Discharge Elimination System permit violations,
underground storage tank removal, transformer replacement and transformer
removal and disposal. The Company does not believe the rejection by Ford of any
claims made under the Ford Indemnity will have a materially adverse effect on
the Company's results of operations or financial position.

In late 1995, the existence of material containing polychlorinated
biphenyls ("PCBs") was noted within a containment area of an electrical
substation in the cold mills. Upon further investigation, the Company discovered
PCB contamination in the diked area surrounding one transformer, on the floor of
the substation, in the hydraulically isolated floor drain system in the
substation, at one sump servicing this floor drain system, and in four
electrical manholes. The sump and floor drains have been remediated. The
investigation and cleanup of PCB contamination in the manholes is proceeding. At
this point, management believes that the costs and projected costs associated
with this investigation will not have a materially adverse effect on the
Company's results of operations or financial position. As of December 31, 1998,
the Company had spent approximately $1.2 million for the investigation and
cleanup. The Company believes that these costs are subject to the Ford Indemnity
and has filed a claim with Ford. Negotiations with Ford continue regarding this
indemnity claim. The Company has not recorded an asset in anticipation of
recovery pursuant to the Ford Indemnity.

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In 1990, Congress passed amendments to the Clean Air Act which impose
more stringent standards on air emissions. Pursuant to Title V of the Clean Air
Act Amendments of 1990, the Company submitted an application for a facility
operating permit in 1997 with amendments in April, 1998. The Company was advised
that the application and the amendment were administratively complete. It is
expected to take approximately one year for final approval.

In April 1998, the Company and the Wayne County Air Pollution Control
Division (the "Division") entered into a consent order resolving certain notices
of violation ("NOVs") and issues involving the basic oxygen furnace
electrostatic precipitator and the blast furnace flare stack. The settlement
agreement includes performance of a supplemental environmental project ("SEP")
for the installation of a waste oxide dryer, a project undertaken in connection
with the enforcement action for violations or applicable operating conditions
and emission standards at operations other than the waste oxide dryer. This
dryer is intended to secure significant additional environmental and public
health improvements. The settlement agreement imposed a $125,000 penalty,
stipulated penalties for future violations, a compliance program, and a
five-year term.

In February 1999, the Company and the Division executed a settlement
agreement resolving certain NOVs for events which occurred in 1997 and 1998. The
penalty amount was $140,000, with an SEP for design improvements to the basic
oxygen furnace ("BOF") off-gas conditioning system, a project undertaken in
connection with the enforcement action for violations of applicable operating
conditions and emission standards at operations other than the BOF.

During meetings with the Division, the Company voluntarily disclosed its
failure to obtain a construction and operating permit for an operational change
previously thought to be exempt from the air permitting requirements. A permit
application has been submitted for that change to both the Division and the
Michigan Department of Environmental Quality. The preliminary nature of the
discussions with the Division regarding this issue makes it difficult to predict
the outcome or its impact on the Company's results of operations or financial
position.

In 1997, the Company received a notice from the Corporation Counsel of
the City of Melvindale (the "City") of the City's intention to sue the Company
for alleged release of particulates into the air and violations of the County of
Wayne permit. The Company is currently in discussions with the City in an
attempt to resolve this matter prior to the filing of any lawsuit. However, the
City has also made damage claims on behalf of approximately 50 residents who
claim to have incurred property damage as a result of dust fallout which
occurred during the second half of 1997. Each of these claims appear to be for
an amount of less than $2,000. In addition, two court actions are pending in the
State of Michigan 24th District Court seeking damages, in each instance of not
more than $50,000. The Company does not believe that it was the source of dust
which allegedly caused this property damage. The Company intends to vigorously
defend the property damage claims. Management believes that the potential impact
of this matter will not have a materially adverse impact on the Company's
results of operations or financial position.

In September, 1998, U.S. EPA Region 5 commenced a multimedia
investigation of Rouge Steel's facility. U.S. EPA has discussed several issues
with the Company and, to date, has issued one Notice of Violation alleging
certain violations of the Clean Air Act. U.S. EPA requested that the Company
furnish information in accordance with Section 114(a) of the Clean Air Act. The
Company furnished information to the U.S. EPA in October, 1998. U.S. EPA then
requested that the Company furnish information in accordance with Section 3007
of RCRA which the Company excess of $100,000.

11
<PAGE> 12

Also in connection with the multimedia inspection, in January 1999, the
Company received a letter from U.S. EPA identifying several non-complying
conditions with respect to spill control requirements. Penalties may be
incurred, but none have been specified to date. Any penalties from the
non-complying spill control conditions are not expected to have a materially
adverse impact on the Company's results of operations or financial position.

Rouge Steel has received a series of NOVs from the Wayne County Air
Quality Division spanning August 1, 1998 through September 18, 1998, alleging
violation of air rules, characterizing the facility's emission fallout as a
nuisance condition resulting in an unreasonable interference with the
comfortable enjoyment of life and property. Rouge Steel has denied the
allegations contained in the NOVs. The preliminary nature of the NOVs and Rouge
Steel's response make it difficult to predict the outcome or its impact on the
Company's results of operations and financial position.

RESEARCH AND DEVELOPMENT

The Company does not incur material expenses in research and development
activities but does participate in various research and development programs.
The Company addresses research and development requirements and product
enhancement by maintaining a staff of technical support, quality assurance and
engineering personnel. The Company also participates in joint projects with the
American Iron and Steel Institute.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995

The matters discussed in this Annual Report on Form 10-K include certain
forward-looking statements that involve risks and uncertainties. These
forward-looking statements may include, among others, statements concerning
projected levels of production, sales, shipments and income, pricing trends,
cost reduction strategies, product mix, anticipated capital expenditures and
other future plans and strategies.

As permitted by the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Rouge Industries is identifying in this Annual
Report on Form 10-K a number of factors which could cause the Company's actual
results to differ materially from those anticipated. These factors include, but
are not necessarily limited to, (i) changes in the general economic climate,
(ii) the supply of and demand for steel products in the Company's markets, (iii)
pricing of steel products in the Company's markets, (iv) potential environmental
liabilities, (v) the availability and prices associated with raw materials,
supplies, utilities and other services and items required by the Company's
operations, (vi) uncertainty related to the Powerhouse explosion (vii)
uncertainty related to Year-2000 readiness and (viii) higher than expected
operating costs.

12
<PAGE> 13

Item 2. Properties.

Rouge Steel's integrated single-site facility is located on a 457-acre
industrial site adjacent to Ford's stamping, engine, glass, frame and assembly
plants in Dearborn, Michigan. The Rouge Steel facility is strategically located
in the heart of the automotive manufacturing region and in an area where many
customers of flat rolled steel are situated. The Company believes that Rouge
Steel's single-site location is a strategic advantage because it permits reduced
transportation costs, increased efficiencies and better management response
times.

Rouge Steel's facilities include three blast furnaces (one of which has
been idle since 1988), two basic oxygen furnaces, two electric arc furnaces
(which have been idle since 1992), two ladle refining facilities, a vacuum
degassing facility, one three-strand continuous caster, one hot strip mill,
three pickle lines, one tandem mill, two annealing facilities (one of which is a
hydrogen annealing facility), two temper mills, two slitters and one recoil
welder. In addition, Rouge Steel owns a 50% interest in Double Eagle, the
world's largest electrogalvanizing facility and a 60% interest in the Powerhouse
that is managed by Ford (which owns the other 40%). On February 1, 1999, an
explosion and fire at the Powerhouse curtailed the supply of utilities which
resulted in the temporary idling of the Company's steel making facilities. It is
uncertain whether the Powerhouse will be operational in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Powerhouse Explosion". Prior to the Powerhouse explosion, Ford and
Rouge Steel had entered an agreement for long-term energy services with CMS
which, along with DTE, will build and operate a co-generation power plant to
begin operating in mid-2000. Along with Rouge Steel's properties, Rouge
Industries owns (i) a 48% interest in Spartan Steel, a cold rolled hot dipped
galvanizing facility; (ii) a 20% interest in Shiloh of Michigan, an engineered
steel blanking facility; (iii) a 45% interest in EVTAC, an iron ore mining and
pellet producing facility; (iv) an 11.1% interest in TWB, a producer of laser
welded blanks; (v) a 49% interest in Delaco Steel Processing, a steel processor
and (vi) a 40% interest in Bing Blanking, a steel blanker and producer of roll
formed parts.

Item 3. Legal Proceedings.

Residents of the City of Melvindale (a suburb in close proximity) have
filed a class action lawsuit against the Company. The lawsuit claims trespass,
nuisance and negligence as a result of alleged air pollution over an unspecific
period of time including the period from March to June of 1997. Since damage
calculations have not yet been performed, it is currently not possible to
determine either the level of the Company's monetary exposure or the likely
outcome of the lawsuit.

In addition to the matter discussed above, from time to time, Rouge
Industries is involved in routine litigation incidental to its business. The
Company believes that such other current proceedings, individually or in the
aggregate, will not have a materially adverse effect on the Company's results of
operations or financial condition.

Item 4. Submission of Matters to a Vote of Security Holders.

There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.

13
<PAGE> 14

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth, as of December 31, 1998, certain
information with respect to the executive officers of the Company. Executive
officers are chosen by the Board of Directors of the Company at the first
meeting of the Board after each annual meeting of stockholders. Officers of the
Company serve at the discretion of the Board of Directors and are subject to
removal at any time. There is no family relationship among any of the officers
or directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------

<S> <C> <C>
Carl L. Valdiserri................. 62 Chairman and Chief Executive Officer
Louis D. Camino.................... 61 President and Chief Operating Officer
Gary P. Latendresse................ 55 Executive Vice President and Chief Financial Officer
Dennis T. Crosby................... 55 Vice President, Engineering and Technology
William E. Hornberger.............. 52 Vice President, Employee Relations and Public Affairs
George T. Kilavos.................. 67 Vice President, Production Planning
Daniel A. Marion................... 60 Vice President, Purchasing and Transportation
Ronald J. Nock..................... 46 Vice President, Sales and Marketing
Martin Szymanski................... 45 Secretary and General Counsel
</TABLE>

BUSINESS EXPERIENCE

Mr. Valdiserri has been Chairman and Chief Executive Officer of the
Company since 1989. From 1987 until 1989 he was an independent consultant
regarding the steel industry, principally to The Chase Manhattan Bank, N.A. From
1982 until 1987, Mr. Valdiserri was Executive Vice President of Weirton Steel
Company. Mr. Valdiserri joined the Weirton Division of National Steel
Corporation in 1978. He was Chief Engineer in the Great Lakes Division of
National Steel Corporation from 1973 to 1978 and held various other engineering
positions from 1964 to 1972. He began his career with Wheeling-Pittsburgh Steel
Corporation in 1958. Mr. Valdiserri has 39 years of experience in the steel
manufacturing industry. Mr. Valdiserri is also a director of Champion
Enterprises, Inc.

Mr. Camino has served as President and Chief Operating Officer, as well
as a director of the Company, since 1990. Mr. Camino was Vice President of
Operations for Acme Steel Company from 1986 to 1990. Mr. Camino began his career
with Jones and Laughlin Steel Corporation as a supervisor in 1960, and has 38
years of experience in the steel manufacturing industry.

Mr. Latendresse has been Executive Vice President and Chief Financial
Officer since January 1, 1998. From 1992 to 1997, Mr. Latendresse was Vice
President and Chief Financial Officer. He became a director of the Company in
1992. He was Vice President, Finance and Controller from 1987 until 1992. Mr.
Latendresse has held various financial positions with the Company and Ford for
30 years. Mr. Latendresse has 30 years of experience in the steel manufacturing
industry. Mr. Latendresse is also the Treasurer and Assistant Secretary of the
Company.

Mr. Crosby has been Vice President, Engineering and Technology since
1989. Mr. Crosby previously served as General Manager of Engineering and
Environmental Affairs at Inland Steel

14
<PAGE> 15

Company where he was employed between 1967 and 1989. Mr. Crosby has 31 years of
experience in the steel manufacturing industry.

Mr. Hornberger has been Vice President, Employee Relations and Public
Affairs since 1992. From 1987 to 1992, he was Vice President, Employee
Relations. Mr. Hornberger has held various employee relations positions at Rouge
Steel and Ford since 1973. He has 15 years of experience in the steel
manufacturing industry.

Mr. Kilavos has been Vice President, Production Planning since 1990. From
1984 to 1990, Mr. Kilavos was Director, Production Planning at Weirton Steel
Company. He previously held various materials management positions at Weirton
Steel Company and National Steel Corporation. Mr. Kilavos has 37 years of
experience in the steel manufacturing industry.

Mr. Marion has been Vice President, Purchasing and Transportation since
1995. From 1988 to 1995, Mr. Marion was Procurement Manager, Purchasing and
Supply Staff, Ford Motor Company. He previously held various purchasing
positions during his 34 years with Ford, including more than ten years of steel
purchasing experience.

Mr. Nock has been Vice President, Sales and Marketing since 1988. Mr.
Nock held various positions at the Company since 1982, including Manager of
Sales and Sales Representative. He has 23 years of experience in the steel
manufacturing industry.

Mr. Szymanski has served as Secretary and General Counsel since January
1, 1998. From January 1997 to December 1997, he was Associate General Counsel of
the Company. From 1990 through 1996, he served as General Counsel and Assistant
Secretary of Modern Engineering, Inc., a Warren, Michigan-based tier one
automotive technical services, prototype and assembly tooling supplier. Prior to
that, he held key legal assignments at Stroh Brewery Company and Fruehauf
Corporation. Mr. Szymanski has over 20 years of corporate and private practice
legal experience.

15
<PAGE> 16

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.

As of December 31, 1998, there were (i) 14,521,538 shares of class A
common stock, par value $0.01 per share (the "Class A Common Stock"), issued and
outstanding and held by approximately 7,000 stockholders of record, and (ii)
7,562,400 shares, of class B common stock, par value $0.01 per share (the "Class
B Common Stock" and together with the Class A Common Stock, the "Common Stock"),
issued and outstanding and held by two stockholders of record. As of December
31, 1998, Carl L. Valdiserri and Worthington held 7,140,400 and 422,000 shares,
respectively, of Class B Common Stock. The principal market for the Class A
Common Stock is the New York Stock Exchange, Inc. (the "NYSE"). The Class B
Common Stock is not listed for trading on any securities exchange.

Quarterly cash dividends of $0.03 per share of Common Stock were paid on
January 24, April 25, July 25, and October 24, 1997, January 23, April 24, July
24 and October 23, 1998 and January 22, 1999. Future dividends on the Common
Stock are payable in cash or shares of Class A Common Stock, at the discretion
of the Board of Directors of the Company. The Company's Certificate of
Incorporation provides that (i) no dividends be paid on the Class B Common Stock
unless a dividend (equal to the dividend declared and paid to the holders of
Class B Common Stock) is declared and paid on the Class A Common Stock and (ii)
any dividend paid on the Class B Common Stock will be paid only in shares of
Class A Common Stock or cash. Holders of Class A Common Stock and Class B Common
Stock will be entitled to share ratably, as a single class, in any dividends
paid on the Common Stock. The declaration and payment of dividends on the Common
Stock will be subject to a quarterly review by the Board of Directors of the
Company. The timing and amount of dividends, if any, will depend, among other
things, on the Company's funding obligations with respect to profit sharing
plans, results of operations, financial condition, cash requirements,
restrictions, if any, in loan agreements, obligations with respect to preferred
stock, if any, and other factors deemed relevant by the Board of Directors.

The Company's Class A Common Stock has been listed for trading on the
NYSE since March 29, 1994 under the symbol ROU. The following table sets forth,
for the periods indicated, the high and low sales prices of the Company's Class
A Common Stock. The closing sale price of the Company's Class A Common Stock on
February 26, 1999 was $9.94.

<TABLE>
<CAPTION>
1998 HIGH LOW
- ---- ----- ---
<S> <C> <C>
First Quarter............................................ $16.13 $12.13
Second Quarter........................................... 16.00 10.75
Third Quarter............................................ 12.75 7.13
Fourth Quarter........................................... 10.63 6.25

1997 HIGH LOW
- ---- ----- ---
First Quarter............................................ $21.50 $14.88
Second Quarter........................................... 17.25 14.38
Third Quarter............................................ 19.00 14.75
Fourth Quarter........................................... 16.50 11.94
</TABLE>

16
<PAGE> 17

Item 6. Selected Financial Data.

The Statement of Operations data and Balance Sheet data in the following
table present selected historical consolidated financial information derived
from the historical consolidated financial statements of the Company as of and
for each of the years in the five-year period ended December 31, 1998. This
information should be read in conjunction with the historical consolidated
financial statements of the Company and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 18.

<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Sales $1,163.2 $1,341.6 $ 1,307.4 $ 1,206.6 $ 1,236.1
Operating Income 35.1 31.7 24.7 121.6(1) 103.0
Net Interest Income (Expense) 0.7 0.8 4.8 5.4 (2.5)
Income Tax (Provision) Benefit (8.7) (8.1) (6.9) (33.5) 8.3
Net Income 23.4 22.4 23.4 94.7(1) 105.6

Per Share Data
Net Income - Basic and Diluted $ 1.06 $ 1.02 $ 1.07 $ 4.37 $ 5.21
Cash Dividends Declared 0.12 0.12 0.12 0.10 0.06
Weighted Average Shares Outstanding (000) 22,025 21,939 21,845 21,677 20,262
</TABLE>

<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in millions)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital $ 212.4 $ 177.2 $ 216.6 $ 294.2 $ 268.3
Property, Plant, and Equipment, Net 258.1 268.6 209.2 135.7 80.4
Total Assets 768.9 728.5 682.0 672.5 616.8
Long-Term Debt 29.0 17.9 -- -- --
Stockholders' Equity 459.6 438.6 417.3 393.9 295.7
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Net Tons Shipped (000) 2,630 3,029 2,876 2,542 2,643
Raw Steel Production (Mils) NT 3.1 2.8 2.6 2.9 3.0
Effective Capacity Utilization 94% 91% 84% 96% 102%
Continuously Cast Percentage 100 100 95 92 88
Purchased Slabs (000) NT 76 619 843 -- --
Number of Employees at Year-End (2) 3,108 3,128 3,119 3,167 3,194
Average Hourly Labor Rate (3) $ 30.25 $ 30.43 $ 30.81 $ 32.40 $ 30.02
Total Sales per Employee (000) (2) 374 429 419 381 387
Hours Worked per Net Ton Produced (2) 2.81 2.81 2.89 3.14 2.92
Operating Income per Net Ton Shipped $ 13 $ 10 $ 9 $ 48(1) $ 39
Capital Expenditures (Mils) (4) 31.8 112.4 101.5 69.4 29.2
</TABLE>

(1) Operating income and net income for the year ended December 31, 1995
include the effect of a $30.0 million (or $12 per net ton shipped) pre-tax
gain from the settlement of certain litigation relating to property tax
assessment matters.

(2) Includes all hourly and salaried employees.

(3) Includes $0.29 per hour in 1998, $0.35 per hour in 1997, $0.49 per hour in
1996, $1.94 per hour in 1995 and $1.54 per hour in 1994 paid or accrued
pursuant to the Rouge Steel Company Profit Sharing Plan for Hourly
Employees.

(4) Includes capital expenditures paid or accrued and investments in
unconsolidated subsidiaries.

17
<PAGE> 18

Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.

OVERVIEW

The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the Consolidated Financial Statements
which begin on page 28.

Rouge Steel Company ("Rouge Steel") is the primary operating subsidiary
of Rouge Industries, Inc., a Delaware corporation (together with its
subsidiaries, "Rouge Industries" or the "Company"). Rouge Steel is an integrated
producer of high quality, flat rolled steel products consisting of hot rolled,
cold rolled and galvanized steel. In recent years, the Company has emphasized
the production of value-added flat rolled carbon steel products that require
additional processing and generally command higher margins than commodity flat
rolled carbon steel products. The Company's products generally, and its
value-added products specifically, are sold primarily to customers in the
automotive industry which have exacting quality, delivery and service
requirements. The Company also sells its products to steel converters, service
centers and other end users.

Other wholly-owned subsidiaries of Rouge Industries include QS Steel Inc.
("QS Steel") and Eveleth Taconite Company ("Eveleth"). QS Steel holds minority
ownership interests in five Michigan- based joint ventures. Eveleth holds a 45%
interest in Eveleth Mines LLC ("EVTAC"), a Minnesota-based iron ore mining and
pellet producing operation.

Rouge Steel's operations are subject to the cyclicality of the steel
industry and the domestic economy as a whole. Given the inherent cyclicality of
the domestic steel industry, the Company believes it is important to maintain
financial flexibility in order to take advantage of opportunities to reduce
costs and upgrade the quality and mix of its products. Rouge Industries believes
that its strong balance sheet combined with its plan to reduce operating costs
will position the Company to continue to pursue its business strategy throughout
the economic cycle and to respond to the continually changing needs of its
customers.

The following table summarizes the annual raw steel capacity, raw steel
production, utilization rates and finished shipment information for the domestic
steel industry (as reported by the American Iron and Steel Institute) and for
Rouge Steel for the years from 1996 through 1998:

<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
1998 1997 1996
---- ---- ----
(in millions of tons except utilization)

DOMESTIC INDUSTRY
<S> <C> <C> <C>
Raw Steel Capacity 124.9 121.1 116.1
Raw Steel Production 107.3 106.7 105.3
Utilization 85.9 % 88.1 % 90.7 %
Finished Shipments 102.1 105.5 100.9

ROUGE STEEL
Raw Steel Capacity 3.3 3.1 3.0
Raw Steel Production 3.1 2.8 2.6
Utilization 94.3 % 91.2 % 84.3 %
Finished Shipments 2.6 3.0 2.9
</TABLE>

18
<PAGE> 19

The cyclicality of the steel industry and the domestic economy affects
the Company's steel product prices. To protect itself from the volatile nature
of prices in the domestic steel industry, the Company sells approximately two
thirds of its steel products pursuant to fixed price contracts, under which
prices are typically set annually. In 1991, when domestic steel industry
production and shipments were low, the Company's steel product prices reached a
nine-year low. In 1993, prices began to rise and in 1994 they reached the
highest level since 1988. By mid-1995, however, prices began to soften despite
the continuing strong demand for the Company's products. During the second half
of 1995, the Company lost approximately one half of the pricing gains which it
realized in 1993 and 1994. Prices in 1996 made a modest recovery from late-1995
levels, but nevertheless remained lower than average 1995 prices. In 1997,
prices declined slightly from 1996 levels despite strong demand for the
Company's products. In 1998, prices declined again, partially as a result of the
unprecedented levels of imports.

Total Sales. The Company's total sales are a function of net tons
shipped, prices and mix of products. The following table sets forth the
percentage of the Company's steel product revenues represented by each of its
product types for each of the years from 1996 through 1998:

<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Hot Rolled 44.6 % 49.4% 47.4%
Cold Rolled 30.5 29.8 30.6
Electrogalvanized 21.0 20.2 22.0
Hot Dip Galvanized 3.9 0.6 --
----- ----- -----
Total 100.0 % 100.0% 100.0%
===== ===== =====
</TABLE>

Sales to affiliates are comprised primarily of sales to Worthington,
Rouge Industries' third largest customer and second largest shareholder.
Worthington owns approximately 27.2% of the Company's common stock which
represents a voting interest of 19.8%.

Costs of Goods Sold. The principal elements constituting Rouge
Industries' costs of goods sold are raw materials, labor and energy. Outside
processing costs represent a growing element of the Company's costs of goods
sold. The major raw materials and energy used by the Company in its production
process are coke, iron ore pellets, steel scrap, natural gas, electricity,
steam, oxygen and nitrogen.

Iron ore pellets are purchased from EVTAC pursuant to a pellet purchase
agreement which expires in 2002. The Company's wholly-owned subsidiary, Eveleth,
holds a 45% interest in EVTAC.

Rouge Steel's hourly production and maintenance employees are
represented by the International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America, UAW and are working under a labor
contract which expires on August 1, 2000. The collective bargaining agreement,
which has a term of five years, contains no provision to renegotiate prior to
its expiration.

Outside processing costs, which are principally costs for value-added
processing that the Company cannot perform at Rouge Steel's integrated facility,
have always been an element of the Company's costs of goods sold. The Company's
joint ventures will increase the use of outside processing and related costs.
However, Rouge Industries believes that the incremental revenue generated from
additional sales of value-added products produced by the joint ventures will
exceed such cost increases.

19
<PAGE> 20

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997

Total Sales. Total sales decreased 13.3% in 1998 to $1,163.2 million
from $1,341.6 million in 1997, a decrease of $178.4 million. The decrease in
total sales was caused by lower shipments and lower steel product selling
prices, partially offset by improved product mix. Shipments decreased 13.2% in
1998 to 2,630,000 net tons from 3,029,000 net tons in 1997, a decrease of
399,000 net tons. Shipments were lower in 1998 for two reasons: (i) the
unprecedented high level of low-priced imports which resulted in the Company
losing sales to service center customers and (ii) the decision by the Company to
purchase fewer slabs to augment its own production.

Costs and Expenses. Total costs and expenses decreased 13.9% in 1998 to
$1,128.1 million from $1,309.9 million in 1997, a decrease of $181.8 million.
Costs of goods sold decreased 14.7% in 1998 to $1,090.0 million from $1,278.3
million in 1997, a decrease of $188.3 million. The decrease in costs of goods
sold in 1998 can be attributed primarily to the 13.2% decrease in shipments
discussed above, as well as dramatically lower scrap prices, the absence of a
blast furnace reline and a reduced level of purchased slabs. The Company's
smaller blast furnace was relined in 1997. Costs of goods sold was 93.7% of
total sales in 1998, down from 95.3% of total sales in 1997. Depreciation and
amortization expense increased 28.5% in 1998 to $20.0 million from $15.6 million
in 1997, an increase of $4.4 million. The higher depreciation and amortization
expense reflects the completion of major capital projects, primarily the
automated raw material handling system and the reline of the Company's smaller
blast furnace. Selling and administrative expenses increased 9.7% in 1998 to
$23.9 million from $21.8 million in 1997, an increase of $2.1 million. The
increase in selling and administrative expenses is primarily due to higher
Michigan single business tax resulting from a lower capital acquisition
deduction in 1998.

Operating Income. Operating income increased 10.7% in 1998 to $35.1
million from $31.7 million in 1997, an increase of $3.4 million, despite lower
steel product shipments. Operating income represented 3.0% of total sales in
1998, up from 2.4% of total sales in 1997.

Other - Net. Other - net increased in 1998 to $2.7 million from $1.2
million in 1997, an increase of $1.5 million. The increase was comprised of two
items: (i) insurance deductibles for a railroad accident and a mobile equipment
fire and (ii) an increase in the reserve for doubtful accounts.

YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996

Total Sales. Total sales increased 2.6% in 1997 to $1,341.6 million from
$1,307.4 million in 1996, an increase of $34.2 million. The increase in total
sales was caused principally by higher shipments. Shipments increased 5.3% in
1997 to 3,029,000 net tons from 2,876,000 net tons in 1996, an increase of
153,000 net tons. Shipments were higher in 1997 because the Company was able to
add new customers and increase sales to its existing customers. The Company
purchased approximately 619,000 net tons of slabs in 1997 to augment its own
production and accommodate the demand for its products. The higher revenue
caused by increased shipments was partially offset by lower steel product
selling prices. Total sales per net ton shipped decreased 2.6% in 1997 to $443
from $455 in 1996, a decrease of $12 per ton.

Costs and Expenses. Total costs and expenses increased 2.1% in 1997 to
$1,309.9 million from $1,282.7 million in 1996, an increase of $27.2 million.
Costs of goods sold increased 2.2% in 1997 to $1,278.3 million from $1,251.1
million in 1996, an increase of $27.2 million. The increase in costs of

20
<PAGE> 21

goods sold can be attributed primarily to the 5.3% increase in shipments
discussed above, higher purchased slab prices and increased project expense for
blast furnace stove repairs, the takeover of Rouge Steel's internal railroad
from Ford Motor Company ("Ford") and demolition and site preparation expenses
related to the new raw material handling system. Several factors partially
offset the costs of goods sold increase: (i) non-capital expenditures associated
with the reline of "B" blast furnace were lower in 1997 than non-capital
expenditures associated with the reline of "C" blast furnace in 1996, (ii) "C"
blast furnace performed more efficiently in post-reline 1997 than it did when it
was nearing the end of its campaign in 1996, and (iii) the full-year effect of
efficiencies gained from the launch in mid-1996 of the continuous caster third
strand which allowed the Company to eliminate the more costly ingot-slab
process. Costs of goods sold was 95.3% of total sales in 1997, down slightly
from 95.7% of total sales in 1996. Depreciation and amortization increased 19.2%
in 1997 to $15.6 million from $13.1 million in 1996, an increase of $2.5
million. The higher depreciation and amortization expense reflects the
completion of major capital projects, primarily the full year effect of the
third strand of the Company's continuous caster. Selling and administrative
expenses decreased 10.6% in 1997 to $21.8 million from $24.3 million in 1996, a
decrease of $2.5 million. The decrease in selling and administrative expenses is
primarily due to lower legal expenses and Michigan single business tax.

Operating Income. Primarily as a result of the efficiencies discussed
above, including costs related to the "B" furnace reline, the improved
productivity of "C" furnace and the full-year effect of the third strand of the
caster, offset partially by lower steel product selling prices, operating income
increased 28.3% in 1997 to $31.7 million from $24.7 million in 1996, an increase
of $7.0 million. Operating income represented 2.4% of total sales in 1997, up
from 1.9% of total sales in 1996.

Interest Income. Interest income decreased 72.4% in 1997 to $1.4 million
from $5.1 million in 1996, a decrease of $3.7 million. The decrease in interest
income was the result of a lower cash and marketable securities balance in 1997.
The average cash and marketable securities balance in 1997 was $20 million
compared to $86 million in 1996.

Equity in Unconsolidated Subsidiaries. Equity in loss of unconsolidated
subsidiaries was $718,000 in 1997 compared to equity in income of unconsolidated
subsidiaries of $50,000 in 1996. The loss in 1997 reflects the after-tax effect
of Rouge Industries' share of losses incurred by Shiloh of Michigan and EVTAC as
well as preproduction expenses recorded by Spartan Steel. The income in 1996
reflects the after-tax effect of the Company's share of Shiloh of Michigan's
losses offset by one month's income generated by EVTAC.

LIQUIDITY AND CAPITAL RESOURCES

Rouge Industries' liquidity needs arise predominantly from capital
investments and working capital requirements. As a result of the explosion and
fire at the Rouge Complex Powerhouse (the "Powerhouse") on February 1, 1999, the
Company anticipates increased levels of expenditures to restore its operations
to normal levels. The Company expects to meet its liquidity needs with cash
provided by operating activities, funds provided by borrowings and anticipated
insurance recovery. See "-Powerhouse Explosion."

Cash and cash equivalents on December 31, 1998 totaled $2.4 million
compared to $12.6 million on December 31, 1997, a decrease of $10.2 million.
This decrease was primarily due to cash used for capital spending and
investments in unconsolidated subsidiaries, higher inventories and higher
accounts receivable, partially offset by increases in borrowings, accounts
payable and accrued liabilities.

Cash Flows from Operating Activities. Net cash provided by operating
activities decreased in 1998 to $20.3 million from $90.4 million in 1997, a
decrease of $70.1 million. The decrease is primarily the result of higher
accounts receivable and inventories.

21
<PAGE> 22

Capital Expenditures. Cash used for capital expenditures, including
investments in unconsolidated subsidiaries, decreased 67.3% in 1998 to $39.2
million from $119.9 million in 1997, a decrease of $80.7 million. The most
significant of the expenditures made in 1998 was the investment in Spartan
Steel. The remaining expenditures were made primarily to upgrade and modernize
the Company's steel processing facilities. The planned capital expenditures are
generally directed at improving and maintaining plant efficiency and quality to
position the Company to improve its competitive position in the marketplace. In
1999, the Company plans to spend approximately $29 million on capital items
and investment in joint ventures, including information systems upgrades and
replacements.

Waste Oxide Reclamation Facility Lease. Rouge Steel has committed to a
seven-year lease for a $52.5 million waste oxide reclamation facility. The
facility is presently being constructed, and it is expected to be completed in
mid 1999. Lease payments will commence at that time.

Credit Facility. Rouge Steel has a five-year, $100 million, unsecured
revolving loan commitment under a credit agreement (the "Credit Agreement")
among the Company, the banks named therein and NBD Bank, as administrative
agent. The commitments of the lenders under the Credit Agreement expire on
December 16, 2002. The revolving loans provided for under the Credit Agreement
bear interest, at the option of the Company, at a rate equal to either (i) the
base rate, which is the higher of the prime rate or the federal funds rate plus
0.5%, or (ii) the LIBOR rate plus an applicable margin, which varies with the
Company's debt to capitalization ratio and can range from 0.20% to 0.40%. The
Company had borrowings of $29.0 million under the facility as of December 31,
1998. The Company believes that net income and funds available under the Credit
Agreement will be adequate for its working capital and capital expenditure
requirements.

ENVIRONMENTAL MATTERS

The Company's operations are subject to many federal, state and local
laws, regulations, permits and consent agreements relating to the protection of
human health and the environment. The Company believes that its facilities are
in material compliance with these provisions and does not believe that future
compliance with such provisions will have a materially adverse effect on its
results of operations or financial position. The Company has incurred capital
expenditures in connection with matters relating to environmental control of
approximately $2 million during the past four years. In addition, the Company
has planned an aggregate of approximately $3 million in capital expenditures for
environmental compliance for the years 1999 through 2002. Since environmental
laws and regulations are becoming increasingly more stringent, the Company's
environmental capital expenditures and costs for environmental compliance may
increase in the future. In addition, due to the possibility of unanticipated
regulatory or other developments, the amount and timing of future environmental
expenditures may vary substantially from those currently anticipated. The costs
for current and future environmental compliance may also place domestic steel
producers at a competitive disadvantage with respect to foreign steel producers,
which may not be required to undertake equivalent costs in their operations, and
manufacturers of steel substitutes, which are subject to less stringent
environmental requirements.

22
<PAGE> 23

Drinking Water Act, the Clean Air Act and the Occupational Safety and Health Act
of 1970 or an environmental claim based upon a release of a material of
environmental concern. An environmental claim includes, among other things, the
costs associated with the release of any pollutants, contaminants, toxic
substances and hazardous substances into the environment. The Ford Indemnity
provides that Ford pay the Company's liabilities, including any penalties and
attorney's fees, in connection with any environmental claim relating to a
pre-Acquisition condition. The Ford Indemnity terminates on December 15, 2009.
In some instances, Ford has acted proactively; in others, it has denied
responsibility. The submitted claims include asbestos removal, CERCLA
liabilities, National Pollutant Discharge Elimination System permit violations,
underground storage tank removal, transformer replacement and transformer
removal and disposal. The Company does not believe the rejection by Ford of any
claims made under the Ford Indemnity will have a materially adverse effect on
the Company's results of operations or financial position.

In late 1995, the existence of material containing polychlorinated
biphenyls ("PCBs") was noted within a containment area of an electrical
substation in the cold mills. Upon further investigation, the Company discovered
PCB contamination in the diked area surrounding one transformer, on the floor of
the substation, in the hydraulically isolated floor drain system in the
substation, at one sump servicing this floor drain system, and in four
electrical manholes. The sump and floor drains have been remediated. The
investigation and cleanup of PCB contamination in the manholes is proceeding. At
this point, management believes that the costs associated with this
investigation will not have a materially adverse effect on the Company's results
of operations or financial position. As of December 31, 1998, the Company had
spent approximately $1.2 million for the investigation and cleanup. The Company
believes that these costs are subject to the Ford Indemnity and has filed a
claim with Ford. Negotiations with Ford continue regarding this indemnity claim.
The Company has not recorded an asset in anticipation of recovery pursuant to
the Ford Indemnity.

In 1990, Congress passed amendments to the Clean Air Act which impose
more stringent standards on air emissions. Pursuant to Title V of the Clean Air
Act Amendments of 1990, the Company submitted an application for a facility
operating permit in 1997 with amendments in April, 1998. The Company was advised
that the application and the amendment were administratively complete. It is
expected to take approximately one year for final approval.

In April 1998, the Company and the Wayne County Air Pollution Control
Division (the "Division") entered into a consent order resolving certain notices
of violation ("NOVs") and issues involving the basic oxygen furnace
electrostatic precipitator and the blast furnace flare stack. The settlement
agreement includes performance of a supplemental environmental project ("SEP")
for the installation of a waste oxide dryer, a project undertaken in connection
with the enforcement action for violations of applicable operating conditions
and emission standards at operations other than the waste oxide dryer. This
dryer is intended to secure significant additional environmental and public
health improvements. The settlement agreement imposed a $125,000 penalty,
stipulated penalties for future violations, a compliance program, and a
five-year term.

During meetings with the Division, the Company voluntarily disclosed its
failure to obtain a construction and operating permit for an operational change
previously thought to be exempt from the

23
<PAGE> 24

air permitting requirements. A permit application has been submitted for that
change to both the Division and the Michigan Department of Environmental
Quality. The preliminary nature of the discussions with the Division regarding
this issue makes it difficult to predict the outcome or its impact on the
Company's results of operations or financial position.

In 1997, the Company received a notice from the Corporation Counsel of
the City of Melvindale (the "City") of the City's intention to sue the Company
for alleged release of particulates into the air and violations of the County of
Wayne permit. The Company is currently in discussions with the City in an
attempt to resolve this matter prior to the filing of any lawsuit. However, the
City has also made damage claims on behalf of approximately 50 residents who
claim to have incurred property damage as a result of dust fallout which
occurred during the second half of 1997. Each of these claims appear to be for
an amount of less than $2,000. In addition, two court actions are pending in the
State of Michigan 24th District Court seeking damages in each instance of not
more than $50,000. The Company does not believe that it was the source of dust
which allegedly caused this property damage. The Company intends to vigorously
defend the property damage claims. Management believes that the potential impact
of this matter will not have a materially adverse impact on the Company's
results of operations or financial position.

In September, 1998, the U.S. Environmental Protection Agency ("U.S. EPA")
Region 5 commenced a multimedia investigation of Rouge Steel's facility. U.S.
EPA has discussed several issues with the Company and, to date, has issued one
NOV alleging certain violations of the Clean Air Act. U.S. EPA requested that
the Company furnish information in accordance with Section 114(a) of the Clean
Air Act. The Company furnished information to the U.S. EPA in October, 1998.
U.S. EPA then requested that the Company furnish information in accordance with
Section 3007 of RCRA which the Company furnished. If this matter proceeds, the
Company believes it may include monetary sanctions in excess of $100,000.

YEAR-2000 READINESS

The Year-2000 problem affects computer hardware, software and other
equipment used by the Company in the day-to-day conduct of its business. The use
of two-digit dates in computational and other decision-making functions may
cause computer systems and operating equipment to fail in the year 2000,
potentially leading to business and manufacturing disruptions.

The Company has performed an assessment of the Year-2000 issues and
believes that it has identified all of its computer systems, software
applications and manufacturing equipment that could be impacted by Year-2000
related problems. A remediation program was undertaken in 1998 to modify or

24
<PAGE> 25

replace significant portions of the Company's hardware and software so that its
systems will properly interpret dates beyond January 1, 2000. The remediation
program is well underway with business and manufacturing systems now expected to
be Year-2000 ready before mid-year 1999.

The remediation program is proceeding on four fronts: technical
infrastructure, business computing and manufacturing systems, plant-floor and
other facility-related equipment, and external suppliers and customers.

The technical infrastructure effort, which refers to the technical
computing environment such as networks and personal computers, is approximately
75% complete. The mainframe computer and all network components are Year-2000
ready. Over two-thirds of the network servers have been upgraded to Year-2000
ready levels. The Company has replaced or upgraded 75% of the personal
computers, with the remainder scheduled to be completed by the end of April
1999. The infrastructure is targeted for completion by the end of May 1999.

Remediation of business computing and manufacturing systems is being
handled by replacing selected business systems with third-party applications and
by internal and outside technical resources. A program was undertaken in 1998 to
replace the Company's financial and purchasing systems with third-party
applications acquired from PeopleSoft and Indus. Although some launch delays
have been experienced with both of these applications due to the need to adapt
to new business practices, the new systems are expected to be fully launched by
the end of June 1999. Likewise, remediation of the balance of the systems is
targeted for completion during that same time frame.

All plant-floor equipment has been assessed; 91% of the hardware and 70%
of the software are now considered ready. The remainder of the hardware and
software will be remediated by the end of the second quarter of 1999. Extensive
testing, including live production tests of the major manufacturing processes,
is scheduled to be completed during the first half of 1999. To date, live tests
have been successfully conducted on two of the processes; namely, the blast
furnace and one of two caster operations. Subject to a final assessment of the
tandem and hot strip mill equipment, remediation and testing of all plant-floor
equipment are scheduled to be completed by the end of the second quarter of
1999.

Work is progressing on other facility-related equipment and services,
such as voice mail and security systems. All are expected to be ready by the end
of June 1999.

The Company has contacted all of its outside processors and key suppliers
to determine their progress in achieving Year-2000 readiness. All outside
processors have indicated, through a self- assessment checklist, that they are
either Year-2000 ready today, or have established plans to be so by mid-1999.
The Company is conducting interviews with its outside processors to ensure that
they will be ready in the required time frame. To date, ten interviews covering
16 facilities, or 25% of the total, have been conducted. The Company expects to
finish the review process during the first quarter of 1999. To further ensure
the Year-2000 readiness of the Company's outside processors, the Company is
requiring that each of its outside processors conduct a live Year-2000
electronic date interchange test during the second quarter of 1999.

The Company's purchasing organization is following up with other key
suppliers relative to their Year-2000 plans. To further protect Rouge Industries
from supplier disruptions, the Company has commenced auditing suppliers for
their Year-2000 compliance. The Company's contingency plans, which will include
replacements for suppliers who provide no response or unfavorable responses,
will be based on a review of their plans, input from using areas, and the use of
supplier audit information.

25
<PAGE> 26

The Company expects to make approximately $7 million in capital
expenditures to replace or significantly upgrade existing hardware and software
with new equipment. The Company also expects to incur approximately $4.5 million
of additional expense to remediate existing computer systems and manufacturing
equipment that are not Year-2000 ready. To date, approximately 90% of the
capital expenditures have been made and about 35% of the total expense incurred
in the course of addressing the Year-2000 problem. A majority of the remaining
expense will involve the actual labor cost for both remediation and testing
activities during the first half of 1999. The expenditures represent about 20%
of Rouge Industries' information technology expense budget and were identified
as part of the normal planning processes used by the Company in the development
of its budgets. As a result, there has been virtually no impact on previously
scheduled systems replacements or upgrades.

The Company expects to identify and resolve all Year-2000 problems that
could materially affect its business. Nevertheless, there always is a
possibility that the Company could experience unforeseen problems that could
result in a disruption of its manufacturing capabilities. In the event of such
disruption, the Company will take every means available to rectify the problems
and resume normal manufacturing operations. It is difficult to accurately
predict the magnitude and extent of such disruptions; however, the Company
believes that it can operate the majority of its administrative and some of its
manufacturing operations on a manual basis without suffering the consequences of
a lengthy outage. All manufacturing operations are critical to the Company's
operations in the event of Year-2000 failures. It would be difficult to operate
Rouge Industries' manufacturing facilities in the event of a catastrophic
failure of any of these operations. To mitigate these concerns, the Company
plans to continue both simulation and live testing for these areas during 1999
to assure compliance.

The Company believes that all other operational failures, particularly
those of an administrative nature, can be handled through other means, such as
manual intervention and processing, the use of contract labor, etc. One
prerequisite is the establishment of effective contingency plans. The Company
recognizes the need for effective contingency plans and has embarked on a
program to establish them. Rouge Industries' present intent is to establish the
majority of these contingency plans by mid-1999. The Company foresees no problem
in this regard in that the time-horizon-to-failure for most systems is not
projected to occur until the latter part of 1999 or beyond.

The costs and timing of the Year-2000 project are based on management's
best estimates, which were derived using assumptions of future events. There can
be no guarantee that actual costs will not exceed such estimates or that the
project will be completed on time. Specific factors which might cause higher
actual costs or delays include the availability and cost of trained personnel,
the ability to locate all computer codes requiring correction and the failure of
third parties to remediate their own potential problems related to the Year-2000
issue.

POWERHOUSE EXPLOSION

On February 1, 1999, an explosion and fire at the Powerhouse resulted in
the interruption of the supply of electricity, process and heating steam, turbo
air, mill water and other utilities to virtually all of the facilities of Rouge
Steel. The loss of power resulted in a temporary shutdown of steel making
facilities and the Company's corporate offices. The Powerhouse is owned by Rouge
Steel (60%) and Ford (40%).

On February 4, 1999, partial electricity and steam service were restored
to the Rouge Steel facilities through a combination of new power lines from DTE
Energy Company and temporary generators and package boilers.

26
<PAGE> 27

On February 11, 1999, Rouge Steel resumed limited production at its hot
strip mill and cold mills. Primary operations, including the Company's two blast
furnaces, the basic oxygen furnace and continuous caster, will remain idle
pending the refurbishment and restart of the Powerhouse's turbo air equipment,
which is integral to the operation of the blast furnaces and was housed in the
Powerhouse. The Company believes that the blast furnaces will return to
production by April 30, 1999. In advance of the resumption of full production
capacity, the Company has purchased an aggregate of 450,000 tons of
semi-finished steel to partially support its automotive order book.

Although the Company has a considerable insurance program that provides
coverage for damage to property destroyed, interruption of business operations
and expenses incurred to minimize the period of disruption to operations, the
full extent of the damage to the Powerhouse and the resulting financial effect
have not been determined.

27
<PAGE> 28

Item 8. Financial Statements and Supplementary Data.

The following information is submitted pursuant to the requirements of Item 8:

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants............................................................ 29

Consolidated Balance Sheets as of December 31, 1998 and 1997................................ 30

Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996......................................................... 32

Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996......................................................... 33

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996......................................................... 34

Notes to Consolidated Financial Statements................................................... 35

Schedule II - Valuation and Qualifying Accounts and Reserves................................. 49
</TABLE>

<PAGE> 29

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of
Rouge Industries, Inc.

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Rouge
Industries, Inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
February 3, 1999, except as to Note 11
which is as of March 2, 1999

<PAGE> 30
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)

Assets
<TABLE>
<CAPTION>

December 31
-----------------------
1998 1997
---- ----

Current Assets

<S> <C> <C>
Cash and Cash Equivalents $ 2,418 $ 12,570
Accounts Receivable
Trade and Other (Net of Allowances of $17,937 and $6,333) 130,624 101,590
Affiliates 5,644 9,876
Inventories 275,811 248,317
Other Current Assets 7,075 8,562
--------- ---------
Total Current Assets 421,572 380,915
--------- ---------

Property, Plant, and Equipment
Land 366 --
Buildings and Improvements 23,018 24,718
Machinery and Equipment 289,058 275,489
Construction in Progress 4,525 10,517
--------- ---------
Subtotal 316,967 310,724
Less: Accumulated Depreciation (58,846) (42,162)
--------- ---------
Net Property, Plant, and Equipment 258,121 268,562
--------- ---------

Investment in Unconsolidated Subsidiaries 64,646 50,936
--------- ---------

Deferred Charges and Other 24,548 28,096
--------- ---------

Total Assets $ 768,887 $ 728,509
========= =========
</TABLE>

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

30
<PAGE> 31

ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share amounts)

Liabilities and Stockholders' Equity

December 31
--------------------
1998 1997
---- ----

Current Liabilities
<S> <C> <C>
Accounts Payable
Trade $ 153,115 $ 152,917
Affiliates 13,776 13,924
Accrued Vacation Pay 10,737 11,007
Taxes Other than Income 6,131 4,312
Other Accrued Liabilities 25,394 21,579
--------- ---------
Total Current Liabilities 209,153 203,739
--------- ---------

Long-Term Debt 29,000 17,900
--------- ---------

Other Postretirement Benefits 54,301 46,454
--------- ---------

Other Liabilities 11,327 10,515
--------- ---------

Excess of Net Assets Acquired Over Cost 5,484 11,280
--------- ---------

Commitments and Contingencies (Note 10)

Stockholders' Equity
Common Stock
Class A, 80,000,000 shares authorized with 14,521,538 and 14,428,219 issued
and outstanding as of December 31, 1998
and 1997, respectively 145 144
Class B, 8,690,400 shares authorized with 7,562,400
issued and outstanding 76 76
Capital in Excess of Par Value 129,458 128,517
Retained Earnings 332,876 312,130
Accumulated Other Comprehensive Income (2,933) (2,246)
--------- ---------
Total Stockholders' Equity 459,622 438,621
--------- ---------
Total Liabilities and Stockholders' Equity $ 768,887 $ 728,509
========= =========
</TABLE>

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

<PAGE> 32

ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share and per share amounts)

Years Ended December 31
--------------------------------------------
1998 1997 1996
---- ---- ----
Sales
<S> <C> <C> <C>
Unaffiliated Customers $ 1,050,144 $ 1,158,218 $ 1,125,722
Affiliates 113,045 183,342 181,676
------------ ------------ ------------
Total Sales 1,163,189 1,341,560 1,307,398
------------ ------------ ------------

Costs and Expenses
Costs of Goods Sold 1,090,032 1,278,351 1,251,114
Depreciation and Amortization 19,993 15,563 13,056
Selling and Administrative Expenses 23,875 21,760 24,339
Amortization of Excess of Net Assets Acquired Over Cost (5,796) (5,796) (5,796)
------------ ------------ ------------
Total Costs and Expenses 1,128,104 1,309,878 1,282,713
------------ ------------ ------------

Operating Income 35,085 31,682 24,685

Interest Income 1,473 1,418 5,136
Interest Expense (775) (630) (329)
Other - Net (2,722) (1,244) 728
------------ ------------ ------------
Income Before Income Taxes, Minority Interest
and Equity in Unconsolidated Subsidiaries 33,061 31,226 30,220
Income Tax Provision (8,705) (8,094) (6,915)
------------ ------------ ------------
Income Before Minority Interest and Equity in
Unconsolidated Subsidiaries 24,356 23,132 23,305
Minority Interest in Consolidated Subsidiary -- -- 37
Equity in Unconsolidated Subsidiaries (964) (718) 50
------------ ------------ ------------

Net Income $ 23,392 $ 22,414 $ 23,392
============ ============ ============

Net Income Per Share - Basic and Diluted $ 1.06 $ 1.02 $ 1.07
============ ============ ============

Weighted-Average Shares Outstanding 22,025,430 21,938,743 21,844,864
============ ============ ============
</TABLE>

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

32
<PAGE> 33

ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(amounts in thousands)
<TABLE>
<CAPTION>

Years Ended December 31
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Class A and Class B Common Stock
Beginning Balance $ 220 $ 219 $ 218
Common Stock Issued for Employee
Benefit Plans 1 1 1
--------- --------- ---------
Ending Balance 221 220 219
--------- --------- ---------

Capital in Excess of Par Value
Beginning Balance 128,517 127,096 124,246
Common Stock Issued for Employee
Benefit Plans 932 1,405 2,811
Common Stock Issued for ODEP 9 16 39
--------- --------- ---------
Ending Balance 129,458 128,517 127,096
--------- --------- ---------

Retained Earnings
Beginning Balance 312,130 292,349 271,580
Net Income 23,392 22,414 23,392
Cash Dividends Declared (2,646) (2,633) (2,623)
--------- --------- ---------
Ending Balance 332,876 312,130 292,349
--------- --------- ---------

Accumulated Other Comprehensive Income
Beginning Balance (2,246) (2,399) (2,190)
Additional Minimum Pension Liability Adjustment (687) 153 (209)
--------- --------- ---------
Ending Balance (2,933) (2,246) (2,399)
--------- --------- ---------

Total Stockholders' Equity $ 459,622 $ 438,621 $ 417,265
========= ========= =========

Comprehensive Income
Net Income $ 23,392 $ 22,414 $ 23,392
Additional Minimum Pension Liability Adjustment (687) 153 (209)
--------- --------- ---------
Comprehensive Income $ 22,705 $ 22,567 $ 23,183
========= ========= =========
</TABLE>

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

33
<PAGE> 34

ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>

Years Ended December 31
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 23,392 $ 22,414 $ 23,392
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Deferred Taxes 3,193 9,540 4,433
Depreciation and Amortization 19,993 15,563 13,056
Equity in Unconsolidated Subsidiaries 964 718 (50)
Amortization of Excess of Net Assets Acquired Over Cost (5,796) (5,796) (5,796)
Common Stock Issued for Benefit Plans 942 1,422 2,851
Changes in Assets and Liabilities:
Accounts Receivable (17,465) (3,878) 3,692
Inventories (25,108) 21,164 (42,802)
Prepaid Expenses (288) (47) 1,208
Accounts Payable and Accrued Liabilities 20,479 24,171 14,202
Other - Net -- 117 (183)
Proceeds from Property Tax Settlement -- 5,000 5,000
--------- --------- ---------
Net Cash Provided by Operating Activities 20,306 90,388 19,003
--------- --------- ---------

Cash Flows From Investing Activities
Capital Expenditures (21,226) (82,359) (80,339)
Purchase of Marketable Securities -- (6,310) (30,276)
Sale of Marketable Securities -- 8,349 71,561
Investment in Unconsolidated Subsidiaries (17,959) (37,538) (9,222)
Other - Net 273 (142) (229)
--------- --------- ---------
Net Cash Used for Investing Activities (38,912) (118,000) (48,505)
--------- --------- ---------

Cash Flows From Financing Activities
Drawdowns on Revolving Line 271,700 121,800 --
Principal Payments on Revolving Line (260,600) (103,900) --
Cash Dividend Payments (2,646) (2,632) (2,620)
--------- --------- ---------
Net Cash Provided by (Used for) Financing Activities 8,454 15,268 (2,620)
--------- --------- ---------

Net Decrease in Cash and Cash Equivalents (10,152) (12,344) (32,122)

Cash and Cash Equivalents - Beginning of Year 12,570 24,914 57,036
--------- --------- ---------

Cash and Cash Equivalents - End of Year $ 2,418 $ 12,570 $ 24,914
========= ========= =========
</TABLE>

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

34
<PAGE> 35

ROUGE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Description of the Company

Rouge Steel Company ("Rouge Steel") is the principal operating subsidiary of
Rouge Industries, Inc. (together with its subsidiaries, "Rouge Industries" or
the "Company"). Rouge Steel is engaged in the production and sale of flat rolled
steel products primarily to domestic automotive manufacturers and their
suppliers. Other wholly-owned subsidiaries of Rouge Industries include QS Steel
Inc. ("QS Steel") and Eveleth Taconite Company ("Eveleth"). QS Steel holds
minority ownership interests in five Michigan- based joint ventures. Eveleth
holds a 45 percent interest in Eveleth Mines LLC, a Minnesota-based iron ore
mining and pellet producing operation. For the purpose of these Notes to
Consolidated Financial Statements, "Rouge Industries" or the "Company" refers to
Rouge Industries, Inc. and its subsidiaries, unless the context requires
otherwise.

Principles of Consolidation

The consolidated financial statements include the accounts of Rouge Industries
and its subsidiaries. Intercompany transactions have been eliminated.
Investments in business entities in which the Company does not have control, but
has the ability to exercise significant influence over the operating and
financial policies, are accounted for under the equity method.

Comprehensive Income

Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires disclosure of total comprehensive income in interim periods and
additional disclosures of the components of comprehensive income on an annual
basis. Total comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to the Company's
stockholders. The Company's total comprehensive income is comprised of net
income and minimum pension liability adjustments. Prior year comparative
information has been restated to conform to the current year presentation.

Segment Information

In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect the Company's results of operations or financial
position.

Rouge Industries has one operating segment that comprises its flat rolled steel
products. The Company's business is conducted entirely in the United States.
Significant customers are discussed elsewhere in this Note.

35
<PAGE> 36

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

Internal Use Software Costs

Effective March 1, 1998, the Company adopted AICPA Statement of Position ("SOP")
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP No. 98-1 requires, in certain cases, capitalization of
software costs that previously would have been expensed as incurred. Software
costs capitalized during the year ended December 31, 1998 were $4,669,000. These
capitalized software costs will be amortized over the lesser of 60 months or the
useful life of the software.

Costs not eligible for capitalization under SOP No. 98-1 and costs incurred to
remediate Year-2000 issues are expensed as incurred.

Financial Instruments

The carrying amount of the Company's financial instruments, which include cash
equivalents, marketable securities, accounts receivable, accounts payable and
long-term debt, approximates their fair value at December 31, 1998 and 1997. The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of
credit risk are cash equivalents, marketable securities and accounts receivable.
The Company attempts to limit its credit risk associated with cash equivalents
and marketable securities by utilizing outside investment managers to place the
Company's investments with highly rated corporate and financial institutions.
With respect to accounts receivable, the Company limits its credit risk by
performing ongoing credit evaluations and, when deemed necessary, requiring
letters of credit, guarantees or collateral. The Company's customer base is
comprised principally of domestic automotive manufacturers and their suppliers.
Management does not believe significant risk exists in connection with the
Company's concentrations of credit at December 31, 1998.

Significant Customers

The Company's significant customers are Ford Motor Company ("Ford"),
DaimlerChrysler AG ("DaimlerChrysler") and Worthington Industries, Inc.
("Worthington"). Sales to Ford, which are primarily made pursuant to a ten-year
steel purchase agreement, totaled $429,230,000 in 1998, $434,898,000 in 1997 and
$397,723,000 in 1996. The steel purchase agreement expires after model-year
2000.

Sales to DaimlerChrysler totaled $120,061,000 in 1998, $116,013,000 in 1997 and
$109,312,000 in 1996.

Sales are made to Worthington, a stockholder of the Company, pursuant to a
seven-year steel purchase agreement which expires on December 15, 2003. Sales to
affiliates include $87,208,000, $157,307,000, and $159,030,000 to Worthington
for 1998, 1997 and 1996, respectively.

<PAGE> 37

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

Inventories

Inventories are stated at the lower of cost or market with cost determined by
the last-in, first-out ("LIFO") method for raw materials, work-in-process and
finished goods and the first-in, first-out ("FIFO") method for nonproduction and
sundry. Costs in inventory include materials, direct labor, Double Eagle
electrogalvanizing and Spartan Steel hot dip galvanizing (see Note 4) and
applied manufacturing overhead.

Nonmonetary Transactions

The Company routinely exchanges iron ore inventory with other parties. Since the
exchanges involve similar productive assets and do not complete an earnings
process, the Company accounts for the exchanges on the cost basis of the
inventory relinquished without recognition of gain or loss.

Property, Plant, and Equipment

Property, plant, and equipment are recorded at cost. Replacements and major
improvements are capitalized; maintenance and repairs are expensed as incurred.
Gains or losses on asset dispositions are included in the determination of net
income.

Depreciation and Amortization

Depreciation of the Company's property, plant, and equipment is computed using
the straight-line method. The average estimated useful lives are as follows:

Years
-----
Buildings 35
Land Improvements 20
Steel-Producing Machinery and Equipment 18
Power Equipment 28
Office Furniture 12

The costs of relines to the blast furnaces and the refurbishment of turbo
generators are capitalized and amortized over their expected lives which are
eight to ten years and five years, respectively.

The excess of net assets acquired over cost, relating to the acquisition of the
Company from Ford (the "Acquisition") in 1989, is being amortized on a
straight-line basis over a ten-year period.

Environmental Accounting

Environmental expenditures are capitalized if the costs mitigate or prevent
future environmental contamination or if the costs improve existing assets'
environmental safety or efficiency. All other environmental expenditures are
expensed. Liabilities for environmental expenditures are accrued when it is
probable that such obligations have been incurred and the amounts can be
reasonably estimated.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates.

<PAGE> 38

NOTE 2 - MARKETABLE SECURITIES

As of December 31, 1998 and 1997, marketable securities classified as cash
equivalents were $313,000 and $36,000, respectively. The Company's investments
in marketable securities are comprised entirely of money market funds.

NOTE 3 - INVENTORIES

The major classes of inventories are as follows (dollars in thousands):
<TABLE>
<CAPTION>

December 31
---------------------
1998 1997
---- ----
<S> <C> <C>
Production
Raw Materials $ 83,422 $ 84,169
Semifinished and Finished Steel Products 175,831 160,017
--------- ---------
Total Production at FIFO 259,253 244,186
LIFO Reserves (4,651) (17,285)
--------- ---------
Total Production at LIFO 254,602 226,901
Nonproduction and Sundry 21,209 21,416
--------- ---------
Total Inventories $ 275,811 $ 248,317
========= =========
</TABLE>

During 1997, inventory quantities were reduced. This reduction resulted in a
liquidation of LIFO inventory quantities which were carried at costs that
prevailed in prior years which were lower than the cost of 1997 purchases. The
effect of the liquidation of LIFO inventories decreased costs of goods sold by
approximately $1,000,000 and increased net income by approximately $650,000 or
$0.03 per share.

NOTE 4 - INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

At December 31, 1998, the Company's investments in unconsolidated subsidiaries
consist of a 50 percent interest in Double Eagle Steel Coating Company ("Double
Eagle"), a 45 percent interest in Eveleth Mines LLC ("EVTAC"), a 20 percent
interest in Shiloh of Michigan, L.L.C. ("Shiloh of Michigan"), a 48 percent
interest in Spartan Steel Coating, L.L.C. ("Spartan Steel"), an 11.1 percent
interest in TWB Company, L.L.C. ("TWB"), a 40 percent interest in Bing Blanking,
L.L.C. ("Bing Blanking") and a 49 percent interest in Delaco Processing, L.L.C.
("Delaco Steel Processing"). All of the Company's investments in unconsolidated
subsidiaries are accounted for under the equity method.

Double Eagle is an electrolytic galvanizing facility which is operated as a cost
center. Accordingly, Double Eagle records neither sales nor income. Rouge
Industries' proportionate share of Double Eagle's production costs of
$40,432,000, $39,459,000 and $37,618,000 for 1998, 1997 and 1996, respectively,
is included in the Company's costs and expenses and inventory. The Company is
committed to pay 50 percent of the fixed costs incurred and a pro rata share of
variable costs based on coatings applied to the Company's products. At December
31, 1998, the Company's share of the underlying net assets of Double Eagle
exceeded its investment by $39,231,000. This excess results from purchase
accounting adjustments made on the consolidated accounts of the Company at the
time of the Acquisition and relates primarily to property, plant, and equipment.
This excess is being amortized as a reduction of Rouge Industries' share of
Double Eagle's costs over the remaining lives of the property.

<PAGE> 39

NOTE 4 - INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (continued)

Until November 30, 1996, Eveleth was 85 percent owned by the Company and 15
percent owned by Oglebay Norton Company and produced iron ore pellets at Eveleth
Mines under collective operating agreements with Eveleth Expansion Company.
Effective December 1, 1996, under the terms of a restructuring agreement,
Eveleth became a wholly-owned subsidiary of the Company and, in exchange for a
45 percent ownership interest in EVTAC, Eveleth assigned substantially all of
its operating assets and liabilities to EVTAC. No gain or loss was recorded at
the time of the transaction and the impact of the transfer of approximately
$17,681,000 of assets and $30,253,000 of liabilities by Eveleth to EVTAC was
excluded from the Statement of Cash Flows. At December 31, 1998, the Company's
share of the underlying net assets of EVTAC exceeded its investment by
$9,605,000. This excess is being amortized into income over the estimated
remaining useful lives of the contributed assets.

Shiloh of Michigan produces engineered steel blanks, TWB produces laser welded
blanks, Spartan Steel is a cold rolled hot dip galvanizing facility, Bing
Blanking is a producer of first operation blanks and rollformed parts, and
Delaco Steel Processing is a steel processor and warehouser. Spartan Steel, Bing
Blanking and Delaco Steel Processing all began operation in 1998.

The table below sets forth summarized financial information for Rouge
Industries' unconsolidated subsidiaries (dollars in thousands):

December 31
------------------------
1998 1997
---- ----

<S> <C> <C>
Current Assets $ 97,468 $ 82,014
Noncurrent Assets 360,312 308,047
Current Liabilities 91,756 45,920
Noncurrent Liabilities 119,155 120,012
</TABLE>

Year Ended December 31
--------------------------------------
1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Net Sales $ 258,779 $ 193,463 $ 16,268
Gross Profit 18,422 2,960 446
Net Income (Loss) (1,594) (6,358) 498
</TABLE>

NOTE 5 - DEBT

The Company had borrowings of $29,000,000 outstanding as of December 31, 1998
and $17,900,000 outstanding as of December 31, 1997.

In 1997, Rouge Steel and Rouge Industries entered into an agreement for a
$100,000,000, unsecured revolving loan facility (the "Credit Agreement"). Rouge
Steel is the borrower under the Credit Agreement and Rouge Industries is the
guarantor. Interest is calculated using one of two methods. Loans under the base
rate option are charged interest equal to the higher of the prime rate or the
federal funds rate plus 0.5%. Loans under the LIBOR option are charged interest
at the London Interbank Offered Rate plus a margin ranging from 0.20% to 0.40%,
depending on the Company's debt to capitalization ratio at the time of
borrowing. The interest rate option is chosen by Rouge Steel at the time of each
borrowing and is thereafter changeable under certain specified conditions. The
facility bears a fixed annual fee of $20,000 and a fee on the entire amount of
the facility which can vary from 0.1% to 0.2%, depending on the

39
<PAGE> 40

NOTE - 5 DEBT (continued)

Company's debt to capitalization ratio at the time. The Credit Agreement, which
expires on December 16, 2002, contains certain financial covenants, with which
the Company was in compliance on December 31, 1998.

Cash paid for interest was $926,000 in 1998, $462,000 in 1997 and $350,000 in
1996.

NOTE 6 - PENSION AND POSTRETIREMENT BENEFIT PLANS

In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 amends certain
provisions of SFAS No. 87, 88 and 106 and revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. Prior year comparative information
has been restated to conform to the current year presentation.

The following table presents benefit obligation, asset value, funded status,
cash flow and weighted average assumptions for Rouge Steel's pension and
postretirement benefit plans (dollars in thousands):
<TABLE>
<CAPTION>
Pension Plans Postretirement Benefit Plans
----------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Change in Benefit Obligation
<S> <C> <C> <C> <C> <C> <C>
Benefit Obligation at Beginning of Year $ 109,087 $ 91,957 $ 79,538 $ 54,530 $ 47,189 $ 39,216
Service Cost 8,116 8,047 8,143 3,649 3,287 2,992
Interest Cost 8,425 7,531 6,541 4,211 3,781 3,163
Plan Participants' Contributions 337 305 373 -- -- --
Plan Amendments -- 1,557 -- -- -- --
Actuarial (Gain) Loss 6,821 739 (1,945) 5,727 453 1,957
Total Benefit Payments (2,023) (1,049) (693) (238) (180) (139)
--------- --------- --------- --------- --------- ---------
Benefit Obligation at End of Year $ 130,763 $ 109,087 $ 91,957 $ 67,879 $ 54,530 $ 47,189
========= ========= ========= ========= ========= =========

Change in Plan Assets
Fair Value of Plan Assets at Beginning of Year $ 121,360 $ 87,729 $ 77,998 $ -- $ -- $ --
Actual Return on Plan Assets 6,550 23,111 9,325 -- -- --
Employer Contributions 2,124 11,264 1,097 238 180 139
Participants' Contributions 337 305 373 -- -- --
Total Benefit Payments (2,023) (1,049) (693) (238) (180) (139)
Other (293) -- (371) -- -- --
--------- --------- --------- --------- --------- ---------
Fair Value of Plan Assets at End of Year $ 128,055 $ 121,360 $ 87,729 $ -- $ -- $ --
========= ========= ========= ========= ========= =========

Funded Status $ (2,708) $ 12,273 $ (4,228) (67,879) (54,530) (47,189)
Unrecognized Actuarial (Gain) Loss (967) (12,760) 1,386 13,273 7,743 7,672
Unrecognized Prior Service Cost 8,600 9,707 9,257 237 284 331
Adjustment to Book Value -- -- -- 68 49 27
Adjustment for Sept. 30th Measurement Date -- (96) 6,120 -- -- --
--------- --------- --------- --------- --------- ---------
Net Amount Recognized $ 4,925 $ 9,124 $ 12,535 $ (54,301) (46,454) (39,159
========= ========= ========= ========= ========= =========

Amount Recognized in the Consolidated
Balance Sheets Consists of
Prepaid Benefit Cost $ 6,837 $ 9,498 $ 12,535 $ -- $ -- $ --
Accrued Benefit Liability (1,912) (374) -- (54,301) (46,454) (39,159)
Additional Minimum Liability (5,878) (3,462) (2,399) -- -- --
Intangible Asset 1,366 1,216 -- -- -- --
Accumulated Other Comprehensive Income 4,512 2,246 2,399 -- -- --
--------- --------- --------- --------- --------- ---------
Net Amount Recognized $ 4,925 $ 9,124 $ 12,535 $ (54,301) (46,454) (39,159)
========= ========= ========= ========= ========= =========
</TABLE>

<PAGE> 41

NOTE 6 - PENSION AND POSTRETIREMENT BENEFIT PLANS (continued)

<S> <C> <C> <C> <C> <C> <C>
Weighted-Average Assumptions
Discount Rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected Return on Plan Assets 9.00 9.00 9.00 N/A N/A N/A
Rate of Compensation Increase - Salaried 3.7% 3.7% 3.7% 3.7% 3.7% 3.7%
Rate of Compensation Increase - Hourly N/A N/A N/A 3.0% 3.0% 3.0%
</TABLE>

For measurement purposes, an assumed health care trend rate of 7.0% was used for
the postretirement benefit obligation in 1996, decreasing to 6.0% in 1997 and
remaining at that level thereafter. A measurement date of September 30 was used
for the pension plans. A measurement date of December 31 was used for the
postretirement benefit plans.

The following schedule sets forth the components of net periodic benefit cost
(dollars in thousands):
<TABLE>
<CAPTION>

Pension Plans Postretirement Benefit Plans
----------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Components of Net Periodic Benefit Cost
Service Cost $ 8,116 $ 8,077 $ 8,143 $ 3,649 $ 3,287 $ 2,992
Interest Cost 8,425 7,565 6,541 4,211 3,781 3,163
Expected Return on Plan Assets (10,833) (8,358) (7,021) -- -- --
Amortization of Prior Service Cost 1,108 1,140 1,012 47 47 47
Recognized Actuarial (Gain) Loss (397) 131 261 197 382 385
-------- -------- -------- -------- -------- --------
Net Periodic Benefit Cost $ 6,419 $ 8,555 $ 8,936 $ 8,104 $ 7,497 $ 6,587
======== ======== ======== ======== ======== ========
</TABLE>

The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets are set forth below (dollars in thousands):
<TABLE>
<CAPTION>

December 31
---------------------------------
1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Projected Benefit Obligation $18,577 $15,486 $67,309
Accumulated Benefit Obligation 18,317 15,271 67,309
Fair Value of Plan Assets 12,939 12,262 63,147
</TABLE>

Rouge Steel Company has two nonpension postretirement benefit plans. One plan is
noncontributory. The health care provision of the other plan has a contribution
requirement for eligible participants hired after November 1, 1988. The life
insurance provision of this plan is noncontributory.

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for the year ended
and as of December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>

One Percentage One Percentage
Point Increase Point Decrease
-------------- --------------

<S> <C> <C>
Effect on Total of Service and Interest Cost Components $ 2,377 $ (1,771)
Effect on Postretirement Benefit Obligation 15,263 (11,584)
</TABLE>

<PAGE> 42

NOTE 7 - INCOME TAXES

Rouge Industries' income tax provision, arising wholly from Federal taxation
since the Company neither has been nor is presently subject to state or foreign
income taxes, consists of the following components (dollars in thousands):

Year Ended December 31
-------------------------------
1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Current $(3,275) $ 1,446 $(2,482)
Deferred (5,430) (9,540) (4,433)
------- ------- -------
Total Provision $(8,705) $(8,094) $(6,915)
======= ======= =======
</TABLE>

The Company's income tax provision is net of taxes related to the equity in the
income or loss of unconsolidated subsidiaries. The income tax benefit associated
with the loss of unconsolidated subsidiaries was $655,000 in 1998, which is
comprised of a current provision of $2,000 and a deferred benefit of $657,000.
The income tax benefit associated with the loss of unconsolidated subsidiaries
was $385,000 in 1997, which is comprised of a current provision of $513,000 and
a deferred benefit of $898,000. The income tax provision associated with the
income of unconsolidated subsidiaries was $27,000 in 1996. The additional
minimum pension liability adjustment of $4,512,000 is shown net of the deferred
tax impact of $1,579,000 at December 31, 1998.

The differences between the total provision and the provision computed using the
Federal statutory income tax rate were as follows (dollars in thousands):

Year Ended December 31
--------------------------------
1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Pre-Tax Income $ 33,061 $ 31,226 $ 30,220
======== ======== ========

Computed Provision $(11,571) $(10,929) $(10,577)
Source of Difference:
Amortization of Negative Goodwill 2,029 2,029 2,029
Change in Valuation Allowance 1,106 774 1,800
Other (269) 32 (167)
-------- -------- --------
Total Provision $ (8,705) $ (8,094) $ (6,915)
======== ======== ========
</TABLE>

<PAGE> 43

NOTE 7 - INCOME TAXES (continued)

Deferred tax assets (liabilities) are comprised of the following (dollars in
thousands):

<TABLE>
<CAPTION>
December 31
--------------------
1998 1997
---- ----
ASSETS
<S> <C> <C>
Basis of Consolidated Subsidiary $ 7,033 $ 8,964
Postretirement and Other Benefits 24,661 18,734
Other 9,991 6,854
Operating Loss and Alternative
Minimum Tax Credit Carryforwards 30,065 31,693
-------- --------
Gross Deferred Tax Assets 71,750 66,245
Valuation Allowance (10,715) (11,821)
-------- --------
Gross Deferred Tax Assets
After Valuation Allowance 61,035 54,424
-------- --------

LIABILITIES
Property, Plant, and Equipment (36,637) (25,939)
Inventories (11,495) (12,388)
Other (33) (34)
-------- --------
Gross Deferred Tax Liabilities (48,165) (38,361)
-------- --------
Total Net Deferred Tax Assets $ 12,870 $ 16,063
======== ========
</TABLE>

Unused regular tax loss carryforwards were approximately $19,245,000 at December
31, 1997. Alternative minimum tax credit carryforwards amounted to $30,065,000
at December 31, 1998 and $24,957,000 at December 31, 1997. The alternative
minimum tax loss carryforwards may be carried forward indefinitely.

A valuation allowance is recorded for deferred tax assets if it is more likely
than not that some or all of the deferred tax assets will not be realized. The
Company previously recorded a partial valuation allowance on certain deferred
tax assets. The reduction of the valuation allowance was primarily the result of
the utilization of basis differences in fixed assets. Certain 1997 deferred tax
balances and the related valuation allowance pertaining to Eveleth were
reclassified to conform with the current year's presentation. Current deferred
tax assets of $45,000 and $1,819,000 in 1998 and 1997, respectively, are
recorded in Other Current Assets. The remaining deferred tax assets are included
in Deferred Charges and Other.

Net cash paid for income taxes was $6,557,000 in 1998. In 1997, the Company made
estimated tax payments of $2,000,000 and received a net cash refund of
$4,704,000. Net cash paid for income taxes was $5,325,000 in 1996.

NOTE 8 - COMMON STOCK

Class A shares have a par value of $0.01. Each Class A share has one vote.

Class B shares have a par value of $0.01. Each Class B share has 2.5 votes.

The Company has an outside director equity plan ("ODEP"), a 1994 stock incentive
plan and a 1998 stock incentive plan (the 1994 stock incentive plan and the 1998
stock incentive plan together the "SIP"). The ODEP and the SIP provide for stock
option grants to the Company's directors and employees, respectively,

<PAGE> 44

NOTE 8 - COMMON STOCK (continued)

at fair market value on the date of grant. Under the plans, the Company is
authorized to grant options to its directors and employees for up to 1,000,000
shares of common stock. Of this amount, options are outstanding for 383,950
shares at December 31, 1998. These stock options generally vest over a period of
three years and are exercisable for a period not exceeding ten years from the
date of grant. The stock options may be exercised subject to continued
employment and certain other conditions.

The Company applies Accounting Principles Board Opinion No. 25 in accounting for
its stock-based compensation plans. Accordingly, no compensation cost has been
recognized for the ODEP and the SIP. If compensation cost for the ODEP and the
SIP had been determined based upon the fair value at the grant dates for awards
under these plans consistent with the method set forth in SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>

Year Ended December 31
------------------------------------------
1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Net Income (dollars in thousands) As Reported $ 23,392 $ 22,414 $ 23,392
Pro Forma 22,880 21,523 22,357

Net Income Per Share As Reported $ 1.06 $ 1.02 $ 1.07
Pro Forma 1.04 0.98 1.02
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1998, 1997 and 1996:
<TABLE>
<CAPTION>

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

<S> <C> <C> <C>
Dividend Yield 0.99% 0.57% 0.51%
Risk-Free Interest Rate 5.77 6.35 5.56
Expected Volatility 36.40 33.26 32.74
Expected Life 7 years 7 years 7 years
</TABLE>

A summary of the status of the Company's stock-based compensation plans as of
December 31, 1998, 1997 and 1996 and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>

1998 1997 1996
------------------------ ------------------------------ --------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Price Shares Price Shares Price
-------- --------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 297,250 $24.29 207,325 $26.04 106,500 $28.33
Granted 109,300 12.16 105,800 20.92 109,200 23.70
Forfeited (22,600) 20.00 (15,875) 24.69 (8,37) 24.77
------- -------- --------
Outstanding at December 31 383,950 $21.09 297,250 $24.29 207,325 $26.04
======= ====== ======= ====== ======= ======

Options Exercisable at Year-End 309,425 $22.58 222,175 $25.11 130,694 $26.46
Weighted-Average Fair Value of
Options Granted During the Year $ 5.41 $ 9.57 $10.43
</TABLE>

<PAGE> 45

NOTE 8 - COMMON STOCK (continued)

The following table presents summarized information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>

Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices December 31, 1998 Contractual Life Exercise Price December 31, 1998 Exercise Price
- --------------- ----------------- ---------------- -------------- ----------------- --------------

<S> <C> <C> <C> <C> <C> <C>
$12.13 to 15.13 104,000 9.0 years $12.20 52,375 $12.23
$21.00 to 23.00 98,350 7.9 21.10 75,450 21.13
$23.01 to 24.00 95,600 7.0 23.73 95,600 23.73
$28.88 86,000 6.0 28.88 86,000 28.88
</TABLE>

NOTE 9 - EARNINGS PER SHARE

The calculation of diluted net income per share for the years ended December 31,
1998, 1997 and 1996 did not require an adjustment to net income for the effect
of dilutive securities. The weighted-average shares outstanding were adjusted
for the effect of 0, 37 and 51 shares of dilutive securities which were
outstanding as of December 31, 1998, 1997 and 1996, respectively.

The dilutive securities represent stock options which were granted to members of
management or the board of directors and which had exercise prices lower than
the average market price of the Company's Class A Common Stock. Options to
purchase 383,950 shares at $12.13 to $28.88 per share in 1998, 295,750 shares at
$21.00 to $28.88 per share in 1997 and 204,325 shares at $22.88 to $28.88 per
share in 1996 were outstanding but were not included in the computation of
diluted earnings per share because the exercise prices of these options were
greater than the average market price of the Company's Class A Common Stock.
These options will expire between 2005 and 2008.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Commitments to Ford

The Company purchases various services including environmental, heavy equipment
repair, construction and transportation from Ford. In addition, the Company
leases certain land, office space and production support facilities from Ford
under cancelable operating leases with terms ranging from 1 to 99 years. The
costs of these services were approximately $3,564,000 in 1998, $18,469,000 in
1997 and $25,643,000 in 1996. The Company has assumed some of the services which
had previously been provided by Ford resulting in the decline in payments to
Ford.

The Company also jointly owns a powerhouse facility (the "Powerhouse") with
Ford, under a renewable ten-year agreement expiring December 31, 1999. On
February 1, 1999, an explosion at the Powerhouse resulted in the interruption of
the supply of electricity, process and heating steam, turbo air, mill water and
other utilities to virtually all of the facilities of Rouge Steel. See Note 11
for a more detailed discussion of the Powerhouse explosion. Prior to the
explosion, the Powerhouse generated electricity, steam and other utilities. The
fixed assets of the Powerhouse are owned 60 percent by the Company and 40
percent by Ford, with each party receiving a portion of the power generated. The
costs of operating the facility are allocated between the Company and Ford based
on the consumption of utilities. The Company's share of the costs of this
facility was approximately $76,185,000 in 1998, $78,499,000 in 1997 and
$74,005,000 in 1996. In 1996, the Company provided written notice to Ford of its
intention to terminate the Powerhouse

<PAGE> 46
NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)

agreement on December 15, 1999. The Company and Ford have signed an agreement
for long-term energy services with CMS Energy Corporation which, along with DTE
Energy Company (together with its subsidiaries, "DTE"), will build and operate a
co-generation power plant.

In connection with its operation of the Powerhouse, Ford purchases a portion of
the gas produced by the Company's blast furnaces for use at the Powerhouse based
on a negotiated formula. Ford purchased $27,046,000, $26,497,000 and $23,638,000
worth of blast furnace gas in 1998, 1997 and 1996, respectively. Of these
amounts, between 60 and 70 percent has been charged back to the Company for its
proportionate share of the cost of such gas.

During 1998, 1997 and 1996, the Company purchased scrap from Ford at a cost of
$31,774,000, $40,496,000 and $31,401,000, respectively. These purchases were
made under a supply agreement that expires in automotive model-year 2000.

Waste Oxide Reclamation Facility Lease

Rouge Steel has committed to a seven-year lease for a $52,500,000 waste oxide
reclamation facility. The facility is presently being constructed, and it is
expected to be completed in the second quarter of 1999.
Lease payments will commence at that time.

Other Commitments

Pursuant to a purchase and sale agreement executed in connection with the
restructuring of EVTAC described in Note 4, Rouge Steel is required to purchase
45 percent of the first 5.0 million natural gross tons of pellets produced each
year by EVTAC at world market prices. The Company also has the right of first
refusal with respect to 45 percent of any pellets produced by EVTAC in excess of
5.0 million natural gross tons. The Company and the other owners of EVTAC are
currently in discussions regarding EVTAC's operations and activities. These
discussions and any subsequent resulting actions may affect, among other things,
the cost and availability of iron ore pellets, the timing of EVTAC employee
benefit liability recognition and funding requirements and recognition of other
obligations relating to the mining operations.

The Company has a ten-year contract for the supply of oxygen and nitrogen which
expires in 2005. The contract contains annual minimum oxygen and nitrogen
purchases of $8,300,000 and $550,000, respectively. Oxygen and nitrogen
purchases aggregated approximately $21,001,000 in 1998, $15,124,000 in 1997 and
$11,707,000 in 1996.

Shiloh of Michigan, L.L.C. Loan Guaranty

Rouge Industries guarantees 20 percent of a $30,000,000 line of credit for
Shiloh of Michigan, an engineered steel blanking joint venture between the
Company and Shiloh Industries, Inc. As of December 31, 1998, Shiloh of Michigan
had borrowings of $28,701,000 outstanding under its line of credit.

46
<PAGE> 47
NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)

Delaco Processing, L.L.C. Loan Guaranty

Rouge Industries and Delaco Steel Corporation have agreed to jointly and
severally guarantee a $7,300,000 line of credit for Delaco Steel Processing, the
Company's 49 percent owned steel slitting joint venture with Delaco Supreme Tool
& Gear Co. As of December 31, 1998, Delaco Steel Processing had borrowings of
$3,036,000 outstanding under its line of credit.

Bing Blanking, L.L.C. Loan Guaranty

The Company guarantees a $4,000,000 term loan and a $1,000,000 line of credit
loan for Bing Blanking. As of December 31, 1998, Bing Blanking had $4,000,000
outstanding under its term loan and did not have any borrowings outstanding
under its line of credit. In addition, as of December 31, 1998, Bing Blanking
owes the Company $3,000,000.

Environmental Matters

The Company is indemnified by Ford through December 15, 2009 for environmental
obligations relating to conditions arising prior to the Acquisition on December
15, 1989. It is the Company's practice to coordinate the resolution of such
obligations with Ford. Management believes that disputed or unresolved
obligations are immaterial in relation to the Company's consolidated financial
position or results of operations.

Litigation

Residents of the City of Melvindale (a suburb in close proximity) have filed a
class action lawsuit against the Company. The lawsuit claims trespass, nuisance
and negligence as a result of alleged air pollution over an unspecified period
of time including the period from March to June of 1997. Since damage
calculations have not yet been performed, it is currently not possible to
determine either the level of the Company's monetary exposure or the likely
outcome of the lawsuit.

The Company is involved in routine litigation incidental to its business. Other
than the matter discussed above, in management's opinion, none of such current
proceedings, individually or in the aggregate, will have a materially adverse
effect on the Company's consolidated financial position or results of
operations.

NOTE 11 - SUBSEQUENT EVENT

On February 1, 1999, an explosion and fire at the Powerhouse resulted in the
interruption of the supply of electricity, process and heating steam, turbo air,
mill water and other utilities to virtually all of the facilities of Rouge
Steel. The loss of power resulted in a temporary shutdown of the Company's steel
making facilities and corporate offices. The Powerhouse is owned by Rouge Steel
(60%) and Ford (40%).

47
<PAGE> 48

NOTE 11 - SUBSEQUENT EVENT (continued)

On February 4, 1999, partial electricity and steam service was restored to the
Rouge Steel facilities through a combination of new power lines from DTE and
temporary generators and package boilers.

On February 11, 1999, Rouge Steel resumed limited production at its hot strip
mill and cold mills. Primary operations, including the Company's two blast
furnaces, the basic oxygen furnace and continuous caster, will remain idle
pending the refurbishment and restart of the turbo air equipment, which is
integral to the operation of the blast furnaces and was housed in the
Powerhouse. The Company believes that its primary operations will return to
production by April 30, 1999. In advance of the resumption of full production
capacity, the Company has purchased an aggregate of 450,000 tons of
semi-finished steel to partially support its automotive order book.

Although the Company has a considerable insurance program that provides coverage
for damage to property destroyed, interruption of business operations and
expenses incurred to minimize the period of disruption to operations, the full
extent of the damage to the Powerhouse and the resulting financial effect have
not been determined.

48
<PAGE> 49

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Accounts Receivable Allowances (amounts in thousands):

<TABLE>
<CAPTION>
Charged
Balance (Credited) to Balance
Year Ended at Beginning Cost and at End
December 31 of Period Expenses Write-Offs of Period
------------ --------- -------- ---------- ---------

49
<PAGE> 50

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1998

Total Sales $318,952 $306,001 $269,679 $268,557

Gross Margin 12,583 13,521 12,724 14,336

Net Income 4,071 6,150 5,543 7,628

Net Income Per Share 0.19 0.28 0.25 0.34

1997

Total Sales $334,172 $355,205 $320,707 $331,476

Gross Margin 17,022 18,724 12,935 (1,035)

Net Income (Loss) 9,284 10,622 6,979 (4,471)

Net Income (Loss) Per Share 0.42 0.48 0.32 (0.20)
</TABLE>

50
<PAGE> 51

Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.

None.

51
<PAGE> 52

PART III

Item 10. Directors and Executive Officers of the Registrant.

Information regarding the Company's Directors is incorporated by
reference to the information contained under the caption "Proposal No. 1 -
Election of Directors" in the Company's 1999 Proxy Statement (the "Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than April 30, 1999. Information regarding the Company's Executive
Officers is set forth in Part I of this Form 10-K pursuant to Instruction G of
Form 10-K.

Item 11. Executive Compensation.

Incorporated by reference to the information contained under the caption
"Executive Compensation" in the Company's Proxy Statement, which will be filed
with the Securities and Exchange Commission not later than April 30, 1999.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Incorporated by reference to the information contained under the caption
"Security Ownership" in the Company's Proxy Statement, which will be filed with
the Securities and Exchange Commission not later than April 30, 1999.

Item 13. Certain Relationships and Related Transactions.

Incorporated by reference to the information contained under the caption
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement, which will be filed with the Securities and Exchange Commission not
later than April 30, 1999.

With the exception of the information specifically incorporated by
reference, the Company's Proxy Statement is not to be deemed filed as part of
this report for purposes of this Part III.

52
<PAGE> 53

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Documents filed as part of this Report:

(1) A list of the financial statements filed as part of this
report is submitted as a separate section, the index to
which is located on page 28.

(2) A list of financial statement schedules required to be
filed by Item 8 is located on page 28.

(3) Exhibits:

The following exhibits are included in this report or incorporated herein
by reference:

Exhibit
Number Description of Exhibit
------ ----------------------

2.1 Agreement and Plan of Merger dated July 20, 1997, by and among
the Registrant, Rouge Steel Company and Merger Sub
(incorporated herein by reference to Exhibit 2.1 to the
Registrant's Registration Statement on Form 8-B (the "Form
8-B")).

3.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated herein by reference to Exhibit 3.1 to
the Form 8-B).

3.2 Amended and Restated By-Laws of the Registrant (incorporated
herein by reference to Exhibit 3.2 to the Form 8-B).

4.1 Amended and Restated Stockholders Agreement dated as of
November 14, 1996 (the "Stockholders Agreement"), among the
Registrant, Carl L. Valdiserri and Worthington Industries,
Inc. ("Worthington") (incorporated herein by reference to
Exhibit 10.3 to the Registrant's 1996 Annual Report on Form
10-K (Commission File Number 1- 12852) (the "1996 Form
10-K")).

4.2 First Amendment to Amended and Restated Stockholders Agreement
dated July 20, 1997, by and among Rouge Steel Company, the
Registrant, Carl L. Valdiserri and Worthington (incorporated
herein by reference to Exhibit 4.1 to the Form 8-B).

10.1 Credit Agreement dated as of December 16, 1997 (the "Credit
Agreement"), among the Registrant, Rouge Steel Company, the
banks named therein and NBD Bank (incorporated herein by
reference to Exhibit 10.1 to the Registrant's 1997 Annual
Report on Form 10-K (Commission File Number I-12852) (the
"1997 Form 10-K")).

10.2 Purchase and Sale Agreement dated as of December 15, 1989,
between Ford Motor Company ("Ford") and Marico Acquisition
Corp. ("Marico") (incorporated herein by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-1
(Registration No. 33-74698) (the "S-1 Registration
Statement")).

53
<PAGE> 54

Exhibit
Number Description of Exhibit
------ ----------------------

10.3 Oxygen, Nitrogen and Argon Supply Agreement dated as of
November 16, 1993, between Praxair, Inc. and the Registrant
(incorporated herein by reference to Exhibit 10.4 to the
Registrant's 1994 Annual Report on Form 10-K (Commission File
Number 1-12852) (the "1994 Form 10-K")).

10.4 Steel Purchase Agreement dated as of December 15, 1989,
between the Registrant and Ford (incorporated herein by
reference to Exhibit 10.16 to the S-1 Registration Statement).

10.5 Steel Products Purchase Agreement dated as of December 15,
1989, between the Registrant and Worthington (the "Worthington
Agreement") (incorporated herein by reference to Exhibit 10.17
to the S-1 Registration Statement).

10.6 Letter dated February 20, 1996 confirming Exercise of Option
to Extend Term of Worthington Agreement (incorporated herein
by reference to Exhibit 10.8 to the Registrant's 1995 Annual
Report on Form 10-K (Commission File Number 1-12852) (the
"1995 Form 10-K")).

10.7 Technical and Transportation Services Agreement dated as of
December 15, 1989, between the Registrant and Ford
(incorporated herein by reference to Exhibit 10.18 to the S-1
Registration Statement).

10.8 Scrap Sale Agreement dated as of December 15, 1989, between
the Registrant and Ford (incorporated herein by reference to
Exhibit 10.20 to the S-1 Registration Statement).

10.9 Powerhouse Joint Operating Agreement dated as of December 15,
1989, between the Registrant and Ford (incorporated herein by
reference to Exhibit 10.21 to the S-1 Registration Statement).

10.10 Transitional Services Agreement dated as of December 15, 1989,
between the Registrant and Ford (incorporated herein by
reference to Exhibit 10.22 to the S-1 Registration Statement).

10.11 Natural Gas Operating Agreement dated as of December 15, 1989
between the Registrant and Ford (incorporated herein by
reference to Exhibit 10.25 to the S-1 Registrant Statement).

10.12 Joint Venture Agreement dated as of November 30, 1984 (the
"Joint Venture Agreement"), between United States Steel
Corporation ("USS") and the Registrant (incorporated herein by
reference to Exhibit 10.23 to the S-1 Registration Statement).

10.13 Amendment to Joint Venture Agreement (incorporated herein by
reference to Exhibit 10.24 to the S-1 Registrant Statement).

54
<PAGE> 55

Exhibit
Number Description of Exhibit
------ ----------------------

10.14 Operating Agreement for Shiloh of Michigan, L.L.C. dated as of
January 2, 1996 by and among Shiloh of Michigan, L.L.C., the
Registrant and Shiloh Industries, Inc. (incorporated herein by
reference to Exhibit 10.16 to the 1995 Form 10-K).

10.15 Operating Agreement of TWB Company, L.L.C. dated as of April
15, 1997 by and between Thyssen Inc. ("Thyssen") and
Worthington Steel of Michigan, Inc., ("Worthington Steel")
(incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the Quarterly
Period Ended March 31, 1997 (the "First Quarter 1997 10-Q")).

10.16 First Amendment to Operating Agreement of TWB Company, L.L.C.
dated as of April 15, 1997 by and among Thyssen, Worthington
Steel, LTV Steel Company, Inc. Bethlehem Blank Welding, Inc.
and QS Steel Inc. (incorporated herein by reference to Exhibit
10.2 to the First Quarter 1997 10-Q).

10.17 Operating Agreement of Delaco Processing, L.L.C. dated as of
September 3, 1997 by and between QS Steel Inc. and Delaco
Supreme Tool & Gear Co. (incorporated herein by reference to
Exhibit 10.18 to the 1997 Form 10-K).

10.18 First Amended and Restated Operating Agreement for Bing
Blanking, L.L.C. dated as of March 31, 1998 by and among Bing
Blanking, L.L.C., QS Steel Inc., and Bing Management II,
L.L.C. (incorporated herein by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the
Quarterly Period Ended March 31, 1998).

10.19 Operating Agreement of Spartan Steel Coating, L.L.C. dated as
of November 14, 1996 among QS Steel Inc. and Worthington Steel
(incorporated herein by reference to Exhibit 10.18 to the 1996
Form 10-K).

10.20 Eveleth Mines Exit Agreement dated as of November 25, 1996
among Oglebay Norton Company, ONCO Eveleth Company, Eveleth
Taconite Company, Eveleth Expansion Company, AK Steel
Corporation, Virginia Horn Taconite Company, Rouge Steel
Company, Stelco, Inc., Ontario Eveleth Company and Eveleth
Mines LLC (incorporated herein by reference to Exhibit 10.19
to the 1996 Form 10-K).

10.21 Pellet Sale and Purchase Agreement dated as of January 1, 1997
by and between Eveleth Mines LLC and Rouge Steel Company
(incorporated herein by reference to Exhibit 10.20 to the 1996
Form 10-K).

10.22 Member Control Agreement of Eveleth Mines LLC dated as of
December 2, 1996 between Virginia Horn Taconite Company, Rouge
Steel Company and Ontario Eveleth Company (incorporated herein
by reference to Exhibit to 10.21 to the 1996 Form 10- K).

55
<PAGE> 56

Exhibit
Number Description of Exhibit
------ ----------------------

10.23 Letter Agreement dated as of October 25, 1996 between
Worthington Industries and Rouge Steel Company (incorporated
herein by reference to Exhibit 10.22 to the 1996 Form 10-K).

10.24 Pellet Sale and Purchase and Trade Agreement dated as of
January 1, 1991 by and between The Cleveland-Cliffs Iron
Company and the Registrant (incorporated herein by reference
to Exhibit 10.31 to the S-1 Registration Statement).

10.25 Agreement for the Provision of Tolled Coke dated December 22,
1992 between New Boston Coke Corporation. and the Registrant
(incorporated herein by reference to Exhibit 10.35 to the S-1
Registration Statement).

10.26** Rouge Steel Company Savings Plan for Salaried Employees
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (Registration No.
33-88520) (the "Form S-8 Registration Statement")).

10.27** Amendment to Rouge Steel Company Savings Plan for Salaried
Employees (incorporated herein by reference to Exhibit 10.3 to
the Form 8-B).

10.28 Rouge Steel Company Tax-Efficient Savings Plan for Hourly
Employees (incorporated herein by reference to Exhibit 4.2 to
the Form S-8 Registration Statement).

10.29 Amendment to Rouge Steel Company Tax-Efficient Savings Plan
for Hourly Employees (incorporated herein by reference to
Exhibit 10.4 to the Form 8-B).

10.30 Rouge Steel Company Profit Sharing Plan for Salaried Employees
(incorporated herein by reference to Exhibit 10.38 to the S-1
Registration Statement).

10.31** Rouge Steel Company Incentive Compensation Plan (incorporated
herein by reference to Exhibit 10.39 to the S-1 Registration
Statement).

10.32** Rouge Steel Company Amended and Restated Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.1 to the Form
8-B).

10.33** Rouge Steel Company Retirement Plan for Salaried Employees
(incorporated herein by reference to Exhibit 10.41 to the S-1
Registration Statement).

10.34** Rouge Steel Company Supplemental Executive Retirement Plan
(incorporated herein by reference to Exhibit 10.31 to the 1997
Form 10-K).

56
<PAGE> 57

Exhibit
Number Description of Exhibit
------ ----------------------

10.35** Rouge Steel Company Benefit Restoration Plan (incorporated
herein by reference to Exhibit 10.40 to the 1997 Form 10-K).

10.36** Rouge Steel Company Amended and Restated Outside Director
Equity Plan (incorporated herein by reference to Exhibit 10.2
to the Form 8-B).

21+ List of Subsidiaries.

23+ Consent of PricewaterhouseCoopers LLP.

27+ Financial Data Schedule

- --------------------
+ Filed herewith.
** Compensatory plans in which the Registrant's directors and executive
officers participate.

(b) The Company did not file a Current Report on Form 8-K during the
fourth quarter of 1998.

(d) The financial statement schedule listed under Item 14(a)(2) is filed
herewith.

57
<PAGE> 58

SIGNATURES

Pursuant to the requirements of Section 13 of 15(a) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
11th day of March 1999.

ROUGE INDUSTRIES, INC.

By: /s/ Carl L. Valdiserri
------------------------------
Name: Carl L. Valdiserri
Title: Chief Executive Officer

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

Signatures Title Date
---------- ----- ----

<S> <C> <C>
/s/ Carl L. Valdiserri Chief Executive Officer and Chairman of March 11, 1999
- ------------------------------ the Board

/s/ Louis D. Camino President, Chief Operating Officer and March 11, 1999
- --------------------------- Director

/s/ Gary P. Latendresse Executive Vice President, March 11, 1999
- --------------------------- Chief Financial Officer and Director

/s/ Dominick C. Fanello Director March 11, 1999
- -------------------------

/s/ John E. Lobbia Director March 11, 1999
- -----------------------------

/s/ Peter J. Pestillo Director March 11, 1999
- --------------------------------

/s/ Clayton P. Shannon Director March 11, 1999
- --------------------------
</TABLE>

<PAGE> 59
INDEX TO EXHIBITS

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